UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 9, 1997
FRED MEYER, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-13339 91-1826443
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(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
3800 SE 22nd Avenue, Portland, Oregon 97202
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(Address of principal executive offices) (Zip Code)
(503) 232-8844
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(Registrant's telephone number, including area code)
Meyer-Smith Holdco, Inc.
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(Former name or former address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On September 9, 1997, upon filing a Certificate of Merger with the Delaware
Secretary of State, Fred Meyer, Inc., a Delaware corporation formerly known as
Meyer-Smith Holdco, Inc. (the "Company"), succeeded to the businesses of Fred
Meyer Stores, Inc., a Delaware corporation formerly known as Fred Meyer, Inc.
("Fred Meyer"), and Smith's Food & Drug Centers, Inc., a Delaware corporation
("Smith's"), as a result of mergers through which Fred Meyer and Smith's have
become wholly owned subsidiaries of the Company (collectively, the "Merger").
The Merger, as contemplated by the Agreement and Plan of Reorganization and
Merger dated May 11, 1997 between Fred Meyer and Smith's Food & Drug Centers,
Inc., was approved by the stockholders of Fred Meyer and Smith's at separate
stockholders meetings held on September 8, 1997, for which proxies were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
The Company's common stock, $.01 par value, is registered under Section
12(b) of the Exchange Act by operation of Rule 12g-3(d) under the Exchange Act.
The Joint Proxy Statement/Prospectus dated August 6, 1997, which is part of
the Registration Statement on Form S-4 (No. 333-32927), filed by the Company
contains information regarding the Merger, is filed as an exhibit to this Report
and is incorporated herein by reference.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
The audited financial statements of Fred Meyer for the three previous
fiscal years, and the accountants' report related thereto, set forth in Fred
Meyer's Annual Report on Form 10-K for the fiscal year ended February 1, 1997,
as amended by Form 10-K/A dated May 20, 1997 and Forms 10-K/A dated August 6,
1997, and the unaudited financial statements for the period ended May 24, 1997
set forth in Fred Meyer's Quarterly Report on Form 10-Q for the quarter ended
May 24, 1997, as amended by Forms 10-Q/A dated August 6, 1997, are filed as an
exhibit to this Report and are incorporated herein by reference.
The audited financial statements of Smith's for the three previous
fiscal years, and the accountants' report related thereto, set forth in Smith's
Annual Report on Form 10-K for the fiscal year ended December 28, 1996, as
amended by Form 10-K/A dated April 7, 1997 and Form 10-K/A dated August 6, 1997,
and the unaudited financial statements for the period ended July 5, 1997 set
forth in Smith's Quarterly Report on Form 10-Q for the quarter ended July 5,
1997 are filed as an exhibit to this Report and are incorporated herein by
reference.
2
<PAGE>
(b) Pro forma financial information.
The information set forth under the caption "Unaudited Pro Forma
Condensed Combined Financial Statements" in the Joint Proxy Statement/Prospectus
dated August 6, 1997, which is part of the Registration Statement on Form S-4
(No. 333-32927), filed by the Company is filed as an exhibit to this Report and
is incorporated herein by reference.
(c) Exhibits.
2.1 Agreement and Plan of Reorganization and Merger dated as of May
11, 1997. Incorporated by reference to Exhibit 99.1 to Fred
Meyer, Inc.'s Current Report on Form 8-K dated May 11, 1997.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
99.1 Joint Proxy Statement/Prospectus dated August 6, 1997, which is
part of the Registration Statement on Form S-4 (No. 333-32927),
filed by the Company.
99.2 Financial Statements for Fred Meyer, Inc. prior to the Merger
from the Annual Report on Form 10-K for the fiscal year ended
February 1, 1997, as amended, and Quarterly Report on Form 10-Q
for the quarter ended May 24, 1997, as amended.
99.3 Financial Statements for Smith's from Smith's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996, as
amended, and Quarterly Report on Form 10-Q for the quarter ended
July 5, 1997.
3
<PAGE>
SIGNATURE
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.
Dated: September 11, 1997
FRED MEYER, INC.
By: DAVID R. JESSICK
-------------------------------------
David R. Jessick
Chief Financial Officer and
Senior Vice President, Finance
4
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
2.1 Agreement and Plan of Reorganization and Merger dated
May 11, 1997. Incorporated by reference to Exhibit 99.1
to Fred Meyer, Inc.'s Current Report on Form 8-K dated
May 11, 1997. 23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
99.1 Joint Proxy Statement/Prospectus dated August 6, 1997,
which is part of the Registration Statement on Form S-4
(No. 333-32927), filed by the Company.
99.2 Financial Statements for Fred Meyer, Inc. prior to the
Merger from the Annual Report on Form 10-K for the
fiscal year ended February 1, 1997, as amended, and
Quarterly Report on Form 10-Q for the quarter ended May
24, 1997, as amended.
99.3 Financial Statements for Smith's from Smith's Annual
Report on Form 10-K for the fiscal year ended December
28, 1996, as amended, and Quarterly Report on Form 10-Q
for the quarter ended July 5, 1997.
5
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Form 8-K of Fred Meyer,
Inc. (the "Registrant") of our report dated March 12, 1997, appearing in the
Annual Report on Form 10-K of Fred Meyer, Inc., a Delaware corporation renamed
Fred Meyer Stores, Inc. and a subsidiary of the Registrant, for the year ended
February 1, 1997, as amended by Forms 10-K/A dated May 20, 1997 and August 6,
1997.
DELOITTE & TOUCHE LLP
September 12, 1997
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Report (Form 8-K No.
1-13339) of Fred Meyer, Inc. (the "Company") of our report dated January 27,
1997, with respect to the consolidated financial statements of Smith's Food &
Drug Centers, Inc., a subsidiary of the Company, incorporated by reference in
its Annual Report (Form 10-K) for the year ended December 28, 1996, filed with
the Securities and Exchange Commission and amended by Forms 10-K/A dated April
7, 1997 and August 6, 1997.
ERNST & YOUNG LLP
Salt Lake City, Utah
September 5, 1997
Exhibit 99.1
Joint Proxy Statement/Prospectus
dated August 6, 1997, which is part of the Registration Statement
on Form S-4 (No. 333-32927), filed by Fred Meyer, Inc.
incorporated by reference to the attached Form 8-K
LOGO
FRED MEYER, INC.
3800 SE 22nd Avenue
Portland, Oregon 97202
August 6, 1997
Dear Fellow Stockholders:
You are cordially invited to attend a special meeting of stockholders (the
"Fred Meyer Special Meeting") of Fred Meyer, Inc., a Delaware corporation ("Fred
Meyer"), to be held on September 8, 1997 at 10:00 a.m. local time, at the
DoubleTree Hotel, Lloyd Center, 1000 NE Multnomah, Portland, Oregon.
At the Fred Meyer Special Meeting, you will be asked to consider and vote
on a proposal to approve and adopt an Agreement and Plan of Reorganization and
Merger, dated as of May 11, 1997 (the "Merger Agreement"), by and between
Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's"), and Fred
Meyer. Upon consummation of the transactions contemplated by the Merger
Agreement: (i) Smith's and Fred Meyer will become wholly owned subsidiaries of
Meyer-Smith Holdco, Inc., a newly formed holding company ("Holdings"); (ii) each
outstanding share of Class A Common Stock and Class B Common Stock of Smith's
will be converted into 1.05 shares of common stock of Holdings; (iii) each
outstanding share of Series I Preferred Stock of Smith's will be converted into
the right to receive in cash the amount of thirty-three and one-third cents
($.33 1/3); and (iv) each outstanding share of common stock of Fred Meyer will
be converted into one share of common stock of Holdings (the "Fred Meyer
Exchange Ratio"). See "The Merger Agreement -- Conversion of Shares" and "--
Exchange of Stock Certificates," in the accompanying Joint Proxy
Statement/Prospectus. You will also be asked to consider and vote on proposals
to approve and adopt the Holdings 1997 Stock Incentive Plan (the "1997 Plan")
and the Holdings Non-Employee Directors' Deferred Compensation Plan (the
"Directors' Plan").
After careful consideration, your Board of Directors has determined that
the transactions contemplated by the Merger Agreement are in the best interests
of the stockholders of Fred Meyer. Accordingly, the Board of Directors has
unanimously approved the Merger Agreement and recommends that all Fred Meyer
stockholders vote for the approval and adoption of the Merger Agreement. In
making that determination, the Board of Directors took into account, among other
things, the written opinion, dated May 11, 1997, of Salomon Brothers Inc,
financial advisor to Fred Meyer. Your Board of Directors also recommends that
all Fred Meyer stockholders vote for the approval and adoption of the 1997 Plan
and the Directors' Plan.
Stockholders of Fred Meyer are urged to read carefully the accompanying
Notice of Special Meeting of Stockholders and Joint Proxy Statement/Prospectus,
including the Appendices thereto, which contain important information about the
transactions contemplated by the Merger Agreement and about the 1997 Plan and
the Directors' Plan.
Whether or not you plan to attend the Fred Meyer Special Meeting in person,
please be sure to complete, sign and return the enclosed proxy card as soon as
possible in the enclosed postage-paid envelope so that your shares are
represented at the Fred Meyer Special Meeting and voted in accordance with your
wishes. You may, of course, attend the Fred Meyer Special Meeting and vote in
person, even if you have previously returned your proxy card.
<PAGE>
We appreciate your support of this transaction. If you have questions or
need assistance in voting your shares, please contact MacKenzie Partners, Inc.,
which is assisting us with this transaction, toll-free at (800) 322-2885.
Yours very truly,
ROBERT G. MILLER
Robert G. Miller
Chairman of the Board of Directors
and Chief Executive Officer
<PAGE>
LOGO
FRED MEYER, INC.
3800 SE 22nd Avenue
Portland, Oregon 97202
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NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS To Be Held on
September 8, 1997
To the Stockholders of
FRED MEYER, INC.
A special meeting of stockholders (the "Fred Meyer Special Meeting") of
Fred Meyer, Inc., a Delaware corporation ("Fred Meyer"), will be held on
September 8, 1997 at 10:00 a.m. local time, at the DoubleTree Hotel, Lloyd
Center, 1000 NE Multnomah, Portland, Oregon, for the following purposes:
1. To consider and vote on a proposal to approve and adopt the Agreement
and Plan of Reorganization and Merger, dated as of May 11, 1997 (the
"Merger Agreement"), by and between Fred Meyer and Smith's Food & Drug
Centers, Inc., a Delaware corporation ("Smith's"), pursuant to which,
among other things, (i) Smith's and Fred Meyer will become wholly owned
subsidiaries of Meyer-Smith Holdco, Inc., a newly formed holding company
("Holdings"); (ii) each outstanding share of Class A Common Stock and
Class B Common Stock of Smith's will be converted into 1.05 shares of
common stock of Holdings; (iii) each outstanding share of Series I
Preferred Stock of Smith's will be converted into the right to receive
in cash the amount of thirty-three and one-third cents ($.33 1/3); (iv)
each outstanding share of common stock of Fred Meyer will be converted
into one share of common stock of Holdings; (v) the name of Holdings
will be changed to "Fred Meyer, Inc.", and (vi) the name of Fred Meyer
will be changed to "FM Stores, Inc.";
2. To consider and vote on a proposal to approve and adopt the Holdings
1997 Stock Incentive Plan (the "1997 Plan");
3. To consider and vote on a proposal to approve and adopt the Holdings
Non-Employee Directors' Deferred Compensation Plan (the "Directors'
Plan"); and
4. To transact such other business as may properly come before the Fred
Meyer Special Meeting or any postponements and/or adjournments thereof.
The Board of Directors of Fred Meyer recommends that stockholders vote
"FOR" the approval and adoption of the Merger Agreement, "FOR" the approval and
adoption of the 1997 Plan and "FOR" the approval and adoption of the Directors'
Plan.
<PAGE>
The close of business on July 18, 1997 has been fixed by the Board of
Directors of Fred Meyer as the record date for determination of the stockholders
of Fred Meyer entitled to notice of, and to vote at, the Fred Meyer Special
Meeting or any postponements and/or adjournments thereof. Whether or not you
plan to attend the Fred Meyer Special Meeting, we urge you to complete, sign and
return the enclosed proxy card in the enclosed postage-paid envelope. You may
revoke your proxy at any time before it is voted by delivering to Fred Meyer, at
3800 SE 22nd Avenue, Portland, Oregon 97202, Attn: Roger A. Cooke, Secretary, a
written notice of such revocation or a duly executed, later-dated proxy or by
attending the Fred Meyer Special Meeting and voting in person.
By Order of the Board of Directors
Roger A. Cooke
Secretary
Portland, Oregon
August 6, 1997
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| |
| YOUR VOTE IS IMPORTANT |
| |
| TO VOTE YOUR SHARES, PLEASE SIGN, DATE, |
| COMPLETE AND MAIL THE ENCLOSED PROXY CARD |
| PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. |
| |
| PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. |
| |
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<PAGE>
LOGO
SMITH'S FOOD & DRUG CENTERS, INC.
1550 South Redwood Road
Salt Lake City, Utah 84104
August 6, 1997
Dear Fellow Stockholders:
You are cordially invited to attend a special meeting of stockholders (the
"Smith's Special Meeting") of Smith's Food & Drug Centers, Inc., a Delaware
corporation ("Smith's"), to be held on September 8, 1997 at 10:00 a.m. local
time, at the offices of Latham & Watkins, 633 West Fifth Street, 6th Floor, Los
Angeles, California.
At the Smith's Special Meeting, you will be asked to consider and vote on a
proposal to approve and adopt an Agreement and Plan of Reorganization and
Merger, dated as of May 11, 1997 (the "Merger Agreement"), by and between
Smith's and Fred Meyer, Inc., a Delaware corporation ("Fred Meyer"). Upon
consummation of the transactions contemplated by the Merger Agreement: (i)
Smith's and Fred Meyer will become wholly owned subsidiaries of Meyer-Smith
Holdco, Inc., a newly formed holding company ("Holdings"); (ii) each outstanding
share of Class A Common Stock and Class B Common Stock of Smith's will be
converted into 1.05 shares of common stock of Holdings; (iii) each outstanding
share of Series I Preferred Stock of Smith's will be converted into the right to
receive in cash the amount of thirty-three and one-third cents ($.33 1/3); and
(iv) each outstanding share of common stock of Fred Meyer will be converted into
one share of common stock of Holdings. See "The Merger Agreement -- Conversion
of Shares" and "-- Exchange of Stock Certificates" in the accompanying Joint
Proxy Statement/Prospectus. You will also be asked to consider and vote on
proposals to approve and adopt the Holdings 1997 Stock Incentive Plan (the "1997
Plan") and the Holdings Non-Employee Directors' Deferred Compensation Plan (the
"Directors' Plan").
After careful consideration, your Board of Directors has determined that
the transactions contemplated by the Merger Agreement are in the best interests
of the stockholders of Smith's. Accordingly, the Board of Directors has
unanimously approved the Merger Agreement and recommends that all Smith's
stockholders vote for the approval and adoption of the Merger Agreement. In
making that determination, the Board of Directors took into account, among other
things, the written opinion, dated May 11, 1997, of Donaldson, Lufkin & Jenrette
Securities Corporation, financial advisor to Smith's. Your Board of Directors
also recommends that all Smith's stockholders vote for the approval and adoption
of the 1997 Plan and the Directors' Plan.
Fred Meyer has entered into voting agreements with certain stockholders of
Smith's (including, among others, the undersigned, Fred L. Smith, a director of
Smith's, and The Yucaipa Companies and certain of its affiliates) owning in the
aggregate approximately 70% of the combined voting power of the outstanding
capital stock of Smith's, pursuant to which such stockholders have each agreed,
among other things, to vote all shares of Class A Common Stock, Class B Common
Stock or Series I Preferred Stock owned by each of them in favor of the approval
and adoption of the Merger Agreement. Assuming such stockholders vote their
shares in accordance with the voting agreements at the Smith's Special Meeting,
the requisite vote for the approval and adoption of the Merger Agreement would
be assured. See "Other Agreements -- Voting Agreements" in the accompanying
Joint Proxy Statement/Prospectus.
Stockholders of Smith's are urged to read carefully the accompanying Notice
of Special Meeting of Stockholders and Joint Proxy Statement/Prospectus,
including the Appendices thereto, which contain important information about the
transactions contemplated by the Merger Agreement and about the 1997 Plan and
the Directors' Plan.
<PAGE>
Whether or not you plan to attend the Smith's Special Meeting in person,
please be sure to complete, sign and return the enclosed proxy card(s) as soon
as possible in the enclosed postage-paid envelope so that your shares are
represented at the Smith's Special Meeting and voted in accordance with your
wishes. You may, of course, attend the Smith's Special Meeting and vote in
person, even if you have previously returned your proxy card(s).
Yours very truly,
JEFFREY P. SMITH
Jeffrey P. Smith
Chairman of the Board of Directors
<PAGE>
LOGO
SMITH'S FOOD & DRUG CENTERS, INC.
1550 South Redwood Road
Salt Lake City, Utah 84104
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on September 8, 1997
To the Stockholders of SMITH'S FOOD & DRUG CENTERS, INC.
A special meeting of stockholders (the "Smith's Special Meeting") of
Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's"), will be
held on September 8, 1997 at 10:00 a.m. local time, at the offices of Latham &
Watkins, 633 West Fifth Street, 6th Floor, Los Angeles, California, for the
following purposes:
1. To consider and vote on a proposal to approve and adopt the Agreement
and Plan of Reorganization and Merger, dated as of May 11, 1997 (the
"Merger Agreement"), by and between Smith's and Fred Meyer, Inc., a
Delaware corporation ("Fred Meyer"), pursuant to which, among other
things, (i) Smith's and Fred Meyer will become wholly owned subsidiaries
of Meyer-Smith Holdco, Inc., a newly formed holding company
("Holdings"); (ii) each outstanding share of Class A Common Stock and
Class B Common Stock of Smith's will be converted into 1.05 shares of
common stock of Holdings; (iii) each outstanding share of Series I
Preferred Stock of Smith's will be converted into the right to receive
in cash the amount of thirty-three and one-third cents ($.33 1/3); and
(iv) each outstanding share of common stock of Fred Meyer will be
converted into one share of common stock of Holdings;
2. To consider and vote on a proposal to approve and adopt the Holdings
1997 Stock Incentive Plan (the "1997 Plan");
3. To consider and vote on a proposal to approve and adopt the Holdings
Non-Employee Directors' Deferred Compensation Plan (the "Directors'
Plan"); and
4. To transact such other business as may properly come before the Smith's
Special Meeting or any postponements and/or adjournments thereof.
The Board of Directors of Smith's unanimously recommends that stockholders
vote "FOR" the approval and adoption of the Merger Agreement, "FOR" the approval
and adoption of the 1997 Plan and "FOR" the approval and adoption of the
Directors' Plan.
The close of business on July 18, 1997 has been fixed by the Board of
Directors of Smith's as the record date (the "Record Date") for determination of
the stockholders of Smith's entitled to notice of, and to vote at, the Smith's
Special Meeting or any postponements and/or adjournments thereof.
Fred Meyer has entered into voting agreements with certain stockholders of
Smith's (including, among others, Jeffrey P. Smith, the Chairman of the Board of
Directors of Smith's, Fred L. Smith, a director of Smith's, and The Yucaipa
Companies and certain of its affiliates) who at the Smith's Record Date owned in
the aggregate approximately 70% of the combined voting power of the outstanding
capital stock of Smith's, pursuant to which such stockholders have each agreed,
among other things, to vote all shares of Class A Common Stock, Class B Common
Stock or Series I Preferred Stock owned by each of them in favor of the approval
and adoption of the Merger Agreement. Assuming such stockholders vote their
shares in accordance with the voting agreements at the Smith's Special Meeting,
the requisite vote for the approval and adoption of
<PAGE>
the Merger Agreement would be assured. See "Other Agreements -- Voting
Agreements" in the accompanying Joint Proxy Statement/Prospectus.
Whether or not you plan to attend the Smith's Special Meeting, we urge you
to complete, sign and return the enclosed proxy card(s) in the enclosed
postage-paid envelope. You may revoke your proxy at any time before it is voted
by delivering to Smith's, at 1550 South Redwood Road, Salt Lake City, Utah
84104, Attn: Michael C. Frei, Secretary, a written notice of such revocation or
a duly executed, later-dated proxy or by attending the Smith's Special Meeting
and voting in person.
If you own any shares of Class A Common Stock, Class B Common Stock or
Series I Preferred Stock, please sign and return all proxy card(s) provided to
you for each type of stock owned by you as of the Record Date.
BY ORDER OF THE BOARD OF DIRECTORS
MICHAEL C. FREI
Michael C. Frei
Secretary
Salt Lake City, Utah
August 6, 1997
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| |
| YOUR VOTE IS IMPORTANT |
| |
| TO VOTE YOUR SHARES, PLEASE SIGN, DATE, |
| COMPLETE AND MAIL THE ENCLOSED PROXY CARD(S) |
| PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. |
| |
| PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. |
| |
- --------------------------------------------------------------------------------
<PAGE>
JOINT PROXY STATEMENT
FRED MEYER, INC. SMITH'S FOOD & DRUG CENTERS, INC.
Special Meeting of Stockholders Special Meeting of Stockholders
To Be Held On September 8, 1997 To Be Held On September 8, 1997
---------------
PROSPECTUS OF MEYER-SMITH HOLDCO, INC.
(to be renamed "Fred Meyer, Inc." upon consummation
of the Merger described herein)
---------------
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Fred Meyer, Inc., a Delaware corporation ("Fred Meyer"), in connection with the
solicitation of proxies by the Board of Directors of Fred Meyer (the "Fred Meyer
Board") for use at the special meeting of stockholders of Fred Meyer to be held
on September 8, 1997, or any adjournments and/or postponements thereof (the
"Fred Meyer Special Meeting"), and to stockholders of Smith's Food & Drug
Centers, Inc., a Delaware corporation ("Smith's"), in connection with the
solicitation of proxies by the Board of Directors of Smith's (the "Smith's
Board") for use at the special meeting of stockholders of Smith's to be held on
September 8, 1997, or any adjournments and/or postponements thereof (the
"Smith's Special Meeting"). This Joint Proxy Statement/Prospectus and
accompanying form(s) of proxy are first being mailed to the stockholders of Fred
Meyer and Smith's on or about August 8, 1997.
The Fred Meyer Special Meeting has been called to consider and vote on a
proposal to approve and adopt the Agreement and Plan of Reorganization and
Merger, dated as of May 11, 1997 (the "Merger Agreement"), by and between Fred
Meyer and Smith's, pursuant to which, among other things, (i) Meyer-Smith
Holdco, Inc., a newly formed Delaware corporation to be renamed "Fred Meyer,
Inc." following the consummation of the transactions contemplated by the Merger
Agreement ("Holdings"), will form two wholly owned subsidiaries ("Fred Meyer
Sub" and "Smith's Sub"), and Fred Meyer Sub will merge with and into Fred Meyer,
with Fred Meyer surviving the merger and becoming a wholly owned subsidiary of
Holdings (the "Fred Meyer Merger"); and (ii) each issued and outstanding share
of common stock, par value $.01 per share, of Fred Meyer ("Fred Meyer Common
Stock"), will be converted into one fully paid and nonassessable share of common
stock, par value $.01 per share ("Holdings Common Stock"), of Holdings (the
"Fred Meyer Exchange Ratio"). See "The Merger Agreement -- Conversion of Shares"
and "-- Exchange of Stock Certificates." At the Fred Meyer Special Meeting,
stockholders of Fred Meyer will also consider and vote on proposals to approve
and adopt the Holdings 1997 Stock Incentive Plan (the "1997 Plan") and the
Holdings Non-Employee Directors' Deferred Compensation Plan (the "Directors'
Plan"). Approval and adoption of the Merger Agreement requires the approval of
the holders of a majority of the outstanding shares of Fred Meyer Common Stock.
Approval and adoption of each of the 1997 Plan and the Directors' Plan requires
the approval of the holders of a majority of the shares present and entitled to
vote on the matter at the Fred Meyer Special Meeting, provided that the total
votes cast on the matter represent over 50% of the Fred Meyer Common Stock
entitled to vote on the matter. See "Fred Meyer Special Meeting."
---------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Joint Proxy Statement/Prospectus is August 6, 1997.
<PAGE>
(Page one continued)
The Smith's Special Meeting has been called to consider and vote upon the
Merger Agreement, pursuant to which, among other things, (i) Smith's Sub will
merge with and into Smith's, with Smith's surviving the merger and becoming a
wholly owned subsidiary of Holdings (the "Smith's Merger" and, together with the
Fred Meyer Merger, the "Merger"); (ii) each issued and outstanding share of (x)
Class A Common Stock, par value $.01 per share, of Smith's (the "Smith's Class A
Common Stock") and (y) Class B Common Stock, par value $.01 per share, of
Smith's (the "Smith's Class B Common Stock" and, together with the Smith's Class
A Common Stock, the "Smith's Common Stock") will be converted into 1.05 fully
paid and nonassessable shares of Holdings Common Stock (the "Smith's Exchange
Ratio" and, together with the Fred Meyer Exchange Ratio, the "Exchange Ratios");
and (iii) each issued and outstanding share of Series I Preferred Stock, par
value $.01 per share, of Smith's (the "Smith's Series I Preferred Stock" and,
together with the Smith's Common Stock, the "Smith's Stock") will be converted
into the right to receive in cash the amount of thirty-three and one-third cents
($.33 1/3). See "The Merger Agreement -- Conversion of Shares" and "-- Exchange
of Stock Certificates." At the Smith's Special Meeting, stockholders of Smith's
will also consider and vote on proposals to approve and adopt the 1997 Plan and
the Directors' Plan.
Approval and adoption of the Merger Agreement requires the approval of the
holders of a majority of the total votes of the outstanding shares of Smith's
Stock. Fred Meyer has entered into voting agreements with certain stockholders
of Smith's (including, among others, Jeffrey P. Smith, the Chairman of the
Smith's Board, Fred L. Smith, a director of Smith's, and The Yucaipa Companies
and certain of its affiliates) who at the Smith's Record Date owned in the
aggregate approximately 70% of the combined voting power of the outstanding
capital stock of Smith's, pursuant to which such stockholders have each agreed,
among other things, to vote all shares of Smith's Stock owned by each of them in
favor of the approval and adoption of the Merger Agreement. Assuming such
stockholders vote their shares in accordance with the voting agreements at the
Smith's Special Meeting, the requisite vote for the approval and adoption of the
Merger Agreement by the stockholders of Smith's would be assured. See "Other
Agreements -- Voting Agreements." Approval and adoption of each of the 1997 Plan
and the Directors' Plan requires the approval of the holders of a majority of
the total votes of the shares present and entitled to vote on the matter at the
Smith's Special Meeting, provided that the total votes cast on the matter
represent over 50% in interest of all shares entitled to vote on the matter. See
"Smith's Special Meeting."
In considering the Merger, stockholders should be aware that certain
members of management of Fred Meyer and Smith's and the Fred Meyer Board and the
Smith's Board have interests in the Merger that are different from, or in
addition to, the interests of the stockholders of Fred Meyer and Smith's
generally. See "The Merger -- Interests of Certain Persons in the Merger" and
"Management of Holdings Following the Merger."
This Joint Proxy Statement/Prospectus also serves as a prospectus of
Holdings with respect to up to 44,596,272 shares of Holdings Common Stock to be
issued to (i) the holders of Fred Meyer Common Stock outstanding immediately
prior to the Effective Time (as defined herein) and (ii) the holders of Smith's
Common Stock outstanding immediately prior to the Effective Time. See "The
Merger Agreement Conversion of Shares."
The Fred Meyer Common Stock and the Smith's Class B Common Stock are listed
on the New York Stock Exchange (the "NYSE"). Upon consummation of the Merger,
the Holdings Common Stock will be listed on the NYSE, at which time the Fred
Meyer Common Stock and the Smith's Class B Common Stock will be removed from
listing thereon. The last reported sale price of Fred Meyer Common Stock on the
NYSE was $56 per share on August 5, 1997, the most recent practicable trading
day prior to the date of this Joint Proxy Statement/Prospectus, and $41 7/8 per
share on May 9, 1997, the last trading day preceding public announcement of the
proposed Merger. The last reported sale price of Smith's Class B Common Stock on
the NYSE was $58 5/16 per share on August 5, 1997, the most recent practicable
trading day prior to the date of this Joint Proxy Statement/Prospectus, and $40
per share on May 9, 1997, the last trading day preceding public announcement of
the proposed Merger. The Exchange Ratios are fixed and are not subject to
adjustment in the event of fluctuations in the market price of Fred Meyer Common
Stock or Smith's Class B
<PAGE>
(Page one continued)
Common Stock. There is no assurance as to the market price of Fred Meyer Common
Stock or Smith's Class B Common Stock at any time prior to the Effective Time or
as to the market price of Holdings Common Stock at any time thereafter.
Stockholders are urged to obtain current market quotations for Fred Meyer Common
Stock and Smith's Class B Common Stock.
Based on (i) the 15,857,652 shares of Smith's Common Stock outstanding on
the Smith's Record Date, (ii) the 26,760,434 shares of Fred Meyer Common Stock
outstanding on the Fred Meyer Record Date and (iii) the Exchange Ratios, a total
of approximately 16,650,535 shares, or 38%, and approximately 26,760,434 shares,
or 62%, of Holdings Common Stock would be issuable to stockholders of Smith's
and Fred Meyer, respectively, upon consummation of the Merger. In addition,
based on (i) the 2,601,370 shares of Smith's Class B Common Stock issuable upon
the exercise of outstanding options, warrants or other rights to acquire shares
of Smith's Class B Common Stock, (ii) the 2,626,592 shares of Fred Meyer Common
Stock issuable upon the exercise of outstanding options to purchase shares of
Fred Meyer Common Stock and (iii) the Exchange Ratios, on a fully diluted basis
a total of approximately 19,381,974 shares, or 40%, and approximately 29,387,026
shares, or 60%, of Holdings Common Stock would be issuable to stockholders of
Smith's and holders of options, warrants or other rights to acquire shares of
Smith's Class B Common Stock, on the one hand, and stockholders of Fred Meyer
and holders of options to purchase shares of Fred Meyer Common Stock, on the
other hand, respectively, upon consummation of, and upon exercise of such
options, warrants and other rights following the consummation of, the Merger.
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION......................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................. 2
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION................... 4
SUMMARY....................................................................... 5
The Companies............................................................... 5
Fred Meyer............................................................... 5
Smith's.................................................................. 5
Holdings................................................................. 5
Fred Meyer Special Meeting.................................................. 5
Smith's Special Meeting..................................................... 6
The Merger.................................................................. 6
Ownership of Holdings after the Merger................................... 6
Recommendation of the Fred Meyer Board................................... 6
Recommendation of the Smith's Board...................................... 6
Opinion of Fred Meyer Financial Advisor.................................. 7
Opinion of Smith's Financial Advisor..................................... 7
Interests of Certain Persons in the Merger............................... 7
Certain Federal Income Tax Consequences.................................. 8
Accounting Treatment..................................................... 9
Regulatory Approvals..................................................... 9
Appraisal Rights......................................................... 9
Stock Exchange Listing of Holdings Common Stock.......................... 9
The Merger Agreement........................................................ 9
Conversion of Shares..................................................... 9
Representations and Warranties...........................................10
Certain Covenants........................................................10
No Solicitation of Acquisition Proposals.................................10
Conditions to the Obligations of the Parties to Effect the Merger........11
Termination Fee..........................................................11
Amendment and Waiver.....................................................11
Other Agreements............................................................11
Stock Option Agreement...................................................11
Voting Agreements........................................................12
Registration Rights Agreement............................................12
Holdings Management Services Agreement...................................12
Management of Holdings Following the Merger.................................12
Comparison of Stockholders' Rights..........................................13
Comparative Market Prices and Dividends.....................................13
1997 Stock Incentive Plan...................................................13
Non-Employee Directors' Deferred Compensation Plan..........................13
Refinancing Arrangements....................................................14
Selected Historical and Pro Forma Financial Data............................15
Fred Meyer Selected Historical Financial Data...............................16
Smith's Selected Historical Financial Data..................................18
Holdings Selected Unaudited Pro Forma Condensed Combined Financial Data and
per Share Data...........................................................20
i
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Page
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THE COMPANIES.................................................................23
Fred Meyer..................................................................23
Smith's.....................................................................23
Smitty's Merger and Recapitalization.....................................23
Holdings....................................................................24
The Combined Company........................................................24
Estimated Cost Savings and Improvements from Operating Synergies.........24
Estimated Reductions in Financing Costs..................................25
FRED MEYER SPECIAL MEETING....................................................25
General.....................................................................25
Solicitation, Voting and Revocability of Proxies............................26
Recommendations of the Fred Meyer Board.....................................27
SMITH'S SPECIAL MEETING.......................................................27
General.....................................................................27
Solicitation, Voting and Revocability of Proxies............................28
Recommendations of the Smith's Board........................................29
THE MERGER....................................................................30
Background of the Merger....................................................30
Reasons of Fred Meyer for the Merger........................................32
Enhanced Franchise and Resources.........................................32
Long-Term Strategic Issues...............................................32
Opportunities for Efficiencies and Cost Savings..........................32
Financial Considerations.................................................32
Advice of Financial Advisor and Fairness Opinion.........................33
Terms of Merger Agreement and Related Agreements.........................33
Complementary Nature of Businesses.......................................33
Regulatory Approval......................................................33
Directors and Management of Fred Meyer after the Merger..................33
Tax Treatment of the Merger..............................................33
Reasons of Smith's for the Merger...........................................33
Strategic Combination....................................................34
Implementation of Long-Term Strategy.....................................34
Financial Performance and Business.......................................34
Opportunities for Efficiencies and Cost Savings..........................34
Complementary Nature of Businesses.......................................34
Reduced Leverage.........................................................34
Management Team..........................................................34
Consideration to be Received by Stockholders.............................34
The Merger Agreement and Other Agreements................................35
Structure of Merger......................................................35
Regulatory Approval......................................................35
Financing................................................................35
DLJ Opinion..............................................................35
Opinion of Fred Meyer Financial Advisor.....................................36
Discounted Cash Flow Valuation...........................................37
Transaction Multiples Valuation..........................................37
Comparable Company Valuation.............................................37
Pro Forma Combination Analysis...........................................38
ii
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Page
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Contribution Analysis....................................................38
Historical Trading and Premium Analysis..................................38
Certain Assumptions......................................................39
Opinion of Smith's Financial Advisor........................................40
Common Stock Performance Analysis........................................41
Historical Exchange Ratio Analysis.......................................41
Earnings Per Share Impact Analysis.......................................41
Premiums Paid in Public Merger and Acquisition Transactions..............41
Relative Contribution Analysis...........................................42
Comparable Company Analysis..............................................42
Comparable Transaction Analysis..........................................43
Discounted Cash Flow Analysis............................................43
Certain Assumptions......................................................44
Interests of Certain Persons in the Merger..................................45
Existing Arrangements....................................................45
Fred Meyer Stock Option Plans..........................................45
Fred Meyer Non-Employee Directors Stock Compensation Plan..............45
Indemnification Arrangements with Fred Meyer Officers and Directors....45
Smith's Employment Agreements..........................................45
Smith's Deferred Compensation Agreements...............................46
Smith's Stock Option Plan..............................................46
Smith's Management Services Agreement and Transaction
Consulting Agreement.................................................46
The Yucaipa Warrants...................................................47
Indemnification Arrangements with Smith's Officers and Directors.......48
Registration Rights Agreement..........................................48
The Merger...............................................................48
Directors and Officers of Holdings.....................................48
Fred Meyer Stock Option Plans and Compensation.........................48
Holdings Executive Severance Agreements and Employment Agreement.......49
Fred Meyer Non-Employee Directors Stock Compensation Plan..............50
Indemnification Arrangements with Fred Meyer Officers and Directors....50
Smith's Employment Agreements..........................................50
New Employment Agreements..............................................51
Smith's Deferred Compensation Agreements...............................51
Smith's Stock Option Plan..............................................52
Holdings Management Services Agreement.................................53
The Yucaipa Warrants...................................................53
Indemnification Arrangements with Smith's Officers and Directors.......53
Registration Rights Agreement..........................................53
Certain Federal Income Tax Consequences.....................................53
Accounting Treatment........................................................55
Regulatory Approvals and Other Legal Matters................................55
Regulatory Approvals.....................................................55
Legal Proceedings........................................................55
Appraisal Rights............................................................56
Stock Exchange Listing of Holdings Common Stock.............................58
Federal Securities Law Consequences.........................................59
iii
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Page
----
THE MERGER AGREEMENT..........................................................60
The Merger..................................................................60
Conversion of Shares........................................................60
Fractional Shares...........................................................61
Exchange of Stock Certificates..............................................62
Representations and Warranties..............................................63
Certain Covenants...........................................................63
Interim Operations.......................................................63
Capital Expenditures.....................................................63
Indebtedness.............................................................63
Changes in Capital Stock.................................................63
Issuance of Stock; Dispositions; Acquisitions............................63
Employment Agreements....................................................64
Employee Compensation and Benefits.......................................64
Inventory................................................................64
Labor Matters............................................................64
Consents.................................................................64
Further Assurance and Cooperation........................................64
No Solicitation of Acquisition Proposals....................................64
Indemnification.............................................................65
Conditions to Each Party's Obligation to Effect the Merger..................66
Conditions to Obligation of Smith's to Effect the Merger....................66
Conditions to Obligation of Fred Meyer to Effect the Merger.................67
Termination Fee.............................................................68
Amendment and Waiver........................................................68
OTHER AGREEMENTS..............................................................69
Stock Option Agreement......................................................69
Voting Agreements...........................................................71
Registration Rights Agreement...............................................72
Holdings Management Services Agreement......................................73
REFINANCING ARRANGEMENTS......................................................74
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS...................76
COMPARATIVE MARKET PRICES AND DIVIDENDS.......................................84
MANAGEMENT OF HOLDINGS FOLLOWING THE MERGER...................................86
SECURITY OWNERSHIP OF HOLDINGS................................................88
DESCRIPTION OF HOLDINGS CAPITAL STOCK.........................................90
Authorized Capital Stock....................................................90
Holdings Common Stock.......................................................90
Holdings Preferred Stock....................................................90
Certain Anti-Takeover Provisions............................................90
COMPARISON OF STOCKHOLDERS' RIGHTS............................................92
Comparison of Rights of Holders of Common Stock Generally...................92
Number of Directors......................................................92
Classified Board of Directors............................................92
Removal of Directors.....................................................92
Vacancies on the Board of Directors......................................92
Stockholder Action by Written Consent....................................92
Amendments of Certificate of Incorporation...............................93
iv
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Page
----
Amendment of Bylaws......................................................93
Notice of Stockholders Proposals/Nominations of Directors................93
Calling of Special Meeting of Stockholders...............................94
Comparison of Rights of Holders of Smith's Class A Common Stock
and Holders of Holdings Common Stock.....................................94
General..................................................................94
Voting Rights............................................................94
Conversion Rights........................................................94
PROPOSAL TO APPROVE THE 1997 STOCK INCENTIVE PLAN OF HOLDINGS.................95
Description of the 1997 Plan................................................95
Eligibility..............................................................95
Administration...........................................................95
Term of Plan.............................................................95
Stock Options............................................................95
Stock Appreciation Rights................................................96
Stock Bonus Awards.......................................................96
Restricted Stock........................................................ 96
Cash Bonus Rights....................................................... 96
Performance-based Awards................................................ 97
Changes in Capital Structure............................................ 97
Acceleration in Certain Events.......................................... 97
Tax Consequences........................................................... 97
Recommendation of the Boards of Directors.................................. 98
PROPOSAL TO APPROVE THE NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION
PLAN OF HOLDINGS........................................................... 99
General.................................................................... 99
Administration............................................................. 99
Eligibility and Participation.............................................. 99
Form of Election........................................................... 99
Deferral Accounts..........................................................100
Miscellaneous Provisions...................................................100
Federal Income Tax Consequences............................................100
Recommendation of the Boards of Directors..................................101
STOCKHOLDER PROPOSALS........................................................101
LEGAL MATTERS................................................................101
EXPERTS......................................................................101
OTHER MATTERS................................................................102
APPENDIX A -- MERGER AGREEMENT
APPENDIX B -- FAIRNESS OPINION OF SALOMON BROTHERS INC
APPENDIX C -- FAIRNESS OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
APPENDIX D -- RESTATED CERTIFICATE OF INCORPORATION OF HOLDINGS
APPENDIX E -- BYLAWS OF HOLDINGS
APPENDIX F -- VOTING AGREEMENTS
APPENDIX G -- SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPENDIX H -- STOCK OPTION AGREEMENT
APPENDIX I -- 1997 STOCK INCENTIVE PLAN OF HOLDINGS
APPENDIX J -- NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN OF HOLDINGS
v
<PAGE>
AVAILABLE INFORMATION
Fred Meyer and Smith's are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Fred Meyer and Smith's with the
Commission may be inspected and copied at the Commission's public reference room
located at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at the public reference facilities in the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661.
Copies of such material may be obtained at prescribed rates by writing to the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. Certain of such reports, proxy statements and other information are also
available from the Commission over the Internet at http://www.sec.gov. The Fred
Meyer Common Stock is listed on the NYSE. The Smith's Class B Common Stock is
also listed on the NYSE. The periodic reports, proxy statements and other
information filed by Fred Meyer and Smith's with the Commission may be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
This Joint Proxy Statement/Prospectus is included as part of a registration
statement on Form S-4 (together with all amendments and exhibits thereto,
including documents and information incorporated by reference, the "Registration
Statement") filed with the Commission by Holdings, relating to the registration
under the Securities Act of 1933, as amended (the "Securities Act"), of the
shares of Holdings Common Stock offered hereby. This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted pursuant to
the rules and regulations of the Commission, to which reference is hereby made
for further information with respect to Fred Meyer and Smith's and the Holdings
Common Stock offered hereby. Statements contained herein concerning the
provisions of documents filed with, or incorporated by reference in, the
Registration Statement as exhibits are necessarily summaries of such provisions
and documents and each such statement is qualified in its entirety by reference
to the copy of the applicable document filed with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by Fred Meyer are
incorporated herein by reference: (a) Fred Meyer's Annual Report on Form 10-K
for the fiscal year ended February 1, 1997, Amendment No. 1 thereto on Form
10-K/A filed May 20, 1997, Amendment No. 2 thereto on Form 10-K/A filed on
August 6, 1997, and Amendment No. 3 thereto on Form 10-K/A filed on August 6,
1997 (the "Fred Meyer Form 10-K"); (b) Fred Meyer's Quarterly Report on Form
10-Q for the fiscal quarter ended May 24, 1997, Amendment No. 1 thereto on Form
10-Q/A filed on August 6, 1997, and Amendment No. 2 thereto on Form 10-Q/A filed
on August 6, 1997; and (c) Fred Meyer's Current Report on Form 8-K dated May 11,
1997.
The following documents filed with the Commission by Smith's are
incorporated herein by reference: (a) Smith's Annual Report on Form 10-K for the
fiscal year ended December 28, 1996, Amendment No. 1 thereto on Form 10-K/A
filed April 7, 1997, and Amendment No. 2 thereto on Form 10-K/A filed on August
6, 1997 (the "Smith's Form 10-K"); (b) Smith's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 5, 1997; (c) the portions of Smith's Proxy
Statement on Schedule 14A for the Annual Meeting of Stockholders held on April
23, 1997 filed on April 10, 1997 that have been incorporated by reference into
the Smith's Form 10-K; and (d) Smith's Current Report on Form 8-K dated May 11,
1997.
All documents filed by either Fred Meyer or Smith's pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the time at which the Fred Meyer Special Meeting and the Smith's
Special Meeting have been finally adjourned shall be deemed to be incorporated
herein by reference and to be a part hereof from the date of such filing. Any
statement contained herein or in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein or in any
other subsequently filed document which also is, or is deemed to be,
incorporated herein by reference modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed to constitute a part
hereof, except as so modified or superseded.
2
<PAGE>
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THE DOCUMENTS RELATING TO
FRED MEYER (EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN) ARE
AVAILABLE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED, WITHOUT CHARGE, UPON WRITTEN OR
ORAL REQUEST TO FRED MEYER, INC., 3800 SE 22ND AVENUE, PORTLAND, OREGON 97202,
ATTENTION: ROGER A. COOKE, SECRETARY (TELEPHONE NUMBER (503) 232-8844). THE
DOCUMENTS RELATING TO SMITH'S (EXCLUDING EXHIBITS UNLESS SPECIFICALLY
INCORPORATED THEREIN) ARE AVAILABLE TO EACH PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM A COPY OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED,
WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST TO SMITH'S FOOD & DRUG CENTERS,
INC., 1550 SOUTH REDWOOD ROAD, SALT LAKE CITY, UTAH 84104, ATTENTION: MICHAEL C.
FREI, SECRETARY. FRED MEYER OR SMITH'S, AS THE CASE MAY BE, WILL SEND THE
REQUESTED DOCUMENTS BY FIRST-CLASS MAIL WITHIN ONE BUSINESS DAY OF THE RECEIPT
OF THE REQUEST. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE RECEIVED NO LATER THAN FIVE BUSINESS DAYS BEFORE THE APPLICABLE
MEETING DATE. PERSONS REQUESTING COPIES OF EXHIBITS TO SUCH DOCUMENTS THAT ARE
NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS WILL BE CHARGED THE
COSTS OF REPRODUCTION AND MAILING.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FRED MEYER OR SMITH'S. THIS
JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY
OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE ANY SECURITIES BY
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF FRED MEYER OR
SMITH'S SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. FRED MEYER HAS SUPPLIED ALL INFORMATION
CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS RELATING TO FRED MEYER AND
ITS SUBSIDIARIES, AND SMITH'S HAS SUPPLIED ALL INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS RELATING TO SMITH'S AND ITS SUBSIDIARIES.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALE OF THE
SECURITIES TO BE RECEIVED BY STOCKHOLDERS OF FRED MEYER OR SMITH'S UPON THE
CONSUMMATION OF THE MERGER. NO PERSON IS AUTHORIZED TO MAKE USE OF THIS JOINT
PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH ANY SUCH RESALE.
3
<PAGE>
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
Certain matters discussed herein are forward-looking statements that
involve risks and uncertainties. This Joint Proxy Statement/Prospectus contains
certain forward-looking statements with respect to the financial condition,
results of operations and business of each of Fred Meyer and Smith's on a
stand-alone basis and of Holdings on a pro forma combined basis following the
completion of the Merger, including statements relating to (a) the market
presence and growth opportunities of the combined companies expected to result
from the Merger; (b) the operating efficiencies, cost savings and refinancing
opportunities anticipated to result from the Merger; (c) earnings per share and
earnings per share growth projected to result from the Merger; and (d) the
impact on revenues of the Merger. See "The Merger -- Reasons of Fred Meyer for
the Merger," "-- Reasons of Smith's for the Merger," and "Unaudited Pro Forma
Condensed Combined Financial Statements." These forward-looking statements
involve certain risks and uncertainties. Factors that may cause actual results
to differ materially from those contemplated by such forward-looking statements
include, among others, the information set forth under the heading "Risk
Factors" in the Smith's Form 10-K and the following possibilities: (1)
conditions to the completion of the Merger may not be satisfied; (2) regulatory
or government authorities may make adverse determinations regarding the Merger;
(3) expected cost savings from the Merger may not be fully realized or realized
within the expected time frame; (4) revenues following the Merger may be lower
than expected; (5) competitive pressures among food and nonfood retailers may
increase significantly; (6) costs or difficulties related to the integration of
the businesses of Fred Meyer and Smith's may be greater than expected; (7)
unanticipated increases may occur in financing and other costs; (8) general
economic or business conditions, either nationally or in the states in which
Fred Meyer and Smith's conduct business, may be less favorable than expected;
(9) legislative or regulatory changes may adversely affect the businesses in
which Fred Meyer and Smith's are engaged; (10) relations with the union
bargaining units representing the employees of Fred Meyer or Smith's may
deteriorate; and (11) other opportunities may be presented to and pursued by
Fred Meyer or Smith's.
4
<PAGE>
SUMMARY
The following summary of certain information contained in this Joint Proxy
Statement/Prospectus is qualified in its entirety by, and reference is made to,
the more detailed information appearing elsewhere in this Joint Proxy
Statement/Prospectus, including the accompanying Appendices and the documents
incorporated by reference herein. Each stockholder is urged to read this Joint
Proxy Statement/Prospectus and the Appendices hereto in their entirety and with
care. As used in this Joint Proxy Statement/Prospectus, the term "Fred Meyer"
refers to Fred Meyer and, unless the context otherwise requires, its
subsidiaries, the term "Smith's" refers to Smith's and, unless the context
otherwise requires, its subsidiaries and the term "Holdings" refers to Holdings
following completion of the Merger and, unless the context otherwise requires,
its subsidiaries.
The Companies
Fred Meyer. Fred Meyer is a regional retailer of a wide range of food,
apparel, fine jewelry and products for the home. As of February 1, 1997, Fred
Meyer operated 109 multidepartment stores under the name "Fred Meyer" in Alaska,
Idaho, Montana, Oregon, Utah and Washington, and 110 specialty stores in 17
states. The multidepartment stores average approximately 144,000 square feet of
retail space and emphasize one-stop-shopping for necessities and items of
everyday use. All but five of the specialty stores are mall jewelry stores,
which average approximately 1,300 square feet of retail space and operate under
the names "Fred Meyer Jewelers" or "Merksamer Jewelers." See "The Companies --
Fred Meyer."
Smith's. Smith's is a regional supermarket and drug store chain operating
in the Intermountain and Southwestern Regions of the United States. Smith's
develops and operates combination food and drug centers which offer one-stop
shopping convenience through a full-line supermarket with drug and pharmacy
departments and some or all of the following specialty departments:
delicatessens, hot prepared food sections, in-store bakeries, video rental
shops, floral shops, one-hour photo processing labs, full-service banking and
frozen yogurt shops. As of April 5, 1997, Smith's operated 144 combination food
and drug stores, five warehouse stores and two conventional supermarkets in
Arizona, Idaho, New Mexico, Nevada, Texas, Utah and Wyoming. The 144 combination
food and drug stores average approximately 69,000 square feet in size and offer
an extensive line of supermarket, non-food and drug products. See "The Companies
- -- Smith's."
Holdings. Holdings, a newly formed Delaware corporation, all of the issued
and outstanding common stock of which is owned 50% by each of Fred Meyer and
Smith's, has not conducted any substantial business to date. As a result of the
Merger, Fred Meyer and Smith's will become wholly owned subsidiaries of
Holdings. Accordingly, the business of Holdings will be the business currently
conducted by Fred Meyer and Smith's. Upon consummation of the Merger, Holdings
will be renamed "Fred Meyer, Inc." and Fred Meyer will be renamed "FM Stores,
Inc." See "The Companies -- Holdings."
Fred Meyer Special Meeting
The Fred Meyer Special Meeting is scheduled to be held on September 8, 1997
at 10:00 a.m. local time, at the DoubleTree Hotel, Lloyd Center, 1000 NE
Multnomah, Portland, Oregon. The purpose of the Fred Meyer Special Meeting is
(i) to consider and vote on a proposal to approve and adopt the Merger Agreement
and to change the name of Fred Meyer to "FM Stores, Inc."; (ii) to consider and
vote on a proposal to approve and adopt the 1997 Plan; (iii) to consider and
vote on a proposal to approve and adopt the Directors' Plan; and (iv) to
transact such other business that may properly come before the Fred Meyer
Special Meeting. The Fred Meyer Board is not aware of any such other matters.
The record date for the Fred Meyer Special Meeting (the "Fred Meyer Record
Date") is the close of business on July 18, 1997. As of the close of business on
the Fred Meyer Record Date, there were 26,760,434 shares of Fred Meyer Common
Stock outstanding and entitled to vote, held by 1,203 stockholders of record.
Each holder of Fred Meyer Common Stock on the Fred Meyer Record Date is entitled
to one vote per share held on all matters properly presented at the Fred Meyer
Special Meeting.
5
<PAGE>
Approval and adoption of the Merger Agreement requires the approval of the
holders of a majority of the outstanding shares of Fred Meyer Common Stock.
Approval and adoption of each of the 1997 Plan and the Directors' Plan requires
the approval of the holders of a majority of the shares present and entitled to
vote on the matter at the Fred Meyer Special Meeting, provided that the total
votes cast on the matter represent over 50% of the Fred Meyer Common Stock
entitled to vote on the matter. See "Fred Meyer Special Meeting."
Smith's Special Meeting
The Smith's Special Meeting is scheduled to be held on September 8, 1997 at
10:00 a.m. local time, at the offices of Latham & Watkins, 633 West Fifth
Street, 6th Floor, Los Angeles, California. The purpose of the Smith's Special
Meeting is (i) to consider and vote on a proposal to approve and adopt the
Merger Agreement; (ii) to consider and vote on a proposal to approve and adopt
the 1997 Plan; (iii) to consider and vote on a proposal to approve and adopt the
Directors' Plan; and (iv) to transact such other business that may properly come
before the Smith's Special Meeting. The Smith's Board is not aware of any such
other matters.
The record date for the Smith's Special Meeting (the "Smith's Record Date")
is the close of business on July 18, 1997. As of the close of business on the
Smith's Record Date, there were 3,677,205 shares of Smith's Class A Common Stock
outstanding and entitled to vote, held by 156 stockholders of record, 12,180,447
shares of Smith's Class B Common Stock outstanding and entitled to vote, held by
777 stockholders of record, and 9,956,747 shares of Smith's Series I Preferred
Stock outstanding and entitled to vote, held by eight stockholders of record.
Holders of outstanding shares of Smith's Stock on the Smith's Record Date will
vote together as a single class, with each share of Smith's Class A Common Stock
and Smith's Series I Preferred Stock entitling the holder thereof to ten votes,
and each share of Smith's Class B Common Stock entitling the holder thereof to
one vote, on all matters properly presented at the Smith's Special Meeting.
Approval and adoption of the Merger Agreement requires the approval of the
holders of a majority of the total votes of the outstanding shares of Smith's
Stock. Prior to the execution of the Merger Agreement, certain stockholders of
Smith's who at the Smith's Record Date owned in the aggregate approximately 70%
of the combined voting power of the outstanding capital stock of Smith's,
entered into voting agreements with Fred Meyer pursuant to which such
stockholders agreed, among other things, to vote the shares of Smith's Stock
owned or acquired by them in favor of approval and adoption of the Merger
Agreement. Assuming such stockholders vote their shares in accordance with the
voting agreements at the Smith's Special Meeting, the presence of a quorum and
the requisite vote for the approval and adoption of the Merger Agreement would
be assured. Approval and adoption of each of the 1997 Plan and the Directors'
Plan requires the approval of the holders of a majority of the total votes of
the shares present and entitled to vote on the matter at the Smith's Special
Meeting, provided that the total votes cast on the matter represent over 50% in
interest of all shares entitled to vote on the matter. See "Smith's Special
Meeting."
The Merger
Ownership of Holdings after the Merger. Immediately following the Merger
based upon shares of Common Stock of Fred Meyer and Smith's outstanding on July
18, 1997 (the Smith's Record Date and the Fred Meyer Record Date), it is
anticipated that former holders of outstanding Fred Meyer Common Stock and
Smith's Common Stock will collectively own approximately 62% and 38%,
respectively, of the issued and outstanding shares of Holdings Common Stock.
Recommendation of the Fred Meyer Board. The Fred Meyer Board believes that
the transactions contemplated by the Merger Agreement are in the best interests
of the stockholders of Fred Meyer and unanimously recommends that stockholders
of Fred Meyer vote "FOR" approval and adoption of the Merger Agreement. See "The
Merger -- Reasons of Fred Meyer for the Merger."
Recommendation of the Smith's Board. The Smith's Board believes that the
transactions contemplated by the Merger Agreement are in the best interests of
the stockholders of Smith's and unanimously recommends that stockholders of
Smith's vote "FOR" approval and adoption of the Merger Agreement. See "The
Merger -- Reasons of Smith's for the Merger."
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<PAGE>
Opinion of Fred Meyer Financial Advisor. On May 11, 1997, Salomon Brothers
Inc ("Salomon"), financial advisor to Fred Meyer, delivered its written opinion
to the Fred Meyer Board, that, as of such date, the Fred Meyer Exchange Ratio
was fair to the stockholders of Fred Meyer from a financial point of view. The
full text of Salomon's written opinion, which sets forth the assumptions made,
general procedures followed, matters considered and limitations on and scope of
the review undertaken in connection with the opinion, is attached to this Joint
Proxy Statement/Prospectus as Appendix B. Stockholders should read the entire
opinion carefully. See "The Merger -- Opinion of Fred Meyer Financial Advisor."
Opinion of Smith's Financial Advisor. On May 9, 1997, Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), financial advisor to Smith's, rendered
an oral opinion to the Smith's Board, which was confirmed by delivery of its
written opinion dated May 11, 1997, to the effect that, as of such date, the
Smith's Exchange Ratio was fair to the common stockholders of Smith's from a
financial point of view. The full text of DLJ's written opinion, which sets
forth the assumptions made, general procedures followed, matters considered and
limitations on and scope of the review undertaken in connection with the
opinion, is attached to this Joint Proxy Statement/Prospectus as Appendix C.
Stockholders should read the entire opinion carefully. See "The Merger --
Opinion of Smith's Financial Advisor."
Interests of Certain Persons in the Merger. In considering the Merger,
stockholders should be aware that certain members of management of Fred Meyer
and Smith's and the Fred Meyer Board and the Smith's Board have interests in the
Merger that are different from, or in addition to, the interests of the
stockholders of Fred Meyer and Smith's generally.
Following the Merger, certain of the current officers and directors of Fred
Meyer and Smith's, respectively, will become officers and directors of Holdings.
See "The Merger -- Interests of Certain Persons in the Merger -- The Merger --
Directors and Officers of Holdings" and "Management of Holdings Following the
Merger."
In connection with the Merger, the Smith's Board determined that it was in
the best interest of Smith's to provide certain assurances to its senior
management in order to ensure management stability pending the consummation of
the Merger. As a result, Smith's has entered into employment agreements with 17
employees, including three executive officers, of Smith's pursuant to which such
employees will be entitled to certain benefits including, without limitation, a
specified base salary and participation in incentive bonus programs, life
insurance and medical, health, disability and accident and other benefit
programs, upon a "change of control" of Smith's. The Merger will constitute such
a "change of control." Following the Merger, it is also anticipated that Allen
R. Rowland, President and Chief Operating Officer of Smith's, and Matthew G.
Tezak, Senior Vice President and Chief Financial Officer of Smith's, will enter
into agreements with Smith's on terms similar to the terms of the foregoing
agreements. In addition, prior to its consideration of the Merger, Smith's had
entered into deferred compensation agreements with five executive officers and
five other current or former employees which, subject to certain conditions set
forth in such agreements, provide for fixed monthly cash payments for a period
of up to 20 years to commence following the first to occur of such employee's
disability or death or a date specified in the agreement. The amount of benefits
under each of the deferred compensation agreements increases annually with each
year of service to Smith's by the respective employee, except that the
agreements provide that the employee shall become entitled to the maximum amount
of benefits thereunder in the event of a "change of control." The Merger will
constitute a "change of control" resulting in the employee's entitlement to the
maximum benefits under such agreements as if such employee had continued his
employment with Smith's, through the applicable dates specified therein. See
"The Merger -- Interests of Certain Persons in the Merger -- Existing
Arrangements --Smith's Employment Agreements," "-- Smith's Deferred Compensation
Agreements," "-- The Merger -- Smith's Employment Agreements," "-- New
Employment Agreements" and "-- Smith's Deferred Compensation Agreements."
In connection with the Merger, substantially all outstanding stock options
to purchase Fred Meyer Common Stock and Smith's Class B Common Stock granted
under Fred Meyer stock option plans and Smith's stock option plan, respectively,
will become immediately exercisable at the Effective Time for shares of Holdings
Common Stock. See "The Merger -- Interests of Certain Persons in the Merger --
Existing
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<PAGE>
Arrangements -- Fred Meyer Stock Option Plans," "-- Smith's Stock Option Plan,"
"-- The Merger -- Fred Meyer Stock Option Plans" and "-- Smith's Stock Option
Plan."
Following the Merger and as a part of the integration of the compensation
programs of Fred Meyer and Smith's, Holdings will enter into or amend employment
agreements with senior officers of Fred Meyer, grant options to them pursuant to
the 1997 Plan and make other compensation changes. See "The Merger -- Interests
of Certain Persons in the Merger -- The Merger -- Fred Meyer Stock Option Plans
and Compensation" and "-- Fred Meyer Executive Severance Agreements."
Following the Merger all shares of Fred Meyer Common Stock purchased for
non-employee directors under the Fred Meyer Non-Employee Directors Stock
Compensation Plan will become immediately vested in full. See "The Merger --
Interests of Certain Persons in the Merger -- The Merger -- Fred Meyer
Non-Employee Directors Stock Compensation Plan" (the "Fred Meyer Non-Employee
Directors Plan").
Smith's and The Yucaipa Companies LLC, a Delaware limited liability company
("Yucaipa"), of which Ronald W. Burkle, the Chief Executive Officer of Smith's,
is the managing member, have entered into a transaction consulting agreement
pursuant to which, among other things, Smith's has agreed to pay Yucaipa a total
fee of $15 million upon consummation of certain transactions, including the
Merger. In addition, Holdings has agreed to enter into a management services
agreement with Yucaipa on the Closing Date (as defined herein). See "The Merger
- -- Interests of Certain Persons in the Merger -- Existing Arrangements --
Smith's Management Services Agreement and Transaction Consulting Agreement" and
"-- The Merger -- Holdings Management Services Agreement."
In May 1996, Smith's and an affiliate of Yucaipa entered into a warrant
agreement for the purchase of up to 1,842,555 shares of Smith's nonvoting Class
C Common Stock. Pursuant to the terms of the Merger Agreement and the warrant
agreement, Holdings will enter into a supplemental warrant agreement with
respect to the issuance of Holdings Common Stock upon exercise of the warrants
subject to the initial warrant agreement, pursuant to which such warrants will
be exercisable for an aggregate of 1,934,683 shares of Holdings Common Stock at
an exercise price of $50 for each 1.05 shares of Holdings Common Stock, for an
aggregate purchase price of $92,127,750. See "The Merger -- Interests of Certain
Persons in the Merger -- Existing Arrangements -- The Yucaipa Warrants" and "--
The Merger -- The Yucaipa Warrants."
Upon consummation of the Merger, Holdings will be obligated to indemnify
certain current and former directors and officers of Fred Meyer and Smith's to
the fullest extent such persons are indemnified by Fred Meyer and Smith's,
respectively, pursuant to existing arrangements among the parties. In addition,
for a period of five years after the Effective Time, Holdings will maintain
officers' and directors' liability insurance covering such directors and
officers on terms substantially no less advantageous to such directors and
officers than existing insurance. See "The Merger -- Interests of Certain
Persons in the Merger -- Existing Arrangements -- Indemnification Arrangements
with Fred Meyer Officers and Directors," "-- Indemnification Arrangements with
Smith's Officers and Directors," "-- The Merger -- Indemnification Arrangements
with Fred Meyer Officers and Directors" and "-- The Merger --Indemnification
Arrangements with Smith's Officers and Directors."
In connection with the Merger, Holdings will enter into a registration
rights agreement with Jeffrey P. Smith, Fred L. Smith, Richard D. Smith, certain
Smith family trusts and certain affiliates of Yucaipa providing them with
certain "demand," "piggyback" and "shelf" registration rights with respect to
Holdings Common Stock then owned by them. See "The Merger -- Interests of
Certain Persons in the Merger -- Existing Arrangements -- Registration Rights
Agreement" and "-- The Merger -- Registration Rights Agreement."
Certain Federal Income Tax Consequences. The obligations of Fred Meyer and
Smith's to consummate the Merger are conditioned on, among other things, the
receipt of opinions of Cleary, Gottlieb, Steen & Hamilton and Latham & Watkins,
special tax counsel to Fred Meyer and Smith's, respectively, based on certain
facts and assumptions set forth therein and certain representations by their
respective managements, substantially to the effect that for federal income tax
purposes the Merger will be treated as an "exchange" within the meaning of
Section 351(a) of the Internal Revenue Code of 1986, as amended (the "Code").
8
<PAGE>
Accordingly (i) no gain or loss will be recognized by Smith's, Fred Meyer or
Holdings as a result of the Merger; (ii) no gain or loss will be recognized by
holders of Smith's Common Stock or Fred Meyer Common Stock upon the conversion
of such stock into Holdings Common Stock (except with respect to any cash
received in respect of fractional shares); and (iii) the aggregate tax basis and
holding period of the shares of Holdings Common Stock received by holders of
Smith's Common Stock or Fred Meyer Common Stock will be the same as the
aggregate tax basis and holding period of the Smith's Common Stock or Fred Meyer
Common Stock, as the case may be, surrendered in exchange therefor. Each
stockholder of Fred Meyer and Smith's is urged to consult his or her own tax
advisor concerning the federal income tax consequences of the Merger, as well as
any applicable state, local, foreign or other tax consequences, based on such
stockholder's own particular facts and circumstances. See "The Merger -- Certain
Federal Income Tax Consequences."
Accounting Treatment. The Merger will be accounted for as a purchase, with
Fred Meyer as acquiror, in accordance with generally accepted accounting
principles ("GAAP"). See "The Merger -- Accounting Treatment."
Regulatory Approvals. Under the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Merger may
not be consummated until such time as the applicable waiting period requirements
of the HSR Act have been satisfied. The applicable waiting period under the HSR
Act has expired. See "The Merger -- Regulatory Approvals and Other Legal Matters
- -- Regulatory Approvals."
Appraisal Rights. Under the Delaware General Corporation Law (the "DGCL"),
holders of Fred Meyer Common Stock and Smith's Class B Common Stock are not
entitled to appraisal rights in connection with the Merger. Holders of Smith's
Class A Common Stock and Smith's Series I Preferred Stock who do not vote in
favor of the approval and adoption of the Merger Agreement and who have properly
complied with Section 262 of the DGCL ("Section 262") will be entitled to
appraisal rights. To preserve their rights, stockholders who wish to exercise
their statutory appraisal rights must submit a written demand for appraisal
prior to the Smith's Special Meeting and comply with the other procedural
requirements of Section 262 described herein. SECTION 262 IS REPRINTED IN ITS
ENTIRETY AS APPENDIX G TO THIS JOINT PROXY STATEMENT/PROSPECTUS. THE DISCUSSION
OF APPRAISAL RIGHTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NECESSARILY A
SUMMARY OF THE LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO APPENDIX G. THE DISCUSSION CONTAINED HEREIN AND APPENDIX G
SHOULD BE REVIEWED CAREFULLY BY ANY STOCKHOLDER WHO WISHES TO EXERCISE STATUTORY
APPRAISAL RIGHTS, IF AVAILABLE, OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS
FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN
THE LOSS OF APPRAISAL RIGHTS, IF AVAILABLE. See "The Merger -- Appraisal
Rights."
Stock Exchange Listing of Holdings Common Stock. Application has been made
for the listing on the NYSE of the shares of Holdings Common Stock to be issued
in the Merger. This listing is a condition to the consummation of the Merger.
See "The Merger -- Stock Exchange Listing of Holdings Common Stock" and "The
Merger Agreement -- Conditions to Each Party's Obligation to Effect the Merger."
The Merger Agreement
Conversion of Shares. The Merger Agreement provides that, following the
approval of the Merger Agreement by the stockholders of Fred Meyer and Smith's
and the satisfaction or waiver of the other conditions to the Merger, Fred Meyer
Sub will merge with and into Fred Meyer and Smith's Sub will merge with and into
Smith's, with Fred Meyer and Smith's surviving the Fred Meyer Merger and the
Smith's Merger, respectively, and becoming wholly owned subsidiaries of
Holdings. At the Effective Time, (i) each issued and outstanding share of
Smith's Common Stock will be converted into 1.05 shares of Holdings Common
Stock, (ii) each issued and outstanding share of Smith's Series I Preferred
Stock will be converted into the right to receive in cash the amount of
thirty-three and one-third cents ($.33 1/3) and (iii) each issued
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<PAGE>
and outstanding share of Fred Meyer Common Stock will be converted into one
share of Holdings Common Stock.
If the Merger Agreement is approved by the stockholders of Fred Meyer and
Smith's, and the other conditions to the Merger are satisfied or waived, the
closing of the transactions contemplated by the Merger Agreement (the "Closing")
will take place on the third business day following the date on which the last
of the conditions is satisfied or waived, or at such other time and date to
which Fred Meyer and Smith's mutually agree (the "Closing Date"). On the Closing
Date, Smith's and Fred Meyer will cause certificates of merger to be filed with
the Secretary of State of the State of Delaware as provided in Section 251 of
the DGCL, at which time and date of such filing (the "Effective Time") the
Merger will become effective. See "The Merger Agreement -- Conversion of
Shares."
Representations and Warranties. The Merger Agreement contains customary
reciprocal representations and warranties by Fred Meyer and Smith's relating to,
among other things, (a) the organization, standing, capital structure and
similar corporate matters of each of Fred Meyer and Smith's; (b) the
authorization, execution, delivery, performance and enforceability of the Merger
Agreement; (c) compliance with applicable laws and agreements; (d) the accuracy
of certain reports and financial statements filed with the Commission; (e) the
absence of adverse material suits, claims or proceedings or other litigation;
and (f) the absence of any material adverse changes to their respective
businesses. See "The Merger Agreement -- Representations and Warranties."
Certain Covenants. The Merger Agreement contains various customary
covenants, including, among others, covenants of each of Fred Meyer and Smith's
that, until the Effective Time and subject to certain exceptions, unless
consented to in writing by the other party, each of Fred Meyer and Smith's (a)
will conduct its business in the ordinary course; (b) will not split, combine or
reclassify its shares of outstanding capital stock or make any distributions
with respect to such shares, or redeem or otherwise acquire any shares of its
capital stock; (c) will not issue or sell additional shares of, or grant options
or rights to acquire shares of, its capital stock; (d) will use all reasonable
efforts to obtain certain required third-party consents; and (e) will use
reasonable efforts to cause to be done all things necessary to consummate the
Merger. See "The Merger Agreement -- Certain Covenants."
No Solicitation of Acquisition Proposals. Each of Fred Meyer and Smith's
has agreed, prior to the Effective Time, (a) that neither it nor any of its
subsidiaries will, nor will it or any of its subsidiaries permit their
respective officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its subsidiaries) to, directly or indirectly, initiate,
solicit or encourage any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) with respect to an Acquisition Proposal (as defined herein) or
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; and (b) that it will immediately advise the other party to
the Merger Agreement orally and in writing of (i) any inquiry or any request for
information or data, (ii) any request or invitation to engage in negotiations or
discussions with any person relating to an Acquisition Proposal, (iii) any
request to otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal or (iv) any Acquisition Proposal, and in each case, the
material terms and conditions of such inquiry, request, invitation or
Acquisition Proposal and the identity of the person making any such inquiry,
request, invitation or Acquisition Proposal; provided, however, that nothing
contained in the Merger Agreement will prohibit the Fred Meyer Board or the
Smith's Board from, to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act (which relates to the communication of a
recommendation with respect to certain tender offers) with regard to an
Acquisition Proposal or from making any disclosure to, or communicating with,
its stockholders if, in the good faith judgment of the Fred Meyer Board or the
Smith's Board, as applicable, after consultation with outside counsel, failure
to so disclose or communicate would be inconsistent with its fiduciary duties
under applicable law. See "The Merger Agreement -- No Solicitation of
Acquisition Proposals."
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<PAGE>
Conditions to the Obligations of the Parties to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
fulfillment or waiver of various conditions, including, among others: (a)
approval of the Merger Agreement by the stockholders of Smith's and Fred Meyer;
(b) compliance with the filing requirements and expiration of the applicable
waiting periods imposed by the HSR Act; (c) the absence of any governmental
order, rule or injunction prohibiting or otherwise impairing the ability of
Holdings to operate the business of Smith's and Fred Meyer on a consolidated
basis; (d) the effectiveness of the Registration Statement; (e) receipt of all
other necessary governmental approvals; (f) approval of the Holdings Common
Stock for listing on the NYSE; (g) termination of all rights to acquire equity
securities of Smith's or Fred Meyer; (h) the absence of any material adverse
effect with respect to Smith's or Fred Meyer; (i) receipt of legal opinions to
the effect that the Merger will be treated as an exchange under Section 351(a)
of the Code; (j) execution of certain related agreements and the termination of
the Smith's Management Services Agreement; and (k) that certain existing
litigation will not have had, or reasonably be expected to have, a material
adverse effect with respect to Smith's or Holdings or a material adverse effect
on the intended benefits of the Merger to Fred Meyer, Smith's or Holdings. See
"The Merger Agreement -- Conditions to Each Party's Obligation to Effect the
Merger," "-- Conditions to Obligation of Smith's to Effect the Merger" and "--
Conditions to Obligation of Fred Meyer to Effect the Merger."
Termination Fee. Under the terms of the Merger Agreement, Fred Meyer has
agreed under certain circumstances to reimburse certain expenses of Smith's
and/or to pay Smith's a termination fee of $35 million (the "Termination Fee")
in connection with the termination of the Merger Agreement. More specifically,
(a) if the Merger Agreement is terminated by Smith's as a result of a failure to
obtain the approval of the stockholders of Fred Meyer and at the time of the
event giving rise to such termination Fred Meyer would not itself have been
entitled to terminate the Merger Agreement under certain circumstances, Fred
Meyer will pay Smith's up to $5 million as reimbursement for certain expenses of
Smith's actually incurred prior to such termination; (b) if the Merger Agreement
is terminated by Smith's as a result of a failure to obtain the approval of the
stockholders of Fred Meyer and at the time of the event giving rise to such
termination Fred Meyer would not itself have been entitled to terminate the
Merger Agreement under certain circumstances and any Acquisition Proposal
relating to Fred Meyer was pending, then, if within eighteen (18) months
following such termination, any Alternative Transaction (as defined in the
Merger Agreement) relating to Fred Meyer is consummated (or if any specified
Alternative Transaction relating to Fred Meyer shall have been consummated prior
to such termination), Fred Meyer will pay Smith's the Termination Fee; and (c)
if the Merger Agreement is terminated by Smith's as a result of the Merger not
having been consummated by January 31, 1998 under certain circumstances and at
the time of the event giving rise to such termination (i) the approval of the
stockholders of Fred Meyer has not been obtained, (ii) Fred Meyer would not
itself have been entitled to terminate the Merger Agreement under certain
circumstances and (iii) any Acquisition Proposal relating to Fred Meyer is
pending (or any specified Alternative Transaction relating to Fred Meyer has
been consummated), Fred Meyer will pay Smith's the Termination Fee. In addition,
Fred Meyer has granted Smith's a stock option that becomes exercisable if the
Termination Fee becomes payable to Smith's. See "The Merger Agreement --
Termination Fee" and "Other Agreements -- Stock Option Agreement."
Amendment and Waiver. The Merger Agreement may be amended by mutual
agreement of Fred Meyer and Smith's by action taken by their respective Boards
of Directors at any time prior to the completion of the Merger; provided that,
after approval of the Merger Agreement by the stockholders of Fred Meyer or
Smith's, no amendment may be made that by law requires further approval by the
stockholders without obtaining such further approval. In addition, either
company may waive any provision of the Merger Agreement. See "The Merger
Agreement -- Amendment and Waiver."
Other Agreements
Stock Option Agreement. As an inducement and condition to the willingness
of Smith's to enter into the Merger Agreement, Fred Meyer entered into a Stock
Option Agreement, dated as of May 11, 1997 (the "Stock Option Agreement"), with
Smith's pursuant to which Fred Meyer granted to Smith's an irrevocable option to
purchase 5,258,036 shares of Fred Meyer Common Stock (equal on such date to
19.9% of the outstanding shares of Fred Meyer Common Stock) for a purchase price
of $45 per share, subject to
11
<PAGE>
adjustment in certain circumstances. The option will become exercisable only if
the Termination Fee has become payable prior to the termination of the option
pursuant to the terms of the Stock Option Agreement, provided, that the profit
realized under the Stock Option Agreement may not exceed the sum of $10 million
and an amount (not to exceed $35 million) equal to any portion of the
Termination Fee which Smith's advises Fred Meyer in writing it has irrevocably
waived. See "The Merger Agreement -- Termination Fee" and "Other Agreements --
Stock Option Agreement."
Voting Agreements. As an inducement and condition to the willingness of
Fred Meyer to enter into the Merger Agreement, certain stockholders of Smith's,
who at the Smith's Record Date owned in the aggregate approximately 70% of the
combined voting power of the outstanding capital stock of Smith's, entered into
voting agreements, each dated as of May 11, 1997, with Fred Meyer (the "Voting
Agreements"). Each stockholder who is party to a Voting Agreement has agreed,
among other things, to vote the shares of Smith's Stock owned or acquired by
such stockholder (i) in favor of approval and adoption of the Merger Agreement,
(ii) against any other merger agreement or Acquisition Proposal and (iii)
against any amendment of the certificate of incorporation of Smith's (the
"Smith's Certificate") or the bylaws of Smith's (the "Smith's Bylaws") or any
other proposals or transactions that would in any manner impede the transactions
contemplated by the Merger Agreement. Assuming such stockholders vote their
shares in accordance with the voting agreements at the Smith's Special Meeting,
the requisite vote for the approval of the Merger Agreement by the stockholders
of Smith's would be assured. See "Other Agreements -- Voting Agreements."
Registration Rights Agreement. On the Closing Date, Holdings will enter
into a registration rights agreement (the "Registration Rights Agreement") with
(i) Jeffrey P. Smith, Richard D. Smith, Fred L. Smith and certain Smith family
trusts, and (ii) certain affiliates of Yucaipa, each of which will receive
shares of Holdings Common Stock in the Smith's Merger. Pursuant to the terms of
the Registration Rights Agreement, certain "demand", "piggyback" and "shelf"
registration rights will be granted for periods ranging up to 15 years following
the Closing Date. See "Other Agreements -- Registration Rights Agreement."
Holdings Management Services Agreement. On the Closing Date, Holdings will
enter into a management services agreement (the "Holdings Management Services
Agreement") with Yucaipa, pursuant to which Yucaipa, through its members,
employees or other designated representatives or agents, will agree to provide
Holdings and its subsidiaries, subject to the supervision of the Board of
Directors of Holdings (the "Holdings Board"), management consultation and advice
regarding strategic planning and development, budgeting, future financing plans,
selection and retention of management employees, general business management and
governmental affairs and such other similar management services that may be
requested by the Holdings Board and/or the Chief Executive Officer of Holdings
from time to time for a term of five years. In return, Holdings will agree to
pay Yucaipa an annual management fee of $500,000 and will reimburse Yucaipa for
its reasonable out-of-pocket costs and expenses incurred in connection with the
performance of its obligations under the Holdings Management Services Agreement.
If the Holdings Management Services Agreement is terminated by (i) Holdings
without cause, (ii) Yucaipa for cause in accordance with the terms of such
agreement or (iii) pursuant to a change of control of Holdings, Holdings has
agreed to pay or cause to be paid to Yucaipa a termination payment equal to the
greater of (x) $2.5 million and (y) twice the consulting fees that would have
been earned by Yucaipa during the remaining term of the Holdings Management
Services Agreement had the agreement not been terminated. See "Other Agreements
- -- Holdings Management Services Agreement."
Management of Holdings Following the Merger
The Merger Agreement provides that, following the Merger, the Holdings
Board will consist of (i) four of Smith's current directors (including Ronald W.
Burkle and three others selected by the Smith's Board) and (ii) seven
individuals selected by the Fred Meyer Board, one of which will be Robert G.
Miller. The members of the Holdings Board will be divided among three classes,
with each class to be constituted substantially proportionately of the directors
selected by Fred Meyer and those selected by Smith's. The Merger Agreement also
provides that, as of the Effective Time, Mr. Burkle will be the Chairman of the
Holdings Board and that Mr. Miller will be the President and Chief Executive
Officer of Holdings. See "The Merger -- Interests of Certain Persons in the
Merger" and "Management of Holdings Following the Merger."
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Comparison of Stockholders' Rights
Upon consummation of the Merger, holders of Fred Meyer Common Stock and
Smith's Common Stock will become holders of Holdings Common Stock. Because each
of Fred Meyer, Smith's and Holdings is organized under the laws of the state of
Delaware, differences in the rights of the holders of Holdings Common Stock, on
the one hand, and Fred Meyer Common Stock and Smith's Common Stock, on the
other, arise solely from differences in the restated certificate of
incorporation of Holdings (the "Holdings Certificate") and the bylaws of
Holdings (the "Holdings Bylaws"), on the one hand, and the certificate of
incorporation of Fred Meyer (the "Fred Meyer Certificate"), the bylaws of Fred
Meyer (the "Fred Meyer Bylaws"), the Smith's Certificate and the Smith's Bylaws,
on the other. For a discussion of certain similarities and differences in the
rights of holders of Fred Meyer Common Stock and Smith's Common Stock and the
rights of holders of Holdings Common Stock, see "Comparison of Stockholders'
Rights."
Comparative Market Prices and Dividends
The Fred Meyer Common Stock and the Smith's Class B Common Stock are listed
on the NYSE under the ticker symbols FMY and SFD, respectively.
The table below sets forth the closing price per share of Fred Meyer Common
Stock and Smith's Class B Common Stock, as reported on the NYSE Composite
Transactions Reporting System, on May 9, 1997, the last trading day before Fred
Meyer and Smith's publicly announced the execution of the Merger Agreement and
on August 5, 1997, the most recent practicable trading day prior to the date of
this Joint Proxy Statement/Prospectus.
Market Prices
-------------------------------
Fred Meyer Smith's Class B
Common Stock Common Stock
------------ ---------------
May 9, 1997.......................... $41 7/8 $40
August 5, 1997....................... 56 58 5/16
The Exchange Ratios are fixed and are not subject to adjustment in the
event of fluctuations in the market price of Fred Meyer Common Stock or Smith's
Class B Common Stock. There is no assurance as to the market price of Fred Meyer
Common Stock or Smith's Class B Common Stock at any time prior to the Effective
Time or as to the market price of Holdings Common Stock at any time thereafter.
Stockholders are urged to obtain current market quotations for Fred Meyer Common
Stock and Smith's Class B Common Stock prior to making any decision with respect
to the Merger.
Fred Meyer has never declared or paid a dividend, and does not expect to do
so in the foreseeable future. In the past, Smith's has declared and paid
dividends, but has not done so since the first quarter of 1996, and does not
expect to do so in the foreseeable future. Upon consummation of the Merger,
Holdings does not expect to declare or pay dividends in the foreseeable future.
See "Comparative Market Prices and Dividends."
1997 Stock Incentive Plan
The Holdings Board has adopted the 1997 Stock Incentive Plan (the "1997
Plan") to permit the grant of stock options and other stock awards to employees,
directors and consultants of Holdings and its subsidiaries and has reserved a
total of 5,000,000 shares of Holdings Common Stock for purposes of the 1997
Plan. The 1997 Plan is subject to approval by the stockholders of Fred Meyer and
Smith's and will be considered by the stockholders of Fred Meyer at the Fred
Meyer Special Meeting and by the stockholders of Smith's at the Smith's Special
Meeting. The Boards of Directors of Holdings, Fred Meyer and Smith's recommend
approval of the 1997 Plan. See "Proposal to Approve the 1997 Stock Incentive
Plan of Holdings."
Non-Employee Directors' Deferred Compensation Plan
The Holdings Board has adopted the Non-Employee Directors' Deferred
Compensation Plan (the "Directors' Plan") to permit non-employee directors to
defer their directors' fees in cash or Holdings Common Stock and has reserved a
total of 100,000 shares of Holdings Common Stock for purposes of the
13
<PAGE>
Directors' Plan. The Directors' Plan is subject to approval by the stockholders
of Fred Meyer and Smith's and will be considered by the stockholders of Fred
Meyer at the Fred Meyer Special Meeting and by the stockholders of Smith's at
the Smith's Special Meeting. The Boards of Directors of Holdings, Fred Meyer and
Smith's recommend approval of the Directors' Plan. See "Proposal to Approve the
Non-Employee Directors' Deferred Compensation Plan of Holdings."
Refinancing Arrangements
In connection with the Merger, Holdings intends to refinance and
consolidate a majority of the existing indebtedness of the combined company. The
refinancing is expected to be completed on or about the Effective Time, but is
not, however, a condition to the obligations of Fred Meyer and Smith's to effect
the Merger. Fred Meyer has entered into a commitment letter (the "Financing
Commitment") with The Chase Manhattan Bank, Bankers Trust Company and certain of
their affiliates (the "Banks"), which is currently anticipated to provide the
sources of funds required by Holdings to complete the refinancing. Pursuant to
the Financing Commitment, the Banks have agreed to provide senior credit
facilities to Holdings in an aggregate amount of up to $2.03 billion and a lease
financing program for Fred Meyer of up to $270 million.
14
<PAGE>
Selected Historical and Pro Forma Financial Data
The summary below sets forth selected historical and pro forma financial
data. The financial data should be read in conjunction with the historical
consolidated financial statements and related notes thereto of Fred Meyer and
Smith's, incorporated herein by reference, and in conjunction with the unaudited
pro forma condensed combined financial statements and related notes thereto of
Holdings included elsewhere in this Joint Proxy Statement/Prospectus. See
"Unaudited Pro Forma Condensed Combined Financial Statements."
15
<PAGE>
Fred Meyer Selected Historical Financial Data
The following selected consolidated financial data of Fred Meyer for each
of the five fiscal years in the period ended February 1, 1997 have been derived
from Fred Meyer's consolidated financial statements, which have been audited by
Deloitte & Touche LLP, independent auditors. The selected consolidated financial
data of Fred Meyer for the 16 weeks ended May 24, 1997 and May 25, 1996 have
been derived from the unaudited financial statements of Fred Meyer and include
all adjustments consisting of normal recurring items considered necessary by
Fred Meyer management for a fair presentation of the results for the entire
fiscal year. The results of the interim periods are not necessarily indicative
of results for the entire fiscal year. The data should be read in conjunction
with Fred Meyer's consolidated financial statements, the pro forma selected
financial data and the unaudited pro forma condensed combined financial
statements, including the respective notes thereto, incorporated by reference
into, or appearing elsewhere in, this Joint Proxy Statement/Prospectus. See
"Available Information," "Incorporation of Certain Information by Reference,"
"Pro Forma Selected Financial Data" and "Unaudited Pro Forma Condensed Combined
Financial Statements."
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks 53 Weeks 52 Weeks 16 Weeks 16 Weeks
Ended Ended Ended Ended Ended Ended Ended
January 30, January 29, January 28, February 3, February 1, May 25, May 24,
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Net sales(1)........... $ 2,849,521 $ 2,973,825 $ 3,122,635 $ 3,422,718 $ 3,724,839 $ 1,040,028 $ 1,193,936
Cost of goods sold..... 1,996,700 2,088,568 2,261,315 2,449,204 2,619,312 737,956 838,515
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin........... 852,821 885,257(4) 861,320 973,514 1,105,527 302,072 355,421
Operating and
administrative
expenses(1)........... 738,581 747,151 807,924 885,087 971,667 273,736 320,428
Writedown of California
assets................ 15,978
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from
operations............ 114,240 138,106(4) 37,418 88,427 133,860 28,336 34,993
Interest expense, net of
interest income(2) 18,070 17,604 25,857 39,578 39,432 13,104 13,607
Provision for income
taxes................. 35,583 49,598(5) 4,393 18,563 35,883 5,788 8,127
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before accounting
change................ 60,587 70,904(4,5) 7,168 30,286 58,545 9,444 13,259
Accounting change...... (2,588)(6)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 60,587 $ 68,316(4,5,6) $ 7,168 $ 30,286 $ 58,545 $ 9,444 $ 13,259
=========== =========== =========== =========== =========== =========== ===========
Earnings per common
share:
Income before
accounting change $ 2.21 $ 2.50(4,5) $ .25 $ 1.07 $ 2.09 $ .33 $ .48
Accounting change..... (.09)(6)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income............ $ 2.21 $ 2.41(4,5,6) $ .25 $ 1.07 $ 2.09 $ .33 $ .48
=========== =========== =========== =========== =========== =========== ===========
Common shares
outstanding (weighted
average)(3)........... 27,446 28,375 28,625 28,333 27,962 28,539 27,817
Balance Sheet Data
(end of period)
Working capital........ $ 173,975 $ 192,737 $ 249,514 $ 283,082 $ 233,202 $ 250,427 $ 221,702
Inventories............ 426,078 477,568 514,473 520,555 604,910 559,009 624,356
Total assets........... 1,081,627 1,326,076 1,562,672 1,671,592 1,693,414 1,704,559 1,788,589
Long-term obligations 222,898 341,353 564,058 677,542 540,041 637,480 576,826
Deferred lease
transactions.......... 44,785 48,254 45,655 42,271 46,318 41,411 41,547
Stockholders' equity 450,128 527,686 538,620 571,234 567,298 580,844 592,832
Other Data
EBITDA (as
defined)(7)........... $ 185,673 $ 205,673 $ 148,979 $ 194,876 $ 249,548 $ 65,601 $ 75,108
EBITDA margin(7,8)..... 6.52% 6.92% 4.77% 5.69% 6.70% 6.31% 6.29%
Cash Flows
Operating.............. $ 141,159 $ 118,128 $ 50,040 $ 133,052 $ 166,244 $ 68,145 $ 69,378
Financing.............. (5,415) 134,766 231,266 98,088 (148,099) (40,890) 52,242
Investing.............. (133,848) (250,724) (280,492) (224,159) (11,225) (30,304) (106,237)
16
<PAGE>
- --------------
(1) For fiscal years 1992 through 1996, the amounts shown reflect the
reclassification of employee discounts to make the reporting consistent
with the reporting for the 1996 and 1997 interim periods.
(2) Interest income was $544, $707, $885, $1,060, $858, $343 and $42,
respectively, for each period.
(3) Based upon shares outstanding during each period and the application of the
treasury stock method of computing the effect of outstanding stock options.
(4) Includes a nonrecurring LIFO credit of $6,178.
(5) Includes $3,588 from the resolution of an Internal Revenue Service audit,
($2,286) related to the LIFO credit and a 38% tax rate.
(6) Effect of adopting Statement of Financial Accounting Standards No. 109
relating to income taxes.
(7) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA and EBITDA margin are viewed by management as
important alternative measures of cash flow because they are commonly used
by sell-side analysts and institutional investors in analyzing the
financial performance of retailers in the supermarket sector. With certain
variations in definition, EBITDA is an indicator of compliance with various
covenants in Fred Meyer's debt agreements. However, EBITDA should not be
construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of Fred
Meyer's operating performance or as a measure of liquidity. EBITDA as
presented may not be comparable to similarly entitled measures reported by
other companies.
(8) EBITDA margin represents EBITDA as a percentage of net sales.
</TABLE>
17
<PAGE>
Smith's Selected Historical Financial Data
The following selected consolidated financial data of Smith's for each of
the five fiscal years in the period ended December 28, 1996 have been derived
from the financial statements of Smith's audited by Ernst & Young LLP,
independent auditors. The selected consolidated financial data of Smith's for
the 14 weeks ended April 5, 1997 and the 13 weeks ended March 30, 1996 have been
derived from the unaudited financial statements of Smith's and include all
adjustments consisting of normal recurring items considered necessary by Smith's
management for a fair presentation of the results of these periods. The results
for the interim periods are not necessarily indicative of results for the entire
fiscal year. The data should be read in conjunction with Smith's consolidated
financial statements, the pro forma selected financial data and the unaudited
pro forma condensed combined financial statements, including the respective
notes thereto, incorporated by reference into, or appearing elsewhere in, this
Joint Proxy Statement/Prospectus. See "Available Information," "Incorporation of
Certain Information by Reference," "Pro Forma Selected Financial Data" and
"Unaudited Pro Forma Condensed Combined Financial Statements."
<TABLE>
<CAPTION>
53 weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks 13 Weeks 14 Weeks
Ended Ended Ended Ended Ended Ended Ended
Jan 2, Jan 1, Dec 31, Dec 30, Dec 28, Mar 30, Apr 5,
1993 1994 1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Net sales............. $ 2,649,860 $ 2,807,165 $ 2,981,359 $ 3,083,737 $ 2,889,988 $ 693,165 $ 831,821
Cost of goods sold.... 2,038,235 2,169,987 2,312,228 2,386,707 2,237,789 546,606 645,995
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin.......... 611,625 637,178 669,131 697,030 652,199 146,559 185,826
Expenses:
Operating, selling and
administrative..... 419,402 429,914 440,335 461,401 449,247 111,353 116,028
Depreciation and
amortization....... 67,781 82,173 94,491 104,963 93,951 22,639 22,909
Interest............. 36,130 44,627 53,715 60,046 104,602 14,437 32,723
Amortization of
deferred financing
costs.............. 262 344 509 432 5,406 108 2,300
Restructuring
charges(1)......... 140,000 201,622
----------- ----------- ----------- ----------- ----------- ----------- -----------
523,575 557,058 589,050 766,842 854,828 148,537 173,960
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes and
extraordinary
charge............... 88,050 80,120 80,081 (69,812) (202,629) (1,978) 11,866
Income taxes
(benefit)............ 34,400 34,300 31,300 (29,300) (80,245) (800) 5,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary
charge............... 53,650 45,820 48,781 (40,512) (122,384) (1,178) 6,866
Extraordinary charge on
extinguishment of
debt, net of tax
benefit(2)........... 41,782 25,030
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)..... $ 53,650 $ 45,820 $ 48,781 $ (40,512) $ (164,166) $ (1,178) $ (18,164)
=========== =========== =========== =========== =========== =========== ===========
Income (loss) per share
of Common Stock:
Income (loss) before
extraordinary
charge............. $ 1.79 $ 1.52 $ 1.73 $ (1.62) $ (6.28) $ (0.05) $ 0.42
Extraordinary
charge............. (2.14) (1.54)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 1.79 $ 1.52 $ 1.73 $ (1.62) $ (8.42) $ (0.05) $ (1.12)
=========== =========== =========== =========== =========== =========== ===========
Average number of
common shares
outstanding.......... 29,962 30,239 28,177 25,031 19,493 25,072 16,195
Balance Sheet Data
(end of period)
Working capital
(deficit)............ $ 91,235 $ 160,358 $ 62,273 $ 162,722 $ 110,370 $ 87,819 $ (12,173)
Inventories........... 341,416 377,939 389,564 394,982 371,912 297,974 374,585
Total assets.......... 1,486,085 1,654,308 1,653,467 1,686,180 1,786,005 1,485,986 1,643,140
Total debt(2, 3)...... 608,432 720,587 713,679 738,693 1,376,394 665,282 1,247,820
Redeemable preferred
stock................ 7,508 6,469 5,427 4,319 3,319 4,319 3,319
Total stockholders'
equity(2)............ 515,389 542,197 475,342 416,720 (122,203) 411,664 (141,175)
Dividends per share... 0.44 0.52 0.52 0.60 0.15 0.15
18
<PAGE>
53 weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks 13 Weeks 14 Weeks
Ended Ended Ended Ended Ended Ended Ended
Jan 2, Jan 1, Dec 31, Dec 30, Dec 28, Mar 30, Apr 5,
1993 1994 1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data
EBITDA (as
defined)(4).......... $ 192,223 $ 208,864 $ 231,296 $ 239,629 $ 260,336(6) $ 59,093(6) $ 71,383
EBITDA margin(5)...... 7.3% 7.4% 7.8% 7.8% 9.2%(6) 9.5%(6) 8.6%
Cash Flows
Operating............. $ 84,588 $ 118,550 $ 204,059 $ 141,081 $ 82,038 $ 6,431 $ 104,803
Investing............. (286,569) (164,422) (127,885) (146,674) 49,041 65,978 (2,631)
Financing............. 203,113 92,267 (123,907) 7,484 (98,692) (77,466) (147,027)
- --------------
(1) The charges for the 52 weeks ended December 30, 1995 were recorded in
connection with the sale, lease or closure of Smith's Southern California
operations. An additional charge was recorded during the 52 weeks ended
December 28, 1996 following consummation of the Recapitalization (as
defined below) and the implementation of a plan to accelerate the
disposition of certain California nonoperating stores and excess land. See
Note L to Notes to Consolidated Financial Statements of Smith's
incorporated by reference herein from the Smith's Form 10-K.
(2) On May 23, 1996, Smith's completed a tender offer for, and repurchased, 50%
of the then outstanding Smith's Common Stock at a price of $36 per share
(the "Tender Offer"). The total consideration paid in the Tender Offer was
$451.3 million. Concurrently with the Tender Offer, Smith's acquired
Smitty's Supermarket's, Inc. ("Smitty's") in a stock-for-stock merger (the
"Smitty's Merger"). At the time of its acquisition, Smitty's operated 28
supermarkets in Phoenix and Tucson, Arizona. In order to finance the Tender
Offer, refinance substantially all of the existing indebtedness of Smith's
and Smitty's and pay related premiums and other fees and expenses, Smith's
entered into a $995 million bank credit facility (the "Smith's
Recapitalization Credit Facility") and issued $575 million of its 11 1/4%
senior subordinated notes due 2007 (the "Smith's Notes"). The Tender Offer
and the related financings and refinancings are collectively referred to
herein as the "Recapitalization". In connection with the Recapitalization,
Smith's recorded an extraordinary charge of $41.8 million. On March 27,
1997, the Smith's Recapitalization Credit Facility was refinanced with a
new $750 million bank credit facility and a $25 million extraordinary
charge was recorded in connection with the write-off of debt issuance costs
related to the Smith's Recapitalization Credit Facility.
(3) Total debt includes current maturities and long-term portions of debt and
capital lease obligations.
(4) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA and EBITDA margin are viewed by management as
important alternative measures of cash flow because they are commonly used
by sell-side analysts and institutional investors in analyzing the
financial performance of retailers in the supermarket sector. With certain
variations in definition, EBITDA is an indicator of compliance with various
covenants in Smith's debt agreements. However, EBITDA should not be
construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
Smith's operating performance or as a measure of liquidity. EBITDA as
presented may not be comparable to similarly entitled measures reported by
other companies.
(5) EBITDA margin represents EBITDA as a percentage of net sales.
(6) Excludes the effect of the closed California region and one-time expenses
resulting from the Smitty's Merger and the Recapitalization.
</TABLE>
19
<PAGE>
Holdings Selected Unaudited Pro Forma Condensed Combined
Financial Data and per Share Data
The following table sets forth selected unaudited pro forma condensed
combined financial data of Holdings and gives effect to the Merger as if such
transaction occurred as of February 3, 1996 with respect to the pro forma
operating and other data for the 52 weeks ended February 1, 1997 and for the 16
weeks ended May 24, 1997, and as of May 24, 1997 with respect to the balance
sheet data. Such pro forma information: (i) includes the historical results of
operations data of Fred Meyer for the 52 weeks ended February 1, 1997 and for
the 16 weeks ended May 24, 1997 and the historical balance sheet data of Fred
Meyer as of May 24, 1997 and (ii) includes the historical results of operations
data of Smith's for the 52 weeks ended December 28, 1996, as adjusted (x) to
eliminate the effect of Smith's California Disposition (as defined herein), (y)
to combine the results of operations of Smitty's Supermarkets, Inc. ("Smitty's")
from January 15, 1996 through May 22, 1996, and (z) to eliminate certain
non-recurring expenses incurred in connection with the Smitty's Merger (as
defined herein), and includes the historical results of operations data for
Smith's for the 14 weeks ended April 5, 1997 and the historical balance sheet
data of Smith's as of April 5, 1997. See "Unaudited Pro Forma Condensed Combined
Financial Statements." The pro forma condensed combined financial data set forth
below is not necessarily indicative of either future results of operations or
results that might have been achieved if the Merger had been consummated as of
the indicated dates. The pro forma condensed combined financial data does not
reflect approximately $40 million in annualized operating savings which
management believes are achievable by the end of 1998. In addition, the selected
pro forma condensed combined operating data do not reflect an extraordinary
charge on extinguishment of debt as a result of refinancing certain debt. The
selected unaudited pro forma condensed combined financial data should be read in
conjunction with the Unaudited Pro Forma Condensed Combined Financial Statements
and the historical consolidated financial statements of Smith's and Fred Meyer,
and related notes thereto, included elsewhere, or incorporated by reference, in
this Joint Proxy Statement/Prospectus. See "Available Information,"
"Incorporation of Certain Information by Reference," "-- Fred Meyer Selected
Historical Financial Data," "-- Smith's Selected Historical Financial Data" and
"Unaudited Pro Forma Condensed Combined Financial Statements."
<TABLE>
<CAPTION>
52 Weeks Ended 16 Weeks Ended
February 1, 1997 May 24, 1997
---------------- --------------
(In thousands)
<S> <C> <C>
Operating data:
Net sales........................................... $6,742,523 $2,025,757
Gross margin........................................ 1,813,927 543,485
Operating and administrative expenses............... 1,293,941 400,412
Depreciation and amortization expense............... 237,032 68,002
Income from operations.............................. 282,954 75,071
Interest expense.................................... 144,797 42,262
Income before income taxes and extraordinary charge. 136,493 32,306
Income before extraordinary charge.................. 74,053 16,873
Balance sheet data:
Total assets........................................ 4,384,983
Total debt.......................................... 1,926,013
Stockholders' equity................................ 1,211,638
Other data:
Capital expenditures................................ 248,220 132,719
EBITDA (as defined)(1,2)............................ 521,046 146,506
EBITDA margin(3).................................... 7.7% 7.2%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
52 Weeks Ended 16 Weeks Ended
February 1, 1997 May 24, 1997
---------------- --------------
<S> <C> <C>
Per share data for Fred Meyer Common Stock:(4)
Income (loss) before extraordinary charge:
Historical....................................... $ 2.09 $ 0.48
Pro forma combined(5)............................ 1.64 0.38
Book value:
Historical....................................... 21.65 22.25
Pro forma combined(6)............................ 27.15 28.02
52 Weeks Ended 14 Weeks Ended
December 28, 1996 April 5, 1997
----------------- --------------
Per share data for Smith's Common Stock:(4)
Income (loss) before extraordinary charge:
Historical....................................... $ (6.28) $ 0.42
Pro forma equivalent combined(7)................. 1.72 0.40
Book value:
Historical (deficit)............................. (7.73) (8.93)
Pro forma equivalent combined(7)................. 28.51 29.42
</TABLE>
21
<PAGE>
NOTES TO SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL DATA AND PER SHARE DATA
(1) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization, LIFO provision and
restructuring charges. EBITDA and EBITDA margin are viewed by management as
important alternative measures of cash flow because they are commonly used
by sell-side analysts and institutional investors in analyzing the
financial performance of retailers in the supermarket sector. With certain
variations in definition, EBITDA is an indicator of compliance with various
covenants in Fred Meyer's and Smith's debt agreements. However, EBITDA
should not be construed as an alternative to operating income or to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an
indication of Holdings operating performance or as a measure of liquidity.
EBITDA as presented may not be comparable to similarly entitled measures
reported by other companies.
(2) Pro forma EBITDA (as defined) does not give effect to net annual cost
savings (as compared to such costs for the pro forma combined fiscal year
ended February 1, 1997) which management believes are achievable by the end
of 1998. The sum of the components of the estimated annual cost savings
exceeds $40 million; however, management's estimate of $40 million in net
annual cost savings gives effect to an offsetting adjustment to reflect its
expectation that a portion of the savings will be reinvested in Holdings
operations. The estimates of potential cost savings resulting from the
Merger contained in this Joint Proxy Statement/Prospectus are forward
looking statements that involve risks and inherent uncertainties that could
cause actual net annual cost savings to differ materially from those
projected. The sum of Holdings pro forma EBITDA (as defined) ($521.0
million) and the full amount of the estimated net annual cost savings which
management believes are achievable by the end of 1998 ($40 million) is
$561.0 million. See "Cautionary Statement Concerning Forward-Looking
Information."
(3) EBITDA margin represents EBITDA as a percentage of net sales.
(4) Fred Meyer has never declared or paid a dividend, and does not expect to do
so in the foreseeable future. In 1994, 1995 and 1996, Smith's declared cash
dividends aggregating $0.52, $0.60 and $0.15 per share of Smith's Common
Stock, respectively, all of which were paid. Smith's has not declared or
paid a dividend since the first quarter of 1996, and does not expect to do
so in the foreseeable future.
(5) The pro forma combined per share data combines the financial information of
Fred Meyer for each of the 52 weeks ended February 1, 1997 and the 16 weeks
ended May 24, 1997 with the financial information of Smith's for each of
the 52 weeks ended December 28, 1996 and the 14 weeks ended April 5, 1997,
respectively. See "Unaudited Pro Forma Condensed Combined Financial
Statements."
(6) Amount is calculated by dividing total pro forma common stockholders'
equity by the sum of total outstanding shares of Fred Meyer Common Stock
plus new shares of Holdings Common Stock to be issued in the Merger to
holders of Smith's Common Stock based on the number of shares outstanding
at period end.
(7) Amounts are calculated by multiplying Fred Meyer's pro forma combined
amounts by the Smith's Exchange Ratio of 1.05.
22
<PAGE>
THE COMPANIES
Fred Meyer
Fred Meyer is a regional retailer of a wide range of food, apparel, fine
jewelry, and products for the home. As of February 1, 1997, Fred Meyer operated
109 multidepartment stores under the name "Fred Meyer" in Alaska, Idaho,
Montana, Oregon, Utah and Washington, and 110 specialty stores in 17 states. The
multidepartment stores are unique in the Pacific Northwest in combining food
with a wide range of nonfood merchandise under one roof. These stores average
approximately 144,000 square feet of retail space and emphasize
one-stop-shopping for necessities and items of everyday use. All but five of the
specialty stores are mall jewelry stores, which average approximately 1,300
square feet of retail space and operate under the names "Fred Meyer Jewelers" or
"Merksamer Jewelers." The multidepartment stores accounted for approximately
97.4% and 96.6% of Fred Meyer's total sales and operating income, respectively,
for the fiscal year ended February 1, 1997 ("1996"). For 1996, food and nonfood
sales were 41.1% and 58.9% of total sales, respectively.
Fred Meyer's principal business strategy is to operate one-stop-shopping
stores that provide convenient shopping for a broad selection of products in one
location. Stores are organized into distinct departments that specialize in the
sale of particular products. Multidepartment stores that include food, apparel
and general merchandise are Fred Meyer's primary focus. Fred Meyer believes that
its food departments increase the shopping frequency of area residents, build
customer loyalty and enable its nonfood departments to generate higher levels of
sales through increased customer traffic. In more recent years, Fred Meyer added
food to previously nonfood multidepartment stores and replaced some of its older
nonfood stores with new full-service stores which include food departments. Fred
Meyer promotes cross-shopping by providing convenient access between departments
and sections, by making each of these a strong competitor in the market for its
products and by facilitating easy customer checkout through a common cash
register system that allows customers to purchase merchandise from most
departments at any checkstand location. The strength of the individual
departments and sections, with their breadth and depth of product selection,
national and private-label brands and emphasis on products of everyday use,
distinguishes Fred Meyer's stores from other retailers and enables Fred Meyer to
compete with supermarkets, drug stores, discount stores, mass merchandisers,
department stores and specialty stores, including category-dominant retailers.
Fred Meyer was incorporated in Delaware in 1981 as a successor to the
business of a company which opened its first store in downtown Portland, Oregon
in 1922 and was incorporated in Oregon in 1923. Fred Meyer's principal executive
offices are located at 3800 SE 22nd Avenue, Portland, Oregon 97202, and its
telephone number is (503) 232-8844. For further information concerning Fred
Meyer, see the Fred Meyer documents incorporated by reference herein as
described under "Incorporation of Certain Information by Reference."
Smith's
Smith's is a regional supermarket and drug store chain operating in the
Intermountain and Southwestern regions of the United States. As of April 5,
1997, Smith's operated 151 stores in Arizona, Idaho, New Mexico, Nevada, Texas,
Utah, and Wyoming. Smith's develops and operates 144 combination food and drug
centers which offer one-stop shopping convenience through a full-line
supermarket with drug and pharmacy departments and some or all of the following
specialty departments: delicatessens, hot prepared food sections, in-store
bakeries, video rental shops, floral shops, one-hour photo processing labs,
full-service banking and frozen yogurt shops. In addition, Smith's operates five
warehouse stores and two conventional supermarkets. The food and drug
combination stores range in size from 33,000 to 112,000 square feet (with an
average size of 69,000 square feet). Through its 49 years of operations, Smith's
has developed a valuable and strategically located store base, strong name
recognition, customer loyalty and a reputation for quality and service.
Smitty's Merger and Recapitalization. On May 23, 1996, Smith's acquired
Smitty's Supermarkets, Inc. ("Smitty's") which became a wholly owned subsidiary
of Smith's in a stock-for-stock exchange (the "Smitty's Merger"). Smitty's was
controlled by affiliates of Yucaipa, a private investment group specializing
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in the supermarket industry, and, at the time it was acquired, operated 28
stores (two of which were subsequently leased to other retailers) in the Phoenix
and Tucson, Arizona areas. Smith's issued 3,038,877 shares of Smith's Class B
Common Stock for all of Smitty's outstanding common stock. Following the
Smitty's Merger, Smith's consolidated its Arizona operations with those of
Smitty's in order to enhance its market position in Arizona by expanding its
store base. In connection with the Smitty's Merger, on May 23, 1996 Smith's also
purchased 50% of its outstanding Smith's Class A Common Stock and Smith's Class
B Common Stock for $36 per share, excluding shares issued to the stockholders of
Smitty's in connection with the Smitty's Merger (the "Tender Offer"). In order
to finance the Tender Offer, refinance substantially all of the existing
indebtedness of Smith's and Smitty's and pay refinancing premiums and other fees
and expenses, Smith's entered into a $995 million bank credit facility (the
"Smith's Recapitalization Credit Facility") and issued $575 million of its 11
1/4% senior subordinated notes due 2007 (the "Smith's Notes"). The Tender Offer
and related financings are collectively referred to herein as the
"Recapitalization." Concurrently with the Recapitalization, Smith's entered into
a five-year management services agreement with an affiliate of Yucaipa (the
"Smith's Management Services Agreement") and Ronald W. Burkle, the managing
partner of an affiliate of Yucaipa, became Smith's Chief Executive Officer.
Since the completion of the Smitty's Merger, Smith's has integrated the
operations of Smitty's with its existing Arizona operations and accelerated its
disposition of certain non-core assets. Smith's decided late in fiscal 1995 to
exit the California market. By the end of fiscal 1996, it had subleased a major
distribution center, sold or subleased 23 of 34 closed stores and six
non-operating properties in that market. With the proceeds from these asset
sales, together with other proceeds and excess cash, Smith's was able to reduce
its total indebtedness by $175 million and, on March 27, 1997, the Smith's
Recapitalization Credit Facility was replaced with a $750 million bank credit
facility (the "Smith's Credit Facility").
Smith's was founded in 1948 and reincorporated under Delaware law in 1989.
Its principal executive offices are located at 1550 South Redwood Road, Salt
Lake City, Utah 84104 (telephone (801) 974-1400). For further information
concerning Smith's, see the Smith's documents incorporated by reference herein
as described under "Incorporation of Certain Information by Reference."
Holdings
Holdings, a newly formed Delaware corporation, all of the issued and
outstanding common stock of which is owned 50% by each of Fred Meyer and
Smith's, has not conducted any substantial business to date. As a result of the
Merger, Fred Meyer and Smith's will become wholly owned subsidiaries of
Holdings. Accordingly, the business of Holdings will be the business currently
conducted by Fred Meyer and Smith's. Upon consummation of the Merger, Holdings
will be renamed "Fred Meyer, Inc." and Fred Meyer will be renamed "FM Stores,
Inc." Holdings' principal executive offices will be located at 3800 SE 22nd
Avenue, Portland, Oregon 97202, and Holdings' telephone number will be (503)
232-8844.
The Combined Company
The Merger will result in the creation of a premier multi-regional
supermarket and general merchandise retailing company with leading competitive
positions in the Pacific Northwest, Intermountain and Southwest regions of the
United States. Upon consummation of the Merger, Holdings will operate 265 major
stores in eleven states with $7 billion in estimated 1997 annual sales, on a pro
forma basis.
Fred Meyer and Smith's regard the Merger as an opportunity to achieve
certain costs savings and synergies. Based on a preliminary review of their
respective businesses, Fred Meyer and Smith's currently estimate that the Merger
will result in approximately $40 million in net annual cost savings and
improvements attributable to operating synergies and approximately $25 million
in annual savings attributable to reductions in financing costs. These cost
savings are believed to be achievable by the end of 1998.
Estimated Cost Savings and Improvements from Operating Synergies. Fred
Meyer and Smith's preliminarily estimate that the Merger will result in
approximately $40 million in annual cost savings and improvements attributable
to operating synergies. Among the significant operating synergies identified by
Fred Meyer and Smith's which are expected to be realized by Holdings upon
consummation of the Merger are the
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following: the elimination of duplicative overhead and administrative expenses;
the integration of management information systems; the consolidation of the
distribution centers and manufacturing facilities of Fred Meyer and Smith's,
including using Smith's distribution centers located in Salt Lake City and
Layton, Utah to supply Fred Meyer's Utah and Idaho stores; and the enhanced
purchasing power for Fred Meyer and Smith's through Yucaipa's Best Practices
cooperative buying program.
Upon consummation of the Merger, Holdings intends to review Fred Meyer and
Smith's and their respective assets, businesses, operations, properties,
policies, corporate structures, capitalization and management in order to
identify any additional synergies and cost savings.
Estimated Reductions in Financing Costs. Fred Meyer and Smith's
preliminarily estimate that the Merger will also result in approximately $25
million in annual savings attributable to reductions in financing costs. In
connection with the Merger, Holdings intends to refinance and consolidate a
majority of the existing indebtedness of Smith's and Fred Meyer. See
"Refinancing Arrangements."
THE FOREGOING ESTIMATES OF COST SAVINGS AND SYNERGIES ARE INHERENTLY
SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND
THE CONTROL OF FRED MEYER, SMITH'S AND HOLDINGS. THERE IS NO ASSURANCE THAT THEY
WILL BE ACHIEVED AND ACTUAL SAVINGS AND SYNERGIES MAY VARY MATERIALLY FROM THOSE
ESTIMATED. THE INCLUSION OF SUCH ESTIMATES HEREIN SHOULD NOT BE REGARDED AS AN
INDICATION THAT FRED MEYER, SMITH'S, HOLDINGS OR ANY OTHER PERSON CONSIDERS SUCH
ESTIMATES AN ACCURATE PREDICTION OF FUTURE EVENTS. See "Cautionary Statement
Concerning Forward-Looking Information."
FRED MEYER SPECIAL MEETING
General
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Fred Meyer as part of the solicitation of proxies by the Fred Meyer Board for
use at the Fred Meyer Special Meeting to be held on September 8, 1997 at 10:00
a.m. local time, at the DoubleTree Hotel, Lloyd Center, 1000 NE Multnomah,
Portland, Oregon. This Joint Proxy Statement/Prospectus and the enclosed form of
proxy are first being mailed to stockholders of Fred Meyer on or about August 8,
1997.
The purpose of the Fred Meyer Special Meeting is: (a) to consider and vote
on a proposal to approve and adopt the Merger Agreement, pursuant to which,
among other things, (i) Holdings will form two wholly owned subsidiaries, Fred
Meyer Sub and Smith's Sub, (ii) Fred Meyer Sub will merge with and into Fred
Meyer, with Fred Meyer surviving the Fred Meyer Merger and becoming a wholly
owned subsidiary of Holdings, (iii) each issued and outstanding share of Fred
Meyer Common Stock will be converted into one fully paid and nonassessable share
of Holdings Common Stock, and (iv) the name of Fred Meyer will be changed to "FM
Stores, Inc."; (b) to consider and vote on a proposal to approve and adopt the
1997 Plan; (c) to consider and vote on a proposal to approve and adopt the
Directors' Plan; and (d) to transact such other business that may properly come
before the Fred Meyer Special Meeting. See "The Merger Agreement Exchange of
Stock Certificates." Each copy of this Joint Proxy Statement/Prospectus mailed
to holders of Fred Meyer Common Stock is accompanied by a form of proxy for use
at the Fred Meyer Special Meeting.
Pursuant to the Merger Agreement, each share of Fred Meyer Common Stock
that is outstanding as of the Effective Date will be converted into one fully
paid and nonassessable share of Holdings Common Stock. Based on the number of
shares of Fred Meyer Common Stock outstanding on the Fred Meyer Record Date,
consummation of the Fred Meyer Merger would result in the issuance of
approximately 26,760,434 shares of Holdings Common Stock to stockholders of Fred
Meyer.
The Merger is subject to a number of conditions, including the receipt of
required regulatory and stockholder approvals. See "The Merger -- Conditions to
the Merger" and "-- Regulatory Approvals."
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Solicitation, Voting and Revocability of Proxies
The Fred Meyer Record Date is the close of business on July 18, 1997.
Stockholders of Fred Meyer as of the Fred Meyer Record Date are entitled to
notice of, and to vote at, the Fred Meyer Special Meeting. Accordingly, only
holders of record of shares of Fred Meyer Common Stock at the close of business
on such date will be entitled to vote at the Fred Meyer Special Meeting. Each
holder of Fred Meyer Common Stock on the Fred Meyer Record Date is entitled to
one vote per share held on all matters properly presented at the Fred Meyer
Special Meeting. As of the close of business on the Fred Meyer Record Date,
there were 26,760,434 shares of Fred Meyer Common Stock outstanding and entitled
to vote, held by 1,203 holders of record. The presence in person or by proxy at
the Fred Meyer Special Meeting of the holders of at least a majority of the
votes entitled to be cast at the Fred Meyer Special Meeting is necessary to
constitute a quorum for the transaction of business. Approval and adoption of
the Merger Agreement requires the approval of the holders of a majority of the
outstanding shares of Fred Meyer Common Stock. Approval and adoption of the 1997
Plan and the Directors' Plan requires the approval of holders of a majority of
the shares present and entitled to vote on the matter at the Fred Meyer Special
Meeting, provided that the total votes cast on the matter represent over 50% of
the Fred Meyer Common Stock entitled to vote on the matter.
If an executed proxy card is returned and the stockholder has explicitly
abstained from voting on any matter, the shares represented by such proxy will
be considered present at the Fred Meyer Special Meeting for purposes of
determining a quorum, but will not be considered to have been voted in favor of
such matter, and therefore will have the same effect as a vote against the
approval and adoption of the Merger Agreement. With respect to the adoption and
approval of the 1997 Plan and the Directors' Plan, abstentions will not be
counted as votes cast for purposes of determining whether the votes cast
represent over 50% of the Fred Meyer Common Stock entitled to vote, but because
an affirmative vote of a majority of the shares present and entitled to vote is
required, abstentions have the same effect as votes against approval and
adoption of the 1997 Plan and the Directors' Plan. Broker non-votes will be
counted for purposes of determining whether a quorum exists at the Fred Meyer
Special Meeting, but will not be considered to have been voted in favor of any
matter and therefore will have the same effect as a vote against the approval
and adoption of the Merger Agreement. Broker non-votes will not be counted as
votes cast for purposes of determining whether a majority of shares entitled to
vote has been cast with respect to approval and adoption of the 1997 Plan and
the Directors' Plan and will be disregarded in determining the outcome of the
vote on approval and adoption of the 1997 Plan and the Directors' Plan.
If the enclosed proxy card is properly executed and returned to Fred Meyer
in time to be voted at the Fred Meyer Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT, THE 1997 PLAN AND THE DIRECTORS' PLAN. The Fred Meyer Board
does not know of any matters other than those described in the notice of the
Fred Meyer Special Meeting that are to come before the Fred Meyer Special
Meeting. If any other business is properly brought before the Fred Meyer Special
Meeting, including, among other things, a motion to adjourn or postpone the Fred
Meyer Special Meeting to another time and/or place for the purpose of soliciting
additional proxies in favor of the proposal to approve and adopt the Merger
Agreement, the 1997 Plan or the Directors' Plan or to permit dissemination of
information regarding material developments relating to the Merger or otherwise
germane to the Fred Meyer Special Meeting, one or more of the persons named in
the proxy card will vote the shares represented by such proxy upon such matters
as determined in their discretion.
If the Fred Meyer Special Meeting is adjourned for any reason, the approval
of the Merger Agreement, the 1997 Plan and the Directors' Plan will be
considered and voted upon by stockholders at the subsequent reconvened meeting,
if any.
The presence of a stockholder at the Fred Meyer Special Meeting will not
automatically revoke such stockholder's proxy. Any proxy given pursuant to this
solicitation may be revoked by the person giving it by giving written notice of
such revocation to the Secretary of Fred Meyer at any time before it is voted,
by delivering to Fred Meyer a duly executed, later-dated proxy or by attending
the Fred Meyer Special Meeting and voting in person. All written notices of
revocation and other communications with respect to revocation of
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Fred Meyer proxies should be addressed to Fred Meyer, Inc., 3800 SE 22nd Avenue,
Portland, OR 97202, Attn: Roger A. Cooke, Secretary.
The cost of soliciting proxies for the Fred Meyer Special Meeting will be
borne by Fred Meyer, except that the cost of preparing and mailing this Joint
Proxy Statement/Prospectus will be borne equally by Smith's and Fred Meyer. In
addition to use of the mail, proxies may be solicited personally or by
telephone, telegraph, facsimile or other means of communication by directors,
officers and employees of Fred Meyer, who will not be specifically compensated
for such activities, but who may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Fred Meyer will also request
persons, firms and companies holding shares in their names or in the name of
their nominees, which are beneficially owned by others, to send proxy materials
to and obtain proxies from such beneficial owners. Fred Meyer will reimburse
such persons for their reasonable expenses incurred in connection therewith.
Fred Meyer has retained MacKenzie Partners to assist in the solicitation of
proxies by Fred Meyer for a customary fee (estimated to be approximately
$7,500), plus reasonable out of pocket expenses.
Recommendations of the Fred Meyer Board
The Fred Meyer Board has unanimously approved the Merger Agreement. The
Fred Meyer Board believes that the transactions contemplated by the Merger
Agreement are in the best interests of the stockholders of Fred Meyer and
unanimously recommends that stockholders of Fred Meyer vote "FOR" approval and
adoption of the Merger Agreement. See "The Merger -- Reasons of Fred Meyer for
the Merger."
The Holdings Board and the Fred Meyer Board have approved each of the 1997
Plan and the Directors' Plan, and the Fred Meyer Board recommends that
stockholders of Fred Meyer vote "FOR" approval and adoption of the 1997 Plan and
"FOR" approval and adoption of the Directors' Plan. See "Proposal to Approve the
1997 Stock Incentive Plan of Holdings" and "Proposal to Approve the Non-Employee
Directors' Deferred Compensation Plan of Holdings."
SMITH'S SPECIAL MEETING
General
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Smith's as part of the solicitation of proxies by the Smith's Board for use at
the Smith's Special Meeting to be held on September 8, 1997 at 10:00 a.m. local
time, at the offices of Latham & Watkins, 633 West Fifth Street, 6th Floor, Los
Angeles, California. This Joint Proxy Statement/Prospectus and the enclosed
form(s) of proxy are first being mailed to stockholders of Smith's on or about
August 8, 1997.
The purpose of the Smith's Special Meeting is: (a) to consider and vote on
a proposal to approve and adopt the Merger Agreement, pursuant to which, among
other things, (i) Holdings will form two wholly owned subsidiaries, Fred Meyer
Sub and Smith's Sub, (ii) Smith's Sub will merge with and into Smith's, with
Smith's surviving the Smith's Merger and becoming a wholly owned subsidiary of
Holdings, (iii) each issued and outstanding share of Smith's Class A Common
Stock and Smith's Class B Common Stock will be converted into 1.05 fully paid
and nonassessable shares of Holdings Common Stock, and (iv) each issued and
outstanding share of Smith's Series I Preferred Stock will be converted into the
right to receive in cash the amount of thirty-three and one-third cents ($.33
1/3); (b) to consider and vote on a proposal to approve and adopt the 1997 Plan;
(c) to consider and vote on a proposal to approve and adopt the Directors' Plan;
and (d) to transact such other business that may properly come before the
Smith's Special Meeting. See "The Merger Agreement -- Exchange of Stock
Certificates." Each copy of this Joint Proxy Statement/Prospectus mailed to
holders of Smith's Stock is accompanied by form(s) of proxy for use at the
Smith's Special Meeting.
Pursuant to the Merger Agreement, each share of Smith's Common Stock that
is outstanding as of the Effective Date will be converted into 1.05 fully paid
and nonassessable shares of Holdings Common Stock. Based on the number of shares
of Smith's Common Stock outstanding on the Smith's Record Date,
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consummation of the Smith's Merger would result in the issuance of approximately
16,650,535 shares of Holdings Common Stock to stockholders of Smith's.
The Merger is subject to a number of conditions, including the receipt of
required regulatory and stockholder approvals. See "The Merger -- Conditions to
the Merger" and "-- Regulatory Approvals."
Solicitation, Voting and Revocability of Proxies
The Smith's Record Date is the close of business on July 18, 1997.
Stockholders of Smith's as of the Smith's Record Date are entitled to notice of,
and to vote at, the Smith's Special Meeting. Accordingly, only holders of record
of shares of Smith's Stock at the close of business on such date will be
entitled to vote at the Smith's Special Meeting. Holders of outstanding shares
of Smith's Stock on the Smith's Record Date will vote together as a single
class, with each share of Smith's Class A Common Stock and Smith's Series I
Preferred Stock entitling its owner to ten (10) votes and each share of Smith's
Class B Common Stock entitling its owner to one vote, on all matters properly
presented at the Smith's Special Meeting. As of the close of business on the
Smith's Record Date, there were 3,677,205 shares of Smith's Class A Common Stock
outstanding and entitled to vote, held by 156 holders of record, 12,180,447
shares of Smith's Class B Common Stock outstanding and entitled to vote, held by
777 holders of record, and 9,956,747 shares of Smith's Series I Preferred Stock
outstanding and entitled to vote, held by eight holders of record. The presence
in person or by proxy at the Smith's Special Meeting of the holders of at least
a majority of the votes entitled to be cast at the Smith's Special Meeting is
necessary to constitute a quorum for the transaction of business. Approval and
adoption of the Merger Agreement requires the approval of the holders of a
majority of the total votes of the outstanding shares of Smith's Stock. Approval
and adoption of the 1997 Plan and the Directors' Plan requires the approval of
the holders of a majority of the shares present and entitled to vote on the
matter at the Smith's Special Meeting, provided that the total votes cast on the
matter represent over 50% in interest of all shares entitled to vote on the
matter.
Prior to the execution of the Merger Agreement, Jeffrey P. Smith, the
Chairman of the Smith's Board, Fred L. Smith, a director of Smith's, Richard D.
Smith (all of whom are brothers) and certain related family trusts, certain
affiliates of Yucaipa and certain other stockholders of Smith's, who at the
Smith's Record Date owned in the aggregate approximately 70% of the combined
voting power of the outstanding capital stock of Smith's, entered into voting
agreements with Fred Meyer pursuant to which such stockholders agreed, among
other things, to vote the shares of Smith's Stock owned or acquired by them (i)
in favor of approval and adoption of the Merger Agreement and (ii) against any
other merger agreement or Acquisition Proposal and against any amendment of the
Smith's Certificate or the Smith's Bylaws or any other proposals or transactions
which would in any manner impede the transactions contemplated by the Merger
Agreement. Therefore, assuming such stockholders vote their shares in accordance
with the voting agreements at the Smith's Special Meeting, the presence of a
quorum and the requisite vote for the approval and adoption of the Merger
Agreement would be assured. See "Other Agreements -- Voting Agreements."
If an executed proxy card is returned and the stockholder has explicitly
abstained from voting on any matter, the shares represented by such proxy will
be considered present at the Smith's Special Meeting for purposes of determining
a quorum, but will not be considered to have been voted in favor of such matter,
and therefore will have the same effect as a vote against the approval and
adoption of the Merger Agreement. With respect to the adoption and approval of
the 1997 Plan and the Directors' Plan, abstentions will not be counted as votes
cast for purposes of determining whether the votes cast represent over 50% in
interest of all shares entitled to vote on the matter, but because an
affirmative vote of a majority of the total votes of the shares present and
entitled to vote is required, abstentions have the same effect as votes against
approval and adoption of the 1997 Plan and the Directors' Plan. Broker non-votes
will be counted for purposes of determining whether a quorum exists at the
Smith's Special Meeting, but will not be considered to have been voted in favor
of any matter and therefore will have the same effect as a vote against the
approval and adoption of the Merger Agreement. Broker non-votes will not be
counted as votes cast for purposes of determining whether a majority of shares
entitled to vote has been cast with respect to approval and adoption of the 1997
Plan and the Directors' Plan and will be disregarded in determining the outcome
of the vote on approval and adoption of the 1997 Plan and the Directors' Plan.
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If the enclosed form(s) of proxy are properly executed and returned to
Smith's in time to be voted at the Smith's Special Meeting, the shares
represented thereby will be voted in accordance with the instructions marked
thereon. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT, THE 1997 PLAN AND THE DIRECTORS' PLAN. The Smith's
Board does not know of any matters other than those described in the notice of
the Smith's Special Meeting that are to come before the Smith's Special Meeting.
If any other business is properly brought before the Smith's Special Meeting,
including, among other things, a motion to adjourn or postpone the Smith's
Special Meeting to another time and/or place for the purpose of soliciting
additional proxies in favor of the proposal to approve and adopt the Merger
Agreement, the 1997 Plan or the Directors' Plan or to permit dissemination of
information regarding material developments relating to the Merger or otherwise
germane to the Smith's Special Meeting, one or more of the persons named in the
proxy card will vote the shares represented by such proxy upon such matters as
determined in their discretion.
If the Smith's Special Meeting is adjourned for any reason, the approval of
the Merger Agreement, the 1997 Plan and the Directors' Plan will be considered
and voted upon by stockholders at the subsequent reconvened meeting, if any.
The presence of a stockholder at the Smith's Special Meeting will not
automatically revoke such stockholder's proxy. Any proxy given pursuant to this
solicitation may be revoked by the person giving it by giving written notice of
such revocation to the Secretary of Smith's at any time before it is voted, by
delivering to Smith's a duly executed, later-dated proxy or by attending the
Smith's Special Meeting and voting in person. All written notices of revocation
and other communications with respect to revocation of Smith's proxies should be
addressed to Smith's Food & Drug Centers, Inc., 1550 South Redwood Road, Salt
Lake City, Utah 84104, Attn: Michael C. Frei, Secretary.
The cost of soliciting proxies for the Smith's Special Meeting will be
borne by Smith's, except that the cost of preparing and mailing this Joint Proxy
Statement/Prospectus will be borne equally by Smith's and Fred Meyer. In
addition to use of the mail, proxies may be solicited personally or by
telephone, telegraph, facsimile or other means of communication by directors,
officers and employees of Smith's, who will not be specifically compensated for
such activities, but who may be reimbursed for reasonable out-of-pocket expenses
in connection with such solicitation. Smith's will also request persons, firms
and companies holding shares in their names or in the name of their nominees,
which are beneficially owned by others, to send proxy materials to and obtain
proxies from such beneficial owners. Smith's will reimburse such persons for
their reasonable expenses incurred in connection therewith.
Recommendations of the Smith's Board
The Smith's Board has unanimously approved the Merger Agreement. The
Smith's Board believes that the transactions contemplated by the Merger
Agreement are in the best interests of the stockholders of Smith's and
unanimously recommends that stockholders of Smith's vote "FOR" approval and
adoption of the Merger Agreement. See "The Merger -- Reasons of Smith's for the
Merger."
The Holdings Board and the Smith's Board have approved the 1997 Plan and
the Directors' Plan, and the Smith's Board unanimously recommends that
stockholders of Smith's vote "FOR" approval and adoption of the 1997 Plan and
"FOR" approval and adoption of the Directors' Plan. See "Proposal to Approve the
1997 Stock Incentive Plan of Holdings" and "Proposal to Approve the Non-Employee
Directors' Deferred Compensation Plan of Holdings."
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THE MERGER
Background of the Merger
Over the last several years, the food retailing industry has undergone
increasing consolidation. A number of competitive factors underlie this trend,
including advantages of economies of scale from improved vendor purchasing power
and self-distribution, increasing capital required to develop and maintain a
modern store base and information systems and benefits of geographic diversity.
In early February 1997, Salomon met with principals of Yucaipa regarding various
supermarket industry opportunities. Salomon inquired about a proposed
combination between Smith's and Fred Meyer. Upon receiving initial indications
from Yucaipa that Smith's might be receptive to considering a business
combination with Fred Meyer, representatives of Salomon contacted Robert G.
Miller, the Chairman of the Board and Chief Executive Officer of Fred Meyer, to
suggest that Fred Meyer consider a transaction involving Smith's. Salomon had
previously provided financial advisory services to Fred Meyer from time to time.
On February 24, 1997, Mr. Miller and other representatives of Fred Meyer
senior management met with representatives of Salomon to review the financial
and business aspects and the potential strategic benefits of a combination of
Fred Meyer and Smith's. Thereafter, at the request of Mr. Miller, Salomon
contacted Ronald W. Burkle, the Chief Executive Officer of Smith's and Managing
Member of Yucaipa, on behalf of Fred Meyer, to propose a meeting with Mr.
Miller.
Mr. Miller, Mr. Burkle and a representative of Salomon met on March 7,
1997, discussed the possibility of a business combination and agreed that it
would be appropriate to exchange detailed information regarding Fred Meyer and
Smith's, respectively, to facilitate those discussions. Later in March the two
companies executed confidentiality agreements and on March 27, 1997,
representatives of Fred Meyer senior management and representatives of Salomon
met with Mr. Burkle and Lawrence K. Kalantari, a member of Yucaipa, to begin an
exchange of views and information regarding a possible transaction.
Over the next several weeks, the companies exchanged certain financial and
operating information and representatives of Smith's and Fred Meyer senior
managements continued their internal consideration of a combination transaction.
In addition, following discussions between Salomon and Mr. Miller regarding the
possible structure and terms, including the proposed consideration, with respect
to a business combination with Smith's, Salomon had discussions with Mr. Burkle
and Mr. Kalantari regarding such terms including, among other things,
consideration of a proposed common stock exchange ratio, the cash compensation
to be received by holders of preferred stock, and the board composition and
management structure of the combined company. Salomon communicated the results
of its discussions with the Yucaipa principals to Mr. Miller.
On April 16, 1997, Mr. Burkle met again with Mr. Miller and other
representatives of Fred Meyer senior management to discuss the possible
transaction and their management and operating philosophies. Following that
meeting, Mr. Miller wrote to Mr. Burkle outlining the terms of a transaction
toward which he proposed that the parties continue their discussions. The
transaction outlined by Mr. Miller involved a merger of equals on the basis of
an exchange ratio of 1.05 shares of Fred Meyer Common Stock for each share of
Smith's Common Stock. Mr. Miller proposed that the composition of the board of
directors of any combined company reflect the relative share interests of
stockholders of Fred Meyer and Smith's (with Fred Meyer designating seven
directors and Smith's designating four directors) and that Mr. Burkle serve as
chairman of the board and Mr. Miller serve as president and chief executive
officer of any combined company. Mr. Burkle responded to Mr. Miller's letter and
indicated Smith's willingness to continue discussions on the basis outlined by
Mr. Miller. Each company agreed it would discuss the proposed combination at its
next board meeting.
On April 23, 1997, at the regularly scheduled quarterly meeting of the
Smith's Board, Mr. Burkle and Mr. Kalantari made a presentation to all members
of the Smith's Board with regard to a potential combination between Fred Meyer
and Smith's, including the merits of the transaction and the terms proposed by
Fred Meyer, as well as information relating to operations and valuation of the
two companies. At this meeting, the Smith's Board considered the appropriateness
of a combination and was asked to consider engaging Yucaipa to proceed with
discussions with Fred Meyer. A committee of disinterested directors (the
"Smith's Disinterested Directors"), which included all directors of Smith's
other than Mr. Burkle, Linda McLoughlin
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Figel, a member of Yucaipa, and Allen R. Rowland, President of Smith's, was
appointed to consider the retention of Yucaipa. In addition, the Smith's Board
assigned responsibility for the negotiation of employee compensation and
retention issues to Jeffrey P. Smith, the Chairman of Smith's Board, and Mr.
Burkle, subject to the approval of the Compensation Committee of the Smith's
Board.
On April 24, 1997, at a regularly scheduled meeting of the Fred Meyer
Board, Fred Meyer's senior management and representatives of Salomon made a
presentation to the Fred Meyer Board with regard to the potential combination
under discussion, including the status of discussions, the potential strategic
benefits of the transaction, as well as information relating to the finances,
operations and valuation of the two companies. All Fred Meyer directors
participated in the meeting. Fred Meyer senior management also briefed the Fred
Meyer Board with respect to other possible strategic transactions that
management had considered prior to the commencement of discussions with Smith's.
The Fred Meyer Board authorized Fred Meyer senior management to pursue its
discussions with Smith's on the basis presented, to proceed with financial and
operational due diligence and to seek to arrive at an agreement for
consideration by the Fred Meyer Board. The Fred Meyer Board also authorized the
engagement of Salomon as its financial advisor in connection with a possible
transaction involving Smith's.
On April 26, 1997, at a special meeting of the Smith's Disinterested
Directors, the Smith's Disinterested Directors authorized the engagement of
Yucaipa to act as Smith's advisor in discussions with Fred Meyer and authorized
Yucaipa and Smith's senior management to pursue discussions with Fred Meyer on
the basis previously presented to the Smith's Board, to proceed with financial
and operational due diligence and to seek to arrive at an agreement for
consideration by the Smith's Board. In addition, the Smith's Disinterested
Directors authorized the retention of DLJ as Smith's financial advisor in
connection with a possible transaction involving Fred Meyer.
Over the course of the following two weeks, Fred Meyer and Smith's,
assisted by their respective financial advisors, legal counsel and accountants,
exchanged information and conducted due diligence with respect to each other. In
addition, the companies' legal counsel commenced the preparation and negotiation
of agreements to provide for the business combination and related matters.
On May 9, 1997, at a special meeting, the Fred Meyer Board received a
presentation and update as to the status of negotiations by Fred Meyer's
management, legal counsel and financial advisors. All Fred Meyer directors
participated in the special meeting. Members of senior management presented the
findings of their due diligence. Salomon reviewed for the Fred Meyer Board
various financial and other information and indicated that Salomon expected to
be in a position to deliver its opinion that the Fred Meyer Exchange Ratio was
fair, from a financial point of view, to the holders of Fred Meyer Common Stock
when the terms of the transaction were finalized. Legal counsel summarized the
terms of the then current draft of the Merger Agreement and related agreements.
The Fred Meyer Board unanimously approved moving forward with the proposed
transaction as presented, subject to its review of the final terms.
Also on May 9, 1997, a special meeting of the Smith's Board was held at
which the Smith's Board received a presentation and update as to the status of
negotiations by representatives of Yucaipa, legal counsel and DLJ. All Smith's
directors participated in the special meeting. DLJ reviewed various financial
and other information and delivered its oral opinion that the Smith's Exchange
Ratio was fair, from a financial point of view, to the common stockholders of
Smith's. Legal counsel summarized the terms of the then current draft of the
Merger Agreement and related agreements. The Smith's Board unanimously approved
moving forward with the proposed transaction as presented, subject to its review
of the final terms. In a separate session of the Smith's Disinterested
Directors, such directors unanimously approved moving forward with the proposed
transaction as presented, subject to their review of the final terms.
On May 11, 1997, at a special meeting, the Fred Meyer Board was updated by
Fred Meyer's senior management, legal counsel and financial advisors as to the
final terms of the Merger Agreement and related agreements. All Fred Meyer
directors participated in the special meeting. Salomon delivered its written
fairness opinion to the Fred Meyer Board to the effect that the Fred Meyer
Exchange Ratio provided for in the Merger Agreement was fair, from a financial
point of view, to the holders of Fred Meyer Common Stock. After considering and
discussing the various presentations at such meeting and at prior meetings, as
well as the
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recommendation of Fred Meyer senior management, the Fred Meyer Board, by a
unanimous vote, approved the Merger Agreement and the transactions contemplated
thereby and by the related agreements, and authorized their execution.
On May 11, 1997, at a special meeting, the Smith's Board was updated by
Yucaipa and legal counsel as to the final terms of the Merger Agreement and
related agreements. All Smith's directors participated in the special meeting.
DLJ delivered its written fairness opinion to the Smith's Board, dated as of May
11, 1997, confirming the oral opinion rendered on May 9, 1997, to the effect
that Smith's Exchange Ratio was fair, from a financial point of view, to the
common stockholders of Smith's. After considering and discussing the various
presentations at such meeting and at prior meetings, as well as the
recommendation of Smith's senior management, the Smith's Disinterested
Directors, voting separately, and the entire Smith's Board, by a unanimous vote,
approved the Merger Agreement and the transactions contemplated thereby and by
the related agreements, and authorized their execution.
On May 11, 1997, Fred Meyer and Smith's executed and delivered the Merger
Agreement and the Stock Option Agreement, and Fred Meyer and certain
stockholders of Smith's executed the Voting Agreements.
Reasons of Fred Meyer for the Merger
The Fred Meyer Board believes that the terms of the Merger Agreement and
the transactions contemplated thereby are in the best interests of Fred Meyer
and its stockholders. Accordingly, the Fred Meyer Board has unanimously approved
the Merger Agreement and recommends approval and adoption thereof by the
stockholders of Fred Meyer.
Enhanced Franchise and Resources. The Fred Meyer Board considered that the
Merger will result in the creation of a multi-regional supermarket and general
merchandise retailing company with a leading presence in several of the highest
growth markets in the United States. The Fred Meyer Board also considered the
current trend toward consolidation in the supermarket and general merchandise
retailing industries, the prospect for further changes in these industries and
the importance of operational scale, financial resources and geographic
diversity to remaining competitive in the long term and, in that connection,
took into account that Holdings will have 265 major stores in eleven states with
approximately $7 billion in annual sales.
Long-Term Strategic Issues. The Fred Meyer Board considered that the Merger
will assist Fred Meyer in addressing certain long-term strategic issues faced by
Fred Meyer, in particular a pre-Merger geographic concentration in the Pacific
Northwest and a related perception that Fred Meyer lacks significant
opportunities for internal growth. The Fred Meyer Board also considered the
likelihood that the multiple of price to earnings ratio of Holdings Common Stock
would be higher than that of Fred Meyer Common Stock in view of, among other
things, the makeup of the combined company.
Opportunities for Efficiencies and Cost Savings. The Fred Meyer Board
considered that the combined company will be capable of increasing its
profitability through significant cost savings, operating efficiencies,
economies of scale and other synergies stemming from the strategic geographical
fit of the combined company, the strong market position of the combined company
and the opportunity to participate with other companies affiliated with Yucaipa
in their cooperative purchasing and other programs ("Best Practices"), as well
as substantial refinancing opportunities. The Fred Meyer Board was advised by
management that, excluding the effect of one-time Merger-related expenses, the
combined company was estimated to achieve approximately $40 million in annual
savings and improvements attributable to such operating factors and
approximately $25 million in annual savings attributable to such refinancing
opportunities. The Fred Meyer Board also took into account the uncertainties and
risks associated with achieving such potential savings. See "Cautionary
Statement Concerning Forward-Looking Information."
Financial Considerations. The Fred Meyer Board considered its evaluation of
the financial terms of the Merger and their effect on holders of Fred Meyer
Common Stock. The Fred Meyer Board considered the financial performance and
condition, businesses and prospects of Fred Meyer and Smith's, including, but
not limited to, information with respect to their respective recent and
historical stock prices and earnings performance, as well as the results of Fred
Meyer's due diligence review of Smith's. The Fred Meyer Board
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also took into account the detailed financial analyses and pro forma and other
information with respect to Fred Meyer and Smith's presented to it by Salomon,
including projected earnings per share accretion and enhanced earnings per share
growth of the combined companies. In addition, the Fred Meyer Board considered
projections indicating cash flows resulting from the Merger that will be
sufficient to repay certain outstanding indebtedness of the combined company and
still permit the combined company to pursue present store remodeling and growth
strategies. See "Cautionary Statement Concerning Forward-Looking Information."
Advice of Financial Advisor and Fairness Opinion. The Fred Meyer Board
considered the financial advice of Salomon (including the assumptions and
methodologies underlying its analysis in connection therewith) and the May 11,
1997 opinion of Salomon that the Fred Meyer Exchange Ratio is fair, from a
financial point of view, to the holders of Fred Meyer Common Stock. The opinion
of Salomon and the analysis underlying its opinion are summarized below, and a
copy of the opinion delivered on May 11, 1997, setting forth the procedures
followed, the matters considered, the scope of the review undertaken and the
assumptions made by Salomon is attached hereto as Appendix B. See "-- Opinion of
Fred Meyer Financial Advisor."
Terms of Merger Agreement and Related Agreements. The Fred Meyer Board took
into consideration the terms of the Merger Agreement, the Voting Agreements and
the Stock Option Agreement and the transactions contemplated thereby, as well as
the terms of the Holdings Management Services Agreement. The Fred Meyer Board
was aware that the Termination Fee and the Stock Option Agreement might
discourage an offer for Fred Meyer from a third party prior to consummation of
the Merger.
Complementary Nature of Businesses. The Fred Meyer Board considered the
complementary nature of the two companies' businesses and the creation of
significant opportunities for development of the companies on a combined basis
without the need for significant restructuring, redirection or asset
dispositions. The Fred Meyer Board also took into account the challenges of
combining the businesses of two large corporations and the attendant diversion
of management's focus and resources from other operational matters and other
strategic opportunities for an extended period of time.
Regulatory Approval. The Fred Meyer Board considered that Fred Meyer and
Smith's have strong market positions in contiguous geographic regions but with
limited overlap within geographic regions. Based on these facts, the Fred Meyer
Board considered the likelihood of obtaining required regulatory approvals, as
well as the possibility that regulatory authorities may impose conditions to the
grant of such approvals.
Directors and Management of Fred Meyer after the Merger. The Fred Meyer
Board considered the structure of the Merger and the proposed arrangements with
respect to the Board of Directors and management structure and operations of the
combined company following the Merger. In particular, the Fred Meyer Board took
into account that a majority of the Holdings Board will initially consist of
certain current directors of Fred Meyer and that Mr. Robert G. Miller will, as
President and Chief Executive Officer of Holdings, have a significant influence
in the management of Holdings. See "-- Interests of Certain Persons in the
Merger" and "Management of Holdings Following the Merger."
Tax Treatment of the Merger. The Fred Meyer Board considered that the Fred
Meyer Merger was expected to be taxfree to stockholders of Fred Meyer for
federal income tax purposes.
The foregoing discussion of the information and factors considered by the
Fred Meyer Board is not intended to be exhaustive but is believed to include all
material factors considered by the Fred Meyer Board. In reaching its
determination to approve the Fred Meyer Merger, the Stock Option Agreement and
the transactions contemplated thereby, the Fred Meyer Board did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to differing factors.
Reasons of Smith's for the Merger
The Smith's Board believes that the terms of the Merger Agreement and the
transactions contemplated thereby are in the best interests of Smith's and its
stockholders. Accordingly, the Smith's Board has unanimously approved the Merger
Agreement and recommends approval and adoption thereof by the stockholders of
Smith's.
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In reaching its determination to recommend approval and adoption of the
Merger Agreement, the Smith's Board consulted with Smith's senior management, as
well as its legal counsel and financial advisor, and considered a number of
factors, including the following:
Strategic Combination. The Smith's Board considered that the merger of
Smith's and Fred Meyer will create a premier multi-regional supermarket and
general merchandise retailing company with 265 major stores in eleven states
concentrated in the Pacific Northwest, Intermountain and Southwestern regions of
the United States, with estimated 1997 annual sales of $7 billion. The Smith's
Board took into account that the combined company will have an enhanced market
presence, which is expected to facilitate its ability to further increase its
capitalization and provide increased liquidity for stockholders.
Implementation of Long-Term Strategy. The Smith's Board considered the
effectiveness of the Merger in implementing and accelerating Smith's basic
long-term growth strategy of expanding in markets with favorable growth
prospects.
Financial Performance and Business. In evaluating the terms of the Merger,
the Smith's Board reviewed, among other things, information with respect to the
financial performance and condition, businesses, assets, capital structure and
prospects of Smith's and Fred Meyer, including, but not limited to, information
with respect to their respective recent and historical stock prices and earnings
performance, as well as recent improvements in Smith's financial results and
Fred Meyer's strong same store sales trends and earnings growth rate. The
members of Smith's Board were generally familiar with and knowledgeable about
Smith's affairs and Fred Meyer's business and further reviewed these matters in
the course of their deliberations. The Smith's Board considered the detailed
financial analyses and pro forma and other information with respect to Smith's
and Fred Meyer presented to it by DLJ.
Opportunities for Efficiencies and Cost Savings. The Smith's Board
considered that the combined company will be capable of increasing its
profitability through significant cost savings, operating efficiencies,
economies of scale and other synergies stemming from the strategic geographical
fit of the combined company, the strong market position of the combined company
and the opportunity to participate with other companies affiliated with Yucaipa
in its Best Practices program, as well as substantial refinancing opportunities.
The Smith's Board considered DLJ's presentation that, excluding the effect of
one-time Merger-related expenses, the combined company is estimated to achieve
in excess of $40 million in annual savings and improvements attributable to such
operating factors. The Smith's Board also took into account the uncertainties
and risks associated with achieving such potential savings. See "Cautionary
Statement Concerning Forward-Looking Information."
Complementary Nature of Businesses. The Smith's Board considered the
complementary nature of the two companies' businesses and the creation of
significant opportunities for development of the companies on a combined basis
without the need for significant restructuring, redirection or asset
dispositions. The Smith's Board considered that on a combined basis
approximately 75% of the company's sales will be grocery-related and
approximately 25% will be from non-grocery general merchandise sources and the
Smith's Board considered Fred Meyer's strength in the general merchandise area
and the contribution that expertise will make to certain of Smith's stores. The
Smith's Board also took into account the challenges of combining the businesses
of two large corporations and the attendant diversion of management's focus and
resources from other operational matters and other strategic opportunities for
an extended period of time.
Reduced Leverage. The Smith's Board considered the reduced leverage and
improved credit rating of the combined company, which are expected to reduce
future interest expense. The Smith's Board considered that Smith's current
long-term debt to capitalization is approximately 113% and that it is
anticipated that the combined company's long-term debt to capitalization would
be approximately 60%.
Management Team. The Smith's Board considered that the combination of two
experienced management teams will create a strong management structure for the
combined company.
Consideration to be Received by Stockholders. The Smith's Board considered
the amount and form of the consideration to be received by the stockholders of
Smith's in the Merger and that (i) based on historical and anticipated trading
ranges of Fred Meyer Common Stock and Smith's Class B Common Stock, holders of
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Smith's Common Stock are expected to realize a premium for their shares in a
transaction structured to qualify as a tax-free exchange, and (ii) holders of
Smith's Series I Preferred Stock will receive an amount in cash equal to the
liquidation preference thereof and equal to the redemption price of such shares
that would be payable by Smith's commencing after May 1, 1998. DLJ presented
information to the Smith's Board demonstrating that the Smith's Exchange Ratio
represented a premium ranging from 12.2% on May 8, 1997 (two trading days prior
to the public announcement of the Merger) to up to 51.7% based on the historical
trading prices of the Smith's Class B Common Stock since Smith's consummated the
Recapitalization on May 23, 1996. The Smith's Board took into account that the
Smith's Exchange Ratio is fixed and is not subject to adjustment in the event of
fluctuations in the market price of Fred Meyer Common Stock or Smith's Class B
Common Stock. While recognizing that the absence of an adjustment mechanism
exposes the holders of Smith's Common Stock to some market risk, the Smith's
Board considered this risk to be offset by the following facts: (i) holders of
Smith's Common Stock would be able to participate in any appreciation in the
value of Fred Meyer Common Stock between the announcement of the transaction and
the Closing Date, including appreciation related to favorable market perception
of the transaction and of the prospects for Holdings, and (ii) while adjustment
mechanisms provide limited protection against declines in the share price of a
security to be received, they also limit the benefits from any appreciation in
that price.
The Merger Agreement and Other Agreements. The Smith's Board considered the
terms of the Merger Agreement, which are reciprocal in nature and which, under
certain circumstances, require Fred Meyer to reimburse Smith's for up to $5
million of Smith's expenses and/or to pay Smith's the Termination Fee if the
Merger Agreement is terminated, and the terms of the Stock Option Agreement
granting Smith's an option to purchase up to 19.9% of the outstanding common
stock of Fred Meyer under certain circumstances related to payment of the
Termination Fee under the Merger Agreement. In addition, the Smith's Board
considered the terms of the Voting Agreements entered into between Fred Meyer
and holders of shares of Smith's Common Stock and Smith's Series I Preferred
Stock aggregating approximately 70% of the combined voting power of the
outstanding capital stock of Smith's pursuant to which such holders have agreed
to vote such shares in favor of the Merger Agreement and against, among other
things, any other merger agreement or Acquisition Proposal.
Structure of Merger. The Smith's Board considered the structure of the
Merger as a "merger of equals," with four current directors of Smith's becoming
directors of Holdings upon consummation of the Merger, and the management
structure and operations of the combined company following the Mergers, and that
following completion of the Merger, Holdings will be a widely-held public
company with no single person or entity controlling more than 10 percent of the
outstanding shares of Holdings Common Stock. The Smith's Board also took into
account the interests of Smith's officers and directors in the Merger and the
impact of the Merger on customers and employees of each of the companies. See
"The Merger -- Interests of Certain Persons in the Merger."
Regulatory Approval. The Smith's Board considered that Smith's and Fred
Meyer have strong market positions in contiguous geographic regions but with
limited overlap within geographic regions. Based on these facts, the Smith's
Board considered the likelihood of obtaining required regulatory approvals, as
well as the possibility that regulatory authorities may impose conditions to the
grant of such approvals.
Financing. The Smith's Board considered that the Merger is not conditioned
on the availability of financing.
DLJ Opinion. The Smith's Board considered as favorable to its determination
the oral opinion of DLJ, financial advisor to Smith's, subsequently confirmed in
writing on May 11, 1997, that, as of such date, the Smith's Exchange Ratio is
fair to the holders of Smith's Common Stock from a financial point of view. The
Smith's Board also considered the oral and written presentations made to it by
DLJ. A copy of DLJ's written opinion to the Smith's Board dated May 11, 1997 is
attached hereto as Appendix C and is incorporated herein by reference. See "The
Merger -- Opinion of Smith's Financial Advisor."
The foregoing discussion of the information and factors considered by the
Smith's Board is not intended to be exhaustive but is believed to include all
material factors considered by the Smith's Board. In reaching its determination
to approve the transactions contemplated by the Merger Agreement, the Smith's
Board did not
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assign any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to differing factors.
Opinion of Fred Meyer Financial Advisor
Fred Meyer engaged Salomon to act as its financial advisor in connection
with the transactions contemplated by the Merger Agreement based upon Salomon's
qualifications, expertise and reputation as well as Salomon's prior investment
banking relationship and familiarity with Fred Meyer. On May 11, 1997, Salomon
delivered to the Fred Meyer Board its written opinion (the "Salomon Opinion"),
to the effect that, as of such date, and based upon and subject to the
assumptions, limitations and qualifications set forth in such opinion, the Fred
Meyer Exchange Ratio was fair to the stockholders (other than Smith's and any of
its affiliates) of Fred Meyer from a financial point of view.
The full text of the Salomon Opinion is set forth as Appendix B to this
Joint Proxy Statement/Prospectus and should be read carefully in its entirety,
including without limitation, the descriptions of the procedures followed,
assumptions made, other matters considered and limitations of the review
undertaken in arriving at such opinion. The Salomon Opinion addresses only the
fairness of the Fred Meyer Exchange Ratio to the stockholders of Fred Meyer from
a financial point of view and does not constitute a recommendation to any
stockholder of Fred Meyer or Smith's as to how such stockholder should vote at
the respective Special Meetings. The summary of the Salomon Opinion set forth in
this Joint Proxy Statement/Prospectus is qualified in its entirety by reference
to the full text of the Salomon Opinion.
The Salomon Opinion does not constitute an opinion as to the price at which
Holdings Common Stock will actually trade at any time. No restrictions or
limitations were imposed upon Salomon with respect to the investigations made or
procedures followed by Salomon in rendering its opinion. In arriving at its
opinion, Salomon, among other things, reviewed the Merger Agreement, including
exhibits thereto, as well as financial and other information that was publicly
available or furnished to it by Smith's and Fred Meyer including information
provided during discussions with their respective managements regarding their
businesses and prospects. Included in the information provided during
discussions with the respective managements were certain financial forecasts and
other information relating to the business operations, financial condition and
prospects of Smith's and Fred Meyer, respectively, prepared by their respective
managements. In addition, Salomon compared certain financial and securities data
of Smith's and Fred Meyer with various other companies whose securities are
traded in public markets, reviewed the historical stock prices and trading
volumes of the Smith's Class B Common Stock and Fred Meyer Common Stock,
reviewed prices and premiums paid in certain other business combinations and
conducted such other financial studies, analyses and investigations as Salomon
deemed appropriate for purposes of rendering its opinion. Salomon also
considered such other information, financial studies, analyses, investigations
and financing, economic and market criteria that Salomon deemed relevant.
In rendering its opinion, Salomon did not independently verify the
information reviewed by it and assumed the accuracy and completeness of all of
the financial and other information reviewed by it. Salomon did not conduct a
physical inspection of the properties or facilities, or make an independent
evaluation or appraisal of the assets or liabilities, of Smith's or Fred Meyer,
nor was Salomon furnished with any such evaluation or appraisal. Salomon relied
upon the estimates of the respective managements of Smith's and Fred Meyer of
the operating savings and other benefits and cost reductions and synergies
achievable as a result of the Merger. Salomon also assumed that the financial
forecasts relating to the prospects of Smith's and Fred Meyer were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of Smith's and Fred Meyer, respectively, as to the
likely future financial performance of Smith's and Fred Meyer, respectively, and
Salomon expressed no opinion with respect to such forecasts or the assumptions
on which they are based. Salomon did not make any independent investigation of
any legal matters affecting Smith's or Fred Meyer, and assumed the correctness
of all legal advice given to each of them and to the Fred Meyer Board, including
advice as to the tax consequences of the Merger. While Salomon believes that its
review as described herein is an adequate basis for the Salomon Opinion, the
Salomon Opinion is necessarily based upon financial, economic, monetary,
political, market and other conditions that
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existed and could be evaluated as of the date of the Salomon Opinion. Salomon
does not have any obligation to update, revise or reaffirm its opinion as a
result of any such change in such conditions or otherwise.
The following is a brief summary of the analyses performed by Salomon in
connection with the Salomon Opinion and included in its presentations to the
Fred Meyer Board. All analyses discussed below, unless otherwise indicated,
exclude synergies resulting from the Merger estimated by the management of
Smith's and Fred Meyer.
Discounted Cash Flow Valuation. Using a discounted cash flow ("DCF")
methodology, Salomon valued Smith's estimating the present value of unlevered
future free cash flows available to its debt and equity holders if Smith's were
to perform on a stand-alone basis (without giving effect to the Merger) in
accordance with the management forecasts. Free cash flow represented the amount
of cash generated and available for principal, interest and dividend payments
after providing for ongoing business operations. Salomon aggregated (x) the
present value of the free cash flows of Smith's over the five-year forecast
period with (y) the present value of the range of terminal values described
below. The range of terminal values was generally calculated by applying a range
of selected multiples between 6.5x and 7.5x to Smith's EBITDA in the final year
of the forecast period. This range of terminal values represented Smith's value
beyond the applicable forecast period. As part of the DCF analysis, Salomon used
discount rates between 10.5% and 11.5% reflecting Smith's specific financial
characteristics. This DCF analysis resulted in an equity value reference range
of $43.76 to $61.76 for each share of Smith's Common Stock, which results in an
implied exchange ratio (based on Salomon's DCF valuation of Fred Meyer at
corresponding terminal EBITDA multiples and discount rates) of between 1.214 to
1 and 1.320 to 1 for each share of Smith's Common Stock.
Transaction Multiples Valuation. Salomon reviewed and analyzed selected
merger or acquisition transactions involving other companies in the supermarket
chain industries that it deemed relevant. These transactions were the
acquisition of Hughes Markets, Inc. by Quality Food Centers, Inc. (announced
November 1996); the acquisition of Kash n' Karry Food Stores, Inc. by Food Lion,
Inc. (announced October 1996); the acquisition of The Vons Companies, Inc. by
Safeway, Inc. (announced October 1996); the acquisition of The Stop & Shop
Companies, Inc. by Koninklijke Ahold NV (announced March 1996); the acquisition
of Smitty's by Smith's (announced January 1996); the acquisition of Jitney
Jungle Stores of America, Inc. by Bruckmann, Rosser, Sherrill & Co. L.P.
(announced November 1995); the acquisition of Purity Supreme, Inc. by The Stop &
Shop Companies, Inc. (announced April 1995); the acquisition of Bruno's, Inc. by
Kohlberg Kravis Roberts & Co. (announced April 1995); the acquisition of
Dominick's Supermarkets, Inc. by The Yucaipa Companies (announced February
1995); and the acquisition of Ralphs Grocery Company by Food 4 Less
Supermarkets, Inc. (announced September 1994). Among other matters, Salomon
indicated that the merger and acquisition transaction environment varies over
time because of macroeconomic factors such as interest rate and equity market
fluctuations and microeconomic factors such as industry results and growth
expectations. Salomon noted that no transaction reviewed was identical to the
Merger and that, accordingly, an assessment of the results of the following
analysis necessarily involves considerations and judgments concerning
differences in financial and operating characteristics of Smith's and other
factors that would affect the acquisition value of the companies to which it is
being compared. Salomon reviewed, for each acquired company, the ratio of firm
value (as defined below) to latest 12 months ("LTM") sales and to LTM EBITDA. In
addition, for those recent supermarket transactions involving the acquisition of
public companies in which the transaction values exceeded $1 billion, Salomon
also reviewed the implied offer price as a multiple of the projected net income
of the acquired companies (reflecting a composite of equity research analysts'
estimates) for the fiscal year immediately following the fiscal year in which
such acquisition was announced. Based on these analyses and the prices paid in
the transactions described above, Salomon calculated an implied equity value
reference range of $51.08 to $57.20 for each share of Smith's Common Stock.
Comparable Company Valuation. Salomon also performed a comparable company
analysis in which it compared certain publicly available historical financial
and operating data, projections of future financial performance (reflecting
Salomon Brothers Equity Research estimates where available and otherwise
reflecting a composite of equity research analysts' estimates) and market
statistics (calculated based upon closing stock prices as of May 6, 1997) of
selected publicly traded companies in the industries considered by Salomon to be
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reasonably comparable to Smith's with similar historical financial and operating
data, projections of future financial performance (also reflecting Salomon
Brothers Equity Research estimates where available and otherwise reflecting a
composite of equity research analysts' estimates) and market statistics (also
calculated based upon closing stock prices as of May 6, 1997) of Smith's. In the
supermarket chain industry, these companies were Albertson's, Inc.; American
Stores Company; Dominick's Supermarkets, Inc.; Food Lion, Inc.; Giant Food Inc.;
Hannaford Bros. Co.; The Kroger Co.; Quality Food Centers, Inc.; Safeway Inc.;
and Winn-Dixie Stores, Inc. (the "Supermarket Chain Selected Companies") and in
the merchandising industry, these companies were Dayton Hudson Corporation;
Kmart Corporation; Wal-Mart Stores, Inc.; and Woolworth Corporation (the
"Merchandising Selected Companies"). Salomon compared the common stock prices
per share of each of the Supermarket Chain Selected Companies and the
Merchandising Selected Companies, respectively, as of May 6, 1997 ("Per Share
Price"), as a multiple of estimated 1997 and 1998 earnings per share ("EPS") of
the Supermarket Chain Selected Companies and the Merchandising Selected
Companies, respectively. Salomon also compared the "firm value" (equal to the
sum of equity market value (the Per Share Price multiplied by fully diluted
shares outstanding less exercisable option proceeds), straight debt, minority
interest, straight preferred stock, and all out-of-the-money convertibles less
investments in unconsolidated affiliates and cash) as a multiple of 1996 EBITDA
for each of the Supermarket Chain Selected Companies and the Merchandising
Selected Companies, respectively. Based on its analysis, Salomon calculated an
equity value reference range of $35.76 to $46.79 for each share of Smith's
Common Stock on a noncontrol premium adjusted basis. Based on the mean market
price of Smith's Class B Common Stock for the 30-day period ending on May 6,
1997, and a 20% to 45% control premium, Salomon calculated an equity value
reference range of $41.49 to $50.13 for each share of Smith's Common Stock. No
company used in the public market valuation analysis summarized above is
identical to Smith's. Accordingly, any analysis of the value of the Merger based
upon the Supermarket Chain Selected Companies and the Merchandising Selected
Companies involves complex considerations and judgments concerning differences
in the potential financial and operating characteristics of such companies and
other factors in relation to the trading and acquisition values of such
companies.
Pro Forma Combination Analysis. Salomon reviewed certain pro forma
financial effects (including the timing and amount of certain projected
synergies and other cost savings) resulting from the Merger for each of the
12-month periods ending December 31 in the five-year period ending December 31,
2001. Salomon estimated that, on a pro forma basis, the Merger would be
accretive to earnings per share of Fred Meyer Common Stock beginning in 1998.
Contribution Analysis. Salomon reviewed and analyzed the pro forma
estimated contribution to the combined entity of each of Fred Meyer and Smith's
as of and for the 12-month periods ending December 31, 1997 and 1998,
respectively. Salomon reviewed, among other things, the pro forma contribution
to net income and Cash from Operations (representing net income plus
depreciation and amortization and less changes in net working capital, capital
expenditures and changes in other assets and liabilities). Based on this
analysis, Smith's would contribute 32.4% of net income and 43.2% of Cash from
Operations in 1997 and 37.1% of net income and 47.0% of Cash from Operations in
1998. The Smith's Exchange Ratio implied by Smith's estimated contributions to
net income and Cash from Operations for 1997 were 0.808 to 1 and 1.280 to 1,
respectively, and the Smith's Exchange Ratio implied by Smith's estimated
contributions to net income and Cash from Operations for 1998 were 0.996 to 1
and 1.493 to 1, respectively. The results of the contribution analysis are not
necessarily indicative of the contributions that the respective businesses may
actually have in the future.
Historical Trading and Premium Analysis. Salomon reviewed the market prices
for Fred Meyer Common Stock and Smith's Class B Common Stock as of May 6, 1997
and the mean market prices of Fred Meyer Common Stock and Smith's Class B Common
Stock for the 30, 60, 90, 180 and 360 day periods ending on May 6, 1997, and
compared such market prices to the 1.05 to 1 Smith's Exchange Ratio. Such
comparison showed that the Smith's Exchange Ratio represented an implied offer
price for each share of Smith's Class B Common Stock of between $35.34 and
$44.76 and an implied premium for each share of Smith's Class B Common Stock of
between 21.8% and 27.1%.
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Certain Assumptions. In performing the discounted cash flow valuation, pro
forma combination analysis and contribution analysis described above, Salomon
relied on projections prepared by the respective managements of Fred Meyer and
Smith's as to cash flows and certain other performance measures. The material
assumptions underlying the projections with respect to Fred Meyer were as
follows: same store sales will be 2.7%, 2.8%, 1.8%, 1.3% and 1.0% during the
fiscal years 1998, 1999, 2000, 2001 and thereafter, respectively; four new
stores will be opened in each of fiscal year 1998 and fiscal year 1999 and five
new stores will be opened in each fiscal year thereafter; these stores will cost
approximately $20 million (excluding inflation) and will have average weekly
sales of approximately $560,000 (excluding growth); these stores will be owned
stores; five major remodels will be performed per year, one conversion of a
non-food store to a food store will be performed in each of fiscal year 1998 and
1999 and seven minor remodels per year will be performed; one underperforming
store will be closed per year beginning in fiscal year 2000; and gross margins
will be 29.9%. The material assumptions underlying the projections with respect
to Smith's were as follows: 1998 same store sales take into account any known
competitive openings by market area and will average a .3% increase over 1997;
same store sales in future years will increase to 1.0% by 2001 and will remain
at that level thereafter; eight new stores will be opened per year beginning in
1998; these stores will cost approximately $2.4 million each (fixtures and
equipment only) and will be subject to ground and building operating leases; new
stores will have average weekly sales of $319,000 per store in 1998 through 2000
and $321,000 and $320,000 per store in 2001 and 2002, respectively; no stores
will be closed; 15 major remodels will be performed per year; major remodels of
16 Smitty's stores will be performed during fiscal year 1998, 1999 and 2000;
these remodels will not affect sales; and gross margins will be 22.6%.
The summary set forth above does not purport to be a complete description
of the analyses performed by Salomon, but describes, in summary form, the
principal elements of the analyses made by Salomon in arriving at the Salomon
Opinion. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore,
such an opinion is not readily summarized. Each of the analyses conducted by
Salomon was carried out in order to provide a different perspective on the
transaction and add to the total mix of information available. Salomon did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, Salomon considered
the results of the analyses in light of each other and ultimately reached its
opinion based on the results of the analyses taken as a whole. Further,
Salomon's conclusion involved significant elements of judgment and qualitative
analyses as well as the financial and quantitative analyses. Salomon did not
place particular reliance or weight on any individual factor, but instead
concluded that its analyses, taken as a whole, supported its determination.
Accordingly, notwithstanding the separate factors summarized above, Salomon
believes that its analyses must be considered as a whole and that selecting
portions of its analysis and the factors considered by it, without considering
all analyses and factors, could create an incomplete or misleading view of the
evaluation process underlying its opinions. In performing its analyses, Salomon
made numerous assumptions with respect to industry performance, general
business, financial, economic and market conditions and other matters, many of
which are beyond the control of Smith's or Fred Meyer. In addition, analyses
relating to the value of the businesses or securities do not purport to be
appraisals, or to reflect the prices at which such businesses or securities can
actually be sold. The analyses performed by Salomon are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
Salomon is not affiliated with Fred Meyer or Smith's. Salomon has
previously rendered certain financial advisory and investment banking services
to Fred Meyer, for which Salomon received customary compensation. Salomon has
also provided investment banking, lending and broker-dealer-related services to
affiliates of Yucaipa, for which Salomon received customary compensation. In the
ordinary course of its business, Salomon actively trades the securities of Fred
Meyer and Smith's for its own account and the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Pursuant to an engagement letter dated April 24, 1997, Fred Meyer agreed to pay
Salomon for its services in connection with the Merger a cash fee of $7.0
million, of which $750,000 has been paid to Salomon and the balance of which
will be payable upon consummation of the Merger. Fred Meyer also agreed to pay
to Salomon a fee equal to 25% (but in no event more than $2.75 million) of any
break-up or similar fee received by Fred Meyer in
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connection with the termination of the Merger Agreement. In addition, Fred Meyer
agreed to reimburse Salomon for reasonable travel and out-of-pocket expenses
incurred by Salomon in connection with its engagement (including reasonable
travel expenses and expenses of Salomon's counsel). Fred Meyer further agreed to
indemnify Salomon and certain related persons against certain liabilities,
including liabilities under the federal securities laws, relating to or arising
out of its engagement.
Opinion of Smith's Financial Advisor
Smith's engaged DLJ to act as its financial advisor in connection with the
transactions contemplated by the Merger Agreement based upon DLJ's
qualifications, expertise and reputation as well as DLJ's prior investment
banking relationship and familiarity with Smith's and Yucaipa. On May 9, 1997,
DLJ rendered an oral opinion to the Smith's Board, which was confirmed by
delivery of its written opinion dated May 11, 1997 (the "DLJ Opinion"), to the
effect that, as of such date, and based upon and subject to the assumptions,
limitations and qualifications set forth in such opinion, the Smith's Exchange
Ratio was fair to the common stockholders of Smith's from a financial point of
view. The DLJ opinion does not address the consideration to be received by the
preferred stockholders of Smith's.
The full text of the DLJ Opinion is set forth as Appendix C to this Joint
Proxy Statement/Prospectus and should be read carefully in its entirety,
including without limitation, the descriptions of the procedures followed,
assumptions made, other matters considered and limitations of the review
undertaken in arriving at such opinion. The DLJ Opinion addresses only the
fairness of the Smith's Exchange Ratio to the common stockholders of Smith's
from a financial point of view and does not constitute a recommendation to any
stockholder of Smith's or Fred Meyer as to how such stockholder should vote at
the respective Special Meetings. The summary of the DLJ Opinion set forth in
this Joint Proxy Statement/Prospectus is qualified in its entirety by reference
to the full text of the DLJ Opinion.
The DLJ Opinion does not constitute an opinion as to the price at which
Holdings Common Stock will actually trade at any time. DLJ was not requested to
and did not recommend the amount of consideration to be received by the common
stockholders of Smith's and was not requested to and did not participate in
negotiating the terms of the Merger or any other aspect of the Merger; it was
requested to evaluate, from a financial point of view, the fairness of the
Smith's Exchange Ratio to the common stockholders of Smith's, the type and
amount of which was determined in arm's-length negotiations between Smith's and
Fred Meyer. No restrictions or limitations were imposed upon DLJ with respect to
the investigations made or procedures followed by DLJ in rendering its opinion.
In addition, DLJ received no instructions to, and did not, seek or solicit
alternative transactions. In arriving at its opinion, DLJ, among other things,
reviewed the May 9, 1997 draft of the Merger Agreement, including exhibits
thereto, as well as financial and other information that was publicly available
or furnished to it by Smith's and Fred Meyer including information provided
during discussions with their respective managements regarding their businesses
and prospects. Included in the information provided during discussions with the
respective managements were certain financial forecasts and other information
relating to the business operations, financial condition and prospects of
Smith's and Fred Meyer, respectively, prepared by their respective managements.
In addition, DLJ compared certain financial and securities data of Smith's and
Fred Meyer with various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of the Smith's
Class B Common Stock and Fred Meyer Common Stock, reviewed prices and premiums
paid in certain other business combinations and conducted such other financial
studies, analyses and investigations as DLJ deemed appropriate for purposes of
rendering its opinion.
In rendering its opinion, DLJ did not independently verify the information
provided to it or available from public sources and assumed the accuracy and
completeness of all of the financial and other information provided to it or
available from public sources. DLJ did not conduct a physical inspection of the
properties or facilities, or make an independent evaluation or appraisal of the
assets or liabilities, of Smith's or Fred Meyer, nor was DLJ furnished with any
such evaluation or appraisal. DLJ relied upon the estimates of the respective
managements of Smith's and Fred Meyer of the operating savings and other
benefits and cost reductions achievable as a result of the Merger. DLJ also
assumed that the financial forecasts and other information relating to the
prospects of Smith's and Fred Meyer were reasonably prepared on bases reflecting
the best
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currently available estimates and good faith judgments of the management of
Smith's and Fred Meyer, respectively, as to the likely future financial
performance of Smith's and Fred Meyer, respectively, and DLJ expressed no
opinion with respect to such forecasts or the assumptions on which they are
based. DLJ did not make any independent investigation of any legal matters
affecting Smith's or Fred Meyer, and assumed the correctness of all legal advice
given to each of them and to the Smith's Board, including advice as to the tax
consequences of the Merger. While DLJ believes that its review as described
herein is an adequate basis for the DLJ Opinion, the DLJ Opinion is necessarily
based upon financial, economic, monetary, political, market and other conditions
that existed and could be evaluated as of the date of the DLJ Opinion and does
not speak to any date other than the date on which the DLJ Opinion was
delivered. DLJ does not have any obligation to update, revise or reaffirm its
opinion as a result of changes in such conditions or otherwise.
The following is a brief summary of the analyses performed by DLJ in
connection with the DLJ Opinion and included in its presentations to the Smith's
Board. All analyses discussed below, unless otherwise indicated, exclude
synergies resulting from the Merger estimated by the management of Smith's and
Fred Meyer.
Common Stock Performance Analysis. DLJ reviewed the historical closing
prices and trading volumes of Smith's Class B Common Stock for the 245 trading
days ended May 9, 1997 which represents the trading days beginning the day
following the Recapitalization and ending the day DLJ's oral opinion was
delivered to the Smith's Board. See "Business of Smith's." In the 245 trading
days ended May 9, 1997, Smith's Class B Common Stock reached a high of $40.00
per share on May 9, 1997, and a low of $21.88 per share. In the 245 trading days
ended May 9, 1997, Smith's Class B Common Stock outperformed the S&P 400 and a
comparable company index, which includes Albertson's, Inc., American Stores
Company, Dominick's Supermarkets, Inc., Food Lion, Inc., Giant Food Inc.,
Hannaford Bros. Co., The Kroger Co., Quality Food Centers, Inc., Safeway Inc.
and Weis Markets, Inc. DLJ reviewed the historical closing prices and trading
volumes of Fred Meyer Common Stock for the 245 trading days ended May 9, 1997.
In the 245 trading days ended May 9, 1997, Fred Meyer Common Stock reached a
high of $43.00 per share and a low of $26.25 per share. In the 245 trading days
ended May 9, 1997, Fred Meyer Common Stock outperformed Smith's Class B Common
Stock, the S&P 400 and a comparable company index, which includes Albertson's,
Inc., American Stores Company, Dominick's Supermarkets, Inc., Food Lion, Inc.,
Giant Food Inc., Hannaford Bros. Co., The Kroger Co., Quality Food Centers,
Inc., Safeway Inc. and Weis Markets, Inc.
Historical Exchange Ratio Analysis. DLJ compared the Smith's Exchange Ratio
to the ratio implied by dividing the Smith's Class B Common Stock closing stock
price by the Fred Meyer Common Stock closing stock price. The time periods (each
ending on May 9, 1997) selected for analysis were: last 120 trading days, last
60 trading days, last 30 trading days and last 10 trading days. The average
implied exchange ratios for such time periods were 0.828, 0.837, 0.858, and
0.863, respectively. DLJ noted that each such ratio was less than the Smith's
Exchange Ratio of 1.05.
Earnings Per Share Impact Analysis. DLJ analyzed the pro forma effect of
the Merger on the projected earnings per share of Fred Meyer, as forecasted by
the management of Fred Meyer. DLJ reviewed the synergies as forecasted by the
management of Smith's and Fred Meyer contemplated to result from the Merger.
This analysis is based on a number of assumptions, including, among other
things, the projected financial performance of Smith's and Fred Meyer, the
estimated amounts and timing of the synergies and prevailing interest rates. The
analysis indicated that (accounting for the transaction under purchase
accounting, and giving effect to the synergies but excluding one-time
merger-related expenses), the pro forma EPS for Fred Meyer is anticipated to be
lower than Fred Meyer's stand-alone earnings per share estimates for fiscal year
1997 and higher than Fred Meyer's stand-alone earnings per share estimate for
fiscal years 1998 and 1999.
Premiums Paid in Public Merger and Acquisition Transactions. DLJ performed
a comparison of the premium represented by the Smith's Exchange Ratio to
publicly available information regarding the premiums paid over market price in
acquisitions of $1.0 billion to $5.0 billion in size ("Comparable Acquisitions")
since January 1, 1995 and merger and acquisition transactions greater than $250
million in the supermarket industry since January 1987 ("Comparable Supermarket
Transactions"). DLJ reviewed the
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consideration paid in each such transaction in terms of the percentage premium
represented by the offer prices (represented, in the case of transactions in
which all or part of the consideration was in the form of common stock of the
acquiror, by the acquirors' stock price on the day prior to the announcement of
the transaction multiplied by the exchange ratio) over the trading prices one
day, one week and one month prior to the announcement date of each respective
transaction. The average premiums to the market price one day, one week and one
month prior to the announcement date for Comparable Acquisitions and Comparable
Supermarket Transactions were approximately 33.7%, 37.9% and 41.3% and 37.0%,
39.4% and 43.5%, respectively. This compares to the percentage premiums by which
the product of the Smith's Exchange Ratio and the closing price of Fred Meyer
Common Stock on May 9, 1997 (the "Consideration per Share") exceeds the closing
price of Smith's Common Stock one day, one week and one month prior to May 2,
1997, which premiums were 26.1%, 28.4% and 33.7%, respectively. DLJ selected the
May 2, 1997 date due to the 14.7% increase in the price of Smith's Common Stock
on volume which represented 1.4x the prior six month's average weekly volume in
the week ending May 9, 1997. DLJ also noted that the Consideration per Share
represented a premium of 24.7% to the highest closing price of Smith's Common
Stock, over the latest twelve months.
Relative Contribution Analysis. DLJ analyzed the relative contributions of
Smith's and Fred Meyer to the revenues, EBITDA, net earnings before interest and
taxes ("EBIT") and net income of the combined entity for the fiscal year 1996
and the projected fiscal years 1997 and 1998, in each case excluding all
merger-related costs and projected synergies. DLJ relied upon estimates of 1997
and 1998 financial information provided by Smith's and Fred Meyer's respective
managements. Smith's and Fred Meyer provided 53.5% and 46.5%, respectively, of
the combined enterprise value. The projections made by Smith's and Fred Meyer's
managements indicate that in calendar years 1996, 1997 and 1998, Smith's would
provide 44.9%, 43.9% and 43.2% of combined revenue; 52.9%, 50.4% and 49.8% of
combined EBITDA; 58.4%, 55.1% and 53.5% of combined EBIT; and 39.3%, 36.6% and
36.4% of combined net income. On a corresponding basis, Fred Meyer would
contribute 55.1%, 56.1% and 56.8% of combined revenue; 47.1%, 49.6% and 50.2% of
combined EBITDA; 41.6%, 44.9% and 46.5% of combined EBIT and 60.7%, 63.4% and
63.6% of combined net income. The shares of Holdings Common Stock (including
shares underlying all outstanding options, calculated using the treasury stock
method) to be issued to the Smith's stockholders represent approximately 38.6%
of Holdings' outstanding shares pro forma for the Merger based on the May 9,
1997 closing price of Fred Meyer Common Stock.
Comparable Company Analysis. To provide contextual data and comparative
market information, DLJ compared the operating performance of Smith's and Fred
Meyer to certain market trading statistics of nine retail supermarket companies
whose securities are publicly traded (the "Comparable Companies"). The
Comparable Companies consisted of: Quality Food Centers, Dominick's
Supermarkets, Inc., Giant Food Inc., Hannaford Bros. Co., Albertson's, Inc.,
American Stores Company, Food Lion, Inc., Weis Markets, Inc. and The Kroger Co.
Historical financial information used in connection with the ratios provided
below with respect to the Comparable Companies is as of the most recent
financial statements publicly available for each company as of May 9, 1997.
DLJ examined certain publicly available financial data of the Comparable
Companies including Enterprise Value (defined as market value of common equity
("Equity Value") plus book value of total debt and preferred stock less cash) as
a multiple of LTM revenue, EBITDA and EBIT, and price to earnings ratios ("P/E")
based on estimated EPS for calendar years 1997 and 1998. DLJ analyzed the
implied multiples for Smith's at the Consideration per Share without including
the projected synergies. As of May 9, 1996, this analysis resulted in (i)
Enterprise Value to LTM revenue ratios for the Comparable Companies ranging from
0.3x to l.7x, as compared to 0.6x for Smith's at the Consideration per Share and
0.4x for Fred Meyer, (ii) Enterprise Value to LTM EBITDA for the Comparable
Companies ranging from 6.0x to 9.7x, as compared to 6.9x for Smith's at the
Consideration per Share and 13.0x for Fred Meyer, (iii) Enterprise Value to LTM
EBIT for the Comparable Companies ranging from 8.4x to 14.7x, as compared to
10.4x for Smith's at the Consideration per Share and 12.3x for Fred Meyer, and
(iv) estimated P/E based on 1997 and 1998 calendar year estimates ranging from
13.1x to 25.1x and 11.3x to 16.4x, respectively, for the Comparable Companies,
as compared to 16.9x and 14.4x, respectively, for Smith's at the Consideration
per Share and
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15.4x and 13.2x, respectively, for Fred Meyer, in each case assuming the Smith's
Exchange Ratio is calculated using the closing price of Fred Meyer Common Stock
on May 9, 1997 of $41.88 and without giving effect to the projected synergies.
EPS estimates for Smith's and Fred Meyer were provided by the respective
managements and for the Comparable Companies by First Call Research Direct.
No company utilized in the comparable company analysis is identical to
Smith's or Fred Meyer. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of Smith's and Fred Meyer and other
factors that could affect the public trading value of the Comparable Companies
or Company to which they are being compared. Mathematical analysis (such as
determining the mean or median) is not in itself a meaningful method of using
comparable company data.
Comparable Transaction Analysis. DLJ reviewed publicly available
information on 45 merger and acquisition transactions in the regional
supermarket industry completed since 1985 (the "Selected Super-market
Transactions"). DLJ reviewed the consideration paid in the Selected Supermarket
Transactions in terms of (i) Enterprise Value as a multiple of LTM revenues,
EBITDA and EBIT and (ii) Equity Value to LTM net income, in each case, of the
acquired entity prior to its acquisition. The range of multiples of the ratio of
Enterprise Value to LTM revenues computed for the Selected Supermarket
Transactions was 0.1x to 0.6x. This compares to the Enterprise Value to LTM
revenues of Smith's multiple of 0.6x, based on the Consideration per Share. The
range of multiples of the ratio of Enterprise Value to LTM EBITDA computed for
the Selected Supermarket Transactions was 4.3x to 9.6x. This compares to the
Enterprise Value to LTM EBITDA of Smith's multiple of 6.9x, based on the
Consideration per Share. The range of multiples of the ratio of Enterprise Value
to LTM EBIT computed for the Selected Supermarket Transactions was 7.0x to
17.1x. This compares to the Enterprise Value to LTM EBIT of Smith's multiple of
10.4x, based on the Consideration per Share. The range of multiples of the
Equity Value to LTM Net Income computed for the Selected Supermarket
Transactions was 7.0x to 54.1x. This compares to the Equity Value to LTM Net
Income of Smith's multiple of 19.1x. Because Smith's has negative stockholders'
equity, an analysis of Equity Value to book value is not meaningful.
No transaction utilized in the Comparable Transaction Analysis is identical
to the Merger. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of Smith's and Fred Meyer and other
factors that could affect the acquisition value of the companies to which they
are being compared. Mathematical analysis (such as determining the mean or
median) is not itself a meaningful method of using comparable transaction data.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow
analysis for each of Smith's and Fred Meyer on a stand-alone basis for the
three-year period ending with fiscal year 1999, which were based upon financial
projections prepared by the respective managements of each company. In
performing its analysis, DLJ calculated the "Free Cash Flow" for each company as
the after-tax operating earnings of Smith's and Fred Meyer, respectively, plus
depreciation and amortization and other noncash items, plus (or minus) net
changes in working capital, minus projected capital expenditures. DLJ calculated
the terminal value of each of Smith's and Fred Meyer at the end of the forecast
period, by applying a range of estimated EBITDA multiples of 6.0x to 8.0x, such
range of multiples being consistent with those exhibited by the Comparable
Companies and the Selected Supermarket Transactions to the projected Free Cash
Flows of Smith's and Fred Meyer, respectively, in fiscal year 1999. The Free
Cash Flows and terminal values were then discounted to the present using a range
of discount rates of 10.0% to 15.0% representing an estimated range of the
weighted average cost of capital of Smith's and Fred Meyer. This analysis
implied per share equity values for Smith's ranging from $16.84 to $59.40 and
for Fred Meyer ranging from $33.32 to $59.35. DLJ then compared the range of
implied per share equity values for Smith's with the range of implied per share
equity values for Fred Meyer. DLJ noted, that in each of the exit multiple and
discount rate scenarios analyzed, the ratio of the implied per share equity
value of Smith's to the implied per share equity value of Fred Meyer, was less
than the Smith's Exchange Ratio.
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Certain Assumptions. In performing the discounted cash flow valuation, pro
forma combination analysis and contribution analysis described above, DLJ relied
on projections prepared by the respective managements of Fred Meyer and Smith's
as to cash flows and certain other performance measures. DLJ was informed by the
management of Fred Meyer that its projections were based on certain assumptions
with respect to same store sales, new stores, new store sales and store
remodels, conversions and the costs related thereto. DLJ was informed by the
management of Smith's that its projections were based on certain assumptions
with respect to same store sales, new stores, new store sales and store
remodels, conversions and the costs related thereto. In rendering its opinion,
DLJ did not independently verify the projections provided to it by the
respective managements of Fred Meyer and Smith's, or the assumptions underlying
such projections.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ, but describes, in summary form, the principal
elements of the analyses made by DLJ in arriving at the DLJ Opinion. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily summarized. Each of the analyses conducted by DLJ was carried out in
order to provide a different perspective on the transaction and add to the total
mix of information available. DLJ did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to fairness from a financial point of view. Rather, in reaching its
conclusion, DLJ considered the results of the analyses in light of each other
and ultimately reached its opinion based on the results of the analyses taken as
a whole. Further, DLJ's conclusion involved significant elements of judgment and
qualitative analyses as well as the financial and quantitative analyses. DLJ did
not place particular reliance or weight on any individual factor, but instead
concluded that its analyses, taken as a whole, supported its determination.
Accordingly, notwithstanding the separate factors summarized above, DLJ believes
that its analyses must be considered as a whole and that selecting portions of
its analysis and the factors considered by it, without considering all analyses
and factors, could create an incomplete or misleading view of the evaluation
process underlying its opinions. In performing its analyses, DLJ made numerous
assumptions with respect to industry performance, business and regulatory,
financial, economic, monetary, political and market conditions and other
matters, many of which are beyond the control of Smith's or Fred Meyer. In
addition, analyses relating to the value of the businesses or securities do not
purport to be appraisals, or to reflect the prices at which such businesses or
securities can actually be sold. The analyses performed by DLJ are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
DLJ was selected to render an opinion in connection with the Merger based
upon DLJ's qualifications, expertise and reputation, including the fact that
DLJ, as part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Pursuant to a letter agreement between Smith's and DLJ dated April 24, 1997
(the "DLJ Engagement Letter"), DLJ is entitled to (i) a retainer fee of $250,000
payable upon execution of the DLJ Engagement Letter, (ii) a fee of $500,000 at
the time DLJ notifies the Smith's Board that it is prepared to deliver its
opinion to the Smith's Board, and (iii) a fee of $750,000 upon consummation of
business combination between Smith's and Fred Meyer in one or a series of
transactions, by merger, consolidation, or any other business combination, by
purchase involving all or a substantial amount of the business securities or
assets of Smith's or otherwise (including the Merger) (a "Combination
Transaction"). Smith's has agreed to reimburse DLJ for its out-of-pocket
expenses, including reasonable fees and expenses of its counsel, and to
indemnify DLJ for liabilities and expenses arising out of a Combination
Transaction, including liabilities under federal securities laws. The terms of
the fee arrangement with DLJ, which DLJ and Smith's believe are customary in
transactions of this nature, were negotiated at arm's length between Smith's and
DLJ and the Smith's Board was aware of such arrangement, including the fact that
a significant portion of the aggregate fee payable to DLJ is contingent upon
consummation of the Merger.
DLJ provides a full range of financial, advisory and brokerage services and
in the course of its normal trading activities may from time to time effect
transactions and hold positions in the securities or options on
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securities of Fred Meyer and/or Smith's for its own account and for the account
of customers. Over the past twelve months, DLJ has co-managed a $575 million
public offering of Smith's Notes, for which it received customary fees.
Interests of Certain Persons in the Merger
In considering the respective recommendations of the Fred Meyer Board and
the Smith's Board with respect to the Merger Agreement, stockholders of Fred
Meyer and Smith's should be aware that certain members of management of Fred
Meyer and Smith's and the Fred Meyer Board and the Smith's Board have interests
in the Merger that are different from, or in addition to, the interests of the
stockholders of Fred Meyer and Smith's generally. See "-- The Merger." The Fred
Meyer Board and the Smith's Board were aware of these interests and considered
them, among other matters, in approving the Merger Agreement.
Described below under "-- Existing Arrangements" are material employment,
employee benefit and other arrangements of Fred Meyer and Smith's as they
currently exist. Pursuant to the terms of the Merger Agreement and certain other
agreements described herein, certain terms and conditions of such agreements and
arrangements will be amended or become operative and certain new arrangements
will be entered into as a result of the Merger, as described below under the
subheading "-- The Merger."
Existing Arrangements
Fred Meyer Stock Option Plans. The Fred Meyer Amended 1990 Stock Incentive
Plan and the Fred Meyer 1983 Stock Option Plan, as amended, (together, the "Fred
Meyer Plans"), authorize the Compensation Committee of the Fred Meyer Board to
grant options (each, a "Fred Meyer Option") to, among others, key employees for
the purchase of shares of Fred Meyer Common Stock. As of July 18, 1997,
directors and executive officers of Fred Meyer held outstanding Fred Meyer
Options to purchase 1,128,501 shares of Fred Meyer Common Stock at exercise
prices ranging from $14.00 to $40.00 per share and each with a vesting schedule
of five years. In connection with the Merger, the Fred Meyer Board has taken
action to provide that all outstanding Fred Meyer Options will become
immediately exercisable at the Effective Time to purchase shares of Holdings
Common Stock. See "-- The Merger -- Fred Meyer Stock Option Plans."
Fred Meyer Non-Employee Directors Stock Compensation Plan. The Fred Meyer
Non-Employee Directors Plan provides for the purchase on the open market of Fred
Meyer Common Stock for the benefit of non-employee directors of Fred Meyer.
Shares of Fred Meyer Common Stock purchased under the Fred Meyer Non-Employee
Directors Plan (the "Fred Meyer Non-Employee Director Shares") vest ratably over
a five-year period. As of July 18, 1997, 16,574 shares of Fred Meyer Common
Stock had been purchased for non-employee directors of Fred Meyer pursuant to
the Fred Meyer Non-Employee Directors Plan, of which 3,212 shares had vested. In
connection with the Merger, the Fred Meyer Board has taken action to provide
that all unvested Fred Meyer Non-Employee Director Shares will become vested
immediately prior to the Effective Time. See "-- The Merger -- Fred Meyer
Non-Employee Directors Stock Compensation Plan."
Indemnification Arrangements with Fred Meyer Officers and Directors.
Pursuant to the Fred Meyer Certificate and the Fred Meyer Bylaws, Fred Meyer is
obligated to indemnify its current and former directors and officers (the "Fred
Meyer Indemnified Parties") to the fullest extent permitted under applicable
law. Fred Meyer also maintains directors' and officers' liability insurance
covering the Fred Meyer Indemnified Parties in their capacities as directors and
officers of Fred Meyer. Holdings will indemnify the Fred Meyer Indemnified
Parties following the Merger as provided in the Merger Agreement. See "-- The
Merger Indemnification Arrangements with Fred Meyer Officers and Directors."
Smith's Employment Agreements. In connection with the Merger, the Smith's
Board determined that it was in the best interest of Smith's to provide certain
assurances to its senior management to ensure management stability pending the
consummation of the Merger. As a result, Smith's has entered into employment
agreements (the "Smith's Employment Agreements") with three executive officers
and 14 other employees (collectively, the "Employees") of Smith's. Pursuant to
the terms thereof, upon a "change of control" of Smith's, the Smith's Employment
Agreements become effective and the Employees become entitled to certain
benefits thereunder, including, under certain circumstances, the receipt of base
salary and
45
<PAGE>
certain benefits for a specified time following termination of employment. The
Merger will constitute a "change of control" under the Smith's Employment
Agreements. Following the Merger, it is anticipated that Smith's will enter into
additional employment agreements with Allen R. Rowland, the President and Chief
Operating Officer of Smith's, and Matthew G. Tezak, the Senior Vice President
and Chief Financial Officer of Smith's. See "-- The Merger -- Smith's Employment
Agreements" and "-- The Merger -- New Employment Agreements."
Smith's Deferred Compensation Agreements. Prior to its consideration of the
Merger, Smith's had, from time to time, entered into deferred compensation
agreements (the "Smith's Deferred Compensation Agreements") with five executive
officers and five other key employees of Smith's. The Smith's Deferred
Compensation Agreements provide for fixed monthly cash payments to the employee,
the amount of which increases over time with each specified year of service, for
a period of twenty (or in one case, ten) years commencing on a specified date
(the "Commencement Date"). The Smith's Deferred Compensation Agreements also
provide for fixed monthly cash payments to the employee or his beneficiary in
the event the employee, while employed by Smith's, dies or becomes disabled
prior to the Commencement Date. In the case of the employee's death, such
payments will be made for a period of twenty years, and in the case of the
employee's disability, such payments will be made for the shorter of the
duration of the disability or a period of twenty years. Three employees of
Smith's are currently fully vested in their benefits under their Smith's
Deferred Compensation Agreements. With respect to each of Smith's Deferred
Compensation Agreements covering current executive officers and key employees of
Smith's, the payment of all benefits thereunder is subject to forfeiture if the
employee, without the prior written consent of Smith's, accepts employment with
certain companies in the food or drug business prior to the date on which any
payments thereunder are to commence. Prior to the amendment of the Smith's
Deferred Compensation Agreements in connection with the transactions
contemplated by the Merger Agreement, the agreements provided that, upon the
occurrence of certain change of control events of Smith's during the term of
such agreements, Smith's was obligated to purchase for each employee a paid-up
insurance annuity (the value of which would be taxable income to the employee
under the Code) which vested in the employee as of the date of such change of
control and which provided the employee benefits on the same schedule as to be
provided under his Smith's Deferred Compensation Agreement, as if such employee
had continued his continuous employment with Smith's through the applicable
dates specified therein. The Merger will constitute such a change of control
event, subject to certain exceptions. In connection with the transactions
contemplated by the Merger Agreement and in order to reduce the tax obligations
of such employees, eight of the Smith's Deferred Compensation Agreements have
been amended and the two additional Smith's Deferred Compensation Agreements are
anticipated to be amended to provide that in the event of a change of control of
Smith's, rather than purchasing an annuity for each of the employees who are
parties to the agreements, Smith's (or its successor) will be obligated to make
the full fixed monthly cash payments set forth in the agreements on the dates
set forth therein. See "-- The Merger -- Smith's Deferred Compensation
Agreements."
Smith's Stock Option Plan. Smith's Amended and Restated 1989 Stock Option
Plan, as amended (the "1989 Plan"), authorizes the Compensation Committee of the
Smith's Board to grant options (each, a "Smith's Option") to key employees for
the purchase of shares of Smith's Class B Common Stock. As of July 18, 1997,
directors and executive officers of Smith's held outstanding Smith's Options to
purchase 308,000 shares of Smith's Class B Common Stock at exercise prices
ranging from $15 to $24 5/8 per share which vest between 1999 and 2003. Pursuant
to the terms of the 1989 Plan, in connection with the Merger, all outstanding
Smith's Options will become immediately exercisable at the Effective Time to
purchase shares of Holdings Common Stock, subject to certain exceptions. See "--
The Merger -- Smith's Stock Option Plan."
Smith's Management Services Agreement and Transaction Consulting Agreement.
The Smith's Management Services Agreement provides for the payment of an annual
fee to Yucaipa in the amount of $1.0 million per year. During fiscal 1996,
Smith's issued to a Yucaipa affiliate 200,000 shares of Smith's Class B Common
Stock as management fees payable under the Smith's Management Services
Agreement, a portion of which represented prepaid management fees for fiscal
1997 and fiscal 1998. During the term of the Smith's Management Services
Agreement, which has been assumed by Yucaipa, Ronald W. Burkle has the right and
has elected to serve as the Chief Executive Officer of Smith's. Mr. Burkle does
not receive any
46
<PAGE>
compensation for serving in such capacity beyond the management fees paid to
Yucaipa under the Smith's Management Services Agreement. The terms of the
Smith's Management Services Agreement provide that it may be terminated by
Smith's at any time upon 90 days' written notice or by Yucaipa under certain
circumstances, including upon a "change of control" of Smith's. Upon any such
termination (other than termination by Smith's for "cause"), Yucaipa will be
entitled to the greater of (x) $5 million, or (y) twice the total fees that
would have been earned by Yucaipa under the then remaining term of the Smith's
Management Services Agreement, without regard to any sums previously paid by
Smith's to Yucaipa. The Merger will constitute a "change of control" under the
Smith's Management Services Agreement. Pursuant to the Smith's Management
Services Agreement, but for the provisions of the Transaction Consulting
Agreement described below, Yucaipa would have been entitled to approximately
$7.5 million (in the form of cash and shares of Smith's Class B Common Stock
representing prepaid management fees) upon consummation of the Merger.
In addition to the foregoing, the Smith's Management Services Agreement
provides that Smith's may retain Yucaipa in an advisory capacity in connection
with certain acquisition or sale transactions, debt and equity financings, or
any other services not otherwise covered by the Smith's Management Services
Agreement, for which Smith's will pay Yucaipa additional compensation in an
amount to be agreed upon by Smith's and Yucaipa (and approved by a majority of
Smith's disinterested directors).
On April 29, 1997, Smith's and Yucaipa entered into a Transaction
Consulting Agreement (the "Transaction Consulting Agreement") pursuant to which
(i) Smith's retained Yucaipa to provide management consultation and advice in
connection with a possible merger transaction involving Fred Meyer or an
alternative transaction and (ii) effective upon the consummation of any
Transaction (as defined in the Transaction Consulting Agreement and including
the Merger), Smith's and Yucaipa agreed to terminate the Smith's Management
Services Agreement. In consideration for such services and in consideration for
the cancellation of the Smith's Management Services Agreement, pursuant to which
Yucaipa would have been entitled to the amount set forth above upon consummation
of the Merger, Smith's has agreed to pay Yucaipa a total fee of $15 million upon
consummation of a Transaction. In addition, the Yucaipa affiliate will retain
the 200,000 shares of Smith's Class B Common Stock issued to it in fiscal 1996,
approximately two-thirds of which currently represent prepaid management fees
under the Smith's Management Services Agreement, and Smith's will reimburse
Yucaipa for its reasonable out-of-pocket costs and expenses incurred in
connection with, and will indemnify Yucaipa for all losses resulting from claims
arising out of, the performance of its obligations under the Transaction
Consulting Agreement. Pursuant to the terms of the Transaction Consulting
Agreement, Yucaipa agreed to provide services to Smith's, including, but not
limited to, assisting Smith's in reviewing the business and prospects of certain
proposed business combinations, coordinating due diligence activities,
consulting with Smith's concerning the terms of any proposed Transaction and the
preparation of required documentation, assisting Smith's in communications with
its banks and bondholders and coordinating any refinancing activity and advising
Smith's with respect to any new financings to be undertaken in connection with a
Transaction. At a meeting of the Smith's Disinterested Directors on April 26,
1997, the Smith's Disinterested Directors authorized the engagement of Yucaipa
pursuant to the Transaction Consulting Agreement. See "The Merger -- Background
of the Merger."
In connection with the transactions contemplated by the Merger Agreement,
on the Closing Date, Holdings will enter into the Holdings Management Services
Agreement with Yucaipa. See "Other Agreements -- Holdings Management Services
Agreement."
The Yucaipa Warrants. On May 23, 1996, Smith's and an affiliate of Yucaipa
entered into a warrant agreement (the "Warrant Agreement") for the purchase of
up to 1,842,555 shares of Smith's nonvoting Class C Common Stock (the
"Warrants"). One-half of the Warrants are exercisable at the election of Yucaipa
on or prior to May 23, 2000, and one-half of the Warrants are exercisable at the
election of Yucaipa on or prior to May 23, 2001. The foregoing expiration dates
will each be extended by five years in the event that, prior to such respective
dates, the market price of Smith's Class B Common Stock equals or exceeds the
exercise price (as adjusted from time to time) for a period of not less than 60
consecutive trading days. The initial exercise price of the Warrants is $50.00
per share. Shares of Smith's Class C Common Stock will be convertible into an
equal number of shares of Smith's Class B Common Stock following the transfer of
such shares by Yucaipa to any person or entity not affiliated with Yucaipa. The
number of shares to be issued upon
47
<PAGE>
exercise of the Warrants and the exercise price are subject to adjustment under
standard anti-dilution provisions. Pursuant to the terms of the Merger Agreement
and the Warrant Agreement, Yucaipa and Holdings will enter into a supplemental
warrant agreement (the "Supplemental Warrant Agreement") to provide for the
issuance of Holdings Common Stock upon exercise of the Warrants. See "-- The
Merger -- The Yucaipa Warrants."
Indemnification Arrangements With Smith's Officers and Directors. Smith's
has entered into Indemnification Agreements (the "Smith's Indemnification
Agreements") with its current and former directors and officers (the "Smith's
Indemnified Parties") which provide that Smith's shall indemnify the Smith's
Indemnified Parties, to the fullest extent permitted under applicable law and
Smith's Certificate and the Smith's Bylaws, against all liabilities incurred by
reason of such person's status as a director or officer of Smith's. In addition,
Smith's maintains directors' and officers' liability insurance covering the
Smith's Indemnified Parties in their capacities as directors and officers of
Smith's. Holdings will indemnify the Smith's Indemnified Parties following the
Merger as provided in the Merger Agreement. See "-- The Merger Indemnification
Arrangements With Smith's Officers and Directors" and "The Merger Agreement
Indemnification."
Registration Rights Agreement. Smith's has entered into a registration
rights agreement with Jeffrey P. Smith, Fred L. Smith, Richard D. Smith, certain
Smith family trusts and certain affiliates of Yucaipa, providing such persons
with certain registration rights with respect to their Smith's Common Stock.
Pursuant to the terms of the Merger Agreement, Holdings will enter into a
similar registration rights agreement with such persons providing them with
certain registration rights with respect to Holdings Common Stock. See "-- The
Merger -- Registration Rights Agreement" and "Other Agreements -- Registration
Rights Agreement."
The Merger
Directors and Officers of Holdings. Following the Merger, Robert G. Miller,
the Chief Executive Officer of Fred Meyer, will be the Chief Executive Officer
and President of Holdings and Ronald W. Burkle, the Chief Executive Officer of
Smith's, will be Chairman of the Holdings Board. In addition, Vivian A. Bull,
James J. Curran, A. M. Gleason, Roger Meier, Robert G. Miller and Steven R.
Rogel, all of whom are directors of Fred Meyer, and Bruce Karatz, Fred L. Smith
and Jeffrey P. Smith, all of whom are directors of Smith's, will be directors of
Holdings. See "Management of Holdings Following the Merger."
Pursuant to the terms of the Merger Agreement and certain other agreements
described herein, certain terms and conditions of material employment and
employee benefit agreements and arrangements will be amended or become operative
and certain new arrangements will be entered into as a result of the Merger, as
follows:
Fred Meyer Stock Option Plans and Compensation. In connection with the
Merger, the Fred Meyer Board has taken action to provide that at the Effective
Time, each Fred Meyer Option will become a fully vested and immediately
exercisable option (each, a "Holdings Option") to acquire, on substantially the
same terms and conditions as were applicable under such Fred Meyer Option
immediately prior to the Effective Time, the number of shares of Holdings Common
Stock as the holder of such Fred Meyer Option would have been entitled to
receive in the Merger had such holder exercised such Fred Meyer Option in full
immediately prior to the Effective Time, at a price per share equal to the price
per share of such Fred Meyer Option.
48
<PAGE>
The following table sets forth information with respect to the number and
approximate net value of accelerated Fred Meyer Options held by certain named
officers and by all officers at the level of senior vice president or higher as
a group, assuming that the Merger is consummated in September 1997.
<TABLE>
<CAPTION>
Approximate
Number of Net Value
Unvested of
Fred Meyer Accelerated
Options Fred Meyer
Name Accelerated Options(1)
---- ------------ ------------
<S> <C> <C>
Robert G. Miller.................. 60,000 $ 1,676,250
Sammy K. Duncan................... 49,000 1,160,937
Kenneth Thrasher.................. 64,000 1,532,000
Mary F. Sammons................... 15,000 450,937
Edward A. Dayoob.................. 6,000 180,375
18 senior officers as a group,
including those listed above.... 549,100 $ 14,156,444
- --------------
(1) The amounts in this column have been determined by multiplying (i) the
number of shares of Fred Meyer Common Stock subject to the Fred Meyer
Options held by the respective employees that will be accelerated in
connection with the Merger, by (ii) the excess of the $55 15/16 per share
price of Fred Meyer Common Stock on July 18, 1997 over the exercise price
of each Fred Meyer Option. The actual net value of the accelerated Fred
Meyer Options will depend on the market price of Fred Meyer Common Stock on
the Closing Date.
</TABLE>
In connection with the integration of the compensation programs of Fred
Meyer and Smith's following the Merger, it is contemplated that changes will be
made in compensation arrangements with senior officers of Fred Meyer. Robert G.
Miller's base salary is expected to increase from $590,000 to $1,000,000 and the
aggregate base salaries of 16 other Fred Meyer senior officers are expected to
increase approximately 12% in the aggregate following the Merger. These Fred
Meyer officers are also expected to receive stock options to purchase Holdings
Common Stock with exercise prices equal to 50% and 100% of the market value of
the stock at the time of grant. The following table indicates the amount of
stock options expected to be granted to certain named officers and to all senior
officers of Fred Meyer, as a group, effective upon consummation of the Merger:
<TABLE>
<CAPTION>
Options to Options to
be granted be granted
at 100% of at 50% of
Market Value Market Value
------------ ------------
<S> <C> <C>
Robert G. Miller..................... 200,000 50,000
Sammy K. Duncan...................... 50,000 25,000
Kenneth Thrasher..................... 50,000 25,000
Mary F. Sammons...................... 50,000 25,000
Edward A. Dayoob..................... 30,000 15,000
17 senior officers as a group,
including those listed above....... 740,000 320,000
</TABLE>
See "Proposal to Approve 1997 Stock Incentive"
Holdings Executive Severance Agreements and Employment Agreement. In
connection with the Merger, Holdings will enter into Executive Severance
Agreements (the "Holdings Severance Agreements") with certain officers who are
currently senior officers of Fred Meyer (the "Holdings Officers"). The Holdings
Severance Agreements will provide that, if a Holdings Officer is terminated
without "cause" or for "good reason," the Holdings Officer will be entitled to
(i) a severance payment equal to (A) three times the Holdings Officer's annual
base pay if the Holdings Officer is terminated on or before one year has elapsed
from the date of the Holdings Severance Agreement, (B) two times the Holdings
Officer's annual base pay if the Holdings Officer is terminated on or before two
years have elapsed from the date of the Holdings Severance Agreement or (C) the
Holdings Officer's annual base pay if the Holdings Officer is terminated
49
<PAGE>
after two years have elapsed from the date of the Holdings Severance Agreement
(except that the payment would be two times the Holdings Officer's annual base
pay if he or she is terminated in connection with or following a "change in
control"); (ii) a prorated portion of any annual cash incentive plans for the
year in which the termination occurs; (iii) prorated accelerated vesting of
outstanding stock options held by the Holdings Officer under Holdings stock
option and stock incentive plans (except that all such options would accelerate
following a "change in control"); and (iv) additional benefits under the
supplemental retirement plan. If the amount of the severance payment, plus the
other amounts to which the terminated Holdings Officer is entitled, is subject
to the tax imposed by Section 4999 of the Code, the Holdings Officer will also
be entitled to an additional amount (the "Additional Payment") equal to the
amount of such tax incurred by the Holdings Officer on a net basis after the
deduction from the Additional Payment of all federal, state and local income
taxes that would be imposed on the Holdings Officer by reason of the Holdings
Officer's receipt of the Additional Payment. In connection with the Merger,
Robert G. Miller's employment agreement will be amended to increase the monthly
payment upon retirement at age 62 from $10,805 to $25,000.
Fred Meyer Non-Employee Directors Stock Compensation Plan. In connection
with the Merger, the Fred Meyer Board has taken action to provide that
immediately prior to the Effective Time, all unvested Fred Meyer Non-Employee
Director Shares will become vested. The following table sets forth information
with respect to the number and approximate value of accelerated vesting of Fred
Meyer Non-Employee Director Shares held by each Fred Meyer non-employee
director, assuming the Merger is consummated in September 1997.
<TABLE>
<CAPTION>
Number of Unvested Approximate Value
Fred Meyer Non- of Accelerated
Employee Director Fred Meyer Non-
Shares Employee
Name Accelerated Director Shares(1)
---- ------------------ ------------------
<S> <C> <C>
Vivian A. Bull....... 2,697 $ 150,863
James J. Curran...... 2,898 162,107
A. M. Gleason........ 1,173 65,615
David L. Johnson..... 2,724 152,374
Roger S. Meier....... 1,173 65,615
Steven R. Rogel...... 2,697 150,863
- --------------
(1) The amounts in this column have been determined by multiplying (i) the
number of Fred Meyer Non-Employee Director Shares held by the respective
non-employee directors that will be accelerated in connection with the
Merger, by (ii) $55 15/16, the per share price of Fred Meyer Common Stock
on July 18, 1997. The actual value of the accelerated Fred Meyer Awards
will depend on the market price of the Fred Meyer Common Stock on the
Closing Date.
</TABLE>
Indemnification Arrangements with Fred Meyer Officers and Directors. Upon
consummation of the Merger, Holdings will be obligated to indemnify the Fred
Meyer Indemnified Parties to the fullest extent that the Fred Meyer Indemnified
Parties are indemnified by Fred Meyer pursuant to the provisions of the Fred
Meyer Certificate and the Fred Meyer Bylaws. In addition, for a period of five
years after the Effective Time, Holdings will maintain officers' and directors'
liability insurance covering the Fred Meyer Indemnified Parties on terms
substantially no less advantageous to the Fred Meyer Indemnified Parties than
such existing insurance. See "The Merger Agreement -- Indemnification" for a
description of provisions of the Merger Agreement relating to the
indemnification of present and former directors, officers and employees of Fred
Meyer.
Smith's Employment Agreements. Upon consummation of the Merger, the Smith's
Employment Agreements will provide benefits to Employees who are employed by
Smith's as of the Effective Time.
1. Term of the Agreement. Benefits under the Smith's Employment
Agreements will commence at the Effective Time and continue for a period of
two years in the case of the three executive officers and
50
<PAGE>
for a period of either one or two years in the case of the other 14
Employees (the "Term"), except as set forth in paragraph 4 below.
2. Salary and Bonus. The agreements provide for the payment during the
relevant Term of base salary and provide that the Employee shall be
eligible to participate in any incentive bonus or similar program that may
be adopted by the Holdings Board from time to time. Michael C. Frei, James
W. Hallsey and Wade Williams are the three executive officers of Smith's
who have entered into the Smith's Employment Agreements entitling each of
them to payment of his current annual base salary for a period of two years
following completion of the Merger.
3. Other Benefits. The Smith's Employment Agreements provide that the
Employee will be entitled to participate in or receive life insurance,
medical, health and accident, or disability plans and similar benefits as
Smith's provides generally from time to time to its executives.
4. Termination. In the event that the Employee's employment by Smith's
is terminated by reason of (a) the Employee's death, (b) the Employee's
disability, (c) termination without "cause" (as defined in the Smith's
Employment Agreements) or (d) the Employee's "constructive termination" (as
defined in the Smith's Employment Agreements), the Smith's Employment
Agreements provide for the payment of the Employee's base salary and the
continuation of other benefits for the longer of (i) the remainder of the
Term or (ii) such period as the Employee would otherwise be entitled
pursuant to Smith's existing severance policies and procedures; provided,
however, that compensation received by the Employee from any other entity
attributable to the Term would, under certain circumstances, be subtracted
from any amounts otherwise due such Employee under the Smith's Employment
Agreement. All benefits under a Smith's Employment Agreement shall
terminate if the Employee is terminated for "cause."
5. Gross-Up Payments. If the aggregate of all payments, benefits or
distributions by Smith's to or for the benefit of the Employee, including,
without limitation, pursuant to the Smith's Employment Agreement, any
Smith's Deferred Compensation Agreement and any Smith's Option, exceed the
sum of (i) the maximum amount which such Employee could receive without
being subject to the excise tax imposed by Section 4999 of the Code plus
(ii) $50,000, then, subject to certain limitations, the Employee shall be
entitled to receive a cash gross-up payment in an amount sufficient to
place such Employee in the same position as he would have been in if
Section 4999 of the Code were inapplicable.
New Employment Agreements. Following the Merger, it is anticipated (but not
required) that Smith's will enter into employment contracts, with terms similar
to those described above, with Allen R. Rowland and Matthew G. Tezak, who are
the President and Chief Operating Officer, and Senior Vice President and Chief
Financial Officer, respectively, of Smith's.
Smith's Deferred Compensation Agreements. In connection with the
transactions contemplated by the Merger Agreement and in order to reduce the tax
obligations of such employees, eight of the Smith's Deferred Compensation
Agreements have been amended and the two additional Smith's Deferred
Compensation Agreements are anticipated to be amended to provide that in the
event of a change of control of Smith's, rather than purchasing an annuity for
each of the employees who are parties to the agreements, Smith's (or its
successor) will be obligated to make the full fixed monthly cash payments set
forth in the agreements on the dates set forth therein. The following table
lists the executive officers of Smith's who are parties to Smith's
51
<PAGE>
<TABLE>
<CAPTION>
Deferred Compensation Agreements, the total payments to which they will be
entitled thereunder and (subject to the forfeiture provisions contained therein)
the respective Commencement Dates:
Commencement
Name and Title Total Payments Date
-------------- -------------- ---------------
<S> <C> <C>
Richard C. Bylski......................... $1,500,000 January 1, 2000
Senior Vice President, Human Resources
Michael C. Frei........................... $2,250,000 January 1, 2010
Senior Vice President, General Counsel
and Secretary
James W. Hallsey.......................... $1,500,000 January 1, 2000
Senior Vice President and Regional
Manager, Southwest Region
Matthew G. Tezak.......................... $1,500,000 January 1, 2010
Senior Vice President and Chief
Financial Officer
Fred F. Urbanek........................... $1,500,000 November 1, 2000
Senior Vice President, Facility
Engineering
</TABLE>
Smith's Stock Option Plan. Pursuant to the terms of the Merger Agreement,
in connection with the Merger, at the Effective Time, each Smith's Option will
become a fully vested and immediately exercisable Holdings Option to acquire, on
substantially the same terms and conditions as were applicable under such
Smith's Option immediately prior to the Effective Time, the number of shares of
Holdings Common Stock as the holder of such Smith's Option would have been
entitled to receive in the Merger had such holder exercised such Smith's Option
in full immediately prior to the Effective Time, at a price per share equal to
(i) the aggregate exercise price per share for shares of Smith's Class B Common
Stock purchasable pursuant to such Smith's Option (without regard to vesting
provisions) divided by (ii) the number of full shares of Holdings Common Stock
deemed purchasable pursuant to such Smith's Option, subject to certain
exceptions.
The following table sets forth information with respect to the number and
approximate net value of accelerated Smith's Options held by the executive
officers of Smith's, assuming the Merger is consummated in September 1997.
<TABLE>
<CAPTION>
Number of Unvested Approximate Net Value
Smith's of Accelerated
Name Options Accelerated Smith's Options(1)
---- -------------------- --------------------
<S> <C> <C>
Allen R. Rowland........ 125,000 $ 5,359,375
Richard C. Bylski....... 12,000 514,500
Michael C. Frei......... 15,000 643,125
James W. Hallsey........ 35,000 1,500,625
Kenneth A. Martindale... 25,000 1,071,875
Abel Porter............. 25,000 1,071,875
Matthew G. Tezak........ 35,000 1,500,625
Fred F. Urbanek......... 14,500 621,688
Wade S. Williams........ 21,500 729,313
-------- -----------
Total................... 308,000 $13,013,001
======== ===========
- --------------
(1) The amounts in this column have been determined by multiplying (i) the
number of shares of Smith's Class B Common Stock subject to the Smith's
Options held by the respective employees that will be accelerated pursuant
to the terms of the Merger Agreement by (ii) the excess of the $57 7/8 per
share price of Smith's Class B Common Stock on July 18, 1997 over the
exercise price of each Smith's Option. The actual net value of the
accelerated Smith's Options will depend on the market price of Smith's
Class B Common Stock on the Closing Date.
</TABLE>
52
<PAGE>
Holdings Management Services Agreement. In connection with the transactions
contemplated by the Merger Agreement, on the Closing Date, Holdings will enter
into the Holdings Management Services Agreement with Yucaipa. See "Other
Agreements -- Holdings Management Services Agreement."
The Yucaipa Warrants. Pursuant to the terms of the Merger Agreement, at the
Effective Time, Smith's and Fred Meyer will cause Holdings to execute the
Supplemental Warrant Agreement in form reasonably satisfactory to Fred Meyer and
Smith's providing that any holder of a Warrant will have the right until the
expiration date thereof to exercise such Warrant at the existing exercise price
for the number of shares of Holdings Common Stock to which a holder of the
number of shares of Smith's Common Stock that would have otherwise been
deliverable upon the exercise of such Warrant would have been entitled pursuant
to the Merger Agreement if such Warrant had been exercised in full immediately
prior to the Effective Time. One-half of the Warrants will be exercisable at the
election of Yucaipa on or prior to May 23, 2000, and one-half of the Warrants
will be exercisable at the election of Yucaipa on or prior to May 23, 2001. The
foregoing expiration dates will each be extended by five years in the event
that, prior to such respective dates, the market price of Holdings Common Stock
equals or exceeds the exercise price for Holdings Common Stock (as set forth
below and as adjusted from time to time) for a period of not less than 60
consecutive trading days; provided, however, that any period of consecutive
trading days during which the market price of the Smith's Class B Common Stock
equals or exceeds the exercise price of the Warrant prior to the consummation of
the Merger shall count toward such 60-day period. At the Effective Time, the
Warrants will be exercisable for an aggregate of 1,934,683 shares of Holdings
Common Stock at an exercise price of $50 for each 1.05 shares of Holdings Common
Stock, for an aggregate purchase price of $92,127,750.
Indemnification Arrangements With Smith's Officers and Directors. Upon
consummation of the Merger, Holdings will be obligated to indemnify the Smith's
Indemnified Parties to the fullest extent that the Smith's Indemnified Parties
are indemnified by Smith's pursuant to the provisions of the Smith's
Indemnification Agreements. In addition, for a period of five years after the
Effective Time, Holdings will maintain officers' and directors' liability
insurance covering the Smith's Indemnified Parties on terms substantially no
less advantageous to the Smith's Indemnified Parties than such existing
insurance. See "The Merger Agreement -- Indemnification" for a description of
provisions of the Merger Agreement relating to the indemnification of current
and former directors, officers and employees of Smith's.
Registration Rights Agreement. As a condition to Smith's obligation to
effect the Smith's Merger, Holdings is required to execute the Registration
Rights Agreement with Jeffrey P. Smith, Fred L. Smith, Richard D. Smith, certain
Smith family trusts and certain of affiliates of Yucaipa, which provides such
persons with certain "demand," "piggyback" and "shelf" registration rights to
require Holdings to register all or any portion of the Holdings Common Stock
then owned by them. See "Other Agreements -- Registration Rights Agreement."
Certain Federal Income Tax Consequences
Smith's and Fred Meyer expect that the Merger will be treated as an
"exchange" within the meaning of Section 351(a) of the Code and that for federal
income tax purposes no gain or loss will be recognized by holders of Smith's
Common Stock or Fred Meyer Common Stock upon the conversion of such stock into
Holdings Common Stock (except with respect to any cash received in respect of
fractional shares). The Internal Revenue Service (the "Service") has not been
and will not be asked to rule on the tax consequences of the Merger. Instead,
Smith's will rely on the opinion of Latham & Watkins, its counsel, and Fred
Meyer will rely on the opinion of Cleary, Gottlieb, Steen & Hamilton, its
counsel, as to certain federal income tax consequences of the Merger. Such
opinions will be based upon facts described therein and upon certain
representations that will be made by Smith's and Fred Meyer and certain holders
of the Smith's Common Stock or the Fred Meyer Common Stock. The opinions of
Latham & Watkins and Cleary, Gottlieb, Steen & Hamilton will be based on the
Code, the regulations promulgated thereunder, current administrative rulings and
practice and judicial authority, all of which are subject to change. An opinion
of counsel is not binding on the Service and there is no assurance that the
Service will not take a position contrary to one or more positions reflected in
such opinions or that such opinions will be upheld by the courts if challenged
by the Service. Each holder of Smith's Common Stock and Fred Meyer Common Stock
is urged to consult his or her own tax and
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financial advisors as to the effect of such federal income tax consequences on
his or her own particular facts and circumstances and also as to any state,
local, foreign or other tax consequences arising out of the Merger.
The obligation of each of Smith's and Fred Meyer to consummate the Merger
is conditioned on, among other things, the receipt by Smith's of the opinion of
Latham & Watkins and the receipt by Fred Meyer of the opinion of Cleary,
Gottlieb, Steen & Hamilton, each of which will be based upon facts and
representations to be provided to such firms, and subject to various assumptions
and qualifications, that the Merger will qualify as an "exchange" within the
meaning of Section 351(a) of the Code and that the following material federal
income tax consequences will result from the Merger:
(a) No gain or loss will be recognized by Smith's, Fred Meyer or
Holdings as a result of the Merger.
(b) No gain or loss will be recognized by holders of Smith's Common
Stock or Fred Meyer Common Stock upon the conversion of such stock into
Holdings Common Stock (except with respect to any cash received in respect
of fractional shares).
(c) The aggregate tax basis and holding period of the shares of
Holdings Common Stock received by holders of Smith's Common Stock or Fred
Meyer Common Stock will be the same as the aggregate tax basis and holding
period of the Smith's Common Stock or Fred Meyer Common Stock, as the case
may be, surrendered in exchange therefor.
The receipt by a Smith's or Fred Meyer stockholder of cash in lieu of a
fractional share interest in Holdings Common Stock will be treated as though the
fractional shares of Holdings Common Stock were distributed as a part of the
exchange and then redeemed by Holdings, and, assuming that the redemption of the
fractional share of Holdings Common Stock is characterized as a sale or exchange
of such stock and not as a dividend, a Holdings stockholder will recognize gain
or loss in an amount equal to the difference between the amount of cash received
and the basis of the fractional share of Holdings Common Stock deemed to be
surrendered, which gain or loss will be capital gain or loss if the Holdings
Common Stock was a capital asset in the hands of the Smith's or Fred Meyer
stockholder.
A holder of Smith's Series I Preferred Stock (who does not also hold
Smith's Common Stock) who receives cash in connection with the Smith's Merger
will recognize gain or loss for federal income tax purposes equal to the
difference between the amount of cash received and such holder's tax basis in
the Smith's Series I Preferred Stock exchanged therefor. Such gain or loss will
be capital gain or loss provided the Smith's Series I Preferred Stock is held as
a capital asset, and will be long-term capital gain or loss if the Smith's
Series I Preferred Stock had been held for more than one year. This discussion
does not address the federal income tax consequences to holders who hold both
Smith's Common Stock and Smith's Series I Preferred Stock. Such holders are
urged to consult their tax advisors regarding the federal income tax
consequences of the Merger to them.
The foregoing is a summary description of all material federal income tax
consequences of the Merger that are likely to be relevant to a stockholder of
Smith's and Fred Meyer, without regard to the particular facts and circumstances
of each such stockholder. It does not discuss all of the consequences that may
be relevant to stockholders of Smith's and Fred Meyer entitled to special
treatment under the Code (such as insurance companies, dealers in securities,
exempt organizations or foreign persons) or to stockholders of Smith's or Fred
Meyer who acquired their Smith's Common Stock or Fred Meyer Common Stock
pursuant to the exercise of employee stock options or otherwise as compensation.
The summary set forth above does not purport to be a complete analysis of all
potential tax effects of the transactions contemplated by the Merger Agreement
or the Merger itself. No information is provided herein with respect to the tax
consequences, if any, of the Merger or the exchange of shares pursuant thereto
under state, local, foreign or other tax laws.
Smith's has received from Latham & Watkins, and Fred Meyer has received
from Cleary, Gottlieb, Steen & Hamilton, such firm's opinion, dated as of the
date of this Joint Proxy Statement/Prospectus, that, based upon and subject to
certain facts, representations and assumptions set forth therein, the foregoing
discussion, except as otherwise indicated, represents such firm's opinion as to
the material federal income tax consequences of the Merger under currently
applicable law.
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Accounting Treatment
The Merger will be accounted for as a purchase, with Fred Meyer as
acquiror, in accordance with GAAP. Under this method of accounting, the purchase
price will be allocated to assets acquired and liabilities assumed based on
their estimated fair values. Income of Holdings will not include income of
Smith's prior to the Effective Time. See "Unaudited Pro Forma Condensed Combined
Financial Statements."
Regulatory Approvals and Other Legal Matters
Regulatory Approvals. Transactions such as those contemplated by the Merger
Agreement are reviewed by the Antitrust Division of the United States Department
of Justice (the "DOJ") and the United States Federal Trade Commission (the
"FTC") to determine whether they comply with applicable antitrust laws. Under
the provisions of the HSR Act, the Merger may not be consummated until such time
as the applicable waiting period requirements of the HSR Act have been
satisfied. Each of Fred Meyer and Smith's filed notification reports with the
DOJ and the FTC under the HSR Act on May 15, 1997 and the waiting period has
expired.
At any time before or after the Effective Time, the DOJ, the FTC, state
antitrust authorities or a private person or entity could seek under the
antitrust laws, among other things, to enjoin the Merger or to cause the
divestiture of certain assets of Fred Meyer or Smith's. There is no assurance
that a challenge to the Merger will not be made or that, if such a challenge is
made, Fred Meyer and Smith's will prevail.
Except for approvals otherwise described in this Joint Proxy
Statement/Prospectus, neither Fred Meyer nor Smith's is aware of any other
significant government or regulatory approvals required for the consummation of
the transactions contemplated by the Merger Agreement.
Legal Proceedings. On May 22, 1996, Larry F. Klang ("Plaintiff") filed a
purported class action complaint against Smith's in the Court of Chancery of the
State of Delaware, New Castle County (the "Klang Litigation"). Plaintiff filed
an amended complaint on May 30, 1996 (the "Klang Complaint") which named as
defendants, Smith's, the members of the Smith's Board prior to the consummation
of the Recapitalization, an affiliate of Yucaipa, Ronald W. Burkle and Smitty's.
The Klang Complaint alleged, among other things, (i) that the recapitalization
transactions consummated by Smith's on May 23, 1996 violated Delaware law by
impairing the capital of Smith's in its repurchase of its stock, (ii) that the
Smith's Board and Smith's violated fiduciary duties of disclosure under Delaware
law by making allegedly inaccurate and incomplete disclosure in Smith's offer to
purchase and proxy statement in connection with the Recapitalization and (iii)
that Mr. Burkle and an affiliate of Yucaipa aided and abetted these allegedly
illegal actions. The Klang Complaint sought, among other things, injunctive
relief, rescission of the recapitalization transactions, certification of the
action as a class action and costs and fees. On June 28, 1996, Smith's and the
other defendants filed their answer to the Klang Complaint, denying all material
allegations and asserting various defenses to the action. On October 15, 1996,
the Plaintiff filed a motion to rescind the recapitalization transactions and
the defendants filed their opposition to that motion on November 7, 1996.
Plaintiff filed his reply on November 15, 1996. Vice-Chancellor William Chandler
held oral argument on the motion on November 21, 1996, and on May 13, 1997 the
Court denied the Plaintiff's motion to rescind the recapitalization transactions
and dismissed each of the Plaintiff's claims. On May 13, 1997, Plaintiff filed a
notice of appeal and on May 16, 1997, Plaintiff filed his opening brief. On July
14, 1997, the defendants filed their opposition and Plaintiff filed his reply on
July 24, 1997. The Delaware Supreme Court has scheduled oral argument of the
appeal on August 12, 1997. It is a condition to Fred Meyer's obligation to
consummate the Merger that Plaintiff's October 15, 1996 motion shall not have
been granted and there shall have been no development with respect to the Klang
Litigation that has had or could reasonably be expected to have a material
adverse effect with respect to Smith's or Holdings or a material adverse effect
on the intended benefits of the Merger to Fred Meyer, Smith's or Holdings. See
"The Merger Agreement -- Conditions to Obligation of Fred Meyer to Effect the
Merger."
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Appraisal Rights
Under the DGCL, holders of Fred Meyer Common Stock and Smith's Class B
Common Stock are not entitled to appraisal rights in connection with the Merger
because the Fred Meyer Common Stock and the Smith's Class B Common Stock are
listed on a national securities exchange and the consideration which such
holders will receive in the Merger consists of Holdings Common Stock, which will
also be listed on a national securities exchange, and cash in lieu of fractional
shares.
Holders of Smith's Class A Common Stock or Smith's Series I Preferred Stock
who do not vote in favor of the approval and adoption of the Merger Agreement
and who have properly complied with Section 262 will be entitled to appraisal
rights. To preserve their rights, stockholders who wish to exercise their
statutory appraisal rights must submit a written demand for appraisal prior to
the Smith's Special Meeting and comply with the other procedural requirements of
Section 262 described below. Each holder of Smith's Class A Common Stock or
Smith's Series I Preferred Stock who is a party to a Voting Agreement has,
pursuant to such Voting Agreement, waived its appraisal rights.
SECTION 262 IS REPRINTED IN ITS ENTIRETY AS APPENDIX G TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION IS NECESSARILY A SUMMARY OF THE
LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO APPENDIX G. THIS DISCUSSION AND APPENDIX G SHOULD BE REVIEWED CAREFULLY BY
ANY STOCKHOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS, IF AVAILABLE,
OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH THE
PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL
RIGHTS, IF AVAILABLE.
A record holder of shares of Smith's Class A Common Stock or Smith's Series
I Preferred Stock who makes the demand described below with respect to such
shares, who continuously is the record holder of such shares through the
Effective Time, who otherwise complies with the statutory requirements of
Section 262 and who neither votes in favor of the Merger Agreement nor consents
thereto in writing may be entitled to an appraisal by the Delaware Court of
Chancery (the "Delaware Court") of the fair value of his or her shares of
Smith's Class A Common Stock or Smith's Series I Preferred Stock. All references
in this summary of appraisal rights to a "stockholder" are to the record holder
or holders of shares of Smith's Class A Common Stock or Smith's Series I
Preferred Stock.
Under Section 262, where a merger is submitted for approval at a meeting of
stockholders, as in the Smith's Special Meeting, not less than 20 days prior to
the meeting, each constituent corporation must notify each of the holders of its
stock for which appraisal rights are available that such appraisal rights are
available and include in each such notice a copy of Section 262. This Joint
Proxy Statement/Prospectus shall constitute such notice to the record holders of
Smith's Class A Common Stock or Smith's Series I Preferred Stock.
Holders of shares of Smith's Class A Common Stock or Smith's Series I
Preferred Stock who desire to exercise their appraisal rights must not vote in
favor of the Merger Agreement and must deliver a separate written demand for
appraisal to Smith's prior to the vote by the stockholders of Smith's on the
Merger Agreement. A stockholder who signs and returns a proxy without expressly
directing, by checking the applicable boxes on the reverse side of the proxy
card enclosed herewith, that his or her shares of Smith's Class A Common Stock
or Smith's Series I Preferred Stock be voted against the proposal to approve the
Merger Agreement or that an abstention be registered with respect to his or her
shares of Smith's Class A Common Stock or Smith's Series I Preferred Stock will
effectively have thereby waived his or her appraisal rights as to those shares
of Smith's Class A Common Stock or Smith's Series I Preferred Stock because, in
the absence of express contrary instructions, such shares of Smith's Class A
Common Stock or Smith's Series I Preferred Stock will be voted in favor of the
proposal to approve the Merger Agreement. Accordingly, a stockholder who desires
to perfect appraisal rights with respect to any of his or her shares of Smith's
Class A Common Stock or Smith's Series I Preferred Stock must, as one of the
procedural steps involved in such perfection, either (i) refrain from executing
and returning the enclosed proxy card and from voting in person in favor of the
proposal to approve the Merger Agreement, or (ii) check either the "Against" or
the "Abstain" box next to the proposal to approve the Merger Agreement on such
card or affirmatively vote in person against
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the proposal to approve the Merger Agreement or register in person an abstention
with respect thereto. A demand for appraisal must be executed by or on behalf of
the stockholder of record and must reasonably inform Smith's of the identity of
the stockholder of record and that such record stockholder intends thereby to
demand appraisal of his or her shares of Smith's Class A Common Stock or Smith's
Series I Preferred Stock. A person having a beneficial interest in shares of
Smith's Class A Common Stock or Smith's Series I Preferred Stock that are held
of record in the name of another person, such as a broker, fiduciary or other
nominee, must act promptly to cause the record holder to follow the steps
summarized herein properly and in a timely manner to perfect whatever appraisal
rights are available. If the shares of Smith's Class A Common Stock or Smith's
Series I Preferred Stock are owned of record by a person other than the
beneficial owner, including a broker, fiduciary (such as a trustee, guardian or
custodian) or other nominee, such demand must be executed by or for the record
owner. If the shares of Smith's Class A Common Stock or Smith's Series I
Preferred Stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; provided,
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, such person is acting as agent for the
record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds
shares of Smith's Class A Common Stock or Smith's Series I Preferred Stock as a
nominee for others, may exercise appraisal rights with respect to the shares
held for all or less than all beneficial owners of shares as to which such
person is the record owner. In such case, the written demand must set forth the
number of shares covered by such demand. Where the number of shares is not
expressly stated, the demand will be presumed to cover all shares of Smith's
Class A Common Stock or Smith's Series I Preferred Stock outstanding in the name
of such record owner.
A stockholder who elects to exercise appraisal rights, if available, should
mail or deliver his or her written demand to: Smith's Food & Drug Centers, Inc.,
1550 South Redwood Road, Salt Lake City, Utah 84104, Attn: Michael C. Frei,
Secretary.
The written demand for appraisal should specify the stockholder's name and
mailing address, the number of shares of Smith's Class A Common Stock or Smith's
Series I Preferred Stock owned, and that the stockholder is thereby demanding
appraisal of his or her shares. A proxy or vote against the Merger Agreement
will not by itself constitute such a demand. Within ten days after the Effective
Time, the surviving corporation must provide notice of the Effective Time to all
stockholders who have complied with Section 262.
Within 120 days after the Effective Time, either the surviving corporation
or any stockholder who has complied with the required conditions of Section 262
may file a petition in the Delaware Court, with a copy served on the surviving
corporation in the case of a petition filed by a stockholder, demanding a
determination of the fair value of the shares of all dissenting stockholders.
There is no present intent on the part of Smith's to file an appraisal petition
and stockholders seeking to exercise appraisal rights should not assume that the
surviving corporation will file such a petition or that the surviving
corporation will initiate any negotiations with respect to the fair value of
such shares. Accordingly, stockholders of Smith's who desire to have their
shares appraised should initiate any petitions necessary for the perfection of
their appraisal rights within the time period and in the manner prescribed in
Section 262. If appraisal rights are available, within 120 days after the
Effective Time, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the surviving corporation a statement setting forth the aggregate number of
shares of Smith's Class A Common Stock or Smith's Series I Preferred Stock not
voting in favor of the Merger Agreement and with respect to which demands for
appraisal were received by Smith's and the number of holders of such shares.
Such statement must be mailed within 10 days after the written request therefor
has been received by the surviving corporation or within 10 days after the
expiration of the period for delivery of demands for appraisal, whichever is
later.
If a petition for an appraisal is timely filed and assuming appraisal
rights are available, at the hearing on such petition, the Delaware Court will
determine which stockholders, if any, are entitled to appraisal rights. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares and who
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hold stock represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
Delaware Court may dismiss the proceedings as to such stockholder. Where
proceedings are not dismissed, the Delaware Court will appraise the shares of
Smith's Class A Common Stock or Smith's Series I Preferred Stock owned by such
stockholders, determining the fair value of such shares exclusive of any element
of value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value. In determining fair value, the Delaware Court is to take into
account all relevant factors. In Weinberger v. UOP Inc., the Delaware Supreme
Court discussed the factors that could be considered in determining fair value
in an appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered, and that "fair price
obviously requires consideration of all relevant factors involving the value of
a company." In Weinberger, the Delaware Supreme Court stated that "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered." Section 262, however, provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger."
Holders of shares of Smith's Class A Common Stock or Smith's Series I
Preferred Stock considering seeking appraisal should recognize that the fair
value of their shares determined under Section 262 could be more than, the same
as or less than the consideration they are entitled to receive pursuant to the
Merger Agreement if they do not seek appraisal of their shares. The cost of the
appraisal proceeding may be determined by the Delaware Court and taxed against
the parties as the Delaware Court deems equitable in the circumstances. Upon
application of a dissenting stockholder of Smith's, the Delaware Court may order
that all or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, be charged pro
rata against the value of all shares of stock entitled to appraisal.
Any holder of shares of Smith's Class A Common Stock or Smith's Series I
Preferred Stock who has duly demanded appraisal in compliance with Section 262
will not, after the Effective Time, be entitled to vote for any purpose any
shares subject to such demand or to receive payment of dividends or other
distributions on such shares, except for dividends or distributions payable to
stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Smith's Merger; after this period, the stockholder may withdraw
such demand for appraisal only with the consent of Smith's. If no petition for
appraisal is filed with the Delaware Court within 120 days after the Effective
Time, stockholders' rights to appraisal shall cease, and all holders of shares
of Smith's Class A Common Stock or Smith's Series I Preferred Stock will be
entitled to receive the consideration offered pursuant to the Merger Agreement.
Inasmuch as Smith's has no obligation to file such a petition, and Smith's has
no present intention to do so, any holder of shares of Smith's Class A Common
Stock or Smith's Series I Preferred Stock who desires such a petition to be
filed is advised to file it on a timely basis. Any stockholder may withdraw such
stockholder's demand for appraisal by delivering to Smith's a written withdrawal
of his or her demand for appraisal and acceptance of the Smith's Merger, except
(i) that any such attempt to withdraw made more than 60 days after the Effective
Time will require written approval of Smith's and (ii) that no appraisal
proceeding in the Delaware Court shall be dismissed as to any stockholder
without the approval of the Delaware Court, and such approval may be conditioned
upon such terms as the Delaware Court deems just.
Stock Exchange Listing of Holdings Common Stock
Application has been made for the listing on the NYSE of the shares of
Holdings Common Stock to be issued in the Merger. This listing is a condition to
the obligation of Fred Meyer and Smith's to effect the Merger. So long as Fred
Meyer and Smith's continue to meet applicable listing requirements, Fred Meyer
Common Stock and Smith's Class B Common Stock will continue to be listed on the
NYSE until
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consummation of the Merger. See "The Merger Agreement -- Conditions to Each
Party's Obligation to Effect the Merger."
Federal Securities Law Consequences
All shares of Holdings Common Stock received by stockholders of Fred Meyer
or Smith's in connection with the Merger will be freely transferable, except
that shares of Holdings Common Stock received by persons who are deemed to be
"affiliates" (as that term is defined under the Securities Act) of Fred Meyer or
Smith's prior to the Merger may be resold by them only in transactions permitted
by the resale provisions of Rule 145 promulgated under the Securities Act (or
Rule 144, in the case of such persons who become affiliates of Holdings) or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Fred Meyer, Smith's or Holdings generally include individuals or
entities that control, are controlled by, or are under common control with, such
company and may include certain officers and directors of such company as well
as principal stockholders of such company. The Merger Agreement requires each of
Fred Meyer and Smith's to use all reasonable efforts to cause each of its
affiliates to execute a written agreement to the effect that the affiliate will
not sell, assign or transfer any shares of Holdings Common Stock received in
connection with the Merger except (i) pursuant to an effective registration
statement under the Securities Act, (ii) by a sale made in conformity with the
volume and other limitations of Rule 145 promulgated under the Securities Act
(and otherwise in accordance with Rule 144 promulgated under the Securities Act
if the person is an affiliate of Holdings and if so required at the time) or
(iii) in a transaction that, in the opinion of independent counsel to the
affiliate reasonably satisfactory to Holdings or as described in a "no action"
or interpretative letter from the staff of the Commission, is not required to be
registered under the Securities Act.
This Joint Proxy Statement/Prospectus does not cover resales of Holdings
Common Stock received by any person who may be deemed to be an affiliate of Fred
Meyer, Smith's or Holdings.
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THE MERGER AGREEMENT
The following summary of certain terms and provisions of the Merger
Agreement, which describes all material terms and provisions thereof, is
qualified in its entirety by reference to the other information contained
elsewhere in this Joint Proxy Statement/Prospectus including the Appendices
hereto and the documents incorporated herein by reference. A copy of the Merger
Agreement (excluding the Exhibits and Schedules thereto) is set forth in
Appendix A to this Joint Proxy Statement/Prospectus and is incorporated herein
by reference, and reference is made thereto for a complete description of the
terms of the Merger. Stockholders are urged to read the Merger Agreement and
each of the other Appendices hereto carefully.
The Merger
The Merger Agreement provides that, following the approval of the Merger by
the stockholders of Fred Meyer and Smith's and the satisfaction or waiver of the
other conditions to the Merger, Fred Meyer and Smith's will become wholly owned
subsidiaries of Holdings, which will be renamed "Fred Meyer, Inc.", and the
holders of Fred Meyer Common Stock and Smith's Common Stock will become holders
of Holdings Common Stock.
If the Merger Agreement is approved by the stockholders of Fred Meyer and
Smith's, and the other conditions to the Merger are satisfied or waived, the
Closing will take place on the third business day following the date on which
the last of the conditions is satisfied or waived, or at such other time and
date to which Fred Meyer and Smith's mutually agree. On the Closing Date,
Smith's and Fred Meyer will cause certificates of merger to be filed with the
Secretary of State of the State of Delaware as provided in Section 251 of the
DGCL, at which time and date of such filing the Merger will become effective.
See "The Merger Agreement -- Conditions to Obligations to Effect the Merger."
Conversion of Shares
The Merger Agreement provides that the Merger will be effected by merger of
two newly-formed subsidiaries of Holdings, Fred Meyer Sub and Smith's Sub, with
and into Fred Meyer and Smith's, respectively, in which Fred Meyer and Smith's
will be the surviving corporations. At the Effective Time, in the Smith's
Merger:
(i) Each issued and outstanding share of Smith's Common Stock (other
than shares that are canceled and shares as to which appraisal rights are
perfected as described below) will be converted into 1.05 shares of fully
paid and nonassessable shares of Holdings Common Stock.
(ii) Each issued and outstanding share of Smith's Series I Preferred
Stock will be converted into the right to receive in cash an amount equal
to thirty-three and one-third cents ($0.33 1/3), without the payment of any
interest thereon (the "Preferred Consideration").
(iii) Each issued and outstanding share of common stock of Smith's Sub
will be converted into one share of common stock of Smith's, the surviving
corporation in the Smith's Merger.
(iv) Each share of Smith's Common Stock that is held in Smith's
treasury or is owned by subsidiaries of Smith's or by Fred Meyer or any of
its subsidiaries will cease to be outstanding and will be canceled and
retired without payment of any consideration therefor and cease to exist.
(v) Any shares of Smith's Class A Common Stock or Series I Preferred
Stock as to which appraisal rights are perfected will not be converted in
the Smith's Merger but will be converted solely into the right to receive
payment of the appraised value of such shares to the extent permitted by
and in accordance with the applicable provisions of the DGCL. See "The
Merger--Appraisal Rights."
(vi) Each Smith's Option, whether or not then exercisable or vested in
accordance with its terms, which theretofore has been granted under the
1989 Plan, shall become a fully vested and immediately exercisable option
to acquire, on substantially the same terms and conditions as were
applicable under such Smith's Option, for each share of Smith's Class B
Common Stock subject to such Smith's Option the same number of shares of
Holdings Common Stock as the holder of such Smith's Option would have
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been entitled to receive in the Smith's Merger had such holder exercised
such Smith's Option in full immediately prior to the Effective Time
(rounded downward to the nearest whole number), at a price per share
(rounded upward to the nearest whole cent) equal to (i) the aggregate
exercise price for Smith's Class B Common Stock purchasable pursuant to
such Smith's Option (without regard to vesting provisions) divided by (ii)
the number of full shares of Holdings Common Stock deemed purchasable
pursuant to such Smith's Option.
(vii) Holdings will execute the Supplemental Warrant Agreement,
providing that any holder of a Warrant will have the right until the
expiration date thereof to exercise such Warrant at the existing exercise
price for the number of shares of Holdings Common Stock to which a holder
of the number of shares of Smith's Common Stock that would otherwise have
been deliverable upon the exercise of such Warrant would have been entitled
if such Warrant had been exercised in full immediately prior to the
Effective Time (such exercise price and number of shares of Holdings Common
Stock to thereafter be subject to the adjustment provisions of the
Warrant).
At the Effective Time, in the Fred Meyer Merger:
(i) Each issued and outstanding share of Fred Meyer Common Stock
(other than shares that are canceled as described below) will be converted
into one fully paid and nonassessable share of Holdings Common Stock.
(ii) Each issued and outstanding share of common stock of Fred Meyer
Sub will be converted into one share of common stock of Fred Meyer, the
surviving corporation in the Fred Meyer Merger.
(iii) Each share of Fred Meyer Common Stock that is held in Fred
Meyer's treasury or is owned by subsidiaries of Fred Meyer or by Smith's or
any of its subsidiaries will cease to be outstanding and will be canceled
and retired without payment of any consideration therefor and cease to
exist.
(iv) Each Fred Meyer Option, whether or not then exercisable or vested
in accordance with its terms, which theretofore has been granted under the
Fred Meyer Plans, shall become an option to acquire, on substantially the
same terms and conditions as were applicable under such Fred Meyer Option,
for each share of Fred Meyer Common Stock subject to such Fred Meyer
Option, one share of Holdings Common Stock.
Consequently, as a result of the Merger, Fred Meyer and Smith's will become
wholly owned subsidiaries of Holdings and holders of Fred Meyer Common Stock and
Smith's Common Stock (other than holders of Smith's Class A Common Stock who
exercise and perfect their appraisal rights) will become holders of Holdings
Common Stock. It is anticipated that all shares of Holdings Common Stock
outstanding immediately prior to the Merger will be canceled.
Based upon the common stock of Fred Meyer and Smith's outstanding on July
18, 1997 (the Smith's Record Date and the Fred Meyer Record Date) and the
Exchange Ratios, Fred Meyer stockholders will own approximately 62% and Smith's
stockholders will own approximately 38% of Holdings Common Stock that will be
outstanding upon completion of the Merger.
Fractional Shares
If any holder of Smith's Common Stock would be entitled to receive a number
of shares of Holdings Common Stock that includes a fraction, then in lieu of a
fractional share, the holder will be entitled to receive a cash payment, in an
amount in cash (without interest), rounded to the nearest cent, determined by
multiplying (a) the per share last sale price of Holdings Common Stock (as
reported on the NYSE Composite Transactions Reporting System) on the date of the
Effective Time (or, if Holdings Common Stock does not trade on the NYSE on such
date, the first date of trading of Holdings Common Stock on the NYSE after the
Effective Time) by (b) the fractional interest to which such holder otherwise
would be entitled.
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Exchange of Stock Certificates
Promptly after the Effective Time, an exchange agent will mail to each
holder of record of certificates which immediately prior to the Effective Time
represented outstanding shares of Fred Meyer Common Stock or Smith's Common
Stock, a letter of transmittal and instructions for use in effecting the
surrender of such certificates in exchange for certificates representing shares
of Holdings Common Stock. Upon surrender of certificates for cancellation to the
exchange agent, together with such letter of transmittal duly executed and any
other required documents, the holder of such certificates will be entitled to
receive certificates representing the shares of Holdings Common Stock the holder
is entitled to receive and, if the holder is entitled to receive any fractional
shares of Holdings Common Stock, a cash payment representing the amount the
holder is entitled to receive for such fractional shares (such certificates and
cash payment together, the "Common Consideration"), and the certificates so
surrendered will promptly be canceled. Until so surrendered, certificates
representing Fred Meyer Common Stock or Smith's Common Stock will represent
solely the right to receive the Common Consideration and holders thereof shall
not be holders of record of Holdings.
No dividends or other distributions that are declared payable to the
holders of record of shares of Holdings Common Stock after the Effective Time
will be paid to persons entitled by reason of the Merger to receive shares of
Holdings Common Stock until such persons surrender their certificates
representing Fred Meyer Common Stock or Smith's Common Stock. Upon such
surrender, there will be paid to the person in whose name the shares of Holdings
Common Stock are issued any dividends or other distributions on such shares of
Holdings Common Stock which have a record date after the Effective Time and
prior to such surrender, and a payment date prior to such surrender. In no event
will the persons entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions.
If any cash or certificate representing shares of Holdings Common Stock is
to be paid to or issued in a name other than that in which the certificate
surrendered in exchange therefor is registered, it will be a condition of such
exchange that the certificate so surrendered be properly endorsed and otherwise
in proper form for transfer and that the person requesting such exchange pay to
the exchange agent any transfer or other taxes required by reason of the
issuance of certificates for such shares of Holdings Common Stock in a name
other than that of the registered holder of the certificate surrendered, or
establish to the satisfaction of the exchange agent that such tax has been paid
or is not applicable. Notwithstanding the foregoing, neither the exchange agent
nor any party to the Merger Agreement will be liable to a holder of Smith's
Common Stock or Fred Meyer Common Stock for any shares of Holdings Common Stock
or dividends thereon or cash in lieu of fractional shares of Holdings Common
Stock, delivered to a public official pursuant to applicable abandoned property,
escheat or similar law. The exchange agent will not be entitled to vote or
exercise any rights of ownership with respect to such shares of Holdings Common
Stock for the account of the persons entitled thereto.
Promptly after the Effective Time, an exchange agent will mail to each
holder of record of certificates which immediately prior to the Effective Time
represented outstanding shares of Smith's Series I Preferred Stock, a letter of
transmittal and instructions for use in effecting the surrender of the
certificates in exchange for the Preferred Consideration. Upon surrender of such
certificates for cancellation to the exchange agent, together with such letter
of transmittal duly executed and any other required documents, the holder of
such certificates will be entitled to receive for each share of the Smith's
Series I Preferred Stock represented by such certificates the Preferred
Consideration, and the certificates so surrendered will be promptly canceled.
Until so surrendered, certificates representing Smith's Series I Preferred Stock
will represent solely the right to receive the Preferred Consideration. If the
Preferred Consideration is to be paid to a person other than that in which the
certificate surrendered in exchange therefor is registered, it will be a
condition of such exchange that the certificate representing shares of Smith's
Series I Preferred Stock so surrendered be properly endorsed and otherwise in
proper form for transfer. Notwithstanding the foregoing, neither the exchange
agent nor any party to the Merger Agreement will be liable to a holder of
Smith's Series I Preferred Stock for any cash delivered to a public official
pursuant to applicable abandoned property, escheat or similar law.
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HOLDERS OF FRED MEYER COMMON STOCK, SMITH'S COMMON STOCK OR SMITH'S SERIES
I PREFERRED STOCK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
Representations and Warranties
The Merger Agreement contains customary reciprocal representations and
warranties by Fred Meyer and Smith's relating to, among other things, (a) their
respective organizations, the organization of their respective subsidiaries and
similar corporate matters; (b) authorization, execution, delivery, performance
and enforceability of the Merger Agreement and related matters; (c) their
respective capital structures; (d) compliance with applicable laws and
agreements; (e) the accuracy of certain reports and financial statements filed
with the Commission; (f) the absence of adverse material suits, claims or
proceedings and other litigation; (g) the absence of any material adverse
changes to their respective business, operations, condition (financial or
otherwise), results of operations, prospects, assets, liabilities, working
capital or reserves; (h) tax matters; (i) employee benefit plans; (j) the
delivery of fairness opinions by Salomon, in the case of Fred Meyer, and DLJ, in
the case of Smith's; (k) their respective assets; (l) their respective material
contracts and commitments; (m) labor matters; (n) insurance matters; (o)
environmental matters; and (p) the stockholder vote required in connection with
the Merger Agreement and the transactions contemplated thereby.
Certain Covenants
Pursuant to the Merger Agreement, each of Fred Meyer and Smith's has agreed
that, during the period from the date of the Merger Agreement until the
consummation of the Merger, it will, subject to certain exceptions specified
therein, among other things:
Interim Operations. Conduct its business and the business of its
subsidiaries only in the ordinary and usual course as such business has been
conducted.
Capital Expenditures. Not make or commit to make any capital expenditures
in excess of $500,000 in the aggregate, other than expenditures for routine
maintenance and repair or pursuant to existing contracts or commitments or
expenditures reflected in previously disclosed capital expenditure budgets.
Indebtedness. Not incur any material amount of indebtedness for borrowed
money or make any loans, advances or capital contributions to, or investments
(other than non-controlling investments in the ordinary course of business) in,
any other person other than a wholly owned subsidiary of Fred Meyer or Smith's,
as applicable, or issue or sell any debt securities, other than borrowings under
existing lines of credit in the ordinary course of business consistent with past
practice and other than refinancings contemplated by the Merger Agreement. The
Merger Agreement does not quantify what constitutes a "material" amount of
indebtedness. If either party to the Merger Agreement believed the other had
incurred a material amount of indebtedness for borrowed money and declared such
party in default, it would be incumbent on the nonbreaching party to establish
for a finder of fact that the amount was material.
Changes in Capital Stock. Not (i) amend its certificate of incorporation or
bylaws or 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; (iv) sell or pledge any stock of any of its subsidiaries; or (v) make
or enter into any commitment for any of the foregoing actions.
Issuance of Stock; Dispositions; Acquisitions. Not (i) issue or sell or
agree to issue or sell any additional shares of, or grant, confer or award any
options, warrants or rights of any kind to acquire any shares of, its capital
stock of any class; (ii) enter into any agreement, contract or commitment out of
the ordinary course of its business, to dispose of or acquire, or relating to
the disposition or acquisition of, a segment of its business; (iii) except in
the ordinary course of business, sell, pledge, dispose of or encumber any
material assets (including without limitation, any indebtedness owed to them or
any material claims held by them);
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(iv) acquire (by merger, consolidation, acquisition of stock or assets or
otherwise) any corporation, partnership or other business organization or
division thereof or make any material investment, either by purchase of stock or
other securities, contribution to capital, property transfer or purchase, in any
case, of any material amount of property or assets, in or of any other person;
or (v) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing.
Employment Agreements. Not grant any severance or termination pay or
increase the benefits payable under its existing severance or termination pay
policies or agreements or enter into any employment or severance agreement with
any officer, director or employee.
Employee Compensation and Benefits. Not adopt or amend 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 except as required by law.
Inventory. Not enter into or amend any contract for the purchase of
inventory which is not cancelable within one year without penalty, cost or
liability, or any other contract involving annual expenditures or liabilities in
excess of $250,000 which is not cancelable within two years without penalty,
cost or liability.
Labor Matters. Not negotiate, enter into, or modify any agreement or agree
to be bound by any agreement with any collective bargaining agent relating to
its business, except for agreements with respect to routine employee grievance
matters in the ordinary course of business.
Consents. Cooperate and assist each other in obtaining certain third-party
consents to the Merger.
Further Assurance and Cooperation. Use all reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by the Merger Agreement.
Any action prohibited by the foregoing may nonetheless be taken by either
party to the extent expressly permitted by the Merger Agreement, or consented to
in writing by the other party to the Merger Agreement.
No Solicitation of Acquisition Proposals
In the Merger Agreement, each of Fred Meyer and Smith's has agreed, prior
to the Effective Time, (a) that neither it nor any of its subsidiaries will, nor
will it or any of its subsidiaries permit their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
subsidiaries) to, directly or indirectly, initiate, solicit or encourage, any
inquiries or the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its stockholders) with respect to
an Acquisition Proposal or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; and (b) that it will
immediately advise the other party to the Merger Agreement orally and in writing
of (i) any inquiry or any request for information or data, (ii) any request or
invitation to engage in negotiations or discussions with any person relating to
an Acquisition Proposal, (iii) any request to otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal or (iv) any Acquisition
Proposal, and in each case, the material terms and conditions of such inquiry,
request, invitation or Acquisition Proposal and the identity of the person
making any such inquiry, request, invitation or Acquisition Proposal; provided,
however, that nothing contained in the Merger Agreement will prohibit the Fred
Meyer Board or the Smith's Board from, to the extent applicable, complying with
Rule 14e-2 promulgated under the Exchange Act (which relates to the
communication of a recommendation with respect to certain tender offers) with
regard to an Acquisition Proposal or from making any disclosure to, or
communicating with, its stockholders if, in the good faith judgment of the Fred
Meyer Board or the Smith's Board, as applicable, after consultation with outside
counsel, failure to so disclose or communicate would be inconsistent with its
fiduciary duties under applicable law.
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An "Acquisition Proposal" is defined in the Merger Agreement to mean any
proposal or offer or public disclosure of an intention to make a proposal or
offer (in each case, other than the transactions contemplated by the Merger
Agreement) with respect to: (i) any merger, consolidation, recapitalization,
liquidation, dissolution or similar transaction involving Smith's or Fred Meyer
or any of their respective subsidiaries, or (ii) any purchase or acquisition (or
option or agreement to purchase or acquire), including by way of a merger,
consolidation, tender or exchange offer (including a self tender), of any equity
securities (or securities convertible into equity securities) pursuant to which
any person (or group of persons) other than Smith's or Fred Meyer or their
respective affiliates (a "Third Party"), acquires beneficial ownership of 20% or
more of the outstanding voting power of Fred Meyer or Smith's, or (iii) any
other transaction pursuant to which any Third Party acquires control of assets
of Smith's or Fred Meyer having a fair market value (as determined by the
Smith's Board or the Fred Meyer Board, as the case may be, in good faith) equal
to more than 20% of the fair market value of all the assets of Smith's or Fred
Meyer, as the case may be, and their respective subsidiaries, taken as a whole,
immediately prior to such transaction.
Indemnification
The Merger Agreement provides that, from and after the Effective Time,
Holdings will indemnify, defend and hold harmless the current and former
directors, officers and employees of Smith's, Fred Meyer and their respective
subsidiaries (each, an "Indemnified Party") against all costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
the Merger Agreement and the Voting Agreements) to the fullest extent that such
persons are indemnified under the laws of the State of Delaware and the
certificates of incorporation and bylaws, as in effect on the date thereof, of
Smith's, Fred Meyer and their respective subsidiaries or any existing
indemnification agreement with either Fred Meyer or Smith's, and during such
period, Holdings shall advance expenses (including expenses related to enforcing
the indemnity under the Merger Agreement) as incurred to the fullest extent
permitted under applicable law, provided that 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 with no bond or
security to be required. Any determination required to be made with respect to
whether an officer's or director's conduct complies with the standards set forth
under Delaware law and any such certificate of incorporation or bylaws shall be
made by independent counsel (which shall not be counsel that provides material
services to Holdings or its subsidiaries) selected by Holdings and reasonably
acceptable to such officer or director; provided, that in the absence of
applicable Delaware judicial precedent to the contrary, such counsel, in making
such determination, shall presume such officer's or director's conduct complied
with such standard and Holdings shall have the burden to demonstrate that such
officer's or director's conduct failed to comply with such standard.
In addition, the Merger Agreement provides that for a period of five years
after the Effective Time, Holdings will maintain officers' and directors'
liability insurance covering the Indemnified Parties who are covered, in their
capacities as current or former officers and directors, by Smith's or Fred
Meyer's existing officers' and directors' liability insurance policies on terms
substantially no less advantageous to such Indemnified Parties than such
existing insurance. Additionally, Holdings is required to keep in effect
provisions in its certificate of incorporation and bylaws providing for
exculpation of director and officer liability and its indemnification of the
indemnified parties to the fullest extent permitted under the DGCL, which
provisions will not be amended except as required by applicable law or except to
make changes permitted by law that would enlarge the indemnified parties' right
of indemnification.
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Conditions to Each Party's Obligation to Effect the Merger
The respective obligation of each party to effect the Merger is subject to
the fulfillment or waiver by both parties at or prior to the Closing Date of the
following conditions:
(i) The Merger Agreement, the Smith's Merger and the Fred Meyer Merger
shall each have been approved in the manner required by applicable law by
the respective holders of the issued and outstanding shares of capital
stock of Smith's and of Fred Meyer.
(ii) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(iii) Neither Fred Meyer nor Smith's shall be subject to any order,
decree, ruling or injunction of a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, and no
law, statute, rule or regulation shall have been promulgated or enacted by
a governmental or regulatory authority, which prohibits the consummation of
the transactions contemplated by the Merger Agreement or would otherwise
impair the ability of Holdings to operate the business of Smith's and Fred
Meyer on a consolidated basis following the Closing.
(iv) The Registration Statement shall be effective, and no stop order
suspending effectiveness of the Registration Statement shall have been
issued, no action, suit, proceeding or investigation by the Commission to
suspend the effectiveness thereof shall have been initiated and be
continuing or, to the knowledge of Fred Meyer or Smith's, be threatened in
writing, and all necessary approvals under state securities laws relating
to the issuance or trading of Holdings Common Stock to be issued to
stockholders of Smith's and Fred Meyer in connection with the Merger shall
have been received.
(v) All consents, licenses, permits, authorizations, orders and
approvals of (or filings or registrations with) any governmental or
regulatory authorities required in connection with the execution, delivery
and performance of the Merger Agreement shall have been obtained or made,
except for filings in connection with the Merger and any other documents
required to be filed after the Effective Time and except where the failure
to have obtained or made any such consent, license, permit, authorization,
order, approval, filing or registration would not have a material adverse
effect on Holdings following the Effective Time.
(vi) The Holdings Common Stock to be issued to stockholders of Smith's
and Fred Meyer in connection with the Merger shall have been approved for
listing on the NYSE, subject only to official notice of issuance.
(vii) After the Effective Time, no person will have any right under
any stock option plan (or any option granted thereunder) or other plan,
program or arrangement to acquire any equity securities of Smith's, Fred
Meyer or any of their respective Subsidiaries.
Conditions to Obligation of Smith's to Effect the Merger
The obligation of Smith's to effect the Merger is subject to the
fulfillment or waiver by Smith's at or prior to the Closing Date of the
following additional conditions:
(i) Fred Meyer shall have performed and complied in all material
respects with all material obligations and agreements required to be
performed and complied with by it under the Merger Agreement at or prior to
the Closing Date.
(ii) The representations and warranties of Fred Meyer contained in the
Merger Agreement that are qualified as to materiality shall be true and
correct, and such representations and warranties of Fred Meyer that are not
so qualified shall be true and correct in all material respects, in each
case both as of the date of the Merger Agreement and on the Closing Date as
though made on and as of the Closing Date, except to the extent such
representations and warranties are expressly made as of an earlier date, in
which case, such representations and warranties shall be true and correct
as of such date.
(iii) Smith's shall have received a certificate from an officer of
Fred Meyer, dated as of the Closing Date, to the effect that the conditions
set forth in paragraphs (i) and (ii) above have been satisfied.
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(iv) From the date of the Merger Agreement through the Effective Time,
a material adverse effect with respect to Fred Meyer shall not have
occurred.
(v) Holdings shall have duly executed the Supplemental Warrant
Agreement and, upon the execution by the other parties thereto, such
agreement shall be in full force and effect as of the Effective Time.
(vi) Smith's shall have received on the Closing Date a legal opinion
from its tax counsel, Latham & Watkins, substantially to the effect that,
on the basis of the facts, representations and assumptions set forth in
such opinion, the Merger will be treated as an exchange under Section
351(a) of the Code.
(vii) Smith's shall have received on the Closing Date a legal opinion
from counsel to Fred Meyer (which counsel shall be reasonably acceptable to
Smith's) in substantially the form set forth in the Merger Agreement.
(viii) Holdings shall have duly executed the Registration Rights
Agreement and the Holdings Management Services Agreement and, upon
execution by the other parties thereto, such agreements shall be in full
force and effect as of the Effective Time.
Conditions to Obligation of Fred Meyer to Effect the Merger
The obligation of Fred Meyer to effect the Merger is subject to the
fulfillment or waiver by Fred Meyer at or prior to the Closing Date of the
following additional conditions:
(i) Smith's shall have performed and complied in all material respects
with all material obligations and agreements required to be performed and
complied with by it under the Merger Agreement at or prior to the Closing
Date.
(ii) The representations and warranties of Smith's contained in the
Merger Agreement that are qualified as to materiality shall be true and
correct, and such representations and warranties of Smith's that are not so
qualified shall be true and correct in all material respects, in each case
both as of the date of the Merger Agreement and on the Closing Date as
though made on and as of the Closing Date, except to the extent such
representations and warranties are expressly made as of an earlier date, in
which case, such representations and warranties shall be true and correct
as of such date.
(iii) Fred Meyer shall have received from Smith's a certificate from
an officer of Smith's, dated as of the Closing Date, to the effect that the
conditions set forth in paragraphs (i) and (ii) above have been satisfied.
(iv) From the date of the Merger Agreement through the Effective Time,
a material adverse effect with respect to Smith's shall not have occurred.
(v) The Voting Agreements covering at least 50.1%, in the aggregate,
of the voting power of the issued and outstanding shares of capital stock
of Smith's shall be in full force and effect and each party thereto shall
have performed and complied in all material respects with all material
obligations and agreements required to be performed or complied with by
such party at or prior to the Effective Time.
(vi) The Smith's Management Services Agreement shall have been
terminated and shall be of no further force and effect and the Holdings
Management Services Agreement shall have been duly executed by the parties
thereto and shall be in full force and effect as of the Effective Time.
(vii) The motion filed by Larry F. Klang on October 15, 1996 in
respect of that certain legal proceeding relating to Smith's 1996
recapitalization transactions shall not have been granted and there shall
have been no development with respect to such legal proceeding that has had
or could reasonably be expected to have a material adverse effect with
respect to Smith's or Holdings or a material adverse effect on the intended
benefits of the Merger to Fred Meyer, Smith's or Holdings. See "Business of
Smith's--Legal Proceedings."
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(viii) Fred Meyer shall have received on the Closing Date a legal
opinion from its tax counsel, Cleary, Gottlieb, Steen & Hamilton,
substantially to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinion, the Merger will
be treated as an exchange under Section 351(a) of the Code.
(ix) Fred Meyer shall have received on the Closing Date a legal
opinion from counsel to Smith's (which counsel shall be reasonably
acceptable to Fred Meyer) in substantially the form set forth in the Merger
Agreement.
Termination Fee
Under the terms of the Merger Agreement, Fred Meyer has agreed under
certain circumstances to reimburse certain expenses of Smith's and/or to pay
Smith's a termination fee of $35 million (the "Termination Fee") in connection
with the termination of the Merger Agreement. More specifically, (a) if the
Merger Agreement is terminated by Smith's as a result of a failure to obtain the
approval of the stockholders of Fred Meyer and at the time of the event giving
rise to such termination Fred Meyer would not itself have been entitled to
terminate the Merger Agreement under certain circumstances, Fred Meyer will pay
Smith's up to $5 million as reimbursement for certain expenses of Smith's
actually incurred prior to such termination; (b) if the Merger Agreement is
terminated by Smith's as a result of a failure to obtain the approval of the
stockholders of Fred Meyer and at the time of the event giving rise to such
termination Fred Meyer would not itself have been entitled to terminate the
Merger Agreement under certain circumstances and any Acquisition Proposal
relating to Fred Meyer was pending, then, if within eighteen (18) months
following such termination, any Alternative Transaction (as defined in the
Merger Agreement) relating to Fred Meyer is consummated (or if any specified
Alternative Transaction relating to Fred Meyer shall have been consummated prior
to such termination), Fred Meyer will pay Smith's the Termination Fee; and (c)
if the Merger Agreement is terminated by Smith's as a result of the Merger not
having been consummated by January 31, 1998 under certain circumstances and at
the time of the event giving rise to such termination (i) the approval of the
stockholders of Fred Meyer has not been obtained, (ii) Fred Meyer would not
itself have been entitled to terminate the Merger Agreement under certain
circumstances and (iii) any Acquisition Proposal relating to Fred Meyer is
pending (or any specified Alternative Transaction relating to Fred Meyer has
been consummated), Fred Meyer will pay Smith's the Termination Fee. In addition,
Fred Meyer has granted Smith's a stock option that becomes exercisable if the
Termination Fee becomes payable to Smith's. See "Other Agreements -- Stock
Option Agreement."
The Merger Agreement further provides that payment of the Termination Fee
will be the sole, exclusive remedy of Smith's against Fred Meyer and any of its
subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives with respect to the occurrences giving rise to
such payment.
Amendment and Waiver
The Merger Agreement may be amended by mutual agreement of Fred Meyer and
Smith's by action taken by their respective Boards of Directors at any time
prior to consummation of the Merger; provided, that after approval of the Merger
Agreement by the stockholders of Fred Meyer or Smith's, no amendment may be made
that by law requires further approval by the stockholders without obtaining such
further approval. In addition, either company may waive, by a written instrument
signed on its behalf, any provision of the Merger Agreement.
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OTHER AGREEMENTS
Stock Option Agreement
The following summary of certain terms and provisions of the Stock Option
Agreement, which describes all material terms and provisions thereof, is
qualified in its entirety by reference to the full text of the Stock Option
Agreement, a copy of which is attached hereto as Appendix H, and is incorporated
herein by reference.
As an inducement and condition to the willingness of Smith's to enter into
the Merger Agreement, Fred Meyer entered into the Stock Option Agreement,
pursuant to which Fred Meyer granted to Smith's an irrevocable option (the
"Option") to purchase 5,258,036 shares of Fred Meyer Common Stock (equal to
19.9% of the outstanding shares of Fred Meyer Common Stock) for a purchase price
of $45 per share (the "Option Price"), subject to adjustment in certain
circumstances.
The Option will become exercisable by Smith's, in whole or in part, if, but
only if, a Triggering Event (as defined in the Stock Option Agreement) occurs
prior to the occurrence of an Exercise Termination Event (as defined in the
Stock Option Agreement). The purchase of any shares of Fred Meyer Common Stock
pursuant to the Option is subject to compliance with applicable law. If Smith's
were to exercise its right to acquire the full number of shares of Fred Meyer
Common Stock subject to the Option, Smith's would hold approximately 16.4% of
the outstanding shares of Fred Meyer Common Stock immediately after such
exercise.
As defined in the Stock Option Agreement, a Triggering Event would occur
whenever the Termination Fee has become payable. See "The Merger Agreement --
Termination Fee."
The Stock Option Agreement defines Exercise Termination Event to mean any
of (i) the Effective Time of the Merger; (ii) the termination of the Merger
Agreement in accordance with the provisions thereof if such termination occurs
prior to the occurrence of a Triggering Event and in circumstances under which
the conditions necessary for a Triggering Event to occur are incapable of being
fulfilled (see "The Merger Agreement -- Termination Fee"); or (iii) the passage
of 12 months following the occurrence of a Triggering Event.
Notwithstanding anything to the contrary contained in the Stock Option
Agreement, the Option may not be exercised at any time when Smith's is in
material breach of any of its covenants or agreements contained in the Merger
Agreement such that Fred Meyer would be entitled to terminate the Merger
Agreement in accordance with its terms, and the Stock Option Agreement will
automatically terminate upon the termination of the Merger Agreement by Fred
Meyer as a result of a material breach by Smith's of its covenants or agreements
contained therein.
If the Option becomes exercisable, it may be exercised in whole or in part
within twelve months following the applicable Triggering Event. Smith's right to
exercise the Option and certain other rights under the Stock Option Agreement
are subject to an extension in order to obtain any required regulatory approvals
and comply with applicable regulatory waiting periods and to avoid liability
under Section 16(b) of the Exchange Act. The Option Price and the number of
shares issuable under the Option are subject to adjustment in the event of
specified changes in the capital stock of Fred Meyer.
Upon the occurrence of a Triggering Event that occurs prior to an Exercise
Termination Event, Smith's will have certain registration rights with respect to
the shares of Fred Meyer Common Stock issued or issuable pursuant to the Option.
The Stock Option Agreement also provides that at any time after the
occurrence of a Triggering Event, (i) at the request of the holder of the Option
delivered prior to an Exercise Termination Event, Fred Meyer will be obligated
to repurchase the Option for a price equal to the amount by which (A) the
"market/offer price" (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which the Option may then be exercised and (ii) at
the request of the owner of all or any part of the shares ("Option Shares")
received upon the full or partial exercise of the Option, delivered prior to an
Exercise Termination Event, Fred Meyer will be obligated to repurchase such
number of the Option Shares from the owner thereof as the owner shall designate
at a price equal to the "market/offer price" multiplied by the number of Option
Shares so designated. The term "market/offer price" refers to the highest of (i)
the price per share of Fred
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<PAGE>
Meyer Common Stock at which a tender or exchange offer therefor has been made,
(ii) the price per share of Fred Meyer Common Stock to be paid by any third
party pursuant to an agreement with Fred Meyer, (iii) the highest closing price
for shares of Fred Meyer Common Stock within the six-month period immediately
preceding the date notice is given of the required repurchase of the Option or
any Option Shares, as the case may be, or (iv) in the event of a sale of all or
substantially all of Fred Meyer's assets, the sum of the net price paid in such
sale for such assets and the current market value of the remaining net assets of
Fred Meyer as determined by a nationally recognized investment banking firm
selected by the holder of the Option or the owner of Option Shares, as the case
may be, and reasonably acceptable to Fred Meyer, divided by the number of shares
of Fred Meyer Common Stock outstanding at the time of such sale.
The Stock Option Agreement provides that, notwithstanding any of its
provisions, in no event may Smith's Total Profit (as defined below) exceed the
sum of (i) $10 million and (ii) an amount (not to exceed in any event $35
million) equal to any portion of the Termination Fee provided for under the
Merger Agreement the payment of which Smith's has irrevocably waived (the
"Maximum Amount"). If Smith's Total Profit would exceed such amount, Smith's
would be required, at its sole election, to (a) reduce the number of Option
Shares subject to the Option, (b) deliver Option Shares to Fred Meyer for
cancellation, (c) pay cash to Fred Meyer or (d) do any combination of the
foregoing so that Smith's actual, realized Total Profit shall not exceed the
Maximum Amount. Total Profit means the aggregate amount (before taxes) of the
following: (i) the amount received by Smith's pursuant to Fred Meyer's
repurchase of the Option (or any portion thereof), (ii) (x) the amount received
by Smith's pursuant to Fred Meyer's repurchase of Option Shares, less (y)
Smith's purchase price for such Option Shares, (iii) (x) the net cash amounts
received by Smith's pursuant to the sale of Option Shares (or any other
securities into which such Option Shares are converted or exchanged) to any
unaffiliated party, less (y) Smith's purchase price of such Option Shares, (iv)
any amounts received by Smith's on the transfer of the Option (or any portion
thereof) to any unaffiliated party, and (v) certain equivalent amounts received
with respect to any Substitute Option (as defined below).
In addition, Smith's may not exercise the Option for a number of Option
Shares that would, as of the date of such exercise, result in Smith's (if it
were immediately to sell such Option Shares, together with all other Option
Shares held by Smith's and its affiliates as of such date, at the closing market
price for Fred Meyer Common Stock on the previous trading day) realizing a Total
Profit in excess of the Maximum Amount.
Pursuant to the terms of the Stock Option Agreement, if, prior to an
Exercise Termination Event, Fred Meyer enters into an agreement with respect to
certain transactions in which Fred Meyer is not the surviving corporation,
certain fundamental changes in the capital stock of Fred Meyer or sale by Fred
Meyer of all or substantially all of its or certain of its subsidiaries' assets,
the Option shall be converted into a substitute option (the "Substitute
Option"), with terms similar to those of the Option, to purchase capital stock
of the entity that is the effective successor to Fred Meyer.
Arrangements such as the Stock Option Agreement are entered into in
connection with corporate merger and acquisitions in an effort to increase the
likelihood that the transactions will be consummated in accordance with their
terms and to compensate the grantee for the efforts undertaken and the expenses,
losses and opportunity costs incurred by it in connection with the transactions
if they are not consummated under certain circumstances involving an acquisition
or potential acquisition of the issuer by a third party. The Stock Option
Agreement was entered into to accomplish these objectives. The Stock Option
Agreement may have the effect of discouraging offers by third parties to acquire
Fred Meyer prior to the Merger.
To the best knowledge of Fred Meyer and Smith's, no event giving rise to
the right to exercise the Option has occurred as of the date of this Joint Proxy
Statement/Prospectus.
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Voting Agreements
The following summary of certain terms and provisions of the Voting
Agreements, which describes all material terms and provisions thereof, is
qualified in its entirety by reference to the full text of the Voting
Agreements, copies of which are attached hereto as Appendix F and are
incorporated herein by reference.
As an inducement and condition to the willingness of Fred Meyer to enter
into the Merger Agreement, certain stockholders of Smith's (the "Stockholders")
entered into the Voting Agreements. The Stockholders are The Yucaipa Companies,
four limited partnerships of which The Yucaipa Companies is the general partner,
Jeffrey P. Smith, Fred L. Smith, Richard D. Smith, four trusts of which one of
Jeffrey P. Smith, Fred L. Smith or Richard D. Smith is the trustee, University
of Utah and Corporation of the President of the Church of Jesus Christ of
Latter-Day Saints.
Together, the Stockholders held, at the Smith's Record Date, approximately
70% of the combined voting power of the outstanding capital stock of Smith's,
and are therefore together able to control the vote on the approval and adoption
of the Merger Agreement and the transactions contemplated thereby.
In the Voting Agreements, each Stockholder has agreed, at any duly noticed
meeting of the stockholders of Smith's called for a vote upon the Merger
Agreement or in any other circumstances upon which a vote, consent or other
approval with respect to the Merger Agreement is sought, to vote or cause to be
voted (including by initiating a written consent solicitation if requested by
Fred Meyer) all of such Stockholder's shares of Smith's Stock (the "Subject
Shares") (1) in favor of the adoption by Smith's of the Merger Agreement and the
approval of the terms thereof and, to the extent presented to the stockholders
of Smith's for a vote, each of the other transactions contemplated by the Merger
Agreement, and (2) against (i) any merger agreement or merger (other than the
Merger Agreement and the Merger), consolidation, combination, sale of
substantial assets, reorganization, recapitalization, dissolution, liquidation
or winding up of or by Smith's or any other Acquisition Proposal related to
Smith's or (ii) any amendment of the Smith's Certificate or Smith's Bylaws or
other proposal or transaction involving Smith's or any of its subsidiaries,
which amendment or other proposal or transaction would in any manner impede,
frustrate, prevent or nullify the Merger, the Merger Agreement or any of the
other transactions contemplated by the Merger Agreement or change in any manner
the voting rights of any class of capital stock of Smith's.
Additionally, in the Voting Agreements, each Stockholder has agreed,
subject to certain limited exceptions, not to (i) sell, transfer, pledge, assign
or otherwise dispose of (collectively, "Transfer") or enter into any contract,
option or other arrangement (including any profit sharing arrangement) with
respect to the Transfer of, the Subject Shares, any option or warrant any shares
of Smith's Common Stock or any shares of Smith's Common Stock subject to any
option or warrant to any person, other than pursuant to the Merger, (ii) enter
into any voting arrangement, whether by proxy, power-of-attorney, voting
agreement, voting trust or otherwise, in connection with, directly or
indirectly, any Acquisition Proposal or (iii) convert (or cause to be converted)
any Subject Shares consisting of Smith's Class A Common Stock into shares of
Smith's Class B Common Stock, in whole or in part. Each Stockholder has also
waived any appraisal rights under the DGCL to which such Stockholder might
otherwise be entitled in connection with the Merger or the Merger Agreement.
Pursuant to the terms of the Voting Agreements, each Stockholder and each
of its affiliates, directors, officers, employees, investment bankers, attorneys
and other advisers or representatives is prohibited from, directly or
indirectly, (i) soliciting, initiating or encouraging the submission of, any
Acquisition Proposal, or (ii) participating in any discussions or negotiations
regarding, or furnishing to any person any information with respect to, or
taking any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably by expected to lead to, any
Acquisition Proposal.
In the event the Merger Agreement is terminated under certain specified
circumstances and at the time of such termination less than 50.1% of the voting
power of the outstanding capital stock of Smith's is subject to Voting
Agreements in full force and effect, each Stockholder (other than University of
Utah and Corporation of the President of the Church of Jesus Christ of Latter
Day Saints) will be obligated to pay to Fred Meyer on demand an amount equal to
all profit (determined in the manner set forth in the Voting Agreements)
realized
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by such Stockholder from any Acquisition Proposal that is consummated within
eighteen months of such termination.
The Voting Agreements will terminate upon the earlier of (a) the 18-month
anniversary of the termination of the Merger Agreement or (b) the Effective
Time. In addition, subject to certain conditions, if the Merger Agreement is
terminated under certain specified circumstances, the Voting Agreements (other
than the profit recapture provisions described above) will terminate
concurrently with the Merger Agreement.
Registration Rights Agreement
On the Closing Date, Holdings will enter into the Registration Rights
Agreement with (i) Jeffrey P. Smith, Richard D. Smith, Fred L. Smith and certain
Smith family trusts, and (ii) certain affiliates of Yucaipa, each of which will
receive shares of Holdings Common Stock in the Smith's Merger. Under the terms
of the Registration Rights Agreement, each of (i) the holders of a majority of
the Registrable Securities (as defined in the Registration Rights Agreement)
held by Yucaipa and its affiliates and transferees of the foregoing, as a group
(the "Yucaipa Holder Group"), and (ii) the holders of a majority of the
Registrable Securities held by Jeffrey Smith, Richard Smith, Fred Smith, members
of their respective families or any trust of which any of the foregoing are
beneficiaries, as a group (the "Smith Holder Group") will each be entitled to
two written requests (each, a "Demand Registration") upon Holdings for the
registration under the Securities Act of all or part (but not less than one
million shares) of their Registrable Securities; provided, however, that
Holdings will only be required to effect one Demand Registration during any
six-month period. Such Demand Registration may, at the election of the demanding
holders, be in the form of an underwritten offering and such demanding holders
will be entitled to select the underwriters.
If at any time Holdings proposes to file a registration statement under the
Securities Act with respect to an offering by Holdings for its own account or
for the account of any holders of any class of common equity securities (other
than (i) a registration statement on Form S-4 or S-8 or (ii) a registration
statement filed in connection with a Demand Registration or a Shelf Registration
(as defined below) or (iii) a registration statement filed in connection with an
offering of securities solely to existing security holders of Holdings),
Holdings will give notice of such proposed filing to the holders of Registrable
Securities who are parties to the Registration Rights Agreement and their
transferees and will offer such holders the opportunity to register their
Registrable Securities as part of such registration (a "Piggyback
Registration").
Upon the request of holders of a majority of the Registrable Securities
held by the Yucaipa Holder Group at any time, Holdings will cause to be filed
with the Commission as promptly as practicable after such request, but in no
event later than 60 days thereafter, a shelf registration statement (a "Shelf
Registration") which will provide for resales of Registrable Securities held by
members of the Yucaipa Holder Group who have provided information required by
the Registration Rights Agreement. Holdings will agree to use its best efforts
to have such Shelf Registration declared effective and to keep such Shelf
Registration continuously effective, for a period of at least one year following
the date on which it becomes effective under the Securities Act; provided,
however, that in no event will Holdings be required to keep the Shelf
Registration in effect after the fifth anniversary of the Closing Date.
In the event Holdings is not able to fulfill all requests for the
Registrable Securities to be included in any Demand Registration or Piggyback
Registration, Holdings will grant certain priority rights to the Smith Holder
Group and the Yucaipa Holder Group which enable the Smith Holder Group and the
Yucaipa Holder Group to have their Registrable Securities up to certain
designated amounts included in such registrations before certain other
stockholders of Holdings having piggyback or other similar registration rights
are entitled to include their Registrable Securities in such registrations,
subject to the priority of the Registration Rights Agreement, dated December 11,
1981, by and among FMI Acquisition Corporation (now Fred Meyer), FMI Associates
Limited Partnership and certain executive officers of FMI Acquisition
Corporation and the Assignment thereof dated January 27, 1997.
Holdings will be obligated to pay its expenses associated with registration
of the Registrable Securities, regardless of whether any registration statement
required by the Registration Rights Agreement becomes
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<PAGE>
effective. In addition, Holdings will provide customary securities law
indemnification to any party who participates in any registration effected under
the Registration Rights Agreement.
The Registration Rights Agreement will terminate upon the earlier to occur
of (i) the mutual agreement by the parties thereto, (ii) with respect to any
holder, such holder ceasing to own any Registrable Securities, (iii) the
fifteenth anniversary of the Closing Date, or (iv) with respect to the Yucaipa
Holder Group or the Smith Holder Group, the date on which the aggregate number
of shares of outstanding Registrable Securities held by the Yucaipa Holder Group
or the Smith Holder Group, as applicable, is less than 20% of the Registrable
Securities Shares originally held by the Yucaipa Holder Group or the Smith
Holder Group, as applicable, immediately following the consummation of the
transactions contemplated by the Merger Agreement (except with respect to any
holder that is an "affiliate" of Holdings within the meaning of the Securities
Act).
Holdings Management Services Agreement
On the Closing Date, Holdings will enter into the Holdings Management
Services Agreement with Yucaipa.
Under the terms of the Holdings Management Services Agreement, Yucaipa,
through its members, employees or other designated representatives or agents,
will provide Holdings and its subsidiaries, subject to the supervision of the
Holdings Board, management consultation and advice regarding strategic planning
and development, budgeting, future financing plans, selection and retention of
management employees, general business management and governmental affairs and
such other similar management services that may be requested by the Holdings
Board and/or the Chief Executive Officer of Holdings from time to time for a
term of five years. In return, Holdings will pay Yucaipa an annual management
fee of $500,000 and will reimburse Yucaipa for its reasonable out-of-pocket
costs and expenses incurred in connection with the performance of its
obligations under the Holdings Management Services Agreement. If during the term
of the Holdings Management Services Agreement, the Holdings Board requests
Yucaipa to provide (i) consulting services in connection with any proposed
acquisition or divestiture transaction or any debt or equity financing, or (ii)
any other services not otherwise covered by the Holdings Management Services
Agreement, Yucaipa will be entitled to such additional compensation for such
services as may be agreed upon by Yucaipa and Holdings (and approved by a
majority of Holdings' disinterested directors).
In connection with Yucaipa's services, Ronald W. Burkle will have the right
to serve as the Chairman of the Holdings Board during his initial three year
term as a director of Holdings and will have all the rights and responsibilities
customarily vested in a Chairman of the Board of Directors. Mr. Burkle will not
receive any compensation for serving in such capacity beyond the compensation
paid to Yucaipa under the Holdings Management Services Agreement.
The Holdings Management Services Agreement will be terminable by Holdings
(i) at any time following a determination of Holdings' Board to effect such
termination by giving Yucaipa at least 90 days' notice, (ii) if Yucaipa fails to
reasonably perform any material covenant, agreement, term or provision of the
Holdings Management Services Agreement following 60 days' notice or (iii) at any
time if, in connection with its performance under the Holdings Management
Services Agreement, Yucaipa or any of its members commits (or is grossly
negligent in its supervision or hiring of an employee or agent of Yucaipa who
commits) certain acts that are materially detrimental to the business or
reputation of Holdings.
The Holdings Management Services Agreement will be terminable by Yucaipa
(i) if Holdings fails to reasonably perform any material covenant, agreement,
term or provisions of the Holdings Management Services Agreement following 60
days' notice, (ii) if Holdings fails to make any payment due to Yucaipa under
the Holdings Management Services Agreement, if such payments are not made in
full within 30 days' notice, (iii) if Ronald W. Burkle ceases to be Chairman of
the Holdings Board other than by reason of his death, disability, termination
due to his commission of any act of fraud, dishonesty or gross negligence which
is materially detrimental to the business or reputation of Holdings, or any
felony conviction or voluntary resignation.
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The Holdings Management Services Agreement may be terminated at the
election of either party if during its term there is a change of control of
Holdings (defined generally as either (i) the acquisition of beneficial
ownership by any person or group of any securities of Holdings such that, as a
result, such group or person beneficially owns 40% or more of Holdings' then
outstanding voting securities entitled to vote on a regular basis for a majority
of the Holdings Board, or (ii) the sale of substantially all of Holdings' assets
or capital stock in a transaction or series of related transactions (excluding
any transaction with Yucaipa or any of its members or affiliates).
If the Holdings Management Services Agreement is terminated by (i) Holdings
without cause, (ii) Yucaipa for cause in accordance with such agreement, or
(iii) pursuant to a change of control of Holdings, Holdings will pay or cause to
be paid to Yucaipa a termination payment equal to the greater of (x) $2.5
million and (y) twice the total consulting fees that would have been earned by
Yucaipa during the remaining term of the Holdings Management Services Agreement
as if such agreement had not been terminated, without regard to sums previously
paid by Holdings to Yucaipa as part of its management fee.
During the term of the Holdings Management Services Agreement and for a
period of 90 days from the later of (i) the date on which the Holdings
Management Services Agreement is terminated or (ii) the date on which Ronald W.
Burkle ceases to be the Chairman of the Holdings Board, neither Yucaipa nor any
of its affiliates, alone or with others, will, in any manner, without the prior
approval of Holdings Board, (a) enter into or agree to enter into, singly or
with any other person, any form of business combination, acquisition,
restructuring, recapitalization, liquidation or other similar transaction
relating to Holdings or any subsidiary of Holdings, (b) hold, acquire, or offer
or agree to acquire, become the beneficial owner of or obtain any rights in
respect of, in each case by purchase or otherwise, any securities entitled to
vote generally in the election of directors of Holdings, or any direct or
indirect rights or options to acquire any such securities or any securities
convertible into or exercisable for such securities, in excess of 15% of
Holdings' outstanding voting securities, (c) participate in any proxy
solicitation with respect to such voting securities, (d) participate in or
encourage the formation of any partnership, syndicate, voting trust or other
group which owns or seeks or offers to acquire beneficial ownership of any such
voting securities or which seeks control of Holdings or (e) otherwise act, alone
or in concert with others, to seek or offer to control or influence, in any
manner (except pursuant to the Holdings Management Services Agreement or through
its representatives on the Holdings Board), the management, Board of Directors
or policies of Holdings.
Holdings will indemnify and hold harmless Yucaipa and each of its
affiliates, members, officers, agents and the employees from and against all
losses, claims, damages, liabilities or expenses (collectively, "losses")
resulting from any claim, lawsuit or other proceeding by any person to which any
of them may be subject which is related to or arising out of the performance of
the services to be provided under the Holdings Management Services Agreement or
the Merger Agreement, including all reasonable out-of-pocket expenses, unless
such losses result from (i) Yucaipa's or such party's gross negligence or
willful misconduct or any intentional, material breach of the Holdings
Management Services Agreement, or (ii) any settlement effected without the
written consent of Holdings, which consent will not be unreasonably withheld.
REFINANCING ARRANGEMENTS
In connection with the Merger, Holdings intends to refinance and
consolidate a majority of the existing indebtedness of the combined company. The
refinancing is expected to be completed on or about the Effective Time, but is
not, however, a condition to the obligations of Fred Meyer and Smith's to effect
the Merger. Fred Meyer has entered into a commitment letter (the "Financing
Commitment") with The Chase Manhattan Bank, Bankers Trust Company and certain of
their affiliates (the "Banks"), which are presently anticipated to provide the
sources of funds required by Holdings to complete the refinancing. Pursuant to
the Financing Commitment, the Banks have agreed to provide senior credit
facilities to Holdings in an aggregate amount of up to $2.03 billion (the
"Holdings Credit Facility") and a lease financing program for Fred Meyer of up
to $270 million (the "Holdings Lease Facility").
The Holdings Credit Facility is expected to consist of (i) a 364-day $500
million revolving facility, with an option to convert such facility to a one
year term at the end of the revolving period, (ii) a five-year
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$1.03 billion revolving credit facility (the facilities referred to in clauses
(i) and (ii) are referred to as the "Revolving Credit Facilities") and (iii) a
$500 million five-year term facility (the "Term Facility"). The obligations of
Holdings under the Holdings Credit Facility will be guaranteed by its material
subsidiaries (including Fred Meyer and Smith's). In addition to providing funds
for the refinancing, the Revolving Credit Facilities would be available to
satisfy ongoing financing requirements of Holdings. The Term Facility would be
subject to mandatory prepayment in the event of a public debt offering by
Holdings. The Holdings Lease Facility will be available to fund or refinance
existing leases of Fred Meyer and new construction of the following: (i) stores
and a distribution center currently subject to operating leases to Fred Meyer
(approximately $220 million) and (ii) $50 million of new stores or other
facilities (including the construction or improvement thereof).
Included in the indebtedness of Smith's which Holdings intends to refinance
are $575 million principal amount of the Smith's Notes which were issued in
connection with the Recapitalization. The Smith's Notes are not presently
callable pursuant to their terms. Accordingly, Smith's will (i) offer to
purchase all of the Smith's Notes and (ii) solicit consents from holders of the
Smith's Notes to certain amendments to the indenture governing the Smith's Notes
to delete or modify restrictive covenants in the Indenture in order to provide
Smith's sufficient operating flexibility to operate as a subsidiary of Holdings
following the Merger (collectively, the "Smith's Tender Offer"). Consummation of
the Smith's Tender Offer is subject to the tender of, and receipt of consents
from, the holders of a majority of the outstanding aggregate principal amount of
Smith's Notes, the consummation of the Merger and the receipt of financing and
certain other conditions. The Smith's Tender Offer is expected to close shortly
after the consummation of the Merger.
The following table illustrates the pro forma sources and uses of funds in
the Merger and the refinancing, assuming the Merger was consummated as of July
18, 1997. Although Holdings believes the pro forma amounts estimated below are
reasonable under the circumstances, actual sources and uses may differ from
those set forth below:
<TABLE>
<CAPTION>
SOURCES AND USES
(Dollars in Millions)
Sources Uses
- ------- ----
<S> <C> <C> <C>
Holdings Credit Facility...........$ 1,815 Smith's Credit Facility..............$ 587
Holdings Lease Facility............ 220 Smith's Notes(a)..................... 575
Smith's Series I Preferred Stock..... 3
Fred Meyer Commercial Paper.......... 286
Fred Meyer Term Notes................ 90
Fred Meyer Senior Notes.............. 108
Fred Meyer Lease Facility............ 220
Debt Repayment Premiums.............. 114
Fees and expenses.................... 52
------- -------
Total Sources....... $ 2,035 Total Uses...........................$ 2,035
======= =======
- --------------
(a) Assumes that all outstanding Smith's Notes are tendered and accepted for
purchase in connection with the Smith's Tender Offer. If all of the
outstanding Smith's Notes are not tendered and accepted for purchase, it is
anticipated that Holdings would reduce other borrowings.
</TABLE>
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
of Holdings give effect to the Merger as if such transaction occurred as of
February 3, 1996 with respect to the unaudited pro forma condensed combined
statement of operations data for the 52 weeks ended February 1, 1997 and for the
16 weeks ended May 24, 1997, and as of May 24, 1997 with respect to the
unaudited pro forma condensed combined balance sheet data. Such pro forma
information: (i) includes the historical results of operations data of Fred
Meyer for the 52 weeks ended February 1, 1997 and for the 16 weeks ended May 24,
1997 and the historical balance sheet data of Fred Meyer as of May 24, 1997, and
(ii) includes the historical results of operations data of Smith's for the 52
weeks ended December 28, 1996, as adjusted (x) to eliminate the effect of
Smith's California Disposition (as defined below), (y) to reflect the results of
operations of Smitty's from January 15, 1996 through May 22, 1996, and (z) to
eliminate certain non-recurring expenses incurred in connection with the
Smitty's Merger, and includes the historical results of operations data for
Smith's for the 14 weeks ended April 5, 1997 and the historical balance sheet
data of Smith's as of April 5, 1997. See "The Companies -- Smith's" for a
discussion of the Smitty's Merger.
In December 1995, Smith's decided to sell, lease or close all 34 stores and
the distribution center comprising its California region. During 1996, Smith's
sold or leased 23 of its California stores and related equipment and six
non-operating properties to various supermarket companies and others and closed
the remaining eleven California stores, and also adopted a strategy to
accelerate the disposition of its remaining real estate in California (the
"California Disposition") including non-operating stores and excess land.
Accordingly, Smith's recorded restructuring charges of $201.6 million relating
to the difference between the anticipated cash proceeds from the accelerated
dispositions and the existing book values and other charges resulting from its
decision to close the California region. Since December 28, 1996, Smith's has
sold or leased or entered into agreements to sell or lease three stores and
related equipment and seven non-operating properties. The adjustments to Smith's
historical results of operations for the California Disposition differ from a
complete statement of operations because certain corporate allocations such as
benefits of corporate buying, distribution and manufacturing operations and
corporate overhead are included, but certain other corporate services and
interest expense are not included.
The Merger will be accounted for as a purchase of Smith's by Fred Meyer.
Under purchase accounting, the purchase price will be allocated to assets
acquired and liabilities assumed based on their estimated fair values. The
adjustments included in the unaudited pro forma condensed combined financial
statements represent a preliminary determination of these adjustments based upon
available information. There is no assurance that the actual adjustments will
not differ significantly from the pro forma adjustments reflected in the pro
forma financial information. The unaudited pro forma condensed combined
financial statements are not necessarily indicative of either future results of
operations or results that might have been achieved if the Merger had been
consummated as of the indicated dates. The unaudited pro forma condensed
combined financial statements should be read in conjunction with the historical
consolidated financial statements of Fred Meyer and Smith's, together with the
related notes thereto, which are incorporated by reference in this Joint Proxy
Statement/Prospectus.
The unaudited pro forma condensed combined statement of operations included
herein does not reflect (i) approximately $40 million in annualized operating
savings which management believes are achievable by the end of 1998, and (ii) an
extraordinary charge of approximately $80 million (net of taxes) on
extinguishment of debt as a result of refinancing certain debt.
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<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the 52 Weeks Ended February 1, 1997
(In thousands, except per share data)
Smith's Smitty's Fred Meyer
52 Weeks 18 Weeks Adjustments 52 Weeks
Ended Ended for Ended
December 28, May 22, California Smith's February 1, Pro
1996 1996 Disposition and 1996 1997 Adjustments Forma
(Historical) (Historical) Smitty's Merger Pro Forma (Historical) for Merger Combined
---------- ---------- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...............$2,889,988 $ 200,770 $ (73,074)(a) $3,017,684 $3,724,839 $6,742,523
Cost of goods
sold.................. 2,237,789 144,392 (65,910)(a) 2,316,271 2,612,325 4,928,596
---------- ---------- ------------ ---------- ---------- ----------
Gross margin....... 652,199 56,378 (7,164) 701,413 1,112,514 1,813,927
Operating and
administrative
expenses.............. 449,247 45,684 (34,405)(a)
(28,143)(b)
258 (c) 432,641 861,800 $ (500)(i) 1,293,941
Depreciation and
amortization
expense............... 93,951 5,309 (2,250)(a)
191 (d)
1,105 (e) 98,306 116,854 20,222 (j)
1,650 (k) 237,032
Restructuring charges... 201,622 (201,622)(a)
---------- ---------- ------------ ---------- ---------- ---------- ----------
Income (loss) from
operations....... (92,621) 5,385 257,702 170,466 133,860 (21,372) 282,954
Interest expense........ 104,602 6,046 28,384 (f) 139,032 39,432 (33,667)(l) 144,797
Amortization of deferred
financing costs....... 5,406 344 3,466 (g) 9,216 (7,552)(m) 1,664
---------- ---------- ------------ ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
extraordinary charge.. (202,629) (1,005) 225,852 22,218 94,428 19,847 136,493
Provision (benefit)
for income taxes...... (80,245) 90,111 (h) 9,866 35,883 16,691 (n) 62,440
---------- ---------- ------------ ---------- ---------- ---------- ----------
Income (loss) before
extraordinary charge..$ (122,384) $ (1,005) $ 135,741 $ 12,352 $ 58,545 $ 3,156 $ 74,053
========== ========== ============ ========== ========== ========== ==========
Income (loss) per
share of common
stock.................$ (6.28) $ (1.00) $ 0.76 $ 2.09 $ 1.64
========== ========== ========== ========== ==========
Weighted average
common shares
outstanding........... 19,493 1,009 16,149 27,962 45,110 (o)
</TABLE>
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the 52 Weeks Ended February 1, 1997
(a) Reflects the elimination of the 1996 operating results and restructuring
charges for Smith's closed California region recorded in connection with
the California Disposition. See the introduction to "Unaudited Pro Forma
Condensed Consolidated Financial Statements" for an explanation of the
California Disposition. During the closing process, net sales were lower
than normal operating store levels because of significant price reductions
to liquidate the inventory and because of the timing of store closures. The
lower net sales and nonrecurring expenses (see note b) cause the ratio of
operating and administrative expense to net sales to be higher than normal.
(b) Reflects the elimination of nonrecurring expenses totaling $28.1 million
recorded in operating and administrative expenses by Smith's as a result of
the Smitty's Merger. See "The Companies -- Smith's" for a discussion of the
Smitty's Merger. Such expenses included charges for compensation recognized
on the purchase of stock options, recording of deferred compensation,
severance paid to the former Chief Executive Officer and other
miscellaneous expenses.
(c) Represents annual fees payable to Yucaipa pursuant to the Smith's
Management Services Agreement ($1.0 million) and the elimination of the
historical Yucaipa management fees paid by Smith's ($.6 million) and paid
by Smitty's ($.1 million).
(d) Represents the adjustment to depreciation expense associated with the
increase to Smitty's property and equipment to estimated fair market value
($3.6 million).
(e) Represents the elimination of the historical amortization of goodwill
recorded by Smith's ($1.7 million) and Smitty's ($.3 million) and the
amortization of goodwill resulting from the Smitty's Merger ($3.1 million).
(f) Represents the adjustment to interest expense reflecting interest on debt
outstanding during the year resulting from the Smitty's Merger ($139.0
million) and the elimination of the historical interest expense recorded by
Smith's ($104.6 million) and Smitty's ($6.0 million).
(g) Represents the amortization of deferred financing costs resulting from the
Smitty's Merger ($9.2 million) and the elimination of the historical
amortization of deferred financing costs recorded by Smith's ($5.4 million)
and Smitty's ($.3 million).
(h) The adjustment to the provision for income taxes is based upon a tax rate
of 39% applied to Smith's pro forma operating income before income taxes
adjusted for amortization of goodwill.
(i) Represents annual fees payable to Yucaipa pursuant to the Holdings
Management Services Agreement ($.5 million) and the elimination of the
Smith's 1996 pro forma management fees ($1.0 million).
(j) Represents the elimination of Smith's 1996 pro forma amortization of
goodwill ($3.1 million), and the amortization of goodwill resulting from
the Merger ($23.3 million). Amortization of goodwill has been allocated on
a straight-line basis over a period of 40 years.
(k) Represents the adjustment to depreciation expense associated with the
increase to Smith's property and equipment to estimated fair market value
($55.0 million).
78
<PAGE>
(l) The following table presents a reconciliation of pro forma interest expense
(in millions):
<TABLE>
<CAPTION>
<S> <C>
Interest on Holdings Credit Facility at debt levels outstanding at
Fred Meyer and Smith's during the year..............................$ 139.8*
Less interest on:
Refinanced Fred Meyer historical indebtedness:
Commercial paper.................................................. 18.9
Term Notes........................................................ 6.2
Senior Notes...................................................... 8.3
Bank Fees......................................................... 3.1
Refinanced Smith's pro forma indebtedness:
Credit Facility................................................... 71.3
Smith's Notes..................................................... 65.7
--------
Total interest on refinanced indebtedness............................. 173.5
--------
Pro forma adjustment..................................................$ 33.7
========
* The estimated annual interest expense on Holdings Credit Facility based on
indebtedness outstanding at the end of the most recent fiscal years for
Fred Meyer and Smith's and existing indebtedness not refinanced would be
approximately $144.7 million. See "Refinancing Arrangements."
</TABLE>
(m) Represents the amortization of deferred financing costs resulting from the
Merger ($1.5 million) and the elimination of Smith's 1996 pro forma
amortization of deferred financing costs ($9.1 million) on refinanced debt.
See "Refinancing Arrangements."
(n) The pro forma adjustment to the provision for income taxes is based upon a
tax rate of 39% applied to the pro forma operating income before income
taxes adjusted for amortization of goodwill.
(o) Represents the weighted average number of shares of Holdings Common Stock
outstanding after giving effect to the issuance of 16.6 million shares to
be issued in connection with the Merger and the dilutive effect of common
stock equivalents in the form of stock options.
The following table presents a reconciliation of pro forma EBITDA (as
defined) (in millions):
EBITDA (as defined):
Fred Meyer EBITDA (as defined).................$ 249.5
Pro forma Smith's EBITDA (as defined).......... 271.0
Pro forma adjustments.......................... .5
--------
Pro forma EBITDA (as defined)..................$ 521.0
========
EBITDA (as defined) represents income before income taxes, plus interest
expense, depreciation and amortization, and a LIFO provision. EBITDA and
EBITDA margin are viewed by management as important alternative measures of
cash flow because they are commonly used by sell-side analysts and
institutional investors in analyzing the financial performance of retailers
in the supermarket sector. With certain variations in definition, EBITDA is
an indicator of compliance with various covenants in Fred Meyer's and
Smith's debt agreements. However, EBITDA should not be construed as an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) and should not be construed as an
indication of operating performance or as a measure of liquidity. EBITDA as
presented may not be comparable to similarly entitled measures reported by
other companies.
Pro forma EBITDA (as defined) does not give effect to net annual cost
savings (as compared to such costs for the pro forma combined fiscal year
ended February 1, 1997) which management believes are achievable by the end
of 1998. The sum of the components of the estimated annual cost savings
exceeds $40 million; however, management's estimate of $40 million in net
annual cost savings gives effect to an offsetting adjustment to reflect its
expectation that a portion of the savings will be reinvested in Holdings
operations. The estimates of potential cost savings resulting from the
Merger contained in this Joint Proxy Statement/Prospectus are forward
looking statements that involve risks and inherent uncertainties that could
cause actual net annual cost savings to differ materially from those
projected. The sum of Holdings pro forma EBITDA (as defined) ($521.0
million) and the full amount of the estimated net annual cost savings to be
realizable by the end of 1998 ($40 million) is $561.0 million. See
"Cautionary Statement Concerning Forward-Looking Statements."
79
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the 16 Weeks Ended May 24, 1997
(In thousands, except per share data)
Smith's Fred Meyer
14 Weeks Ended 16 Weeks Ended
April 5, 1997 May 24, 1997 Adjustments Pro Forma
(Historical) (Historical) for Merger Combined
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales..................................... $831,821 $1,193,936 $ 2,025,757
Cost of goods sold............................ 645,995 836,277 1,482,272
-------- ---------- -----------
Gross margin............................. 185,826 357,659 543,485
Operating and administrative expenses......... 116,028 284,494 $ (110)(a) 400,412
Depreciation and amortization expense......... 22,909 38,172 6,413 (b)
508 (c) 68,002
-------- ---------- --------- -----------
Income from operations................... 46,889 34,993 (6,811) 75,071
Interest expense.............................. 32,723 13,607 (4,068)(d) 42,262
Amortization of deferred financing costs...... 2,300 (1,797)(e) 503
-------- ---------- --------- -----------
Income before income taxes and
extraordinary charge........................ 11,866 21,386 (946) 32,306
Provision for income taxes.................... 5,000 8,127 2,306 (f) 15,433
-------- --------- -----------
Income before extraordinary charge............ $ 6,866 $ 13,259 $ (3,252) $ 16,873
======== ========== ========= ===========
Income before extraordinary charge
per share of common stock................... $ 0.42 $ 0.48 $ 0.38
======== ========== ===========
Weighted average common shares
outstanding................................. 16,195 27,817 44,965 (g)
======== ========== ===========
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations.
</TABLE>
80
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the 16 Weeks Ended May 24, 1997
(a) Represents annual fees payable to Yucaipa pursuant to the Holdings
Management Services Agreement ($.2 million) and the elimination of the
historical Yucaipa management fees ($.3 million) paid by Smith's.
(b) Represents the elimination of Smith's historical amortization of goodwill
($.8 million), and the amortization of goodwill resulting from the Merger
($7.2 million). Amortization of goodwill has been allocated on a
straight-line basis over a period of 40 years.
(c) Represents the adjustment to depreciation expense associated with the
increase to Smith's property and equipment to estimated fair market value
($55.0 million).
(d) The following table presents a reconciliation of pro forma interest expense
(in millions):
<TABLE>
<CAPTION>
<S> <C>
Interest on Holdings Credit Facility at debt levels outstanding at
Fred Meyer and Smith's during the year..............................$ 40.1*
Less historical interest on:
Refinanced Fred Meyer indebtedness:
Commercial paper............................................... 6.4
Term Notes..................................................... 1.8
Senior Notes................................................... 2.6
Bank Fees...................................................... 1.7
Refinanced Smith's indebtedness:
Credit Facility................................................ 15.5
Smith's Notes.................................................. 16.2
-------
Total interest on refinanced indebtedness........................ 44.2
-------
Pro forma adjustment.............................................$ 4.1
=======
</TABLE>
* The estimated annual interest expense on Holdings Credit Facility based on
indebtedness outstanding at the end of the most recent fiscal quarters for
Fred Meyer and Smith's and existing indebtedness not refinanced would be
approximately $140.5 million. See "Refinancing Arrangements."
(e) Represents the amortization of deferred financing costs resulting from the
Merger ($.5 million) and the elimination of Smith's historical amortization
of deferred financing costs ($2.3 million) on refinanced debt. See
"Refinancing Arrangements."
(f) The pro forma adjustment to the provision for income taxes is based upon a
tax rate of 39% applied to the pro forma operating income before income
taxes adjusted for amortization of goodwill.
(g) Represents the weighted average number of shares of Holdings Common Stock
outstanding after giving effect to the issuance of 16.6 million shares
issued in connection with the Merger and the dilutive effect of common
stock equivalents in the form of stock options.
The following table presents a reconciliation of pro forma EBITDA (as
defined) (in millions):
EBITDA (as defined):
Fred Meyer EBITDA (as defined)...............$ 75.0
Pro forma Smith's EBITDA (as defined)........ 71.4
Pro forma adjustments........................ .1
------
Pro forma EBITDA (as defined)................$146.5
======
Pro forma EBITDA (as defined) does not give effect to net annual cost
savings which management believes are achievable by the end of 1998. See Notes
to Unaudited Pro Forma Condensed Combined Statement of Operations for the 52
Weeks Ended February 1, 1997.
81
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
May 24, 1997
(In thousands)
ASSETS
Smith's Fred Meyer
April 5, 1997 May 24, 1997 Pro Forma Pro Forma
(Historical) (Historical) Adjustments Combined
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................... $ 3,611 $ 64,152 $ (102,000)(c)
1,862,203 (d)
(1,704,384)(e)
(55,819)(j) $ 67,763
Receivables..................................... 21,374 25,265 46,639
Inventories..................................... 374,585 624,356 49,144 (a) 1,048,085
Prepaid expenses and other...................... 23,810 32,911 56,721
Deferred tax assets............................. 59,700 17,226 (8,693)(b)
51,241 (c) 119,474
Assets held for sale............................ 28,277 28,277
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS..................... 511,357 763,910 91,692 1,366,959
PROPERTY AND EQUIPMENT............................ 959,821 997,995 55,000 (k) 2,012,816
OTHER ASSETS:
Goodwill -- net................................. 120,727 4,505 (49,144)(a)
(55,000)(k)
7,466 (b)
40,000 (f)
698,952 (g)
141,175 (h)
45,000 (j) 953,681 (l)
Deferred financing costs -- net................. 32,972 7,500 (j)
(29,387)(c) 11,085
Other........................................... 18,263 22,179 40,442
----------- ----------- ----------- -----------
TOTAL ASSETS...................................... $ 1,643,140 $ 1,788,589 $ 953,254 $ 4,384,983
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and outstanding checks......... $ 292,467 $ 430,632 $ 723,099
Current portion of long-term debt............... 32,843 1,038 $ (30,750)(e) 3,131
Income taxes payable............................ 7,077 (7,077)(b)
Accrued compensation............................ 76,814 61,787 138,601
Other accrued expenses.......................... 104,004 41,674 145,678
Accrued restructuring costs..................... 17,402 17,402
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES................ 523,530 542,208 (37,827) 1,027,911
LONG-TERM DEBT, less current maturities........... 1,176,224 558,089 1,862,203 (d)
(1,673,634)(e) 1,922,882
OTHER LONG-TERM LIABILITIES....................... 81,242 95,460 40,000 (f)
5,850 (b) 222,552
REDEEMABLE PREFERRED STOCK........................ 3,319 (3,319)(j)
COMMON STOCKHOLDERS' EQUITY:
Common Stock.................................... 158 291 166 (g)
(158)(h)
(22)(i) 435
Additional paid-in capital...................... 198,801 215,722 698,786 (g)
(198,801)(h)
(70,540)(i) 843,968
Retained earnings (deficit)..................... (340,134) 447,381 (80,146)(c)
340,134 (h) 367,235
Treasury stock and other........................ (70,562) 70,562 (i)
----------- ----------- ----------- -----------
TOTAL COMMON STOCKHOLDERS' EQUITY................. (141,175) 592,832 759,981 1,211,638
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 1,643,140 $ 1,788,589 $ 953,254 $ 4,384,983
=========== =========== =========== ===========
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
</TABLE>
82
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
MAY 24, 1997
(a) Represents the write-up of Smith's inventory to reflect current estimated
selling prices less disposal costs and a reasonable profit margin.
(b) Represents the adjustments to net deferred tax assets and net deferred tax
liabilities using an estimated effective tax rate of 39% resulting from
temporary differences caused by certain pro forma adjustments.
(c) Represents the write-off of historical deferred financing costs ($29.4
million) of Smith's and the payment of estimated premiums ($102.0 million)
related to the repayment of debt which will be charged to income, net of
tax, as an extraordinary charge ($80.1 million) after the Merger. See
"Refinancing Arrangements."
(d) Reflects the proceeds from the Holdings Credit Facility used to repay and
cancel certain outstanding long-term indebtedness of Smith's and Fred Meyer
and pay related costs and fees of the Merger. See "Refinancing
Arrangements."
(e) Reflects the prepayment and cancellation of certain outstanding long-term
indebtedness of Smith's and Fred Meyer as follows:
Smith's Credit Facility....... $ 612.0
Smith's Notes................. 575.0
Fred Meyer Commercial Paper... 319.9
Fred Meyer Term Notes......... 90.0
Fred Meyer Senior Notes....... 107.5
---------
$ 1,704.4
=========
(f) Represents the increase in restructuring reserves related to the additional
costs expected to be incurred in connection with the California Disposition
($14.0 million) and the disposition of certain assets acquired from
Smitty's ($14.0 million) and miscellaneous accruals under purchase
accounting ($12.0 million). See "Refinancing Arrangements."
(g) Represents the issuance of 16.6 million shares of Holdings Common Stock at
a determined market value of $42 1/8 per share as consideration in the
Merger.
(h) Reflects the elimination of Smith's historical equity.
(i) Reflects the retirement of Fred Meyer's treasury stock.
(j) Reflects the payment of merger costs and fees ($52.5 million) and the
redemption of Smith's Series I Preferred Stock ($3.3 million).
(k) Represents the write-up of Smith's property and equipment to estimated fair
market value.
(l) The purchase price and preliminary calculation of the excess of costs over
the fair value of net assets acquired is as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Purchase Price
16.6 million shares issued at a market value of $42 1/8 per share....$ 699.0
Fees and expenses.................................................... 45.0
---------
Total purchase price................................................. 744.0
Fair value of assets acquired........................................ 1,624.9
Fair value of liabilities assumed.................................... 1,830.1
---------
(205.2)
---------
Goodwill resulting from the Merger................................... 949.2
Fred Meyer historical goodwill....................................... 4.5
---------
Total pro forma goodwill.............................................$ 953.7
=========
</TABLE>
83
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
The Fred Meyer Common Stock and the Smith's Class B Common Stock are listed
on the NYSE under the ticker symbols FMY and SFD, respectively.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sale prices of the Fred Meyer Common Stock and the Smith's
Class B Common Stock as reported on the NYSE Composite Transactions Reporting
System, in each case based on published financial sources.
<TABLE>
<CAPTION>
Fred Meyer Smith's Class B
Common Stock Common Stock
------------------- -------------------
Market Price Market Price
------------------- -------------------
High Low High Low
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1994
First Quarter.......................... $ 41 1/4 $ 34 1/2 $ 24 1/8 $ 20 1/8
Second Quarter......................... 42 1/2 35 22 18 1/8
Third Quarter.......................... 38 1/2 31 1/4 24 3/4 18 1/2
Fourth Quarter......................... 35 3/4 29 1/4 26 3/4 22 5/8
1995
First Quarter.......................... $ 33 3/8 $ 29 1/8 $ 27 5/8 $ 23
Second Quarter......................... 31 3/4 23 1/2 24 19 1/4
Third Quarter.......................... 28 1/2 23 1/2 20 1/4 18 1/8
Fourth Quarter......................... 24 3/4 17 3/8 27 3/4 19 3/8
1996
First Quarter.......................... $ 29 7/8 $ 20 1/2 $ 31 $ 23 1/4
Second Quarter......................... 32 27 28 3/4 21 1/2
Third Quarter.......................... 33 3/4 26 1/8 29 1/2 23 3/4
Fourth Quarter......................... 37 5/8 29 7/8 31 25 5/8
1997
First Quarter.......................... $ 42 $ 32 3/8 $ 35 3/8 $ 23 3/4
Second Quarter......................... 51 7/8 38 1/8 53 5/8 32 5/8
Third Quarter (through August 5, 1997). 57 15/16 51 15/16 60 1/8 53 1/2
</TABLE>
On May 9, 1997, the last trading day preceding the public announcement of
the proposed Merger, the closing price on the NYSE Composite Transaction Tape
was $41 7/8 per share of Fred Meyer Common Stock and $40 per share of Smith's
Class B Common Stock. On August 5, 1997, the most recent practicable date prior
to the date of this Joint Proxy Statement/Prospectus, the closing price on the
NYSE Composite Transaction Tape was $56 per share of Fred Meyer Common Stock and
$58 5/16 per share of Smith's Class B Common Stock. Stockholders are urged to
obtain current market quotations prior to making any decision with respect to
the Merger.
84
<PAGE>
The table below sets forth, for the periods indicated, certain per share
data for Fred Meyer Common Stock and Smith's Common Stock.
<TABLE>
<CAPTION>
52 Weeks Ended 16 Weeks Ended
February 1, 1997 May 24, 1997
---------------- --------------
<S> <C> <C>
Per share data for
Fred Meyer Common Stock:(1)
Income (loss) before extraordinary charge:
Historical..................................... $ 2.09 $ 0.48
Pro forma combined(2).......................... 1.64 0.38
Book value:
Historical..................................... 21.65 22.25
Pro forma combined(3).......................... 27.15 28.02
Dividends:
Historical..................................... -- --
Pro forma combined............................. -- --
52 Weeks Ended 14 Weeks Ended
December 28, 1996 April 5, 1997
----------------- --------------
Per share data for
Smith's Common Stock:(1)
Income (loss) before extraordinary charge:
Historical..................................... $ (6.28) $ 0.42
Pro forma equivalent combined(4)............... 1.72 0.40
Book value:
Historical (deficit)........................... (7.73) (8.93)
Pro forma equivalent combined(4)............... 28.51 29.42
Dividends:
Historical..................................... 0.15 --
Pro forma equivalent combined.................. 0.16 --
- --------------
(1) Fred Meyer has never declared or paid a dividend, and does not expect to do
so in the foreseeable future. In 1994, 1995 and 1996, Smith's declared cash
dividends aggregating $0.52, $0.60 and $0.15 per share of Smith's Common
Stock, respectively, all of which were paid. Smith's has not declared or
paid a dividend since the first quarter of 1996, and does not expect to do
so in the foreseeable future.
(2) The pro forma combined per share data combines the financial information of
Fred Meyer for each of the 52 weeks ended February 1, 1997 and the 16 weeks
ended May 24, 1997 with the financial information of Smith's for each of
the 52 weeks ended December 28, 1996 and the 14 weeks ended April 5, 1997,
respectively. See "Unaudited Pro Forma Condensed Combined Financial
Statements."
(3) Amount is calculated by dividing total pro forma common stockholders'
equity by the sum of total outstanding shares of Fred Meyer Common Stock
plus new shares of Holdings Common Stock to be issued in the Merger based
on the number of shares of Smith's Common Stock outstanding at period end.
(4) Amounts are calculated by multiplying Fred Meyer's pro forma combined
amounts by the Smith's Exchange Ratio of 1.05.
</TABLE>
Upon consummation of the Merger, Holdings expects to use all available cash
flow for reinvestment in its businesses and for the reduction of debt, and does
not expect to declare or pay dividends in the foreseeable future.
85
<PAGE>
MANAGEMENT OF HOLDINGS FOLLOWING THE MERGER
The Merger Agreement provides that the Fred Meyer Board and the Smith's
Board will take such action as may be necessary to cause the Holdings Board at
the completion of the Merger to be constituted of (i) four of Smith's current
directors (including Ronald W. Burkle and three others selected by Smith's
Board) and (ii) seven individuals selected by the Fred Meyer Board, one of which
will be Robert G. Miller. The members of the Holdings Board will be divided
among three classes, with each class to be constituted substantially
proportionately of the directors selected by Fred Meyer and the directors
selected by Smith's. Each director will remain in office until his or her
successor is duly elected or appointed and qualified or until such director's
earlier death, resignation or removal in accordance with the Holdings
Certificate and the Holdings Bylaws.
Following the Merger, the directors of Holdings are expected to be as
follows:
Class A -- Term Expires at 1998 Annual Meeting
Vivian A. Bull
Steven R. Rogel
John G. King
Class B -- Term Expires at 1999 Annual Meeting
James J. Curran
Bruce Karatz
Fred L. Smith
Jeffrey P. Smith
Class C -- Term Expires at 2000 Annual Meeting
Ronald W. Burkle
A. M. Gleason
Roger Meier
Robert G. Miller
Each non-employee director of Holdings (other than Mr. Burkle) will receive
a $40,000 annual retainer plus $1,000 for each board or committee meeting
attended. Subject to approval of the Directors' Plan by the stockholders of Fred
Meyer and Smith's, the directors' fees may be deferred in cash or Holdings
Common Stock pursuant to the terms of the Directors' Plan.
The Merger Agreement also provides that, as of the Effective Time, Mr.
Burkle will be the Chairman of the Holdings Board and that Mr. Miller will be
the President and Chief Executive Officer of Holdings. In addition, on the
Closing Date, Holdings will enter into the Holdings Management Services
Agreement, pursuant to which Yucaipa will agree to provide certain management
services to Holdings. See "Other Agreements -- Holdings Management Services
Agreement."
Dr. Bull, age 62, has been a director of Fred Meyer since November 1996 and
has been President of Linfield College since August 1992. Prior to that time she
was in the Department of Economics at Drew University from 1960 to 1992. Dr.
Bull is a former director at Chemical Bank in New Jersey.
Mr. Burkle, age 44, has been a director and the Chief Executive Officer of
Smith's since May 1996. Mr. Burkle is the managing partner of The Yucaipa
Companies, a private investment group specializing in the acquisition and
management of supermarket chains, which he founded in 1986. Mr. Burkle also
serves as Chairman of the Board for Food 4 Less Holdings, Inc., whose principal
operating subsidiary is Ralphs Grocery Company, the largest food retailer in
Southern California, and for Dominick's Supermarkets, Inc., a leading Chicago
area supermarket chain. Over the course of his career, Mr. Burkle has held
management positions in a wide variety of operational areas within the
supermarket industry. Mr. Burkle is also a director of Kaufman and Broad Home
Corporation.
Mr. Curran, age 57, has been a director of Fred Meyer since June 1996 and
retired from First Interstate Bancorp in April 1996. At the time of his
retirement he was a member of the Executive Operating Committee
86
<PAGE>
of First Interstate Bancorp and Chairman and Chief Executive Officer of First
Interstate Bank, Northwest Region. Mr. Curran is a director of Coeur d'Alene
Mines Corp.
Mr. Gleason, age 66, has been a director of Fred Meyer since June 1992 and
retired from PacifiCorp, a diversified public utility, on May 1, 1995. At the
time of his retirement he was Vice Chairman of PacifiCorp, having previously
served as its President and Chief Executive Officer. Prior to that time he
served as Chairman and Chief Executive Officer of Pacific Telecom, Inc., a
PacifiCorp subsidiary. Mr. Gleason is a director of Tektronix, Inc. and Comdial
Corporation and is President of the Port of Portland.
Mr. Karatz, age 51, has been a director of Smith's since May 1996. Mr.
Karatz has been the Chairman of the Board of Kaufman and Broad Home Corporation
since July 1993 and its President, Chief Executive Officer and a director since
1986. Mr. Karatz is also a director of Honeywell, Inc., National Golf
Properties, Inc. and a Trustee of the National Park Foundation and the RAND
Corporation.
Mr. King, age 58, is not currently a director of Fred Meyer or Smith's. Mr.
King has been President and Chief Executive Officer of Legacy Health System, a
health care provider, since 1991 and has over 30 years experience in hospital
and health care administration.
Mr. Meier, age 71, has been a director of Fred Meyer since 1985 and has
been President and Chief Executive Officer of AMCO, Inc., a privately owned
investment enterprise, for more than twenty years. During that time Mr. Meier
was Chairman of the State of Oregon Investment Council, a member of the Board of
Directors of Red Lion Inns, Ltd. and a Director of Key Bank of Oregon. He is
trustee of Acorn Fund, Acorn International and Acorn USA. He is also an Advisory
Board Member of Key Bank of Oregon and Chairman of the Investment Committee for
Legacy Health Systems.
Mr. Miller, age 52, became Chairman of the Board and Chief Executive
Officer of Fred Meyer in August 1991. Prior to that time he was employed by
Albertson's Inc., where his most recent positions were Executive Vice President
of Retail Operations from 1989 to 1991 and Senior Vice President and Regional
Manager from 1985 to 1989. Mr. Miller is a director of PacifiCorp, Pathmark
Stores, Inc. and Supermarkets General Holdings Corp.
Mr. Rogel, age 54, has been a director of Fred Meyer since November 1996
and has been Chief Executive Officer and a director of Willamette Industries,
Inc. since October 1995 and President since 1991. He served as Chief Operating
Officer of Willamette Industries, Inc. until October 1995 and, prior to that
time, as an executive and group vice president for more than five years.
Mr. Fred Smith, age 50, has been a director of Smith's since 1968. From
1988 to 1996, he was President of Fred Smith's Honda Automobiles of Palm
Springs, an automobile dealership, and President of Fred Smith's Jaguar/Rolls
Royce of Rancho Mirage, an automobile dealership.
Mr. Jeffrey Smith, age 47, has been a director of Smith's since 1971. He
has been Chairman of the Board of Smith's since 1988 and Chief Executive Officer
from 1988 until May 1996. He served as Chief Operating Officer and President of
Smith's from 1984 to 1988.
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<PAGE>
SECURITY OWNERSHIP OF HOLDINGS
The following table sets forth the anticipated beneficial ownership of
Holdings Common Stock, after giving effect to the Merger, as to each person
expected to be (i) a beneficial owner of more than 5% of the outstanding shares
of Holdings Common Stock, (ii) a Holdings director, (iii) the Chief Executive
Officer of Holdings, (iv) among the four most highly compensated executive
officers of Holdings other than the Chief Executive Officer, calculated based
upon expected base compensation of executive officers of Holdings after the
Merger, and (v) all persons expected to be Holdings directors and executive
officers, as a group.
<TABLE>
<CAPTION>
Number of Approximate
Name Shares(1) Percent
---- ------------ -----------
<S> <C> <C>
Metropolitan Life Insurance Company............. 3,645,667 (2) 8.4
Robert G. Miller............................... 473,836 (3)(4) 1.1
Sammy K. Duncan................................ 79,463 (3) *
Mary F. Sammons................................. 93,310 (3)(5) *
Kenneth Thrasher................................ 132,392 (3)(6) *
David Jessick................................... 52,500 (3) *
Vivian A. Bull.................................. 2,697 *
Ronald W. Burkle................................ 2,364,403 (7) 5.4
James J. Curran................................. 2,998 (8) *
A. M. Gleason................................... 26,679 (9) *
Bruce Karatz.................................... -- --
John G. King.................................... -- --
Roger Meier..................................... 22,279 (10) *
Steven R. Rogel................................. 2,697 *
Fred L. Smith................................... 975,268 (11) 3.5
Jeffrey P. Smith................................ 1,510,369 (12) 2.2
16 Executive Officers and Directors as a group.. 5,885,783 (13) 13.6
- --------------
* Less than 1%.
(1) Shares held directly with sole voting and sole investment power unless
otherwise indicated.
(2) Based upon information provided by the shareholder in a Schedule 13G, dated
February 6, 1997, filed with the Securities and Exchange Commission
relating to ownership of Common Stock of Fred Meyer.
(3) Includes 361,209, 75,000, 110,768, and 50,000 and 45,155 shares for Messrs.
Miller, Duncan, Thrasher, and Jessick and Ms. Sammons, respectively,
subject to options that will be exercisable immediately following
consummation of the Merger.
(4) Includes 1,625 shares to be owned by Mr. Miller's son. Beneficial ownership
is disclaimed as to such shares.
(5) Includes 1,161 shares to be owned by Ms. Sammons' spouse and son.
Beneficial ownership is disclaimed as to such shares.
(6) Includes 1,100 shares to be owned by Mr. Thrasher's sons. Beneficial
ownership is disclaimed as to such shares.
(7) Such shares will be held of record by The Yucaipa Companies (210,000
shares) and the following four partnerships of which The Yucaipa Companies
is the general partner: Yucaipa SSV Partners, L.P. (1,407,810 shares);
Yucaipa Smitty's Partners, L.P. (315,700 shares); Yucaipa Smitty's Partners
II, L.P. (143,632 shares); and Yucaipa Arizona Partners, L.P. (287,261
shares). Mr. Burkle is a limited partner in two of those partnerships and
is also the controlling general partner of The Yucaipa Companies. Share
amounts and percentages for Mr. Burkle do not include shares issuable upon
exercise of the Warrants. See "The Merger -- Interests of Certain Persons
in the Merger -- The Merger -- The Yucaipa Warrants."
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(8) Includes 1,000 shares to be owned a trust. Beneficial ownership is
disclaimed as to such shares.
(9) Includes 1,300 shares to be owned by Mr. Gleason's spouse. Beneficial
ownership is disclaimed as to such shares.
(10) Includes 2,500 shares to be held by the Meier Family Partnership and 7,000
shares to be held by Mr. Meier's spouse. Beneficial ownership is disclaimed
as to such shares.
(11) Includes 691,998 shares which will be held of record by four trusts of
which Mr. Smith is the trustee and of which his children are beneficiaries,
and 17,926 shares which will be held of record by Mr. Smith's wife.
(12) Includes 588,370 shares which will be held of record by a trust of which
Mr. Smith is the trustee and of which his children are beneficiaries, and
235,501 shares which will be held of record by a trust for the benefit of
Ida W. Smith and of which Mr. Smith is the trustee.
(13) Includes 428,132 shares subject to options that will be exercisable
immediately following consummation of the Merger and shares indirectly
owned as described above.
</TABLE>
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<PAGE>
DESCRIPTION OF HOLDINGS CAPITAL STOCK
The following description of the capital stock of Holdings, which is
complete in all material respects, is subject, in all respects, and is qualified
by reference to applicable Delaware law and to the provisions of the Holdings
Certificate, a copy of which is attached hereto as Appendix D, and is
incorporated herein by reference.
Authorized Capital Stock
The authorized capital stock of Holdings upon completion of the Merger will
consist of 400,000,000 shares of Holdings Common Stock, and 100,000,000 shares
of preferred stock, $.01 par value per share (the "Holdings Preferred Stock").
Based upon shares of Common Stock of Fred Meyer and Smith's outstanding on July
18, 1997, it is anticipated that approximately 43,410,969 shares of Holdings
Common Stock and no shares of Holdings Preferred Stock will be issued and
outstanding immediately after the completion of the Merger.
Holdings Common Stock
The holders of Holdings Common Stock are entitled to one vote per share for
each share held of record on all matters submitted to a vote of the
stockholders. Under the Holdings Certificate, the Holdings Board will be
classified into three classes each consisting of, as nearly as may be possible,
one-third of the total number of directors constituting the entire Holdings
Board. The holders of Holdings Common Stock will not be entitled to cumulate
votes for the election of directors.
The holders of Holdings Common Stock are entitled to receive ratably such
dividends as are declared by the Holdings Board out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of Holdings,
holders of Holdings Common Stock have the right to a ratable portion of the
assets remaining after payment of liabilities and liquidation preferences of any
outstanding shares of Holdings Preferred Stock. The holders of Holdings Common
Stock have no preemptive rights or rights to convert their Holdings Common Stock
into other securities. All outstanding shares of Holdings Common Stock are, and
the shares of Holdings Common Stock to be issued in connection with the Merger,
when so issued, will be, fully paid and nonassessable. The rights of the holders
of Holdings Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of Holdings Preferred Stock, if any.
It is a condition to the completion of the Merger that Holdings Common
Stock be approved for listing on the NYSE, subject to official notification of
issuance.
Holdings Preferred Stock
The Holdings Board may, without further action of the stockholders, issue
Holdings Preferred Stock in one or more series and fix or alter the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, redemption terms and prices,
liquidation terms and preferences, and the number of shares constituting any
series or the designations of such series. No Holdings Preferred Stock is
outstanding, no Holdings Preferred Stock will be issued in connection with the
Merger, and Holdings has no present plans to issue any shares of Holdings
Preferred Stock.
Certain Anti-Takeover Provisions
The Holdings Certificate and the Holdings Bylaws contain provisions that
may have the effect of discouraging persons from acquiring large blocks of
voting stock of Holdings or delaying or preventing a change in control of
Holdings. The material provisions that may have such an effect are: (i)
classification of the Holdings Board into three classes with the terms of only
one class expiring each year; (ii) a provision that directors may be removed
only for cause and only with the affirmative vote of holders of at least 75% of
the outstanding shares of Holdings; (iii) authorization for the Holdings Board
to issue Holdings Preferred Stock in series and to fix rights and preferences of
the series (including, among other things, whether, and to what extent, the
shares of any series will have voting rights and the extent of the preferences
of the shares of any
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<PAGE>
series with respect to dividends and other matters); (iv) a provision that
stockholders may take action only at an annual or special meeting and not by
written consent in lieu of a meeting; (v) advance notice procedures with respect
to nominations of directors or proposals other than those adopted or recommended
by the Holdings Board; and (vi) provisions permitting amendment of certain of
these and related provisions only by an affirmative vote of the holders of at
least 75% of the outstanding shares of Holdings Common Stock entitled to vote.
See "Comparison of Stockholders' Rights."
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COMPARISON OF STOCKHOLDERS' RIGHTS
The following comparison of stockholders' rights is necessarily a summary
thereof and is subject, in all respects, and is qualified by reference to
Delaware law and to the provisions of the Holdings Certificate, the Holdings
Bylaws, the Fred Meyer Certificate, the Fred Meyer Bylaws, the Smith's
Certificate and the Smith's Bylaws.
The rights of Fred Meyer's stockholders are governed by the Fred Meyer
Certificate, Fred Meyer's Bylaws and the DGCL. The rights of Smith's
stockholders are governed by the Smith's Certificate, Smith's Bylaws and the
DGCL. After the Effective Time, the rights of Fred Meyer and Smith's
stockholders who become Holdings stockholders will be governed by the Holdings
Certificate, the Holdings Bylaws and the DGCL. The following is a summary
comparison of certain differences between the rights of Fred Meyer and Smith's
stockholders under the Fred Meyer Certificate and Bylaws and the Smith's
Certificate and Bylaws, respectively, and the rights of Holdings stockholders
under the Holdings Certificate and Bylaws.
Certain differences, including all material differences, that may affect
the rights and interests of stockholders of Fred Meyer and Smith's are set forth
below. All references herein to the Holdings Certificate and Bylaws are to the
certificate of incorporation and bylaws that will be in effect at the completion
of the Merger. The Holdings Certificate and Bylaws to be in effect at that time
are attached to this Joint Proxy Statement/Prospectus as Appendices D and E,
respectively.
Comparison of Rights of Holders of Common Stock Generally
Number of Directors. The Holdings Certificate provides that the Holdings
Board will consist of between three and 15 members, the exact number to be fixed
by the Holdings Board from time to time. Initially, the Holdings Board will
consist of 11 directors until otherwise fixed by a majority of the entire Board.
Under the Fred Meyer Certificate and Bylaws, the Fred Meyer Board is comprised
of between one and 15 directors, the exact number as fixed by the Fred Meyer
Board or stockholders. The Fred Meyer Board now consists of seven directors.
Under Smith's Certificate, the number of directors on Smith's Board is
determined by resolution of the Smith's Board; provided, however, that any such
resolution will not designate a number other than seven unless approved
unanimously by the directors then in office. The Smith's Board now consists of
seven directors.
Classified Board of Directors. The Holdings Certificate and Bylaws provide
that the Holdings Board will be divided into three classes of directors, with
each class being as nearly equal in size as is possible. At each annual meeting,
one class is to be elected to a three-year term. The Fred Meyer Board is not
classified, and the Fred Meyer Bylaws provide that each director will be elected
annually to a one-year term. The Smith's Certificate provides for the Smith's
Board to be divided into three classes classified in the same manner as the
Holdings Board.
Removal of Directors. The Holdings Certificate provides for the removal of
directors only for cause and only by the affirmative vote of the holders of not
less than 75% of the voting power of the outstanding shares of capital stock of
Holdings entitled to vote generally in the election of directors cast at a
meeting of the stockholders called for that purpose. A director of Fred Meyer
can be removed, with or without cause, prior to the expiration of his or her
term by the affirmative vote of the Fred Meyer stockholders taken at a meeting
called expressly for that purpose. A director of Smith's can be removed at any
time for cause by the holders of a majority of the shares of Smith's Stock then
entitled to vote at an election of directors.
Vacancies on the Board Of Directors. Under the Holdings Certificate and
Bylaws, vacancies on the Holdings Board may be filled by the designee of a
majority of the directors then in office, even if less than a quorum. A director
so designated will hold office for a term coinciding with the term of the class
to which such director is elected. Vacancies on the Fred Meyer and Smith's
Boards are filled in the same manner.
Stockholder Action by Written Consent. The Holdings Certificate provides
that stockholder actions may only be taken at an annual or special meeting of
stockholders. The Fred Meyer Certificate contains a similar provision. Any
action permitted or required to be taken at a special or annual meeting of
stockholders of Smith's may be taken by the written consent of such stockholders
in lieu of such a meeting.
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Amendments of Certificate of Incorporation. The Holdings Certificate
provides that the provisions thereof relating to: (i) the classified Holdings
Board, (ii) the number of directors, (iii) the filling of vacancies on the
Holdings Board, and (iv) the removal of directors, may not be amended or
repealed without the affirmative vote of the holders of not less than 75% of the
voting power of the outstanding shares of capital stock of Holdings entitled to
vote generally in the election of directors cast at a meeting of the
stockholders called for that purpose. The DGCL provides that, unless a higher
percentage is specified in a corporation's certificate of incorporation, such
certificate may be amended by the affirmative vote of the holders of a majority
of the outstanding shares of the corporation entitled to vote thereon. The Fred
Meyer Certificate and the Smith's Certificate may, in general, be amended by an
affirmative vote of holders of a majority of the outstanding shares of Fred
Meyer Common Stock and Smith's Stock, respectively, entitled to vote generally
thereon.
Amendment of Bylaws. The Holdings Certificate provides that the Holdings
Bylaws can be altered, amended or repealed either by an affirmative vote of the
Holdings Board or by an affirmative vote of the holders of a majority of
outstanding Holdings Common Stock, except that Section 1.11 of the Bylaws
(relating to advance notice of stockholder proposals and nominations for
director) can only be amended, altered, changed or repealed by the Holdings
Board or by the affirmative vote of the holders of not less than 75% of the
voting power of the outstanding shares of capital stock of Holdings entitled to
vote generally at an annual or special meeting of stockholders cast at a meeting
of the stockholders called for that purpose. The Fred Meyer Bylaws generally may
be amended by either the vote of a majority of the outstanding shares of Fred
Meyer Common Stock or by approval of the Fred Meyer Board. The Smith's Bylaws
generally may be altered, amended or repealed by either the vote of a majority
of the outstanding shares of Smith's Stock or by approval of the Smith's Board.
Notice of Stockholders Proposals/Nominations of Directors. Under the
Holdings Bylaws, for stock-holders to properly introduce business to be
transacted at the annual or any special meeting of stockholders, a stockholder
of record, on the date both of giving such notice and of determining
stockholders entitled to vote at the annual or special meeting, must give timely
notice of such proposal in a proper written form to Holdings' corporate
secretary, as provided in the Holdings Bylaws. To be timely, a stockholder's
notice to the secretary must be delivered to or mailed and received at Holdings'
principal executive offices not more than 90 nor less than 60 days prior to the
first anniversary of the preceding year's annual meeting of stockholders, or, in
the case of a special meeting, not more than 90 nor less than the later of 60
days prior to such special meeting or 10 days after the day on which a public
announcement is first made of the date of the special meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after the first anniversary date of the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not more than 90 nor less than 60 days prior to such annual meeting
or the 10th day following the day on which public announcement of the date of
such meeting is first made by Holdings.
Generally, the Holdings Bylaws require that a stockholder's notice include:
(i) as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business, the reasons for conducting such
business and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (ii) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the proposal is made, (a) the name and address of such stockholder, as
they appear on Holdings' books, and of such beneficial owner and (b) the class
and number of shares of Holdings which are owned beneficially and of record by
such stockholder and such beneficial owner.
The Holdings Bylaws permit stockholders to nominate persons for election to
the Holdings Board at any annual meeting of stockholders, or at any special
meeting if the Holdings Board has determined that directors will be elected at
such meeting, if they are stockholders of record as of both the date of giving
such notice and the date of determining stockholders entitled to vote at the
annual or special meeting. A stockholder must give timely notice thereof in a
proper written form to the corporate secretary, as provided in the Holdings
Bylaws. To be timely, the stockholder's notice must meet the same timeliness
requirements as described above for providing advance notice of business to be
transacted at a stockholders' meeting; provided, however, that if the number of
directors to be elected to the Holdings Board is increased and there is no
public announcement by
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Holdings naming all of the nominees for director or specifying the size of the
increased Holdings Board at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it is delivered to the secretary at the principal executive offices
of Holdings not later than the 10th day following the day on which such public
announcement is first made by Holdings.
To be in proper written form, a stockholder's notice to the secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Exchange Act; and (b) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination is made, (i) the name and address of such stockholder, as they appear
on Holdings' books, and of such beneficial owner and (ii) the class and number
of shares of Holdings which are owned beneficially and of record by such
stockholder and such beneficial owner. Such notice must be accompanied by a
written consent of each proposed nominee to being named as a nominee and to
serving as a director if elected.
Neither the Fred Meyer Bylaws nor the Smith's Bylaws has any similar
advance notice provisions.
Calling of Special Meeting of Stockholders. The Holdings Bylaws provide
that special meetings of the stockholders can only be called by the Chairman of
the Holdings Board, the President or by the Chairman, President or Secretary
acting upon the direction of the Holdings Board. The Smith's Bylaws are
substantially the same. The Fred Meyer Bylaws provide additionally that the
holders of at least 25% of all the votes entitled to be cast on any issue
proposed to be considered at a special meeting can call such a meeting by a
written demand to the Chairman, President or Secretary of Fred Meyer.
Comparison of Rights of Holders of Smith's Class A Common Stock and Holders of
Holdings Common Stock
General. In accordance with the terms of the Merger, each share of Smith's
Class A Common Stock shall be converted into the right to receive 1.05 shares of
Holdings Common Stock. With the exception of the differences previously set
forth herein under the caption "-- Comparison of Rights of Holders of Common
Stock Generally" and the additional differences set forth below under the
captions "Voting Rights" and "Conversion Rights", there are no material
differences between the rights of the holders of Smith's Class A Common Stock
and the holders of Holdings Common Stock.
Voting Rights. The holders of Smith's Class A Common Stock have the right
to ten votes per share of Smith's Class A Common Stock on each matter presented
to the stockholders, including the election of directors. The holders of
Holdings Common Stock are entitled to one vote per share of Holdings Common
Stock.
Conversion Rights. The Smith's Class A Common Stock converts into an equal
number of the Smith's Class B Common Stock only in the following circumstances:
(i) the transfer of Smith's Class A Common Stock by the holder thereof to other
than a Permitted Transferee (as defined in the Smith's Certificate) of such
shares; (ii) the transfer of any equity or beneficial interest in a Family
Entity (as defined in the Smith's Certificate) which is a holder of Smith's
Class A Common Stock to other than a Permitted Transferee of the Original Class
A Shareholder (as defined in the Smith's Certificate) of the shares of Smith's
Class A Common Stock held by the Family Entity; (iii) the foreclosure upon
Smith's Class A Common Stock by a bona fide pledgee thereof; (iv) the agreement
to transfer Smith's Class A Common Stock by a trustee in the bankruptcy of the
estate of the holder thereof; and (v) the total number of shares of Smith's
Class A Common Stock issued and outstanding is less than 2,910,885, as reflected
upon the stock records of Smith's. In addition, any holder of Smith's Class A
Common Stock may convert any share of Smith's Class A Common Stock into one
share of Smith's Class B Common Stock at any time by presenting the necessary
certificates to Smith's for transfer. The Holdings Common Stock is not
convertible.
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PROPOSAL TO APPROVE THE 1997 STOCK INCENTIVE PLAN OF HOLDINGS
Description of the 1997 Plan
The Boards of Directors of Fred Meyer, Smith's and Holdings believe that
the availability of stock options and related incentives is an important factor
in a company's ability to attract and retain experienced and competent employees
and to provide an incentive for them to exert their best efforts on behalf of
the company. The Holdings Board has adopted and approved the 1997 Plan and
reserved 5,000,000 shares of Holdings Common Stock for stock options and other
stock awards to employees of Holdings and its subsidiaries and other eligible
participants after the Merger. The 1997 Plan provides flexibility in determining
the nature of the incentives to be awarded. Historically, Fred Meyer and Smith's
have used stock options and bonuses as incentives for pay-for-performance
awards. Holdings does not have any current intention to immediately utilize all
the other types of awards available under the 1997 Plan, but will have the
flexibility through the 1997 Plan to grant such incentives in the future.
Certain provisions of the 1997 Plan are summarized below. The complete text
of the 1997 Plan is attached to this Joint Proxy Statement/Prospectus as
Appendix I.
Eligibility. All salaried employees, including employees who are officers
or directors of Holdings and its subsidiaries, are eligible to participate in
the 1997 Plan. Also eligible are nonemployee agents, consultants, directors and
advisors to Holdings or any subsidiary.
Administration. It is contemplated that the 1997 Plan will be administered
by a committee of the Holdings Board consisting entirely of outside directors
(the "Committee"). The Committee may promulgate rules and regulations for the
operation of the 1997 Plan and will generally supervise the administration of
the 1997 Plan. The Committee will determine the persons to whom grants, awards
or sales will be made under the 1997 Plan, and the price and terms of any such
grant, award or sale.
Term of Plan. The 1997 Plan will continue until all shares available for
issuance under the plan have been issued and all restrictions on such shares
have lapsed. The Holdings Board may suspend or terminate the 1997 Plan at any
time. The Holdings Board may also modify or amend the 1997 Plan at any time
without stockholder approval.
Stock Options. The Committee will determine the persons to whom options are
granted, the option price, the number of shares to be covered by each option,
the term of each option, the times at which options may be exercised and whether
the option is an incentive stock option ("ISO") or a nonstatutory stock option.
An ISO is intended to meet all of the requirements of an Incentive Stock Option
as defined in Section 422 of the Code. If the option is an ISO, the option price
cannot be less than the fair market value of the Holdings Common Stock on the
date of grant. If an optionee of an ISO at the time of grant owns stock
representing more than 10 percent of the combined voting power of Holdings, the
option price may not be less than 110 percent of the fair market value of the
Holdings Common Stock on the date of grant. If the option is a nonstatutory
stock option, the option price cannot be less than 50 percent of the fair market
value of the Holdings Common Stock on the date of the grant. The 1997 Plan
provides that no person may be granted options or stock appreciation rights
under the 1997 Plan for more than an aggregate of 1,000,000 shares in connection
with hiring the individual or 250,000 shares in any fiscal year otherwise. The
1997 Plan limits the amount of ISOs that may become vested under the 1997 Plan
in any year to $100,000 per optionee, based on the fair market value on the
grant date of shares covered by such options. For purposes of options and stock
appreciation rights, the fair market value of Holdings Common Stock will be
deemed to be the closing price of the shares as reported in the NYSE Composite
Transactions Reporting System in The Wall Street Journal, or such other reported
value of the Holdings Common Stock as shall be specified by the Committee, on
the trading day preceding the date for which the fair market value is
determined. No monetary consideration will be paid to Holdings upon the granting
of options.
Options granted under the 1997 Plan will generally continue in effect for
the period fixed by the Committee, except that ISOs are not exercisable after
the expiration of 10 years from the date of grant. Options will be exercisable
in accordance with the terms of an option agreement entered into at the time of
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grant and will be nontransferable except on death of a holder or with the
consent of the Committee. Options may be exercised only while an optionee is
employed by or providing services to Holdings or a subsidiary or within 12
months following termination of employment or service by reason of death or
disability or three months following termination for any other reason. The 1997
Plan provides that the Committee may extend the exercise period for any period
up to the expiration date of the option and may increase the number of shares
for which the option may be exercised up to the total number underlying the
option. The purchase price for shares purchased pursuant to exercise of options
must be paid in cash, including cash which may be the proceeds of a loan from
Holdings, in shares of Holdings Common Stock valued at fair market value, in
restricted stock, in performance units or other contingent awards denominated in
either stock or cash, in deferred compensation credits or in other forms of
consideration, as determined by the Committee. Upon the exercise of an option,
the number of shares subject to the option and the number of shares available
under the 1997 Plan for future option grants will be reduced by the number of
shares with respect to which the option is exercised, less any shares
surrendered in payment or withheld to satisfy tax withholding obligations.
Stock Appreciation Rights. Stock appreciation rights ("SARs") may be
granted under the 1997 Plan. SARs may, but need not, be granted in connection
with an option grant or an outstanding option previously granted under the 1997
Plan. A SAR gives the holder the right to payment from Holdings of an amount
equal in value to the excess of the fair market value on the date of exercise of
a share of Holdings Common Stock over its fair market value on the date of
grant, or if granted in connection with an option, the option price per share
under the option to which the SAR relates. The holder does not pay any
consideration to Holdings upon the grant or exercise of a SAR (other than tax
withholding amounts upon exercise).
A SAR is exercisable only at the time or times established by the
Committee. If a SAR is granted in connection with an option it is exercisable
only to the extent and on the same conditions that the related option is
exercisable. Payment by Holdings upon exercise of a SAR may be made in Holdings
Common Stock valued at its fair market value, in cash, or partly in stock and
partly in cash, as determined by the Committee. The Committee may withdraw any
SAR granted under the 1997 Plan at any time and may impose any condition upon
the exercise of a SAR or adopt rules and regulations from time to time affecting
the rights of holders of SARS. If a SAR is not exercised prior to the
expiration, termination or cancellation of the SAR, the unused shares subject to
the SAR are again available for issuance under the 1997 Plan. Cash payments for
SARs do not reduce the number of shares reserved for issuance under the 1997
Plan.
The existence of outstanding SARs, as well as certain bonus rights
described below, would require charges to income over the life of the right
based upon the amount of appreciation, if any, in the market value of the
Holdings Common Stock over the exercise price of shares subject to exercisable
SARs or bonus rights.
Stock Bonus Awards. The Committee may award Holdings Common Stock as a
stock bonus under the 1997 Plan. The Committee may determine the participants to
receive awards, the number of shares to be awarded and the time of the award.
Stock received as a stock bonus is subject to the terms, conditions and
restrictions determined by the Committee at the time the stock is awarded. Stock
bonus shares which are forfeited to Holdings will again be available for
issuance under the 1997 Plan.
Restricted Stock. The 1997 Plan provides that Holdings may issue restricted
stock in such amounts, for such consideration, subject to such restrictions and
on such terms as the Committee may determine. Restrictions may include
restrictions concerning transferability and forfeiture of the shares. Restricted
shares which are forfeited to or repurchased by Holdings are again available for
issuance under the 1997 Plan.
Cash Bonus Rights. The Committee may grant cash bonus rights under the 1997
Plan in connection with (i) options granted or previously granted, (ii) SARs
granted or previously granted, (iii) stock bonuses awarded or previously
awarded, and (iv) shares sold or previously sold under the 1997 Plan. Bonus
rights may be used to provide cash to participants for the payment of taxes in
connection with awards under the 1997 Plan. Bonus rights granted in connection
with options entitle the optionee to a cash bonus if and when the related option
is exercised or terminates in connection with the exercise of a SAR related to
the option. If the shares are purchased on the exercise of an option and the
optionee does not exercise a related SAR, the amount of the bonus shall be
determined by multiplying the excess of the total fair market value for the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage.
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If an optionee exercises a related SAR in connection with the termination of an
option, the amount of the bonus shall be determined by multiplying the total
fair market value of the shares and cash received pursuant to the exercise of
the SAR by the applicable bonus percentage. The bonus percentage applicable to
any bonus right is determined by the Committee but may in no event exceed 75
percent. Bonus rights granted in connection with stock bonuses entitle the
recipient to a cash bonus, in an amount determined by the Committee, at the time
the stock is awarded or at such time as any restrictions to which the stock is
subject lapse. Bonus rights granted in connection with restricted stock
purchases entitle the recipient to a cash bonus in an amount determined by the
Committee, payable when the shares are purchased or restrictions, if any, to
which the stock is subject lapse. Bonus rights granted in connection with
restricted stock purchases or stock bonuses terminate in the event that
restricted stock is repurchased by Holdings or forfeited by the holder pursuant
to the restrictions. The payment of cash bonus will not reduce the number of
shares reserved under the 1997 Plan.
Performance-based Awards. The 1997 Plan includes awards ("Performance-based
Awards") designed to qualify under Section 162(m) of the Code as
performance-based compensation. The Committee may grant Performance-based Awards
denominated either in Holdings Common Stock or in dollar amounts. All or part of
the awards will be earned if performance goals established by the Committee for
the period covered by the award are met and the employee satisfies any other
restrictions established by the Committee. The performance goals are expressed
as one or more targeted levels of performance with respect to one or more of the
following objective measures with respect to Holdings or any subsidiary,
division, store or other unit of Holdings: departmental expense performance,
earnings per share, total stockholder return (stock price increase plus
dividends), return on equity, return on assets, revenues, operating income,
income before taxes, net income, inventories, inventory turns, cash flows,
expenses, capital expenditures, increase in stockholder value as a percentage of
assets employed, other financial return ratios, market performance, customer
satisfaction or any of the foregoing before the effect of acquisitions,
divestitures, accounting changes, and restructuring and special charges.
Performance-based Awards may be paid in cash or Holdings Common Stock and may be
made as awards of restricted shares subject to forfeiture if performance goals
are not satisfied, as determined by the Committee. No participant may receive in
any fiscal year Performance-based Awards denominated in Holdings Common Stock
under which more than 100,000 shares may be issued. No participant may receive
in any fiscal year Performance-based Awards denominated in dollars under which
more than $1,500,000 may be paid. The payment of a Performance-based Award in
cash will not reduce the number of shares reserved under the 1997 Plan.
Changes in Capital Structure. The 1997 Plan provides that if the
outstanding Holdings Common Stock is increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
Holdings or of another corporation by reason of any recapitalization, stock
split or certain other transactions, appropriate adjustment will be made by the
Committee in the number and kind of shares available for awards under the 1997
Plan. In addition, the Committee will make appropriate adjustments in
outstanding options and SARs. In the event of dissolution of Holdings or a
merger, consolidation or plan of exchange affecting Holdings, in lieu of so
providing for options and SARs, the Committee may, in its sole discretion,
provide a 30-day period prior to such event during which optionees shall have
the right to exercise options and SARs in whole or in part without any
limitation or exercisability and upon the expiration of which 30-day period all
unexercised options and SARs shall immediately terminate.
Acceleration in Certain Events. The 1997 Plan provides for accelerated
vesting of options and SARs granted under the 1997 Plan in the event an
optionee's employment by Holdings terminates within one year after a change in
control of Holdings or the occurrence of certain events indicating an imminent
change in control of Holdings as specified in the 1997 Plan. The special
acceleration provision may, in certain circumstances, have the effect of
discouraging attempts of a takeover of Holdings.
Tax Consequences
Certain options authorized to be granted under the 1997 Plan are intended
to qualify as ISOs for federal income tax purposes. Under federal income tax law
currently in effect, the optionee will recognize no income upon grant or
exercise of the ISO. If an employee exercises an ISO and does not dispose of any
of the option
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shares within two years following the date of grant and within one year
following the date of exercise, then the gain will be realized upon subsequent
disposition of the shares. If an employee disposes of shares acquired upon
exercise of an ISO before the expiration of either the one-year holding period
or the two-year waiting period, any amount realized will be taxable for federal
income tax purposes in the year of such disqualifying disposition to the extent
that the lesser of the fair market value of the shares on the exercise date or
the fair market value of the shares on the date of disposition exceeds the
exercise price. Holdings will not be allowed any deduction for federal income
tax purposes at either the time of the grant or exercise of an ISO. Subject to
Section 162(m) of the Code (as described below) upon any disqualifying
disposition by an employee, Holdings will be entitled to a deduction to the
extent the employee realized income.
Certain options authorized to be granted under the 1997 Plan will be
treated as nonstatutory stock options for federal income tax purposes. Under
federal income tax law presently in effect, no income is realized by the grantee
of a nonstatutory stock option pursuant to the 1997 Plan until the option is
exercised. At the time of exercise of a nonstatutory stock option, the optionee
will realize income, and, subject to Section 162(m) of the Code, Holdings will
be entitled to a deduction, in the amount by which the market value of the
shares subject to the option at the time of exercise exceeds the exercise price.
Upon the sale of shares acquired upon exercise of a nonstatutory stock option,
the excess of the amount realized from the sale over the market value of the
shares on the date of exercise will be taxable.
A participant who receives stock in connection with the performance of
services will generally realize taxable income at the time of receipt unless the
shares are substantially nonvested for purposes of Section 83 of the Code.
Absent an election under Section 83(b), an employee who receives substantially
nonvested stock in connection with performance of services will realize taxable
income in each year in which a portion of the shares substantially vest.
Holdings will be entitled to a tax deduction in the amount includable as income
by the participant at the same time or times as the employee recognizes income
with respect to the shares. A participant who receives a cash bonus right under
the plan will generally recognize income equal to the amount of a cash bonus
paid at the time of receipt, and Holdings will generally be entitled to a
deduction equal to the income recognized by the participant.
Section 162(m) of the Code limits to $1,000,000 per person the amount that
Holdings will be able to deduct for compensation paid to certain of its most
highly compensated officers. Under the Section 162(m) regulations, compensation
received through the exercise of an option or SAR or through other
performance-based awards will not be subject to the $1,000,000 limit if the
option, SAR or other award and the 1997 Plan meet certain requirements. One such
requirement for options and SARs is that shareholders approve per-employee
limits on the number of shares as to which options and SARs may be granted,
which are set forth in Section 11 of the 1997 Plan. For other performance-based
awards, stockholders must approve the performance criteria upon which award
payouts will be based and the maximum amount payable under awards, both of which
are set forth in Section 11 of the 1997 Plan for Performance-based Awards.
Another requirement for options and SARs is that the exercise price be not less
than fair market value of the Holdings Common Stock on the date of grant. Other
requirements of the proposed regulations for Performance-based Awards are that
objective performance goals and the amounts payable upon achievement of the
goals be established and that no discretion be retained to increase the amount
payable under the awards. Lastly, a requirement for all awards is that the award
be granted by a committee consisting solely of at least two outside directors.
Holdings believes that compensation received on exercise of options and SARs
granted at fair market value or on vesting or receipt of Performance-based
Awards granted under the 1997 Plan in compliance with all of the above
requirements will not be subject to the $1,000,000 deduction limit.
Recommendation of the Boards of Directors
The Boards of Directors of Holdings, Fred Meyer and Smith's recommend
approval of the 1997 Plan. The proposal must be approved by the holders of at
least a majority of the shares present and entitled to vote on the matter at the
Fred Meyer Special Meeting, provided that the total votes cast on the matter
represent over 50% of the Common Stock entitled to vote on the matter. The
proposal must also be approved by the holders of at least a majority of the
total votes of the shares present and entitled to vote on the matter at the
Smith's Special Meeting, provided that the total votes cast on the matter
represent over 50% in interest of all
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securities entitled to vote on the matter. Abstentions will not be counted as
votes cast for purposes of determining whether the votes cast represent over 50%
in interest of the securities entitled to vote, but because an affirmative vote
of a majority of the total votes of the shares present and entitled to vote is
required, abstentions have the same effect as votes against approval and
adoption of the 1997 Plan. Broker non-votes will not be counted as votes cast
for purposes of determining whether a majority of shares entitled to vote has
been cast with respect to approval and adoption of the 1997 Plan and will be
disregarded in determining the outcome of the vote on approval and adoption of
the 1997 Plan. The enclosed proxy will be voted in accordance with the
instructions specified in the space provided on the form of proxy. If no
instructions are given, proxies will be voted for approval of the 1997 Plan.
PROPOSAL TO APPROVE THE NON-EMPLOYEE DIRECTORS'
DEFERRED COMPENSATION PLAN OF HOLDINGS
General
On July 14, 1997, the Holdings Board adopted the Directors' Plan and
reserved 100,000 shares of Holdings Common Stock for purposes of the Directors'
Plan.
The Directors' Plan will become effective upon the consummation of the
Merger, subject to approval by the stockholders of Fred Meyer and Smith's. The
purpose of the Directors' Plan is to permit non-employee directors (i) to defer
any compensation in connection with their service on the Board of Directors
until retirement or some other specified date or event and (ii) at their
election, to receive any such deferred compensation in the form of shares of
Holdings Common Stock.
The following is a description of the material provisions of the Directors'
Plan, a copy of which is set forth in Appendix J to this Joint Proxy
Statement/Prospectus. Reference should be made to the Directors' Plan for a
complete statement of its terms and provisions.
Two current directors of Smith's who participate in the Smith's Directors'
Deferred Compensation Plan have deferred compensation under the Plan that will
be converted into common stock of Holdings under the Directors' Plan.
Administration
The Directors' Plan will be administered by the Compensation Committee of
the Holdings Board. The Compensation Committee will have all powers necessary to
carry out the provisions of the Directors' Plan, including the power to delegate
administrative matters to other persons and to interpret the Directors' Plan in
a manner consistent with its express provisions.
Eligibility and Participation
Any member of the Holdings Board who is not an employee of Holdings, Fred
Meyer or Smith's and receives an annual retainer and meeting fees is eligible to
participate in the Directors' Plan. Any eligible member of the Holdings Board
may participate in the Directors' Plan with respect to any plan year by
executing an irrevocable deferral election with respect to his or her
compensation for such plan year. A separate election must be made to defer
compensation for each plan year. If no election is made by a director with
respect to a given plan year, such director will receive his or her director's
compensation in cash.
Form of Election
A director may elect to defer all or part of his or her compensation as a
director until some later date or event by making a timely deferral election
which shall specify, among other things, (i) the percentage of compensation that
is to be deferred under the plan, (ii) the date of the event on which payment of
such deferred compensation is to commence (which, other than death, disability
or termination may not be earlier than the later of two years from the date of
the deferral election or termination of service as a director) and
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(iii) whether such payment is to be paid out in a single lump sum or in
approximately equal annual installments over a period not to exceed 15 years.
In addition, a director may elect to receive all or part of his or her
deferred compensation for each plan year in the form of shares of Holdings
Common Stock rather than cash. See "-- Deferral Accounts".
Deferral Accounts
If a director elects to defer compensation, Holdings will establish a
separate bookkeeping account (a "Deferral Account") for each director with
respect to each calendar year in order to record the deferrals and additions of
such director for such year. Each director's Deferral Account will be credited
in the form of cash or shares of Holdings Common Stock or both, as applicable,
with the amount of compensation deferred by such director by a quarterly
crediting on the last day of each March, June, September and December in the
amount of compensation that would have been payable by Holdings to such director
in such quarter. If a participant elects to receive all or part of his or her
deferred compensation in the form of Holdings Common Stock, the amount of
compensation credited quarterly to his or her account shall be the number of
shares of Holdings Common Stock which can be purchased with 110% of the
compensation so deferred at the median of the high and low trading prices of the
Holdings Common Stock as quoted on the New York Stock Exchange Composite
Transactions on such date plus the dollar amount of any part of such
compensation that was not equal to the purchase price of a full share of
Holdings Common Stock. Each director's Deferral Account shall also be increased
on the last day of each March, June, September and December prior to
distribution by (i) the amount obtained by multiplying the cash Deferral Account
balance as of the first day of such quarter by one-fourth of the average prime
rate as published in The Wall Street Journal in effect as of the first day of
such quarter, and (ii) the amount determined by multiplying the number of shares
of Holdings Common Stock in the director's Deferral Account at the beginning of
such quarter by the dividends, if any, paid upon a share of Holdings Common
Stock to a stockholder of record during such quarter. The director's Deferral
Account will be reduced by any payments made to the director or his or her
beneficiary, estate or representative.
Miscellaneous Provisions
Notwithstanding any other provision in the Directors' Plan, a director (or
beneficiary designated by a director) may withdraw an amount of cash or stock
from his or her Deferral Account upon a finding by the Holdings Board in its
sole determination that an unanticipated emergency that is caused by an event
beyond the control of such participant (or beneficiary) has occurred and that
such emergency would result in severe financial hardship to such participant (or
beneficiary). In addition, at a participant or beneficiary's election, all of
the account balance may be withdrawn, less a forfeiture of 10% of the amount
withdrawn, and after such a withdrawal the participant would be ineligible to
participate in the Directors' Plan. In the event of the death of any
participant, the balance in the participant's Deferral Account will be paid or
distributed to the participant's beneficiary within thirty (30) days after the
date of such death. Holdings may amend or terminate the Directors' Plan at any
time by action of the Holdings Board, subject to the rights of participants
thereunder.
Federal Income Tax Consequences
Directors who elect to defer their compensation generally will recognize
income, and Holdings generally will be entitled to a deduction for the amount of
such deferred compensation at the time it is actually paid to the participant.
If a participant elects to receive his or her compensation in the form of shares
of Holdings Common Stock, the participant generally will recognize ordinary
income when such shares are transferred to the participant and Holdings
generally will be entitled to a deduction for the amount equal to the fair
market value of such shares at the date of transfer.
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Recommendation of the Boards of Directors
The Boards of Directors of Holdings, Fred Meyer and Smith's recommend
approval of the Directors' Plan. The proposal must be approved by the holders of
at least a majority of the shares present and entitled to vote on the matter at
the Fred Meyer Special Meeting, provided that the total votes cast on the matter
represent over 50% of the Common Stock entitled to vote on the matter. The
proposal must also be approved by the holders of at least a majority of the
total votes of the shares present and entitled to vote on the matter at the
Smith's Special Meeting, provided that the total votes cast on the matter
represent over 50% in interest of all securities entitled to vote on the matter.
Abstentions will not be counted as votes cast for purposes of determining
whether the votes cast represent over 50% in interest of the securities entitled
to vote, but because an affirmative vote of a majority of the total votes of the
shares present and entitled to vote is required, abstentions have the same
effect as votes against approval and adoption of the Directors' Plan. Broker
non-votes will not be counted as votes cast for purposes of determining whether
a majority of shares entitled to vote has been cast with respect to approval and
adoption of the Directors' Plan and will be disregarded in determining the
outcome of the vote on approval and adoption of the Directors' Plan. The
enclosed proxy will be voted in accordance with the instructions specified in
the space provided on the form of proxy. If no instructions are given, proxies
will be voted for approval of the Directors' Plan.
STOCKHOLDER PROPOSALS
Any stockholder proposals to be considered for inclusion in proxy material
for Holdings June 1998 annual meeting must be received at the principal
executive offices of Holdings no later than January 15, 1998.
LEGAL MATTERS
The validity of the shares of Holdings Common Stock offered hereby will be
passed upon for Holdings by Stoel Rives LLP.
The Merger Agreement provides that, as a condition to Fred Meyer's
obligation to effect the Merger, Fred Meyer receive the opinion of Cleary,
Gottlieb, Steen & Hamilton, special counsel to Fred Meyer, substantially to the
effect that the Merger will be treated as an exchange under Section 351(a) of
the Code. The Merger Agreement also provides that, as a condition to Smith's
obligation to effect the Merger, Smith's shall receive the opinion of Latham &
Watkins, special counsel to Smith's, substantially to the effect that the Merger
will be treated as an exchange under Section 351(a) of the Code.
EXPERTS
The consolidated financial statements incorporated in this Joint Proxy
Statement/Prospectus by reference from the Fred Meyer Form 10-K have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report of
said firm given upon its authority as experts in accounting and auditing.
The consolidated financial statements of Smith's as of December 28, 1996
and December 30, 1995, and for each of the three years in the period ended
December 28, 1996 incorporated by reference in Smith's Form 10-K for the year
ended December 28, 1996 have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
Representatives of Deloitte & Touche LLP are expected to be present at the
Fred Meyer Special Meeting, and representatives of Ernst & Young LLP are
expected to be present at the Smith's Special Meeting. In each case, such
representatives will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
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OTHER MATTERS
As of the date of this Joint Proxy Statement/Prospectus, the Fred Meyer
Board and the Smith's Board know of no matters that will be presented for
consideration at the Fred Meyer Special Meeting or the Smith's Special Meeting
other than as described in this Joint Proxy Statement/Prospectus. If any other
matters shall properly come before either stockholder meeting or any
adjournments or postponements thereof and be voted upon, the enclosed proxies
will be deemed to confer discretionary authority on the individuals named as
proxies therein to vote the shares represented by such proxies as to any such
matters. The persons named as proxies intend to vote or not to vote in
accordance with the recommendation of the respective managements of Fred Meyer
and Smith's.
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APPENDIX A
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
by and between
SMITH'S FOOD & DRUG CENTERS, INC.
and
FRED MEYER, INC.
------------------------
Dated as of May 11, 1997
------------------------
================================================================================
<PAGE>
EXECUTION COPY
TABLE OF CONTENTS
Page
1. The Mergers............................................................. A-1
1.1 Organization of Holdings............................................. A-2
1.2 Directors and Officers of Holdings................................... A-2
1.3 Smith's Sub Merger................................................... A-2
1.4 Fred Meyer Sub Merger................................................ A-2
1.5 The Closing.......................................................... A-3
1.6 Effective Time....................................................... A-3
1.7 Effects of the Mergers............................................... A-3
1.8 Certificates of Incorporation and Bylaws of the Surviving
Corporations......................................................... A-3
1.9 Directors and Officers of the Surviving Corporations................. A-3
1.10 Execution of Related Agreements...................................... A-3
2. Conversion of Securities................................................ A-4
2.1 Conversion of Securities............................................. A-4
2.2 Payment for Smith's Common Shares, Fred Meyer Common Shares
and Series I Preferred Shares........................................ A-6
2.3 Fractional Shares.................................................... A-8
2.4 Dissenting Shares.................................................... A-8
2.5 No Transfer after the Effective Time................................. A-8
3. Representations and Warranties of Smith's............................... A-8
3.1 Existence; Good Standing; Corporate Authority........................ A-8
3.2 Authorization; Validity and Effect of Agreement...................... A-9
3.3 Capitalization....................................................... A-9
3.4 Subsidiaries......................................................... A-9
3.5 Other Interests...................................................... A-10
3.6 No Conflict; Required Filings and Consents........................... A-10
3.7 Compliance........................................................... A-10
3.8 SEC Documents........................................................ A-11
3.9 Litigation........................................................... A-11
3.10 Absence of Certain Changes........................................... A-11
3.11 Taxes................................................................ A-11
3.12 Employee Benefit Plans............................................... A-12
3.13 State Takeover Statutes.............................................. A-13
3.14 No Brokers........................................................... A-13
3.15 Opinion of Financial Advisor......................................... A-13
3.16 No Other Agreements to Sell Smith's or its Assets.................... A-13
3.17 Assets............................................................... A-13
3.18 Contracts and Commitments............................................ A-14
3.19 Absence of Breaches or Defaults...................................... A-15
3.20 Labor Matters........................................................ A-15
3.21 Insurance............................................................ A-16
3.22 Affiliate Transactions............................................... A-16
3.23 Environmental Matters................................................ A-16
3.24 Information in Joint Proxy Statement/Prospectus and Form S-4......... A-17
3.25 Vote Required........................................................ A-17
3.26 Standstill and Confidentiality Agreements............................ A-17
A-i
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Page
4. Representations and Warranties of Fred Meyer............................ A-17
4.1 Existence; Good Standing; Corporate Authority........................ A-17
4.2 Authorization; Validity and Effect of Agreement...................... A-18
4.3 Capitalization....................................................... A-18
4.4 Subsidiaries......................................................... A-18
4.5 Other Interests...................................................... A-18
4.6 No Conflict; Required Filings and Consents........................... A-19
4.7 Compliance........................................................... A-19
4.8 SEC Documents........................................................ A-19
4.9 Litigation........................................................... A-20
4.10 Absence of Certain Changes........................................... A-20
4.11 Taxes................................................................ A-20
4.12 Employee Benefit Plans............................................... A-21
4.13 State Takeover Statutes.............................................. A-22
4.14 No Brokers........................................................... A-22
4.15 Opinion of Financial Advisor......................................... A-22
4.16 No Other Agreements to Sell Fred Meyer or its Assets................. A-22
4.17 Assets............................................................... A-22
4.18 Contracts and Commitments............................................ A-23
4.19 Absence of Breaches or Defaults...................................... A-24
4.20 Labor Matters........................................................ A-24
4.21 Insurance............................................................ A-25
4.22 Affiliate Transactions............................................... A-25
4.23 Environmental Matters................................................ A-25
4.24 Information in Joint Proxy Statement/Prospectus and Form S-4......... A-26
4.25 Vote Required........................................................ A-26
4.26 Standstill and Confidentiality Agreements............................ A-26
5. Covenants............................................................... A-26
5.1 Acquisition Proposals................................................ A-26
5.2 Interim Operations of Smith's........................................ A-27
5.3 Interim Operations of Fred Meyer..................................... A-28
5.4 Meeting of Stockholders.............................................. A-30
5.5 Further Assurance and Cooperation.................................... A-30
5.6 Certain Filings and Consents......................................... A-31
5.7 Inspection of Records................................................ A-31
5.8 Publicity............................................................ A-31
5.9 Joint Proxy Statement/Prospectus and the Form S-4.................... A-31
5.10 Listing Application.................................................. A-32
5.11 Further Action....................................................... A-32
5.12 Affiliate Letters.................................................... A-32
5.13 Expenses............................................................. A-32
5.14 Indemnification...................................................... A-32
5.15 Consents............................................................. A-33
5.16 Financing Arrangements............................................... A-33
5.17 Financial Information................................................ A-33
5.18 Letter of Smith's Accountants........................................ A-33
5.19 Letter of Fred Meyer's Accountants................................... A-34
5.20 Registration Statement on Form S-8................................... A-34
5.21 Tax Matters Certificates............................................. A-34
5.22 Standstill and Confidentiality Agreements............................ A-34
5.23 Assumption of Obligations by Holdings, Smith's Sub and Fred Meyer.... A-34
A-ii
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Page
6. Conditions.............................................................. A-34
6.1 Conditions to Each Party's Obligation to Effect the Mergers.......... A-34
6.2 Conditions to Obligation of Smith's to Effect the Mergers............ A-35
6.3 Conditions to Obligation of Fred Meyer to Effect the Mergers......... A-36
7. Termination............................................................. A-37
7.1 Termination by Mutual Consent........................................ A-37
7.2 Termination by Either Fred Meyer or Smith's.......................... A-37
7.3 Termination by Smith's............................................... A-37
7.4 Termination by Fred Meyer............................................ A-37
7.5 Effect of Termination and Abandonment................................ A-38
8. General Provisions...................................................... A-38
8.1 Non-survival of Representations and Warranties....................... A-38
8.2 Notices.............................................................. A-39
8.3 Assignment; Binding Effect........................................... A-39
8.4 Entire Agreement..................................................... A-39
8.5 Amendment............................................................ A-39
8.6 Governing Law........................................................ A-39
8.7 Counterparts......................................................... A-39
8.8 Headings............................................................. A-39
8.9 Interpretation....................................................... A-39
8.10 Waivers.............................................................. A-40
8.11 Incorporation of Schedules........................................... A-40
8.12 Severability......................................................... A-40
8.13 Enforcement of Agreement............................................. A-40
9. Definitions............................................................. A-40
9.1 Defined Terms........................................................ A-40
9.2 Other Defined Terms.................................................. A-43
LIST OF EXHIBITS
Exhibit A -- Form of Certificate of Incorporation of Holdings
Exhibit B -- Form of Bylaws of Holdings
Exhibit C -- Form of Registration Rights Agreement
Exhibit D -- Form of New Management Agreement
Exhibit E -- Forms of Affiliate Letter
Exhibit F -- Forms of Tax Matters Certificate
Exhibit G -- Form of Smith's Legal Opinion
Exhibit H -- Form of Fred Meyer Legal Opinion
A-iii
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EXECUTION COPY
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
Agreement and Plan of Reorganization and Merger (this "Agreement"), dated
as of May 11, 1997, by and between Smith's Food & Drug Centers, Inc., a Delaware
corporation ("Smith's"), and Fred Meyer, Inc., a Delaware corporation ("Fred
Meyer").
RECITALS
A. The respective Boards of Directors of Fred Meyer and Smith's deem it
advisable and in the best interests of their respective companies and
shareholders to consummate, and have approved, including for purposes of Section
251(b) of the General Corporation Law of the State of Delaware (the "DGCL"), the
business combination transactions provided for herein in which:
(i) Fred Meyer and Smith's will form a Delaware holding company,
Meyer-Smith Holdco, Inc. ("Holdings"); and
(ii) Holdings will form two subsidiaries, one of which will merge with
and into Fred Meyer with Fred Meyer continuing as the surviving corporation
(the "Fred Meyer Merger"), and the other of which will merge with and into
Smith's with Smith's continuing as the surviving corporation (the "Smith's
Merger" and together with the Fred Meyer Merger, the "Mergers"), and (1)
each issued and outstanding Fred Meyer Common Share (as hereinafter
defined), and each issued and outstanding Smith's Common Share (as
hereinafter defined) that is not a Dissenting Share (as hereinafter
defined), will be converted into the right to receive common stock, par
value $.01 per share, of Holdings ("Holdings Common Stock") and (2) each
issued and outstanding Series I Preferred Share (as hereinafter defined)
that is not a Dissenting Share will be converted into the right to receive
in cash the amount of thirty-three and one-third cents ($.33 1/3) per
share, without the payment of any interest thereon, all as more fully set
forth below;
B. For federal income tax purposes, it is intended that each of the Mergers
qualify as a tax-free exchange within the meaning of Section 351(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
C. As a condition to its willingness to enter into this Agreement, Fred
Meyer has required that, simultaneously with the execution hereof, certain
holders owning Smith's Common Shares or Series I Preferred Shares representing,
in the aggregate, at least 50.1% of the voting power of the issued and
outstanding shares of capital stock of Smith's enter into the Voting Agreements,
dated as of the date hereof (the "Voting Agreements"), with Fred Meyer,
agreeing, among other matters, to vote all of such Smith's Common Shares or
Series I Preferred Shares in favor of the Mergers and the approval and adoption
of this Agreement;
D. As a condition to its willingness to enter into this Agreement, Smith's
has required that, simultaneously with the execution hereof, Fred Meyer enter
into the Option Agreement, dated as of the date hereof, with Smith's, pursuant
to which Fred Meyer is granting Smith's an option to purchase up to 19.9% of
Fred Meyer Common Stock (as hereinafter defined) on the terms and conditions set
forth therein; and
E. Smith's and Fred Meyer desire to make certain representations,
warranties and agreements in connection with the Mergers and also to prescribe
various conditions to the Mergers.
Capitalized terms used in this Agreement and not otherwise defined herein
shall have the meanings set forth in Section 9.1 hereof.
1. THE MERGERS
1.1 Organization of Holdings. As promptly as practicable following the
execution of this Agreement, Smith's and Fred Meyer shall cause Holdings to be
organized under the laws of the State of Delaware. The
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initial certificate of incorporation and bylaws of Holdings shall be
substantially in the forms attached hereto as Exhibits A and B, respectively.
The authorized capital stock of Holdings shall consist initially of 100 shares
of Holdings Common Stock and 100 shares of undesignated preferred stock, of
which 50 shares of Holdings Common Stock will be issued to Smith's and 50 shares
of Holdings Common Stock will be issued to Fred Meyer. Prior to the Effective
Time (as hereinafter defined), Smith's and Fred Meyer shall cause Holdings to
amend its certificate of incorporation to increase the number of authorized
shares thereunder to provide for the issuance of Holdings Common Stock pursuant
to the Mergers. Immediately after the Effective Time, Smith's and Fred Meyer
shall cause Holdings to amend its certificate of incorporation to change its
name from Meyer-Smith Holdco, Inc. to Fred Meyer, Inc.
1.2 Directors and Officers of Holdings. (a) Upon formation of Holdings,
Smith's and Fred Meyer shall cause to be elected as directors of Holdings (and
as of the Effective Time the Holdings Board of Directors shall consist of) (i)
four (4) of Smith's current directors (including Ronald W. Burkle and three (3)
others selected by Smith's Board of Directors) and (ii) seven (7) individuals
selected by Fred Meyer's Board of Directors, one of which shall be Robert G.
Miller. The members of the Board of Directors shall be divided among the classes
substantially proportionately between Fred Meyer's current directors and Smith's
current directors, as set forth on Section 1.2 of the Disclosure Schedule. Each
director shall remain in office until his successor is duly elected or appointed
and qualified or until such director's earlier death, resignation or removal in
accordance with the certificate of incorporation and bylaws of Holdings.
(b) As of the Effective Time, Ronald W. Burkle shall be the Chairman of the
Board of Directors of Holdings (which position shall not constitute an officer
position of Holdings) and Robert G. Miller shall be the President and Chief
Executive Officer of Holdings.
1.3 Smith's Sub Merger.
(a) As promptly as practicable after the formation of Holdings, the Smith's
and Fred Meyer shall cause Holdings to form a wholly-owned corporation called
Smith Merger Sub, Inc. ("Smith's Sub") under the laws of the State of Delaware.
The Smith's and Fred Meyer shall cause Holdings to cause Smith's Sub to execute
and deliver this Agreement. Smith's shall be the surviving corporation in the
Smith's Merger and as a result thereof shall become a wholly-owned subsidiary of
Holdings.
(b) The certificate of incorporation and bylaws of Smith's Sub shall be in
such form as shall be determined by Holdings. Upon formation of Smith's Sub,
Holdings shall designate the Board of Directors and officers of Smith's Sub.
(c) Smith's shall use its best efforts to cause the Smith's Merger to be
consummated in accordance with the terms of this Agreement. The Smith's and Fred
Meyer shall cause Holdings to execute a formal written consent under Section 228
of the DGCL, as the sole stockholder of Smith's Sub, to the execution, delivery
and performance of this Agreement by Smith's Sub.
1.4 Fred Meyer Sub Merger.
(a) As promptly as practicable after the formation of Holdings, Fred Meyer
and Smith's shall cause Holdings to form a wholly-owned corporation called Fred
Meyer Merger Sub, Inc. ("Fred Meyer Sub") under the laws of the State of
Delaware. The parties shall cause Holdings to cause Fred Meyer Sub to execute
and deliver this Agreement. Fred Meyer shall be the surviving corporation in the
Fred Meyer Merger and as a result thereof shall become a wholly-owned subsidiary
of Holdings.
(b) The certificate of incorporation and bylaws of Fred Meyer Sub shall be
in such form as shall be determined by Holdings. Upon formation of Fred Meyer
Sub, Holdings shall designate the Board of Directors and officers of Fred Meyer
Sub.
(c) Fred Meyer shall use its best effort to cause the Fred Meyer Merger to
be consummated in accordance with the terms of this Agreement. The parties shall
cause Holdings to execute a formal written consent under Section 228 of the
DGCL, as the sole stockholder of Fred Meyer Sub, to the execution, delivery and
performance of this Agreement by Fred Meyer Sub.
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1.5 The Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement will take place at the offices of Cleary,
Gottlieb, Steen & Hamilton, at 10:00 a.m., local time, on the third business day
following the date on which the last of the conditions set forth in Article 6 is
satisfied or waived in accordance herewith or at such other place, time or date
as the parties may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date".
1.6 Effective Time. On the Closing Date, Smith's and Fred Meyer will cause
certificates of merger to be filed with the Secretary of State of the State of
Delaware as provided in Section 251 of the DGCL in order to effect the Mergers.
Upon completion of such filing, the respective Mergers will become effective in
accordance with the DGCL. The time and date on which the Mergers become
effective is herein referred to as the "Effective Time".
1.7 Effects of the Mergers. At the Effective Time,
(a) The separate existence of Smith's Sub shall cease and Smith's Sub shall
be merged with and into Smith's with Smith's continuing as the surviving
corporation (as such, "New Smith's");
(b) The separate existence of Fred Meyer Sub shall cease and Fred Meyer Sub
shall be merged with and into Fred Meyer with Fred Meyer continuing as the
surviving corporation (as such, "New Fred Meyer" and, together with New Smith's,
the "Surviving Corporations"); and
(c) The Mergers shall have all the effects of applicable law, including,
without limitation, the applicable provisions of the DGCL.
1.8 Certificates of Incorporation and Bylaws of the Surviving Corporations.
(a) Immediately after the Effective Time, Holdings will cause New Smith's
and New Fred Meyer to amend their respective certificates of incorporation (to
be in effect immediately after the Effective Time, until amended in accordance
with their respective terms and the DGCL) to be substantially identical to the
certificates of incorporation of Smith's Sub and Fred Meyer Sub, respectively,
as in effect immediately prior to the Effective Time, except that the name of
New Fred Meyer shall not be Fred Meyer, Inc.
(b) Immediately after the Effective Time, Holdings will cause New Smith's
and New Fred Meyer to amend their respective bylaws (to be in effect immediately
after the Effective Time, until amended in accordance with their respective
terms and the DGCL) to be substantially identical to the bylaws of Smith's Sub
and Fred Meyer Sub, as in effect immediately prior to the Effective Time.
1.9 Directors and Officers of the Surviving Corporations. (a) The members
of the Board of Directors of each of New Smith's and New Fred Meyer will be the
respective members of the Board of Directors of Smith's Sub and Fred Meyer Sub
immediately prior to the Effective Time. All of the members of the Board of
Directors of New Smith's and New Fred Meyer will serve until their respective
successors are duly elected or appointed and qualified or until their earlier
death, resignation or removal in accordance with the respective certificate of
incorporation and bylaws of each of New Smith's and New Fred Meyer.
(b) The officers of each of New Smith's and New Fred Meyer will consist of
the respective officers of Smith's and Fred Meyer immediately prior to the
Effective Time. Such persons will continue as officers of New Smith's and New
Fred Meyer until their respective successors have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in accordance
with the respective certificate of incorporation and bylaws of each of New
Smith's and New Fred Meyer.
1.10 Execution of Related Agreements. (a) On the Closing Date, Holdings and
the stockholders of Smith's named therein shall enter into a Registration Rights
Agreement (the "Registration Rights Agreement"), in the form of Exhibit C
hereto.
(b) On the Closing Date, the existing Management Services Agreement, dated
as of May 23, 1996, by and between The Yucaipa Companies, a California general
partnership (the "Partnership") and Smith's (the "Old Management Agreement")
shall terminate and Holdings and the Yucaipa Companies LLC ("Yucaipa LLC") shall
enter into a management agreement (the "New Management Agreement"), in the form
of Exhibit D hereto.
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2. CONVERSION OF SECURITIES
2.1 Conversion of Securities.
(a) Capital Stock of Merger Companies. As of the Effective Time, by virtue
of the Mergers and without any action on the part of the holder of any shares of
capital stock of the corporations involved: (i) each outstanding share of common
stock of Smith's Sub, par value $.01 per share, which is issued and outstanding
immediately prior to the Effective Time, shall be converted into and become one
(1) share of common stock of New Smith's and (ii) each outstanding share of
common stock of Fred Meyer Sub, par value $.01 per share, which is issued and
outstanding immediately prior to the Effective Time, shall be converted into and
become one (1) share of common stock of New Fred Meyer.
(b) Common Stock of Smith's and Fred Meyer.
(i) As of the Effective Time, by virtue of the Mergers and without any
action on the part of the holder of any shares of capital stock of the
corporations involved: each share of Class A Common Stock, par value $.01
per share, of Smith's ("Class A Common Stock"), Class B Common Stock, par
value $.01 per share, of Smith's ("Class B Common Stock") and Class C
Common Stock, par value $.01 per share, of Smith's ("Class C Common Stock"
and together with shares of the Class A Common Stock and the Class B Common
Stock, the "Smith's Common Stock") issued and outstanding immediately prior
to the Effective Time (other than shares of Smith's Common Stock owned by
Fred Meyer or any direct or indirect Subsidiary of Fred Meyer
(collectively, the "Fred Meyer Companies") or held in the treasury of
Smith's or owned by any of Smith's direct or indirect Subsidiaries
("Smith's Common Treasury Shares")) will, by virtue of the Smith's Merger
and without any action on the part of the holder thereof, be converted into
1.05 fully paid and nonassessable shares of Holdings Common Stock (the
"Smith's Exchange Ratio"). Shares of Smith's Common Stock other than those
owned by the Fred Meyer Companies and other than Smith's Common Treasury
Shares are referred to herein as "Smith's Common Shares." Notwithstanding
the foregoing provisions of this Section 2.1(b)(i), no Smith's Common Share
which constitutes a Dissenting Share will be deemed to be converted into
Holdings Common Stock hereunder and holders of Dissenting Shares, if any,
will be entitled to payment, solely from Smith's of the appraised value of
such Dissenting Shares to the extent permitted by and in accordance with
Section 262 of the DGCL.
(ii) As of the Effective Time, by virtue of the Mergers and without
any action on the part of the holder of any shares of capital stock of the
corporations involved: each share of common stock, par value $.01 per
share, of Fred Meyer ("Fred Meyer Common Stock") issued and outstanding
immediately prior to the Effective Time (other than Fred Meyer Common Stock
owned by Smith's or any direct or indirect Subsidiary of Smith's
(collectively, the "Smith's Companies") or held in the treasury of Fred
Meyer or owned by any of Fred Meyer's direct or indirect wholly owned
Subsidiaries ("Fred Meyer Common Treasury Shares")) will, by virtue of the
Fred Meyer Merger and without any action on the part of the holder thereof,
be converted into one (1) fully paid and nonassessable share of Holdings
Common Stock (the "Fred Meyer Exchange Ratio"). Shares of Fred Meyer Common
Stock other than those owned by the Smith's Companies and other than Fred
Meyer Common Treasury Shares are referred to herein as "Fred Meyer Common
Shares."
(iii) All Fred Meyer Common Shares and all Smith's Common Shares to be
converted into shares of Holdings Common Stock pursuant to this Section 2.1
will, by virtue of the Mergers and without any action on the part of the
holders thereof, cease to be outstanding, be canceled and retired and cease
to exist, and each holder of a certificate previously representing any such
Smith's Common Shares or Fred Meyer Common Shares will thereafter cease to
have any rights with respect to such Smith's Common Shares or Fred Meyer
Common Shares, except the right to receive, upon the surrender of such
certificate in accordance with Section 2.2, certificates representing the
number of shares of Holdings Common Stock specified above and cash in lieu
of fractional shares of Holdings Common Stock as contemplated by Section
2.3 (with respect to the Smith's Common Shares, the "Smith's Common
Consideration", with respect to the Fred Meyer Common Shares, the "Fred
Meyer Common Consideration" and collectively, the "Common Consideration").
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(iv) Each Smith's Common Treasury Share, and each share of Smith's
Common Stock owned by any of the Fred Meyer Companies, immediately prior to
the Effective Time, will, by virtue of the Mergers and without any action
on the part of the holder thereof, cease to be outstanding, be canceled and
retired without payment of any consideration therefor and cease to exist.
(v) Each Fred Meyer Common Treasury Share, and each share of Fred
Meyer Common Stock owned by the Smith's Companies, immediately prior to the
Effective Time, will, by virtue of the Mergers and without any action on
the part of the holder thereof, cease to be outstanding, be canceled and
retired without payment of any consideration therefor and cease to exist.
(c) Series I Preferred Stock.
(i) As of the Effective Time, by virtue of the Smith's Merger and
without any action on the part of the holder of any shares of capital stock
of the corporations involved: each share of Series I Preferred Stock, par
value $.01 per share, of Smith's ("Series I Preferred Stock") issued and
outstanding immediately prior to the Effective Time (other than shares of
Series I Preferred Stock owned by the Fred Meyer Companies or held in the
treasury of Smith's or owned by any Smith's Company ("Smith's Preferred
Treasury Shares")) will, by virtue of the Mergers and without any action on
the part of the holder thereof, be converted into the right to receive in
cash the amount of thirty-three and one-third cents ($.33 1/3) per share,
without the payment of any interest thereon (the "Preferred
Consideration"). Shares of Series I Preferred Stock other than those owned
by the Fred Meyer Companies and other than the Smith's Preferred Treasury
Shares are referred to herein as the "Series I Preferred Shares."
Notwithstanding the foregoing provisions of this Section 2.1(c)(i), no
Series I Preferred Shares which constitute Dissenting Shares will be deemed
to be converted into and to represent the right to receive the cash payment
described above and holders of Dissenting Shares, if any, will be entitled
to payment, solely from Smith's of the appraised value of such Dissenting
Shares to the extent permitted by and in accordance with Section 262 of the
DGCL.
(ii) All Series I Preferred Shares to be converted to cash pursuant to
this Section 2.1 will, by virtue of the Mergers and without any action on
the part of the holders thereof, cease to be outstanding, be canceled and
retired and cease to exist, and each holder of a certificate previously
representing any such Series I Preferred Shares will thereafter cease to
have any rights with respect to such Series I Preferred Shares, except the
right to receive, upon the surrender of such certificate in accordance with
Section 2.2, a cash payment in the amount of the Preferred Consideration.
(iii) At the Effective Time, each Smith's Preferred Treasury Share and
each Series I Preferred Share owned by any of the Fred Meyer Companies,
immediately prior to the Effective Time, will, by virtue of the Mergers and
without any action on the part of the holder thereof, cease to be
outstanding, be canceled and retired without payment of any consideration
therefor and cease to exist.
(d) Smith's and Fred Meyer Options. (i) At the Effective Time, each holder
of a then outstanding option to purchase Smith's Common Shares, whether or not
then exercisable or vested in accordance with its terms (the "Smith's Options"),
which theretofore has been granted under Smith's Amended and Restated 1989 Stock
Option Plan, as amended, (the "Smith's Stock Option Plan"), shall become a fully
vested and immediately exercisable option to acquire, on substantially the same
terms and conditions as were applicable under such Smith's Option immediately
prior to the Effective Time, except as otherwise set forth in this Section
2.1(d), for each Smith's Common Share subject to such Smith's Option the same
number of shares of Holdings Common Stock as the holder of such Smith's Option
would have been entitled to receive in the Mergers had such holder exercised
such Smith's Option in full immediately prior to the Effective Time (rounded
downward to the nearest whole number), at a price per share (rounded upward to
the nearest whole cent) equal to (i) the aggregate exercise price for Smith's
Common Shares purchasable pursuant to such Smith's Option (without regard to
vesting provisions) divided by (ii) the number of full shares of Holdings Common
Stock deemed purchasable pursuant to such Smith's Option. Except as set forth in
this Section 2.1(d)(i), any and all rights under any provisions of the Smith's
Stock Option Plan or in any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of
Smith's or any Subsidiary thereof shall be canceled as of the Effective Time
except as provided in
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Section 2.1(e) hereof. As soon as practicable following the date of this
Agreement, and, in any event, prior to the Effective Time, the Board of
Directors of Smith's (or, if appropriate, any committee administering the
Smith's Stock Option Plan) and Smith's shall take all action necessary to give
effect to the provisions of this Section 2.1(d)(i) and to ensure that no Person
shall have any right under any Stock Option Plan (or any Smith's Option granted
thereunder) following the Effective Time except for the right to exercise
Smith's Options for shares of Holdings Common Stock as provided in this
paragraph and except as provided in this Section 2.1. As soon as practicable
following the date of this Agreement, and, in any event, prior to the Effective
Time, the Board of Directors of Smith's (or, if appropriate, any committee
thereof) and Smith's shall take all action necessary to either terminate any
other plan, program or arrangement with respect to, including any right to
acquire, equity securities of Smith's, or to amend or modify such other plans,
programs or arrangements to provide for the issuance of shares of Holdings
Common Stock in lieu of equity securities of Smith's.
(ii) At the Effective Time, each holder of a then outstanding option to
purchase Fred Meyer Common Shares, whether or not then exercisable or vested in
accordance with its terms (the "Fred Meyer Options"), which theretofore has been
granted under Fred Meyer's 1983 Stock Option Plan, as amended and Fred Meyer's
Amended 1990 Stock Incentive Plan (together, the "Fred Meyer Stock Option
Plans"), shall become an option to acquire, on substantially the same terms and
conditions as were applicable under such Fred Meyer Option immediately prior to
the Effective Time, except as otherwise set forth in this Section 2.1(d), for
each Fred Meyer Common Share subject to such Fred Meyer Option one (1) share of
Holdings Common Stock. Except as set forth in this Section 2.1(d)(ii), any and
all rights under any provisions of the Fred Meyer Stock Option Plans or in any
other plan, program or arrangement providing for the issuance or grant of any
other interest in respect of the capital stock of Fred Meyer or any Subsidiary
thereof shall be canceled as of the Effective Time. As soon as practicable
following the date of this Agreement, and, in any event, prior to the Effective
Time, the Board of Directors of Fred Meyer (or, if appropriate, any committee
administering the Fred Meyer Stock Option Plans) and Fred Meyer shall take all
action necessary to give effect to the provisions of this Section 2.1(d)(ii) and
to ensure that no Person shall have any right under any Fred Meyer Stock Option
Plan (or any Fred Meyer Option granted thereunder) following the Effective Time
except for the right to exercise Fred Meyer Options for shares of Holdings
Common Stock as provided in this paragraph and except as provided in this
Section 2.1. As soon as practicable following the date of this Agreement, and,
in any event, prior to the Effective Time, the Board of Directors of Fred Meyer
(or, if appropriate, any committee thereof) and Fred Meyer shall take all action
necessary to either terminate any other plan, program or arrangement with
respect to, including any right to acquire, equity securities of Fred Meyer or
to amend or modify such other plans, programs or arrangements to provide for the
issuance of shares of Holdings Common Stock in lieu of equity securities of Fred
Meyer.
(e) Smith's Warrants. At the Effective Time, Smith's and Fred Meyer will
cause Holdings to execute an agreement in form reasonably satisfactory to Fred
Meyer and Smith's (a "Supplemental Warrant Agreement"), providing that any
holder of a warrant issued pursuant to the Warrant Agreement, dated as of May
23, 1996, between Smith's and the Partnership (a "Smith's Warrant"), will have
the right until the expiration date thereof to exercise such Smith's Warrant at
the existing exercise price for the number of shares of Holdings Common Stock to
which a holder of the number of Smith's Common Shares that would otherwise have
been deliverable upon the exercise of such Smith's Warrant would have been
entitled pursuant to Section 2.1(b) hereof if such Smith's Warrant had been
exercised in full immediately prior to the Effective Time (such exercise price
and number of shares of Holdings Common Stock to thereafter be subject to the
adjustment provisions of the Smith's Warrant). At the Effective Time, the
Smith's Warrants shall be exercisable, for 1,934,683 shares, in the aggregate,
of Holdings Common Stock.
2.2 Payment for Smith's Common Shares, Fred Meyer Common Shares and Series
I Preferred Shares. (a) At the Effective Time, (i) Smith's and Fred Meyer will
cause Holdings to make available to such bank or trust company as may be
selected by Fred Meyer and reasonably acceptable to Smith's (the "Exchange
Agent"), for the benefit of the holders of Smith's Common Shares and Fred Meyer
Common Shares, a sufficient number of certificates representing shares of
Holdings Common Stock to effect the delivery of the aggregate Common
Consideration pursuant to Section 2.1(b), and (ii) Smith's and Fred Meyer will
cause
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Holdings to make available to the Exchange Agent for the benefit of holders of
Series I Preferred Shares, a sufficient amount of cash representing the amount
to effect delivery of the Preferred Consideration pursuant to Section 2.1(c)
(the certificates representing shares of Holdings Common Stock and any cash
delivered to the Exchange Agent pursuant to Section 2.3 comprising the aggregate
Common Consideration and the cash delivered to the Exchange Agent comprising the
Preferred Consideration, being hereinafter referred to as the "Exchange Fund").
The Exchange Agent will, pursuant to irrevocable instructions, deliver the
shares of Holdings Common Stock contemplated to be issued pursuant to Section
2.1(b) and make the payments contemplated to be paid pursuant to Section 2.1(c)
out of the Exchange Fund, and, except as provided in Section 2.3, the Exchange
Fund will not be used for any other purpose.
(b) Promptly after the Effective Time, the Exchange Agent will mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding Smith's Common Shares or Fred Meyer
Common Shares (the "Common Certificates") or outstanding Series I Preferred
Shares (the "Preferred Certificates") (i) a form of letter of transmittal (which
will specify that delivery will be effected, and risk of loss and title to the
Common Certificates and the Preferred Certificates will pass, only upon proper
delivery of the Common Certificates or the Preferred Certificates, as the case
may be, to the Exchange Agent) and (ii) instructions for use in effecting the
surrender of the Common Certificates and the Preferred Certificates for payment
therefor.
(c) Upon surrender of Common Certificates for cancellation to the Exchange
Agent, together with such letter of transmittal duly executed and any other
required documents, the holder of such Common Certificates will be entitled to
receive for each Smith's Common Share represented by such Common Certificates
the Smith's Common Consideration and for each Fred Meyer Common Share
represented by such Common Certificates the Fred Meyer Common Consideration, and
the Common Certificates so surrendered will promptly be canceled. Until so
surrendered, Common Certificates will represent solely the right to receive the
Common Consideration and holders thereof shall not be holders of record of
Holdings. No dividends or other distributions that are declared payable to the
holders of record of shares of Holdings Common Stock after the Effective Time
will be paid to Persons entitled by reason of the Mergers to receive shares of
Holdings Common Stock until such Persons surrender their Common Certificates.
Upon such surrender, there will be paid to the Person in whose name the shares
of Holdings Common Stock are issued any dividends or other distributions on such
shares of Holdings Common Stock which have a record date after the Effective
Time and prior to such surrender, and a payment date prior to such surrender. In
no event will the Persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions. If any cash or certificate representing shares of Holdings Common
Stock is to be paid to or issued in a name other than that in which the Common
Certificate surrendered in exchange therefor is registered, it will be a
condition of such exchange that the Common Certificate so surrendered be
properly endorsed and otherwise in proper form for transfer and that the Person
requesting such exchange pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of certificates for such shares of Holdings
Common Stock in a name other than that of the registered holder of the Common
Certificate surrendered, or establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not applicable. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto will be liable to a holder of
Smith's Common Shares or Fred Meyer Common Shares for any shares of Holdings
Common Stock or dividends thereon or, in accordance with Section 2.3, cash in
lieu of fractional shares of Holdings Common Stock, delivered to a public
official pursuant to applicable abandoned property, escheat or similar law. The
Exchange Agent will not be entitled to vote or exercise any rights of ownership
with respect to such shares of Holdings Common Stock for the account of the
Persons entitled thereto.
(d) Upon surrender of Preferred Certificates for cancellation to the
Exchange Agent, together with such letter of transmittal duly executed and any
other required documents, the holder of such Preferred Certificates will be
entitled to receive for each of the Series I Preferred Shares represented by
such Preferred Certificates the Preferred Consideration, and the Preferred
Certificates so surrendered will be promptly canceled. Until so surrendered,
Preferred Certificates will represent solely the right to receive the Preferred
Consideration. If the Preferred Consideration is to be paid to a Person other
than that in which the Preferred Certificate surrendered in exchange therefor is
registered, it will be a condition of such exchange that the
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Preferred Certificate so surrendered be properly endorsed and otherwise in
proper form for transfer. Notwithstanding the foregoing, neither the Exchange
Agent nor any party hereto will be liable to a holder of Series I Preferred
Shares for any cash delivered to a public official pursuant to applicable
abandoned property, escheat or similar law.
(e) Any portion of the Exchange Fund that remains unclaimed by the former
stockholders of Smith's or Fred Meyer for twelve (12) months after the Effective
Time will be delivered to Holdings and any former stockholders of Smith's or
Fred Meyer will thereafter look only to Holdings for payment of their claim for
the Smith's Common Consideration for Smith's Common Shares or the Fred Meyer
Common Consideration for Fred Meyer Common Shares or the Preferred Consideration
for Series I Preferred Shares.
2.3 Fractional Shares. No fractional shares of Holdings Common Stock will
be issued in the Mergers. In lieu of any such fractional securities, each holder
of Smith's Common Shares or Fred Meyer Common Shares who would otherwise have
been entitled to a fraction of a share of Holdings Common Stock upon surrender
of Common Certificates for exchange pursuant to this Article 2 will be paid an
amount in cash (without interest), rounded to the nearest cent, determined by
multiplying (a) the per share last sale price of Holdings Common Stock (as
reported on the NYSE Composite Transactions Reporting System) on the date of the
Effective Time (or, if Holdings Common Stock does not trade on the New York
Stock Exchange, Inc. (the "NYSE") on such date, the first date of trading of
Holdings Common Stock on the NYSE after the Effective Time) by (b) the
fractional interest to which such holder otherwise would be entitled. Promptly
upon request from the Exchange Agent, Holdings will make available to the
Exchange Agent the cash necessary for this purpose.
2.4 Dissenting Shares. (a) Notwithstanding the provisions of Section 2.1 or
any other provision of this Agreement to the contrary, the shares of Class A
Common Stock that are also Smith's Common Shares and the Series I Preferred
Shares that are issued and outstanding immediately prior to the Effective Date
and are held by stockholders who have not voted such shares of Class A Common
Stock or Series I Preferred Shares, as the case may be, in favor of the adoption
of this Agreement and who properly demand appraisal of such shares of Class A
Common Stock or such Series I Preferred Shares, in accordance with Section 262
of the DGCL (the "Dissenting Shares"), will not be converted as provided in
Section 2.1(b) or 2.1(c), as the case may be, at or after the Effective Time
unless and until the holder of such Dissenting Shares fails to perfect or
effectively withdraws or loses such right to appraisal and payment under the
DGCL. If a holder of Dissenting Shares so fails to perfect or effectively
withdraws or loses such right to appraisal and payment, then, as of the
Effective Time or the occurrence of such event, whichever last occurs, such
holder's Dissenting Shares will be converted into and represent solely the right
provided in Section 2.1(b) or 2.1(c), as the case may be.
(b) Smith's will give Fred Meyer (i) prompt written notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served pursuant to Section 262 of the DGCL and received by Smith's
and (ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under Section 262 of the DGCL. Smith's will not
voluntarily make any payment with respect to any demands for appraisal and will
not, except with the prior written consent of Fred Meyer, settle or offer to
settle any such demands.
2.5 No Transfer after the Effective Time. No transfers of Smith's Common
Shares or Series I Preferred Shares will be made on the stock transfer books of
Smith's, and no transfers of Fred Meyer Common Shares will be made on the stock
transfer books of Fred Meyer, after the close of business on the day prior to
the date of the Effective Time.
3. REPRESENTATIONS AND WARRANTIES OF SMITH'S
Smith's hereby represents and warrants to Fred Meyer as follows:
3.1 Existence; Good Standing; Corporate Authority. Smith's and each of its
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, with the power and authority to
own and operate its businesses as presently conducted. Smith's and each of its
Subsidiaries is duly qualified as a foreign corporation or other entity to do
business and is in good standing in
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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 Smith's and any of its Subsidiaries to be so qualified as
would not, individually or in the aggregate, have a Material Adverse Effect.
Smith's has previously provided Fred Meyer with true and correct copies of its
certificate of incorporation and bylaws or other organizational documents and
the charter documents and bylaws or other organizational documents of each of
its Subsidiaries, as currently in effect.
3.2 Authorization; Validity and Effect of Agreement. Smith's has the
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement, each other document or agreement to be
executed by Smith's under this Agreement (each a "Smith's Transaction Document")
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement by Smith's and the performance by
Smith's of its obligations hereunder, the execution and delivery of each of the
Smith's Transaction Documents by Smith's and the performance of its obligations
thereunder and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by the Board of Directors of Smith's and all
other necessary corporate action on the part of Smith's, other than the adoption
and approval of this Agreement by the stockholders of Smith's, and no other
corporate proceedings on the part of Smith's are necessary to authorize this
Agreement, the Smith's Transaction Documents and the transactions contemplated
hereby and thereby and the execution, delivery and performance of the Voting
Agreement by the parties thereto. The Board of Directors of Smith's has approved
for the purposes of Section 251(b) of the DGCL the agreement of merger contained
in this Agreement and the Smith's Merger. This Agreement has been duly and
validly executed and delivered by Smith's and constitutes a legal, valid and
binding obligation of Smith's, enforceable against it in accordance with its
terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally or by general
principles of equity. Each Smith's Transaction Document has been or, as of the
Effective Time, will have been, duly and validly authorized, executed and
delivered by Smith's, and constitutes or will constitute as of such time a
legally valid and binding obligation of Smith's, enforceable against it in
accordance with its terms, except to the extent that such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally or by
general principles of equity.
3.3 Capitalization. The authorized capital stock of Smith's consists of
20,000,000 shares of Class A Common Stock, 100,000,000 shares of Class B Common
Stock, 20,000,000 shares of Class C Common Stock and 85,000,000 shares of
preferred stock having a par value of $.01 per share, ("Smith's Preferred
Stock") 34,524,579 shares of which have been designated as Series I Preferred
Stock. As of the date hereof, 3,855,600 shares of Class A Common Stock (none of
which are held in Smith's treasury), 11,949,630 shares of Class B Common Stock
(none of which are held in Smith's treasury), no shares of Class C Common Stock,
9,956,749 shares of Series I Preferred Stock (none of which are held in Smith's
treasury) and no other shares of Smith's Preferred Stock are issued and
outstanding. All of the issued and outstanding shares of Smith's Common Stock
and Series I Preferred Stock are validly issued, fully paid and non-assessable.
As of the date hereof, except as otherwise disclosed in Section 3.3 of the
Disclosure Schedule, there are no existing options, warrants, calls,
subscriptions, convertible securities or other securities, agreements,
commitments, or obligations which would require Smith's to issue or sell shares
of Smith's Common Stock, Smith's Preferred Stock or any other equity securities,
or securities convertible into or exchangeable or exercisable for shares of
Smith's Common Stock, Smith's Preferred Stock or any other equity securities of
Smith's or any of its Subsidiaries. Except as set forth in Section 3.3 of the
Disclosure Schedule, Smith's has no commitments or obligations to purchase or
redeem any shares of Smith's Common Stock or (except as specified in Smith's
certificate of incorporation with respect to its Series I Preferred Stock)
Smith's Preferred Stock.
3.4 Subsidiaries. The only Subsidiaries of Smith's are those set forth in
Section 3.4 of the Disclosure Schedule. All of the outstanding shares of capital
stock and other ownership interests of each of Smith's Subsidiaries are validly
issued, fully paid, non-assessable and free of preemptive rights or rights of
first refusal. Except as set forth in Section 3.4 of the Disclosure Schedule,
Smith's owns, directly or indirectly, all of the issued and outstanding capital
stock and other ownership interests of each of its Subsidiaries, free and clear
of all Encumbrances, and there are no existing options, warrants, calls,
subscriptions, convertible securities or
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other securities, agreements, commitments or obligations of any character
relating to the outstanding capital stock or other securities of any Subsidiary
of Smith's or which would require any Subsidiary of Smith's 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.
3.5 Other Interests. Except as set forth in Section 3.5 of the Disclosure
Schedule, neither Smith's nor any of Smith's Subsidiaries owns, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, limited liability company, joint venture, business,
trust or other Person (other than Smith's Subsidiaries).
3.6 No Conflict; Required Filings and Consents. (a) Except as set forth in
Section 3.6(a) of the Disclosure Schedule, neither the execution and delivery of
this Agreement and the Smith's Transaction Documents, nor the performance by
Smith's of its obligations hereunder and thereunder, nor the consummation of the
transactions contemplated hereby or thereby, will: (i) conflict with Smith's
certificate of incorporation or bylaws; (ii) assuming satisfaction of the
requirements set forth in Section 3.6(b) below, violate any statute, law,
ordinance, rule or regulation, applicable to Smith's or any of its Subsidiaries
or any of their properties or assets; or (iii) 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 Smith's or any
of its Subsidiaries, or result in the creation or imposition of any lien upon
any properties, assets or business of Smith's 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 Smith's or any of its Subsidiaries is a
party or by which Smith's 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 Smith's or any of its Subsidiaries to purchase or repurchase any notes,
bonds or instruments of any kind except, in each case, for such violations,
conflicts, defaults or other occurrences which, individually or in the
aggregate, would not have, and would not reasonably be expected to have, a
Material Adverse Effect.
(b) Except (i) for applicable requirements, if any, of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (the
"Exchange Act"), the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"), and state securities or "blue
sky" laws ("Blue Sky Laws"), (ii) for 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"), (iii) for the filing of
certificates of merger pursuant to the DGCL, or (iv) with respect to matters set
forth in Sections 3.6(a) or 3.6(b) of the Disclosure Schedule, no consent,
approval or authorization of, permit from, or declaration, filing or
registration with, any governmental or regulatory authority, or any other Person
or entity (including, without limitation, any landlord under any lease) is
required to be made or obtained by Smith's or its Subsidiaries in connection
with the execution, delivery and performance of this Agreement, the Smith's
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby except where the failure to obtain such consent, approval,
authorization, permit or declaration or to make such filing or registration
would not, individually or in the aggregate, have a Material Adverse Effect.
3.7 Compliance. Except as set forth in Section 3.7 of the Disclosure
Schedule, Smith's 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 (including, without limitation, all Environmental Laws), except
to the extent that failure to comply would not, individually or in the
aggregate, have a Material Adverse Effect. Except as set forth in Section 3.7 of
the Disclosure Schedule, to the best knowledge of Smith's, neither Smith's 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. Smith's and its
Subsidiaries have all material permits, licenses and franchises from
governmental agencies required to conduct their respective businesses as they
are now being conducted and all such permits, licenses
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and franchises will remain in effect after the Effective Time, except for such
failures to remain effective that would not, individually or in the aggregate,
have a Material Adverse Effect.
3.8 SEC Documents. (a) Smith's has delivered or made available to Fred
Meyer 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 Securities and Exchange Commission (the "SEC") since January 1, 1996
(collectively, the "Smith's SEC Reports"). As of their respective dates, the
Smith's SEC Reports and any registration statements, reports, forms, proxy or
information statements and other documents filed by Smith's with the SEC after
the date of this Agreement (i) complied, 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 (ii) did not, 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.
(b) Each of the consolidated balance sheets of Smith's included in or
incorporated by reference into the Smith's SEC Reports (including the related
notes and schedules) presents fairly, in all material respects, the consolidated
financial position of Smith's and its consolidated Subsidiaries as of its date,
and each of the consolidated statements of income, retained earnings and cash
flows of Smith's included in or incorporated by reference into the Smith's SEC
Reports (including any related notes and schedules) presents fairly, in all
material respects, the results of operations, retained earnings or cash flows,
as the case may be, of Smith's and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments), in each case in accordance with GAAP consistently applied during
the periods involved, except as may be noted therein.
(c) Neither Smith's 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 balance
sheet of Smith's or in the notes thereto, prepared in accordance with GAAP
consistently applied, except for (i) liabilities or obligations that were so
reserved on, or reflected in (including the notes to), the consolidated balance
sheet of Smith's as of December 28, 1996 and (ii) liabilities or obligations
arising in the ordinary course of business (including trade indebtedness) since
December 28, 1996 which would not, individually or in the aggregate, have a
Material Adverse Effect.
3.9 Litigation. Except as set forth in Section 3.9 of the Disclosure
Schedule or the Smith's SEC Reports, there is no Action instituted, pending or,
to the best knowledge of Smith's, threatened, which, if adversely decided,
would, individually or in the aggregate, directly or indirectly, have a Material
Adverse Effect, nor is there any outstanding judgment, decree, or injunction or
any statute, rule or order of any domestic or foreign court, governmental
department, commission or agency which has or will have, individually or in the
aggregate, any Material Adverse Effect.
3.10 Absence of Certain Changes. Except as set forth in Section 3.10 of the
Disclosure Schedule or the Smith's SEC Reports and except for the transactions
expressly contemplated hereby, since December 28, 1996, Smith's 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 change in
Smith's' business, operations, condition (financial or otherwise), results of
operations, prospects, assets, liabilities, working capital or reserves, except
for changes contemplated hereby or changes which have not, individually or in
the aggregate, had a Material Adverse Effect. Except as set forth in Section
3.10 of the Disclosure Schedule or the Smith's SEC Reports, from December 28,
1996 through the date of this Agreement, neither Smith's nor any of its
Subsidiaries has taken any of the actions prohibited by Section 5.2 hereof.
3.11 Taxes. Except as set forth in Section 3.11 of the Disclosure Schedule:
(a) Smith's and its Subsidiaries have (A) duly filed (or there have
been filed on their behalf) with the appropriate governmental authorities
all Tax Returns required to be filed by them and such Tax Returns are true,
correct and complete in all material respects, and (B) duly paid in full or
made provision in accordance with GAAP (or there has been paid or provision
has been made on their behalf) for the payment of all Taxes for all periods
(or portions thereof) ending on or prior to the Closing Date;
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(b) Smith's and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the
payment and withholding of Taxes and have, within the time and the manner
prescribed by law, withheld and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under
applicable laws;
(c) No federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any
Taxes or Tax Returns of Smith's or its Subsidiaries and neither Smith's nor
its Subsidiaries has received a written notice of any pending audits or
proceedings;
(d) Neither the Internal Revenue Service nor any other taxing
authority (whether domestic or foreign) has asserted, or to the best
knowledge of Smith's, is threatening to assert, against Smith's or any of
its Subsidiaries any deficiency or claim for Taxes;
(e) There are no material liens for Taxes upon any Property or Assets
of Smith's or any Subsidiary thereof, except for liens for Taxes not yet
due and payable and liens for Taxes that are being contested in good faith
by appropriate proceedings;
(f) Neither Smith's nor any of its Subsidiaries has agreed to or is
required to make any adjustment under Section 481(a) of the Code;
(g) The applicable statutes of limitation for the assessment of
federal income Taxes upon Smith's and its Subsidiaries for all periods have
expired, except as set forth on Section 3.11 of the Disclosure Schedule;
(h) Neither Smith's nor any of its Subsidiaries is a party to any
material agreement providing for the allocation or sharing of Taxes;
(i) Neither Smith's nor any of its Subsidiaries has, with regard to
any assets or property held or acquired by any of them, filed a consent to
the application of Section 341(f) of the Code, or 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 Smith's
or any of its Subsidiaries; and
(j) Neither Smith's nor any of its Subsidiaries is obligated, or will
be obligated by reason of the transaction, to pay compensation to any
employee not deductible by reason of Sections 280G or 162(m) of the Code.
3.12 Employee Benefit Plans.
(a) Section 3.12 of the Disclosure Schedule contains a complete list of all
Employee Plans of Smith's and its Subsidiaries. True and complete copies or
descriptions of the Employee Plans of Smith's and its Subsidiaries, including,
without limitation, trust instruments, if any, that form a part thereof, and all
amendments thereto have been furnished or made available to Fred Meyer and its
counsel.
(b) Except as described in Section 3.12 of the Disclosure Schedule, each of
the Employee Plans of Smith's and of its Subsidiaries (other than any
Multiemployer Plan) has been administered and is in compliance with the terms of
such Employee Plan and all applicable laws, rules and regulations except for
noncompliance which would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect.
(c) No "reportable event" (as such term is used in section 4043 of the
Employee Retirement Income Security Act of 1974 ("ERISA")), "prohibited
transaction" (as such term is used in section 406 of ERISA or section 4975 of
the Code), "nondeductible contributions" (as such term is used in Section 4972
of the Code) or "accumulated funding deficiency" (as such term is used in
section 412 or 4971 of the Code) has heretofore occurred with respect to any
Smith's Employee Plan (other than any Multiemployer Plan) which would,
individually or in the aggregate, have a Material Adverse Effect.
(d) No litigation or administrative or other proceeding involving any
Employee Plans of Smith's or any of its ERISA Affiliates (other than any
Multiemployer Plan) has occurred or are threatened where an adverse
determination would, individually or in the aggregate, have a Material Adverse
Effect.
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(e) Except as set forth in Section 3.12 of the Disclosure Schedule, neither
Smith's nor any ERISA Affiliate of Smith's has incurred any withdrawal liability
with respect to any Multiemployer Plan under Title IV of ERISA which remains
unsatisfied in an amount which would, individually or in the aggregate, have a
Material Adverse Effect.
(f) All of the Employee Plans of Smith's or its Subsidiaries (other than
any Multiemployer Plan) can be terminated by Smith's. Smith's and its
Subsidiaries can withdraw from participation in any Employee Plan that is a
Multiemployer Plan. Any termination of, or withdrawal from, any Employee Plans
of Smith's or its Subsidiaries, on or prior to the Closing Date, would not
subject Smith's to any material liability under Title IV of ERISA.
(g) Neither Smith's nor any of its Affiliates is aware of any situation
with respect to a Multiemployer Plan described in (b), (c) or (d) above, except
as described in Section 3.12 of the Disclosure Schedule.
(h) The transactions contemplated by this Agreement will not cause the
occurrence of a situation described in (b), (c), (d) or (e) as of or after the
Effective Time.
3.13 State Takeover Statutes. The Board of Directors of Smith's has
approved this Agreement and the transactions contemplated hereby, and the
execution, delivery and performance of the Voting Agreement for purposes of
Section 203 of the DGCL and any other "fair price", "merger moratorium",
"control share acquisition" or other anti-takeover statute or similar statute or
regulation that might be applicable and such approval is sufficient to render
inapplicable to this Agreement, the Voting Agreement and the transactions
contemplated hereby and thereby, the restrictions on business combinations
contained in Section 203 of the DGCL.
3.14 No Brokers. Except (a) as set forth in Section 3.14 of the Disclosure
Schedule, including the fee to be paid to Yucaipa LLC in connection with certain
financial advisory services and with the cancellation of the Old Management
Agreement, (b) fees to be paid to Donaldson, Lufkin & Jenrette Securities
Corporation (the arrangements of which have been disclosed to Fred Meyer prior
to the date hereof) and (c) the fees to be paid pursuant to the New Management
Agreement, no broker, finder, investment banker, or other person or firm is
entitled to any brokerage, finder's or other fee or commission in connection
with this Agreement or the transactions contemplated hereby based upon
arrangements made by or on behalf of Smith's, any of its Subsidiaries or any of
their respective directors, officers or employees.
3.15 Opinion of Financial Advisor. Smith's has received the opinion of
Donaldson, Lufkin & Jenrette Securities Corporation to the effect that, as of
the date hereof, the Smith's Exchange Ratio is fair to the holders of Smith's
Common Stock from a financial point of view. Smith's has delivered to Fred Meyer
a true, complete and correct copy of such opinion.
3.16 No Other Agreements to Sell Smith's or its Assets. Except as set forth
in Section 3.16 of the Disclosure Schedule, Smith's has no legal obligation,
absolute or contingent, to any other Person to sell any material portion of the
Assets of Smith's, to sell the capital stock or other ownership interests of
Smith's or any of its Subsidiaries, or to effect any merger, consolidation or
other reorganization of Smith's or any of its Subsidiaries or to enter into any
agreement with respect thereto. As of the date hereof, Smith's is not engaged,
directly or indirectly, in any discussions or negotiations with any other party
with respect to an Acquisition Proposal.
3.17 Assets.
(a) Except as set forth in Section 3.17(a) of the Disclosure Schedule,
Smith's and its Subsidiaries have good and marketable title to or a valid
leasehold estate in all of the properties and assets, real or personal,
reflected on Smith's balance sheet at December 28, 1996 (except for properties
or assets subsequently sold in the ordinary course of business consistent with
past practice), and have good and marketable title or a valid right to use all
of the real properties that are necessary, and all of the personal assets and
properties that are materially necessary, for the conduct of the business of
Smith's or any of its Subsidiaries free and clear of all Encumbrances (other
than Permitted Encumbrances).
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(b) Section 3.17(b) of the Disclosure Schedule sets forth a complete and
accurate list of each improved or unimproved real property (whether owned or
leased, "Property") and/or store, office, plant or warehouse ("Facility") owned
or leased by Smith's or any of its Subsidiaries, and the current use of such
Property or Facility and indicating whether the Property or Facility is owned or
leased.
(c) There are no pending or, to the best knowledge of Smith's, threatened
condemnation or similar proceedings relating to any of the Properties or
Facilities of Smith's and its Subsidiaries except for such proceedings which
would not, individually or in the aggregate, have a Material Adverse Effect.
(d) Section 3.17(d) of the Disclosure Schedule sets forth a complete and
accurate list of all Leases (including subleases and licenses) of personal
property entered into by Smith's or any of its Subsidiaries and involving any
annual expense to Smith's or any such Subsidiary in excess of $250,000 and not
cancelable (without material liability) within two (2) years.
(e) Section 3.17(e) of the Disclosure Schedule indicates with respect to
each Lease entered into by Smith's or any of its Subsidiaries, as a tenant or
subtenant: (i) the term (including renewal options), (ii) current fixed rent,
and (iii) any Lease requiring consent or approval of the lessor for the
transaction contemplated hereby or permitting (or granting an option to) the
lessor to terminate the Lease or option terms or requiring payment of
consideration to the lessor (other than immaterial processing fees).
(f) Smith's 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 (i) all Assets leased by it or to it (whether as lessor or
lessee), and (ii) 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
default on the part of Smith's or any of its Subsidiaries under any Lease, in
each case except where the failure to perform would not, individually or in the
aggregate, have a Material Adverse Effect.
(g) To the best knowledge of Smith's, 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, 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.
(h) Subject to the provisions of Section 3.18 below and except as shown on
Section 3.17(h) of the Disclosure Schedule, Smith's has delivered to Fred Meyer,
or otherwise made available, originals or true copies of all material Leases (as
the same may have been amended or modified, in any material respect, from time
to time).
3.18 Contracts and Commitments. Section 3.18 of the Disclosure Schedule
contains a complete and accurate list of all contracts (written or oral), plans,
undertakings, commitments or agreements ("Contracts") of the following
categories to which Smith's or any of its Subsidiaries is a party or by which
any of them is bound as of the date of this Agreement:
(a) employment contracts, including, without limitation, contracts to
employ executive officers and other contracts with officers, directors or
stockholders of Smith's, and any other Contracts with or for the benefit of
Smith's or its affiliates, and all severance, change in control or similar
arrangements with any officers, employees or agents of Smith's that will
result in any obligation (absolute or contingent) of Smith's or any of its
Subsidiaries to make any payment to any officers, employees or agents of
Smith's following either the consummation of the transactions contemplated
hereby, termination of employment, or both;
(b) labor contracts;
(c) material distribution, franchise, license, sales, agency or
advertising contracts;
(d) Contracts for the purchase of inventory which are not cancelable
(without material penalty, cost or other liability) within one (1) year
(other than Contracts for the purchase of holiday goods in accordance with
customary industry practices) and other Contracts made in the ordinary
course of
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business involving annual expenditures or liabilities in excess of $150,000
which are not cancelable (without material penalty, cost or other
liability) within thirty (30) days;
(e) promissory notes, loans, agreements, indentures, evidences of
indebtedness or other instruments relating to the lending of money, whether
as borrower, lender or guarantor, in excess of $250,000;
(f) Contracts containing covenants limiting the freedom of Smith's or
any of its Subsidiaries to engage in any line of business or compete with
any Person or operate at any location;
(g) powers of attorney;
(h) joint venture or partnership agreements or joint development or
similar agreements pursuant to which any third party is entitled to develop
any Property and/or Facility on behalf of Smith's or its Subsidiaries;
(i) any other Contract, whether similar or dissimilar to the
foregoing, which would be material to Smith's and its Subsidiaries taken as
a whole;
(j) any Contract with any federal, state or local government; and
(k) Contracts involving annual expenditures or liabilities in excess
of $250,000.
True copies of the written Contracts identified in Section 3.18 of the
Disclosure Schedule have been delivered or made available to Fred Meyer.
3.19 Absence of Breaches or Defaults. Except as set forth in Section 3.19
of the Disclosure Schedule, neither Smith's nor any of its Subsidiaries is and,
to the best knowledge of Smith's, no other party is in default under, or in
breach or violation of, any Contract identified on Section 3.18 of the
Disclosure Schedule and, to the best knowledge of Smith's, no event has occurred
which, with the giving of notice or passage of time or both would constitute a
default under any Contract identified on Section 3.18 of the Disclosure
Schedule, except for defaults, breaches, violations or events which,
individually or in the aggregate, would not have a Material Adverse Effect. Each
of the Contracts identified on Section 3.18 of the Disclosure Schedule 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, such Contracts 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. No event has occurred which either entitles, or would, on notice or
lapse of time or both, entitle the holder of any indebtedness affecting Smith's
or any of its Subsidiaries (except for the execution of this Agreement, the
Voting Agreement and the Smith's Transaction Agreements) to accelerate, or which
does accelerate, the maturity of any indebtedness affecting Smith's or any of
its Subsidiaries, except as set forth in Section 3.19 of the Disclosure
Schedule.
3.20 Labor Matters.
(a) Section 3.20(a) of the Disclosure Schedule contains a complete list of
all organizations representing the employees of Smith's or any of its
Subsidiaries. There is no strike, work stoppage or labor disturbance pending or,
to the best knowledge of Smith's, threatened, which involves any employees of
Smith's or any of its Subsidiaries.
(b) Section 3.20(b) of the Disclosure Schedule contains a list of all
material unfair employment or labor practice charges which are presently
pending, as well as a description and the status of each, which to the best
knowledge of Smith's have been filed with any governmental authority by or on
behalf of any employee of Smith's or any of its Subsidiaries and a list of all
material employment-related litigation, including, without limitation,
arbitrations or administrative proceedings which are presently pending (together
with a description and the status of each such litigation or proceeding), filed
by or on behalf of any former, current or prospective employee of Smith's or any
of its Subsidiaries.
(c) Except as described in Sections 3.9, 3.20(a) and (b) of the Disclosure
Schedule, there are not presently pending or, to the best knowledge of Smith's,
threatened, against Smith's or any of its Subsidiaries any material claims by
any governmental authority, labor organization, or any former, current or
prospective
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employee alleging that Smith's or any such employer has violated any applicable
laws respecting employment practices. Smith's and each of its Subsidiaries is in
compliance in all material respects with its obligations under all statutes,
executive orders and other governmental regulations or judicial decrees
governing its employment practices, including without limitation, provisions
relating to wages, hours, equal opportunity and payment of social security and
other taxes and, except as described in Section 3.20(d) of the Disclosure
Schedule, has timely filed all regular federal and state employment related
reports and other documents.
(d) Except as described in Section 3.20(d) of the Disclosure Schedule, (i)
Smith's has paid, or caused to be paid, in full to all employees of Smith's and
its Subsidiaries all wages, salaries, commissions, bonuses, benefits and other
compensation due to such employees or otherwise arising under any policy,
practice, agreement, plan, program, statute or other law, (ii) neither Smith's
nor any of its Subsidiaries is liable for any severance pay or other payments to
any employee or former employee arising from the termination of employment, nor
will Smith's or its Subsidiaries have any liability under any benefit or
severance policy, practice, agreement, arrangement, plan, or program, including,
without limitation, any change in control agreement, arrangement, plan or
program which exists or arises, or may be deemed to exist or arise, as a result
of or in connection with the transactions contemplated hereunder or as a result
of the termination by Smith's or such Subsidiaries or any successor thereto of
any Persons employed on or prior to the Closing Date, (iii) Smith's and its
Subsidiaries have not closed any plant or facility, effectuated any layoffs of
employees or implemented any early retirement, separation or window program
within the past year, nor has Smith's or its Subsidiaries planned or announced
any such future action or program for the future, and (iv) Smith's is in
compliance with its obligations, if any, pursuant to the Worker Adjustment and
Retraining Notification Act of 1988, and all other notification and bargaining
obligations arising under any collective bargaining agreement, statute or
otherwise.
3.21 Insurance. All material fire and casualty, general liability, business
interruption, product liability, and sprinkler and water damage insurance
policies maintained by Smith's or any of its Subsidiaries are with reputable
insurance carriers, provide full and adequate coverage for all normal risks
incident to the business of Smith's and its Subsidiaries and their respective
Properties and Assets, and are in character and amount at least equivalent to
that carried by Persons engaged in similar businesses and substantially
equivalent to that carried by Persons engaged in similar businesses and subject
to the same or similar perils or hazards, except for any such failures to
maintain insurance policies that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect.
3.22 Affiliate Transactions. Except as set forth in Section 3.22 of the
Disclosure Schedule or in the Smith's SEC Reports, from December 30, 1995
through the date of this Agreement there have been no transactions, agreements,
arrangements or understandings between Smith's or any of its Subsidiaries, on
the one hand, and Smith's affiliates (other than wholly owned Subsidiaries of
Smith's) 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.
3.23 Environmental Matters. Except as set forth in Section 3.23 of the
Disclosure Schedule, each of the Properties and Facilities of Smith's or any of
its Subsidiaries has been maintained by Smith's in compliance with all
Environmental Laws, except where the failure to so comply, or any aggregation of
such failures, would not, individually or in the aggregate, have a Material
Adverse Effect. Except as set forth in Section 3.23 of the Disclosure Schedule,
to the best knowledge of Smith's, no conditions exist with respect to the soil,
surface waters, groundwaters, land, stream sediments, surface or subsurface
strata, ambient air, and any other environmental medium on or off the
Properties, which, individually or in the aggregate, could result in any damage,
claim, or liability to or against Smith's or any of its Subsidiaries by any
third party (including without limitation, any government entity), including,
without limitation, any condition resulting from the operation of Smith's
business and/or operations in the vicinity of any of the Properties and/or any
activity or operation formerly conducted by any Person on the Properties, except
in any such case which would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect. With the exception of
retail consumer products sold in the ordinary course of business and materials
and supplies used in the ordinary course of business or except as set forth in
Section 3.23 of the Disclosure Schedule, Smith's has not generated,
manufactured, refined, transported, treated, stored, handled, disposed,
transferred, produced, or
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processed any Hazardous Materials, except in any such case which would not,
individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect. Except as set forth in Section 3.23 of the Disclosure Schedule,
(i) there are no existing uncured notices of noncompliance, notices of
violation, administrative actions, or lawsuits against Smith's or any of its
Subsidiaries arising under Environmental Laws or relating to the use, handling,
storage, treatment, recycling, generation, or release of Hazardous Materials at
any of the Properties, nor has Smith's received any uncured notification of any
allegation of any responsibility for any disposal, release, or threatened
release at any location of any Hazardous Materials, except in any such case
which would not, individually or in the aggregate, be reasonably expected to
have a Material Adverse Effect; (ii) there have been no spills or releases of
Hazardous Materials at any of the Properties in excess of quantities reportable
under Environmental Laws, except in any such case which would not be reasonably
expected to have, individually or in the aggregate, a Material Adverse Effect;
(iii) there are no consent decrees, consent orders, judgments, judicial or
administrative orders, or liens by any governmental authority relating to any
Environmental Law which have not already been fully satisfied and which
regulate, obligate, or bind Smith's or any of its Subsidiaries, except in any
such case which would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect; and (iv) except as set forth in
Section 3.23 of the Disclosure Schedule, no Properties or Facilities are listed
on the federal National Priorities List, the federal Comprehensive Environmental
Response Compensation Liability Information System list, or any similar state
listing of sites known to be contaminated with Hazardous Materials.
3.24 Information in Joint Proxy Statement/Prospectus and Form S-4.
Information supplied by Smith's or any of its affiliates for inclusion or
incorporation by reference in (i) the Joint Proxy Statement/Prospectus (as
hereinafter defined) (or any amendment thereof or supplement thereto), at the
date mailed to Fred Meyer's and to Smith's stockholders and at the time of the
respective meetings of the stockholders of Fred Meyer and of the stockholders of
Smith's contemplated hereby or (ii) the Form S-4 (as hereinafter defined) at any
time the Form S-4 is filed with the SEC, at any time it is amended or
supplemented and at any time it becomes effective under the Securities Act, will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
3.25 Vote Required. The approval by a majority of the voting power
represented by the outstanding shares of Smith's Common Stock and Series I
Preferred Stock (with holders of shares of Class B Common Stock entitled to one
vote per share and holders of shares of Class A Common Stock and Series I
Preferred Stock entitled to 10 votes per share) (the "Smith's Stockholder
Approval") is the only vote of the holders of any class or series of Smith's
capital stock necessary to approve the transactions contemplated by this
Agreement.
3.26 Standstill and Confidentiality Agreements. Except as set forth in
Section 3.26 of the Disclosure Schedule, neither Smith's nor any of its
Subsidiaries is a party to any confidentiality or standstill agreement other
than confidentiality agreements with employees, consultants and providers or
purchasers of goods and services entered into in the ordinary course of
business.
4. Representations and Warranties of Fred Meyer.
Fred Meyer hereby represents and warrants to Smith's as follows:
4.1 Existence; Good Standing; Corporate Authority. Fred Meyer and each of
its Subsidiaries is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, with the power and authority
to own and operate its businesses as presently conducted. Fred Meyer 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 properties owned or held under lease or the nature of its activities makes
such qualification necessary, except for such failures of Fred Meyer and any of
its Subsidiaries to be so qualified as would not, individually or in the
aggregate, have a Material Adverse Effect. Fred Meyer has previously provided
Smith's with true and correct copies of its certificate of incorporation and
bylaws or other
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organizational documents and the charter documents and bylaws or other
organizational documents of each of its Subsidiaries, as currently in effect.
4.2 Authorization; Validity and Effect of Agreement. Fred Meyer has the
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement, each other document or agreement to be
executed by Fred Meyer under this Agreement (each a "Fred Meyer Transaction
Document") and the Option Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement by
Fred Meyer and the performance by Fred Meyer of its obligations hereunder, the
execution and delivery of each of the Fred Meyer Transaction Documents by Fred
Meyer and the performance of its obligations thereunder and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
the Board of Directors of Fred Meyer and all other necessary corporate action on
the part of Fred Meyer, other than the adoption and approval of this Agreement
by the stockholders of Fred Meyer, and no other corporate proceedings on the
part of Fred Meyer are necessary to authorize this Agreement, the Fred Meyer
Transaction Documents and the transactions contemplated hereby and thereby. The
Board of Directors of Fred Meyer has approved for the purposes of Section 251(b)
of the DGCL the agreement of merger contained in this Agreement and the Fred
Meyer Merger. This Agreement has been duly and validly executed and delivered by
Fred Meyer and constitutes a legal, valid and binding obligation of Fred Meyer,
enforceable against it in accordance with its terms, except to the extent that
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general principles of equity. Each Fred Meyer Transaction
Document has been or, as of the Effective Time, will have been, duly and validly
authorized, executed and delivered by Fred Meyer, and constitutes or will
constitute as of such time a legally valid and binding obligation of Fred Meyer,
enforceable against it in accordance with its terms, except to the extent that
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general principles of equity.
4.3 Capitalization. The authorized capital stock of Fred Meyer consists of
(i) 100,000,000 shares of Fred Meyer Common Stock and (ii) 5,000,000 shares of
preferred stock, par value $.01 per share ("Fred Meyer Preferred Stock"). As of
the date hereof, 26,422,292 shares of Fred Meyer Common Stock and no shares of
Fred Meyer Preferred Stock are issued and outstanding; 2,200,200 shares of Fred
Meyer Common Stock are held in Fred Meyer's treasury as of the date hereof. All
of the issued and outstanding shares of Fred Meyer Common Stock and Fred Meyer
Preferred Stock are validly issued, fully paid and non-assessable. Except as set
forth on Section 4.3 of the Disclosure Schedule, there are no existing options,
warrants, calls, subscriptions, convertible securities or other securities,
agreements other than this Agreement, commitments, or obligations which would
require Fred Meyer to issue or sell shares of Fred Meyer Common Stock, Fred
Meyer Preferred Stock or any other equity securities, or securities convertible
into or exchangeable or exercisable for shares of Fred Meyer Common Stock, Fred
Meyer Preferred Stock or any other equity securities of Fred Meyer as of the
date hereof. Except as set forth on Section 4.3 of the Disclosure Schedule, Fred
Meyer has no commitments or obligations to purchase or redeem any shares of
capital stock of any class of Fred Meyer Common Stock or Fred Meyer Preferred
Stock.
4.4 Subsidiaries. The only Subsidiaries of Fred Meyer are those set forth
in Section 4.4 of the Disclosure Schedule. All of the outstanding shares of
capital stock and other ownership interests of each of Fred Meyer's Subsidiaries
are validly issued, fully paid, non-assessable and free of preemptive rights or
rights of first refusal. Except as set forth in Section 4.4 of the Disclosure
Schedule, Fred Meyer owns, directly or indirectly, all of the issued and
outstanding capital stock and other ownership interests of each of its
Subsidiaries, free and clear of all Encumbrances, 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 Fred
Meyer or which would require any Subsidiary of Fred Meyer 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.
4.5 Other Interests. Except as set forth in Section 4.5 of the Disclosure
Schedule, neither Fred Meyer nor any of Fred Meyer's Subsidiaries owns, directly
or indirectly, any interest or investment (whether equity or
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debt) in any corporation, partnership, limited liability company, joint venture,
business, trust or other Person (other than Fred Meyer's Subsidiaries).
4.6 No Conflict; Required Filings and Consents. (a) Except as set forth in
Section 4.6(a) of the Disclosure Schedule, neither the execution and delivery of
this Agreement and the Fred Meyer Transaction Documents, nor the performance by
Fred Meyer of its obligations hereunder and thereunder, nor the consummation of
the transactions contemplated hereby or thereby, will: (i) conflict with Fred
Meyer's certificate of incorporation or bylaws; (ii) assuming satisfaction of
the requirements set forth in Section 4.6(b) below, violate any statute, law,
ordinance, rule or regulation, applicable to Fred Meyer or any of its
Subsidiaries or any of their properties or assets; or (iii) 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 Fred Meyer or any of its Subsidiaries, or result in the creation
or imposition of any lien upon any properties, assets or business of Fred Meyer
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 Fred
Meyer or any of its Subsidiaries is a party or by which Fred Meyer 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 Fred Meyer or any of its
Subsidiaries to purchase or repurchase any notes, bonds or instruments of any
kind except, in each case, for such violations, conflicts, defaults or other
occurrences which, individually or in the aggregate, would not have, and would
not reasonably be expected to have, a Material Adverse Effect.
(b) Except (i) for applicable requirements, if any, of the Exchange Act,
the Securities Act and Blue Sky Laws, (ii) for the pre-merger notification
requirements of the HSR Act, (iii) for the filing of certificates of merger
pursuant to the DGCL, or (iv) with respect to matters set forth in Sections
4.6(a) or 4.6(b) of the Disclosure Schedule, no consent, approval or
authorization of, permit from, or declaration, filing or registration with, any
governmental or regulatory authority, or any other Person or entity (including,
without limitation, any landlord under any lease) is required to be made or
obtained by Fred Meyer or its Subsidiaries in connection with the execution,
delivery and performance of this Agreement, the Fred Meyer Transaction Documents
and the consummation of the transactions contemplated hereby and thereby except
where the failure to obtain such consent, approval, authorization, permit or
declaration or to make such filing or registration would not, individually or in
the aggregate, have a Material Adverse Effect.
4.7 Compliance. Except as set forth in Section 4.7 of the Disclosure
Schedule, Fred Meyer 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 (including, without limitation, all Environmental Laws), except
to the extent that failure to comply would not, individually or in the
aggregate, have a Material Adverse Effect. Except as set forth in Section 4.7 of
the Disclosure Schedule, to the best knowledge of Fred Meyer, neither Fred Meyer
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. Fred
Meyer and its Subsidiaries have all material permits, licenses and franchises
from governmental agencies required to conduct their respective businesses as
they are now being conducted and all such permits, licenses and franchises will
remain in effect after the Effective Time, except for such failure to remain
effective that would not, individually or in the aggregate, have a Material
Adverse Effect.
4.8 SEC Documents. (a) Fred Meyer has delivered or made available to
Smith's 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, 1996 (collectively, the "Fred Meyer SEC
Reports"). As of their respective dates, the Fred Meyer SEC Reports and any
registration statements, reports, forms, proxy or information statements and
other documents filed by Fred Meyer with the SEC after the date of this
Agreement (i) complied, 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 (ii) did not, 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
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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.
(b) Each of the consolidated balance sheets of Fred Meyer included in or
incorporated by reference into the Fred Meyer SEC Reports (including the related
notes and schedules) presents fairly, in all material respects, the consolidated
financial position of Fred Meyer and its consolidated Subsidiaries as of its
date, and each of the consolidated statements of income, retained earnings and
cash flows of Fred Meyer included in or incorporated by reference into the Fred
Meyer SEC Reports (including any related notes and schedules) presents fairly,
in all material respects, the results of operations, retained earnings or cash
flows, as the case may be, of Fred Meyer and its Subsidiaries for the periods
set forth therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments), in each case in accordance with GAAP consistently
applied during the periods involved, except as may be noted therein.
(c) Neither Fred Meyer 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 balance
sheet of Fred Meyer or in the notes thereto, prepared in accordance with GAAP
consistently applied, except for (i) liabilities or obligations that were so
reserved on, or reflected in (including the notes to), the consolidated balance
sheet of Fred Meyer as of February 1, 1997 and (ii) liabilities or obligations
arising in the ordinary course of business (including trade indebtedness) since
February 1, 1997 which would not, individually or in the aggregate, have a
Material Adverse Effect.
4.9 Litigation. Except as set forth in Section 4.9 of the Disclosure
Schedule or the Fred Meyer SEC Reports, there is no Action instituted, pending
or, to the best knowledge of Fred Meyer, threatened, which, if adversely
decided, would, individually or in the aggregate, directly or indirectly, have a
Material Adverse Effect, nor is there any outstanding judgment, decree, or
injunction or any statute, rule or order of any domestic or foreign court,
governmental department, commission or agency which has or will have,
individually or in the aggregate, any Material Adverse Effect.
4.10 Absence of Certain Changes. Except as set forth in Section 4.10 of the
Disclosure Schedule or the Fred Meyer SEC Reports and except for the
transactions expressly contemplated hereby, since February 1, 1997, Fred Meyer
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 change in Fred Meyer' business, operations, condition (financial or
otherwise), results of operations, prospects, assets, liabilities, working
capital or reserves, except for changes contemplated hereby or changes which
have not, individually or in the aggregate, had a Material Adverse Effect.
Except as set forth in Section 4.10 of the Disclosure Schedule or the Fred Meyer
SEC Reports, from February 1, 1997 through the date of this Agreement, neither
Fred Meyer nor any of its Subsidiaries has taken any of the actions prohibited
by Section 5.3 hereof.
4.11 Taxes. Except as set forth in Section 4.11 of the Disclosure Schedule:
(a) Fred Meyer and its Subsidiaries have (A) duly filed (or there have
been filed on their behalf) with the appropriate governmental authorities
all Tax Returns required to be filed by them and such Tax Returns are true,
correct and complete in all material respects, and (B) duly paid in full or
made provision in accordance with GAAP (or there has been paid or provision
has been made on their behalf) for the payment of all Taxes for all periods
(or portions thereof) ending on or prior to the Closing Date;
(b) Fred Meyer and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the
payment and withholding of Taxes and have, within the time and the manner
prescribed by law, withheld and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under
applicable laws;
(c) No federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any
Taxes or Tax Returns of Fred Meyer or its Subsidiaries and neither Fred
Meyer nor its Subsidiaries has received a written notice of any pending
audits or proceedings;
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(d) Neither the Internal Revenue Service nor any other taxing
authority (whether domestic or foreign) has asserted, or to the best
knowledge of Fred Meyer, is threatening to assert, against Fred Meyer or
any of its Subsidiaries any deficiency or claim for Taxes;
(e) There are no material liens for Taxes upon any Property or Assets
of Fred Meyer or any Subsidiary thereof, except for liens for Taxes not yet
due and payable and liens for Taxes that are being contested in good faith
by appropriate proceedings;
(f) Neither Fred Meyer nor any of its Subsidiaries has agreed to or is
required to make any adjustment under Section 481(a) of the Code;
(g) The applicable statutes of limitation for the assessment of
federal income Taxes upon Fred Meyer and its Subsidiaries for all periods
have expired, except as set forth on Section 4.11 of the Disclosure
Schedule;
(h) Neither Fred Meyer nor any of its Subsidiaries is a party to any
material agreement providing for the allocation or sharing of Taxes;
(i) Neither Fred Meyer nor any of its Subsidiaries has, with regard to
any assets or property held or acquired by any of them, filed a consent to
the application of Section 341(f) of the Code, or 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 Fred
Meyer or any of its Subsidiaries; and
(j) Neither Fred Meyer nor any of its Subsidiaries is obligated, or
will be obligated by reason of the transaction, to pay compensation to any
employee not deductible by reason of Sections 280G or 162(m) of the Code.
4.12 Employee Benefit Plans.
(a) Section 4.12 of the Disclosure Schedule contains a complete list of all
Employee Plans of Fred Meyer and its Subsidiaries. True and complete copies or
descriptions of the Employee Plans of Fred Meyer and its Subsidiaries,
including, without limitation, trust instruments, if any, that form a part
thereof, and all amendments thereto have been furnished or made available to
Smith's and its counsel.
(b) Except as described in Section 4.12 of the Disclosure Schedule, each of
the Employee Plans of Fred Meyer and of its Subsidiaries (other than any
Multiemployer Plan) has been administered and is in compliance with the terms of
such Employee Plan and all applicable laws, rules and regulations except for
noncompliance which would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect.
(c) No "reportable event" (as such term is used in section 4043),
"prohibited transaction" (as such term is used in section 406 of ERISA or
section 4975 of the Code), "nondeductible contributions" (as such term is used
in Section 4972 of the Code) or "accumulated funding deficiency" (as such term
is used in section 412 or 4971 of the Code) has heretofore occurred with respect
to any Fred Meyer Employee Plan (other than any Multiemployer Plan) which would,
individually or in the aggregate, have a Material Adverse Effect.
(d) No litigation or administrative or other proceeding involving any
Employee Plans of Fred Meyer or any of its ERISA Affiliates (other than any
Multiemployer Plan) has occurred or are threatened where an adverse
determination would, individually or in the aggregate, have a Material Adverse
Effect.
(e) Except as set forth in Section 4.12 of the Disclosure Schedule, neither
Fred Meyer nor any ERISA Affiliate of Fred Meyer has incurred any withdrawal
liability with respect to any Multiemployer Plan under Title IV of ERISA which
remains unsatisfied in an amount which would, individually or in the aggregate,
have a Material Adverse Effect.
(f) All of the Employee Plans of Fred Meyer or its Subsidiaries (other than
any Multiemployer Plan) can be terminated by Fred Meyer. Fred Meyer and its
Subsidiaries can withdraw from participation in any Employee Plan that is a
Multiemployer Plan. Any termination of, or withdrawal from, any Employee Plans
of
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Fred Meyer or its Subsidiaries, on or prior to the Closing Date, would not
subject Fred Meyer to any material liability under Title IV of ERISA.
(g) Neither Fred Meyer nor any of its Affiliates is aware of any situation
with respect to a Multiemployer Plan described in (b), (c) or (d) above, except
as described in Section 4.12 of the Disclosure Schedule.
(h) The transactions contemplated by this Agreement will not cause the
occurrence of a situation described in (b), (c), (d) or (e) as of or after the
Effective Time.
4.13 State Takeover Statutes. The Board of Directors of Fred Meyer has
approved this Agreement and the transactions contemplated hereby for purposes of
Section 203 of the DGCL and any other "fair price", "merger moratorium",
"control share acquisition" or other anti-takeover statute or similar statute or
regulation that might be applicable and such approval is sufficient to render
inapplicable to this Agreement and the transactions contemplated hereby, the
restrictions on business combinations contained in provisions of Section 203 of
the DGCL.
4.14 No Brokers. Except for fees to be paid to Salomon Brothers Inc (the
arrangements of which have been disclosed to Smith's prior to the date hereof),
no broker, finder, investment banker, or other person or firm is entitled to any
brokerage, finder's or other fee or commission in connection with this Agreement
or the transactions contemplated hereby based upon arrangements made by or on
behalf of Fred Meyer, any of its Subsidiaries or any of their respective
directors, officers or employees.
4.15 Opinion of Financial Advisor. Fred Meyer has received the opinion of
Salomon Brothers Inc to the effect that, as of the date hereof, the Fred Meyer
Exchange Ratio is fair to the holders of Fred Meyer Common Shares from a
financial point of view. Fred Meyer has delivered to Smith's a true, complete
and correct copy of such opinion.
4.16 No Other Agreements to Sell Fred Meyer or its Assets. Except as set
forth in Section 4.16 of the Disclosure Schedule, Fred Meyer has no legal
obligation, absolute or contingent, to any other Person to sell any of its
Assets, to sell the capital stock or other ownership interests of Fred Meyer or
any of its Subsidiaries, or to effect any merger, consolidation or other
reorganization of Fred Meyer or any of its Subsidiaries or to enter into any
agreement with respect thereto. As of the date hereof, Fred Meyer is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal.
4.17 Assets.
(a) Except as set forth in Section 4.17(a) of the Disclosure Schedule, Fred
Meyer and its Subsidiaries have good and marketable title to or a valid
leasehold estate in all of the properties and assets, real or personal,
reflected on Fred Meyer's balance sheet at February 1, 1997 (except for
properties or assets subsequently sold in the ordinary course of business
consistent with past practice), and have good and marketable title or a valid
right to use all of the real properties that are necessary, and all of the
personal assets and properties that are materially necessary, for the conduct of
the business of Fred Meyer or any of its Subsidiaries free and clear of all
Encumbrances (other than Permitted Encumbrances).
(b) Section 4.17(b) of the Disclosure Schedule sets forth a complete and
accurate list of each Property and/or Facility owned or leased by Fred Meyer or
any of its Subsidiaries and the current use of such Property or Facility and
indicating whether the Property or Facility is owned or leased.
(c) There are no pending or, to the best knowledge of Fred Meyer,
threatened condemnation or similar proceedings relating to any of the Properties
or Facilities of Fred Meyer and its Subsidiaries except for such proceedings
which would not, individually or in the aggregate, have a Material Adverse
Effect.
(d) Section 4.17(d) of the Disclosure Schedule sets forth a complete and
accurate list of all leases (including subleases and licenses) of personal
property entered into by Fred Meyer or any of its Subsidiaries and involving any
annual expense to Fred Meyer or any such Subsidiary in excess of $250,000 and
not cancelable (without material liability) within two (2) years.
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(e) Section 4.17(e) of the Disclosure Schedule indicates with respect to
each Lease entered into by Fred Meyer or any of its Subsidiaries, as a tenant or
subtenant: (i) the term (including renewal options), (ii) current fixed rent,
and (iii) any Lease requiring consent or approval of the lessor for the
transaction contemplated hereby or permitting (or granting an option to) the
lessor to terminate the Lease or option terms or requiring payment of
consideration to the lessor (other than immaterial processing fees).
(f) Fred Meyer 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 (i) all Assets leased by it or to it (whether as lessor or
lessee) and (ii) 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
default on the part of Fred Meyer or any of its Subsidiaries under any Lease, in
each case except where the failure to perform would not, individually or in the
aggregate, have a Material Adverse Effect.
(g) To the best knowledge of Fred Meyer, 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, 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.
(h) Subject to the provisions of Section 4.18 below and except as shown on
Section 4.17(h) of the Disclosure Schedule, Fred Meyer has delivered to Smith's,
or otherwise made available, originals or true copies of all material Leases (as
the same may have been amended or modified, in any material respect, from time
to time).
4.18 Contracts and Commitments. Section 4.18 of the Disclosure Schedule
contains a complete and accurate list of all Contracts of the following
categories to which Fred Meyer or any of its Subsidiaries is a party or by which
any of them is bound as of the date of this Agreement:
(a) employment contracts, including, without limitation, contracts to
employ executive officers and other contracts with officers, directors or
stockholders of Fred Meyer, and any other Contracts with or for the benefit
of Fred Meyer or its affiliates, and all severance, change in control or
similar arrangements with any officers, employees or agents of Fred Meyer
that will result in any obligation (absolute or contingent) of Fred Meyer
or any of its Subsidiaries to make any payment to any officers, employees
or agents of Fred Meyer following either the consummation of the
transactions contemplated hereby, termination of employment, or both;
(b) labor contracts;
(c) material distribution, franchise, license, sales, agency or
advertising contracts;
(d) Contracts for the purchase of inventory which are not cancelable
(without material penalty, cost or other liability) within 1 year (other
than Contracts for the purchase of holiday goods in accordance with
customary industry practices) and other Contracts made in the ordinary
course of business involving annual expenditures or liabilities in excess
of $150,000 which are not cancelable (without material penalty, cost or
other liability) within thirty (30) days;
(e) promissory notes, loans, agreements, indentures, evidences of
indebtedness or other instruments relating to the lending of money, whether
as borrower, lender or guarantor, in excess of $250,000;
(f) Contracts containing covenants limiting the freedom of Fred Meyer
or any of its Subsidiaries to engage in any line of business or compete
with any Person or operate at any location;
(g) powers of attorney;
(h) joint venture or partnership agreements or joint development or
similar agreements pursuant to which any third party is entitled to develop
any Property and/or Facility on behalf of Fred Meyer or its Subsidiaries;
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(i) any other Contract, whether similar or dissimilar to the
foregoing, which would be material to Fred Meyer and its Subsidiaries taken
as a whole;
(j) any Contract with any federal, state or local government; and
(k) Contracts involving annual expenditures or liabilities in excess
of $250,000.
True copies of the written Contracts identified in Section 4.18 of the
Disclosure Schedule have been delivered or made available to Smith's.
4.19 Absence of Breaches or Defaults. Except as set forth in Section 4.19
of the Disclosure Schedule, neither Fred Meyer nor any of its Subsidiaries is
and, to the best knowledge of Fred Meyer, no other party is in default under, or
in breach or violation of, any Contract identified on Section 4.18 of the
Disclosure Schedule and, to the best knowledge of Fred Meyer, no event has
occurred which, with the giving of notice or passage of time or both would
constitute a default under any Contract identified on Section 4.18 of the
Disclosure Schedule, except for defaults, breaches, violations or events which,
individually or in the aggregate, would not have a Material Adverse Effect. Each
of the Contracts identified on Section 4.18 of the Disclosure Schedule 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, such Contracts 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. No event has occurred which either entitles, or would, on notice or
lapse of time or both, entitle the holder of any indebtedness affecting Fred
Meyer or any of its Subsidiaries (except for the execution of this Agreement and
the Fred Meyer Transaction Agreements) to accelerate, or which does accelerate,
the maturity of any indebtedness affecting Fred Meyer or any of its
Subsidiaries, except as set forth in Section 4.19 of the Disclosure Schedule.
4.20 Labor Matters.
(a) Section 4.20(a) of the Disclosure Schedule contains a complete list of
all organizations representing the employees of Fred Meyer or any of its
Subsidiaries. There is no strike, work stoppage or labor disturbance pending or,
to the best knowledge of Fred Meyer, threatened, which involves any employees of
Fred Meyer or any of its Subsidiaries.
(b) Section 4.20(b) of the Disclosure Schedule contains a list of all
material unfair employment or labor practice charges which are presently
pending, as well as a description and the status of each, which to the best
knowledge of Fred Meyer have been filed with any governmental authority by or on
behalf of any employee of Fred Meyer or any of its Subsidiaries and a list of
all material employment-related litigation, including, without limitation,
arbitration or administrative proceedings which are presently pending (together
with a description and the status of each such litigation or proceeding), filed
by or on behalf of any former, current, or prospective employee of Fred Meyer or
any of its Subsidiaries.
(c) Except as described in Sections 4.9, 4.20(a) and (b) of the Disclosure
Schedule, there are not presently pending or, to the best knowledge of Fred
Meyer, threatened, against Fred Meyer or any of its Subsidiaries any material
claims by any governmental authority, labor organization, or any former, current
or prospective employee alleging that Fred Meyer or any such employer has
violated any applicable laws respecting employment practices. Fred Meyer and
each of its Subsidiaries is in compliance in all material respects with its
obligations under all statutes, executive orders and other governmental
regulations or judicial decrees governing its employment practices, including
without limitation, provisions relating to wages, hours, equal opportunity and
payment of social security and other taxes and, except as described in Section
4.20(d) of the Disclosure Schedule, has timely filed all regular federal and
state employment related reports and other documents.
(d) Except as described in Section 4.20(d) of the Disclosure Schedule, (i)
Fred Meyer has paid, or caused to be paid, in full to all employees of Fred
Meyer and its Subsidiaries all wages, salaries, commissions, bonuses, benefits
and other compensation due to such employees or otherwise arising under any
policy, practice, agreement, plan, program, statute or other law, (ii) neither
Fred Meyer nor any of its Subsidiaries is
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liable for any severance pay or other payments to any employee or former
employee arising from the termination of employment, nor will Fred Meyer or its
Subsidiaries have any liability under any benefit or severance policy, practice,
agreement, arrangement, plan or program, including, without limitation, any
change in control agreement, arrangement, plan or program which exists or
arises, or may be deemed to exist or arise, as a result of or in connection with
the transactions contemplated hereunder or as a result of the termination by
Fred Meyer or such Subsidiaries or any successor thereto of any Persons employed
on or prior to the Closing Date, (iii) Fred Meyer and its Subsidiaries have not
closed any plant or facility, effectuated any layoffs of employees or
implemented any early retirement, separation or window program within the past
year, nor has Fred Meyer or its Subsidiaries planned or announced any such
future action or program for the future, and (iv) Fred Meyer is in compliance
with its obligations, if any, pursuant to the Worker Adjustment and Retraining
Notification Act of 1988, and all other notification and bargaining obligations
arising under any collective bargaining agreement, statute or otherwise.
4.21 Insurance. All material fire and casualty, general liability, business
interruption, product liability, and sprinkler and water damage insurance
policies maintained by Fred Meyer or any of its Subsidiaries are with reputable
insurance carriers, provide full and adequate coverage for all normal risks
incident to the business of Fred Meyer and its Subsidiaries and their respective
Properties and Assets, and are in character and amount at least equivalent to
that carried by Persons engaged in similar businesses and substantially
equivalent to that carried by Persons engaged in similar businesses and subject
to the same or similar perils or hazards, except for any such failures to
maintain insurance policies that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect.
4.22 Affiliate Transactions. Except as set forth in Section 4.22 of the
Disclosure Schedule or in the Fred Meyer SEC Reports, from December 30, 1995
through the date of this Agreement there have been no transactions, agreements,
arrangements or understandings between Fred Meyer or any of its Subsidiaries, on
the one hand, and Fred Meyer's affiliates (other than wholly owned Subsidiaries
of Fred Meyer) 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.
4.23 Environmental Matters. Except as set forth in Section 4.23 of the
Disclosure Schedule, each of the Properties and Facilities of Fred Meyer or any
of its Subsidiaries has been maintained by Fred Meyer in compliance with all
Environmental Laws, except where the failure to so comply, or any aggregation of
such failures, would not, individually or in the aggregate, have a Material
Adverse Effect. Except as set forth in Section 4.23 of the Disclosure Schedule,
to the best knowledge of Fred Meyer, no conditions exist with respect to the
soil, surface waters, groundwaters, land, stream sediments, surface or
subsurface strata, ambient air, and any other environmental medium on or off the
Properties, which, individually or in the aggregate, could result in any damage,
claim, or liability to or against Fred Meyer or any of its Subsidiaries by any
third party (including without limitation, any government entity), including,
without limitation, any condition resulting from the operation of Fred Meyer's
business and/or operations in the vicinity of any of the Properties and/or any
activity or operation formerly conducted by any Person on the Properties, except
in any such case which would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect. With the exception of
retail consumer products sold in the ordinary course of business and materials
and supplies used in the ordinary course of business or except as set forth in
Section 4.23 of the Disclosure Schedule, Fred Meyer has not generated,
manufactured, refined, transported, treated, stored, handled, disposed,
transferred, produced, or processed any Hazardous Materials, except in any such
case which would not, individually or in the aggregate, be reasonably expected
to have a Material Adverse Effect. Except as set forth in Section 4.23 of the
Disclosure Schedule, (i) there are no existing uncured notices of noncompliance,
notices of violation, administrative actions, or lawsuits against Fred Meyer or
any of its Subsidiaries arising under Environmental Laws or relating to the use,
handling, storage, treatment, recycling, generation, or release of Hazardous
Materials at any of the Properties, nor has Fred Meyer received any uncured
notification of any allegation of any responsibility for any disposal, release,
or threatened release at any location of any Hazardous Materials, except in any
such case which would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect; (ii) there have been no spills or
releases of Hazardous Materials at any of the Properties in excess of quantities
reportable under Environmental Laws, except in any such case which would
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not be reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect; (iii) there are no consent decrees, consent orders, judgments,
judicial or administrative orders, or liens by any governmental authority
relating to any Environmental Law which have not already been fully satisfied
and which regulate, obligate, or bind Fred Meyer or any of its Subsidiaries,
except in any such case which would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect; and (iv) except as set
forth in Section 4.23 of the Disclosure Schedule, no Properties or Facilities
are listed on the federal National Priorities List, the federal Comprehensive
Environmental Response Compensation Liability Information System list, or any
similar state listing of sites known to be contaminated with Hazardous
Materials.
4.24 Information in Joint Proxy Statement/Prospectus and Form S-4.
Information supplied by Fred Meyer or any of its affiliates for inclusion or
incorporation by reference in (i) the Joint Proxy Statement/Prospectus (or any
amendment thereof or supplement thereto), at the date mailed to Smith's and to
Fred Meyer's stockholders and at the time of the respective meetings of the
stockholders of Smith's and of the stockholders of Fred Meyer contemplated
hereby or (ii) the Form S-4 at any time the Form S-4 is filed with the SEC, at
any time it is amended or supplemented and at any time it becomes effective
under the Securities Act, will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
4.25 Vote Required. The approval by a majority of the voting power
represented by the outstanding shares of Fred Meyer Common Stock (the "Fred
Meyer Stockholder Approval") is the only vote of the holders of any class or
series of Fred Meyer's capital stock necessary to approve the transactions
contemplated by this Agreement.
4.26 Standstill and Confidentiality Agreements. Except as set forth in
Section 4.26 of the Disclosure Schedule, neither Fred Meyer nor any of its
Subsidiaries is a party to any confidentiality or standstill agreement other
than confidentiality agreements with employees, consultants and providers or
purchasers of goods and services entered into in the ordinary course of
business.
5. COVENANTS
5.1 Acquisition Proposals. Prior to the Effective Time, each of Fred Meyer
and Smith's agree (a) that neither it nor any of its Subsidiaries will, nor will
it or any of its Subsidiaries permit their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) to, directly or indirectly, initiate, solicit or encourage, any
inquiries or the making or implementation of any proposal or offer (including
without limitation any proposal or offer to its stockholders) with respect to an
Acquisition Proposal or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any Person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; and (b) that it will
immediately advise the other party hereto orally and in writing of (i) any
inquiry or any request for information or data, (ii) any request or invitation
to engage in negotiations or discussions with any Person relating to an
Acquisition Proposal, (iii) any request to otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal or (iv) any Acquisition
Proposal, and in each case, the material terms and conditions of such inquiry,
request, invitation or Acquisition Proposal and the identity of the Person
making any such inquiry, request, invitation or Acquisition Proposal. Each party
will keep the other party fully and timely informed of the status and details
(including amendments and proposed amendments) of any such inquiry, request,
invitation or Acquisition Proposal, provided, however, that nothing contained in
this Section 5.1 will prohibit the Board of Directors of either Fred Meyer or
Smith's from, to the extent applicable, complying with Rule 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal or from making any
disclosure to, or communicating with, its shareholders if, in the good faith
judgment of the Board of Directors of Fred Meyer or Smith's, as applicable,
after consultation with outside counsel, failure to so disclose or communicate
would be inconsistent with its fiduciary duties under applicable law. In
addition, nothing in this Section 5.1 will (x) permit Fred Meyer or Smith's to
terminate this Agreement or either of their Boards of Directors to withdraw or
alter its approval, within the meaning of
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Section 251(b) of the DGCL, of the agreement of merger contained in this
Agreement and the Smith's Merger or the Fred Meyer Merger, as the case may be,
(y) permit Fred Meyer or Smith's to enter into any agreement with respect to an
Acquisition Proposal for as long as this Agreement remains in effect (it being
agreed that for as long as this Agreement remains in effect, neither Fred Meyer
nor Smith's will enter into any agreement with any Person that provides for, or
in any way facilitates, an Acquisition Proposal), or (z) affect any other
obligation of Fred Meyer or Smith's under this Agreement. Each of Fred Meyer and
Smith's shall, and shall cause its Subsidiaries and their respective officers,
directors, employees, agents and representatives to, immediately cease and cause
to be terminated all discussions and negotiations that have taken place prior to
the date hereof, if any, with respect to any Acquisition Proposal.
5.2 Interim Operations of Smith's. Prior to the Effective Date, except as
set forth in Section 5.2 of the Disclosure Schedule or as otherwise specifically
provided for in this Agreement or as Fred Meyer may specifically consent in
writing, which consent shall not be unreasonably withheld, Smith's shall conduct
its business and the business of its Subsidiaries only in the ordinary and usual
course as such business has been conducted, and shall use reasonable best
efforts to keep intact the business organization in all material respects.
Without limiting the foregoing, except as set forth in Section 5.2 of the
Disclosure Schedule or as otherwise specifically provided for in this Agreement
or as Fred Meyer may specifically consent in writing, which consent shall not be
unreasonably withheld, Smith's shall, and shall cause its Subsidiaries to,
preserve intact its business organizations and goodwill, keep available the
services of its officers and employees and maintain satisfactory relationships
with those Persons having business relationships with it. Smith's shall use all
reasonable efforts to avoid, and to cause each of its Subsidiaries to avoid, the
occurrence of a breach of any representation or warranty hereunder as of the
Closing Date, or the failure to satisfy any condition to the obligations of any
party hereto. In addition, prior to the Effective Time, except as set forth in
Section 5.2 of the Disclosure Schedule or as otherwise specifically provided for
in this Agreement or as Fred Meyer may specifically consent in writing, which
consent shall not be unreasonably withheld, neither Smith's nor any of its
Subsidiaries shall:
(a) make or commit to make any capital expenditures in excess of
$500,000 in the aggregate, other than expenditures for routine maintenance
and repair or pursuant to existing contracts or commitments or expenditures
reflected in capital expenditure budgets disclosed in the Smith's SEC
Reports;
(b) incur any material amount of indebtedness for borrowed money or
make any loans, advances or capital contributions to, or investments (other
than non-controlling investments in the ordinary course of business) in,
any other Person other than a wholly owned Subsidiary of Smith's, or issue
or sell any debt securities, other than borrowings under existing lines of
credit in the ordinary course of business consistent with past practice and
other than refinancings contemplated by this Agreement;
(c) (i) amend its certificate of incorporation or bylaws or 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; (iv) sell or pledge any stock of any of its
Subsidiaries; or (v) make or enter into any commitment for any of the
foregoing actions;
(d) (i) issue or sell or agree to issue or sell any additional shares
of, or grant, confer or award any options, warrants or rights of any kind
to acquire any shares of, its capital stock of any class; (ii) enter into
any agreement, contract or commitment out of the ordinary course of its
business, to dispose of or acquire, or relating to the disposition or
acquisition of, a segment of its business; (iii) except in the ordinary
course of business, sell, pledge, dispose of or encumber any material
Assets (including without limitation, any indebtedness owed to them or any
material claims held by them); (iv) acquire (by merger, consolidation,
acquisition of stock or assets or otherwise) any corporation, partnership
or other business organization or division thereof or make any material
investment, either by purchase of stock or other securities, contribution
to capital, property transfer or purchase, in any case, of any material
amount
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of property or assets, in or of any other Person; or (v) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing;
(e) grant any severance or termination pay (other than pursuant to
policies or agreements in effect on the date hereof as disclosed in the
Smith's SEC Reports and set forth in Section 5.2(e) of the Disclosure
Schedule) or increase the benefits payable 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, except for certain employment contracts and amendments to
certain severance arrangements and deferred compensation agreements as set
forth in Section 5.2(e) of the Disclosure Schedule;
(f) adopt or amend 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 except as required by law;
(g) enter into or amend any Contract for the purchase of inventory
which is not cancelable within one (1) year without penalty, cost or
liability, or any other Contract involving annual expenditures or
liabilities in excess of $250,000 which is not cancelable within two (2)
years without penalty, cost or liability;
(h) negotiate, enter into, or modify any agreement or agree to be
bound by any agreement with any collective bargaining agent relating to its
business, except for agreements with respect to routine employee grievance
matters in the ordinary course of business;
(i) make any material change in its tax or accounting policies or any
material reclassification of assets or liabilities except as required by
law or GAAP;
(j) fail to notify Fred Meyer upon (i) the occurrence of any event or
change in circumstances as a result of which any representation or warranty
of Smith's contained in this Agreement would be untrue or incorrect if such
representation or warranty were made immediately following the occurrence
of such event or change in circumstance, promptly (and in any event within
two (2) business days of an executive officer of Smith's obtaining
knowledge thereof) and (ii) any material failure of Smith's or any of its
Subsidiaries or Affiliates to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that no such notification shall affect the
representations or warranties of the parties or the conditions to the
obligations of the parties hereunder; and
(k) fail to promptly deliver to Fred Meyer true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the date
of this Agreement.
5.3 Interim Operations of Fred Meyer. Prior to the Effective Date, except
as set forth in Section 5.3 of the Disclosure Schedule or as otherwise
specifically provided for in this Agreement or as Smith's may specifically
consent in writing, which consent shall not be unreasonably withheld, Fred Meyer
shall conduct its business and the business of its Subsidiaries only in the
ordinary and usual course as such business has been conducted, and shall use
reasonable best efforts to keep intact the business organization in all material
respects. Without limiting the foregoing, except as set forth in Section 5.3 of
the Disclosure Schedule or as otherwise specifically provided for in this
Agreement or as Smith's may specifically consent in writing, which consent shall
not be unreasonably withheld, Fred Meyer shall, and shall cause its Subsidiaries
to, preserve intact its business organizations and goodwill, keep available the
services of its officers and employees and maintain satisfactory relationships
with those Persons having business relationships with it. Fred Meyer shall use
all reasonable efforts to avoid, and to cause each of its Subsidiaries to avoid,
the occurrence of a breach of any representation or warranty hereunder as of the
Closing Date, or the failure to satisfy any condition to the obligations of any
party hereto. In addition, prior to the Effective Time, except as set forth in
Section 5.3 of the Disclosure Schedule or as otherwise specifically provided for
in this Agreement or as Smith's may specifically
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consent in writing, which consent shall not be unreasonably withheld, neither
Fred Meyer nor any of its Subsidiaries shall:
(a) make or commit to make any capital expenditures in excess of
$500,000 in the aggregate, other than expenditures for routine maintenance
and repair or pursuant to existing contracts or commitments or expenditures
reflected in capital expenditure budgets disclosed in the Fred Meyer SEC
Reports;
(b) incur any material amount of indebtedness for borrowed money or
make any loans, advances or capital contributions to, or investments (other
than non-controlling investments in the ordinary course of business) in,
any other Person other than a wholly owned Subsidiary of Fred Meyer, or
issue or sell any debt securities, other than borrowings under existing
lines of credit in the ordinary course of business consistent with past
practice and other than refinancings contemplated by this Agreement;
(c) (i) amend its certificate of incorporation or bylaws or 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; (iv) sell or pledge any stock of any of its
Subsidiaries; or (v) make or enter into any commitment for any of the
foregoing actions;
(d) (i) issue or sell or agree to issue or sell any additional shares
of, or grant, confer or award any options, warrants or rights of any kind
to acquire any shares of, its capital stock of any class; (ii) enter into
any agreement, contract or commitment out of the ordinary course of its
business, to dispose of or acquire, or relating to the disposition or
acquisition of, a segment of its business; (iii) except in the ordinary
course of business, sell, pledge, dispose of or encumber any material
Assets (including without limitation, any indebtedness owed to them or any
material claims held by them); (iv) acquire (by merger, consolidation,
acquisition of stock or assets or otherwise) any corporation, partnership
or other business organization or division thereof or make any material
investment, either by purchase of stock or other securities, contribution
to capital, property transfer or purchase, in any case, of any material
amount of property or assets, in or of any other Person; or (v) enter into
any contract, agreement, commitment or arrangement with respect to any of
the foregoing;
(e) grant any severance or termination pay (other than pursuant to
policies or agreements in effect on the date hereof as disclosed in the
Fred Meyer SEC Reports and set forth in Section 5.3(e) of the Disclosure
Schedule) or increase the benefits payable 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, except for certain employment contracts and amendments to
certain severance arrangements and deferred compensation agreements as set
forth in Section 5.3(e) of the Disclosure Schedule;
(f) adopt or amend 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 except as required by law;
(g) enter into or amend any Contract for the purchase of inventory
which is not cancelable within one (1) year without penalty, cost or
liability, or any other Contract involving annual expenditures or
liabilities in excess of $250,000 which is not cancelable within two (2)
years without penalty, cost or liability;
(h) negotiate, enter into, or modify any agreement or agree to be
bound by any agreement with any collective bargaining agent relating to its
business, except for agreements with respect to routine employee grievance
matters in the ordinary course of business;
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(i) make any material change in its tax or accounting policies or any
material reclassification of assets or liabilities except as required by
law or GAAP;
(j) fail to notify Smith's upon (i) the occurrence of any event or
change in circumstances as a result of which any representation or warranty
of Fred Meyer contained in this Agreement would be untrue or incorrect if
such representation or warranty were made immediately following the
occurrence of such event or change in circumstance, promptly (and in any
event within two (2) business days of an executive officer of Fred Meyer
obtaining knowledge thereof) and (ii) any material failure of Fred Meyer or
any of its Subsidiaries or Affiliates to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
under this Agreement; provided, however, that no such notification shall
affect the representations or warranties of the parties or the conditions
to the obligations of the parties hereunder; and
(k) fail to promptly deliver to Smith's true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement.
5.4 Meeting of Stockholders. Each of Fred Meyer and Smith's will take all
action necessary in accordance with applicable law and its certificate of
incorporation and bylaws to convene a meeting of its stockholders as promptly as
practicable to consider and vote upon the adoption of this Agreement and the
transactions contemplated hereby, as required by applicable law. The Board of
Directors of each of Fred Meyer and Smith's, respectively, will recommend that
its stockholders vote in favor of such adoption and Fred Meyer and Smith's will
each take all lawful action to solicit such approval, including, without
limitation, timely mailing the Joint Proxy Statement/Prospectus; provided,
however, that nothing contained in this Section 5.4 shall prohibit either Fred
Meyer or Smith's from taking and disclosing to its stockholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making
any disclosure to, or having any communication with, their respective
stockholders if, in the good faith judgment of the Board of Directors of Fred
Meyer or Smith's, as applicable, after consultation with outside counsel,
failure so to disclose or communicate would be inconsistent with its fiduciary
duties under applicable law; provided, however, that neither Fred Meyer or
Smith's nor their respective Boards of Directors, nor any committee of either of
such Boards, shall withdraw or modify, or propose publicly to withdraw or
modify, their approval or recommendation with respect to this Agreement or the
Mergers or approve or recommend, or propose publicly to approve or recommend,
any Acquisition Proposal. The respective meetings of the stockholders of Fred
Meyer and Smith's shall be held as soon as practicable and in any event (to the
extent permissible under applicable law) within forty-five (45) days after the
date upon which the Joint Proxy Statement/Prospectus shall have been approved
for release to the stockholders of Fred Meyer and of Smith's by the SEC;
provided, however, that notwithstanding anything to the contrary contained in
this Agreement, Fred Meyer and Smith's may adjourn or postpone their respective
meetings of stockholders to the extent necessary, in the opinion of their
respective counsel, to supplement or amend the Joint Proxy Statement Prospectus
in advance of a vote on this Agreement and the Mergers. The parties shall
coordinate and cooperate with respect to the timing of such meetings and shall
endeavor to hold such meetings on the same day.
5.5 Further Assurance and Cooperation. Subject to the terms and conditions
herein provided, Smith's and Fred Meyer agree to use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
cooperate with each other in connection therewith, (a) to obtain all necessary
waivers, consents and approvals from other parties to material loan agreements,
leases and other contracts (provided that neither Smith's nor Fred Meyer shall
agree to any substantial modification to any such agreement, lease or contract
or to any payment of funds in order to obtain such waiver, consent or approval
without the prior written consent of the other), (b) to defend any lawsuits or
other legal proceedings challenging this Agreement or the consummation of the
transactions contemplated hereby, (c) to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated thereby, (d) to effect all necessary
registrations and filings (including any registrations and filings which may be
required to be made by Holdings pursuant to any federal or state securities
laws), and (e) to fulfill all conditions to this Agreement.
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5.6 Certain Filings and Consents. Each party hereto shall (a) as promptly
as practicable make any required filings and submissions under the HSR Act with
respect to the Mergers, (b) cooperate with each other in determining whether any
other filings are required to be made or consents, approvals, permits or
authorizations are required to be obtained under any other federal, state, local
or foreign law or regulation or whether any consents, approvals or waivers are
required to be obtained from other parties to loan agreements, leases or other
contracts in connection with the consummation of the Mergers and the other
transactions contemplated by this Agreement, and (c) actively assist each other
in obtaining any consents, permits, authorizations, approvals or waivers which
are required. Each party hereto shall promptly inform the other of any material
communication between such party and the Federal Trade Commission, the
Department of Justice or any other government or governmental authority
regarding the Mergers or the other transactions contemplated by this Agreement.
If any party receives a request for additional information or documentary
material from any such government or governmental authority, then such party
shall endeavor in good faith to make, or cause to be made, as soon as reasonably
practicable and after consultation with the other party, an appropriate response
to such request. Notwithstanding the foregoing, in connection with proceedings
under or relating to the HSR Act or any other federal or state antitrust law,
all analyses, appearances, presentations, memoranda, briefs, arguments, and
opinions made or submitted by or on behalf of any party hereto shall be subject
to the joint approval or disapproval and the joint control of Smith's and Fred
Meyer, acting with the advice of their respective counsel, provided that nothing
herein shall prevent any party hereto or their authorized representatives from
making or submitting any such analysis, appearance, presentation, memorandum,
brief, argument, or opinion in response to a subpoena or as otherwise required
by law. Smith's and Fred Meyer shall cooperate in connection with reaching any
understandings, undertaking or agreements (oral or written) involving the
Federal Trade Commission, the Department of Justice or any other governmental
authority in connection with the transactions contemplated hereby. Smith's and
Fred Meyer shall use all reasonable efforts to resolve such objections, if any,
as may be asserted with respect to the transactions contemplated hereby under
any applicable federal or state antitrust laws; provided, however, that in no
event shall Smith's or Fred Meyer or any of their respective Subsidiaries or
Holdings or any of its Subsidiaries be required in that connection to (i) effect
any divestitures of any material assets of Smith's or Fred Meyer or their
respective Subsidiaries, (ii) hold separate any such material assets or (iii)
agree to any material restrictions on the operations of Holdings, or their
respective Subsidiaries of any material portion of the business or assets of
Smith's or Fred Meyer or their respective Subsidiaries.
5.7 Inspection of Records. From the date hereof to the Effective Time,
subject to the confidentiality agreements dated March 17, 1997 and March 26,
1997 between Fred Meyer and Smith's (the "Confidentiality Agreements"), each of
the parties will (a) allow all designated officers, attorneys, accountants and
other representatives of the other reasonable access at all reasonable times to
the offices, records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs, of the parties
and their respective Subsidiaries, as the case may be, (b) furnish to the other,
the other's counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
Persons may reasonably request, and (c) instruct the employees, counsel and
financial advisors of the parties, as the case may be, to cooperate with the
other in the other's investigation of the business of it and its Subsidiaries.
No investigation shall affect the representations and warranties of the parties
or the conditions to the obligations of the parties hereunder.
5.8 Publicity. The initial press release relating to this Agreement will be
a joint press release and thereafter Smith's and Fred Meyer will, subject to
their respective legal obligations (including requirements of stock exchanges
and other similar regulatory bodies), consult with each other, and use
reasonable efforts to agree upon the text of any press release, before issuing
any such press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any governmental
or regulatory authorities or with any national securities exchange with respect
thereto.
5.9 Joint Proxy Statement/Prospectus and the Form S-4. Fred Meyer and
Smith's will cooperate and promptly prepare and file with the SEC as soon as
practicable a joint proxy statement/prospectus and a form of proxy in connection
with the vote of Fred Meyer's and of Smith's stockholders with respect to the
Mergers
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and the offer to such stockholders of the securities to be issued pursuant to
the Mergers (the "Joint Proxy Statement/Prospectus") and will cause Holdings to
prepare and file with the SEC the registration statement on Form S-4 (the "Form
S-4") under the Securities Act, in which the Joint Proxy Statement/Prospectus
shall be included as a prospectus. The respective parties will cause the Form
S-4 to comply in all material respects with the applicable provisions of the
Securities Act and the Exchange Act. Each of Smith's and Fred Meyer will use its
best efforts to have the Form S-4 declared effective by the SEC as promptly as
practicable and to keep the Form S-4 effective as long as is necessary to
consummate the Mergers. Smith's and Fred Meyer will cause Holdings to take any
action required to be taken to obtain, prior to the effective date of the Form
S-4, all necessary state securities law or "Blue Sky" permits or approvals
required to carry out the transactions contemplated by this Agreement and all
expenses incident thereto will be shared equally by Fred Meyer and Smith's. No
amendment or supplement to the Form S-4 or the Joint Proxy Statement/Prospectus
will be made by Fred Meyer or Smith's without the approval of the other party,
such approval not to be unreasonably withheld or delayed. Each of Smith's and
Fred Meyer shall use reasonable best efforts to cause the Joint Proxy
Statement/Prospectus to be mailed to its respective stockholders as soon as
practicable after the date hereof.
5.10 Listing Application. Each of Smith's and Fred Meyer will cause
Holdings to promptly prepare and submit to the NYSE a listing application
covering the shares of Holdings Common Stock issuable in the Mergers, and will
use its best efforts to obtain, prior to the Effective Time, approval for the
listing of such Holdings Common Stock, subject to official notice of issuance.
5.11 Further Action. Each party hereto will, subject to the other terms and
conditions set forth herein and to the fulfillment at or before the Effective
Time of each of the conditions of performance set forth herein or the waiver
thereof, perform such further acts and execute such documents as may be
reasonably required to effect the Mergers.
5.12 Affiliate Letters. At least 15 days prior to the Closing Date, each of
Smith's and Fred Meyer will deliver to the other party a list of names and
addresses of those Persons who were, in its respective reasonable judgment, at
the record date for its respective stockholders' meeting to approve the Mergers,
"affiliates" within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act. Each party will use all reasonable efforts
to deliver or cause to be delivered to the other, prior to the Closing Date,
from each of the "affiliates" identified in the foregoing list, an Affiliate
Letter in the form attached hereto as Exhibit E. Holdings will be entitled, to
the extent it is so required by applicable law (as advised by outside counsel
experienced in such matters) to place legends as specified in such Affiliate
Letters on the certificates evidencing any Holdings Common Stock to be received
by such "affiliates" pursuant to the terms of this Agreement, and to issue
appropriate stop-transfer instructions to the transfer agent for Holdings Common
Stock, consistent with the terms of such Affiliate Letters.
5.13 Expenses. Whether or not the Mergers are consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by the party incurring such expenses except as
expressly provided herein, including Section 7.5, and except that (a) the filing
fee in connection with the HSR Act filing, (b) the filing fee in connection with
the filing of the Form S-4 or Joint Proxy Statement/Prospectus with the SEC, and
(c) the expenses incurred in connection with the preparation, printing and
mailing the Form S-4 and the Joint Proxy Statement/Prospectus, will be shared
equally by Smith's and Fred Meyer.
5.14 Indemnification. (a) From and after the Effective Time, Holdings shall
indemnify, defend and hold harmless the present and former directors, officers
and employees of Smith's, Fred Meyer and their respective Subsidiaries (each, an
"Indemnified Party") against all costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement and the Voting Agreement) to the fullest extent that such persons
are indemnified under the laws of the State of Delaware and the certificates of
incorporation and bylaws, as in effect on the date hereof, of Smith's, Fred
Meyer and their respective Subsidiaries or any
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existing indemnification agreement with either Fred Meyer or Smith's (and during
such period Holdings shall also advance expenses (including expenses
constituting Costs described in Section 5.14(e)) as incurred to the fullest
extent permitted under applicable law, provided that 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 with no bond or
security to be required); provided that any determination required to be made
with respect to whether an officer's or director's conduct complies with the
standards set forth under Delaware law and any such certificate of incorporation
or bylaws shall be made by independent counsel (which shall not be counsel that
provides material services to Holdings or its Subsidiaries) selected by Holdings
and reasonably acceptable to such officer or director; and provided, further,
that in the absence of applicable Delaware judicial precedent to the contrary,
such counsel, in making such determination, shall presume such officer's or
director's conduct complied with such standard and Holdings shall have the
burden to demonstrate that such officer's or director's conduct failed to comply
with such standard.
(b) For a period of five (5) years after the Effective Time, Holdings will
maintain officers' and directors' liability insurance covering the Indemnified
Parties who are currently covered, in their capacities as current or former
officers and directors, by Smith's or Fred Meyer's existing officers' and
directors' liability insurance policies on terms substantially no less
advantageous to the Indemnified Parties than such existing insurance.
(c) Any Indemnified Party wishing to claim indemnification under Section
5.14(a), upon learning of any claim, action, suit, proceeding or investigation
described above, shall promptly notify Holdings thereof; provided that the
failure so to notify shall not affect the obligations of Holdings under Section
5.14(a) unless and to the extent such failure materially increases Holding's
liability under such subsection (a).
(d) If Holdings or any of its successors or assigns shall consolidate with
or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provision shall
be made so that the successors and assigns of Holdings shall assume the
obligations set forth in this Section 5.14.
(e) Holdings shall pay all reasonable Costs, including attorneys' fees,
that may be incurred by any Indemnified Party in enforcing the indemnity and
other obligations provided for in this Section 5.14. The rights of each
Indemnified Party hereunder shall be in addition to any other rights such
Indemnified Party may have under applicable law.
(f) Smith's and Fred Meyer will cause Holdings to keep in effect provisions
in its certificate of incorporation and by-laws providing for exculpation of
director and officer liability and its indemnification of the Indemnified
Parties to the fullest extent permitted under the DGCL, which provisions will
not be amended except as required by applicable law or except to make changes
permitted by law that would enlarge the Indemnified Parties' right of
indemnification.
(g) The provisions of this Section 5.14 will survive the consummation of
the Mergers and expressly are intended to benefit each Indemnified Party.
5.15 Consents. Smith's and Fred Meyer will use all reasonable efforts to
obtain each of the consents identified in Section 3.6 and 4.6, respectively, of
the Disclosure Schedule.
5.16 Financing Arrangements. Smith's and Fred Meyer shall cooperate with
each other, with a view to obtaining financing for Holdings on terms and
conditions reasonably satisfactory to Smith's and Fred Meyer, the funds of
which, if obtained, shall be used to repay substantially all outstanding
indebtedness of Smith's, Fred Meyer and their respective Subsidiaries.
5.17 Financial Information. Smith's and Fred Meyer shall each deliver to
the other as soon as available all interim and other financial statements and
other management reports generated in the ordinary course of business prepared
by or for Smith's or Fred Meyer, prior to the Closing.
5.18 Letter of Smith's Accountants. Smith's shall use reasonable efforts to
cause to be delivered to Fred Meyer and Holdings a letter of Ernst & Young, LLP,
Smith's independent auditors, dated a date within two business days before the
date on which the Form S-4 shall become effective and addressed to Holdings, in
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form reasonably satisfactory to Fred Meyer and customary in scope and substance
for letters delivered by independent public accountants in connection with
registration statements similar to the Form S-4.
5.19 Letter of Fred Meyer's Accountants. Fred Meyer shall use reasonable
efforts to cause to be delivered to Smith's and Holdings a letter of Deloitte &
Touche, LLP, Fred Meyer's independent auditors, dated a date within two business
days before the date on which the Form S-4 shall become effective and addressed
to Holdings, in form reasonably satisfactory to Smith's and customary in scope
and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Form S-4.
5.20 Registration Statement on Form S-8. No later than the Effective Time,
Smith's and Fred Meyer shall cause Holdings to prepare and file with the SEC a
registration statement on Form S-8 (or another appropriate form) registering a
number of shares of Holdings Common Stock at least equal to the sum of (x) the
number of shares of Holdings Common Stock subject to options to be received by
the holders of Smith's Options pursuant to Section 2.1(d)(i) and (y) the number
of shares of Holdings Common Stock subject to options to be received by the
holders of Fred Meyer Options pursuant to Section 2.1(d)(ii). Such registration
statement shall be kept effective (and the current status of the prospectus or
prospectuses required thereby shall be maintained) at least for so long as any
options with respect to Holdings Common Stock received by the holders of Smith's
Options and Fred Meyer Options pursuant to Section 2.1(d) remain outstanding.
5.21 Tax Matters Certificates. In connection with the opinions to be
rendered by counsel to the parties pursuant to Sections 6.2(f) and 6.3(h), at
the Closing, Smith's, Fred Meyer and Holdings shall deliver, and each of Smith's
and Fred Meyer will use its best efforts to cause each of its stockholders
owning five percent (5%) or more of any class of the voting stock of Smith's or
Fred Meyer, to deliver Tax Matters Certificates to the respective counsel of
Smith's, Fred Meyer or Holdings, as the case may be, which certificates shall be
in substantially the forms set forth on Exhibit F. Such counsel shall, in
rendering such opinions, be entitled to rely on representations contained in
such Tax Matters Certificates.
5.22 Standstill and Confidentiality Agreements. During the period from the
date of this Agreement through the Effective Time, neither Fred Meyer nor
Smith's shall terminate, amend, modify or waive any provision of any
confidentiality or standstill agreement to which it or any of its respective
Subsidiaries is a party. During such period, Fred Meyer or Smith's, as the case
may be, shall enforce, to the fullest extent permitted under applicable law, the
provisions of any such agreement, including by obtaining injunctions to prevent
any breaches of such agreements and to enforce specifically the terms and
provisions thereof in any court of the United States of America or of any state
having jurisdiction.
5.23 Assumption of Obligations by Holdings, Smith's Sub and Fred Meyer Sub.
As soon as practicable after the formation of Holdings, Smith's and Fred Meyer
shall cause Holdings (i) to sign and become a party to this Agreement and to
assume the obligations applicable to it hereunder and (ii) to cause Smith's Sub
and Fred Meyer Sub to sign and become a party to this Agreement and to assume
their respective obligations hereunder and under the agreements of merger
contained herein. Upon their execution of this Agreement, Holdings, Smith's Sub
and Fred Meyer Sub will be bound by the provision hereof and Fred Meyer and
Smith's hereby agree that upon such execution such entities shall be a party
hereto.
6. Conditions
6.1 Conditions to Each Party's Obligation to Effect the Mergers. The
respective obligations of each party to effect the Mergers will be subject to
the fulfillment or waiver by both parties at or prior to the Closing Date of the
following conditions:
(a) This Agreement, the Smith's Merger and the Fred Meyer Merger shall
each have been approved in the manner required by applicable law by the
respective holders of the issued and outstanding shares of capital stock of
Smith's and of Fred Meyer;
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(b) The waiting period applicable to the consummation of the Mergers
under the HSR Act shall have expired or been terminated;
(c) Neither of the parties hereto shall be subject to any order,
decree, ruling or injunction of a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, and no
law, statute, rule or regulation shall have been promulgated or enacted by
a governmental or regulatory authority, which prohibits the consummation of
the transactions contemplated by this Agreement or would otherwise impair
the ability of Holdings to operate the business of Smith's and Fred Meyer
on a consolidated basis following the Closing;
(d) The Form S-4 shall have become effective and shall be effective at
the Effective Time, and no stop order suspending effectiveness of the Form
S-4 shall have been issued, no action, suit, proceeding or investigation by
the SEC to suspend the effectiveness thereof shall have been initiated and
be continuing or, to the knowledge of Fred Meyer or Smith's, be threatened
in writing, and all necessary approvals under state securities laws
relating to the issuance or trading of Holdings Common Stock to be issued
to Smith's and Fred Meyer stockholders in connection with the Mergers shall
have been received;
(e) All consents, licenses, permits, authorizations, orders and
approvals of (or filings or registrations with) any governmental or
regulatory authorities required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Mergers and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, license, permit, authorization, order,
approval, filing or registration would not have a Material Adverse Effect
on Holdings following the Effective Time;
(f) Holdings Common Stock to be issued to Smith's and Fred Meyer
stockholders in connection with the Mergers shall have been approved for
listing on the NYSE, subject only to official notice of issuance; and
(g) After the Effective Time, no Person will have any right under any
stock option plan (or any option granted thereunder) or other plan, program
or arrangement to acquire any equity securities of Smith's, Fred Meyer or
any of their respective Subsidiaries.
6.2 Conditions to Obligation of Smith's to Effect the Mergers. The
obligation of Smith's to effect the Mergers will be subject to the fulfillment
or waiver by Smith's at or prior to the Closing Date of the following additional
conditions:
(a) Fred Meyer shall have performed and complied in all material
respects with all material obligations and agreements required to be
performed and complied with by it under this Agreement at or prior to the
Closing Date;
(b) The representations and warranties of Fred Meyer contained in this
Agreement that are qualified as to materiality shall be true and correct,
and such representations and warranties of Fred Meyer that are not so
qualified shall be true and correct in all material respects, in each case
both as of the date of this Agreement and on the Closing Date as though
made on and as of the Closing Date, except to the extent such
representations and warranties are expressly made as of an earlier date, in
which case, such representations and warranties shall be true and correct
as of such date;
(c) Smith's shall have received a certificate from the President or an
Executive Vice President of Fred Meyer, dated as of the Closing Date, to
the effect that the conditions set forth in paragraphs (a) and (b) above
have been satisfied;
(d) From the date of this Agreement through the Effective Time, a
Material Adverse Effect with respect to Fred Meyer shall not have occurred;
(e) Holdings shall have duly executed the Supplemental Warrant
Agreement and, upon the execution by the other parties thereto, such
agreement shall be in full force and effect as of the Effective Time;
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(f) Smith's shall have received on the Closing Date a legal opinion
from its tax counsel, Latham & Watkins, substantially to the effect that,
on the basis of the facts, representations and assumptions set forth in
such opinion, the Fred Meyer Merger, taken together with the Smith's
Merger, will be treated as an exchange under Section 351(a) of the Code;
(g) Smith's shall have received on the Closing Date a legal opinion
from counsel to Fred Meyer (which counsel shall be reasonably acceptable to
Smith's) in substantially the form attached hereto as Exhibit G; and
(h) Holdings shall have duly executed the Registration Rights
Agreement and the New Management Agreement and, upon execution by the other
parties thereto, such agreements shall be in full force and effect as of
the Effective Time.
6.3 Conditions to Obligation of Fred Meyer to Effect the Mergers. The
obligation of Fred Meyer to effect the Mergers will be subject to the
fulfillment or waiver by Fred Meyer at or prior to the Closing Date of the
following additional conditions:
(a) Smith's shall have performed and complied in all material respects
with all material obligations and agreements required to be performed and
complied with by it under this Agreement at or prior to the Closing Date;
(b) The representations and warranties of Smith's contained in this
Agreement that are qualified as to materiality shall be true and correct,
and such representations and warranties of Smith's that are not so
qualified shall be true and correct in all material respects, in each case
both as of the date of this Agreement and on the Closing Date as though
made on and as of the Closing Date, except to the extent such
representations and warranties are expressly made as of an earlier date, in
which case, such representations and warranties shall be true and correct
as of such date;
(c) Fred Meyer shall have received from Smith's a certificate from the
President or an Executive Vice President of Smith's, dated as of the
Closing Date, to the effect that the conditions set forth in paragraphs (a)
and (b) above have been satisfied;
(d) From the date of this Agreement through the Effective Time, a
Material Adverse Effect on Smith's shall not have occurred;
(e) The Voting Agreements covering at least 50.1%, in the aggregate,
of the voting power of the issued and outstanding shares of capital stock
of Smith's shall be in full force and effect and each party thereto shall
have performed and complied in all material respects with all material
obligations and agreements required to be performed or complied with by
such party at or prior to the Effective Time;
(f) The Old Management Agreement shall have been terminated and shall
be of no further force and effect and the New Management Agreement shall
have been duly executed by the parties thereto and shall be in full force
and effect as of the Effective Time;
(g) The motion filed by Larry F. Klang on October 15, 1996 relating to
Smith's 1996 recapitalization transactions shall not have been granted and
there shall have been no development with respect to the legal proceedings
related to the class action complaint filed by Larry F. Klang on May 22,
1996 as amended on May 30, 1996 that has had or could reasonably be
expected to have a Material Adverse Effect with respect to Smith's or
Holdings or a material adverse effect on the intended benefits of the
Mergers to Fred Meyer, Smith's or Holdings;
(h) Fred Meyer shall have received on the Closing Date a legal opinion
from its tax counsel, Cleary, Gottlieb, Steen & Hamilton, substantially to
the effect that, on the basis of the facts, representations and assumptions
set forth in such opinion, the Smith's Merger, taken together with the Fred
Meyer Merger, will be treated as an exchange under Section 351(a) of the
Code; and
(i) Fred Meyer shall have received on the Closing Date a legal opinion
from counsel to Smith's (which counsel shall be reasonably acceptable to
Fred Meyer) in substantially the form attached hereto as Exhibit H.
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7. TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time, whether before
or after the approval of this Agreement by the respective stockholders of
Smith's and Fred Meyer, by the mutual written consent of Fred Meyer and Smith's.
7.2 Termination by Either Fred Meyer or Smith's. This Agreement may be
terminated and the Mergers may be abandoned by action of the Board of Directors
of either Fred Meyer or Smith's if (a) the Mergers shall not have been
consummated by January 31, 1998 (the "Outside Date"); provided, however, that
the right to terminate this Agreement pursuant to this clause (a) shall not be
available to any party whose breach of any of its obligations hereunder in any
manner has caused, or proximately contributed to, the failure or inability to
consummate the Mergers by the Outside Date, (b) a United States federal or state
court of competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission issues an order, decree or
ruling or takes any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action becomes final and non-appealable, (c) the meeting
of Smith's stockholders (or any adjournment thereof) is held to consider this
Agreement and the Smith's Merger and the Smith's Stockholder Approval is not
obtained or (d) the meeting of Fred Meyer's stockholders (or any adjournment
thereof) is held to consider this Agreement and the Fred Meyer Merger and the
Fred Meyer Stockholder Approval is not obtained.
7.3 Termination by Smith's. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time, by action of
the Board of Directors of Smith's, if (a) (1) the Board of Directors of Fred
Meyer shall have withdrawn or modified in a manner adverse to Smith's its
recommendation that Fred Meyer stockholders vote in favor of this Agreement or
the Fred Meyer Merger or shall have recommended an Acquisition Proposal relating
to Fred Meyer to Fred Meyer's stockholders or otherwise materially breached its
obligations under Sections 5.1 or 5.4 hereof, or (2) any Alternative Transaction
relating to Fred Meyer of the type described in clause (ii) of the definition of
Acquisition Proposal shall have occurred, (b) there has been a breach by Fred
Meyer of any representation or warranty contained in this Agreement, or any
representation or warranty of Fred Meyer shall have become untrue in any
respect, in either case such that the condition set forth in Section 6.2(b)
would be incapable of being satisfied by the Outside Date, or (c) there has been
a breach of any of the covenants set forth in this Agreement on the part of Fred
Meyer, which breach is not curable or, if curable, is not cured within twenty
(20) calendar days after written notice of such breach is given by Smith's to
Fred Meyer, in either case such that the condition set forth in Section 6.2(a)
would be incapable of being satisfied by the Outside Date.
7.4 Termination by Fred Meyer. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time, by action of
the Board of Directors of Fred Meyer if (a)(1) the Board of Directors of Smith's
shall have withdrawn or modified in a manner adverse to Fred Meyer its
recommendation that Smith's stockholders vote in favor of this Agreement or the
Smith's Merger or shall have recommended an Acquisition Proposal relating to
Smith's to Smith's stockholders or otherwise materially breached its obligations
under Sections 5.1 or 5.4 hereof, or (2) any Alternative Transaction relating to
Smith's described in clause (ii) of the definition thereof shall have occurred,
(b) there has been a breach by Smith's of any representation or warranty
contained in this Agreement, or any representation or warranty of Smith's shall
have become untrue in any respect, in either case such that the conditions set
forth in Section 6.3(b) would be incapable of being satisfied by the Outside
Date, (c) there has been a breach of any of the covenants set forth in this
Agreement on the part of Smith's, which breach is not curable or, if curable, is
not cured within twenty (20) days after written notice of such breach is given
by Fred Meyer to Smith's, in either case such that the condition set forth in
Section 6.3(a) would be incapable of being satisfied by the Outside Date or (d)
there has been a material breach of any Voting Agreement by any party thereto
which breach would deprive Fred Meyer of the intended benefits thereof with
respect to the approval of this Agreement and the Smith's Merger by the
stockholders of Smith's.
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7.5 Effect of Termination and Abandonment. (a) In the event of termination
of this Agreement and the abandonment of the Mergers pursuant to this Article 7,
all obligations of the parties hereto will terminate, except the obligations of
the parties pursuant to this Section 7.5 and Section 5.13 and except for the
provisions of Article 8. Moreover, in the event of termination of this Agreement
pursuant to Section 7.2, 7.3 or 7.4, nothing herein will prejudice the ability
of the non-breaching party from seeking damages from any other party for any
willful breach of this Agreement, including without limitation attorneys' fees,
and the right to pursue any remedy at law or in equity, except as provided in
Section 7.5(e) below.
(b) In the event that (i) this Agreement is terminated by Smith's pursuant
to Section 7.2(d) and (ii) at the time of the event giving rise to such
termination Fred Meyer would not have been entitled to terminate this Agreement
pursuant to Section 7.4 or 7.2(c), then Fred Meyer will pay Smith's up to $5
million as reimbursement for expenses of Smith's actually incurred prior to such
termination relating to the transactions contemplated by this Agreement
(including but not limited to fees and expenses of Smith's counsel, accountants
and financial advisors, but excluding any discretionary fees paid to such
financial advisors).
(c) In the event that (i) this Agreement is terminated by Smith's pursuant
to Section 7.2(d), (ii) at the time of the event giving rise to such
termination, Fred Meyer would not have been entitled to terminate this Agreement
pursuant to Section 7.4 or 7.2(c) and (iii) at the time of the event giving rise
to such termination, any Acquisition Proposal relating to Fred Meyer was
pending, then, if within eighteen (18) months following such termination, any
Alternative Transaction relating to Fred Meyer is consummated (or if any
Alternative Transaction relating to Fred Meyer described in clause (ii) of the
definition Acquisition Proposal shall have been consummated prior to such
termination), Fred Meyer will pay Smith's a termination fee of $35 million (the
"Termination Fee").
(d) In the event that (i) this Agreement is terminated by Smith's pursuant
to Section 7.2(a), (ii) at the time of the event giving rise to such
termination, the Fred Meyer Shareholder Approval has not been obtained and Fred
Meyer would not have been entitled to terminate this Agreement pursuant to
Section 7.4 or 7.2(c) and (iii) at the time of the event giving rise to such
termination, any Acquisition Proposal relating to Fred Meyer is pending (or any
Alternative Transaction relating to Fred Meyer described in clause (ii) of the
definition Acquisition Proposal has been consummated), then Fred Meyer will pay
Smith's the Termination Fee.
(e) Any fees payable pursuant to Sections 7.5(b), (c) or (d) above shall be
paid within one business day after the occurrence of the event giving rise to
the obligation to make such payment. All such payments shall be made by wire
transfer to such bank account as Smith's may designate. Fred Meyer's
reimbursement of Smith's expenses pursuant to Section 7.5(b) and/or payment of a
termination fee pursuant to Section 7.5(c) or Section 7.5(d), as the case may
be, shall be the sole and exclusive remedy of Smith's against Fred Meyer and any
of its Subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives with respect to the occurrences giving rise to
such payment.
8. GENERAL PROVISIONS
8.1 Non-survival of Representations and Warranties. All representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement will be deemed to the extent expressly provided herein to be
conditions to the Mergers and will not survive the Mergers. This Section shall
not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
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8.2 Notices. Any notice required to be given hereunder will be sufficient
if in writing, and sent by facsimile transmission and by courier service (with
proof of service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
If to Fred Meyer: If to Smith's:
Fred Meyer, Inc. Smith's Food & Drug Centers, Inc.
3800 S.E. 22nd Avenue 1550 South Redwood Road
Portland, Oregon 97202 Salt Lake City, Utah 84104
Attention: General Counsel Attention: General Counsel
Fax No.: (503) 220-7138 Fax No.: (801) 974-1676
With copies to: With copies to:
Cleary, Gottlieb, Steen & Hamilton Latham & Watkins
One Liberty Plaza 633 West Fifth Street, Suite 4000
New York, New York 10006 Los Angeles, California 90071
Attention: Daniel S. Sternberg, Esq. Attention: Thomas C. Sadler, Esq.
Fax No.: 212-225-3999 Fax No.: 213-891-8763
or to such other address as any party will specify by written notice so given,
and such notice will be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
8.3 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder will be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon and will inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Section 5.14, nothing in this Agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
8.4 Entire Agreement. This Agreement, the Exhibits, the Disclosure Schedule
and any documents delivered by the parties in connection herewith, together with
the Confidentiality Agreements, which will survive the execution and delivery of
this Agreement, constitute the entire agreement among the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No addition to or
modification of any provision of this Agreement will be binding upon any party
hereto unless made in writing and signed by all parties hereto.
8.5 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Board of Directors, at any time before or after
approval of matters presented in connection with the Mergers by the respective
stockholders of Fred Meyer and Smith's but after any such stockholder approval,
no amendment will be made which by law requires the further approval of such
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.6 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws.
8.7 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered will be an
original, but all such counterparts will together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
8.8 Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and will be given no substantive or
interpretive effect whatsoever.
8.9 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number will include the plural and vice
versa, and words denoting any gender will include all genders and words denoting
natural Persons will include corporations and partnerships and vice versa.
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8.10 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, will be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of any
provision hereunder shall be valid only if set forth in an instrument in writing
signed on behalf of such party and will not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
8.11 Incorporation of Schedules. The Disclosure Schedule attached hereto
and referred to herein is hereby incorporated herein and made a part hereof for
all purposes as if fully set forth herein.
8.12 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction will, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision will be interpreted
to be only so broad as is enforceable.
8.13 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties will be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware Court, this being in addition to
any other remedy to which they are entitled at law or in equity.
9. DEFINITIONS
9.1 Defined Terms. As used herein, the terms below shall have the following
meanings:
"Acquisition Proposal" means with respect to Smith's or Fred Meyer,
respectively, any proposal or offer or public disclosure of an intention to
make a proposal or offer (in each case, other than the transactions
contemplated by this Agreement) with respect to: (i) any merger,
consolidation, recapitalization, liquidation, dissolution or similar
transaction involving Smith's or Fred Meyer or any of their respective
Subsidiaries, or (ii) any purchase or acquisition (or option or agreement
to purchase or acquire), including by way of a merger, consolidation,
tender or exchange offer (including a self tender), of any equity
securities (or securities convertible into equity securities) pursuant to
which any Person (or group of Persons) other than Smith's or Fred Meyer or
their respective affiliates (a "Third Party"), acquires beneficial
ownership of 20% or more of the outstanding voting power of Fred Meyer or
Smith's, or (iii) any other transaction pursuant to which any Third Party
acquires control of assets of Smith's or Fred Meyer having a fair market
value (as determined by the Board of Directors of Smith's or Fred Meyer, as
the case may be, in good faith) equal to more than 20% of the fair market
value of all the assets of Smith's or Fred Meyer, as the case may be, and
their respective Subsidiaries, taken as a whole, immediately prior to such
transaction.
"Alternative Transaction" means with respect to Smith's or Fred Meyer,
respectively, any transaction of the nature described in clauses (i), (ii)
or (iii) of the definition of Acquisition Proposal.
"Action" shall mean 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.
"Affiliate" shall mean, 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.
"Assets" shall mean, with respect to any Person, all land, buildings,
improvements, leasehold improvements, Fixtures and Equipment and other
assets, real or personal, tangible or intangible, owned, leased or licensed
by such Person or any of its Subsidiaries.
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"Benefit Arrangement" shall mean, with respect to any Person, any
employment, consulting, severance, change in control or other similar
contract, arrangement or policy and each plan, arrangement (written or
oral), program, agreement or commitment providing for insurance coverage
(including without limitation any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, life, health, disability or
accident benefits (including without limitation any "voluntary employees'
beneficiary association" as defined in Section 501(c) (9) of the Code
providing for the same or other benefits) or for deferred compensation,
profit-sharing bonuses, stock options, stock appreciation rights, stock
purchases or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (A) is not a Welfare Plan,
Pension Plan or Multiemployer Plan, (B) is entered into, maintained,
contributed to or required to be contributed to, as the case may be, by
such Person or an ERISA Affiliate or under which such Person or any ERISA
Affiliate may incur any liability, and (C) covers any employee or former
employee of such Person or any ERISA Affiliate (with respect to their
relationship with such entities).
"Contract" shall mean any contract (written or oral), plan,
undertaking or other commitment or agreement.
"Disclosure Schedule" means the schedules dated as of the date hereof
and delivered by or on behalf of each party hereto to the other party
hereto in connection with this Agreement and which set forth exceptions to
the representations and warranties contained in herein hereof and certain
other information called for by other provisions of this Agreement.
"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.
"Employee Plans" shall mean all Benefit Arrangements, Multiemployer
Plans, Pension Plans and Welfare Plans.
"ERISA Affiliate" shall mean, with respect to any Person, any entity
which is (or at any relevant time was) a member of a "controlled group of
corporations" with, under "common control" with, or a member of an
"affiliated service group" with, such Person as defined in Section 414(b),
(c), (m) or (o) of the Code.
"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 withdrawal or use of groundwater; 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 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 laws and all rules, regulations and
guidance documents promulgated pursuant thereto or published thereunder.
"Fixtures and Equipment" shall mean, with respect to any Person, all
of the furniture, fixtures, furnishings, machinery and equipment owned,
leased or licensed by such Person and located in, at or upon the Facilities
of such Person.
"GAAP" shall mean generally accepted accounting principles in the
United States of America, as in effect from time to time, consistently
applied.
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"Hazardous Materials" shall mean each and every element, compound,
chemical mixture, contaminant, pollutant, material, waste or other
substance which is defined, determined or identified as hazardous or toxic
under Environmental Laws or the release of which is regulated under
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; asbestos or asbestos-containing materials; and radon.
"Leases" shall mean, with respect to any Person, all leases (including
subleases, licenses, any occupancy agreement and any other agreement) of
real or 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.
"Material Adverse Effect" shall mean, with respect to any of Holdings
(following the Mergers), Smith's or Fred Meyer, as the context requires, a
material adverse change in or effect on the business, results of
operations, assets, liabilities, prospects or conditions (financial or
otherwise) of such Person and its Subsidiaries taken as a whole or any
change which impairs or materially delays the ability of such Person to
consummate the transactions contemplated by this Agreement.
"Multiemployer Plan" shall mean, with respect to any Person, any
"multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A) which
such Person or any ERISA Affiliate maintains, administers, contributes to
or is required to contribute to, or, after September 25, 1980, maintained,
administered, contributed to or was required to contribute to, or under
which such Person or any ERISA Affiliate may incur any liability and (B)
which covers any employee or former employee of such Person or any ERISA
Affiliate (with respect to their relationship with such entities).
"Multiemployer Welfare Plan" shall mean a Welfare Plan that is a
"multiemployer plan," as defined in Section 3(37) of ERISA.
"Pension Plan" shall mean, with respect to any Person, any "employee
pension benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) (A) which such Person or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the
six years prior to the Closing Date, maintained, administered, contributed
to or was required to contribute to, or under which such Person or any
ERISA Affiliate may incur any liability and (B) which covers any employee
or former employee of such Person or any ERISA Affiliate (with respect to
their relationship with such entities).
"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 accordance with GAAP; (ii) all cashiers', workers' and
repairers' liens, and other similar liens imposed by law, incurred in the
ordinary course of business; (iii) all laws and governmental rules,
regulations, ordinances and restrictions; (iv) all leases, subleases,
licenses, concessions or service contracts to which any Person or any of
its Subsidiaries is a party; (v) Encumbrances identified on title policies
or preliminary title reports delivered or made available for inspection to
any Person prior to the date hereof; and (vi) all other liens and mortgages
(but solely to the extent such liens or mortgages secure indebtedness
described in the Disclosure Schedule), covenants, imperfections in title,
charges, easements, restrictions and other Encumbrances which, in the case
of any such Encumbrances pursuant to clause (i) through (vi), do not
materially detract from or materially interfere with the value or present
use of the asset subject thereto or affected thereby.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, governmental agency or instrumentality,
or any other entity.
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"Subsidiary" shall mean, with respect to any Person, any corporation
or other organization, whether incorporated or unincorporated, of which
such Person directly or indirectly owns or controls at least a majority of
the securities or other interests having by their terms ordinary voting
power to elect a majority of the board of directors or others performing
similar functions.
"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, employment, commercial rent or
withholding, occupancy, premium, gross receipts, profits, windfall profits,
deemed profits, license, lease, severance, capital, production,
corporation, ad valorem, excise, duty or other taxes, including interest,
penalties and additions (to the extent applicable) thereto.
"Tax Return" shall mean any report, return, document, declaration or
other information or filing 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.
"Welfare Plan" shall mean, with respect to any Person, any "employee
welfare benefit plan" as defined in Section 3(1) of ERISA, (A) which such
Person or any ERISA Affiliate maintains, administers, contributes to or is
required to contribute to, or under which such Person or any ERISA
Affiliate may incur any liability and (B) which covers any employee or
former employee of such Person or any ERISA Affiliate (with respect to
their relationship with such entities).
9.2 Other Defined Terms. The following terms shall have the respective
meanings given to such terms in the Sections set forth below:
Term Section
---- -------
Agreement Preamble
Blue Sky Laws Section 3.6(b)
Cap Section 5.14(b)
Class A Common Stock Section 2.1(b)(i)
Class B Common Stock Section 2.1(b)(i)
Class C Common Stock Section 2.1(b)(i)
Closing Section 1.5
Closing Date Section 1.5
Code Preamble
Common Certificates Section 2.2(b)
Common Consideration Section 2.1(b)(iii)
Confidentiality Agreements Section 5.7
Contracts Section 3.18
Costs Section 5.14(a)
DGCL Preamble
Dissenting Shares Section 2.4(a)
Effective Time Section 1.6
ERISA Section 3.12(c)
Exchange Act Section 3.6(b)
Exchange Agent Section 2.2(a)
Exchange Fund Section 2.2(a)
Facility Section 3.17(b)
Form S-4 Section 5.9
Fred Meyer Preamble
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Term Section
---- -------
Fred Meyer Common Consideration Section 2.1(b)(iii)
Fred Meyer Common Shares Section 2.1(b)(ii)
Fred Meyer Common Stock Section 2.1(b)(ii)
Fred Meyer Common Treasury Shares Section 2.1(b)(ii)
Fred Meyer Companies Section 2.1(b)(i)
Fred Meyer Exchange Ratio Section 2.1(b)(ii)
Fred Meyer Merger Preamble
Fred Meyer Options Section 2.1(d)(ii)
Fred Meyer Preferred Stock Section 4.3
Fred Meyer SEC Reports Section 4.8(a)
Fred Meyer Stock Option Plans Section 2.1(d)(ii)
Fred Meyer Stockholder Approval Section 4.25
Fred Meyer Sub Section 1.4(a)
Fred Meyer Transaction Document Section 4.2
Holdings Preamble
Holdings Common Stock Preamble
HSR Act Section 3.6(b)
Indemnified Party Section 5.14(a)
Joint Proxy Statement/Prospectus Section 5.9
Mergers Preamble
New Fred Meyer Section 1.7(b)
New Management Agreement Section 1.10(b)
New Smith's Section 1.7(a)
NYSE Section 2.3
Old Management Agreement Section 1.10(b)
Outside Date Section 7.2
Partnership Section 1.10(a)
Preferred Certificates Section 2.2(b)
Preferred Consideration Section 2.1(c)(i)
Property Section 3.17(b)
Registration Rights Agreement Section 1.10(a)
SEC Section 3.8(a)
Securities Act Section 3.6(b)
Series I Preferred Shares Section 2.1(b)(i)
Series I Preferred Stock Section 2.1(c)(i)
Smith's Preamble
Smith's Common Consideration Section 2.1(b)(iii)
Smith's Common Shares Section 2.1(b)(i)
Smith's Common Stock Section 2.1(b)(i)
Smith's Common Treasury Shares Section 2.1(b)(i)
Smith's Companies Section 2.1(b)(ii)
Smith's Exchange Ratio Section 2.1(b)(i)
Smith's Merger Preamble
Smith's Options Section 2.1(d)(i)
Smith's Preferred Stock Section 3.3
Smith's Preferred Treasury Shares Section 2.1(c)(i)
Smith's SEC Reports Section 3.8(a)
Smith's Stock Option Plan Section 2.1(d)(i)
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Term Section
---- -------
Smith's Stockholder Approval Section 3.25
Smith's Sub Section 1.3(a)
Smith's Transaction Document Section 3.2
Smith's Warrant Section 2.1(e)
Superior Proposal Section 5.1
Supplemental Warrant Agreement Section 2.1(e)
Surviving Corporations Section 1.7(b)
Termination Fee Section 7.5(c)
Voting Agreements Preamble
Yucaipa LLC Section 1.10(b)
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
SMITH'S FOOD & DRUG CENTERS, INC.
By: /s/ RONALD W. BURKLE
-------------------------------------
Name: Ronald W. Burkle
Title: Chief Executive Officer
FRED MEYER, INC.
By: /s/ ROBERT G. MILLER
-------------------------------------
Name: Robert G. Miller
Title: Chairman of the Board and
Chief Executive Officer
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APPENDIX B
Salomon Brothers Inc
333 South Hope Street
Los Angeles, California 90071
213-253-2200
[SALOMON BROTHERS LOGO]
May 11, 1997
Board of Directors
Fred Meyer, Inc.
3800 SE 22nd Avenue
Portland, OR 97202
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of common stock, par value $.01 per share ("FMI Common
Stock"), of Fred Meyer, Inc. ("Fred Meyer"), other than Smith's Food and Drug
Centers, Inc. (the "Company") and any of its affiliates, of the consideration to
be received by such holders in connection with the proposed merger (the
"Merger") of Fred Meyer and Fred Meyer Merger Sub, Inc.("Fred Meyer Sub"), a
wholly owned subsidiary of a newly formed Delaware corporation ("Meyer-Smith
Holdco, Inc."), pursuant to the Agreement and Plan of Reorganization (the
"Reorganization Agreement"), dated as of May 11, 1997, by and between Fred Meyer
and the Company. In the Merger, Fred Meyer Sub will be merged into Fred Meyer,
which will be the surviving corporation and, in connection therewith, Smith
Merger Sub, Inc., a wholly owned subsidiary of Meyer-Smith Holdco, Inc., will be
merged into the Company, which will be the surviving corporation in such merger
(the "Company Merger"). In the Merger, each issued and outstanding share of FMI
Common Stock (other than (a) FMI Common Stock held in Fred Meyer's treasury or
held by any subsidiary of Fred Meyer, (b) FMI Common Stock held by the Company
or any subsidiary of the Company and (c) any FMI Common Stock the subject of
appraisal rights) will be converted into and become one fully paid and
nonassessable share (the "Exchange Ratio") of common stock, par value $.01 per
share, of Meyer-Smith Holdco, Inc. ("Meyer-Smith Holdco, Inc. Common Stock"),
and in the Company Merger, each issued and outstanding share of Class A Common
Stock, par value $.01 per share, Class B Common Stock, par value $.01 per share
and Class C Common Stock, par value $.01 per share (together "Company Common
Stock") of the Company (other than (a) Company Common Stock held in the
Company's treasury, (b) Company Common Stock held by Fred Meyer and any
subsidiary of Fred Meyer and (c) any Company Common Stock the subject of
appraisal rights) will be converted into and become 1.05 fully paid and
nonassessable shares of Meyer-Smith Holdco, Inc. Common Stock.
In connection with rendering our opinion, we have reviewed certain publicly
available information concerning Fred Meyer and the Company and certain other
financial information concerning Fred Meyer and the Company, including financial
forecasts, that were provided to us by Fred Meyer and the Company, respectively.
We have discussed the past and current business operations, financial condition
and prospects of Fred Meyer and the Company with certain officers and employees
of Fred Meyer and the Company, respectively. We have also considered such other
information, financial studies, analyses, investigations and financial, economic
and market criteria that we deemed relevant.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of the information reviewed by us
for the purpose of this opinion and we have not assumed any responsibility for
independent verification of such information. With respect to the financial
forecasts of Fred Meyer and the Company, we have assumed that they have been
reasonably prepared on bases reflecting
B-1
<PAGE>
Saloman Brothers Inc
the best currently available estimates and judgments of the respective
managements of Fred Meyer or the Company, and we express no opinion with respect
to such forecasts or the assumptions on which they are based. We have not
assumed any responsibility for any independent evaluation or appraisal of any of
the assets (including properties and facilities) or liabilities of Fred Meyer or
the Company.
Our opinion is necessarily based upon conditions as they exist and can be
evaluated on the date hereof. Our opinion as expressed below does not imply any
conclusion as to the likely trading range for Meyer-Smith Holdco, Inc. Common
Stock following the consummation of the Merger and the Company Merger, which may
vary depending upon, among other factors, changes in interest rates, dividend
rates, market conditions, general economic conditions and other factors that
generally influence the price of securities. Our opinion does not address Fred
Meyer's underlying business decision to effect the Merger. Our opinion is
directed only to the fairness, from a financial point of view, of the Exchange
Ratio to holders of FMI Common Stock and does not constitute a recommendation
concerning how holders of FMI Common Stock should vote with respect to the
Merger.
We have acted as financial advisor to Fred Meyer in connection with the
Merger and will receive a fee for our services, a portion of which is payable
upon execution of the Reorganization Agreement and the remainder of which is
contingent upon consummation of the Merger. In the ordinary course of business,
we may actively trade the securities of Fred Meyer and the Company 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. In addition, we have previously
rendered certain investment banking and financial advisory services to Fred
Meyer for which we have received customary compensation. We have also provided
investment banking, lending and broker-dealer related services to The Yucaipa
Companies and its affiliates.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of FMI Common Stock (other than the Company and any of its affiliates).
Very truly yours,
/s/ WESLEY WALRAVEN
SALOMON BROTHERS INC
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APPENDIX C
Donaldson, Lufkin & Jenrette
Donaldson, Lufkin & Jenrette Securities Corporation
2121 Avenue of the Stars, Los Angeles, CA 90067-5014 o (310) 282-6161
May 11, 1997
Board of Directors
Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, Utah 84104
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the common stockholders of Smith's Food & Drug Centers, Inc. (the
"Company") of the Exchange Ratio (as defined below) to be applied in the Merger
(as defined below) pursuant to the terms of the Agreement and Plan of
Reorganization to be dated as of May 11, 1997 (the "Agreement"), by and between
the Company and Fred Meyer, Inc. ("Fred Meyer"), pursuant to which the Company
and Fred Meyer will form a holding company ("Holdings") which will form two
subsidiaries, one of which will merge with and into Fred Meyer and the other of
which will merge with and into the Company (the "Merger").
Pursuant to the Agreement, each share of Class A Common Stock, par value
$.01 per share, of the Company, Class B Common Stock, par value $0.01 per share,
of the Company and Class C Common Stock, par value $0.01, of the Company
(excluding any such shares owned by Fred Meyer or the Company) (collectively,
"Smith's Common Stock") will be converted into the right to receive 1.05 shares
(the "Smith's Exchange Ratio") of common stock, par value $0.01 per share, of
Holdings ("Holdings Common Stock"), and each share of common stock, par value
$0.01 per share, of Fred Meyer (excluding any such shares owned by the Company
or Fred Meyer) ("Fred Meyer Common Stock") will be converted into the right to
receive 1.00 shares (the "Fred Meyer Exchange Ratio") of Holdings Common Stock
(the quotient of the Smith's Exchange Ratio and the Fred Meyer Exchange Ratio,
the "Exchange Ratio").
In arriving at our opinion, we have reviewed the draft dated May 9, 1997 of
the Agreement, including exhibits thereto, as well as financial and other
information that was publicly available or furnished to us by the Company and
Fred Meyer including information provided during discussions with their
respective managements. Included in the information provided during discussions
with the respective managements were certain financial projections for the
Company and Fred Meyer prepared by their respective managements. In addition, we
have compared certain financial and securities data of the Company and Fred
Meyer with various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of Smith's
Common Stock and Fred Meyer Common Stock, reviewed prices and premiums paid in
certain other business combinations and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion. We were not requested to, nor did we, solicit the interest of any other
party in connection with any strategic transactions with respect to the Company.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Fred Meyer or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have reviewed and relied upon the estimates of the management of
the Company and Fred Meyer of the cost savings and operating synergies
achievable as a result of the Merger. With respect to the financial projections
supplied to us, we have assumed that they have been reasonably prepared on the
basis reflecting the best currently available estimates and judgments of the
management of the Company and Fred
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Meyer as to the future operating and financial performance of the Company and
Fred Meyer. We have not assumed responsibility for making an independent
evaluation of the Company's or Fred Meyer's assets or liabilities or any
independent verification of any of the information reviewed by us. We have
relied as to certain legal matters on advice of counsel to the Company.
Our opinion is necessarily based on economics, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
price at which Holdings Common Stock will actually trade at any time. Our
opinion does not address the Board's decision to proceed with the Merger. Our
opinion does not constitute a recommendation to any stockholder of the Company
as to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuation for estate, corporate and other purposes. DLJ has performed investment
banking and other services for the Company in the past and has been compensated
for such services. During the past year, DLJ has co- managed a $575 million
offering of Senior Subordinated Notes of the Company for which it received usual
and customary compensation.
Based upon the foregoing and other factors as we deem relevant, we are of
the opinion that the Exchange Ratio is fair to the holders of Smith's Common
Stock from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ KENNETH VIELLIEU
-------------------------------------
Kenneth Viellieu
Managing Director
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APPENDIX D
RESTATED CERTIFICATE OF INCORPORATION
OF
MEYER-SMITH HOLDCO, INC.
A DELAWARE CORPORATION
Pursuant to Section 245 of the Delaware General Corporation Law, the
undersigned hereby makes this Restated Certificate of Incorporation of the
Delaware corporation MEYER-SMITH HOLDCO, INC., whose Certificate of
Incorporation was filed in the office of the Secretary of State of Delaware on
July 7, 1997, and certifies as follows:
ARTICLE I
The name of the Corporation is MEYER-SMITH HOLDCO, INC.
ARTICLE II
The registered office and registered agent of the Corporation is The
Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which Corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
A. The total number of shares of stock that the Corporation shall have
authority to issue is five hundred million (500,000,000) shares, consisting of
four hundred million (400,000,000) shares of Common Stock having a par value of
$.01 per share and one hundred million (100,000,000) shares of Preferred Stock
having a par value of $.01 per share.
B. The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article IV, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series shall
include determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate, if any, on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates,
and the relative rights of priority, if any, of payment of dividends
on shares of that series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting
rights and the voting powers, if any, of the holders of such series;
(4) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of
Directors shall determine;
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(5) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(7) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of
that series; and
(8) Any other relative rights, preferences and limitations of that series.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
ARTICLE V
The Board of Directors of the Corporation may alter, amend or repeal the
Bylaws of the Corporation.
ARTICLE VI
No action may be taken by stockholders of this Corporation other than at an
annual or special meeting of stockholders and the ability of stockholders to act
by written consent is specifically denied.
ARTICLE VII
A. The Corporation shall indemnify to the fullest extent then permitted by
law any person who is made, or threatened to be made, a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise (including an action, suit or
proceeding by or in the right of the Corporation) by reason of the fact that the
person is or was a director or officer of the Corporation, or serves or served
at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred in connection therewith. Expenses
incurred by an officer or director in defending a civil or criminal action, suit
or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
Corporation as authorized in this Article. The indemnification provided hereby
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any statute, bylaw, agreement, vote of shareholders or
directors or otherwise, both as to action in any official capacity and as to
action in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the heirs, executors and administrators of such person. The foregoing right
to indemnification shall not apply in respect of actions, suits or proceedings
(or parts thereof) against the Corporation unless such action, suit or
proceeding shall have been approved by the Board of Directors.
Any person other than a director or officer who is or was an employee or
agent of the Corporation, or fiduciary within the meaning of the Employee
Retirement Income Security Act of 1974 with respect to any employee benefit plan
of the Corporation, or is or was serving at the request of the Corporation as an
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, may be indemnified to such extent as the Board of Directors in
its discretion at any time or from time to time may authorize.
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B. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect any
right or protection of a director of the Corporation hereunder in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal.
ARTICLE VIII
A. The number of directors constituting the entire Board of Directors of
the Corporation shall be not less than three nor more than 15 as fixed from time
to time by the Board of Directors, provided, however, that the number of
directors shall not be reduced so as to shorten the term of any director at the
time in office, and provided further, that the number of directors constituting
the entire Board of Directors shall be eleven until otherwise fixed by a
majority of the entire Board of Directors.
B. The Board of Directors, other than those who may be elected by the
holders of any class or series of stock having a preference over the Common
Stock as to dividend or upon liquidation, shall be divided into three classes,
as nearly equal in number as the then total number of directors constituting the
entire Board of Directors permits with the term of office of one class expiring
each year. Directors of the first class shall be elected to hold office for a
term expiring at the 1998 annual meeting, directors of the second class shall be
elected to hold office for a term expiring at the 1999 annual meeting and
directors of the third class shall be elected to hold office for a term expiring
at the 2000 annual meeting. Any vacancies in the Board of Directors for any
reason, and any directorships resulting from any increase in the number of
directors, may be filled by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
directors shall have been chosen and until their successors shall be elected and
qualified. Subject to the foregoing, at each annual meeting of stockholders the
successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting. Despite the expiration of a director's term, the director shall
continue to serve until the director's successor is elected and qualified or the
number of directors is decreased. Directors need not be residents of the State
of Delaware or stockholders of the Corporation.
C. Notwithstanding any other provisions of this Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Certificate of
Incorporation or the Bylaws of the Corporation), any director or the entire
Board of Directors of the Corporation may be removed at any time, but only for
cause and only by the affirmative vote of the holders of 75% or more of the
voting power of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for that
purpose.
D. Notwithstanding any other provisions of this Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Certificate of
Incorporation or the Bylaws of the Corporation), the provisions set forth in
this Article VIII may not be amended, altered, changed or repealed in any
respect, nor may any provision be adopted which is inconsistent with this
Article VIII, unless such action is approved by the affirmative vote of the
holders of not less than 75% of the voting power of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose.
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E. Notwithstanding any other provisions of this Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Certificate of
Incorporation or the Bylaws of the Corporation), the provisions set forth in
Section 1.11 of the Bylaws of the Corporation may not be amended, altered,
changed or repealed in any respect, nor may any provision be adopted which is
inconsistent with Section 1.11 of the Bylaws, unless such action is approved by
the Board of Directors or by the affirmative vote of the holders of not less
than 75% of the voting power of the outstanding shares of capital stock of the
Corporation entitled to vote generally at an annual or special meeting of
stockholders (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose.
MEYER-SMITH HOLDCO, INC.
By: /s/ KENNETH THRASHER
------------------------------------------
Kenneth Thrasher, Executive Vice President
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APPENDIX E
BYLAWS
OF
MEYER-SMITH HOLDCO, INC.
ARTICLE I
STOCKHOLDERS
1.1 Annual Meeting. The annual meeting of the stockholders shall be held at
a date and time fixed by the Board of Directors and stated in the notice of the
meeting. Failure to hold an annual meeting on the designated date shall not
affect the validity of any corporate action.
1.2 Special Meetings. Special meetings of the stockholders, for any
purposes, unless otherwise prescribed by statute, may be called by the Chairman
of the Board or the President and shall be called by the Chairman of the Board,
the President or the Secretary upon direction by the Board of Directors.
1.3 Place of Meetings. Meetings of the stockholders shall be held at any
place in or out of the State of Delaware designated by the Board of Directors.
If a meeting place is not designated by the Board of Directors, the meeting
shall be held at the Corporation's principal office.
1.4 Notice of Meetings. Written or printed notice stating the date, time
and place of the meeting of the stockholders and, in the case of a special
meeting or a meeting for which special notice is required by law, the purposes
for which the meeting is called shall be given by the corporation to each
stockholder entitled to vote at the meeting and, if required by law, to any
other stockholders entitled to receive notice, not more than 60 days nor less
than 10 days before the meeting date. If mailed, the notice shall be deemed
given when deposited in the United States mail, postage prepaid, directed to
each stockholder at the stockholder's address shown in the Corporation's record
of stockholders. Any previously scheduled meeting of the shareholders may be
postponed and any special meeting of the shareholders may be canceled by
resolution of the Board of Directors upon public announcement given prior to the
date previously scheduled for such meeting of shareholders.
1.5 Waiver of Notice. A stockholder may at any time waive any notice
required by law, these Bylaws or the Certificate of Incorporation. The waiver
shall be in writing, be signed by the stockholder entitled to the notice and be
delivered to the Corporation for inclusion in the minutes for filing with the
corporate records. A stockholder's attendance at a meeting constitutes a waiver
of notice of such meeting, except when the person attends for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
1.6 Fixing of Record Date.
(1) In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of the stockholders or any adjournment
thereof, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be (i) more than 60 nor less than 10 days before the date of such meeting
nor (ii) more than 10 days after the date upon which the resolution fixing the
record date is adopted by the Board of Directors nor (iii) more than 60 days
prior to any other action.
(2) If no record date is fixed:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of the stockholders shall be at the close of
business on the day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the day next preceding the
day on which the meeting is held.
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(ii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(3) A determination of stockholders of record entitled to notice of or to
vote at a meeting of the stockholders shall apply to any adjournment of the
meeting, provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
1.7 List of Stockholders for Meeting. After a record date for a meeting of
the stockholders is fixed and at least 10 days before any such meeting, the
Corporation shall prepare an alphabetical list of all stockholders entitled to
vote at the meeting of the stockholders showing the address of each stockholder
and the number of shares registered in the name of each stockholder. The list of
stockholders shall be available for inspection by any stockholder, upon proper
demand as may be required by law, for any purpose germane to the meeting, during
ordinary business hours for a period of at least 10 days prior to the meeting,
at the Corporation's principal office or at a place identified in the meeting
notice in the city where the meeting will be held. The Corporation shall make
the list of stockholders available at the meeting, and any stockholder or the
stockholder's agent or attorney shall be entitled to inspect the list at any
time during the meeting or any adjournment. Refusal or failure to prepare or
make available the list of stockholders does not affect the validity of action
taken at the meeting except that upon the willful neglect or refusal of the
directors to produce such a list at any meeting for the election of directors
they shall be ineligible for election to any office at such meeting.
1.8 Quorum; Adjournment.
(1) A majority of the voting power present in person or represented by
proxy, shall constitute a quorum at a meeting of stockholders.
(2) The chair of the meeting or a majority of voting power represented at
the meeting, may adjourn the meeting from time to time to a different time and
place without further notice to any stockholder of any adjournment, except that
notice is required if a new record date is or must be set for the adjourned
meeting or if the adjournment is for more than 30 days. At an adjourned meeting
at which a quorum is present, any business may be transacted that might have
been transacted at the meeting originally hold.
(3) Once a share is represented for any purpose at a meeting, it shall be
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for the
adjourned meeting.
1.9 Voting Requirements. If a quorum exists, action on a matter, other than
the election of directors, is approved by the affirmative vote of a majority of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the matter. Unless otherwise provided in the Certificate of
Incorporation, directors are elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present.
1.10 Proxies. A stockholder may vote shares in person or by proxy. A
stockholder may appoint a proxy either by personally executing an appointment
form or by causing the stockholder's agent or attorney-in-fact to execute such
form, or by such other means as is specifically authorized by law. An
appointment of a proxy is effective when received by the Secretary or other
officer of the Corporation authorized to tabulate votes, but no proxy shall be
voted or acted upon after three years from its date, unless the proxy provides
for a longer period. An appointment is revocable by the stockholder unless the
appointment form conspicuously states that it is irrevocable and the appointment
is coupled with an interest sufficient in law to support an irrevocable power.
1.11 Notice of Stockholder Business and Nominations.
(1) Annual Meetings of Stockholders.
(a) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (ii) by any
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stockholder of the Corporation who was a stockholder of record at the time of
giving of notice as provided for in this Section 1.11 and on the date of the
annual meeting, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 1.11.
(b) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to this Section 1.11, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation and such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not later
than the close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days before or more than 60 days after such anniversary
date, notice by the stockholder to be timely must be so delivered not earlier
than the close of business on the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made by the Corporation. In no event shall the
public announcement of an adjournment of an annual meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (a) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (b) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(c) Notwithstanding anything in this Section 1.11 to the contrary, in the
event that the number of directors to be elected to the Board of Directors of
the Corporation is increased and there is no public announcement by the
Corporation naming all of the nominees for director or specifying the size of
the increased Board of Directors at least 70 days prior to the first anniversary
of the preceding year's annual meeting, a stockholder's notice required by this
Section 1.11 shall also be considered timely, but only with respect to nominees
for any new positions created by such increase, if it shall be delivered to the
secretary at the principal executive offices of the Corporation not later than
the close of business on the 10th day following the day on which such public
announcement is first made by the Corporation.
(2) Special Meetings of Stockholders. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (a) by or at the direction of the Board of Directors or (b)
provided that the Board of Directors has determined that directors shall be
elected at such meeting, by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
Section 1.11, who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in this Section 1.11. In the event the
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by this Section 1.11 shall be delivered to the
Secretary at the principal executive offices of the Corporation not earlier than
the close of business on the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the 10th day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the
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Board of Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
(3) General.
(a) Only such persons who are nominated in accordance with the procedures
set forth in this Section 1.11 shall be eligible to serve as directors and only
such business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Section 1.11. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the Chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 1.11, and, if any
proposed nomination or business is not in compliance with this Section 1.11, to
declare that such defective proposal or nomination shall be disregarded.
(b) For the purposes of these Bylaws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission.
(c) Notwithstanding the foregoing provisions of Section 1.11, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in
Section 1.11. Nothing in Section 1.11 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
2.1 Duties of Board of Directors. All corporate powers of the Corporation
shall be exercised by or under the authority of its Board of Directors; the
business and affairs of the Corporation shall be managed under the direction of
its Board of Directors. The Board of Directors shall appoint a Chairman, who
shall preside at meetings of the Board of Directors and of the stockholders and
who shall exercise the usual powers pertaining to that office. The Chairman of
the Board shall not be an officer of the Corporation.
2.2 Number, Term, Qualification and Classification. The number, term,
qualification and classification of the directors of the Board of Directors
shall be as set forth in the Corporation's Certificate of Incorporation.
2.3 Regular Meetings. A regular meeting of the Board of Directors may be
held without notice other than this Bylaw immediately after, and at the same
place as, the annual meeting of the stockholders. Regular meetings of the Board
of Directors shall be held at such times and places as may be from time to time
fixed by the Board of Directors or as may be specified in a notice of meeting.
Notice need not be given of regular meetings of the Board of Directors.
2.4 Special Meetings. Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board, the President or a majority of
the directors then serving and shall be called by the Chairman of the Board, the
President or the Secretary upon direction by the Board of Directors.
2.5 Notice. Notice of the date, time and place of any special meeting of
the Board of Directors shall be given at least 24 hours prior to the meeting by
notice communicated in person, by telephone, telegraph, teletype, facsimile
transmission, other form of wire or wireless communication, mail or courier
service sent to director's business or home address. If mailed, notice shall be
effective at the earliest of (a) when received, (b) five days after its deposit
in the United States mail, as evidenced by the postmark, if mailed postpaid and
correctly addressed, (c) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested and the receipt is signed
by or on behalf of the addressees, (d) if given by teletype or facsimile, upon
transmission of the message, or (e) if given by overnight mail or courier, one
day after delivery to the overnight mail or courier service company. Notice by
all other means shall be deemed effective when
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received by or on behalf of the director. Notice or waiver of notice of any
regular or special meeting need not describe the purposes of, or the business to
be transacted at, the meeting unless required by law or the Certificate of
Incorporation.
2.6 Waiver of Notice. A director may at any time waive any notice required
by law, these Bylaws or the Certificate of Incorporation. Except as set forth
below, the waiver must be in writing, be signed by the director entitled to the
notice, specify the meeting for which notice is waived and be filed with the
minutes or corporate records. A director's attendance at or participation in a
meeting waives any required notice to the director of the meeting unless the
director at the beginning of the meeting, or promptly upon the director's
arrival, objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
2.7 Quorum. One-third of the total number of directors fixed in accordance
with the Certificate of Incorporation shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors, except that,
if the total number of directors fixed in accordance with the provisions of the
Certificate of Incorporation is one, then one director shall constitute a
quorum. If less than a quorum is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice.
2.8 Manner of Acting. The act of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors,
unless a different number is provided by law, the Certificate of Incorporation
or these Bylaws.
2.9 Meeting by Telephone Conference; Action Without Meeting.
(1) Directors may participate in a regular or special meeting by, or
conduct the meeting through, use of any means of communications by which all
directors participating may simultaneously hear each other during the meeting.
Participation in a meeting by this means shall constitute presence in person at
the meeting.
(2) Any action that is required or permitted to be taken at a meeting of
the Board of Directors may be taken without a meeting if one or more written
consents describing the action taken are signed by all of the directors entitled
to vote on the matter and included in the minutes of proceedings of the Board of
Directors. The action shall be effective when the last director signs the
consent, unless the consent specifies an earlier or later effective date.
2.10 Vacancies. Any vacancy on the Board of Directors may be filled by the
Board of Directors as set forth in the Corporation's Certificate of
Incorporation. Any vacancy not filled by the directors shall be filled by
election at an annual meeting or at a special meeting of stockholders called for
that purpose. A vacancy that will occur at a specified later date, by reason of
a resignation or otherwise, may be filled before the vacancy occurs, but the new
director may not take office until the vacancy occurs.
2.11 Compensation. By resolution of the Board of Directors, the directors
may be paid reasonable compensation for services as directors and their expenses
of attending meetings of the Board of Directors.
2.12 Presumption of Assent. A director who is present at a meeting of the
Board of Directors or a committee of the Board of Directors shall be deemed to
have assented to the action taken at the meeting unless (a) the director's
dissent or abstention from the action is entered in the minutes of the meeting,
(b) the director delivers a written notice of dissent or abstention to the
action to the presiding officer of the meeting before any adjournment or to the
Corporation immediately after the adjournment of the meeting or (c) the director
objects at the beginning of the meeting or promptly upon the director's arrival
to the holding of the meeting or transacting business at the meeting. The right
to dissent or abstain is not available to a director who voted in favor of the
action.
2.13 Resignation. Any director may resign by delivering written notice to
the Board of Directors, the Chairman of the Board or the Corporation. Unless the
notice specifies a later effective date, a resignation notice shall be effective
upon the earlier of (a) receipt, (b) five days after its deposit in the United
States mail, if mailed postpaid and correctly addressed, or (c) on the date
shown on the return receipt, if sent by registered or certified mail, return
receipt requested, and the receipt is signed by addressee. Once delivered, a
resignation notice is irrevocable unless revocation is permitted by the Board of
Directors.
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ARTICLE III
COMMITTEES OF THE BOARD
3.1 Committees. The Board of Directors may, by resolution passed by a
majority of the whole Board, create one or more committees and appoint members
of the Board of Directors to serve on them. Each committee shall have one or
more members. The creation of a committee and appointment of members to it must
be approved by a majority of all directors in office when the action is taken.
Subject to any limitation imposed by the Board of Directors or by law, each
committee may exercise all the authority of the Board of Directors in the
management of the Corporation. A committee may not take any action that a
committee is prohibited from taking by the General Corporation Law of Delaware.
3.2 Changes of Size and Function. Subject to the provisions of the General
Corporation Law of Delaware, the Board of Directors shall have the power at any
time to change the number of committee members, fill committee vacancies, change
any committee members and change the functions and terminate the existence of a
committee.
3.3 Conduct of Meetings. Each committee shall conduct its meetings in
accordance with the applicable provisions of these Bylaws relating to meetings
and action without meetings of the Board of Directors. Each committee shall
adopt any further rules regarding its conduct, keep minutes and other records
and appoint subcommittees and assistants as it deems appropriate.
3.4 Compensation. By resolution of the Board of Directors, Committee
members may be paid reasonable compensation for services on committees and their
expenses of attending committee meetings.
ARTICLE IV
OFFICERS
4.1 Appointment. The Board of Directors shall appoint a President and Chief
Executive Officer, such Vice Presidents as the Board of Directors may determine,
a Secretary and a Treasurer. The Board of Directors may appoint such other
officers, assistant officers and agents as the Board of Directors may determine.
Any two or more offices may be held by the same person.
4.2 Term. The term of office of all officers commences upon their
appointment and continues until their successors are appointed or until their
resignation or removal.
4.3 Removal. Any officer or agent appointed by the Board of Directors may
be removed by the Board of Directors at any time with or without cause.
4.4 President. The President shall be the Chief Executive Officer and
exercise the usual powers pertaining to that office. Subject to the control of
the Board of Directors, the President shall be in general charge of the
Corporation's business and affairs. The President shall report to and consult
with the Board of Directors. Unless otherwise determined by the Board of
Directors, the President shall have authority to vote any shares of stock of
another corporation owned by the Corporation and to delegate this authority to
any other officer. The President shall have such other powers and duties as the
Board of Directors may from time to time prescribe. In the absence of the
Chairman of the Board, the President shall preside at meetings of the Board of
Directors and the stockholders.
4.5 Vice Presidents. Each Vice President shall perform the duties and
responsibilities prescribed by the Board of Directors or as may be assigned from
time to time by the President. The Board of Directors may confer a special title
upon a Vice President.
4.6 Secretary.
(1) The Secretary shall record and keep the minutes of all meetings of the
directors and the stockholders in one or more books provided for that purpose
and perform any other duties prescribed by the Board of Directors.
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(2) Any assistant secretary shall have the duties prescribed from time to
time by the Board of Directors or the secretary. In the absence or disability of
the Secretary, the Secretary's duties shall be performed by an assistant
secretary.
4.7 Treasurer. The Treasurer shall be responsible for such financial
matters of the Corporation and shall have such other duties as are prescribed
from time to time by the Board of Directors.
ARTICLE V
INDEMNIFICATION
The Corporation shall indemnify any current or former director or officer
and may indemnify any current or former employee or agent of the Corporation to
the fullest extent not prohibited by law who is made, or threatened to be made,
a party to an action, suit or proceeding, whether civil, criminal,
administrative, investigative or other (including an action, suit or proceeding
by or in the right of the Corporation), by reason of the fact that such person
is or was a director, officer, employee or agent of the Corporation, or serves
or served at the request of the Corporation as a director, officer, employee or
agent of another corporation partnership, joint venture, trust or other
enterprise. To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
such action, suit or proceeding, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith. The
corporation shall pay for or reimburse the reasonable expenses incurred by any
such current or former director or officer and may pay for or reimburse the
reasonable expenses of any such current or former employee or agent in any such
proceeding in advance of the final disposition of the proceeding if such person
sets forth in writing (i) the person's good faith belief that the person is
entitled to indemnification under this Article and (ii) the person's agreement
to repay all advances if it is ultimately determined that the person is not
entitled to indemnification under this Article. No amendment to these Bylaws
that limits the corporation's obligation to indemnify any person shall have any
effect on such obligation for any act or omission that occurs prior to the later
to occur of the effective date of the amendment or the date notice of the
amendment is given to the person. This Article shall not be deemed exclusive of
any other provisions for indemnification or advancement of expenses of
directors, officers, employees, agents and fiduciaries that may be included in
the Certificate of Incorporation or any statute, Bylaw, agreement, general or
specific action of the Board of Directors, vote of stockholders or other
document or arrangement. The foregoing right to indemnification shall not apply
in respect of actions, suits or proceedings (or parts thereof) against the
Corporation unless such action, suit or proceeding shall have been approved by
the Board of Directors.
ARTICLE VI
ISSUANCE OF SHARES
6.1 Adequacy of Consideration. Before the Corporation issues shares, the
Board of Directors shall determine that the consideration received or to be
received for the shares to be issued is adequate. The authorization by the Board
of Directors of the issuance of shares for stated consideration shall evidence a
determination by the Board that such consideration is adequate.
6.2 Certificates for Shares.
(1) Certificates representing shares of the Corporation shall be in any
form determined by the Board of Directors consistent with the requirements of
the General Corporation Law of Delaware and these Bylaws. The certificates shall
be signed, either manually or in facsimile, by two officers of the corporation,
who shall be the Chairman of the Board, the President or a Vice President and
the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary,
and may be sealed with the seal of the Corporation, if any, or a facsimile
thereof. All certificates for shares shall be consecutively numbered or
otherwise identified. Any or all of the signatures upon a certificate may be
facsimiles.
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(2) Every certificate for shares of stock that are subject to any
restriction on transfer or registration of transfer pursuant to the Certificate
of Incorporation, the Bylaws, securities laws, a stockholders' agreement or any
agreement to which the Corporation is a party shall have conspicuously noted on
the face or back of the certificate either the full text of the restriction or a
statement of the existence of the restriction and that the corporation retains a
copy of the full text. Every certificate issued when the corporation is
authorized to issue more than one class or series within a class of shares shall
set forth on its face or back either (a) a summary of the designations, relative
rights, preferences and limitations of the shares of each class and the
variations in rights, preferences and limitations for each series authorized to
be issued and the authority of the Board of Directors to determine variations
for future series or (b) a statement of the existence of those designations,
relative rights, preferences and limitations and a statement that the
Corporation will furnish a copy thereof to the holder of the certificate upon
written request and without charge.
(3) All certificates surrendered to the Corporation for transfer shall be
canceled. The Corporation shall not issue a new certificate for previously
issued shares until the former certificate or certificates for those shares are
surrendered and canceled, except that in case of a lost, destroyed or mutilated
certificate a new certificate may be issued upon receipt by the Corporation of
security against loss (by bond, indemnity or otherwise) to the extent deemed
necessary by the Board of Directors.
6.3 Transfer of Shares. Transfer of shares of the Corporation shall be made
only on the stock transfer books of the Corporation by the holder of record
thereof or by the holder's legal representative, who shall furnish proper
evidence of authority to transfer, or by the holder's attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the Corporation. The person in whose name shares stand on the books of the
Corporation shall be deemed by the corporation to be the owner thereof for all
purposes.
6.4 Transfer Agent and Registrar. The Board of Directors may from time to
time appoint one or more transfer agents and one or more registrars for the
shares of the Corporation, with powers and duties determined by the Board of
Directors.
6.5 Officer Ceasing to Act. If the person who signed a share certificate,
either manually or in facsimile, no longer holds office when the certificate is
issued, the certificate is nevertheless valid.
6.6 Fractional Shares. The Corporation shall not issue certificates for
fractional shares.
ARTICLE VII
CONTRACTS, CHECKS AND OTHER INSTRUMENTS
7.1 Contracts. Except as otherwise provided by law, the Board of Directors
may authorize any officers or agents to execute and deliver any contract or
other instrument in the name of and on behalf of the Corporation, and this
authority may be general or confined to specific instances.
7.2 Checks, Drafts, Etc. All checks, drafts or other orders for the payment
of money and notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed in the manner and by the officers or agents of the
Corporation designated by the Board of Directors, the Chairman of the Board or
the President.
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7.3 Deposits. All funds of the Corporation not otherwise employed shall be
deposited to the credit of the Corporation in those banks, trust companies or
other depositories as the Board of Directors or officers of the Corporation
designated by the Board of Directors select, or be invested as authorized by the
Board of Directors.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Severability. A determination that any provision of these Bylaws is for
any reason inapplicable, invalid, illegal or otherwise ineffective shall not
affect or invalidate any other provision of these Bylaws.
8.2 Amendments. Subject to the provisions of the Certificate of
Incorporation, these Bylaws may be amended or repealed and new Bylaws may be
adopted by the Board of Directors or the stockholders of the Corporation.
Adopted: July 14, 1997
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APPENDIX F
================================================================================
VOTING AGREEMENT
among
FRED MEYER, INC.
and
EACH OF THE INDIVIDUALS AND ENTITIES
LISTED ON THE SIGNATURE PAGE HERETO
Dated as of May 11, 1997
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<PAGE>
VOTING AGREEMENT (this "Agreement") dated as of May 11, 1997, among Fred
Meyer, Inc., a Delaware corporation ("Fred Meyer") and the individuals and
entities (other than the University of Utah and the Corporation of the President
of the Church of Jesus Christ of Latter-Day Saints (the "Other Stockholders"))
listed on Schedule A attached hereto and each of such individuals and entities
being a "Stockholder" and, collectively, the "Stockholders").
WHEREAS, Fred Meyer and Smith's Food & Drug Centers, Inc., a Delaware
corporation (the "Company"), propose to enter into an Agreement and Plan of
Reorganization and Merger dated as of the date hereof (as the same may be
amended or supplemented in a manner not adverse to the Stockholders, the
"Reorganization Agreement"; capitalized terms used but not defined herein shall
have the meanings set forth in the Reorganization Agreement) providing for the
formation of a new Delaware holding company, Meyer-Smith Holdco, Inc.
("Holdings"), the formation of two subsidiaries wholly-owned by Holdings ("Fred
Meyer Merger Sub, Inc." and "Smith's Merger Sub, Inc.") and the simultaneous
merger of Fred Meyer Merger Sub, Inc. with and into Fred Meyer and Smith's
Merger Sub, Inc. with and into the Company (the "Merger") so that each of Fred
Meyer and the Company become wholly-owned subsidiaries of Holdings, upon the
terms and subject to the conditions set forth in the Reorganization Agreement;
WHEREAS, pursuant to the Merger the Common Stock (as defined below) will be
converted into shares of common stock, par value $.01 per share, of Holdings and
each share of the Series I Preferred Stock (as defined below) shall be converted
into the right to receive thirty-three and one-third cents ($.33 1/3) (the
"Preferred Consideration)";
WHEREAS, simultaneously with the execution hereof, Fred Meyer is entering
into voting agreements (the "Other Voting Agreements", and together with this
Agreement, the "Voting Agreements") with the Other Stockholders, dated as of the
date hereof;
WHEREAS, immediately prior to the Effective Time, Fred Meyer will assign
each of the Voting Agreements and all of its rights, interests and obligations
hereunder and thereunder to Holdings;
WHEREAS, each Stockholder and each Other Stockholder owns beneficially and
(except as set forth on Schedule A attached hereto) of record (i) the number of
shares of Class A Common Stock, par value $.01 per share, of the Company (the
"Class A Common Stock"), of Class B Common Stock, par value $.01 per share, of
the Company (the "Class B Common Stock"), of Class C Common Stock, par value
$.01 per share, of the Company (the "Class C Common Stock" and, together with
the Class A Common Stock and the Class B Common Stock, the "Common Stock") and
of Series I Preferred Stock, par value $.01 per share, of the Company (the
"Series I Preferred Stock") set forth opposite his or its name on Schedule A
attached hereto (such shares of Common Stock and of Series I Preferred Stock,
together with any other shares of capital stock of the Company acquired
(including, without limitation, through the exercise of Options or Warrants or
by reason of any split, reclassification, stock dividend or other distribution
with respect to the capital stock of the Company) by such Stockholder or such
Other Stockholder after the date hereof and during the term of the Voting
Agreements, being collectively referred to herein as the "Subject Shares") and
(ii) options issued under any Stock Option Plan (the "Options") and warrants
(the "Warrants") issued under the Warrant Agreement, dated as of May 23, 1996,
between the Company and The Yucaipa Companies, a California general partnership
(the "Partnership") (the "Warrant Agreement") to acquire the number of shares of
Common Stock or of Series I Preferred Stock, if any, set forth opposite his or
its name on Schedule A attached hereto;
WHEREAS, the Common Stock and the Series I Preferred Stock set forth on
Schedule A attached hereto represent at least 50.1% of the voting power of the
issued and outstanding shares of capital stock of the Company entitled to vote
on each of the matters set forth in Section 3 hereof; and
WHEREAS, as a condition to its willingness to enter into the Reorganization
Agreement, Fred Meyer has required that the Other Stockholders enter into the
Other Voting Agreements and that each Stockholder enter into this Agreement.
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NOW, THEREFORE, to induce Fred Meyer to enter into, and in consideration of
its entering into, the Reorganization Agreement, and in consideration of the
premises and the representations, warranties and agreements contained herein,
the parties agree as follows:
1. Representations and Warranties of each Stockholder. Each Stockholder
hereby, severally and not jointly, represents and warrants to Fred Meyer as of
the date hereof in respect of himself or itself as follows:
(a) Authority. The Stockholder has all requisite power and authority
to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Stockholder (or in the case of any Stockholder which is a
trust, by the trustee on behalf of such trust, or in the case of any
Stockholder which is a partnership by a general partner on behalf of such
partnership) and constitutes a valid and binding obligation of the
Stockholder enforceable in accordance with its terms. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby and compliance with the terms hereof will not, conflict
with, or result in any violation of, or default (with or without notice or
lapse of time or both) under any provision of, any trust agreement, loan or
credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise, license, judgment,
order, notice, decree, statute, law, ordinance, rule or regulation
applicable to the Stockholder or to the Stockholder's property or assets.
If the Stockholder is married and the Stockholder's Subject Shares, Option
or Warrants constitute community property or otherwise need spousal or
other approval for this Agreement to be legal, valid and binding, this
Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Stockholder's spouse, and
is enforceable against such spouse in accordance with its terms. No trust
which is a Stockholder requires the consent of any beneficiary to the
execution and delivery of this Agreement or to the consummation of the
transactions contemplated hereby.
(b) The Subject Shares, Options and Warrants. The Stockholder is the
beneficial and (except as set forth on Schedule A attached hereto) record
owner of, and has good and marketable title to, the Subject Shares, Options
and Warrants set forth opposite such Stockholder's name on Schedule A
attached hereto, free and clear of any claims, liens, encumbrances and
security interests whatsoever (other than as set forth on Schedule A
attached hereto). The Stockholder does not own, of record or beneficially,
any shares of capital stock of the Company other than the Subject Shares
and the shares of Common Stock subject to any Options or Warrants set forth
opposite such Stockholder's name on Schedule A attached hereto. The
Stockholder has the sole right to vote such Subject Shares, and none of
such Subject Shares is subject to any voting trust or other agreement,
arrangement or restriction with respect to the voting of such Subject
Shares, except as contemplated by this Agreement or as otherwise set forth
on Schedule A attached hereto. The Partnership has not transferred, sold,
pledged, assigned or otherwise disposed of (including by gift)
(collectively, "Transfer") any Warrants issued to it pursuant to the
Warrant Agreement and the Warrants set forth opposite the Partnership's
name on Schedule A attached hereto constitute all of the Warrants issued
and outstanding under the Warrant Agreement.
2. Representations and Warranties of Fred Meyer. Fred Meyer hereby
represents and warrants to each Stockholder that Fred Meyer has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Fred Meyer, and the consummation of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action on the part of Fred
Meyer. This Agreement has been duly executed and delivered by Fred Meyer and
constitutes a valid and binding obligation of Fred Meyer enforceable in
accordance with its terms.
3. Covenants of each Stockholder. Until the termination of this Agreement
in accordance with Section 7 hereof, each Stockholder, severally and not
jointly, agrees as follows:
(a) Vote for the Merger. At any duly noticed meeting of stockholders
of the Company called to vote upon the Merger and the Reorganization
Agreement or at any adjournment thereof or in any other circumstances upon
which a vote, consent or other approval (including by written consent) with
respect to the Merger and the Reorganization Agreement is sought, the
Stockholder shall, including by initiating
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a written consent solicitation if requested by Fred Meyer, vote (or cause
to be voted) the Subject Shares in favor of the Merger, the adoption by the
Company of the Reorganization Agreement and the approval of the terms
thereof and, to the extent presented to the stockholders of the Company for
a vote, each of the other transactions contemplated by the Reorganization
Agreement. The Stockholder hereby waives any appraisal rights granted
pursuant to Section 262 of the General Corporation Law of the State of
Delaware (the "DGCL") (or any successor provision) to which it may
otherwise be entitled as a result of the Merger or the other transactions
contemplated by the Reorganization Agreement.
(b) Vote Against Acquisition Proposals. At any duly noticed meeting of
stockholders of the Company or at any adjournment thereof or in any other
circumstances upon which the Stockholder's vote, consent or other approval
is sought, the Stockholder shall be present (in person or by proxy) and
shall vote (or cause to be voted) the Subject Shares against (i) any merger
agreement or merger (other than the Reorganization Agreement and the
Merger), consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of
or by the Company or any other Acquisition Proposal as such term is defined
in the Reorganization Agreement relating to the Company (an "Acquisition
Proposal") or (ii) any amendment of the Company's certificate of
incorporation or by-laws or other proposal or transaction involving the
Company or any of its subsidiaries, which amendment or other proposal or
transaction would in any manner impede, frustrate, prevent or nullify the
Merger, the Reorganization Agreement or any of the other transactions
contemplated by the Reorganization Agreement or change in any manner the
voting rights of any class of capital stock of the Company. Subject to
Section 9, the Stockholder further agrees not to commit or agree to take
any action inconsistent with the foregoing.
(c) Transfer of Subject Shares, Options and Warrants. Except pursuant
to this Agreement and except as provided in the immediately succeeding
sentence of this Section 3(c), the Stockholder agrees not to (i) Transfer,
or enter into any contract, option or other arrangement (including any
profit sharing arrangement) with respect to the Transfer of, the Subject
Shares, any Option or Warrant or any shares of Common Stock subject to any
Option or Warrant to any person, other than pursuant to the terms of the
Merger, (ii) enter into any voting arrangement, whether by proxy,
power-of-attorney, voting agreement, voting trust or otherwise, in
connection with, directly or indirectly, any Acquisition Proposal or (iii)
convert (or cause to be converted) any of the Subject Shares consisting of
Class A Common Stock into Class B Common Stock, in whole or in part, and
agrees not to commit or agree to take any of the foregoing actions.
Notwithstanding the foregoing, the Stockholder shall have the right (i) for
estate planning purposes, to Transfer Subject Shares to a transferee if and
only if such Transfer will not result in the automatic conversion of Class
A Common Stock or Class C Common Stock to Class B Common Stock or the
reduction in the number of votes allocated to the Series I Preferred Stock
and only following the due execution and delivery to Fred Meyer by each
transferee of a legal, valid and binding counterpart to this Agreement and
(ii) to pledge such Subject Shares for purposes of securing customary
margin or similar loans (and other customary steps related thereto,
including transferring the certificate evidencing the shares into the name
of the lender or its nominee) if and only if, in the case of the Class A
Common Stock or the Series I Preferred Stock, such pledge will not result
in the automatic conversion of Class A Common Stock to Class B Common Stock
or the reduction in the number of votes allocated to the Series I Preferred
Stock and only following the delivery to Fred Meyer of an acknowledgment by
the pledgee of the existence of this Agreement.
(d) No Solicitation. During the term of this Agreement, the
Stockholder shall not, nor shall it permit any of its Affiliates or any
director, officer, employee, investment banker, attorney or other adviser
or representative of any of the foregoing to, (i) directly or indirectly,
solicit, initiate or encourage the submission of, any Acquisition Proposal
or (ii) subject to the terms of Section 9, directly or indirectly
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal.
(e) Stockholder Assistance. Until the Merger is consummated or the
Reorganization Agreement is terminated, the Stockholder shall use all
reasonable efforts to assist and cooperate with the other parties
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to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by the
Reorganization Agreement, subject, in each case to the requirements of
applicable laws, regulations, decrees or other judicial process and subject
to the fiduciary obligations of any such Stockholder who is also an officer
or director of the Company in his capacity as such.
(f) Treatment of Certain Stockholder Profits. (i) In the event that
the Reorganization Agreement shall have been terminated at any time
pursuant to Section 7.4(a) thereof or Section 7.4(d) thereof, or is
terminated, at any time after an Acquisition Proposal is made, pursuant to
Section 7.2(c) thereof (regardless of whether such termination is by Fred
Meyer or the Company), Section 7.4(b) thereof or Section 7.4(c) thereof,
and at the time of such termination less than 50.1% of the voting power of
the issued and outstanding shares of capital stock of the Company entitled
to vote on each of the matters set forth in Section 3 hereof is subject to
valid and binding Voting Agreements in full force and effect in all
respects. Each Stockholder shall pay to Fred Meyer on demand an amount
equal to all profit (determined in accordance with Section 3(f) (ii) of
such Stockholder from the consummation of any Acquisition Proposal (an
"Acquisition Transaction") within 18 months of such termination.
(ii) For purposes of this Section 3(f), the profit of any Stockholder
from any Acquisition Transaction shall equal (A) the aggregate
consideration received by such Stockholder (or which such Stockholder is
legally entitled to receive) pursuant to such Acquisition Transaction,
valuing any non-cash consideration (including any residual interest in the
Company) at its fair market value on the date of such consummation plus (B)
the fair market value, on the date of disposition, of all Subject Shares,
Options and Warrants of such Stockholder and shares of Common Stock
acquired by such Stockholder upon exercise of any Option or Warrant (less
the exercise price thereof) disposed of after the termination of the
Reorganization Agreement and prior to the date of such consummation less
(C) the fair market value of the aggregate consideration that would have
been issuable or payable to such Stockholder pursuant to the Reorganization
Agreement in effect on the date hereof, valued as of immediately prior to
the first public announcement of the termination of, or the intention of
Fred Meyer or the Company to terminate, the Reorganization Agreement, as if
the Merger had been consummated on the date of such public announcement.
For purposes of clause (C) above, the fair market value of the common stock
of Holdings that would have been received by the Stockholders pursuant to
the Reorganization Agreement as originally executed shall be deemed to be
the fair market value of the common stock, par value $.01 per share, of
Fred Meyer.
(iii) For purposes of this Section 3(f), the fair market value of any
non-cash consideration consisting of:
(A) securities listed on a national securities exchange or
traded on the NASDAQ/NMS 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/NMS
for the five trading days ending on the trading day
immediately prior to the date of value determination; and
(B) consideration which is other than cash or securities of the
form specified in clause (A) of this Section 3(f) (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 Fred Meyer, on the one hand, and the
Stockholders, on the other hand. The determination of the
investment banking firm shall be binding upon the parties.
(iv) Any payment of profit under this Section 3(f) shall (x) if paid
in cash, be paid by wire transfer of same day funds to an account
designated by Fred Meyer and (y) if paid through a mutually agreed transfer
of securities, to the extent such transfer is permitted by applicable law
and the transfer of such securities to Fred Meyer would not adversely
impact Fred Meyer, or the value of such securities, be paid through
delivery of such securities, suitably endorsed for transfer.
F-4
<PAGE>
4. Affiliate Letter; Tax Certificates. Each Stockholder (other than any
Stockholder holding only shares of Series I Preferred Stock) shall execute and
deliver an Affiliate Letter contemplated by the Reorganization Agreement and
such tax certificates as may reasonably be requested by tax counsel for Fred
Meyer or for the Company in connection with the rendering of the tax opinions
contemplated by the Reorganization Agreement.
5. Further Assurances. Each Stockholder will, from time to time, execute
and deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as Fred Meyer or Holdings may
reasonably request for the purpose of effectively carrying out the transactions
contemplated by this Agreement.
6. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the prior
written consent of the other parties, except that Fred Meyer may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to Holdings or to any direct or indirect wholly owned subsidiary of Fred Meyer.
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 heirs,
successors and assigns.
7. Termination. This Agreement shall terminate upon the earlier of (a) the
18 month anniversary of the termination of the Reorganization Agreement or (b)
the Effective Time of the Merger; provided, however, that unless (x) the Company
is in material breach of its material obligations under the Reorganization
Agreement, (y) any Stockholder or any Other Stockholder is in material breach of
its material obligations under this Agreement or the Other Voting Agreements, as
the case may be or (z) a meeting of the Company's stockholders (or any
adjournment thereof) has been held to consider the Merger and the other
transactions contemplated by the Reorganization Agreement and the Smith's
Stockholder Approval was not obtained, this Agreement shall terminate at the
time the Reorganization Agreement is terminated (i) pursuant to Section 7.1 or
7.2(b) thereof, or (ii) by the Company (A) pursuant to Section 7.2(d) thereof or
(B) pursuant to Section 7.2(a) thereof (unless an Acquisition Proposal is
pending at the time of such termination) or (C) pursuant to Section 7.3 thereof.
Notwithstanding the foregoing, Section 3(f) shall (if operative in accordance
with its terms) survive the termination of the Reorganization Agreement for the
period of time specified therein.
8. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by overnight courier (providing proof of
delivery) to Fred Meyer in accordance with the notification provision
contained in the Reorganization Agreement and to the Stockholders at their
respective addresses set forth on Schedule A attached hereto (or at such
other address for a party as shall be specified by like notice).
(c) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
(d) 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 party, it being
understood that each party need not sign the same counterpart.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof and (ii) is not intended to confer upon any
person other than the parties hereto and other than Holdings, which is an
express beneficiary of this Agreement, any rights or remedies hereunder.
F-5
<PAGE>
(f) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware regardless of the
laws that might otherwise govern under applicable principles of conflicts
of law thereof.
(g) Public Announcements. Each Stockholder will consult with Fred
Meyer and use reasonable efforts to agree upon the text of any press
release, before issuing any press release or otherwise making public
statements with respect to the transactions contemplated by this Agreement
and the Reorganization Agreement and shall not issue any such press release
or make any such public statement without Fred Meyer's prior consent, which
consent shall not be unreasonably withheld, except as may be required by
applicable law (including requirements of stock exchanges and other similar
regulatory bodies).
(h) Severability. If any term, provision, covenant or restriction
herein, or the application thereof to any circumstance, shall, to any
extent, be held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions herein and the application thereof to any other circumstances,
shall remain in full force and effect, shall not in any way be affected,
impaired or invalidated, and shall be enforced to the fullest extent
permitted by law, and the parties hereto shall reasonably negotiate in good
faith a substitute term or provision that comes as close as possible to the
invalidated and unenforceable term or provision, and that puts each party
in a position as nearly comparable as possible to the position each such
party would have been in but for the finding of invalidity or
unenforceability, while remaining valid and enforceable.
9. Stockholder Capacity. No person executing this Agreement who is or
becomes during the term hereof a director or officer of the Company makes any
agreement or understanding herein in his capacity as such director or officer.
Each Stockholder signs solely in his capacity as the record holder and
beneficial owner of, or the trustee of a trust whose beneficiaries are the
beneficial owners of, or the general partner of a partnership which is the
beneficial owner of such Stockholder's Subject Shares or Options or Warrants and
nothing herein shall limit or affect any actions taken by a Stockholder in his
or its capacity as an officer or director of the Company to the extent
specifically permitted by the Reorganization Agreement. Nothing in this
Agreement shall be deemed to constitute a transfer of the beneficial ownership
of the Subject Shares by any Stockholder.
10. Enforcement. The parties agree, and the beneficiaries of each trust
which is a party hereto have agreed, 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 or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in a Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated hereby, (ii) agrees that such party will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that such party will not
bring any action relating to this Agreement or the transactions contemplated
hereby in any court other than a Federal court sitting in the state of Delaware
or a Delaware state court, (iv) waives any right to trial by jury with respect
to any claim or proceeding related to or arising out of this Agreement or any of
the transactions contemplated hereby and (v) appoints The Corporation Trust
Corporation as such party's agent for service of process in the State of
Delaware.
11. Each Stockholder owning Series I Preferred Stock hereby acknowledges
that it will receive the Preferred Consideration in the Merger and hereby agrees
to accept the Preferred Consideration in exchange for the cancellation of its
Series I Preferred Stock and to take such further actions as Fred Meyer and the
Company may request to evidence such agreement.
(Signature page follows)
F-6
<PAGE>
IN WITNESS WHEREOF, Fred Meyer has caused this Agreement to be signed by
its officer thereunto duly authorized and each Stockholder has signed this
Agreement or has caused this Agreement to be signed by its officer thereunto
duly authorized, all as of the date first written above.
FRED MEYER, INC.
By: /s/ ROBERT G. MILLER
-------------------------------------
Name: Robert G. Miller
Title: Chief Executive Officer
and President
STOCKHOLDERS:
THE YUCAIPA COMPANIES
By: /s/ RONALD W. BURKLE
-------------------------------------
Name: Ronald W. Burkle
Title: General Partner
YUCAIPA ARIZONA PARTNERS, L.P.
YUCAIPA SMITTY'S PARTNERS, L.P.
YUCAIPA SMITTY'S PARTNERS II, L.P.
YUCAIPA SSV PARTNERS, L.P.
By: THE YUCAIPA COMPANIES
as the General Partner of each of
the entities listed above
By: /s/ RONALD W. BURKLE
--------------------------------
Name: Ronald W. Burkle
Title: General Partner
/s/ JEFFREY P. SMITH
------------------------------------
JEFFREY P. SMITH
/s/ FRED L. SMITH
------------------------------------
FRED L. SMITH
/s/ RICHARD D. SMITH
------------------------------------
RICHARD D. SMITH
THE DEE GLENN MARITAL TRUST
By: /s/ JEFFREY P. SMITH
--------------------------------
Name: Jeffrey P. Smith
Title: Trustee
F-7
<PAGE>
TRUST FOR THE CHILDREN
OF JEFFREY P. SMITH
By: /s/ JEFFREY P. SMITH
--------------------------------
Name: Jeffrey P. Smith
Title: Trustee
TRUST FOR THE CHILDREN
OF FRED L. SMITH
By: /S/ FRED L. SMITH
--------------------------------
Name: Fred L. Smith
Title: Trustee
TRUST FOR THE CHILDREN
OF RICHARD D. SMITH
By: /S/ RICHARD D. SMITH
--------------------------------
Name: Richard D. Smith
Title: Trustee
F-8
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A(1)
Shares of Shares of
Shares of Shares of Shares of capital stock capital stock
Class A Class B Series I subject to subject to
Name Common Stock Common Stock Preferred Stock Options Warrants
---- ------------ ------------ --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
The Yucaipa Companies.................... 200,000 1,842,555 (1)
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Arizona Partners, L.P. .......... 273,582
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Smitty's Partners, L.P. ......... 300,667
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Smitty's Partners II, L.P. ...... 136,793
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa SSV Partners, L.P. .............. 1,340,772 (2)
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
University of Utah....................... 2,267,731
c/o Treasurer
University of Utah
407 Park Building
Salt Lake City, UT 84112
Corporation of the President of the Church 2,000,010
of Jesus Christ of Latter-Day Saints...
50 East North Temple
Salt Lake City UT 84150
Jeffrey P. Smith......................... 648,666 5,141
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84101
Fred L. Smith............................ 252,708
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84101
Richard D. Smith.........................
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Dee Glen Smith Marital Trust I........... 224,287 3,253,623
c/o Ida W. Smith
1066 North East Capital Blvd.
Salt Lake City, UT 84103
Trust for the Children of
Jeffrey P. Smith....................... 560,353
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Trust for the Children of Fred L. Smith.. 560,353 (3)
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Trust for the Children of
Richard D. Smith....................... 483,952
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
---------- --------- ---------- ---------- ---------
Total Shares............................. 2,730,319 2,256,955 7,521,364 1,842,555
========== ========= ========== ========== =========
Total Voting Power....................... 27,303,190 2,256,955 75,213,640
========== ========= ========== ========== =========
- --------------
(1) No shares of Class C Common Stock have been issued. 1,842,555 shares of
non-voting Class C Common Stock are issuable upon exercise of the Yucaipa
Warrant.
(2) Of this total, 660,000 shares are pledged to Goldman, Sachs & Co. for
collateral purposes in connection with a margin account.
(3) The children of Fred L. Smith have individual trusts of shares of Class A
Common Stock. Fred L. Smith is the trustee and the trusts are as follows:
Fred Lloyd Smith Trust - 41,353 shares, Staci Elaine Smith Trust - 28,670
shares and Zachary Dee Smith Trust - 28,670 shares.
</TABLE>
F-9
<PAGE>
================================================================================
VOTING AGREEMENT
between
FRED MEYER, INC.
and
UNIVERSITY OF UTAH
Dated as of May 11, 1997
================================================================================
F-10
<PAGE>
VOTING AGREEMENT (this "Agreement") dated as of May 11, 1997, between Fred
Meyer, Inc., a Delaware corporation ("Fred Meyer"), and the University of Utah
(the "Stockholder").
WHEREAS, Fred Meyer and Smith's Food & Drug Centers, Inc., a Delaware
corporation (the "Company"), propose to enter into an Agreement and Plan of
Reorganization and Merger dated as of the date hereof (as the same may be
amended or supplemented in a manner not adverse to the Stockholder, the
"Reorganization Agreement"; capitalized terms used but not defined herein shall
have the meanings set forth in the Reorganization Agreement) providing for the
formation of a new Delaware holding company, Meyer-Smith Holdco, Inc.
("Holdings"), the formation of two subsidiaries wholly-owned by Holdings ("Fred
Meyer Merger Sub, Inc." and "Smith's Merger Sub, Inc.") and the simultaneous
merger of Fred Meyer Merger Sub, Inc. with and into Fred Meyer and Smith's
Merger Sub, Inc. with and into the Company (the "Merger") so that each of Fred
Meyer and the Company become wholly-owned subsidiaries of Holdings, upon the
terms and subject to the conditions set forth in the Reorganization Agreement;
WHEREAS, pursuant to the Merger the Common Stock (as defined below) will be
converted into shares of common stock, par value $.01 per share, of Holdings and
each share of the Series I Preferred Stock (as defined below) shall be converted
into the right to receive thirty-three and one-third cents ($.33 1/3) (the
"Preferred Consideration");
WHEREAS, simultaneously with the execution hereof, Fred Meyer is entering
into voting agreements (the "Other Voting Agreements", and together with this
Agreement, the "Voting Agreements"), with each of the other stockholders of the
Company named in Schedule A attached hereto (the "Other Stockholders" and
together with the Stockholder, the "Stockholders");
WHEREAS, immediately prior to the Effective Time, Fred Meyer will assign
each of the Voting Agreements and all of its rights, interests and obligations
hereunder and thereunder to Holdings;
WHEREAS, the Stockholder and each Other Stockholder owns beneficially and
(except as set forth on Schedule A attached hereto) of record the number of
shares of Class A Common Stock, par value $.01 per share, of the Company (the
"Class A Common Stock"), of Class B Common Stock, par value $.01 per share, of
the Company (the "Class B Common Stock"), of Class C Common Stock, par value
$.01 per share, of the Company (the "Class C Common Stock" and, together with
the Class A Common Stock and the Class B Common Stock, (the "Common Stock") and
of Series I Preferred Stock, par value $.01 per share, of the Company (the
"Series I Preferred Stock") set forth opposite his or its name on Schedule A
attached hereto (such shares of Common Stock and of Series I Preferred Stock,
together with any other shares of capital stock of the Company acquired
(including, without limitation, through the exercise of Options or Warrants or
by reason of any split, reclassification, stock dividend or other distribution
with respect to the capital stock of the Company) by such Stockholder or such
Other Stockholder after the date hereof and during the term of the Voting
Agreements, being collectively referred to herein as the "Subject Shares");
WHEREAS, the Common Stock and the Series I Preferred Stock set forth on
Schedule A attached hereto represent at least 50.1% of the voting power of the
issued and outstanding shares of capital stock of the Company entitled to vote
on each of the matters set forth in Section 3 hereof; and
WHEREAS, as a condition to its willingness to enter into the Reorganization
Agreement, Fred Meyer has required that the Other Stockholders enter into the
Other Voting Agreements and that the Stockholder enter into this Agreement;
NOW, THEREFORE, to induce Fred Meyer to enter into, and in consideration of
its entering into, the Reorganization Agreement, and in consideration of the
premises and the representations, warranties and agreements contained herein,
the parties agree as follows:
1. Representations and Warranties of the Stockholder. The Stockholder
hereby represents and warrants to Fred Meyer as of the date hereof in respect of
itself as follows:
(a) Authority. The Stockholder has all requisite power and authority
to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Stockholder (or in the case of a Stockholder which is a
trust, by the trustee
F-11
<PAGE>
on behalf of such trust or in the case of a Stockholder which is a
partnership, by a general partner on behalf of such partnership) and
constitutes a valid and binding obligation of the Stockholder enforceable
in accordance with its terms. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby and
compliance with the terms hereof will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time or both)
under any provision of, any trust agreement, loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument,
permit, concession, franchise, license, judgment, order, notice, decree,
statute, law, ordinance, rule or regulation applicable to the Stockholder
or to the Stockholder's property or assets. No trust which is a Stockholder
requires the consent of any beneficiary to the execution and delivery of
this Agreement or to the consummation of the transactions contemplated
hereby.
(b) The Subject Shares, Options and Warrants. The Stockholder is the
beneficial and (except as set forth on Schedule A attached hereto) record
owner of, and has good and marketable title to, the Subject Shares, options
and warrants set forth opposite the Stockholder's name on Schedule A
attached hereto, free and clear of any claims, liens, encumbrances and
security interests whatsoever (other than as set forth on Schedule A
attached hereto). The Stockholder does not own, of record or beneficially,
any shares of capital stock of the Company other than the Subject Shares
and the shares of Common Stock subject to any options or warrants set forth
opposite the Stockholder's name on Schedule A attached hereto. The
Stockholder has the sole right to vote such Subject Shares, and none of
such Subject Shares is subject to any voting trust or other agreement,
arrangement or restriction with respect to the voting of such Subject
Shares, except as contemplated by this Agreement or as otherwise set forth
on Schedule A attached hereto.
2. Representations and Warranties of Fred Meyer. Fred Meyer hereby
represents and warrants to the Stockholder that Fred Meyer has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Fred Meyer, and the consummation of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action on the part of Fred
Meyer. This Agreement has been duly executed and delivered by Fred Meyer and
constitutes a valid and binding obligation of Fred Meyer enforceable in
accordance with its terms.
3. Covenants of the Stockholder. Until the termination of this Agreement in
accordance with Section 7 hereof, the Stockholder agrees as follows:
(a) Vote for the Merger. At any duly noticed meeting of stockholders
of the Company called to vote upon the Merger and the Reorganization
Agreement or at any adjournment thereof or in any other circumstances upon
which a vote, consent or other approval (including by written consent) with
respect to the Merger and the Reorganization Agreement is sought, the
Stockholder shall, including by initiating a written consent solicitation
if requested by Fred Meyer, vote (or cause to be voted) the Subject Shares
in favor of the Merger, the adoption by the Company of the Reorganization
Agreement and the approval of the terms thereof and, to the extent
presented to the stockholders of the Company for a vote, each of the other
transactions contemplated by the Reorganization Agreement. The Stockholder
hereby waives any appraisal rights granted pursuant to Section 262 of the
General Corporation Law of the State of Delaware (the "DGCL") (or any
successor provision) to which it may otherwise be entitled as a result of
the Merger or the other transactions contemplated by the Reorganization
Agreement.
(b) Vote Against Acquisition Proposals. At any duly noticed meeting of
stockholders of the Company or at any adjournment thereof or in any other
circumstances upon which the Stockholder's vote, consent or other approval
is sought, the Stockholder shall be present (in person or by proxy) and
shall vote (or cause to be voted) the Subject Shares against (i) any merger
agreement or merger (other than the Reorganization Agreement and the
Merger), consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of
or by the Company or any other Acquisition Proposal as such term is defined
in the Reorganization Agreement relating to the Company (an "Acquisition
Proposal") or (ii) any amendment of the Company's certificate of
incorporation or by-laws or other proposal or transaction involving the
Company or any of its subsidiaries,
F-12
<PAGE>
which amendment or other proposal or transaction would in any manner
impede, frustrate, prevent or nullify the Merger, the Reorganization
Agreement or any of the other transactions contemplated by the
Reorganization Agreement or change in any manner the voting rights of any
class of capital stock of the Company. Subject to Section 9, the
Stockholder further agrees not to commit or agree to take any action
inconsistent with the foregoing.
(c) Transfer of Subject Shares, Options and Warrants. Except pursuant
to this Agreement and except as provided in the immediately succeeding
sentence of this Section 3(c), the Stockholder agrees not to (i) Transfer,
or enter into any contract, option or other arrangement (including any
profit sharing arrangement) with respect to the Transfer of, the Subject
Shares, any option or warrant or any shares of Common Stock subject to any
option or warrant to any person, other than pursuant to the terms of the
Merger, (ii) enter into any voting arrangement, whether by proxy,
power-of-attorney, voting agreement, voting trust or otherwise, in
connection with, directly or indirectly, any Acquisition Proposal or (iii)
convert (or cause to be converted) any of the Subject Shares consisting of
Class A Common Stock into Class B Common Stock, in whole or in part, and
agrees not to commit or agree to take any of the foregoing actions.
Notwithstanding the foregoing, the Stockholder shall have the right (i) for
estate planning purposes, to Transfer Subject Shares to a transferee if and
only if such Transfer will not result in the automatic conversion of Class
A Common Stock or Class C Common Stock to Class B Common Stock or the
reduction in the number of votes allocated to the Series I Preferred Stock
and only following the due execution and delivery to Fred Meyer by each
transferee of a legal, valid and binding counterpart to this Agreement and
(ii) to pledge such Subject Shares for purposes of securing customary
margin or similar loans (and other customary steps related thereto,
including transferring the certificate evidencing the shares into the name
of the lender or its nominee) if and only if, in the case of the Class A
Common Stock or the Series I Preferred Stock, such pledge will not result
in the automatic conversion of Class A Common Stock to Class B Common Stock
or the reduction in the number of votes allocated to the Series I Preferred
Stock and only following the delivery to Fred Meyer of an acknowledgment by
the pledgee of the existence of this Agreement.
(d) No Solicitation. During the term of this Agreement, the
Stockholder shall not, nor shall it permit any of its Affiliates or any
director, officer, employee, investment banker, attorney or other adviser
or representative of any of the foregoing to, (i) directly or indirectly
solicit, initiate or encourage the submission of, any Acquisition Proposal
or (ii) subject to the terms of Section 9, directly or indirectly
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal.
(e) Stockholder Assistance. Until the Merger is consummated or the
Reorganization Agreement is terminated, the Stockholder shall use all
reasonable efforts to assist and cooperate with the other parties to
consummate and make effective, in the most expeditious manner practicable,
the Merger and the other transactions contemplated by the Reorganization
Agreement, subject, in each case to the requirements of applicable laws,
regulations, decrees or other judicial process and subject to the fiduciary
obligations of any of the Stockholders who is also an officer or director
of the Company in his capacity as such.
4. Confidentiality. The Stockholder hereby agrees to be bound, to the same
extent as the Company is bound, by the terms and conditions of the
Confidentiality Agreement, dated as of March 26, 1997 by and between Fred Meyer
and the Company.
5. Further Assurances. The Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as Fred Meyer or Holdings may
reasonably request for the purpose of effectively carrying out the transactions
contemplated by this Agreement.
6. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the prior
written consent of the other parties, except that Fred Meyer may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to Holdings or to
F-13
<PAGE>
any direct or indirect wholly owned subsidiary of Fred Meyer. 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 heirs, successors and
assigns.
7. Termination. This Agreement shall terminate upon the earlier of (a) the
18 month anniversary of the termination of the Reorganization Agreement or (b)
the Effective Time of the Merger; provided, however, that unless (x) the Company
is in material breach of its material obligations under the Reorganization
Agreement, (y) the Stockholder or any Other Stockholder is in material breach of
its material obligations under this Agreement or the Other Voting Agreements, as
the case may be or (z) a meeting of the Company's stockholders (or any
adjournment thereof) has been held to consider the Merger and the other
transactions contemplated by the Reorganization Agreement and the Smith's
Stockholder Approval was not obtained, this Agreement shall terminate at the
time the Reorganization Agreement is terminated (i) pursuant to Section 7.1 or
7.2(b) thereof, or (ii) by the Company (A) pursuant to Section 7.2(d) thereof or
(B) pursuant to Section 7.2(a) thereof (unless an Acquisition Proposal is
pending at the time of such termination) or (C) pursuant to Section 7.3 thereof.
8. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by overnight courier (providing proof of
delivery) to Fred Meyer in accordance with the notification provision
contained in the Reorganization Agreement and to the Stockholder at its
address set forth on Schedule A attached hereto (or at such other address
for a party as shall be specified by like notice).
(c) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
(d) 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 party, it being
understood that each party need not sign the same counterpart.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof and (ii) is not intended to confer upon any
person other than the parties hereto and other than Holdings, which is an
express beneficiary of this Agreement, any rights or remedies hereunder.
(f) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware regardless of the
laws that might otherwise govern under applicable principles of conflicts
of law thereof.
(g) Public Announcements. The Stockholder will consult with Fred Meyer
and use reasonable efforts to agree upon the text of any press release,
before issuing any press release or otherwise making public statements with
respect to the transactions contemplated by this Agreement and the
Reorganization Agreement and shall not issue any such press release or make
any such public statement without Fred Meyer's prior consent, which consent
shall not be unreasonably withheld, except as may be required by applicable
law (including requirements of stock exchanges and other similar regulatory
bodies).
(h) Severability. If any term, provision, covenant or restriction
herein, or the application thereof to any circumstance, shall, to any
extent, be held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions herein and the
F-14
<PAGE>
application thereof to any other circumstances, shall remain in full force
and effect, shall not in any way be affected, impaired or invalidated, and
shall be enforced to the fullest extent permitted by law, and the parties
hereto shall reasonably negotiate in good faith a substitute term or
provision that comes as close as possible to the invalidated and
unenforceable term or provision, and that puts each party in a position as
nearly comparable as possible to the position each such party would have
been in but for the finding of invalidity or unenforceability, while
remaining valid and enforceable.
9. Stockholder Capacity. No person executing this Agreement who is or
becomes during the term hereof a director or officer of the Company makes any
agreement or understanding herein in his capacity as such director or officer.
The Stockholder signs solely in its capacity as the record holder and beneficial
owner of, or the trustee of a trust whose beneficiaries are the beneficial
owners of, or the general partner of a partnership which is the beneficial owner
of the Stockholder's Subject Shares or Options or Warrants and nothing herein
shall limit or affect any actions taken by the Stockholder in its capacity as an
officer or director of the Company to the extent specifically permitted by the
Reorganization Agreement. Nothing in this Agreement shall be deemed to
constitute a transfer of the beneficial ownership of the Subject Shares by the
Stockholder.
10. Enforcement. The parties agree, and the beneficiaries of each trust
which is a party hereto have agreed, 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 or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in a Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit such party to the
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated hereby, (ii) agrees that such party will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that such party will not
bring any action relating to this Agreement or the transactions contemplated
hereby in any court other than a Federal court sitting in the state of Delaware
or a Delaware state court, (iv) waives any right to trial by jury with respect
to any claim or proceeding related to or arising out of this Agreement or any of
the transactions contemplated hereby and (v) appoints The Corporation Trust
Corporation as such party's agent for service of process in the State of
Delaware.
11. The Stockholder hereby acknowledges that it will receive the Preferred
Consideration in the Merger and hereby agrees to accept the Preferred
Consideration in exchange for the cancellation of its Series I Preferred Stock
and to take such further actions as Fred Meyer and the Company may request to
evidence such agreement.
(Signature page follows)
F-15
<PAGE>
IN WITNESS WHEREOF, each of Fred Meyer and the Stockholder has caused this
Agreement to be signed by its officer thereunto duly authorized and the
Stockholder as of the date first written above.
FRED MEYER, INC.
By: /s/ ROBERT G. MILLER
---------------------------------------------
Name: Robert G. Miller
Title: Chief Executive Officer and President
UNIVERSITY OF UTAH
By: /s/ THOMAS G. NYCUM
---------------------------------------------
Name: Thomas G. Nycum
Title: Vice President for Administrative Services
F-16
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A(1)
Shares of Shares of
Shares of Shares of Shares of capital stock capital stock
Class A Class B Series I subject to subject to
Name Common Stock Common Stock Preferred Stock Options Warrants
---- ------------ ------------ --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
The Yucaipa Companies.................... 200,000 1,842,555 (1)
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Arizona Partners, L.P. .......... 273,582
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Smitty's Partners, L.P. ......... 300,667
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Smitty's Partners II, L.P. ...... 136,793
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa SSV Partners, L.P. .............. 1,340,772 (2)
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
University of Utah....................... 2,267,731
c/o Treasurer
University of Utah
407 Park Building
Salt Lake City, UT 84112
Corporation of the President of the Church 2,000,010
of Jesus Christ of Latter-Day Saints...
50 East North Temple
Salt Lake City UT 84150
Jeffrey P. Smith......................... 648,666 5,141
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84101
Fred L. Smith............................ 252,708
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84101
Richard D. Smith.........................
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Dee Glen Smith Marital Trust I........... 224,287 3,253,623
c/o Ida W. Smith
1066 North East Capital Blvd.
Salt Lake City, UT 84103
Trust for the Children of
Jeffrey P. Smith....................... 560,353
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Trust for the Children of Fred L. Smith.. 560,353 (3)
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Trust for the Children of
Richard D. Smith....................... 483,952
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
---------- --------- ---------- ---------- ---------
Total Shares............................. 2,730,319 2,256,955 7,521,364 1,842,555
========== ========= ========== ========== =========
Total Voting Power....................... 27,303,190 2,256,955 75,213,640
========== ========= ========== ========== =========
- --------------
(1) No shares of Class C Common Stock have been issued. 1,842,555 shares of
non-voting Class C Common Stock are issuable upon exercise of the Yucaipa
Warrant.
(2) Of this total, 660,000 shares are pledged to Goldman, Sachs & Co. for
collateral purposes in connection with a margin account.
(3) The children of Fred L. Smith have individual trusts of shares of Class A
Common Stock. Fred L. Smith is the trustee and the trusts are as follows:
Fred Lloyd Smith Trust - 41,353 shares, Staci Elaine Smith Trust - 28,670
shares and Zachary Dee Smith Trust - 28,670 shares.
</TABLE>
F-17
<PAGE>
================================================================================
VOTING AGREEMENT
between
FRED MEYER, INC.
and
CORPORATION OF THE PRESIDENT OF THE CHURCH
OF JESUS CHRIST OF LATTER-DAY SAINTS
Dated as of May 11, 1997
================================================================================
F-18
<PAGE>
VOTING AGREEMENT (this "Agreement") dated as of May 11, 1997, between Fred
Meyer, Inc., a Delaware corporation ("Fred Meyer"), and the Corporation of the
President of the Church of Jesus Christ of Latter-Day Saints (the
"Stockholder").
WHEREAS, Fred Meyer and Smith's Food & Drug Centers, Inc., a Delaware
corporation (the "Company"), propose to enter into an Agreement and Plan of
Reorganization and Merger dated as of the date hereof (as the same may be
amended or supplemented in a manner not adverse to the Stockholder, the
"Reorganization Agreement"; capitalized terms used but not defined herein shall
have the meanings set forth in the Reorganization Agreement) providing for the
formation of a new Delaware holding company, Meyer-Smith Holdco, Inc.
("Holdings"), the formation of two subsidiaries wholly-owned by Holdings ("Fred
Meyer Merger Sub, Inc." and "Smith's Merger Sub, Inc.") and the simultaneous
merger of Fred Meyer Merger Sub, Inc. with and into Fred Meyer and Smith's
Merger Sub, Inc. with and into the Company (the "Merger") so that each of Fred
Meyer and the Company become wholly-owned subsidiaries of Holdings, upon the
terms and subject to the conditions set forth in the Reorganization Agreement;
WHEREAS, pursuant to the Merger the Common Stock (as defined below) will be
converted into shares of common stock, par value $.01 per share, of Holdings and
each share of the Series I Preferred Stock (as defined below) shall be converted
into the right to receive thirty-three and one-third cents ($.33 1/3) (the
"Preferred Consideration");
WHEREAS, simultaneously with the execution hereof, Fred Meyer is entering
into voting agreements (the "Other Voting Agreements", and together with this
Agreement, the "Voting Agreements") with each of the other stockholders of the
Company named in Schedule A attached hereto (the "Other Stockholders" and
together with the Stockholder, the "Stockholders") dated as of the date hereof;
WHEREAS, immediately prior to the Effective Time, Fred Meyer will assign
each of the Voting Agreements and all of its rights, interests and obligations
hereunder and thereunder to Holdings;
WHEREAS, the Stockholder and each Other Stockholder owns beneficially and
(except as set forth on Schedule A attached hereto) of record the number of
shares of Class A Common Stock, par value $.01 per share, of the Company (the
"Class A Common Stock"), of Class B Common Stock, par value $.01 per share, of
the Company (the "Class B Common Stock"), of Class C Common Stock, par value
$.01 per share, of the Company (the "Class C Common Stock" and, together with
the Class A Common Stock and the Class B Common Stock, the "Common Stock") and
of Series I Preferred Stock, par value $.01 per share, of the Company (the
"Series I Preferred Stock") set forth opposite his or its name on Schedule A
attached hereto (such shares of Common Stock and of Series I Preferred Stock,
together with any other shares of capital stock of the Company acquired
(including, without limitation, through the exercise of Options or Warrants or
by reason of any split, reclassification, stock dividend or other distribution
with respect to the capital stock of the Company) by the Stockholder or such
Other Stockholder after the date hereof and during the term of the Voting
Agreements, being collectively referred to herein as the "Subject Shares");
WHEREAS, the Common Stock and the Series I Preferred Stock set forth on
Schedule A attached hereto represent at least 50.1% of the voting power of the
issued and outstanding shares of capital stock of the Company entitled to vote
on each of the matters set forth in Section 3 hereof; and
WHEREAS, as a condition to its willingness to enter into the Reorganization
Agreement, Fred Meyer has required that each of the Other Stockholders enter
into the Other Voting Agreements and that the Stockholder enter into this
Agreement;
NOW THEREFORE, to induce Fred Meyer to enter into, and in consideration of
its entering into, the Reorganization Agreement, and in consideration of the
premises and the representations, warranties and agreements contained herein,
the parties agree as follows:
1. Representations and Warranties of the Stockholder. The Stockholder
hereby represents and warrants to Fred Meyer as of the date hereof in respect of
itself as follows:
(a) Authority. The Stockholder has all requisite power and authority
to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized,
F-19
<PAGE>
executed and delivered by the Stockholder (or in the case of a Stockholder
which is a trust, by the trustee on behalf of such trust, or in the case of
a Stockholder which is a partnership by a general partner on behalf of such
partnership) and constitutes a valid and binding obligation of the
Stockholder enforceable in accordance with its terms. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby and compliance with the terms hereof will not, conflict
with, or result in any violation of, or default (with or without notice or
lapse of time or both) under any provision of, any trust agreement, loan or
credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise, license, judgment,
order, notice, decree, statute, law, ordinance, rule or regulation
applicable to the Stockholder or to the Stockholder's property or assets.
No trust which is a Stockholder requires the consent of any beneficiary to
the execution and delivery of this Agreement or to the consummation of the
transactions contemplated hereby.
(b) The Subject Shares, Options and Warrants. The Stockholder is the
beneficial and (except as set forth on Schedule A attached hereto) record
owner of, and has good and marketable title to, the Subject Shares, options
and warrants set forth opposite its name on Schedule A attached hereto,
free and clear of any claims, liens, encumbrances and security interests
whatsoever (other than as set forth on Schedule A attached hereto). The
Stockholder does not own, of record or beneficially, any shares of capital
stock of the Company other than the Subject Shares and the shares of Common
Stock subject to any options or warrants set forth opposite the
Stockholder's name on Schedule A attached hereto. The Stockholder has the
sole right to vote such Subject Shares, and none of such Subject Shares is
subject to any voting trust or other agreement, arrangement or restriction
with respect to the voting of such Subject shares, except as contemplated
by this Agreement or as otherwise set forth on Schedule A attached hereto.
2. Representations and Warranties of Fred Meyer. Fred Meyer hereby
represents and warrants to the Stockholder that Fred Meyer has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Fred Meyer, and the consummation of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action on the part of Fred
Meyer. This Agreement has been duly executed and delivered by Fred Meyer and
constitutes a valid and binding obligation of Fred Meyer enforceable in
accordance with its terms.
3. Covenants of the Stockholder. Until the termination of this Agreement in
accordance with Section 7 hereof, the Stockholder agrees as follows:
(a) Vote for the Merger. At any duly noticed meeting of stockholders
of the Company called to vote upon the Merger and the Reorganization
Agreement or at any adjournment thereof or in any other circumstances upon
which a vote, consent or other approval (including by written consent) with
respect to the Merger and the Reorganization Agreement is sought, the
Stockholder shall, including by initiating a written consent solicitation
if requested by Fred Meyer, vote (or cause to be voted) the Subject Shares
in favor of the Merger, the adoption by the Company of the Reorganization
Agreement and the approval of the terms thereof and, to the extent
presented to the stockholders of the Company for a vote, each of the other
transactions contemplated by the Reorganization Agreement. The Stockholder
hereby waives any appraisal rights granted pursuant to Section 262 of the
General Corporation Law of the State of Delaware (the "DGCL") (or any
successor provision) to which it may otherwise be entitled as a result of
the Merger or the other transactions contemplated by the Reorganization
Agreement.
(b) Vote Against Acquisition Proposals. At any duly noticed meeting of
stockholders of the Company or at any adjournment thereof or in any other
circumstances upon which the Stockholder's vote, consent or other approval
is sought, the Stockholder shall be present (in person or by proxy) and
shall vote (or cause to be voted) the Subject Shares against (i) any merger
agreement or merger (other than the Reorganization Agreement and the
Merger), consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of
or by the Company or any other Acquisition Proposal as such term is defined
in the Reorganization Agreement relating to the Company (an "Acquisition
Proposal") or (ii) any amendment of the Company's certificate of
incorporation or by-laws or other proposal or transaction involving the
Company or any of its subsidiaries,
F-20
<PAGE>
which amendment or other proposal or transaction would in any manner
impede, frustrate, prevent or nullify the Merger, the Reorganization
Agreement or any of the other transactions contemplated by the
Reorganization Agreement or change in any manner the voting rights of any
class of capital stock of the Company. Subject to Section 9, the
Stockholder further agrees not to commit or agree to take any action
inconsistent with the foregoing.
(c) Transfer of Subject Shares, Options and Warrants. Except pursuant
to this Agreement and except as provided in the immediately succeeding
sentence of this Section 3(c), the Stockholder agrees not to (i) Transfer,
or enter into any contract, option or other arrangement (including any
profit sharing arrangement) with respect to the Transfer of, the Subject
Shares, any option or warrant or any shares of Common Stock, subject to any
option or warrant to any person other than pursuant to the terms of the
Merger, (ii) enter into any voting arrangement, whether by proxy,
power-of-attorney, voting agreement, voting trust or otherwise, in
connection with, directly or indirectly, any Acquisition Proposal or (iii)
convert (or cause to be converted) any of the Subject Shares consisting of
Class A Common Stock into Class B Common Stock, in whole or in part, and
agrees not to commit or agree to take any of the foregoing actions.
Notwithstanding the foregoing, the Stockholder shall have the right (i) for
estate planning purposes, to Transfer Subject Shares to a transferee if and
only if such Transfer will not result in the automatic conversion of Class
A Common Stock or Class C Common Stock to Class B Common Stock or the
reduction in the number of votes allocated to the Series I Preferred Stock
and only following the due execution and delivery to Fred Meyer by each
transferee of a legal, valid and binding counterpart to this Agreement and
(ii) to pledge such Subject Shares for purposes of securing customary
margin or similar loans (and other customary steps related thereto,
including transferring the certificate evidencing the shares into the name
of the lender or its nominee) if and only if, in the case of the Class A
Common Stock or the Series I Preferred Stock, such pledge will not result
in the automatic conversion of Class A Common Stock to Class B Common Stock
or the reduction in the number of votes allocated to the Series I Preferred
Stock and only following the delivery to Fred Meyer of an acknowledgment by
the pledgee of the existence of this Agreement.
(d) No Solicitation. During the term of this Agreement, the
Stockholder shall not, nor shall it permit any of its Affiliates or any
director, officer, employee, investment banker, attorney or other adviser
or representative of any of the foregoing to, (i) directly or indirectly
solicit, initiate or encourage the submission of, any Acquisition Proposal
or (ii) subject to the terms of Section 9, directly or indirectly
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal.
(e) Stockholder Assistance. Until the Merger is consummated or the
Reorganization Agreement is terminated, the Stockholder shall use all
reasonable efforts to assist and cooperate with the other parties to
consummate and make effective, in the most expeditious manner practicable,
the Merger and the other transactions contemplated by the Reorganization
Agreement, subject, in each case to the requirements of applicable laws,
regulations, decrees or other judicial process and subject to the fiduciary
obligations of any such Stockholder who is also an officer or director of
the Company in his capacity as such.
4. Confidentiality. The Stockholder hereby agrees to be bound, to the same
extent as the Company is bound, by the terms and conditions of the
Confidentiality Agreement, dated as of March 26, 1997 by and between Fred Meyer
and the Company.
5. Further Assurances. The Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as Fred Meyer or Holdings may
reasonably request for the purpose of effectively carrying out the transactions
contemplated by this Agreement.
6. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the prior
written consent of the other parties, except that Fred Meyer may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to Holdings or to any direct or indirect wholly owned subsidiary of Fred Meyer.
Subject to the preceding sentence, this
F-21
<PAGE>
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective heirs, successors and assigns.
7. Termination. This Agreement shall terminate upon the earlier of (a) the
18 month anniversary of the termination of the Reorganization Agreement or (b)
the Effective Time of the Merger; provided, however, that unless (x) the Company
is in material breach of its material obligations under the Reorganization
Agreement, (y) the Stockholder or any Other Stockholder is in material breach of
its material obligations under this Agreement or the Other Voting Agreements, as
the case may be or (z) a meeting of the Company's stockholders (or any
adjournment thereof) has been held to consider the Merger and the other
transactions contemplated by the Reorganization Agreement and the Smith's
Stockholder Approval was not obtained, this Agreement shall terminate at the
time the Reorganization Agreement is terminated (i) pursuant to Section 7.1 or
7.2(b) thereof, or (ii) by the Company (A) pursuant to Section 7.2(d) thereof or
(B) pursuant to Section 7.2(a) thereof (unless an Acquisition Proposal is
pending at the time of such termination) or (C) pursuant to Section 7.3 thereof.
8. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by overnight courier (providing proof of
delivery) to Fred Meyer in accordance with the notification provision
contained in the Reorganization Agreement and to the Stockholder at its
address set forth on Schedule A attached hereto (or at such other address
for a party as shall be specified by like notice).
(c) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
(d) 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 party, it being
understood that each party need not sign the same counterpart.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof and (ii) is not intended to confer upon any
person other than the parties hereto and other than Holdings, which is an
express beneficiary of this Agreement, any rights or remedies hereunder.
(f) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware regardless of the
laws that might otherwise govern under applicable principles of conflicts
of law thereof.
(g) Public Announcements. The Stockholder will consult with Fred Meyer
and use reasonable efforts to agree upon the text of any press release,
before issuing any press release or otherwise making public statements with
respect to the transactions contemplated by this Agreement and the
Reorganiza- tion Agreement and shall not issue any such press release or
make any such public statement without Fred Meyer's prior consent, which
consent shall not be unreasonably withheld, except as may be required by
applicable law (including requirements of stock exchanges and other similar
regulatory bodies).
(h) Severability. If any term, provision, covenant or restriction
herein, or the application thereof to any circumstance, shall, to any
extent, be held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions herein and the application thereof to any other circumstances,
shall remain in full force and effect, shall not in any way
F-22
<PAGE>
be affected, impaired or invalidated, and shall be enforced to the fullest
extent permitted by law, and the parties hereto shall reasonably negotiate
in good faith a substitute term or provision that comes as close as
possible to the invalidated and unenforceable term or provision, and that
puts each party in a position as nearly comparable as possible to the
position each such party would have been in but for the finding of
invalidity or unenforceability, while remaining valid and enforceable.
9. Stockholder Capacity. No person executing this Agreement who is or
becomes during the term hereof a director or officer of the Company makes any
agreement or understanding herein in his capacity as such director or officer.
The Stockholder signs solely in its capacity as the record holder and beneficial
owner of, or the trustee of a trust whose beneficiaries are the beneficial
owners of, or the general partner of a partnership which is the beneficial owner
of its Stockholder's Subject Shares or Options or Warrants and nothing herein
shall limit or affect any actions taken by the Stockholder in its capacity as an
officer or director of the Company to the extent specifically permitted by the
Reorganization Agreement. Nothing in this Agreement shall be deemed to
constitute a transfer of the beneficial ownership of the Subject Shares by the
Stockholder.
10. Enforcement. The parties agree, and the beneficiaries of each trust
which is a party hereto have agreed, 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 or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in a Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated hereby, (ii) agrees that such party will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that such party will not
bring any action relating to this Agreement or the transactions contemplated
hereby in any court other than a Federal court sitting in the state of Delaware
or a Delaware state court, (iv) waives any right to trial by jury with respect
to any claim or proceeding related to or arising out of this Agreement or any of
the transactions contemplated hereby and (v) appoints The Corporation Trust
Corporation as such party's agent for service of process in the State of
Delaware.
11. The Stockholder hereby acknowledges that it will receive the Preferred
Consideration in the Merger and hereby agrees to accept the Preferred
Consideration in exchange for the cancellation of its Series I Preferred Stock
and to take such further actions as Fred Meyer and the Company may request to
evidence such agreement.
(Signature page follows)
F-23
<PAGE>
IN WITNESS WHEREOF, each of Fred Meyer and the Stockholder has caused this
Agreement to be signed by its officer thereunto duly authorized as of the date
first written above.
FRED MEYER, INC.
By: /s/ ROBERT G. MILLER
----------------------------------------
Name: Robert G. Miller
Title: Chief Executive Officer and President
CORPORATION OF THE PRESIDENT OF
THE CHURCH OF JESUS CHRIST OF
LATTER-DAY SAINTS
By: /s/ ROGER G. CLARKE
----------------------------------------
Name: Roger G. Clarke
Title: Authorized Agent
F-24
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A(1)
Shares of Shares of
Shares of Shares of Shares of capital stock capital stock
Class A Class B Series I subject to subject to
Name Common Stock Common Stock Preferred Stock Options Warrants
---- ------------ ------------ --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
The Yucaipa Companies.................... 200,000 1,842,555 (1)
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Arizona Partners, L.P. .......... 273,582
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Smitty's Partners, L.P. ......... 300,667
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa Smitty's Partners II, L.P. ...... 136,793
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
Yucaipa SSV Partners, L.P. .............. 1,340,772 (2)
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
5th Floor
Los Angeles, CA 90067
University of Utah....................... 2,267,731
c/o Treasurer
University of Utah
407 Park Building
Salt Lake City, UT 84112
Corporation of the President of the Church 2,000,010
of Jesus Christ of Latter-Day Saints...
50 East North Temple
Salt Lake City UT 84150
Jeffrey P. Smith......................... 648,666 5,141
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84101
Fred L. Smith............................ 252,708
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84101
Richard D. Smith.........................
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Dee Glen Smith Marital Trust I........... 224,287 3,253,623
c/o Ida W. Smith
1066 North East Capital Blvd.
Salt Lake City, UT 84103
Trust for the Children of
Jeffrey P. Smith....................... 560,353
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Trust for the Children of Fred L. Smith.. 560,353 (3)
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Trust for the Children of
Richard D. Smith....................... 483,952
c/o Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
---------- --------- ---------- ---------- ---------
Total Shares............................. 2,730,319 2,256,955 7,521,364 1,842,555
========== ========= ========== ========== =========
Total Voting Power....................... 27,303,190 2,256,955 75,213,640
========== ========= ========== ========== =========
- --------------
(1) No shares of Class C Common Stock have been issued. 1,842,555 shares of
non-voting Class C Common Stock are issuable upon exercise of the Yucaipa
Warrant.
(2) Of this total, 660,000 shares are pledged to Goldman, Sachs & Co. for
collateral purposes in connection with a margin account.
(3) The children of Fred L. Smith have individual trusts of shares of Class A
Common Stock. Fred L. Smith is the trustee and the trusts are as follows:
Fred Lloyd Smith Trust - 41,353 shares, Staci Elaine Smith Trust - 28,670
shares and Zachary Dee Smith Trust - 28,670 shares.
</TABLE>
F-25
<PAGE>
APPENDIX G
DELAWARE GENERAL CORPORATION LAW
Section 262 Appraisal Rights. -- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to ss. 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to
subsection (g) of Section 251), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or
ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to ss.ss.
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if
it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. If such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of
the effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given; provided that, if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next proceeding the day on which the notice is given.
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<PAGE>
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall by borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
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<PAGE>
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
G-4
<PAGE>
APPENDIX H
================================================================================
STOCK OPTION AGREEMENT
between
SMITH'S FOOD & DRUG CENTERS, INC.
and
FRED MEYER, INC.
---------------
Dated as of May 11, 1997
---------------
================================================================================
<PAGE>
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of May 11, 1997, between Smith's Food &
Drug Centers, Inc., a Delaware corporation ("Grantee"), and Fred Meyer, Inc., a
Delaware corporation ("Issuer").
WITNESSETH:
WHEREAS, on May 11, 1997, Grantee and Issuer entered into an Agreement and
Plan of Reorganization and Merger (the "Reorganization Agreement");
WHEREAS, as a condition and inducement to Grantee's execution of the
Reorganization Agreement and pursuit of the transactions contemplated thereby,
Issuer has agreed to grant Grantee the Option (as hereinafter defined); and
WHEREAS, the Board of Directors of Issuer has approved the grant of the
Option and the Reorganization Agreement prior to the execution hereof;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Reorganization Agreement, the parties
hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option
(the "Option") to purchase, subject to the terms hereof, up to an aggregate of
Five Million Two Hundred Fifty-Eight Thousand Thirty-Six (5,258,036) fully paid
and nonassessable shares of the common stock, $0.01 par value per share, of
Issuer ("Common Stock") at a price per share equal to $45.00 (the "Option
Price"); provided, further, that in no event shall the number of shares for
which this Option is exercisable exceed 19.9% of the issued and outstanding
shares of Common Stock. The number of shares of Common Stock that may be
received upon the exercise of the Option and the Option Price is subject to
adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5(a) hereof), the number of shares of Common Stock subject to the Option
shall be increased so that, after such issuance, such number together with any
shares of Common Stock previously issued pursuant hereto, equals 19.9% of the
number of shares of Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the Option. Nothing contained
in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer or Grantee to breach any provision of the Reorganization Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, if, but only if, the termination fee provided for in either
Section 7.5(c) or Section 7.5(d) of the Reorganization Agreement has become
payable (a "Triggering Event") and prior to the occurrence of an Exercise
Termination Event (as hereinafter defined). The term "Holder" shall mean the
holder or holders of the Option. Notwithstanding anything to the contrary
contained herein, (i) the Option may not be exercised at any time when Grantee
shall be in material breach of any of its covenants or agreements contained in
the Reorganization Agreement such that Issuer shall be entitled to terminate the
Reorganization Agreement pursuant to Section 7.4(c) thereof and (ii) this
Agreement shall automatically terminate upon the termination of the
Reorganization Agreement by Issuer pursuant to Section 7.4(c) thereof as a
result of the material breach by Grantee of its covenants or agreements
contained in the Reorganization Agreement. Each of the following shall be an
"Exercise Termination Event": (i) the Effective Time of the Merger; (ii) the
termination of the Reorganization Agreement in accordance with the provisions
thereof if such termination occurs prior to the occurrence of a Triggering Event
and in circumstances under which the conditions necessary for a Triggering Event
to occur are incapable of being fulfilled; or (iii) the passage of twelve (12)
months following the occurrence of a Triggering Event.
(b) Issuer shall notify Grantee promptly in writing of the occurrence of
any Triggering Event, it being understood that the giving of such notice by
Issuer shall not be a condition to the right of the Holder to exercise the
Option.
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<PAGE>
(c) In the event the Holder is entitled to and wishes to exercise the
Option (or any portion thereof), it shall send to Issuer a written notice (the
date of which being herein referred to as the "Notice Date") specifying (i) the
total number of shares it will purchase pursuant to such exercise and (ii) a
place and date not earlier than three business days nor later than 60 business
days from the Notice Date for the closing of such purchase (the "Closing Date");
provided, that if prior notification to or approval of any regulatory or
antitrust agency is required in connection with such purchase, the Holder shall
promptly file the required notice or application for approval, shall promptly
notify Issuer of such filing, and shall expeditiously process the same and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which any required notification periods have expired or
been terminated or such approvals have been obtained and any requisite waiting
period or periods shall have passed. Any exercise of the Option shall be deemed
to occur on the Notice Date relating thereto.
(d) At the closing referred to in subsection (c) of this Section 2, the
Holder shall (i) pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option and (ii) present and
surrender this Agreement to Issuer at its principal executive offices.
(e) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (d) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder.
(f) Certificates for Common Stock delivered at a closing hereunder may be
endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder hereof
and Issuer and to resale restrictions arising under the Securities Act of
1933, as amended. A copy of such agreement is on file at the principal
office of Issuer and will be provided to the holder hereof without charge
upon receipt by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act") in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Holder shall have delivered to Issuer a copy of a letter from the staff
of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the 1933 Act; (ii) the reference to the provisions of this Agreement
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference in the opinion of Counsel to the Holder;
and (iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) are both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
(g) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (c) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and
H-2
<PAGE>
other rights to purchase Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution or sale
of assets, or by any other voluntary act, avoid or seek to avoid the observance
or performance of any of the covenants, stipulations or conditions to be
observed or performed hereunder by Issuer; (iii) promptly to take all action as
may from time to time be required (including complying with all applicable
premerger notification, reporting and waiting period requirements specified in
15 U.S.C. Section 18a and regulations promulgated thereunder) in order to permit
the Holder to exercise the Option and Issuer duly and effectively to issue
shares of Common Stock pursuant hereto; and (iv) promptly to take all action
provided herein to protect the rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable, without
expense, at the option of the Holder, upon presentation and surrender of this
Agreement at the principal office of Issuer, for other Agreements providing for
Options of different denominations entitling the holder thereof to purchase, on
the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Agreements and
related Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5.
(a) In the event of any change in, or distributions in respect of, the
Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares or the like, the type and number of shares of Common Stock
purchasable upon exercise hereof shall be appropriately adjusted and proper
provision shall be made so that, in the event that any additional shares of
Common Stock are to be issued or otherwise become outstanding as a result
of any such change (other than pursuant to an exercise of the Option), the
number of shares of Common Stock that remain subject to the Option shall be
increased so that, after such issuance and together with shares of Common
Stock previously issued pursuant to the exercise of the Option (as adjusted
on account of any of the foregoing changes in the Common Stock), it equals
19.9% of the number of shares of Common Stock then issued and outstanding.
(b) Whenever the number of shares of Common Stock purchasable upon
exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the
numerator of which shall be equal to the number of shares of Common Stock
purchasable prior to the adjustment and the denominator of which shall be
equal to the number of shares of Common Stock purchasable after the
adjustment.
6. Upon the occurrence of a Triggering Event that occurs prior to an
Exercise Termination Event, Issuer shall, at the request of Grantee deliver
within twelve (12) months (or such later period as provided in Section 10) of
such Triggering Event (whether on its own behalf or on behalf of any subsequent
holder of this Option (or part thereof) or any of the shares of Common Stock
issued pursuant hereto), promptly prepare, file and keep current a registration
statement under the 1933 Act covering any shares issued and issuable pursuant to
this Option and shall use its reasonable best efforts to cause such registration
statement to become effective and remain current in order to permit the sale or
other disposition of any shares of Common Stock issued upon total or partial
exercise of this Option ("Option Shares") in accordance with any plan of
disposition requested by Grantee. Issuer will use its reasonable best efforts to
cause such registration statement promptly to become effective and then to
remain effective for such period not in excess of 180 days from the day such
registration statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or
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other dispositions. Grantee shall have the right to demand two such
registrations. The Issuer shall bear the costs of such registrations (including,
but not limited to, Issuer's attorneys' fees, printing costs and filing fees,
except for underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto). The foregoing
notwithstanding, if, at the time of any request by Grantee for registration of
Option Shares as provided above, Issuer is in registration with respect to an
underwritten public offering by Issuer of shares of Common Stock, and if in the
good faith judgment of the managing underwriter or managing underwriters, or, if
none, the sole underwriter or underwriters, of such offering the inclusion of
the Option Shares would interfere with the successful marketing of the shares of
Common Stock offered by Issuer, the number of Option Shares otherwise to be
covered in the registration statement contemplated hereby may be reduced;
provided, however, that after any such required reduction the number of Option
Shares to be included in such offering for the account of the Holder shall
constitute at least 25% of the total number of shares to be sold by the Holder
and Issuer in the aggregate; and provided further, however, that if such
reduction occurs, then Issuer shall file a registration statement for the
balance as promptly as practicable thereafter as to which no reduction pursuant
to this Section 6 shall be permitted or occur and the Holder shall thereafter be
entitled to one additional registration and the twelve (12) month period
referred to in the first sentence of this section shall be increased to
twenty-four (24) months. Each such Holder shall provide all information
reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in such underwriting agreements for Issuer. Upon receiving
any request under this Section 6 from any Holder, Issuer agrees to send a copy
thereof to any other person known to Issuer to be entitled to registration
rights under this Section 6, in each case by promptly mailing the same, postage
prepaid, to the address of record of the persons entitled to receive such
copies. Notwithstanding anything to the contrary contained herein, in no event
shall the number of registrations that Issuer is obligated to effect be
increased by reason of the fact that there shall be more than one Holder as a
result of any assignment or division of this Agreement.
7. (a) At any time after the occurrence of a Triggering Event (i) at the
request of the Holder, delivered prior to an Exercise Termination Event (or such
later period as provided in Section 10), Issuer (or any successor thereto) shall
repurchase the Option from the Holder at a price (the "Option Repurchase Price")
equal to the amount by which (A) the market/offer price (as defined below)
exceeds (B) the Option Price, multiplied by the number of shares for which this
Option may then be exercised and (ii) at the request of the owner of Option
Shares from time to time (the "Owner"), delivered prior to an Exercise
Termination Event (or such later period as provided in Section 10), Issuer (or
any successor thereto) shall repurchase such number of the Option Shares from
the Owner as the Owner shall designate at a price (the "Option Share Repurchase
Price") equal to the market/offer price multiplied by the number of Option
Shares so designated. The term "market/offer price" shall mean the highest of
(i) the price per share of Common Stock at which a tender or exchange offer
therefor has been made, (ii) the price per share of Common Stock to be paid by
any third party pursuant to an agreement with Issuer, (iii) the highest closing
price for shares of Common Stock within the six-month period immediately
preceding the date the Holder gives notice of the required repurchase of this
Option or the Owner gives notice of the required repurchase of Option Shares, as
the case may be, or (iv) in the event of a sale of all or substantially all of
Issuer's assets, the sum of the net price paid in such sale for such assets and
the current market value of the remaining net assets of Issuer as determined by
a nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, and reasonably acceptable to Issuer, divided by the
number of shares of Common Stock of Issuer outstanding at the time of such sale.
In determining the market/offer price, the value of consideration other than
cash shall be determined by a nationally recognized investment banking firm
selected by the Holder or Owner, as the case may be, and reasonably acceptable
to Issuer.
(b) The Holder and the Owner, as the case may be, may exercise its right to
require Issuer to repurchase the Option and any Option Shares pursuant to this
Section 7 by surrendering for such purpose to Issuer, at its principal office, a
copy of this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that the Holder or the Owner,
as the case may be, elects to require Issuer to repurchase this Option and/or
the Option Shares in accordance with the provisions of this
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Section 7. As promptly as practicable, and in any event within five business
days after the surrender of the Option and/or certificates representing Option
Shares and the receipt of such notice or notices relating thereto, Issuer shall
deliver or cause to be delivered to the Holder the Option Repurchase Price
and/or to the Owner the Option Share Repurchase Price therefor or the portion
thereof that Issuer is not then prohibited under applicable law and regulation
from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from repurchasing the
Option and/or the Option Shares in full, Issuer shall immediately so notify the
Holder and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the portion of the
Option Repurchase Price and the Option Share Repurchase Price, respectively,
that it is no longer prohibited from delivering, within five business days after
the date on which Issuer is no longer so prohibited; provided, however, that if
Issuer at any time after delivery of a notice of repurchase pursuant to
paragraph (b) of this Section 7 is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from delivering to the
Holder and/or the Owner, as appropriate, the Option Repurchase Price and the
Option Share Repurchase Price, respectively, in full (and Issuer hereby
undertakes to use its reasonable best efforts to obtain all required regulatory
and legal approvals and to file any required notices as promptly as practicable
in order to accomplish such repurchase), the Holder or Owner may revoke its
notice of repurchase of the Option and/or the Option Shares whether in whole or
to the extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to the Holder and/or the Owner, as appropriate, that
portion of the Option Repurchase Price and/or the Option Share Repurchase Price
that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate,
either (A) to the Holder, a new Agreement evidencing the right of the Holder to
purchase that number of shares of Common Stock obtained by multiplying the
number of shares of Common Stock for which the surrendered Agreement was
exercisable at the time of delivery of the notice of repurchase by a fraction,
the numerator of which is the Option Repurchase Price less the portion thereof
theretofore delivered to the Holder and the denominator of which is the Option
Repurchase Price, and/or (B) to the Owner, a certificate for the Option Shares
it is then so prohibited from repurchasing. If an Exercise Termination Event
shall have occurred prior to the date of the notice by Issuer described in the
first sentence of this subsection (c), or shall be scheduled to occur at any
time before the expiration of a period ending on the thirtieth day after such
date, the Holder shall nonetheless have the right to exercise the Option until
the expiration of such 30-day period.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or a Grantee Subsidiary and Issuer shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or a Grantee Subsidiary, to merge into
Issuer and Issuer shall be the continuing or surviving or acquiring corporation,
but, in connection with such merger, the then outstanding shares of Common Stock
shall be changed into or exchanged for stock or other securities of any other
person or cash or any other property or the then outstanding shares of Common
Stock shall after such merger represent less than 50% of the outstanding shares
and share equivalents of the merged or acquiring company, or (iii) to sell or
otherwise transfer all or substantially all of its or any Significant
Subsidiary's assets to any person, other than Grantee or a Grantee Subsidiary,
then, and in each such case, the agreement governing such transaction shall make
proper provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth herein, be converted
into, or exchanged for, an option (the "Substitute Option"), at the election of
the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or
(y) any person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or surviving
person of a consolidation or merger with Issuer (if other than Issuer),
(ii) Issuer in a merger in which Issuer is the continuing or surviving or
acquiring person, and (iii) the transferee of all or substantially all of
Issuer's assets (or the assets of a Significant Subsidiary of Issuer).
(ii) "Assigned Value" shall mean the market/offer price, as defined in
Section 7.
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(iii) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; provided that if Issuer is the issuer
of the Substitute Option, the Average Price shall be computed with respect
to a share of common stock issued by the person merging into Issuer or by
any company which controls or is controlled by such person, as the Holder
may elect.
(iv) "Substitute Common Stock" shall mean the common stock issued by
the issuer of the Substitute Option upon exercise of the Substitute Option.
(c) The Substitute Option shall have the same terms as the Option, provided
that if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to the Holder. The issuer of the Substitute Option shall also
enter into an agreement with the then Holder or Holders of the Substitute Option
in substantially the same form as this Agreement (after giving effect for such
purpose to the provisions of Section 9), which agreement shall be applicable to
the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares of
Substitute Common Stock as is equal to the Assigned Value multiplied by the
number of shares of Common Stock for which the Option was exercisable
immediately prior to the event described in the first sentence of Section 8(a),
divided by the Average Price. The exercise price of the Substitute Option per
share of Substitute Common Stock shall then be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option was exercisable immediately prior to the
event described in the first sentence of Section 8(a) and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option. In the
event that the Substitute Option would be exercisable for more than 19.9% of the
shares of Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer")
shall make a cash payment to Holder equal to the excess of (i) the value of the
Substitute Option without giving effect to the limitation in this clause (e)
over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (e). This difference in value shall be determined by a
nationally recognized investment banking firm selected by the Holder.
(f) Issuer shall not enter into any transaction described in subsection (a)
of this Section 8 unless the Acquiring Corporation and any person that controls
the Acquiring Corporation assume in writing all the obligations of Issuer
hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the issuer of the Substitute Option (the
"Substitute Option Issuer") shall repurchase the Substitute Option from the
Substitute Option Holder at a price (the "Substitute Option Repurchase Price")
equal to the amount by which (i) the Highest Closing Price (as hereinafter
defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute Option
may then be exercised, and at the request of the owner (the "Substitute Share
Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the
Substitute Option Issuer shall repurchase the Substitute Shares at a price (the
"Substitute Share Repurchase Price") equal to the Highest Closing Price
multiplied by the number of Substitute Shares so designated. The term "Highest
Closing Price" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as the
case may be, may exercise its respective rights to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to
this Section 9 by surrendering for such purpose to the Substitute Option Issuer,
at its principal office, the agreement for such Substitute Option (or, in the
absence of such an
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agreement, a copy of this Agreement) and/or certificates for Substitute Shares
accompanied by a written notice or notices stating that the Substitute Option
Holder or the Substitute Share Owner, as the case may be, elects to require the
Substitute Option Issuer to repurchase the Substitute Option and/or the
Substitute Shares in accordance with the provisions of this Section 9. As
promptly as practicable and in any event within five business days after the
surrender of the Substitute Option and/or certificates representing Substitute
Shares and the receipt of such notice or notices relating thereto, the
Substitute Option Issuer shall deliver or cause to be delivered to the
Substitute Option Holder the Substitute Option Repurchase Price and/or to the
Substitute Share Owner the Substitute Share Repurchase Price therefor or the
portion thereof which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation, or as a consequence of administrative policy, from
repurchasing the Substitute Option and/or the Substitute Shares in part or in
full, the Substitute Option Issuer shall immediately so notify the Substitute
Option Holder and/or the Substitute Share Owner and thereafter deliver or cause
to be delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute Option
Repurchase Price and/or the Substitute Share Repurchase Price, respectively,
which it is no longer prohibited from delivering, within five (5) business days
after the date on which the Substitute Option Issuer is no longer so prohibited;
provided, however, that if the Substitute Option Issuer is at any time after
delivery of a notice of repurchase pursuant to subsection (b) of this Section 9
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from delivering to the Substitute Option Holder and/or
the Substitute Share Owner, as appropriate, the Substitute Option Repurchase
Price and the Substitute Share Repurchase Price, respectively, in full (and the
Substitute Option Issuer shall use its best efforts to receive all required
regulatory and legal approvals as promptly as practicable in order to accomplish
such repurchase), the Substitute Option Holder and/or Substitute Share Owner may
revoke its notice of repurchase of the Substitute Option or the Substitute
Shares either in whole or to the extent of prohibition, whereupon, in the latter
case, the Substitute Option Issuer shall promptly (i) deliver to the Substitute
Option Holder or Substitute Share Owner, as appropriate, that portion of the
Substitute Option Repurchase Price or the Substitute Share Repurchase Price that
the Substitute Option Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Substitute Option Holder, a new
Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of shares of the Substitute Common Stock obtained by
multiplying the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of the
notice of repurchase by a fraction, the numerator of which is the Substitute
Option Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, and/or (B) to the Substitute Share Owner, a certificate for
the Substitute Option Shares it is then so prohibited from repurchasing. If an
Exercise Termination Event shall have occurred prior to the date of the notice
by the Substitute Option Issuer described in the first sentence of this
subsection (c), or shall be scheduled to occur at any time before the expiration
of a period ending on the thirtieth day after such date, the Substitute Option
Holder shall nevertheless have the right to exercise the Substitute Option until
the expiration of such 30-day period.
10. The time periods for exercise of certain rights under Sections 2, 6, 7,
9, 12 and 15 shall be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights (for so long as the Holder,
Owner, Substitute Option Holder or Substitute Share Owner, as the case may be,
is using commercially reasonable efforts to obtain such regulatory approvals),
and for the expiration of all statutory waiting periods; and (ii) to the extent
necessary to avoid liability under Section 16 (b) of the 1934 Act by reason of
such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Issuer Board and no other corporate proceedings on the part of Issuer are
necessary to authorize this Agreement or to
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consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant thereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and not subject to any preemptive rights.
12. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party.
13. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement.
14. (a) Notwithstanding any other provision of this Agreement, in no event
shall the Grantee's Total Profit (as hereinafter defined) exceed the sum of (i)
$10 million and (ii) an amount (not to exceed in any event $35 million) equal to
any portion of the Termination Fee provided for in Sections 7.5(c) or (d) of the
Reorganization Agreement the payment of which under the Reorganization Agreement
the Grantee has advised the Issuer in writing that it has permanently and
irrevocably waived (such sum of clause (i) and (ii) is referred to herein as the
"Maximum Amount") and, if it otherwise would exceed such amount, the Grantee, at
its sole election, shall either (a) reduce the number of shares of Common Stock
subject to this Option, (b) deliver to Issuer for cancellation Option Shares
previously purchased by Grantee, (c) pay cash to Issuer, or (d) any combination
thereof, so that Grantee's actually realized Total Profit shall not exceed the
Maximum Amount after taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this Option may
not be exercised for a number of shares as would, as of the date of exercise,
result in a Notional Total Profit (as defined below) of more than the Maximum
Amount; provided that nothing in this sentence shall restrict any exercise of
the Option permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the aggregate amount
(before taxes) of the following: (i) the amount received by Grantee pursuant to
Issuer's repurchase of the Option (or any portion thereof) pursuant to Section
7, (ii) (x) the amount received by Grantee pursuant to Issuer's repurchase of
Option Shares pursuant to Section 7, less (y) the Grantee's purchase price for
such Option Shares, (iii) (x) the net cash amounts received by Grantee pursuant
to the sale of Option Shares (or any other securities into which such Option
Shares are converted or exchanged) to any unaffiliated party, less (y) the
Grantee's purchase price of such Option Shares, (iv) any amounts received by
Grantee on the transfer of the Option (or any portion thereof) to any
unaffiliated party, and (v) any amount equivalent to the foregoing with respect
to the Substitute Option.
(d) As used herein, the term "Notional Total Profit" with respect to any
number of shares as to which Grantee may propose to exercise this Option shall
be the Total Profit determined as of the date of such proposed exercise assuming
that this Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Grantee
and its affiliates as of such date, were sold for cash at the closing market
price for the Common Stock as of the close of business on the preceding trading
day (less customary brokerage commissions).
15. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
16. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder
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of the terms, provisions and covenants and restrictions contained in this
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Holder is not permitted to acquire, or Issuer is not
permitted to repurchase pursuant to Section 7, the full number of shares of
Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section
1(b) or Section 5 hereof), it is the express intention of Issuer to allow the
Holder to acquire or to require Issuer to repurchase such lesser number of
shares as may be permissible, without any amendment or modification hereof.
17. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
fax, telecopy, or by registered or certified mail (postage prepaid, return
receipt requested) at the respective addresses of the parties set forth in the
Reorganization Agreement.
18. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without regard to the conflict of law
principles thereof.
19. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
20. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
21. Except as otherwise expressly provided herein, in the Reorganization
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assignees.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assignees, any rights, remedies, obligations or liabilities under or by reason
of this Agreement, except as expressly provided herein.
22. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Reorganization Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
SMITH'S FOOD & DRUG CENTERS, INC.
By: /s/ RONALD W. BURKLE
-------------------------------------
Name: Ronald W. Burkle
Title: Chief Executive Officer
FRED MEYER, INC.
By: /s/ ROBERT G. MILLER
-------------------------------------
Name: Robert G. Miller
Title: Chairman of the Board and Chief
Executive Officer
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APPENDIX I
MEYER-SMITH HOLDCO, INC.
1997 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this 1997 Stock Incentive Plan (the "Plan") is
to enable Meyer-Smith Holdco, Inc. (the "Company") to attract and retain the
services of selected salaried employees, including employees who may be officers
or directors of the Company or of any subsidiary of the Company, and selected
nonemployee agents, consultants, directors and advisors to the Company or any
subsidiary.
2. Shares Subject to the Plan. Subject to adjustment as provided below and
in paragraph 12, the shares to be offered under the Plan shall consist of Common
Stock of the Company ("Common Stock"), and the total number of shares of Common
Stock that may be issued under the Plan shall not exceed 5,000,000 shares. The
shares issued under the Plan may be authorized and unissued shares or reacquired
shares. If an option, stock appreciation right or Performance-based Award
granted under the Plan expires, terminates or is canceled, the unissued shares
subject to such option, stock appreciation right or Performance-based Award
shall again be available under the Plan. If shares sold or issued under the Plan
are forfeited to the Company or repurchased by the Company, the number of shares
forfeited or repurchased shall again be available under the Plan.
3. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective as of the date of
consummation of the mergers whereby Fred Meyer, Inc. and Smith's Food & Drug
Centers, Inc. become wholly owned subsidiaries of the Company.
(b) Duration. The Plan shall continue in effect until all shares available
for issuance under the Plan have been issued and all restrictions on such shares
have lapsed. The Board of Directors may suspend or terminate the Plan at any
time except with respect to options, Performance-based Awards and shares subject
to restrictions then outstanding under the Plan. Termination shall not affect
any outstanding awards, any right of the Company to repurchase shares or the
forfeitability of shares issued under the Plan.
4. Administration.
(a) Board of Directors. The Plan shall be administered by the Board of
Directors of the Company, which shall determine and designate from time to time
the individuals to whom awards shall be made, the amount of the awards and the
other terms and conditions of the awards. Subject to the provisions of the Plan,
the Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to share (except those restrictions imposed by law) and make all
other determinations in the judgment of the Board of Directors necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the Board
of Directors shall be final and conclusive. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect, and it shall be the sole and final judge of such
expediency.
(b) Committee. The Board of Directors may delegate to a committee of the
Board of Directors (the "Committee") any or all authority for administration of
the Plan. If authority is delegated to a Committee, all references to the Board
of Directors in the Plan shall mean and relate to the Committee except (i) as
otherwise provided by the Board of Directors, and (ii) that only the Board of
Directors may amend or terminate the Plan as provided in paragraphs 3 and 15.
5. Types of Awards; Eligibility. The Board of Directors may, from time to
time, take the following action, separately or in combination, under the Plan:
(i) grant Incentive Stock Options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), as provided in paragraphs 6(a)
and 6(b); (ii) grant options other than Incentive Stock Options ("Nonstatutory
Stock Options") as provided in paragraphs 6(a) and 6(c); (iii) award stock
bonuses as provided in paragraph 7; (iv) sell shares subject to
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restrictions as provided in paragraph 8; (v) grant stock appreciation rights as
provided in paragraph 9; (vi) grant cash bonus rights as provided in paragraph
10; and (vii) grant Performance-based Awards as provided in paragraph 11. Any
such awards may be made to salaried employees, including employees who are
officers or directors, and to other individuals described in paragraph 1 who the
Board of Directors believes may have made or will make an important contribution
to the Company or its subsidiaries; provided, however, that only employees of
the Company and its subsidiaries shall be eligible to receive Incentive Stock
Options under the Plan. The Board of Directors shall select the individuals to
whom awards shall be made and shall specify the action taken with respect to
each individual to whom an award is made. At the discretion of the Board of
Directors, an individual may be given an election to surrender an award in
exchange for the grant of a new award. No individual may be granted options or
stock appreciation rights under the Plan for more than an aggregate of 1,000,000
shares of Common Stock in connection with the hiring of the individual or
250,000 shares in any fiscal year otherwise.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Board of Directors may grant options under
the Plan. With respect to each option grant, the Board of Directors shall
determine the number of shares subject to the option, the option price, the
period of the option, the time or times at which the option may be exercised and
whether the option is an Incentive Stock Option or a Nonstatutory Stock Option.
At the time of the grant of an option or at any time thereafter, the Board of
Directors may provide that an optionee who exercised an option with Common Stock
of the Company shall automatically receive a new option to purchase additional
shares equal to the number of shares surrendered and may specify the terms and
conditions of such new options.
(ii) Exercise of Options. Except as provided in paragraph 6(a)(iv) or
as determined by the Board of Directors, no option granted under the Plan may be
exercised unless at the time of such exercise the optionee is employed by or in
the service of the Company or any subsidiary of the Company and shall have been
so employed or provided such service continuously since the date such option was
granted. Absence on leave or on account of illness or disability under rules
established by the Board of Directors shall not, however, be deemed an
interruption of employment or service for this purpose. Unless otherwise
determined by the Board of Directors, vesting of options shall not continue
during an absence on leave (including an extended illness) or on account of
disability. Except as provided in paragraphs 6(a)(iv), 12 and 13, options
granted under the Plan may be exercised from time to time over the period stated
in each option in such amounts and at such times as shall be prescribed by the
Board of Directors, provided that options shall not be exercised for fractional
shares. Unless otherwise determined by the Board of Directors, if the optionee
does not exercise an option in any one year with respect to the full number of
shares to which the optionee is entitled in that year, the optionee's rights
shall be cumulative and the optionee may purchase those shares in any subsequent
year during the term of the option.
(iii) Nontransferability. Each Incentive Stock Option and, unless
otherwise determined by the Board of Directors, each other option granted under
the Plan by its terms shall be nonassignable and nontransferable by the
optionee, either voluntarily or by operation of law, except by will or by the
laws of descent and distribution of the state or country of the optionee's
domicile at the time of death, and each option by its terms shall be exercisable
during the optionee's lifetime only by the optionee.
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the Board of
Directors, in the event the employment or service of the optionee with the
Company or a subsidiary terminates for any reason other than because of physical
disability or death as provided in subparagraphs 6(a)(iv)(B) and (C) or because
of a change in control as provided in subparagraph 6(a)(iv)(D), the option may
be exercised at any time prior to the expiration date of the option or the
expiration of three months after the date of such termination, whichever is the
shorter period, but only if and to the extent the optionee was entitled to
exercise the option at the date of such termination.
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(B) Termination Because of Total Disability. Unless otherwise
determined by the Board of Directors, in the event of termination of employment
or service because of total disability, the option may be exercised at any time
prior to the expiration date of the option or the expiration of 12 months after
the date of such termination, whichever is the shorter period, but only if and
to the extent the optionee was entitled to exercise the option at the date of
such termination. The term "total disability" means a mental or physical
impairment which is expected to result in death or which has lasted or is
expected to last for a continuous period of 12 months or more and which causes
the optionee to be unable, in the opinion of the Company and two independent
physicians, to perform his or her duties as an employee, director, officer or
consultant of the Company and to be engaged in any substantial gainful activity.
Total disability shall be deemed to have occurred on the first day after the
Company and the two independent physicians have furnished their opinion of total
disability to the Company.
(C) Termination Because of Death. Unless otherwise determined by
the Board of Directors, in the event of the death of an optionee while employed
by or providing service to the Company or a subsidiary, the option may be
exercised at any time prior to the expiration date of the option or the
expiration of 12 months after the date of such death, whichever is the shorter
period, but only if and to the extent the optionee was entitled to exercise the
option at the date of such termination and only by the person or persons to whom
such optionee's rights under the option shall pass by the optionee's will or by
the laws of descent and distribution of the state or country of domicile at the
time of death.
(D) Termination upon a Change of Control. In the event an
optionee's employment by the Company or by any parent or subsidiary of the
Company terminates within one year after a change in control of the Company for
any reason other than retirement, death or total disability (as defined in
paragraph 6(a)(iv)(B)), any option held by such optionee may be exercised with
respect to all remaining shares subject thereto, free of any limitation on the
number of shares with respect to which the option may be exercised in any one
year, at any time prior to its expiration date or the expiration of three months
after the date of such termination of employment, whichever is the shorter
period. A "change in control of the Company" shall mean a change in control of a
nature that would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended ("Exchange Act"), or any successor provision; provided that,
without limitation, such a change in control shall be deemed to have occurred if
(1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding securities; or (2) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each new director was approved by
a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period. A change in control of the Company
shall not include any change in control (i) pursuant to a written agreement
between the Company and another person, which agreement is approved and adopted
by the Board of Directors of the Company, or (ii) pursuant to any tender offer
or exchange offer which the Board of Directors has in any manner recommended
acceptance of to the shareholders of the Company.
(E) Amendment of Exercise Period Applicable to Termination. The
Board of Directors, at the time of grant or at any time thereafter, may extend
the three-month and 12-month exercise periods any length of time not later than
the original expiration date of the option, and may increase the portion of an
option that is exercisable, subject to such terms and conditions as the Board of
Directors may determine.
(F) Failure to Exercise Option. To the extent that the option of
any deceased optionee or of any optionee whose employment or service terminates
is not exercised within the applicable period, all further rights to purchase
shares pursuant to such option shall cease and terminate.
(v) Purchase of Shares. Unless the Board of Directors determines
otherwise, shares may be acquired pursuant to an option granted under the Plan
only upon receipt by the Company of notice in writing from the optionee of the
optionee's intention to exercise, specifying the number of shares as to which
the optionee desires to exercise the option and the date on which the optionee
desires to complete the transaction,
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and if required in order to comply with the Securities Act of 1933, as amended,
containing a representation that it is the optionee's present intention to
acquire the shares for investment and not with a view to distribution. Unless
the Board of Directors determines otherwise, on or before the date specified for
completion of the purchase of shares pursuant to an option, the optionee must
have paid the Company the full purchase price of such shares in cash (including
cash that may be the proceeds of a loan from the Company) or, in whole or in
part, in Common Stock of the Company valued at fair market value, or, with the
consent of the Board of Directors, restricted stock, Performance-based Awards or
other contingent awards denominated in either stock or cash, deferred
compensation credits, promissory notes and other forms of consideration. The
fair market value of Common Stock provided in payment of the purchase price
shall be the closing price for the Common Stock as reported in the NYSE
Composite Transactions and published in The Wall Street Journal on the trading
day preceding the date the option is exercised, or such other reported value of
the Common Stock as shall be specified by the Board of Directors. No shares
shall be issued until full payment therefor has been made. Subject to such rules
as may be adopted by the Board of Directors, an optionee may request the Company
to apply automatically the shares to be received upon the exercise of a portion
of a stock option (even though stock certificates have not yet been issued) to
satisfy the purchase price for additional portions of the option.
Each optionee who has exercised an option shall immediately upon
notification of the amount due, if any, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required beyond any amount
deposited before delivery of the certificates, the optionee shall pay such
amount to the Company on demand. If the optionee fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable by the
Company to the optionee, including salary, subject to applicable law. Subject to
such rules as may be adopted by the Board of Directors, an optionee may satisfy
this obligation, in whole or in part, by having the Company withhold from the
shares to be issued upon the exercise that number of shares that would satisfy
the withholding amount due or by delivering to the Company Common Stock to
satisfy the withholding amount. Upon the exercise of an option, the number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued upon exercise of the option, less the number of shares surrendered
in payment of the option exercise or surrendered or withheld to satisfy
withholding obligations.
(b) Incentive Stock Options. Incentive Stock Options shall be subject to
the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value, on
the date of grant, of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by that employee during any calendar
year under the Plan and under any other incentive stock option plan (within the
meaning of Section 422 of the Code) of the Company or any parent or subsidiary
of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An Incentive
Stock Option may be granted under the Plan to an employee possessing more than
10 percent of the total combined voting power of all classes of stock of the
Company or of any parent or subsidiary of the Company only if the option price
is at least 110 percent of the fair market value of the Common Stock subject to
the option on the date it is granted, as described in paragraph 6(b)(iv), and
the option by its terms is not exercisable after the expiration of five years
from the date it is granted.
(iii) Duration of Options. Subject to paragraphs 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Board of Directors, except that no Incentive
Stock Option shall be exercisable after the expiration of 10 years from the date
it is granted.
(iv) Option Price. The option price per share shall be determined by
the Board of Directors at the time of grant. Except as provided in paragraph
6(b)(ii), the option price shall not be less than 100 percent of the fair market
value of the Common Stock covered by the Incentive Stock Option at the date the
option is granted. The fair market value shall be deemed to be the closing price
for the Common Stock as reported in the NYSE Composite Transactions and
published in The Wall Street Journal on the day preceding the date the option is
granted, or if there has been no sale on that date, on the last preceding date
on which a sale
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occurred, or such other value of the Common Stock as shall be specified by the
Board of Directors.
(v) Limitation on Time of Grant. No Incentive Stock Option shall be
granted on or after the tenth anniversary of the effective date of the Plan.
(vi) Conversion of Incentive Stock Options. The Board of Directors
may at any time without the consent of the optionee covert an Incentive Stock
Option to a Nonstatutory Stock Option.
(vii) Limitation on Number of Shares Issuable Under Incentive Stock
Options. Subject to adjustment as provided in paragraph 12, the total number of
shares of Common Stock that may be issued under the Plan upon exercise of
Incentive Stock Option shall not exceed 5,000,000 shares.
(c) Nonstatutory Stock Options. Nonstatutory Stock Options shall be
subject to the following additional terms and conditions:
(i) Option Price. The option price for Nonstatutory Stock Options
shall be determined by the Board of Directors at the time of grant. The option
price may not be less than 50 percent of the fair market value of the shares on
the date of grant. The fair market value of shares covered by a Nonstatutory
Stock Option shall be determined pursuant to paragraph 6(b)(iv).
(ii) Duration of Options. Nonstatutory Stock Options granted under
the Plan shall continue in effect for the period fixed by the Board of
Directors.
7. Stock Bonuses. The Board of Directors may award shares under the Plan as
stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. The Board of Directors may require the
recipient to sign an agreement as a condition of the award, but may not require
the recipient to pay any monetary consideration other than amounts necessary to
satisfy tax withholding requirements. The agreement may contain any terms,
conditions, restrictions, representations and warranties required by the Board
of Directors. The certificates representing the shares awarded shall bear any
legends required by the Board of Directors. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the recipient fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the recipient,
including salary or fees for services, subject to applicable law. With the
consent of the Board of Directors, a recipient may deliver Common Stock to the
Company to satisfy this withholding obligation. Upon the issuance of a stock
bonus, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued, less the number of shares surrendered or
withheld to satisfy withholding obligations.
8. Restricted Stock. The Board of Directors may issue shares under the Plan
for such consideration (including promissory notes and services) as determined
by the Board of Directors. Shares issued under the Plan shall be subject to the
terms, conditions and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability, repurchase by
the Company and forfeiture of the shares issued, together with such other
restrictions as may be determined by the Board of Directors. All Common Stock
issued pursuant to this paragraph 8 shall be subject to a purchase agreement,
which shall be executed by the Company and the prospective recipient of the
shares prior to the delivery of certificates representing such shares to
recipient. The purchase agreement may contain any terms, conditions,
restrictions, representations and warranties required by the Board of Directors.
The certificates representing the shares shall bear any legends required by the
Board of Directors. The Company may require any purchaser of restricted stock to
pay to the Company in cash upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements. If the
purchaser fails to pay the amount demanded, the Company may withhold that amount
from other amounts payable by the Company to the purchaser, including salary,
subject to applicable law. With the consent of the Board of Directors, a
purchaser may deliver Common Stock to the Company to satisfy this withholding
obligation. Upon the issuance of restricted stock, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued,
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less the number of shares surrendered in payment of the restricted stock or
surrendered or withheld to satisfy withholding obligations.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the Plan by
the Board of Directors, subject to such rules, terms and conditions as the Board
of Directors prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal in
value to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over its fair market value on the date of
grant (or, in the case of a stock appreciation right granted in connection with
an option, the excess of the fair market value of one share of Common Stock of
the Company over the option price per share under the option to which the stock
appreciation right relates), multiplied by the number of shares covered by the
stock appreciation right or the option, or portion thereof, that is surrendered.
No stock appreciation right shall be exercisable at a time that the amount
determined under this subparagraph is negative. Payment by the Company upon
exercise of a stock appreciation right may be made in Common Stock valued at
fair market value, in cash, or partly in Common Stock and partly in cash, all as
determined by the Board of Directors.
(ii) A stock appreciation right shall be exercisable only at the time
or times established by the Board of Directors; provided, that the provisions of
paragraph 6(a)(iv)(D) shall apply to the exercise of a stock appreciation right
upon termination of employment of the grantee following a change in control as
provided therein. If a stock appreciation right is granted in connection with an
option, the following rules shall apply: (1) the stock appreciation right shall
be exercisable only to the extent and on the same conditions that the related
option could be exercised; (2) upon exercise of the stock appreciation right,
the option or portion thereof to which the stock appreciation right relates
terminates; and (3) upon exercise of the option, the related stock appreciation
right or portion thereof terminates.
(iii) The Board of Directors may withdraw any stock appreciation
right granted under the Plan at any time and may impose any conditions upon the
exercise of a stock appreciation right or adopt rules and regulations from time
to time affecting the rights of holders of stock appreciation rights. Such rules
and regulations may govern the right to exercise stock appreciation rights
granted prior to adoption or amendment of such rules and regulations as well as
stock appreciation rights granted thereafter.
(iv) For purposes of this paragraph 9, the fair market value of the
Common Stock shall be the closing price for the Common Stock as reported in the
NYSE Composite Transactions and published in The Wall Street Journal, or such
other reported value of the Common Stock as shall be specified by the Board of
Directors, on the trading day preceding the date the stock appreciation right is
exercised.
(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to the
value of the fraction or, if the Board of Directors shall determine, the number
of shares may be rounded downward to the next whole share.
(vi) Each participant who has exercised a stock appreciation right
shall, upon notification of the amount due, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the participant fails to pay the amount demanded, the Company
may withhold that amount from other amounts payable by the Company to the
participant including salary, subject to applicable law. With the consent of the
Board of Directors a participant may satisfy this obligation, in whole or in
part, by having the Company withhold from any shares to be issued upon the
exercise that number of shares that would satisfy the withholding amount due or
by delivering Common Stock to the Company to satisfy the withholding amount.
(vii) Upon the exercise of a stock appreciation right for shares, the
number of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued, less the number of shares surrendered or withheld to
satisfy withholding obligations. Cash payments of stock appreciation rights
shall not reduce the number of shares of Common Stock reserved for issuance
under the Plan.
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10. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus rights under the
Plan in connection with (i) options granted or previously granted, (ii) stock
appreciation rights granted or previously granted, (iii) stock bonuses awarded
or previously awarded and (iv) shares sold or previously sold under the Plan.
Cash bonus rights will be subject to rules, terms and conditions as the Board of
Directors may prescribe. The payment of a cash bonus shall not reduce the number
of shares of Common Stock reserved for issuance under the Plan.
(b) Cash Bonus Rights in Connection with Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part. No cash bonus right granted to an officer or director in connection with
an option may be exercised during the first six months following the date the
bonus right is granted. If an optionee purchases shares upon exercise of an
option and does not exercise a related stock appreciation right, the amount of
the bonus shall be determined by multiplying the excess of the total fair market
value of the shares to be acquired upon the exercise over the total option price
for the shares by the applicable bonus percentage. If the optionee exercises a
related stock appreciation right in connection with the termination of an
option, the amount of the bonus shall be determined by multiplying the total
fair market value of the shares and cash received pursuant to the exercise of
the stock appreciation right by the applicable bonus percentage. The bonus
percentage applicable to a bonus right shall be determined from time to time by
the Board of Directors but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection with Stock Bonus. A cash bonus right
granted in connection with a stock bonus will entitle the recipient to a cash
bonus payable when the stock bonus is awarded or restrictions, if any, to which
the stock is subject lapse. If bonus stock awarded is subject to restrictions
and is repurchased by the Company or forfeited by the holder, the cash bonus
right granted in connection with the stock bonus shall terminate and may not be
exercised. The amount and timing of payment of a cash bonus shall be determined
by the Board of Directors.
(d) Cash Bonus Rights in Connection with Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to paragraph 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to paragraph 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount of any cash bonus to be awarded and timing of payment of a cash bonus
shall be determined by the Board of Directors.
(e) Taxes. The Company shall withhold from any cash bonus paid pursuant
to paragraph 10 the amount necessary to satisfy any applicable federal, state
and local withholding requirements.
11. Performance-based Awards. The Board of Directors may grant awards
intended to qualify as performance-based compensation under Section 162(m) of
the Code and the regulations thereunder ("Performance-based Awards").
Performance-based Awards shall be denominated at the time of grant either in
Common Stock ("Stock Performance Awards") or in dollar amounts ("Dollar
Performance Awards"). Payment under a Stock Performance Award or a Dollar
Performance Award shall be made, at the discretion of the Board of Directors, in
Common Stock ("Performance Shares"), or in cash or in any combination thereof.
Performance-based Awards shall be subject to the following terms and conditions:
(a) Award Period. The Board of Directors shall determine the period of
time for which a Performance-based Award is made (the "Award Period").
(b) Performance Goals and Payment. The Board of Directors shall
establish in writing an objective ("Performance Goals") that must be met by the
Company or any subsidiary, division or other unit (including one or more regions
or stores) of the Company ("Business Unit") during the Award Period as a
condition to payment being made under the Performance-based Award. The
Performance Goals shall be set within the applicable time periods required under
Section 162(m) of the Code. The Performance Goals for each award shall be one or
more targeted levels of performance with respect to one or more of the following
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objective measures with respect to The Company or any Business Unit:
departmental expense performance, earnings per share, total shareholder return
(stock price increase plus dividends), return on equity, return on assets,
revenues, operating income, income before taxes, net income, inventories,
inventory turns, cash flows, expenses, capital expenditures, increase in
shareholder value as a percentage of assets employed, other financial return
ratios, market performance, customer satisfaction or any of the foregoing before
the effect of acquisitions, divestitures, accounting changes and restructuring
and special charges (determined according to criteria established by the Board
of Directors). The Board of Directors shall also establish the number of
Performance Shares or the amount of cash payment to be made under the
Performance-based Award if the Performance Goals are met or exceeded, including
the fixing of a maximum payment (subject to Section 11(d)). The Board of
Directors may establish other restrictions to payment under a Performance-based
Award, such as a continued employment requirement, in addition to satisfaction
of the Performance Goals. Some or all of the Performance Shares may be issued at
the time of the award as restricted shares subject to forfeiture in whole or in
part if Performance Goals or, if applicable, other restrictions are not
satisfied.
(c) Computation of Payment. After an Award Period, the financial
performance of the Company or Business Unit, as applicable, during the period
shall be measured against the Performance Goals. If the Performance Goals are
not met, no payment shall be made under a Performance-based Award. If the
Performance Goals are met or exceeded, the Board of Directors shall certify that
fact in writing and certify the number of Performance Shares earned or the
amount of cash payment to be made under the terms of the Performance-based
Award.
(d) Maximum Awards. No participant may receive Stock Performance Awards
in any fiscal year under which the maximum number of shares of Common Stock
issuable under the award exceeds 100,000 shares. No participant may receive
Dollar Performance Awards in any fiscal year under which the maximum amount of
cash payable under the award exceeds $1,500,000.
(e) Tax Withholding. Each participant who has received Performance
Shares shall, upon notification of the amount due, pay to the Company in cash
amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant, including salary, subject to applicable law. With the
consent of the Board of Directors, a participant may satisfy this obligation, in
whole or in part, by having the Company withhold from any shares to be issued
that number of shares that would satisfy the withholding amount due or by
delivering Common Stock to the Company to satisfy the withholding amount.
(f) Effect on Shares Available. The payment of a Performance-based Award
in cash shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan. The number of shares of Common Stock reserved for
issuance under the Plan shall be reduced by the number of shares issued upon
payment of an award, less the number of shares surrendered or withheld to
satisfy withholding obligations.
12. Changes in Capital Structure. If the outstanding Common Stock of the
Company is hereafter increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Company or of
another corporation by reason of any reorganization, merger, consolidation, plan
of exchange, recapitalization, reclassification, stock split-up, combination of
shares or dividend payable in shares, appropriate adjustment shall be made by
the Board of Directors in the number and kind of shares available for awards
under the Plan. In addition, the Board of Directors shall make appropriate
adjustment in the number and kind of shares as to which outstanding options and
stock appreciation rights, or portion thereof then unexercised, shall be
exercisable, so that the optionee's proportionate interest before and after the
occurrence of the event is maintained. The Board of Directors may also require
that any securities issued in respect of or exchanged for shares issued
hereunder that are subject to restrictions be subject to similar restrictions.
Notwithstanding the foregoing, the Board of Directors shall have no obligation
to effect any adjustment that would or might result in the issuance of
fractional shares, and any fractional shares resulting from any adjustment may
be disregarded or provided for in any manner determined by the Board of
Directors. Any such adjustments made by the Board of Directors shall be
conclusive. In the event of dissolution of the Company or a merger,
consolidation or plan of exchange affecting The Company, in lieu of providing
for
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options and stock appreciation rights as provided above in this paragraph 12,
the Board of Directors may, in its sole discretion, provide a 30-day period
prior to such event during which optionees shall have the right to exercise
options and stock appreciation rights in whole or in part without any limitation
on exercisability and upon the expiration of which 30-day period all unexercised
options and stock appreciation rights shall immediately terminate.
13. Corporate Mergers, Acquisitions, etc. The Board of Directors may also
grant options, stock appreciation rights, Performance-based Awards, stock
bonuses and cash bonuses and issue restricted stock under the Plan having terms,
conditions and provisions that vary from those specified in this Plan provided
that any such awards are granted in substitution for, or in connection with, the
assumption of existing options, stock appreciation rights, stock bonuses, cash
bonuses, restricted stock and Performance-based Awards granted, awarded or
issued by another corporation and assumed or otherwise agreed to be provided for
by the Company pursuant to or by reason of a transaction involving a corporate
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to which the Company or a subsidiary is a party.
14. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraphs 6(a)(iv), 9 and 13, however, no
change in an award already granted shall be made without the written consent of
the holder of such award.
15. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the grants under the
Plan. The foregoing notwithstanding, the Company shall not be obligated to issue
or deliver Common Stock under the Plan if such issuance or delivery would
violate applicable state or federal securities laws.
16. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal or
modification of any compensation, contract or arrangement with or by the
Company.
17. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
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APPENDIX J
MEYER-SMITH HOLDCO, INC.
NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN
July 23, 1997
Meyer-Smith Holdco, Inc.
a Delaware corporation
800 SE 22nd Avenue
Portland, Oregon 97202 Company
The Company hereby establishes this plan (the Plan) effective as of July
23, 1997. The name of the Plan is the Meyer-Smith Holdco, Inc. Non-Employee
Directors' Deferred Compensation Plan. The purpose of the Plan is to attract and
retain certain individuals of outstanding competence to serve as members of the
Board of Directors of the Company by permitting such individuals to elect to
defer all or a portion of their Compensation as a Director otherwise payable
currently to them by the Company for payment occurring or commencing at a later
date or upon the occurrence of a later event.
As provided below, this Plan is a successor to the Smith's Food & Drug
Centers, Inc. Directors' Deferred Compensation Plan (Smith's Plan) adopted by
Smith's Food & Drug Centers, Inc. (Smith's) effective May 1, 1997.
SECTION 1. Definitions. As used in this Plan, the following terms shall
have the indicated meanings:
(a) Board. The Board of Directors of the Company.
(b) Committee. The Compensation Committee of the Board.
(c) Common Stock. The Company's Common Stock, par value $.01 per
share.
(d) Company. Meyer-Smith Holdco, Inc.
(e) Compensation. The annual retainer and all fees (excluding any
reimbursed expenses) directly payable to a Director in the Director's
capacity as a member of the Board in any calendar year.
(f) Director. Any member of the Board who directly receives
Compensation in connection with being a member of the Board.
(g) Non-Employee Director. A Director who is not an employee of the
Company.
(h) Participant. Any Director who becomes a participant in the Plan as
provided in Section 2 of the Plan.
(i) Plan. Meyer-Smith Holdco, Inc. Non-Employee Directors' Deferred
Compensation Plan, as it may be amended from time to time.
(j) Plan Year. Each 12 month period as to which an election is made to
defer Compensation in accordance with the provisions of Section 3 of the
Plan. Such 12 month period shall be from each January 1st to the following
December 31st.
(k) Retirement. Any termination or resignation from membership on the
Board, including the reaching of any mandatory retirement age.
SECTION 2. Eligibility and Participation.
(a) All Non-Employee Directors shall be eligible to participate in the
Plan. Deferral elections shall apply only to Compensation for service as a
Director while not an employee of the Company or an affiliate of the Company. A
Director may become a Participant for any Plan Year by executing an irrevocable
deferral election (in the form attached hereto or on such other form as may be
prescribed by the Committee) with
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respect to the Director's Compensation for such Plan Year. Except as provided in
Section 2(b), such election shall be executed on or before the day following the
day of the annual meeting of shareholders. If a Non-Employee Director becomes an
employee of the Company and remains a member of the Board, the former
Non-Employee Director's participation in the Plan shall cease, but then-existing
deferrals shall remain in the Plan for payment in accordance with the former
Non-Employee Director's deferral election.
(b) With respect to an individual who first becomes eligible to participate
in the Plan after the beginning of a Plan Year by reason of an election or
appointment to the Board, such individual may become a Participant for the
remainder of such Plan Year by executing an irrevocable deferral election with
respect to future Compensation as soon as practicable, but in any event within
30 days of the date such individual becomes a Director. A Director, at the time
the Plan becomes effective, may become a Participant for the remainder of such
Plan Year by executing such a form within 30 days following upon approval of the
Plan.
SECTION 3. Deferral Election.
(a) As a condition of participation under the Plan, a Director must agree
to defer all or part of Compensation for any Plan Year. An election made under
this Plan with respect to Compensation shall relate only to Compensation for the
succeeding Plan Year, or to Compensation for the remainder of a Plan Year if
Section 2(b) applies, and a separate election must be made in order to defer
Compensation during any subsequent Plan Year. In the event of a failure to make
a timely election to defer Compensation for any Plan Year, no portion of the
Participant's Compensation for such Plan Year may be deferred under this Plan.
(b) Each deferral election shall designate the following:
(1) The percentage of Compensation that is to be deferred under this
Plan.
(2) The percentage of deferred Compensation that is to bear interest
and the percentage that is to be invested in Common Stock until paid or
distributed as the case may be.
(3) The date of the event on which payment of deferred Compensation is
to commence, provided, however, that any date or event (other than death,
disability or termination of directorship) shall not be earlier than the
later of two years from the date of the deferral election or termination of
directorship.
(4) The method of distribution of deferred Compensation; provided,
however, that the portion of deferred Compensation that is to bear interest
will be distributed in cash and the portion of deferred Compensation that
is to be invested in Common Stock will be distributed in shares of Common
Stock.
(5) The beneficiary to receive any payment or distribution if the
Participant dies before receiving all amounts to which the Participant is
entitled under the Plan.
SECTION 4. Participant's Account.
(a) The Company shall establish bookkeeping accounts to record the
deferrals and additions under this Plan. Each Participant shall have a separate
account for each Plan Year, and each account shall be increased and decreased as
provided in this Section 4.
(b) During the Plan Year, each Participant's account shall be credited on
the last day of each March, June, September, and December with the amount of
Compensation deferred by the Participant for the calendar quarter ending on that
day.
(c) If crediting with interest is elected, the Participant's account shall
be credited as of the last day of each March, June, October, and December during
the Plan Year with the dollar amount obtained by multiplying the cash balance as
of the first day of the calendar quarter by one-fourth of the average prime rate
as published in The Wall Street Journal in effect as of the first day of such
quarter. That portion of each Participant's account that is interest bearing
shall continue to bear interest in accordance with this Section 4(c) until
payment of all cash amounts has been made pursuant to Section 6, including
during any installment payment period which may have been elected by the
Participant or approved by the Committee under Section 6(c).
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(d) If investment in Common Stock is elected as of the last day of each
March, June, September, and December during the Plan Year, then the following
shall apply:
(1) The Company shall issue stock certificates to the trust described
in Section 5 for the account of the Participant, in a share amount which
shall be equal to the number of full shares of Common Stock which can be
purchased with 110 percent of the dollar amount of the Compensation so
deferred at the median of the high and low trading prices of the Common
Stock as quoted on the New York Stock Exchange Composite Transactions on
such date as reported in The Wall Street Journal (or if there is no
reported sale on such date, on the last preceding date on which any
reported sale occurred).
(2) The Participant's cash deferral account shall be credited with the
dollar amount of any part of such deferred Compensation that was not equal
to the purchase price of a full share of Common Stock. The cash portion of
a Participant's account representing a fractional share shall bear interest
as set forth in Section 4(c) until a full share of Common Stock can be
allotted to such account as of the last day of a quarter.
(e) If investment in Common Stock is elected, the Participant's account
shall be credited as of the last day of each March, June, September, and
December with any dividend payable to stockholders, which shall be an amount
determined by multiplying the dividends paid, either in cash or property (other
than shares of Common Stock) upon a share of Common Stock to a stockholder of
record during the calendar quarter, by the number of shares in the Participant's
account at the beginning of such quarter. Such dividend amounts in a
Participant's account shall be converted to Common Stock in the manner described
in Section 4(d) above. That portion of each Participant's account that is
invested in Common Stock shall continue to be credited with respect to any
dividends paid to the stockholders of the Company in accordance with this
Section 4(e) until distribution of all share amounts has been made pursuant to
Section 6, including during any installment payment period which may have been
elected by the Participant or approved by the Committee under Section 6(c).
(f) In the event of any change in the shares of Common Stock upon which the
share amounts hereunder are based, by reason of a merger, consolidation,
reorganization, recapitalization, stock dividend, stock split-up, combination or
exchange of shares, or other change in the corporate structure, the number and
kind of shares reserved for the Plan and credited to each Participant's account
and any related dividends credited to each Participant's account shall be
appropriately adjusted by the Committee.
(g) The Participant's account shall be reduced by any payments or
distributions made to the Participant or the Participant's beneficiary, estate
or representative.
SECTION 5. Funding Prohibitions. All entries in a Participant's account
shall be bookkeeping entries only and shall not represent a special reserve or
otherwise constitute a funding of the Company's unsecured promise to pay any
amounts or make any distributions hereunder. All payments to be made under this
Plan shall be paid from the general funds of the Company or by distributing
previously unissued or treasury shares of Common Stock. The maximum amount of
Common Stock issuable under the Plan shall be 100,000 shares, which shall be
adjusted, if necessary, under Section 4(f).
Participants and their beneficiaries shall have no right, title or interest
in or to any investments which the Company may make to aid it in meeting its
obligations under this Plan. Except to the extent a so called "rabbi trust" is
established and funded as provided below, all such assets shall be the property
solely of the Company and shall be subject to the claims of the Company's
unsecured general creditors. To the extent a Participant or any other person
acquires a right to receive payments from the Company under this Plan, such
right shall be no greater than the right of any unsecured general creditor of
the Company and such person shall have only the unsecured promise of the Company
that such payments shall be made. The Company, however, may establish a "rabbi
trust" and place in such trust some or all assets attributable to this Plan.
SECTION 6. Payment.
(a) The payment of cash amounts and the distribution of Common Stock amounts
credited to a Participant's account shall be made in the manner and at the time
or times specified herein. All payments of
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cash shall be made by Company or the trustees of a trust established under
Section 5 to the Participant by check. All distributions of Common Stock shall
be by share certificates representing the number of whole shares of Common Stock
then due to the Participant.
(b) A Participant who makes a deferral election for a Plan Year shall at
the same time also elect the time at which or the event (such as Retirement)
after which payment of the amounts credited to the Participant's account
established for such Plan Year shall commence. Subject to Section 6(d) below,
once made, such election of time of commencement of payment or distribution for
such Plan Year shall be irrevocable. Payment or distribution of amounts credited
to the Participant's account for such Plan Year shall commence within 30 days of
the date or the occurrence of the event specified by the Participant in such
election and shall be made in accordance with the other provisions of this Plan.
(c) A Participant who makes a deferral election with respect to a Plan Year
shall at the same time also elect to have the balance of the Participant's
account paid out or distributed in one of two methods, and subject to Section
6(d), once made, such election of payment/distribution method shall be
irrevocable:
(1) In a single lump sum.
(2) In approximately equal annual installments (calculated on the
basis of the amounts in the Participant's account and the amounts to be
accrued during the installment payment period) over a period of years
(selected by the Participant) not to exceed fifteen.
(d) Notwithstanding any other provision of this Plan to the contrary, a
Participant or beneficiary may withdraw an amount of cash or Common Stock or
both from the Participant's or beneficiary's account before the designated time
at which or event after which payment is to commence as follows:
(1) Upon a finding by the Committee in its sole discretion that an
unanticipated emergency that is caused by an event beyond the control of
such Participant or beneficiary has occurred and that such emergency would
result in severe financial hardship to such Participant or beneficiary if
early withdrawal were not permitted. The amount which may be withdrawn
pursuant to this Section 6(d) shall not exceed the amount necessary to meet
such financial hardship as determined by the Committee in its sole
discretion. The Committee shall have the right to require such Participant
or beneficiary to submit such documentation as it deems appropriate for the
purpose of determining the existence, cause and extent of such financial
hardship.
(2) At the Participant's or beneficiary's option, 100 percent of the
account balance may be withdrawn, less a forfeiture of 10 percent of the
amount withdrawn. The Participant shall be permanently ineligible to
participate after a forfeiture withdrawal.
(e) Distributions of shares of Common Stock in a Participant's account will
be made by delivery of an equal number of shares of Common Stock.
(f) Notwithstanding any provision of this Plan to the contrary, in the
event of the death of any Participant, the amounts in the Participant's account
shall be paid or distributed to the Participant's beneficiary as designated on
the Participant's deferral election form in a single lump sum or in a single
distribution of shares of Common Stock, as the case may be, within 30 days after
the date of such death.
Each Participant shall designate a beneficiary to whom any amounts in the
Participant's account under this Plan shall be payable or distributable on the
Participant's death. A Participant may also designate an alternate beneficiary
to receive such distribution in the event that the designated beneficiary cannot
receive the distribution for any reason. In the event no designated or alternate
beneficiary can receive such payment or distribution for any reason, the payment
or distribution will be made to the Participant's estate. Each Participant may
at any time change any beneficiary designation. A change of beneficiary
designation must be made in writing and delivered to the Committee or its
delegate. The interest of any beneficiary who dies before the Participant will
terminate unless otherwise specified by the Participant.
SECTION 7. Administration. The Plan shall be administered by the Committee.
The Committee shall have all powers necessary to carry out the provisions of the
Plan, including without limitation, the power to
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delegate administrative matters to other persons and to interpret the Plan in a
manner consistent with its express provisions.
SECTION 8. Miscellaneous.
(a) Termination of the Plan. The Company may at any time by action of its
Board terminate this Plan. Upon termination of the Plan, no further deferrals
will be permitted, and each Participant's Compensation will be paid thereafter
on a non-deferred basis. Each Participant's accounts as they then exist will be
maintained, credited and distributed pursuant to the provisions of this Plan and
the Participant's elections.
(b) Amendment. The Company may at any time amend this Plan in any respect
as follows:
(1) In the case of amendments which have a material effect on the cost
to the Company of maintaining the Plan, by action of its Board.
(2) With respect to any other amendments, by action of the Committee.
(3) No amendment shall adversely effect the right of Participants or
their beneficiaries to any amounts credited or to be credited to the
Participants' accounts with respect to any Plan Year which has commenced
prior to the adoption of the amendment.
(c) No Alienation of Benefits. To the extent permitted by law, Participants
and beneficiaries shall not have the right to alienate, anticipate, commute,
sell, assign, transfer, pledge, encumber or otherwise convey the right to
receive any distributions under this Plan, and any distributions under this Plan
or rights thereto shall not be subject to the debts, liabilities, contracts,
engagements or torts of Participants or beneficiaries nor to attachment,
garnishment or execution, nor shall they be transferable by operation of law in
the event of bankruptcy or insolvency. Any attempt, whether voluntary or
involuntary, to effect any such action shall be null, void and of no effect.
(d) No Right to Continue as a Director. Nothing contained herein shall be
construed as conferring upon a Director the right to continue as a member of the
Board or to continue Director's current or any other rate of Compensation.
(e) Headings. The headings of paragraphs are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of the Plan.
(f) Compliance with Laws. This Plan and the issuance and delivery of shares
of Common Stock and the payment of money under this Plan are subject to
compliance with all applicable federal and state laws, rules and regulations
(including, but not limited to, state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, this Plan shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
(g) General Restrictions. The issuance of Common Stock or the delivery of
certificates for such shares to Participants under the Plan or the sale of such
shares by Participants shall be subject to the requirement that, if at any time
the General Counsel or Secretary of the Company shall reasonably determine, in
either's discretion, that the listing, registration or qualification of such
Common Stock upon any securities exchange or under any state or federal law, or
the consent or approval of any governmental body, is necessary or desirable as a
condition of, or in connection with, the issuance or sale of such shares,
payment or delivery shall not take place unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not reasonably acceptable to the General Counsel or Secretary.
(h) Governing Law. The Plan shall be construed and administered under the
laws of the State of Oregon, without regard to the conflicts of laws principles
thereof.
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(i) Successorship to the Smith's Plan. As of the effective date of this
Plan, Smith's is a wholly owned subsidiary of the Company. The terms of this
Plan are substantially the same as the Smith's Plan. Deferrals under the Smith's
Plan are ending as of the effective date of this Plan. Deferral accounts under
the Smith's Plan are being assumed by the Company as of the effective date of
this Plan, with the consent of then-current participants under the Smith's Plan.
After the effective date, the Smith's Plan shall no longer exist. All
obligations under this Plan are obligations of the Company and not of Smith's.
Participants' accounts credited under the Smith's Plan in Smith's Class B Common
Stock, par value $.01 per share, shall be converted to Common Stock of the
Company under this plan based on the conversion rate for Smith's Class B Common
Stock as set forth in the "Agreement and Plan of Reorganization and Merger,
dated as of May 11, 1997, between Smith's and Fred Meyer, Inc." Deferral
elections under the Smith's Plan as to amounts deferred as of the effective date
of this Plan, including elections as to time and form of payment of benefits,
shall continue to apply to amounts from the Smith's Plan assumed under this
Plan. Former Smith's Plan participants who qualify for ongoing deferrals of
Compensation after the effective date of this Plan shall execute new deferral
elections under this Plan with respect to any such deferrals.
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Exhibit 99.2
Financial Statements for Fred Meyer, Inc. prior to the Merger
from the Annual Report on Form 10-K for the fiscal year ended
February 1, 1997, as amended, and Quarterly Report on Form 10-Q
for the quarter ended May 24, 1997, as amended
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<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
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(Page 1 of 3)
Fiscal Year Ended
-------------------------------------------------------------
(In thousands, except per-share data, February 1, February 3, January 28, January 29,
percentages and number of stores) 1997 1996 1995 1994
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<S> <C> <C> <C> <C>
Income Statement Data
Net sales ......................................... $3,724,839 $3,422,718 $3,122,635 $2,973,825
Gross margin ...................................... 1,105,527 973,514 861,320 885,257/6
Operating and administrative expenses ............. 971,667 885,087 807,924 747,151
Writedown of California assets/restructuring
charge (reversal) ............................... -- -- 15,978/5 --
Income from operations ............................ 133,860 88,427 37,418/5 138,106/6
Interest expense, net of interest income/1 ........ 39,432 39,578 25,857 17,604
Income (loss) before income taxes ................. 94,428 48,849 11,561/5 120,502
Provision for (benefit from) income taxes ......... 35,883 18,563 4,393/5 49,598/7
Net income (loss) before accounting
change/extraordinary item ....................... 58,545 30,286 7,168/5 70,904/6,7
Accounting change/extraordinary item .............. -- -- -- (2,588)/8
---------- ---------- ---------- ----------
Net income (loss) ................................. $ 58,545 $ 30,286 $ 7,168/5 $ 68,316/6,7,8
========== ========== ========== ==========
Earnings (loss) per common share:
Net income (loss) before accounting
change/extraordinary item ..................... $2.09 $1.07 $.25/5 $2.50/6,7
Accounting change/extraordinary item ............ -- -- -- (.09)/8
---------- ---------- ---------- ----------
Net income (loss) ............................... $2.09 $1.07 $.25/5 $2.41/6,7,8
========== ========== ========== ==========
Balance Sheet Data
Total assets ...................................... $1,693,414 $1,671,592 $1,562,672 $1,326,076
========== ========== ========== ==========
Capitalization:
Long-term debt .................................. $ 521,512 $ 656,260 $ 540,166 $ 321,398
Capital lease obligations ....................... 59,882 58,318 63,229 65,955
---------- ---------- ---------- ----------
Total long-term debt and capital lease
obligations ................................. 581,394 714,578 603,395 387,353
Stockholders' equity ............................ 567,298 571,234 538,620 527,686
---------- ---------- ---------- ----------
Total capitalization .......................... $1,148,692 $1,285,812 $1,142,015 $ 915,039
========== ========== ========== ==========
Statistical Information
Percent of net sales:
Nonfood sales ................................... 58.9% 59.0% 61.7% 62.5%
Food sales ...................................... 41.1% 41.0% 38.3% 37.5%
Net income (loss) ............................... 1.6% .9% .2%/5 2.3%/6,7,8
Total stores sales growth ......................... 8.8% 9.6% 5.0% 4.4%
Comparable stores sales percentage increase
(decrease)/2 .................................... 3.8%/3 2.1%/4 (2.0)% 2.4%
Long-term debt and capital leases as a
percent of total capitalization ................. 50.6% 55.6% 52.8% 42.3%
Number of multidepartment and specialty
stores operated at year end ..................... 219 136 131 127
Total retail square feet at end of year ........... 15,935 14,857 14,194 13,423
Selling square feet at end of year ................ 11,704 10,817 10,490 9,999
Sales per selling square foot (weighted average)... $328 $316 $304 $312
Common shares outstanding (weighted average)....... 27,962 28,333 28,625 28,375
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</TABLE>
12 Fred Meyer, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
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(Page 2 of 3)
Fiscal Year Ended
-------------------------------------------------------------
(In thousands, except per-share data, January 30, February 1, February 2, February 3,
percentages and number of stores) 1993 1992 1991 1990
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<S> <C> <C> <C> <C>
Income Statement Data
Net sales ......................................... $2,849,521 $2,700,550 $2,474,327 $2,283,187
Gross margin ...................................... 852,821 807,729 739,992 669,696
Operating and administrative expenses ............. 738,581 724,446 672,484 619,605
Writedown of California assets/restructuring
charge (reversal) ............................... -- (8,289)/9 -- 49,277/9
Income from operations ............................ 114,240 91,572 67,508 814
Interest expense, net of interest income/1 ........ 18,070 20,577 15,974 13,947
Income (loss) before income taxes ................. 96,170 70,995/9 51,534 (13,133)
Provision for (benefit from) income taxes ......... 35,583 25,768 17,951 (6,285)
Net income (loss) before accounting
change/extraordinary item ....................... 60,587 45,227/9 33,583 (6,848)
Accounting change/extraordinary item .............. -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) ................................. $ 60,587 $ 45,227/9 $ 33,583 $ (6,848)
========== ========== ========== ==========
Earnings (loss) per common share:
Net income (loss) before accounting
change/extraordinary item ..................... $2.21 $1.80/9 $1.37 $(.28)
Accounting change/extraordinary item ............ -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) ............................... $2.21 $1.80/9 $1.37 $(.28)
========== ========== ========== ==========
Balance Sheet Data
Total assets ...................................... $1,081,627 $974,780 $905,756 $796,894
========== ========== ========== ==========
Capitalization:
Long-term debt .................................. $195,837 $240,968 $232,881 $188,441
Capital lease obligations ....................... 70,313 67,387 67,664 66,393
---------- ---------- ---------- ----------
Total long-term debt and capital lease
obligations ................................. 266,150 308,355 300,545 254,834
Stockholders' equity ............................ 450,128 335,154 285,299 251,546
---------- ---------- ---------- ----------
Total capitalization .......................... $ 716,278 $ 643,509 $ 585,844 $ 506,380
========== ========== ========== ==========
Statistical Information
Percent of net sales:
Nonfood sales ................................... 63.3% 63.7% 64.3% 66.8%
Food sales ...................................... 36.7% 36.3% 35.7% 33.2%
Net income (loss) ............................... 2.1% 1.7% 1.4% (.3)%
Total stores sales growth ......................... 5.6% 9.2% 11.6%/10 8.4%/10
Comparable stores sales percentage increase
(decrease)/2 .................................... 3.0% 4.0% 3.6%/10 4.5%/10
Long-term debt and capital leases as a
percent of total capitalization ................. 37.2% 47.9% 51.3% 50.3%
Number of multidepartment and specialty
stores operated at year end ..................... 123 122 122 125
Total retail square feet at end of year ........... 12,646 12,679 12,213 11,743
Selling square feet at end of year ................ 9,471 9,657 9,361 9,056
Sales per selling square foot (weighted average)... $304 $283 $269 $261/10
Common shares outstanding (weighted average)....... 27,446 25,182 24,500 24,801
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</TABLE>
Fred Meyer, Inc. and Subsidiaries 13
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
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(Page 3 of 3)
Fiscal Year Ended
-------------------------------------------
(In thousands, except per-share data, January 28, January 30, January 31,
percentages and number of stores) 1989 1988 1987
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Statement Data
Net sales ......................................... $2,072,507 $1,847,104 $1,687,674
Gross margin ...................................... 609,378 546,418 487,295
Operating and administrative expenses ............. 543,188 485,083 429,935
Writedown of California assets/restructuring
charge (reversal) ............................... -- -- --
Income from operations ............................ 66,190 61,335 57,360
Interest expense, net of interest income/1 ........ 9,291 7,449 11,945
Income (loss) before income taxes ................. 56,899 53,886 45,415
Provision for (benefit from) income taxes ......... 20,238 21,850 21,350
Net income (loss) before accounting
change/extraordinary item ....................... 36,661 32,036 24,065
Accounting change/extraordinary item .............. -- -- (1,530)/11
---------- ---------- ----------
Net income (loss) ................................. $ 36,661 $ 32,036 $ 22,535
========== ========== ==========
Earnings (loss) per common share:
Net income (loss) before accounting
change/extraordinary item ..................... $1.50 $1.31 $1.15
Accounting change/extraordinary item ............ -- -- (.07)/11
---------- ---------- ----------
Net income (loss) ............................... $1.50 $1.31 $1.08
========== ========== ==========
Balance Sheet Data
Total assets ...................................... $ 686,806 $ 626,522 $ 533,986
========== ========== ==========
Capitalization:
Long-term debt .................................. $ 92,180 $ 87,730 $ 76,874
Capital lease obligations ....................... 50,774 46,904 36,093
---------- ---------- ----------
Total long-term debt and capital lease
obligations ................................. 142,954 134,634 112,967
Stockholders' equity ............................ 258,188 221,056 186,692
---------- ---------- ----------
Total capitalization .......................... $ 401,142 $ 355,690 $ 299,659
========== ========== ==========
Statistical Information
Percent of net sales:
Nonfood sales ................................... 68.2% 67.6% 66.1%
Food sales ...................................... 31.8% 32.4% 33.9%
Net income (loss) ............................... 1.8% 1.7% 1.3%
Total stores sales growth ......................... 12.2% 9.5% 6.6%
Comparable stores sales percentage increase
(decrease)/2 .................................... 7.9% 6.6% 4.3%
Long-term debt and capital leases as a
percent of total capitalization ................. 35.6% 37.9% 37.7%
Number of multidepartment and specialty
stores operated at year end ..................... 112 99 93
Total retail square feet at end of year ........... 10,925 10,494 9,738
Selling square feet at end of year ................ 8,388 8,064 7,497
Sales per selling square foot (weighted average)... $253 $239 $228
Common shares outstanding (weighted average)....... 24,470 24,403 20,870
- - -----------------------------------------------------------------------------------------------
<FN>
/1 Interest income was $858, $1,060, $885, $707, $544, $517, $467, $482, $336,
$350 and $1,679, respectively.
/2 Includes only sales of stores operating throughout each of the periods
compared.
/3 The calculation for comparable store sales for the year ended February 1,
1997 is computed on a 52-week basis for both years.
/4 The calculation for comparable store sales for the year ended February 3,
1996, a 53-week year, is computed by adding a 53rd week to 1994's sales
base.
/5 In 1994, the Company recorded a pretax charge of $15,978 to writedown to
their estimated net realizable value one multidepartment store and three
land parcels in California.
/6 Includes a nonrecurring LIFO credit of $6,178.
/7 Includes $3,588 from the resolution of an IRS audit ($2,286) related to the
LIFO credit and a 38% tax rate.
/8 Effect of adopting Statement of Financial Accounting Standards No. 109
relating to income taxes.
/9 In 1989, the Company took a pretax charge of $49,277 related to closing
some of its stores and for conversion of its management information systems
from Honeywell to IBM. In 1991, the Company reversed $8,289 of this charge
based on a decision not to close as many stores as previously provided for.
/10 Excludes 53rd week in the fiscal year ended February 3, 1990.
/11 Prepayment costs of $1,530 ($.07 per share) from early extinguishment of
17% Senior and Subordinated Notes, net of taxes.
</FN>
</TABLE>
14 Fred Meyer, Inc. and Subsidiaries
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- - ----------------------------------------------------
<TABLE>
<CAPTION>
Statements of Consolidated Operations
Fiscal Year Ended
----------------------------------------------
February 1, February 3, January 28,
(In thousands, except per-share data) 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales .................................................... $3,724,839 $3,422,718 $3,122,635
---------------------------------------------
Cost of Goods Sold:
General .................................................. 2,613,746 2,443,531 2,255,749
Related party lease (Note 3) ............................. 5,566 5,673 5,566
---------------------------------------------
Total cost of goods sold ..................................... 2,619,312 2,449,204 2,261,315
---------------------------------------------
Gross Margin ................................................. 1,105,527 973,514 861,320
Operating and Administrative Expenses:
General .................................................. 920,713 829,486 750,888
Related party leases (Notes 3 and 8) ..................... 50,954 55,601 57,036
Writedown of California Assets (Note 4) .................. -- -- 15,978
---------------------------------------------
Total operating and administrative expenses .............. 971,667 885,087 823,902
---------------------------------------------
Income from Operations ....................................... 133,860 88,427 37,418
Interest Expense, net of interest income of $858,
$1,060 and $885 .......................................... 39,432 39,578 25,857
---------------------------------------------
Income before Income Taxes ................................... 94,428 48,849 11,561
Provision for Income Taxes (Note 6) .......................... 35,883 18,563 4,393
---------------------------------------------
Net Income ................................................... $ 58,545 $ 30,286 $ 7,168
=============================================
Net Income per Common Share .................................. $2.09 $1.07 $.25
=============================================
Weighted Average Number of Common Shares Outstanding ......... 27,962 28,333 28,625
- - ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Assets
February 1, February 3,
(In thousands) 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................................. $ 48,769 $ 41,849
Receivables ................................................................ 23,729 24,683
Inventories ................................................................ 604,910 520,555
Prepaid expenses and other ................................................. 43,149 23,680
Current portion of deferred taxes (Note 6) ................................. 17,226 22,046
----------------------------
Total current assets ....................................................... 737,783 632,813
----------------------------
Property and Equipment:
Buildings, fixtures and equipment .......................................... 1,397,872 1,366,511
Property held under capital leases (Note 8) ................................ 17,523 17,523
Land ....................................................................... 139,474 160,657
----------------------------
Total property and equipment ............................................... 1,554,869 1,544,691
Less accumulated depreciation and amortization ............................. 625,104 530,543
----------------------------
Property and equipment--net ................................................. 929,765 1,014,148
----------------------------
Other Assets:
Goodwill--net ............................................................... 4,599 4,907
Other ...................................................................... 19,873 17,885
----------------------------
Total other assets ......................................................... 24,472 22,792
----------------------------
Total assets ............................................................... $1,692,020 $1,669,753
- - -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
16 Fred Meyer, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Liabilities and Stockholder's Equity
February 1, February 3,
(In thousands, except per share data) 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Outstanding checks ......................................................... $ 112,991 $ 63,177
Accounts payable ........................................................... 285,439 193,896
Current portion of long-term debt and lease obligations (Notes 5 and 8) 1,038 1,468
Income taxes payable ....................................................... 5,115 4,857
Accrued expenses:
Compensation ........................................................... 58,347 48,743
Insurance and other .................................................... 41,651 37,590
----------------------------
Total current liabilities .................................................. 504,581 349,731
----------------------------
Long-term Debt (Note 5) ........................................................ 521,512 656,260
----------------------------
Capital Lease Obligations (Note 8) ............................................. 13,227 13,298
----------------------------
Deferred Lease Transactions (Note 8) ........................................... 46,318 42,271
----------------------------
Deferred Income Taxes (Note 6) ................................................. 35,176 30,814
----------------------------
Other Long-term Liabilities (Notes 8 and 10) ................................... 5,302 7,984
----------------------------
Commitments and Contingencies (Notes 8 and 12)
Stockholders' Equity (Note 7):
Preferred stock, $.01 par value (authorized, 5,000 shares;
outstanding, none) ..................................................... -- --
Common stock, $.01 par value (authorized, 100,000 shares;
issued--28,404 shares and 26,705 shares;
outstanding--26,204 shares and 26,705 shares) .......................... 287 270
Additional paid-in capital ..................................................... 203,314 195,593
Treasury stock 1996--2,200 shares............................................... (69,773) --
Notes receivable from officers.................................................. (1,394) (1,839)
Unearned compensation........................................................... (652) (206)
Retained earnings .............................................................. 434,122 375,577
----------------------------
Total stockholders' equity ..................................................... 565,904 569,395
----------------------------
Total liabilities and stockholders' equity ..................................... $1,692,020 $1,669,753
- - -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 17
<PAGE>
<TABLE>
<CAPTION>
Statements of Consolidated Cash Flows
Fiscal Year Ended
----------------------------------------------
February 1, February 3, January 28,
(In thousands) 1997 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ................................................................. $ 58,545 $ 30,286 $ 7,168
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment ................ 116,546 107,077 89,474
Amortization of goodwill ............................................... 308 308 308
Writedown of California assets ......................................... -- -- 15,978
Deferred lease transactions ............................................ (4,944) (3,384) (2,599)
Deferred income taxes .................................................. 9,182 1,626 (3,526)
Other liabilities ...................................................... (2,682) (2,085) (347)
Inventories ............................................................ (84,355) (6,082) (37,358)
Other current assets ................................................... (17,714) 13,705 1,552
Accounts payable and accrued expenses .................................. 105,210 (28,890) 11,613
Income taxes ........................................................... 258 19,878 (33,681)
Other .................................................................. (14,110) 613 1,458
-------------------------------------------
Net cash provided by operating activities .................................. 166,244 133,052 50,040
-------------------------------------------
Cash Flows from Financing Activities:
Issuance of common stock - net ............................................. 7,498 2,278 3,369
Stock repurchase and related expenses ...................................... (70,099) -- --
Collection of notes receivable ............................................. 794 515 364
Increase in notes receivable ............................................... (857) (2,391) (213)
Increase/(decrease) in outstanding checks .................................. 49,814 (18,162) 8,968
Long-term financing:
Borrowings ............................................................. -- 158,500 258,871
Repayments ............................................................. (135,249) (42,652) (40,093)
-------------------------------------------
Net cash (used for) provided by financing activities ....................... (148,099) 98,088 231,266
-------------------------------------------
Cash Flows from Investing Activities:
Net sales (purchases) of investment securities ............................. 12,340 1,110 (935)
Purchases of property and equipment ........................................ (146,917) (236,052) (284,193)
Proceeds from sale of property and equipment ............................... 123,352 10,783 4,636
-------------------------------------------
Net cash used for investing activities ..................................... (11,225) (224,159) (280,492)
-------------------------------------------
Net Increase in Cash and Cash Equivalents for the Year ......................... 6,920 6,981 814
Cash and Cash Equivalents, Beginning of Year ................................... 41,849 34,868 34,054
-------------------------------------------
Cash and Cash Equivalents, End of Year ......................................... $ 48,769 $ 41,849 $ 34,868
-------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid (refunded) during the year for:
Interest (including interest capitalized of $121, $3,629, and $2,520) $ 40,458 $ 45,228 $ 31,022
Income taxes ........................................................... 25,744 (3,256) 40,757
- - ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
18 Fred Meyer, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Consolidated Stockholders' Equity
Common Stock Treasury Stock
--------------------------------------------------
Number Additional Number
of Paid-in of Retained
(In thousands) Shares Amount Capital Shares Amount Other Earnings Total
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 29, 1994 ................ 26,415 $267 $189,949 -- $ -- $(653) $338,123 $527,686
Issuance of common stock:
Stock options exercised .................. 153 1 2,611 -- -- -- -- 2,612
Tax benefits from stock options .......... -- -- 757 -- -- -- -- 757
Amortization of unearned compensation .... -- -- -- -- -- 397 -- 397
Net income ............................... -- -- -- -- -- -- 7,168 7,168
--------------------------------------------------------------------------------------
Balance, January 28, 1995 ................ 26,568 268 193,317 -- -- (256) 345,291 538,620
Issuance of common stock:
Stock options exercised .................. 137 2 2,016 -- -- -- -- 2,018
Tax benefits from stock options .......... -- -- 260 -- -- -- -- 260
Amortization of unearned compensation .... -- -- -- -- -- 50 -- 50
Notes receivable - officers............... -- -- -- -- -- (1,839) -- (1,839)
Net income ............................... -- -- -- -- -- -- 30,286 30,286
--------------------------------------------------------------------------------------
Balance, February 3, 1996 ................ 26,705 270 195,593 -- -- (2,045) 375,577 569,395
Issuance of common stock:
Stock options exercised .................. 1,689 17 7,244 -- -- -- -- 7,261
Stock bonus .............................. 10 -- 166 -- -- (566) -- (400)
Treasury stock ........................... -- -- (326) 2,200 (69,773) -- -- (70,099)
Tax benefits from stock options .......... -- -- 637 -- -- -- -- 637
Amortization of unearned compensation .... -- -- -- -- -- 120 -- 120
Payment on notes receivable - officers.... -- -- -- -- -- 445 -- 445
Net income ............................... -- -- -- -- -- -- 58,545 58,545
--------------------------------------------------------------------------------------
Balance, February 1, 1997 ................ 28,404 $287 $203,314 2,200 $(69,773) $(2,046) $434,122 $565,904
- - ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 19
<PAGE>
Notes to Consolidated Financial Statements
1. The Company
Fred Meyer, Inc., a Delaware corporation, and its subsidiaries operate a
chain of retail stores offering a wide range of food, products for the
home, apparel, fine jewelry, and home improvement items, with emphasis on
necessities and items of everyday use. At February 1, 1997 the Company
operated 219 stores, of which 109 are large multidepartment stores (101
with food departments), located in Oregon, Washington, Utah, Alaska, Idaho
and Montana; and the balance are smaller specialty stores (including 105
jewelry stores in malls).
2. Summary of Significant Accounting Policies
Principles of Consolidation--The accompanying financial statements include
the consolidated accounts of the Company and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Fiscal Year--The Company's fiscal year ends on the Saturday closest to
January 31. Fiscal years 1996, 1995 and 1994 ended on February 1, 1997,
February 3, 1996 and January 28, 1995, respectively. Fiscal years 1996,
1995 and 1994 were 52, 53 and 52 weeks, respectively.
Unless otherwise stated, references to years in this report relate to
fiscal years rather than to calendar years.
Business Segment--The Company's operations consist of one segment, retail
sales.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
Receivables--Receivables are reported net of allowances for potential
uncollected accounts of $1,348,000 and $1,294,000 at February 1, 1997 and
February 3, 1996, respectively.
Inventories--Inventories consist principally of items held for sale in its
retail operations and substantially all inventories are stated at the lower
of last-in, first-out (LIFO) cost or market. If the first-in, first-out
method, which approximates replacement cost, had been used in determining
inventory values, they would have been $52,774,000 and $53,940,000 higher
at February 1, 1997 and February 3, 1996, respectively.
Property and Equipment--Property and equipment is stated at cost.
Depreciation on owned buildings and equipment is provided using the
straight-line method over the estimated useful lives of the related assets
of three to 31 years. Amortization of buildings under capital leases is
provided using the straight-line method over the remaining related lease
terms of 16 to 40 years. The Company has no equipment under capital leases.
Goodwill--Goodwill is being amortized on a straight-line basis over 30
years. Management periodically evaluates the recoverability of goodwill
based upon current and anticipated net income and undiscounted future cash
flows. Accumulated amortization was $4,659,000 and $4,352,000 at February
1, 1997 and February 3, 1996, respectively.
Impairment of Long-lived Assets--In accordance with SFAS 121, the Company
annually reviews and evaluates long-lived assets for potential impairment
of value. The net book value of long-lived assets is compared to estimated
fair market value and to estimated future cash flows (undiscounted and
without interest). An impairment loss would be recorded for the excess of
net book value over the fair market value or discounted future cash flows.
A review and evaluation also occurs whenever events or changes in
circumstances indicate that a long-lived asset's value may not be
recoverable.
Investment Securities--As of January 28, 1995, the Company adopted SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. SFAS
No. 115 requires the classification of securities at acquisition into one
of three categories: held to maturity, available for sale, or trading. At
February 1, 1997, the carrying value of all debt and equity securities
approximated their aggregate fair value. Debt securities are classified as
held to maturity and are included in Other Assets.
Outstanding Checks--Checks that are issued and that have not yet cleared
the banks are included in current liabilities.
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. Actual results could differ from those
estimates.
20 Fred Meyer, Inc. and Subsidiaries
<PAGE>
Buying and Promotional Allowances--Vendor allowances and credits that
relate to the Company's buying and merchandising activities are recognized
as earned.
Advertising--Advertising costs are expensed as incurred. Advertising costs
were $34,867,000, $37,156,000 and $34,932,000 for 1996, 1995 and 1994.
Self-insurance--The Company is primarily self-insured for general
liability, property loss, worker's compensation and non-union health and
welfare. Liabilities for these costs are based on actual claims and
actuarial statements for estimates of claims that have been incurred but
not reported.
Pre-opening Costs--All noncapital expenditures incurred in connection with
the opening of new or acquired stores and other facilities or the
remodeling of existing stores are expensed as incurred.
Income Taxes--Deferred income taxes are provided for those items included
in the determination of income or loss in different periods for financial
reporting and income tax purposes. Targeted jobs and other tax credits are
recognized in the year realized.
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is
the tax payable for the period and the change during the period in deferred
tax assets and liabilities (see note 6).
Stock-based Compensation--The Company adopted SFAS No. 123, Accounting for
Stock-based Compensation, effective January 1, 1996. The Company will
continue to measure compensation expense for its stock-based employee
compensation plans using the method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, but will provide pro forma
disclosures of net income and earnings per share as if the method
prescribed by SFAS No. 123 had been applied in measuring compensation
expense.
Earnings Per Common Share--Fully diluted earnings per common share are
computed by dividing net income by the weighted average number of common
and common equivalent shares outstanding. Weighted average shares reflect
the dilutive effect of outstanding stock options using the treasury stock
method.
Reclassifications--Certain prior year amounts have been reclassified to
conform to current year presentation. The reclassifications have no effect
on reported net income.
3. Related-party Transactions
The Company leases 56 store locations (one of which is closed) and a
distribution center from MetLife, which is a major beneficial shareholder
of the Company's stock, and other related parties. Rents paid to related
parties on these properties were $61,762,000; $64,010,000 and $65,804,000;
respectively for 1996, 1995 and 1994. (See note 8.)
Total rents included in operating and administrative expenses for
locations leased or subleased from related parties were based on the
average rental paid during the primary term of the leases. Rents associated
with the Company's main distribution center and central bakery are included
in cost of goods sold.
In 1995, the Company offered interest-free loans of up to $100,000
each to 19 executives for the purpose of acquiring common stock of the
Company. Repayment of these loans is required by June 1998 or upon
termination of employment or sale of stock. At February 1, 1997 and
February 3, 1996, outstanding loans under this program amounted to
$1,394,000 and $1,839,000, respectively.
4. Writedown of California Assets
During 1994, the Company incurred a charge of $15,978,000 ($9,906,000 after
a deferred tax benefit of $6,072,000) related to the writedown of certain
assets and other costs associated with the Company's decision to exit the
northern California market except for mall jewelry locations.
Fred Meyer, Inc. and Subsidiaries 21
<PAGE>
5. Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consisted of the following (in thousands):
1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper with maturities through July 1997,
classified as long-term, interest rates of 5.44% to
6.11% at February 1, 1997 ................................... $283,040 $283,344
Uncommitted bank borrowings classified as long-term ............ -- 123,500
Long-term notes secured by trust deeds, due through 2012,
fixed interest rates from 9.00% to 9.52% .................... 41,819 42,536
Long-term notes, unsecured:
Due 1997 through 1998, interest rate is periodically
reset, 6.10% at February 1,1997, paid quarterly ........... 70,000 70,000
Due 1996, fixed interest rate of 7.74%, paid quarterly ...... -- 10,000
Due 2000, fixed interest rate of 6.775%, paid quarterly ..... 20,000 20,000
Senior notes, unsecured, due 1999 through 2007,
fixed interest rates from 7.25% to 7.98% .................... 107,500 107,500
Other .......................................................... -- 159
--------------------------
Total .......................................................... 522,359 657,039
Less current portion............................................ (847) (779)
--------------------------
Total .......................................................... $521,512 $656,260
-----------------------------------------------------------------------------------------------
</TABLE>
The Company has the ability to support commercial paper, uncommitted
bank borrowings, and other debt on a long-term basis through its Bank
Credit Agreement and therefore, based upon management's intent, has
classified these borrowings, which total $283,040,000 at February 1, 1997,
as long-term debt.
The Company has a Bank Credit Agreement which provides for, among
other things: (1) a revolving credit commitment of $500,000,000 with
payment of the unpaid balance at June 30, 2000; (2) interest at a spread
over LIBOR on such borrowings or various other pricing options; and (3) a
facility fee of .15% of the amount of the commitment. This agreement
requires the maintenance of specified ratios and restricts the amounts of
cash dividends paid. The Company bought back $69,773,000 of its stock in
1996 under provisions of this agreement. At February 1, 1997 and through
June 14, 1997, the Company is restricted from payment of dividends or
repurchase of Company stock under this provision. As of June 15, 1997 the
Company may pay cash dividends or repurchase Company stock based on 40% of
net income for the year ending January 31, 1998.
The Company has established uncommitted lines of credit for
$105,000,000 with foreign banks and has uncommitted bid lines of credit for
$120,000,000 with certain banks within its committed bank group. These
lines, which generally have terms of one year, allow the Company to borrow
from the banks at mutually agreed upon rates, usually below the rates
offered under the Bank Credit Agreement. The Company has unrated commercial
paper programs with maturities ranging up to 270 days in amounts up to a
maximum of $500,000,000. The Company also has available letters of credit
lines for $66,000,000, of which $24,330,000 had been issued at February 1,
1997.
The Company has entered into interest rate swap and cap agreements to
reduce the impact of changes in interest rates on its floating rate
long-term debt. At February 1, 1997, the Company had outstanding four
interest rate contracts, for a total notional principal amount of
$75,000,000, with commercial banks. The two swap agreements effectively fix
the Company's interest rate on unrated commercial paper, floating rate
facilities and uncommitted lines of credit at rates between 5.20% and
7.595% on a notional principal amount of $40,000,000. These contracts
expire through 1998. The two cap agreements effectively limit the maximum
interest rate the Company will pay at rates between 5.0% and 9.0% on
notional principal amounts totaling $35,000,000. These contracts expire
through 1999. The Company has entered into swap and cap agreements to
reduce the impact of changes in rent expense on its two lease lines of
credit. At February 1, 1997, the Company had outstanding seven rent rate
contracts, for a total notional principal amount of $80,000,000, with
commercial banks. Three of these agreements effectively fix the Company's
rental rate on the lease lines at rates between 6.2775% and 6.537% on
notional amounts of $40,000,000. The remaining four agreements effectively
limit the maximum rental rate the Company will pay at 7.25% on notional
amounts totaling $40,000,000. All seven of these contracts expire in 2000.
Gains and losses on swaps
22 Fred Meyer, Inc. and Subsidiaries
<PAGE>
and caps are amortized over the life of the instruments. The Company is
exposed to credit loss in the event of nonperformance by the other parties
to the interest rate swap and cap agreements. The Company requires an "A"
or better rating of the counterparties and, accordingly, does not
anticipate nonperformance by the counterparties.
Annual estimated long-term debt maturities for the five fiscal years
subsequent to February 1, 1997 are: 1997, $847,000; 1998, $60,428,000;
1999, $8,516,000; 2000, $314,743,000; 2001, $16,228,000; and thereafter,
$121,597,000.
6. Income Taxes
The provision for income taxes includes the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ....................................... $26,701 $16,937 $7,919
Deferred ...................................... 9,182 1,626 (3,526)
------------------------------------------
Total ......................................... $35,883 $18,563 $4,393
------------------------------------------------------------------------------------------
</TABLE>
A reconciliation between the statutory federal income tax rate to the
provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at the statutory rate .... $33,050 $17,097 $4,046
State income taxes ............................ 2,833 1,466 347
------------------------------------------
Provision for income taxes .................... $35,883 $18,563 $4,393
------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
February 1, 1997 and February 3, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Capitalized inventory costs ................. $ 8,627 $ 7,150
Accrued expenses ............................ 23,954 20,369
Restructuring related charges ............... 4,215 5,124
Deferred lease transactions ................. 13,644 16,063
Other ....................................... 8,552 10,058
--------------------------
Total deferred tax assets ................. 58,992 58,764
--------------------------
Deferred tax liabilities:
Accumulated depreciation .................... 55,782 54,170
Prepaid expenses ............................ 12,748 5,918
LIFO inventory .............................. 8,412 7,444
--------------------------
Total deferred tax liabilities ............ 76,942 67,532
--------------------------
Net deferred income taxes ..................... $ 17,950 $ 8,768
--------------------------
Current deferred income taxes--asset .......... $(17,226) $(22,046)
Noncurrent deferred income taxes--liability ... 35,176 30,814
--------------------------
Net deferred income taxes ..................... $ 17,950 $ 8,768
--------------------------------------------------------------------------
</TABLE>
Fred Meyer, Inc. and Subsidiaries 23
<PAGE>
7. Stockholders' Equity
Stock Incentive Plans--At February 1, 1997, 4,113,000 shares of common
stock were reserved for issuance to employees, including officers and
directors, and nonemployee agents, consultants and advisors, under stock
incentive plans. These plans provide for the granting of incentive stock
options, nonqualified stock options, stock bonuses, stock appreciation
rights, cash bonus rights and performance units.
Under the terms of the plans, the option price is determined by the
Board of Directors at the time the option is granted. The option price for
incentive stock options cannot be less than the fair value of the Company's
stock on the day prior to the date of grant. Nonqualified stock options may
not be granted at less than 50% of the fair value on the day prior to the
date of grant.
Stock Options--Activity under the plans was as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Weighted
Average
Option Price
Shares Per Share Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option:
Balance, January 29, 1994...................... 2,154 $23.52 $50,651
Options granted............................. 406 36.16 14,696
Options exercised........................... (152) 17.14 (2,612)
Options cancelled........................... (50) 33.58 (1,678)
Balance, January 28, 1995 ..................... 2,358 25.90 61,057
Options granted ............................ 457 24.47 11,181
Options exercised .......................... (137) 14.76 (2,018)
Options cancelled ......................... (121) 32.51 (3,929)
------- ------- -------
Balance, February 3, 1996 ..................... 2,557 25.93 66,291
Options granted ............................ 1,628 27.83 45,309
Options exercised .......................... (123) 17.74 (2,181)
Options cancelled .......................... (891) 33.41 (29,778)
------- ------- -------
Balance, February 1, 1997 ..................... 3,171 25.12 $79,641
--------------------------------------------------------------------------------------------
</TABLE>
Stock options granted in 1994, 1995 and 1996 expire in 10 years. The
options vest over five years, 20 percent each year, beginning at the end of
the first year. All stock options granted in 1994, 1995 and 1996 were
granted at an amount equal to or greater than the fair market value on the
grant date. Accordingly no compensation was recorded.
The following table summarizes information concerning currently
outstanding and exercisable options at February 1, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ------------------------------------
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$12 to $20 343 2.7 $14.61 337 $14.58
21 to 30 2,339 7.7 24.94 774 23.28
31 to 42 489 9.4 33.36 40 34.52
----- -----
12 to 42 3,171 7.4 25.12 1,151 21.13
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Shares available for option as of February 1, 1997 and February 3,
1996 were 943,000 and 1,679,000, respectively.
The Company issued a replacement grant election program in 1996 that
allowed stock option holders with options granted at more than $26.00 per
share to reset the price at $26.00, on up to 984,000 options that were
previously granted at prices ranging from $27.25 to $41.25. For those who
elected to reset their option price to $26.00, the vesting period started
over.
24 Fred Meyer, Inc. and Subsidiaries
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No.
123. Accordingly, no compensation cost has been recognized for stock
options granted at the fair value on the date of grant. Had compensation
cost for the Company's stock option plans been determined based on the
estimated fair value of the options at the date of grant, the Company's net
income and income per share would have been reduced to the pro forma
amounts below:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
Actual Pro forma Actual Pro forma
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (in thousands) ........................... $58,545 $56,946 $30,286 $30,078
Net income per common share ......................... $2.09 $2.04 $1.07 $1.06
------------------------------------------------------------------------------------------------------
</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
used for grants awarded in 1996 and 1995:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
<S> <C>
Weighted average expected volatility (based on historical volatility) ...............32.35%
Weighted average risk-free interest rate .............................................5.98%
Expected term ......................................................................5 years
-------------------------------------------------------------------------------------------
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to stock options
granted prior to 1995. It is anticipated that additional stock options will
be granted in future years.
Other Option--FMI Associates, which was the Company's principal shareholder
in 1996, exercised an option in 1996 for the purchase of 1,566,441 shares
with an aggregate value of $5,080,349.
Management Bonus--In 1992, the Company awarded a stock bonus to a corporate
officer for 5,000 shares totaling $124,000. Shares vest annually over five
years.
In 1996, the Company awarded a stock bonus to a corporate officer for
10,000 shares totaling $291,250. Shares vest annually over five years.
Nonemployee Directors Stock Compensation Plan--In 1992, the Company
purchased 4,016 shares of its common stock at market prices for the benefit
of two of its nonemployee directors in lieu of a portion of current and
future Board of Director fee payments. The shares total $125,000 and vest
annually over five years.
In 1996, the Company purchased 12,558 shares of its common stock at
market prices for the benefit of six of its nonemployee directors in lieu
of a portion of current and future Board of Director fee payments. The
shares total $400,103 and vest annually over five years.
8. Leases
The Company leases or subleases a substantial portion of the real property
used in its operations.
In 1986, the leases and subleases for a distribution center, 71 store
locations and certain other properties were amended and restated to
provide, among other things, an initial lease term of 20 years for 36
locations (with cash rents of $38,476,000 for the first seven years and
$46,070,000 for the remaining 13 years). The average rent over the primary
lease term is charged to rent expense.
As a result of the above transaction: (1) five previously capitalized
leases qualified as operating leases, resulting in a decrease in property
held under capital leases and capital lease obligations of $53,678,000 and
$72,160,000 respectively, with the resulting $18,482,000 gain deferred and
amortized over the 20-year lease period; and (2) the difference between the
amount of the cash rent paid and the expense charged to operations on the
36 locations described above is included in deferred lease transactions.
Fred Meyer, Inc. and Subsidiaries 25
<PAGE>
In 1992, the Company amended leases for nine store locations, with
cash rent escalating over the term of the leases. The difference between
cash rent paid and the expense charged to operations is included in
deferred lease transactions. The average rent over the primary lease term,
which is lower than the prior rents paid, is charged to rent expense.
At February 1, 1997, deferred lease transactions consisted of
$9,008,000 unamortized gain on capital leases, $27,784,000 of excess of
rent expense over cash rents for the aforementioned leases and unamortized
deferred gain on a sale-leaseback transaction of $9,526,000.
In 1995, the Company entered into operating lease agreements covering
existing leased stores and the construction of new stores, with costs
aggregating $160,000,000. Lease payments are based on a spread over LIBOR
on the utilized portion of the facility. As of February 1, 1997,
$136,307,000 was utilized under the agreement. After the initial five-year
noncancelable lease term, the leases may be extended by agreement of the
parties or the Company may purchase the properties.
On September 5, 1996, the Company closed a sale-leaseback with respect
to 10 of its stores which generated $108,000,000 in net proceeds used to
pay down its credit lines. The leases are for an initial term of 21 years,
subject to renewal at the option of the Company; and the average rent,
including amortization of fees and a deferred gain, is approximately
$8,200,000 annually.
Subsequent to year end in a series of transactions with MetLife, the
Company purchased, for approximately $49,000,000, six stores leased from
MetLife, including one store that was previously closed, plus an option to
purchase 25 parcels at 18 of the 29 stores it will continue to lease from
MetLife. An agreement has been entered into for new 25-year leases on these
29 stores that will result in reduced rents for accounting purposes. The
Company's Clackamas Distribution Center has been sold by MetLife for
approximately $63,000,000 to a third party and leased to Fred Meyer at
reduced rates. An agreement with another lessor covered acquisition of
fixed assets and utilized funds totaling $8,585,000.
The terms of certain operating leases require the payment of executory
costs such as property taxes, utilities, insurance and maintenance. Certain
leases provide for percentage rents. Portions of the properties are
subleased to others for periods of from one to 20 years.
Minimum rentals under noncancelable leases for future fiscal years
were (in thousands):
<TABLE>
<CAPTION>
Operating Capitalized Less Net
Fiscal Year Leases Leases Subleases Rentals
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 .............................. $ 94,687 $1,759 $10,300 $ $86,146
1998 .............................. 93,324 1,880 9,314 85,890
1999 .............................. 90,553 1,880 8,012 84,421
2000 .............................. 83,311 1,880 6,452 78,739
2001 .............................. 78,338 1,880 3,410 76,808
2002 and thereafter ............... 859,220 26,334 19,635 865,919
-----------------------------------------------------
Total ............................. $1,299,433 35,613 $57,123 $1,277,923
---------- ----------------------
Less imputed interest ............. (22,315)
Present value of minimum --------
rental payments ................. 13,298
Less current portion .............. (71)
--------
Capitalized lease obligations ..... $13,227
------------------------------------------------------------------------------------------
</TABLE>
As of February 1, 1997, the leases for eight store locations and
certain equipment were accounted for as capitalized leases. The amounts
representing interest expense on these capitalized lease obligations were
included in operating and administrative expenses and were $1,628,000,
$1,701,000, and $1,848,000 in 1996, 1995, and 1994, respectively.
Accumulated amortization of property under capitalized leases was
$7,186,000 and $6,556,000, at February 1, 1997 and February 3, 1996,
respectively.
26 Fred Meyer, Inc. and Subsidiaries
<PAGE>
Rent expense under operating leases, including executory costs, and
payments under capitalized leases were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross rent expense .................................. $109,393 $100,986 $101,163
Rent income from subleases .......................... (15,261) (13,941) (12,803)
--------------------------------
Net rent expense .................................... 94,132 87,045 88,360
Payments under capitalized leases ................... 1,718 1,807 1,947
--------------------------------
Total ............................................... $ 95,850 $ 88,852 $ 90,307
----------------------------------------------------------------------------------------
</TABLE>
Included in gross rent expense for 1996, 1995, and 1994 were
contingent rents of $1,467,000, $1,264,000, and $1,421,000, respectively.
9. Employee Benefit Plans
Employees' Profit-sharing Plan--Profit-sharing contributions under this
Plan, which covers the Company's nonunion employees, are made to a trust
fund held by a third-party trustee. Contributions are based on the
Company's pretax income, as defined, at rates determined by the Board of
Directors and are not to exceed amounts deductible under applicable
provisions of the Internal Revenue Code. In 1994, the Company added a 1%
basic contribution to all eligible employees' accounts each year subject to
normal plan vesting. The Company expensed $7,723,000, $6,438,000, and
$5,891,000 in 1996, 1995, and 1994, respectively, for these contributions.
Multiemployer Pension Plans--The Company contributes to multiemployer
pension plan trusts at specified rates in accordance with collective
bargaining agreements. Contributions to the trusts were $10,358,000,
$9,938,000, and $8,498,000 in 1996, 1995, and 1994, respectively. The
Company's relative positions in these plans with respect to the actuarial
present value of the accumulated benefit obligation and the projected
benefit obligation, net assets available for benefits and the assumed rates
of return used by the plans are not determinable.
Employee Stock Purchase Plan--The Company has a noncontributory employee
stock purchase plan. The plan allows employees to purchase stock in the
Company via payroll deductions. The Company pays all brokerage fees
associated with the purchase of the stock. The plan is available to all
employees over age 18 who have completed six months of continuous
employment with the Company.
Supplemental Retirement Program--The Company has a supplemental retirement
program for senior management, selected vice presidents and selected key
individuals. Program provisions are as follows:
Senior Management--The plan is funded with life insurance contracts on
the lives of the participants. The Company is the owner of the contracts
and makes annual contributions of $25,000 per participant. Total
contributions were $400,000 in 1996, $350,000 in 1995 and $325,000 in 1994.
Retirement age under the plan is normally 62 with an alternative age of 65,
at which point the Company will make 15 annual benefit payments to the
executive.
Selected Vice Presidents and Selected Key Individuals--The Company
will contribute annually a percentage of each participant's gross salary.
The plan is funded with life insurance contracts on participants age 54 and
younger and variable annuity contracts for participants age 55 and older.
Each participant is the owner of his/her respective contract.
Fred Meyer, Inc. and Subsidiaries 27
<PAGE>
10. Other Postretirement Benefits
For employees who qualified prior to January 1, 1994, the Company sponsored
a retiree health plan for postretirement health care coverage with
eligibility requirements and benefits varying by region of the Company.
Under this plan, the Company contributes 100% of the premiums of the
basic plan for retired salaried employees qualifying under eligibility
requirements which specify minimum age and years of continuous service at
age 60 with 25 years of service, age 62 with 20 years of service and age 65
with 15 years of service.
For retired salaried and hourly employees between the ages of 62 to 65
years and having completed minimum continuous service of 15 years, the
retiree pays premiums at current employee rates.
As of January 1, 1994, the Company changed the eligibility
requirements and benefits available under the retiree health plan. For all
salaried and non-union hourly employees in all regions who retire after
January 1, 1994, eligibility requirements changed to a minimum of 60 years
of age with 10 years of continuous service. Under the revised plan, the
retiree pays premiums at current employee rates.
The following table sets forth the plan's funded status, reconciled
with the amount shown in the Company's balance sheet (in thousands):
<TABLE>
<CAPTION>
February 1, 1997 February 3, 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Current retirees ................................................... $1,289 $1,326
Fully eligible plan participants ................................... 877 912
Other active plan participants ..................................... 3,598 3,312
--------------------------
Accumulated postretirement benefit obligation
in excess of plan assets ......................................... 5,764 5,550
Unrecognized transition obligation ................................... (1,253) (1,337)
Unrecognized prior service cost ...................................... (283) (324)
Unrecognized net gain/(loss) ......................................... 257 (211)
--------------------------
Accrued postretirement benefit cost ................................ $4,485 $3,678
--------------------------
Weighted average discount rate ....................................... 8.0% 7.5%
Net periodic postretirement benefit cost included
the following components:
Service cost--benefits attributed to service during the period ..... $411 $284
Interest cost on accumulated postretirement benefit obligation ..... 410 332
Amortization of transition obligation over 20 years ................ 125 125
Amortization of unrecognized gain .................................. -- (19)
--------------------------
Net periodic postretirement benefit cost ............................. $ 946 $ 722
---------------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rates used in measuring the
accumulated postretirement benefit obligation were as follows:
Under Medicare Retirement Age--6% for one year, then grading down to
4.5% by the year 2000, and
Medicare Retirement Age and Over--5% for one year, then grading down
to 4.5% in 1998.
The health care cost trend rate assumption has a significant effect on
the amounts reported. To illustrate, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of February 1, 1997 and
February 3, 1996 and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for 1996 and
1995 as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Increase in accumulated postretirement benefit obligation......... $1,053 $990
Increase in service and interest costs............................ 169 121
----------------------------------------------------------------------------------------
</TABLE>
28 Fred Meyer, Inc. and Subsidiaries
<PAGE>
11. Estimated Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation methodologies
as shown below. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could actually realize.
Management is not aware of any factors that would significantly change
the estimated fair value amounts shown below. A comprehensive revaluation
for purposes of these financial statements has not been performed since
February 1, 1997, and current estimates of fair value may differ from the
amounts presented herein. The Company is not subjected to a concentration
of credit risk.
Cash and Cash Equivalents, Receivables, Prepaid Expenses and Other Current
Assets, Other Long-term Assets, Outstanding Checks and Accounts
Payable--The carrying amounts of these items are a reasonable estimate of
their fair value.
Long-term Debt and Interest Rate Agreements--The carrying amount and
estimated fair value of long-term debt at February 1, 1997 are $522,359 and
$535,891, respectively. The fair value of notes, mortgages and real estate
assessments payable is estimated by discounting expected future cash flows.
The discount rate used is the rate currently available to the Company for
issuance of debt with similar terms and remaining maturities. For
commercial paper and bid lines of credit under the revolving credit
agreement (see Note 5), the carrying amounts are a reasonable estimate of
their fair value.
The fair value of interest rate or rent rate swap and cap agreements
is the estimated amount at which they could be settled. At February 1,
1997, the Company could settle the various swap agreements at a loss of
$550,000 and the various cap agreements at a gain of $573,000. At February
3, 1996 the Company could settle the various swap agreements outstanding at
that time at a loss of $1,038,000 and the various cap agreements
outstanding at that time at a gain of $312,000. The value is determined
based on the notional amount of each cap and swap, its term, and the
difference in rates between the date of measurement and when the cap or
swaps were initiated.
12. Commitments and Contingencies
The Company and its subsidiaries are parties to various legal claims,
actions and complaints, certain of which involve material amounts. Although
the Company is unable to predict with certainty whether or not it will
ultimately be successful in these legal proceedings or, if not, what the
impact might be, management presently believes that disposition of these
matters will not have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations.
13. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1996 Fiscal Quarters 1995 Fiscal Quarters
(In thousands, except --------------------------------------------- -------------------------------------------
per-share data) Fourth Third Second First Fourth/3 Third Second First
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............... $995,755 $835,142 $853,914 $1,040,028 $963,650 $749,015 $774,702 $935,351
Gross margin ............ 303,642/1 244,427 255,386 302,072 280,228/4 207,791 220,783 264,712
Income from operations... 53,401/1 18,472 33,651 28,336 41,676/4 5,393 25,233 16,125
Net income (loss)........ 27,636/1 6,292 15,173 9,444 18,839/4 (2,309) 10,673 3,083
Net income (loss)
per common share....... $1.03/1,2 $.23/2 $.53/2 $.33/2 $.67/4 $(.08) $.37 $.11
Weighted average number
of shares outstanding.. 26,722 27,693 28,703 28,539 28,199 28,254 28,369 28,465
-------------------------------------------------------------------------------------------------------------------------
/1 The LIFO adjustment in the fourth quarter of 1996 increased gross
margin and income from operations by $5,386, net income by $3,339 and
earnings per common share by $.12.
/2 In 1996, the sum of the four quarters net income per common share does
not equal the annual amount due to the purchase by the Company in
October 1996 of 2,200,000 shares of its common stock.
/3 The fourth quarter of 1995 is a 13-week period.
/4 The LIFO adjustment in the fourth quarter of 1995 increased gross
margin and income from operations by $6,737, net income by $4,177 and
earnings per common share by $.15.
</TABLE>
Fred Meyer, Inc. and Subsidiaries 29
<PAGE>
Management's Report on Responsibility for Financial Statements
- - --------------------------------------------------------------
The management of Fred Meyer, Inc. has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity.
The statements were prepared in accordance with generally accepted
accounting principles. The financial statements include amounts that are
based on management's best estimates and judgments. Management also
prepared other information in the annual report and is responsible for its
accuracy and consistency with the financial statements.
The Company's financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte
& Touche LLP all the Company's financial records and related data, as well
as the minutes of shareholders' and directors' meetings.
Management has established and maintains an internal control structure
that provides reasonable assurance as to the integrity and reliability of
the financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial
reporting. The internal control structure provides for the appropriate
division of responsibility, which is monitored for compliance.
The Company maintains an internal auditing program that assesses the
effectiveness of the internal control structure and recommends
improvements.
Deloitte & Touche LLP also considered the internal control structure
in connection with its audit. Management has considered the internal
auditors' and Deloitte & Touche LLP's recommendations concerning the
Company's internal control structure and has taken the appropriate actions
to respond to these recommendations.
The Company's principles of business conduct address, among other
things, potential conflicts of interests and compliance with laws,
including those relating to financial disclosure and the confidentiality of
proprietary information.
The Board of Directors pursues its responsibility for the quality of
the Company's financial reporting primarily through its Audit Committee,
which is comprised of outside directors. The Audit Committee meets
approximately three times a year with management, the corporate internal
audit manager, and the independent auditors to ensure that each is meeting
its responsibilities and to discuss matters concerning internal controls
and accounting and financial reporting. The corporate internal audit
manager and independent auditors have unrestricted access to the Audit
Committee.
DAVID R. JESSICK
David R. Jessick
Senior Vice President, Finance and Chief Financial Officer
30 Fred Meyer, Inc. and Subsidiaries
<PAGE>
Independent Auditors' Report
- ----------------------------
To the Shareholders and Board of Directors of Fred Meyer, Inc.:
We have audited the accompanying consolidated balance sheets of Fred
Meyer, Inc. and subsidiaries as of February 1, 1997 and February 3, 1996,
and the related statements of consolidated operations, changes in
consolidated stockholders' equity, and consolidated cash flows for each of
the three fiscal years in the period ended February 1, 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Fred Meyer, Inc. and
subsidiaries at February 1, 1997 and February 3, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended February 1, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
March 12, 1997
Fred Meyer, Inc. and Subsidiaries 31
<PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
May 24, February 1,
1997 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 64,152 $ 48,769
Receivables-net........................................................ 25,265 23,729
Inventories............................................................ 624,356 604,910
Prepaid expenses and other............................................. 32,911 43,149
Current portion of deferred taxes..................................... 17,226 17,226
---------- ----------
Total current assets............................................... 763,910 737,783
---------- ----------
PROPERTY AND EQUIPMENT-NET................................................ 997,995 929,765
---------- ----------
OTHER ASSETS.............................................................. 25,989 24,472
---------- ----------
TOTAL........................................................... $1,787,894 $1,692,020
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and outstanding checks................................ $ 430,632 $ 398,430
Current portion of long-term debt
and lease obligations............................................... 1,038 1,038
Income taxes payable................................................... 7,077 5,115
Accrued expenses and other............................................. 103,461 99,998
---------- ----------
Total current liabilities........................................... 542,208 504,581
---------- ----------
LONG-TERM DEBT AND MORTGAGES.............................................. 558,089 521,512
---------- ----------
CAPITAL LEASE OBLIGATIONS................................................. 13,182 13,227
---------- ----------
DEFERRED LEASE TRANSACTIONS............................................... 41,547 46,318
---------- ----------
DEFERRED INCOME TAXES..................................................... 35,176 35,176
---------- ----------
OTHER LONG-TERM LIABILITIES............................................... 5,555 5,302
---------- ----------
STOCKHOLDERS' EQUITY
Common stock........................................................... 291 287
Additional paid-in capital............................................. 215,722 203,314
Retained earnings...................................................... 447,381 434,122
Treasury stock......................................................... (69,781) (69,773)
Notes receivable from officers......................................... (695) (1,394)
Unearned compensation.................................................. (781) (652)
---------- ----------
Total stockholders' equity.......................................... 592,137 565,904
---------- ----------
TOTAL............................................................ $1,787,894 $1,692,020
========== ==========
See notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
16 Weeks Ended
------------------------------
May 24, May 25,
1997 1996
---------- ----------
<S> <C> <C>
NET SALES.................................................................. $1,193,936 $1,040,028
COST OF MERCHANDISE SOLD................................................... 838,515 737,956
---------- ----------
GROSS MARGIN............................................................... 355,421 302,072
OPERATING AND ADMINISTRATIVE EXPENSES...................................... 320,428 273,736
---------- ----------
INCOME FROM OPERATIONS..................................................... 34,993 28,336
INTEREST EXPENSE-NET....................................................... 13,607 13,104
---------- ----------
INCOME BEFORE INCOME TAXES................................................. 21,386 15,232
PROVISION FOR INCOME TAXES................................................. 8,127 5,788
---------- ----------
NET INCOME................................................................. $ 13,259 $ 9,444
========== ==========
EARNINGS PER COMMON SHARE.................................................. $.48 $.33
==== ====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING............................................... 27,817 28,539
====== ======
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FRED MEYER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
16 Weeks Ended
----------------------------
May 24, May 25,
1997 1996
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 13,259 $ 9,444
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment........................................... 38,172 35,322
Amortization of goodwill............................................ 95 95
Deferred lease transactions......................................... (4,771) (860)
Other liabilities................................................... 253 (430)
Income taxes........................................................ 1,961 (269)
Inventories......................................................... (19,446) (38,454)
Other current assets................................................ 7,669 3,781
Accounts payable and accrued expenses............................... 32,042 65,719
Other............................................................... 144 (6,203)
-------- -------
Net cash provided by operating activities.............................. 69,378 68,145
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock-net........................................... 12,227 151
Increase (decrease) in outstanding checks.............................. 3,622 (1,136)
Increase in notes receivable........................................... (139) (273)
Long-term financing:
Borrowings.......................................................... 36,845 ---
Repayments.......................................................... (313) (39,632)
-------- -------
Net cash provided by (used for)
financing activities................................................ 52,242 (40,890)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................... (111,702) (36,131)
Net proceeds from sale of real property................................ 5,465 5,827
-------- -------
Net cash used for investing activities................................. (106,237) (30,304)
-------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) for the period................................. 15,383 (3,049)
Beginning of period.................................................... 48,769 41,849
-------- -------
End of period.......................................................... $ 64,152 $38,800
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................ $13,117 $12,510
Income taxes........................................................ 3,013 6,038
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
FRED MEYER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Reporting Periods
-------------------------
The Company's interim reporting periods for reports to stockholders are
the 16th, 28th, and 40th weeks of its fiscal year.
2. Inventories
-----------
Inventories consist mainly of merchandise held for sale. Substantially all
of the inventories are valued at the lower of last-in, first-out (LIFO)
cost or market. Estimated gross margins have been used for determining the
cost of merchandise sold for those operating departments not taking
physical inventories at the end of the interim periods.
3. Income Taxes
------------
Income taxes have been provided for based upon the current estimate of the
Company's annual effective tax rate.
4. Stockholders' Equity
--------------------
Changes in stockholders' equity for the sixteen weeks ended May 24, 1997
were:
(In thousands)
--------------
Stockholders' equity, February 1, 1997 $567,298
Issuance of common stock - net 12,404
Unearned compensation (177)
Amortization of unearned compensation 48
Net income 13,259
--------
Stockholders' equity, May 24, 1997 $592,832
========
5. Earnings Per Common Share
-------------------------
Fully diluted earnings per common share are computed by dividing net
income by the weighted average number of common and common equivalent
shares outstanding. Weighted average shares reflect the dilutive effect of
outstanding stock options (ranging in exercise price from $12.125 to
$41.25 per share) which was determined by using the "treasury stock"
method.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, which establishes new standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. SFAS No. 128 replaces the presentation of
primary EPS with a presentation of basic EPS, requires dual presentation
of basic and diluted EPS on the face of the income statement, and requires
additional disclosures regarding EPS. SFAS No. 128 will require changes in
the computation and presentation of the Company's EPS commencing with the
financial statements for the year ending January 31, 1998 and require
restatement of all prior periods presented. Earlier application of this
statement is not permitted. However, if the Company computed its EPS for
the 16 weeks ended May 24, 1997 in a manner consistent with SFAS No. 128,
the pro forma amounts would have been as follows:
Basic earnings per share $.50
Diluted earnings per share $.48
Basic weighted average number of common shares
outstanding to the nearest thousand 26,525
Diluted weighted average number of common and
common equivalent shares outstanding to
the nearest thousand 27,628
5
<PAGE>
6. Commitments and Contingencies
-----------------------------
The Company and its subsidiaries are parties to various legal claims,
actions, and complaints, certain of which involve material amounts.
Although the Company is unable to predict with certainty whether or not it
will ultimately be successful in these legal proceedings or, if not, what
the impact might be, management presently believes that disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations.
---------------
The financial information furnished in this Form 10-Q reflects all adjustments
of a normal recurring nature which, in the opinion of management, are necessary
for a fair presentation of the results for the 16 weeks ended May 24, 1997 and
May 25, 1996.
The consolidated results of operations presented herein are not necessarily
indicative of the results to be expected for the year due to the seasonality of
the Company's business. These consolidated financial statements should be read
in conjunction with the financial statements and related notes incorporated by
reference in the Company's latest annual report filed on Form 10-K.
6
Exhibit 99.3
Financial Statements for Smith's from Smith's Annual Report
on Form 10-K for the fiscal year ended December 28, 1996, as
amended, and Quarterly Report on
Form 10-Q for the quarter ended July 5, 1997
Consolidated Balance Sheets
Dollar amounts in thousands December 28, December 30,
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,466 $ 16,079
Rebates and accounts receivable 23,624 23,802
Refundable income taxes 49,832
Inventories 371,912 394,982
Prepaid expenses and deposits 25,520 21,255
Deferred tax assets 60,679 23,900
Assets held for sale 40,348 125,000
---------- ----------
TOTAL CURRENT ASSETS 620,381 605,018
PROPERTY AND EQUIPMENT
Land 195,408 276,626
Buildings 591,075 610,049
Leasehold improvements 46,266 55,830
Property under capitalized leases 33,212
Fixtures and equipment 530,894 509,524
---------- ----------
1,396,855 1,452,029
Less allowances for depreciation
and amortization 440,811 390,933
---------- ----------
956,044 1,061,096
OTHER ASSETS
Goodwill, less accumulated
amortization of $1,684 121,484
Deferred financing costs, net 72,364 5,529
Other 15,732 14,537
---------- ----------
209,580 20,066
---------- ----------
$1,786,005 $1,686,180
========== ==========
Dollar amounts in thousands December 28, December 30,
1996 1995
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 269,717 $ 214,152
Accrued sales and other taxes 29,480 38,724
Accrued payroll and related benefits 78,950 65,785
Other accrued expenses 69,303 43,695
Current maturities of long-term debt 35,496 20,932
Current maturities of obligations
under capital leases 1,387
Current maturities of Redeemable
Preferred Stock 1,008
Accrued restructuring costs 25,678 58,000
---------- ----------
TOTAL CURRENT LIABILITIES 510,011 442,296
LONG-TERM DEBT, less current maturities 1,313,926 717,761
OBLIGATIONS UNDER CAPITAL LEASES, less
current portion 25,585
ACCRUED RESTRUCTURING COSTS, less current
portion 10,421 40,000
DEFERRED INCOME TAXES 13,330 58,600
OTHER LONG-TERM LIABILITIES 31,616 7,492
REDEEMABLE PREFERRED STOCK, less current
maturities 3,319 3,311
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock, par
value $.01 per share: 20,000,000 shares;
issued and outstanding, 5,117,144 shares in
1996 and 11,613,043 shares in 1995 51 116
Class B Common Stock, par value $.01 per
share: 100,000,000 shares; issued 10,685,086
shares in 1996 and 18,348,968 shares in 1995 107 183
Additional paid-in capital 199,609 285,236
Retained earnings (deficit) (321,970) 238,027
---------- ----------
(122,203) 523,562
Less Treasury Shares at cost
(4,890,302 shares in 1995) 106,842
---------- ----------
(122,203) 416,720
---------- ----------
$1,786,005 $1,686,180
========== ==========
See notes to consolidated financial statements
<PAGE>
Consolidated Statements of Income
Dollar amounts in thousands, 52 Weeks Ended
except per share data ---------------------------------------
December 28, December 30, December 31,
1996 1995 1994
----------- ----------- -----------
Net sales $2,889,988 $3,083,737 $2,981,359
Cost of goods sold 2,237,789 2,386,707 2,312,228
---------- ---------- ----------
652,199 697,030 669,131
Expenses:
Operating selling and administrative 449,247 461,401 440,335
Depreciation and amortization 93,951 104,963 94,491
Interest 104,602 60,046 53,715
Amortization of deferred
financing costs 5,406 432 509
Restructuring charges 201,622 140,000
---------- ---------- ----------
854,828 766,842 589,050
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY CHARGE (202,629) (69,812) 80,081
Income taxes (benefit) (80,245) (29,300) 31,300
--------- --------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE (122,384) (40,512) 48,781
Extraordinary charge on
extinguishment of debt,
net of tax benefit 41,782
--------- --------- ----------
NET INCOME (LOSS) $(164,166) $ (40,512) $ 48,781
========= ========= ==========
Income (loss) per share of Common Stock:
Income (loss) before
extraordinary charge $ (6.28) $ (1.62) $ 1.73
Extraordinary charge (2.14)
---------- ---------- ----------
Net income (loss) $ (8.42) $ (1.62) $ 1.73
========== ========== ==========
See notes to consolidated financial statements
<PAGE>
<TABLE>
Consolidated Statements of Common Stockholders' Equity
<CAPTION>
Class A Common Stock Class B Common Stock
-------------------- --------------------
Additional
Number Par Number of Par Paid-in Retained Treasury
of Shares Value Shares Value Capital Earnings Stock Total
--------- ----- -------- ----- ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 2, 1994 12,617,445 $126 17,344,566 $ 173 $285,482 $ 259,400 $ (2,984) $ 542,197
Net income for 1994 48,781 48,781
Conversion of shares from
Class A to Class B (477,128) (5) 477,128 5
Purchase of Class B Common
Stock for the treasury (109,239) (109,239)
Shares sold to the Employee
Stock Profit Sharing Plan 143 1,505 1,648
Shares sold under the
Employee Stock Purchase Plan (668) 6,713 6,045
Cash dividends--$.52 per share (14,725) (14,725)
Other 635 635
---------- ---- ----------- ------ -------- --------- --------- ---------
Balance at December 31, 1994 12,140,317 121 17,821,694 178 285,592 293,456 (104,005) 475,342
Net loss for 1995 (40,512) (40,512)
Conversion of shares from
Class A to Class B (527,274) (5) 527,274 5
Purchase of Class B Common
Stock for the treasury (9,039) (9,039)
Shares sold to the Employee
Stock Profit Sharing Plan 2 108 110
Shares sold under the
Employee Stock Purchase Plan (926) 6,094 5,168
Cash dividends--$.60 per share (14,917) (14,917)
Other 568 568
---------- ---- ----------- ------ -------- --------- --------- ---------
Balance at December 30, 1995 11,613,043 116 18,348,968 183 285,236 238,027 (106,842) 416,720
Net loss for 1996 (164,166) (164,166)
Conversion of shares from
Class A to Class B (751,672) (8) 751,672 8
Purchase of Class B Common
Stock for the treasury (2,290) (2,290)
Shares sold under the
Employee Stock Purchase Plan (477) 2,291 1,814
Shares purchased pursuant
to the Tender Offer (451,291) (451,291)
Shares issued pursuant to
the Merger 3,238,877 32 81,367 81,399
Exercise of stock options 27,500 412 412
Retirement of Treasury
Stock (5,744,227) (57) (11,681,931) (116) (165,889) (392,070) 558,132
Cash dividends--$.15 per share (3,761) (3,761)
Other (1,040) (1,040)
---------- ---- ----------- ------ -------- --------- --------- ---------
Balance at December 28, 1996 5,117,144 $ 51 10,685,086 $ 107 $199,609 $(321,970) $ -- $(122,203)
========== ==== =========== ====== ======== ========= ========= =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
Consolidated Statements of Cash Flows
52 Weeks Ended
--------------------------------------------
Dollar amounts in thousands December 28, December 30, December 31,
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ (164,166) $ (40,512) $ 48,781
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and
amortization 93,951 104,963 94,491
Amortization of deferred
financing costs 5,406 432 509
Deferred income taxes
(benefit) (58,703) (53,400) 10,500
Restructuring charges 201,622 140,000
Extraordinary charge 69,636
Other 551 568 635
Changes in operating
assets and liabilities:
Rebates and accounts
receivable 8,966 1,794 (4,758)
Refundable income
taxes (49,832)
Inventories 68,894 (5,418) (11,625)
Prepaid expenses
and deposits 5,561 (5,397) (1,324)
Trade accounts
payable 18,483 (21,691) 50,618
Accrued sales and
other taxes (15,608) 6,583 5,927
Accrued payroll and
related benefits 3,391 7,058 3,100
Accrued other expenses (29,882) 6,101 7,205
Accrued restructuring
costs (76,232)
---------- --------- ---------
CASH PROVIDED BY
OPERATING ACTIVITIES 82,038 141,081 204,059
INVESTING ACTIVITIES:
Additions to property
and equipment (101,303) (149,035) (146,676)
Proceeds from sale of
property and equipment 146,075 5,841 20,949
Other 4,269 (3,480) (2,158)
---------- --------- ---------
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 49,041 (146,674) (127,885)
FINANCING ACTIVITIES:
Additions to long-term
debt 1,380,000 45,978 27,000
Payments on long-term
debt (887,425) (18,686) (33,594)
Redemptions of
Preferred Stock (1,000) (1,108) (1,042)
Purchases of Treasury
Stock (453,581) (9,039) (109,239)
Proceeds from sale of
Treasury Stock 1,814 5,278 7,693
Payments for deferred
financing costs (79,224) (22)
Fees paid on early
extinguishment of debt (57,287)
Payment of dividends (3,761) (14,917) (14,725)
Other 1,772
---------- --------- ---------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (98,692) 7,484 (123,907)
---------- --------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS 32,387 1,891 (47,733)
Cash and cash equivalents at
beginning of year 16,079 14,188 61,921
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 48,466 $ 16,079 $ 14,188
========== ========= =========
See notes to consolidated financial statements
<PAGE>
Notes to Consolidated Financial Statements
NOTE A - Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Smith's Food &
Drug Centers, Inc. and its wholly-owned subsidiaries (the "Company"), after the
elimination of significant intercompany transactions and accounts. The Company
operates a regional supermarket and drug store chain in the Intermountain and
Southwestern regions of the United States.
Estimates and Assumptions
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 those estimates.
Definition of Accounting Period
The Company's fiscal year ends on the Saturday nearest to December 31. Fiscal
year operating results include 52 weeks for each year.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities less than three months. The amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Inventories
Inventories are valued at the lower of cost, determined on the last-in, first-
out (LIFO) method, or market. Approximately 93% and 95% of inventories in 1996
and 1995, respectively, were valued using the LIFO method. Other inventories
were valued using the first-in, first-out (FIFO) method. The FIFO cost exceeded
the LIFO value of inventories by $10.1 million in 1996 and $8.1 million in 1995.
The pretax LIFO charge was $2.0 million in 1996, $4.0 million in 1995, and $2.5
million in 1994.
Assets Held for Sale
Assets held for sale are valued at the lower of cost or estimated net realizable
value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided by the straight-line method based upon estimated useful lives.
Improvements to leased property are amortized over their estimated useful lives
or the remaining terms of the leases, whichever is shorter.
Property under capital leases is stated at the lower of the fair market value of
the asset or the present value of future minimum lease payments. These leases
are amortized on the straight-line method over the terms of the leases and such
amortization is included in depreciation and amortization expense.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
acquired assets less assumed liabilities and is amortized on a straight-line
method over 40 years.
Deferred Financing Costs
Deferred financing costs represent costs incurred in connection with the
issuance of debt and are amortized on a straight-line method over the term of
the related debt.
Accrued Insurance Claims
The Company is self-insured, with certain stop loss insurance coverage, for
workers' compensation, non-union employee health care and general liability
claims. Expense is recorded based on estimates of the ultimate liability,
including claims incurred but not reported. The liabilities for accrued
insurance claims were $43.4 million and $31.8 million at the end of 1996 and
1995, respectively. These liabilities are not discounted.
Pre-Operating and Closing Costs
Costs incurred in connection with the opening of new stores and distribution
facilities are expensed as incurred. The remaining net investment in stores
closed, less salvage value, is charged against earnings in the period of
closing. For leased stores that are closed and subleased to third parties, a
provision is made for the remaining lease liability, net of expected sublease
rental. For leased stores that are closed but not yet subleased, a provision is
made based on discounted lease payments through the estimated period until
subleased.
Interest Costs
Interest costs are expensed as incurred, except for interest costs which have
been capitalized as part of the cost of properties under development. The
Company's cash payments for interest (net of capitalized interest of
approximately $0.9 million in 1996, $1.4 million in 1995, and $5.8 million in
1994) amounted to $100.7 million in 1996, $60.7 million in 1995, and $54.0
million in 1994.
Income Taxes
The Company determines its deferred tax assets and liabilities based on
differences between the financial reporting and tax basis of its assets and
liabilities using the tax rates that will be in effect when the differences are
expected to reverse.
Net Income Per Share of Common Stock
Net income per share of Common Stock is computed by dividing the net income by
the weighted average number of shares of Common Stock outstanding of 19,493,236
in 1996, 25,030,882 in 1995, and 28,176,907 in 1994. Common stock equivalents
in the form of stock options are excluded from the weighted average number of
common shares outstanding in 1996 and 1995 due to the net loss.
Litigation
The Company is a party to certain legal actions arising out of the ordinary
course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
Company's results of operations or financial position.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform with the 1996 presentation.
NOTE B - MERGER AND RECAPITALIZATION
On May 23, 1996, the Company completed a merger (the "Merger") in which Smitty's
Supermarkets, Inc. ("Smitty's") became a wholly owned subsidiary of the Company
in a transaction accounted for as a purchase. Smitty's is a regional
supermarket company operating 28 stores (two stores were subsequently leased to
other retailers) in the Phoenix and Tucson, Arizona areas. The Company issued
3,038,877 shares of the Company's Class B Common Stock for all of Smitty's
outstanding common stock. An additional 200,000 shares of the Company's Class B
Common Stock were issued in prepayment of certain management fees. The
financial statements reflect the preliminary allocation of the purchase price
and assumption of certain debt and include the results of operations for
Smitty's from May 23, 1996.
The supplemental schedule of business acquisition is as follows:
Dollar amounts in thousands 52 Weeks Ended
December 28, 1996
-----------------
Fair value of assets acquired $378,524
Value of stock issued (78,100)
--------
Liabilities assumed $300,424
========
The Company recorded a reserve of $40.4 million in the purchase price allocation
in connection with the closure of certain stores and Smitty's corporate office
and the cancellation of duplicate contractual agreements. This reserve includes
lease termination costs, contract cancellation fees, and closure costs. The
store closures and contract terminations are expected to be completed by
December 1997. The reserve balance at December 28, 1996 was $26.8 million.
The Company also recorded a reserve of $5.6 million for costs related to the
termination of duplicative personnel which was paid during 1996.
The following unaudited pro forma information presents the results of the
Company's operations as though the Merger had been consummated at the beginning
of each period and excludes the Company's California stores and charges related
to the disposition of California assets or closure of the California region.
The amounts represent fifty-two weeks of the combined operations of the Company
and Smitty's.
52 Weeks Ended
--------------------------
Dollar amounts in thousands, December 28, December 30,
except per share data 1996 1995
----------- -----------
Net sales $3,033,169 $2,993,439
Loss before extraordinary charge (9,372) (3,604)
Net loss (73,873) (27,518)
Loss per share of Common Stock:
Loss before extraordinary charge (.59) (.23)
Net loss (4.68) (1.75)
The Company also completed a self tender offer on May 23, 1996 pursuant to which
it purchased 50% of its outstanding Class A and Class B Common Stock for $36 per
share, excluding the shares issued in connection with the Smitty's merger
(together with the Merger, the "Recapitalization"). The purchase of shares in
the tender offer was accounted for as a purchase of treasury stock which was
subsequently retired. The tender offer price of $36 per share was set in
January 1996 by the Company's Board of Directors to allow stockholders to sell
at least 50% of their shares at an appropriate premium of approximately $8.00
per share above trading prices of the Class B Common Stock on the New York
Stock Exchange prior to the announcement of the tender offer. Debt consisting
of $575 million principal amount of 11 1/4% senior subordinated notes due 2007
and $805 million principal amount of secured bank term loans at various
interest rates were used to finance the stock purchase, repay certain existing
indebtedness, and pay premiums related to early repayment of such indebtedness.
NOTE C - Property and Equipment
The Company depreciates its buildings over 25 to 30 years and its fixtures and
equipment over a period of 2 to 9 years and amortizes its leasehold improvements
over their estimated useful lives or the life of the lease, whichever is
shorter. Property and equipment consists of the following:
Allowances Net
Dollar amounts in for Depreciation Book
thousands Cost and Amortization Value
---------- ---------------- ----------
December 28, 1996
Land $ 195,408 $ 195,408
Buildings 591,075 $117,108 473,967
Leasehold improvements 46,266 13,271 32,995
Property under
capitalized leases 33,212 1,655 31,557
Fixtures and equipment 530,894 308,777 222,117
---------- -------- ----------
$1,396,855 $440,811 $ 956,044
========== ======== ==========
December 30, 1995
Land $ 276,626 $ 276,626
Buildings 610,049 $108,985 501,064
Leasehold improvements 55,830 12,556 43,274
Fixtures and equipment 509,524 269,392 240,132
---------- -------- ----------
$1,452,029 $390,933 $1,061,096
========== ======== ==========
NOTE D - Long-Term Debt
Long-term debt consists of the following:
December 28, December 30,
Dollar amounts in thousands 1996 1995
----------- -----------
Term loans, principal due quarterly
through 2005, with interest payable
monthly $ 753,800
11 1/4% Senior Subordinated Notes,
principal due 2007 with interest
payable semi-annually 575,000
Sinking fund bonds, 10 1/2% interest,
semi-annual maturities to 2016 11,872
Unsecured notes repaid in 1996 $410,000
Mortgage notes, collateralized by
property and equipment with a cost
of $2.8 million in 1996 and $420.7
million in 1995, due through 2005
with interest at an average rate of
5.11% in 1996 and 9.68% in 1995 2,742 254,385
Revolving credit bank loans repaid in
1996 with an average interest rate of
6.06% in 1995 68,000
Industrial revenue bonds, collateralized
by property and equipment with a cost
of $9.0 million in 1996 and $11.7 million
in 1995, due in 2000 through 2010 plus
interest at an average rate of 7.22% in
1996 and 7.44% in 1995 6,008 6,308
---------- --------
1,349,422 738,693
Less current maturities 35,496 20,932
---------- --------
$1,313,926 $717,761
========== ========
The Company entered into a new senior credit facility (the "New Credit
Facility") that provides term loans totaling $805 million (the "New Term Loans")
which were funded in connection with the Merger and Recapitalization and a $190
million revolving credit facility (the "New Revolving Facility") less amounts
outstanding under letters of credit. All indebtedness under the New Credit
Facility is secured by substantially all of the assets of the Company. A
commitment fee of one-half of one percent is charged on the average daily unused
portion of the New Revolving Facility, payable quarterly. Interest on
borrowings under the New Term Loans is at the bank's Base Rate plus a margin
ranging from 1.5% to 2.75% or the Adjusted Eurodollar Rate plus a margin ranging
from 2.50% to 4.00%. At December 28, 1996, the weighted average interest rate
on the New Term Loans was 8.57%. Interest on borrowings under the New Revolving
Facility is at the bank's Base Rate plus a margin of 1.25% or the Adjusted
Eurodollar Rate plus a margin of 2.5%. At December 28, 1996, the interest rate
on the New Revolving Facility was 7.88%; however, no amounts were outstanding
under the New Revolving Facility other than $23.1 million of letters of credit.
Maturities of the Company's long-term debt for the five fiscal years succeeding
December 28, 1996 are approximately $35.5 million in 1997, $56.5 million in
1998, $66.4 million in 1999, $68.9 million in 2000, and $65.1 million in 2001.
The New Credit Facility requires the Company to maintain minimum levels of net
worth and earnings, to maintain a hedge agreement to provide interest rate
protection, and to comply with certain ratios related to fixed charges and
indebtedness. In addition, the New Credit Facility limits additional
borrowings, dividends on and redemption of capital stock and the acquisition and
the disposition of assets.
On August 23, 1996, the Company entered into an interest rate collar agreement
with the New Credit Facility Administrative Agents which effectively established
interest rate limits on $260.0 million of the Company's New Term Loans. This
interest rate collar limits the interest rate fluctuation of the Adjusted
Eurodollar Rate to a range between 5.3% and 7.5% for two years. This agreement
satisfies the interest rate protection requirements under the New Credit
Facility.
The Company recorded an extraordinary charge of $69.6 million less a $27.8
million income tax benefit which consisted of fees incurred in the prepayment of
certain mortgage notes and unsecured notes of the Company and certain long-term
debt of Smitty's assumed in the Merger and the write-off of their related debt
issuance costs.
The amount included in the balance sheet for long-term debt approximates its
fair value at December 28, 1996. The amounts classified as revolving credit
bank loans approximate their fair value at December 30, 1995. The fair value of
the Company's long-term debt was estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
debt arrangements.
NOTE E - Redeemable Preferred Stock
The Company has 85,000,000 shares of $.01 per share par value Preferred Stock
authorized. The Company has designated 34,524,579 of these shares as Series I
Preferred Stock, of which 9,956,749 shares and 12,956,747 shares were issued and
outstanding in 1996 and 1995, respectively. The Preferred Stock has no dividend
requirement.
All shares of the Company's Series I Preferred Stock are subject to redemption
at any time after May 23, 1998 at the option of the Board of Directors, in such
numbers as the Board may determine, and at a redemption price of $.33 1/3 per
share. The scheduled redemptions of the Company's Redeemable Preferred Stock
are approximately $1.0 million each year beginning in 2001 until all outstanding
shares are redeemed. Upon liquidation of the Company, each share of Series I
Preferred Stock is entitled to a liquidation preference of $.33 1/3, on a pro
rata basis with any other series of Preferred Stock, before any distribution to
the holders of Common Stock. Each share of Series I Preferred Stock is entitled
to ten votes. Redeemable Series I Preferred Stock is stated at redemption value
in the balance sheet.
The amount included in the balance sheet for Redeemable Preferred Stock
approximates its fair value.
NOTE F - Common Stockholders' Equity
The voting powers, preferences and relative rights of Class A Common Stock and
Class B Common Stock are identical in all respects, except that the holders of
Class A Common Stock have ten votes per share and the holders of Class B Common
Stock have one vote per share. Each share of Class A Common Stock is
convertible at any time at the option of the holder into one share of Class B
Common Stock. The Company's Certificate of Incorporation also provides that
each share of Class A Common Stock will be converted automatically into one
share of Class B Common Stock if at any time the number of shares of Class A
Common Stock issued and outstanding shall be less than 2,910,885. Future sales
or transfers of the Company's Class A Common Stock are restricted to the Company
or immediate family members of the original Class A Common Stockholders unless
first presented to the Company for conversion into an equal number of Class B
Common Stock shares. The Class B Common Stock has no conversion rights.
The Company's Class C Common Stock has the same rights and preferences as the
other classes of Common Stock, except that the Class C Common Stock will not
have any voting rights while it is owned by an original Class C Stockholder.
Upon any transfer of shares of Class C Common Stock by an original Class C
Stockholder to a third party, the transferee may convert such shares into an
equal number of shares of Class B Common Stock. At December 28, 1996 there were
20,000,000 shares of $.01 per share par value Class C Common Stock authorized
and no shares of Class C Common Stock were issued or outstanding.
At the time of the Merger, the Company issued to The Yucaipa Companies
("Yucaipa") warrants ("Warrants") to purchase up to 1.5 million shares of the
Company's Class C Common Stock at an exercise price of $50.00 per share. One
half of the Warrants expire on May 23, 2000 and the remaining half expire on May
23, 2001. In the event that certain financial performance conditions are met,
however, the expiration dates may be extended by five years.
NOTE G - Income Taxes
Income tax expense (benefit) consists of the following:
52 weeks ended
-----------------------------------------
December 28, December 30, December 31,
Dollar amounts in thousands 1996 1995 1994
----------- ----------- -----------
Current:
Federal $(37,394) $ 20,220 $17,211
State 3,880 3,589
-------- -------- -------
(37,394) 24,100 20,800
Deferred:
Federal (34,818) (46,681) 9,247
State (8,033) (6,719) 1,253
-------- -------- -------
(42,851) (53,400) 10,500
-------- -------- -------
$(80,245) $(29,300) $31,300
======== ======== =======
Cash disbursements for income taxes were $6.9 million in 1996, $19.2 million in
1995, and $21.7 million in 1994. The difference between income tax expense
(benefit) and the tax computed by applying the statutory income tax rate to
income before income taxes is as follows:
52 Weeks Ended
-----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
----------- ----------- -----------
Statutory federal
income tax rate (35.0%) (35.0%) 35.0%
State income tax rate,
net of federal income
tax effect (3.9) (4.3) 4.7
Effect of income tax rate
changes on deferred taxes (3.6)
Other (.8) .9 (.6)
------ ------ -----
(39.7%) (42.0%) 39.1%
====== ====== =====
The effect of temporary differences that give rise to deferred tax balances are
as follows:
December 28, December 30,
Dollar amounts in thousands 1996 1995
----------- -----------
Deferred tax liabilities:
Depreciation and amortization $ 86,176 $ 81,008
LIFO 8,421 5,192
Pension plan expense 6,841 5,383
Other 5,135 2,997
--------- --------
106,573 94,580
Deferred tax assets:
Accrued restructuring costs (54,130) (33,305)
Net operating loss carryforwards (43,787)
Accrued insurance claims (16,874) (12,271)
Accrued acquisition costs (13,976)
Tax credits carryforwards (7,791)
Rent (6,627) (8,138)
Other (10,737) (6,166)
--------- --------
(153,922) (59,880)
--------- --------
(47,349) 34,700
Net current deferred tax assets 60,679 23,900
--------- --------
Net non-current deferred tax liabilities $ 13,330 $ 58,600
========= ========
At December 28, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes of $96.5 million and $256.2 million,
respectively, which expire from 2010 through 2012. In addition, the Company has
net operating loss carryforwards for state income tax purposes of $200.5 million
which expire from 1998 through 2012. The Company has federal Alternative
Minimum Tax ("AMT") credit carryforwards of $7.8 million which are available to
reduce future regular taxes in excess of AMT. These credits have no expiration
date.
NOTE H - Fair Value of Financial Instruments
The carrying amounts and related fair values of the Company's financial
instruments are as follows:
December 28, 1996 December 30, 1995
------------------ -----------------
Dollar amounts in thousands Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------- -------------------
Cash and cash equivalents $ 48,466 $ 48,466 $ 16,079 $ 16,079
Long-term debt 1,349,422 1,349,422 738,693 796,121
Redeemable Preferred Stock 3,319 3,319 4,319 4,319
The methods of determining the fair value of the Company's financial instruments
are disclosed in the respective notes to the consolidated financial statements.
NOTE I - Leases and Commitments
The Company leases property and equipment under terms which include, in some
cases, renewal options, escalation clauses or contingent rentals which are based
on sales. Total rental expense for such leases amounted to the following:
52 Weeks Ended
-----------------------------------------
December 28, December 30, December 31,
Dollar amounts in thousands 1996 1995 1994
----------- ----------- -----------
Minimum rentals $28,854 $52,196 $44,662
Contingent rentals 296 235 293
------- ------- -------
29,150 52,431 44,955
Less sublease rental income 14,563 13,070 10,763
------- ------ ------
$14,587 $39,361 $34,192
======= ======= =======
At December 28, 1996, future minimum rental payments and sublease rentals for
all noncancellable leases with initial or remaining terms of one year or more
consisted of the following:
Minimum Rental Payments
------------------------
Dollar amounts
in thousands Capital Operating Less Sublease Total
Leases Leases Rentals
------- --------- ------------- -----
1997 $ 4,631 $ 57,824 $ 26,143 $ 36,312
1998 4,569 55,218 25,873 33,914
1999 4,565 54,628 25,002 34,191
2000 4,360 52,810 24,359 32,811
2001 3,809 47,966 23,555 28,220
Thereafter 44,515 796,574 321,961 519,128
------- ---------- -------- --------
66,449 $1,065,020 $446,893 $684,576
========== ======== ========
Less amount
representing
interest 39,477
-------
Present value $26,972
=======
At December 28, 1996 the Company had contract commitments of approximately $3.2
million for future construction and a contract for information technology
services requiring payments of approximately $21.6 million in 1997, $24.4
million in 1998, $27.1 million in 1999, $35.5 million in 2000, and $39.6 million
in 2001.
NOTE J - Employee Stock Plans
The Company established a stock profit sharing plan under which year end
employees who are compensated for more than 1,000 hours during the year are
participants. Eligible employees are allocated shares of the Company's Class B
Common Stock based on hours of service up to 2,080 hours. Contributions are
made at the sole discretion of the Company based on its profitability. The
contribution expense was $1.4 million in 1995 and $1.6 million in 1994. In
1996, the stock profit sharing plan was terminated. Benefits earned became
vested and were distributed to the participants.
The Company has a stock purchase plan which permits employees to purchase shares
of the Company's Class B Common Stock through payroll deductions at 85% of fair
market value at the time of purchase. Employees purchased 55,313 shares,
282,485 shares, and 309,553 shares from the Treasury during 1996, 1995, and
1994, respectively.
The Company has a Stock Option Plan which authorizes the Compensation Committee
of the Board of Directors to grant options to key employees for the purchase of
Class B Common Stock. The Company has elected to follow Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options rather than
the alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under APB 25, compensation expense for the difference between the market
value of the options on the grant date and the grant price is recognized on a
straight-line basis over the vesting period of the options.
The aggregate number of shares available for grant under the plan is equal to
10% of the number of shares of Class B Common Stock authorized. However, the
number of outstanding and unexercised options shall not exceed 10% of the number
of shares of Class A and Class B Common Stock outstanding. The number of
unoptioned shares of Class B Common Stock available for grant was 778,973 shares
and 890,671 shares at the end of 1996 and 1995, respectively. The options may
be either incentive stock options or non-qualified stock options.
As part of the Recapitalization (see Note B), the Company purchased 50% of the
outstanding stock options at May 23, 1996 and reduced the exercise price from
$19.00 to $15.00 per share on the remaining options outstanding. All other
terms of the granted options remained the same. Additional compensation expense
of $3.7 million resulting from the reduction in the exercise price will be
amortized over the remaining vesting periods of the options ranging from 3 to
9 years.
The options outstanding at December 28, 1996 are exercisable as follows:
Number of
Shares
-------
Options exercisable in the future
1999 230,500
2000 50,000
2001 131,000
2002 26,750
2003 191,500
2004 5,500
2005 52,000
-------
687,250
Options currently exercisable 114,000
-------
801,250
=======
Compensation expense for the difference between the market value of the options
on the grant date and the grant price is recognized on a straight-line basis
over the vesting period of the options. The amounts charged to operations were
$12.7 million in 1996, $.6 million in 1995 and $.6 million in 1994. The charge
for 1996 included $12.3 million recognized on the purchase of 805,750 options
for $36 per share less the exercise price of $19.00 per share.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
6.2%; dividend yields of 0% in 1996 and 2.35% in 1995; volatility factors of the
expected market price of the Company's Common Stock of 2.86 in 1996 and 2.84 in
1995; and weighted-average expected lives of the options equal to the vesting
period.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for options granted in 1996 and 1995 follows:
52 Weeks Ended
-------------------------------
Dollar amounts in thousands, December 28, December 30,
except per share data 1996 1995
----------- -----------
Pro forma net loss $(163,490) $(40,588)
Pro forma net loss per common share (8.39) (1.62)
For purposes of the pro forma expense, the weighted average fair value of the
options is amortized over the vesting period. The pro forma effect on net
income for 1995 through 2004 will not be representative of future years' impact
because options granted prior to 1995 are excluded from the pro forma
calculations. The pro forma expense in future years will grow due to the added
layers of amortization for succeeding grants. By 2005, however, the pro forma
results will include amortization for all nonvested options outstanding.
A summary of the Company's stock option activity and related information
follows:
52 Weeks Ended
----------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------------- ------------------- ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding
at
beginning
of year 1,616,500 $19.00 1,545,500 $19.00 1,497,500 $19.00
Granted 125,000 15.00 317,000 19.00 81,000 19.00
Exercised (27,500) 15.00
Forfeited (107,000) 17.37 (246,000) 19.00 (33,000) 19.00
Purchased in
Recapitaliza-
tion (805,750) 19.00
-------- ----- --------- ------ --------- ------
Outstanding
at end of
year 801,250 $15.00 1,616,500 $19.00 1,545,500 $19.00
======== ====== ========= ====== ========= ======
Exercisable
at end of
year 114,000 $15.00 60,000 $19.00 60,000 $19.00
======== ====== ========= ====== ========= ======
The weighted-average fair value of options granted during 1996 and 1995,
respectively, was $12.76 and $8.00. The weighted-average remaining contractual
life of those options is 4.65 years.
NOTE K - Pension Plans
Employees whose terms of employment are determined by negotiations with
recognized collective bargaining units are covered by their respective multi-
employer defined benefit pension plans to which the Company contributes. The
costs charged to operations for these plans amounted to approximately $5.1
million in 1996, $4.6 million in 1995, and $4.2 million in 1994. Other
information for these multi-employer plans is not available to the Company.
The Company maintains a defined benefit pension plan for all other permanent
employees which provides for normal retirement at age 65. Employees are
eligible to join when they complete at least one year of service and have
reached age 21. The benefits are based on years of service and stated amounts
associated with those years of service. The Company's current funding policy is
to contribute annually up to the maximum amount deductible for federal income
tax purposes. Net pension cost includes the following components:
52 Weeks Ended
-----------------------------------------
Dollar amounts December 28, December 30, December 31,
in thousands 1996 1995 1994
----------- ----------- -----------
Service cost - present
value of benefits
earned during the
period $ 3,024 $ 2,119 $ 2,326
Interest cost on
projected benefit
obligation 2,603 1,966 1,725
Actual return on
plan assets (7,230) (9,692) 237
Net amortization
and deferral 4,488 7,598 (1,615)
------- ------- -------
$ 2,885 $ 1,991 $ 2,673
======= ======= =======
The following table presents the plan's funded status and amounts recognized in
the Company's consolidated balance sheets:
Dollar amounts in thousands December 28, 1996 December 30, 1995
----------------- -----------------
Actuarial present value of
accumulated benefits based
on service to date:
Vested $30,523 $29,649
Non-vested 2,763 3,482
------- -------
33,286 33,131
Fair value of plan assets
(primarily in equity and
fixed income funds) 44,778 37,934
------- -------
Fair value of plan assets in
excess of projected benefit
obligation 11,492 4,803
Unrecognized net loss 264 7,473
Prior service cost 105 133
Unrecognized net asset (815) (978)
------- -------
Net prepaid pension cost $11,046 $11,431
======= =======
The weighted average discount rate used to determine the actuarial present value
of the projected benefit obligation was 7.75% in 1996, 7.25% in 1995 and 8.5% in
1994. The expected long-term rate of return on plan assets was 8.5% in 1996,
1995, and 1994.
The Company provides a 401(k) plan for virtually all employees. The plan is
entirely funded by employee contributions which are based on employee
compensation not to exceed certain limits.
NOTE L - Restructuring Charges
In December 1995, the Company recorded restructuring charges amounting to $140
million related to its decision to sell, lease or close all 34 stores and the
distribution center comprising its Southern California Region. The Southern
California Region contributed sales of approximately $73 million, $675 million
and $653 million in 1996, 1995 and 1994, respectively, and recognized operating
losses of $29.5 million, $41.1 million, and $49.5 million in 1996, 1995 and
1994, respectively. These losses include corporate allocations such as benefits
of corporate buying, distribution and manufacturing operations, interest expense
and corporate overhead. During 1996, the Company sold or leased 23 of its
California stores and related equipment and six non-operating properties to
various supermarket companies and others. Of the stores sold or leased, 12
owned stores were sold outright, three owned stores were leased, three store
leases were assigned and five leased stores were subleased. The remaining
eleven California stores have been closed and it is anticipated that these
stores will be sold or leased.
Following the Merger and Recapitalization on May 23, 1996 (see Note B), the
Company adopted a strategy to accelerate the disposition of its remaining real
estate assets in California including its non-operating stores and excess land.
The Company intends to use the net cash proceeds from the sales of these assets
to either reinvest in the Company's business or reduce indebtedness.
Accordingly, in the second quarter the Company recorded additional restructuring
charges of $201.6 million relating to the difference between the anticipated
cash proceeds from the accelerated dispositions (based on appraisals obtained
following the completion of the Merger and Recapitalization) and the Company's
existing book values and other charges in connection with its decision to close
the California Region.
The following table presents the components of the accrued restructuring costs
and actual activity for the year ended December 31, 1996:
Costs Accrued
Balance at Incurred Adjustments Restructuring
Dollar amounts December 30, during & Additional Costs at
in thousands 1995 1996 Charges December 28, 1996
----------- -------- ------------ ------------------
Current Long-term
------- ---------
Charges for
lease
obligations $65,600 $23,813 $(19,922) $14,096 $ 7,769
Inventory 16,000 16,020 (20)
Termination costs 10,000 24,633 17,174 2,541
Property maintenance
costs and other 6,400 10,714 16,047 9,041 2,652
------- ------- -------- ------- -------
$98,000 $75,180 $ 13,279 $25,678 $10,421
======= ======= ======== ======= =======
NOTE M - Related Party Transactions
The Company has a five year management agreement with Yucaipa, whose managing
general partner is also the Company's chief executive officer, effective May 23,
1996 for management and financial services. The agreement provides for annual
management fees equal to $1.0 million plus reimbursement of all of Yucaipa's
reasonable out-of-pocket costs and expenses. In addition, the Company may
retain Yucaipa in an advisory capacity in connection with certain acquisitions
or sale trasactions, debt and equity financings, or any other services not
otherwise covered by the agreement for an agreed upon fee.
The Company has leased or subleased nine stores located in California and the
Riverside, California distribution center and dairy processing plant to Ralphs
Grocery Company, an affiliate of Yucaipa.
NOTE N - Subsequent Event
From December 29, 1996 through January 31, 1997, the Company made prepayments
totalling $125.0 million on the New Term Loans included in long-term debt.
On February 20, 1997, the Company announced it had entered into an agreement to
obtain a $750 million senior secured credit facilities financing. The proceeds
from the planned financing will be used to repay the existing New Term Loans and
any outstanding indebtedness under the Company's revolvers and letters of
credit. The new facility will provide term loans totaling $600 million and a
$150 million revolving credit facility, less amounts outstanding under letters
of credit. A commitment fee ranging from .25% to .50% will be charged on the
average daily unused portion of the new revolving credit facility. Interest on
borrowings under the term loans and the revolving facility will be at the bank's
Base Rate plus a margin based on the Company's leverage ratio ranging from 0% to
1.25% or the adjusted Eurodollar Rate plus a margin based on the Company's
leverage ratio ranging from .75% to 2.25%.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders of Smith's Food & Drug Centers, Inc.
We have audited the accompanying consolidated balance sheets of Smith's Food &
Drug Centers, Inc. and subsidiaries as of December 28, 1996 and December 30,
1995, and the related consolidated statements of income, common stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
December 28, 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 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 consolidated financial position of Smith's Food &
Drug Centers, Inc. and subsidiaries at December 28, 1996 and December 30, 1995,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended December 28, 1996, in conformity
with generally accepted accounting principles.
\s\ Ernst & Young
Salt Lake City, Utah
January 27, 1997 except for Note N, as to which the date is February 20, 1997
RESPONSIBILITY FOR FINANCIAL REPORTING
The Management of Smith's Food & Drug Centers, Inc. and its subsidiaries has the
responsibility for the preparation, integrity, and objectivity of the
accompanying consolidated financial statements. The statements were prepared in
accordance with generally accepted accounting principles, using Management's
best estimates and judgment where necessary. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
Management maintains a cost effective system of internal controls that provides
reasonable assurance as to the integrity and reliability of the consolidated
financial statements and underlying transactions and the safeguarding of assets
against loss or unauthorized use. Management believes this system of internal
controls, augmented by its internal auditing function, assures the adequacy and
quality of financial reporting.
Our independent auditors, Ernst & Young LLP, audited the consolidated financial
statements in accordance with generally accepted auditing standards to
independently assess the fair presentation, in all material respects, of the
Company's consolidated financial statements.
The Audit Committee of the Board of Directors consists entirely of directors who
are not officers or employees of the Company. The Audit Committee meets
periodically with the independent auditors and Company management to review the
results of audit work and any comments on the adequacy of the system of internal
controls and the quality of financial reporting.
We believe the consolidated financial statements and related financial
information in the annual report are accurate in all material respects and that
they were prepared in accordance with generally accepted accounting principles.
\s\Ronald W. Burkle \s\Matthew G. Tezak
Chief Executive Officer Senior Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
Dollar amounts in millions, 52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks
except per share data Ended Ended Ended Ended Ended
December 28, December 30, December 31, January 1, January 2,
1996 1995 1994 1994 1993
----------- ----------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $2,890.0 $3,083.7 $2,981.4 $2,807.2 $2,649.9
Gross profit 652.2 697.0 669.1 637.2 611.6
Operating, selling and
administrative expense 449.2 461.4 440.8 430.3 419.7
Depreciation and amortization
expense 94.0 105.0 94.5 82.2 67.8
Interest expense 104.6 60.5 53.7 44.6 36.1
Restructuring charges 201.6 140.0
Extraordinary charge 41.8
Net income (loss) (164.2) (40.5) 48.8 45.8 53.7
Net income (loss)
per common share (8.42) (1.62) 1.73 1.52 1.79
Average number of common
shares outstanding 19,493,236 25,030,882 28,176,907 30,238,811 29,962,011
BALANCE SHEET DATA
Working capital 110.4 162.7 62.3 160.4 91.2
Total assets 1,786.0 1,686.2 1,653.5 1,654.3 1,486.1
Total debt 1,376.4 738.7 713.7 720.6 608.4
Redeemable preferred stock 3.3 4.3 5.4 6.5 7.5
Total stockholders' equity (122.2) 416.7 475.3 542.2 515.4
Dividends per common share .15 .60 .52 .52 .44
OTHER DATA
Number of stores 150 154 137 129 119
Total store square footage 10,200,000 10,102,000 9,101,000 8,501,000 7,668,000
Capital expenditures 101.3 149.0 146.7 322.3 288.0
Number of employees 20,200 20,277 19,859 18,759 19,310
Ratio of earnings to
fixed charges -- <F1> -- <F2> 2.18x 2.55x 3.06x
<FN>
<F1>The Company's earnings were inadequate to cover fixed charges by $202.6
million. However, such earnings included non-cash charges of $99.4 million,
primarily consisting of depreciation and amortization, and restructuring charges
of $201.6 million.
<F2>The Company's earnings were inadequate to cover fixed charges by $69.8
million. However, such earnings included non-cash charges of $105.4 million,
primarily consisting of depreciation and amortization, and restructuring charges
of $140.0 million.
</FN>
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Thirteen Thirteen Twenty-Seven Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
Jul 5, Jun 29, Jul 5, Jun 29,
1997 1996 1997 1996
-------- -------- ---------- ----------
Net sales $780,231 $690,023 $1,612,052 $1,383,188
Cost of goods sold 601,646 533,312 1,247,641 1,079,918
-------- -------- ---------- ---------
178,585 156,711 364,411 303,270
Expenses:
Operating, selling
and administrative 109,392 130,350 225,420 241,703
Depreciation and
amortization 23,978 21,432 46,887 44,071
Interest 28,948 22,655 61,671 37,092
Amortization of deferred
financing costs 809 772 3,109 880
Restructuring charges 201,622 201,622
-------- -------- ---------- ---------
163,127 376,831 337,087 525,368
-------- -------- ---------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY CHARGE 15,458 (220,120) 27,324 (222,098)
Income taxes (benefit) 6,500 (87,245) 11,500 (88,045)
-------- -------- ---------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE 8,958 (132,875) 15,824 (134,053)
Extraordinary charge on
extinguishment of debt,
net of tax benefit 41,782 25,030 41,782
-------- --------- ---------- ---------
NET INCOME (LOSS) $ 8,958 $(174,657) $ (9,206) $(175,835)
======== ========= ========== =========
Income (loss) per share of Common Stock:
Income (loss) before
extraordinary charge $ 0.55 $ (6.24) $ 0.97 $ (5.78)
Extraordinary charge (1.96) (1.54) (1.80)
-------- -------- ---------- ---------
Net income (loss) $ 0.55 $ (8.20) $ (0.57) $ (7.58)
======== ======== ========== =========
Average number of common
shares outstanding
(In thousands) 16,328 21,297 16,275 23,184
======== ======== ========== =========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
Jul 5, Dec 28,
1997 1996
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,333 $ 48,466
Rebates and accounts receivable 24,036 23,624
Refundable income taxes 49,832
Inventories 357,993 371,912
Prepaid expenses and deposits 22,820 25,520
Deferred tax assets 60,810 60,679
Assets held for sale 31,747 40,348
---------- ----------
TOTAL CURRENT ASSETS 500,739 620,381
PROPERTY AND EQUIPMENT
Land 193,344 195,408
Buildings 591,831 591,075
Leasehold improvements 55,217 46,266
Property under capitalized leases 49,025 33,212
Fixtures and equipment 496,772 530,894
---------- ----------
1,386,189 1,396,855
Less allowances for depreciation
and amortization 432,134 440,811
---------- ----------
954,055 956,044
OTHER ASSETS
Goodwill, less accumulated amortization
of $3,211 in 1997 and $1,684 in 1996 122,662 121,484
Deferred financing costs, net 32,514 72,364
Other 19,199 15,732
---------- ----------
174,375 209,580
---------- ----------
$1,629,169 $1,786,005
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 274,058 $ 269,717
Accrued sales and other taxes 27,175 29,480
Accrued payroll and related benefits 77,394 78,950
Other accrued expenses 51,683 69,303
Current maturities of long-term debt 54,757 35,496
Current maturities of obligations
under capital leases 2,049 1,387
Accrued restructuring costs 16,716 25,678
---------- ----------
TOTAL CURRENT LIABILITIES 503,832 510,011
LONG-TERM DEBT, less current maturities 1,169,862 1,313,926
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 39,866 25,585
ACCRUED RESTRUCTURING COSTS,
less current portion 6,116 10,421
DEFERRED INCOME TAXES 9,550 13,330
OTHER LONG-TERM LIABILITIES 27,611 31,616
REDEEMABLE PREFERRED STOCK 3,319 3,319
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock,
par value $.01 per share:
Authorized 20,000,000 shares; issued
and outstanding, 3,678,961 shares in
1997 and 5,117,144 shares in 1996 37 51
Class B Common Stock, par value $.01
per share: Authorized 100,000,000
shares; issued and outstanding,
12,178,691 shares in 1997 and
10,685,086 shares in 1996 122 107
Additional paid-in capital 200,030 199,609
Accumulated deficit (331,176) (321,970)
---------- ----------
(130,987) (122,203)
---------- ----------
$1,629,169 $1,786,005
========== ==========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Twenty-Seven Twenty-Six
Weeks Ended Weeks Ended
Jul 5, 1997 Jun 29, 1996
-------- ----------
OPERATING ACTIVITIES:
Net loss $ (9,206) $ (175,835)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 46,877 44,071
Amortization of deferred financing costs 3,109 880
Deferred income benefit (3,901) (74,189)
Restructuring charges 201,622
Extraordinary charge 40,430 69,637
Other 844 303
Changes in operating assets and liabilities:
Rebates and accounts receivable (412) 5,171
Refundable income taxes 49,832 (40,878)
Inventories 13,919 112,132
Prepaid expenses and deposits 2,700 11,808
Trade accounts payable 4,341 (30,633)
Accrued sales and other taxes (2,305) (12,151)
Accrued payroll and related benefits (1,556) (8,231)
Accrued other expenses (17,620) (18,470)
Accrued restructuring costs (13,267) (48,636)
-------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 113,785 36,601
INVESTING ACTIVITIES:
Additions to property and equipment (72,106) (64,996)
Proceeds from sale of property and equipment 50,444 96,846
Other (3,467) (454)
-------- ----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (25,129) 31,396
FINANCING ACTIVITIES:
Additions to long-term debt 636,164 1,380,000
Payments on long-term debt (760,967) (830,536)
Purchases of Treasury Stock (3,142) (452,405)
Proceeds from sale of Treasury Stock 2,720 1,227
Payments of deferred financing costs (3,689) (74,935)
Fees paid on early extinguishment of debt (57,287)
Payment of dividends (3,761)
Other (4,875) (1,000)
-------- ----------
CASH USED IN FINANCING ACTIVITITES (133,789) (38,697)
-------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (45,133) 29,300
Cash and cash equivalents at beginning of year 48,466 16,079
-------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,333 $ 45,379
======== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Obligations under capital leases incurred $ 15,813 $ --
======== ==========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the thirteen
week period ended July 5, 1997 are not necessarily indicative of the results
that may be expected for the year ending January 3, 1998. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 28, 1996.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower of cost, determined on the last-in, first-
out (LIFO) method, or market. The pretax LIFO charge for the second quarter
was $0.8 million in 1997 and $1.8 million in 1996 and for the first twenty-
seven weeks in 1997 was $2.4 million and for the first twenty-six weeks in 1996
was $3.5 million.
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of Common Stock is computed by dividing net income by the
weighted average number of shares of Common Stock outstanding. The weighted
average number of common shares for 1996 excludes Common Stock equivalents in
the form of stock options due to the net loss.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform with the 1997 presentation.
NOTE C -- MERGERS AND RECAPITALIZATION
SMITTY'S MERGER
On May 23, 1996, the Company completed a merger (the "Merger") in which
Smitty's Supermarkets, Inc. ("Smitty's") became a wholly owned subsidiary of
the Company in a transaction accounted for as a purchase. Smitty's is a
regional supermarket company operating 28 stores (two stores were subsequently
leased to other retailers) in the Phoenix and Tucson, Arizona areas. The
Company issued 3,038,877 shares of the Company's Class B Common Stock for all
of Smitty's outstanding common stock. An additional 200,000 shares of the
Company's Class B Common Stock were issued in prepayment of certain management
fees. The financial statements reflect the allocation of the purchase price
and assumption of certain debt and include the results of operations for
Smitty's from May 23, 1996.
RECAPITALIZATION
The Company also completed a self tender offer on May 23, 1996 pursuant to
which it purchased 50% of its outstanding Class A and Class B Common Stock for
$36 per share, excluding the shares issued in connection with the Merger
(together with the Merger, the "Recapitalization"). The purchase of shares in
the tender offer was accounted for as a purchase of treasury stock which was
subsequently retired. The tender offer price of $36 per share was set in
January 1996 by the Company's Board of Directors to allow stockholders to sell
at least 50% of their shares at an appropriate premium of approximately $8.00
per share above trading prices of the Class B Common Stock on the New York
Stock Exchange prior to the announcement of the tender offer. Debt consisting
of $575 million principal amount of 11 1/4% senior subordinated notes due 2007
and $805 million principal amount of secured bank term loans at various interest
rates were used to finance the stock purchase, repay certain existing
indebtedness, and pay premiums related to early repayment of such indebtedness.
PENDING MERGER
On May 11, 1997, the Company entered into a definitive merger agreement with
Fred Meyer, Inc. ("Fred Meyer") in which Smith's and Fred Meyer will form a
holding company ("Holdings") with two subsidiaries. Subject to certain
conditions, one subsidiary will merge with and into Smith's and the other
subsidiary will merge with and into Fred Meyer (collectively, the "1997
Mergers"). The 1997 Mergers will be completed by converting each outstanding
share of Smith's Class A Common Stock and Class B Common Stock into the right
to receive 1.05 shares of Holdings Common Stock, each outstanding share of
Smith's Series I Preferred Stock into the right to receive $0.33 1/3, and each
outstanding share of Fred Meyer Common Stock into the right to receive one
share of Holdings Common Stock. Completion of the 1997 Mergers is conditioned
on approval by the Company's and Fred Meyer's shareholders and various other
conditions and is expected to be consummated during September of 1997.
NOTE D -- RESTRUCTURING CHARGES
In December 1995, the Company recorded restructuring charges amounting to $140
million related to its decision to sell, lease or close all 34 stores and the
distribution center comprising its California Region. During 1996, the Company
sold or leased 23 of its California stores and related equipment and six non-
operating properties to various supermarket companies and others. During the
first twenty-seven weeks of 1997, the Company sold or leased three of its
California stores and related equipment and five non-operating properties. Of
the stores 26 sold or leased, 16 owned stores were sold outright, two owned
stores were leased, three store leases were assigned and five leased stores
were subleased. The remaining eight California stores have been closed and it
is anticipated that these stores will be sold or leased.
Following the Merger and Recapitalization on May 23, 1996 (see Note C), the
Company adopted a strategy to accelerate the disposition of its remaining real
estate assets in California including its non-operating stores and excess land.
The Company intends to use the net cash proceeds from the sales of these assets
to either reinvest in the Company's business or reduce indebtedness.
Accordingly, the Company recorded in the second quarter of 1996 additional
restructuring charges amounting to $201.6 million relating to (i) the
difference between the anticipated cash proceeds from the accelerated
dispositions (based on appraisals obtained following the completion of the
Merger and Recapitalization) and the Company's existing book values and (ii)
other charges in connection with its decision to close the California Region.
The following table presents the components of the accrued restructuring costs
and actual activity for the first twenty-seven weeks of 1997 (dollar amounts in
thousands):
Expenditures Accrued
Balance at Incurred Restructuring Costs
Dec 28, during at Jul 5, 1997
1996 1997 Current Long-term
------- ------- ------- ------
Charges for lease obligations $21,865 $ 4,116 $11,633 $6,116
Termination costs 2,541 1,584 957
Property maintenance costs
and other 11,693 7,567 4,126
------- ------- ------- ------
$36,099 $13,267 $16,716 $6,116
======= ======= ======= ======
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
Jul 5, Dec 28,
1997 1996
---------- ----------
Term loans, principal due quarterly through
2005, with interest at an average rate of
7.10% in 1997 and 8.57% in 1996 $ 600,000 $ 753,800
11 1/4% Senior Subordinated Notes, principal due
2007 with interest payable semi-annually 575,000 575,000
Unsecured Notes, principal due in annual
installments beginning in 2000 and interest
payable semi-annually at an average rate
of 8.89% 24,164
Revolving Credit Facility with interest at an
average rate of 6.94% 5,000
Sinking fund bonds, 10 1/2% interest,
semi-annual maturities to 2016 11,780 11,872
Mortgage notes, collateralized by property and
equipment with a cost of $2.8 million in 1997
and 1996, due in 2000 through 2005 with interest
at an average rate of 4.86% in 1997 and 5.11%
in 1996 2,741 2,742
Industrial revenue bonds, collateralized by
property and equipment with a cost of $9.3
million in 1997 and $9.0 million in 1996 due
in 2000 through 2010 plus interest at an
average rate of 7.22% in 1997 and 1996 5,934 6,008
---------- ----------
1,224,619 1,349,422
Less current maturities 54,757 35,496
---------- ----------
$1,169,862 $1,313,926
========== ==========
On March 27, 1997, the Company entered into an amended and restated senior
credit facility (the "New Credit Facility") that provides term loans totaling
$600 million (the "New Term Loans") and a $150 million revolving credit
facility (the "New Revolving Facility") less amounts outstanding under letters
of credit. The proceeds from the New Credit Facility were used to repay the
old term bank loans and outstanding indebtedness under the Company's revolvers
and letters of credit. All indebtedness under the New Credit Facility is
secured by substantially all of the assets of the Company. A commitment fee
ranging from .25% to .50% is charged on the average daily unused portion of the
New Revolving Facility, payable quarterly. Interest on borrowings under the
New Credit Facility is at the bank's Base Rate plus a margin based on the
Company's leverage ratio ranging from 0% to 1.25% or the Adjusted Eurodollar
Rate plus a margin based on the Company's leverage ratio ranging from .75% to
2.25%. At July 5, 1997, $7.8 million of letters of credit were issued under
the New Revolving Facility.
Maturities of the Company's long-term debt for the five fiscal years succeeding
July 5, 1997 are approximately $30.5 million in 1997, $59.9 million in 1998,
$66.5 million in 1999, $75.3 million in 2000, and $77.1 million in 2001.
The New Credit Facility requires the Company to maintain minimum levels of net
worth and earnings, and to comply with certain ratios related to fixed charges,
capital expenditures and indebtedness. In addition, the New Credit Facility
limits additional borrowings, dividends on and redemption of capital stock and
the acquisition and the disposition of assets.
The Company recorded an extraordinary charge of $40.4 million net of a $15.4
million income tax benefit in the first quarter of 1997 which consisted of the
write-off of debt issuance costs related to the old credit facility which was
refinanced.
