<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1996
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
----------------
SMITH'S FOOD & DRUG CENTERS, INC.
(NAME OF ISSUER AND PERSON FILING STATEMENT)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLES OF CLASSES OF SECURITIES)
----------------
N/A
(CUSIP NUMBER FOR CLASS A COMMON STOCK)
832388-10-2
(CUSIP NUMBER FOR CLASS B COMMON STOCK)
MICHAEL C. FREI
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
SMITH'S FOOD & DRUG CENTERS, INC.
1550 SOUTH REDWOOD ROAD
SALT LAKE CITY, UTAH 84104
(801) 974-1400
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON BEHALF OF THE PERSON FILING STATEMENT)
----------------
COPIES TO:
ROBERT L. FRIEDMAN
JOHN W. CARR
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
(212) 455-2000
----------------
APRIL 25, 1996
(DATE TENDER OFFER FIRST PUBLISHED,
SENT OR GIVEN TO SECURITY HOLDERS)
----------------
CALCULATION OF FILING FEE
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TRANSACTION VALUATION* AMOUNT OF FILING FEE
- - ------------------------------------------------------------------------------
<S> <C>
$451,291,032 $90,259
</TABLE>
- - -------------------------------------------------------------------------------
* Assumes purchase of 50% of its outstanding shares of Common Stock (or
12,535,862 shares based on Common Stock outstanding as of April 15, 1996) at
$36 per share.
----------------
[_]CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-11(A)(2)
AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID.
IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM OR
SCHEDULE AND THE DATE OF ITS FILING.
AMOUNT PREVIOUSLY PAID: N/A FILING PARTY: N/A
FORM OR REGISTRATION NO.: N/A DATE FILED: N/A
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<PAGE>
ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer is Smith's Food & Drug Centers, Inc., a Delaware
corporation (the "Company"), which has its principal executive offices at 1550
South Redwood Road, Salt Lake City, Utah 84104 (telephone number (801) 974-
1400).
(b) This Schedule 13E-4 relates to the offer by the Company to purchase, in
the aggregate, 50% of its outstanding shares of Class A Common Stock, par
value $.01 per share, and Class B Common Stock, par value $.01 per share, of
the Company (collectively, the "Shares") (or 12,535,862 Shares based on Shares
outstanding as of April 15, 1996) at a price of $36 per Share, net to the
seller in cash, upon the terms and subject to the conditions set forth in the
Offer to Purchase dated April 25, 1996 (the "Offer to Purchase"), and related
Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1)
and (a)(2), respectively. The information set forth under "Introduction--
General," "The Tender Offer--Number of Shares; Proration; Extension of Offer"
and "The Tender Offer--Interests of Certain Persons in the Transactions" of
the Offer to Purchase is incorporated herein by reference.
(c) The information set forth under "The Tender Offer--Price Range of Common
Stock; Dividends" of the Offer to Purchase is incorporated herein by
reference.
(d) Not Applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth under "Introduction--General"; "--Risk
Factors--Leverage and Debt Service" and "Financing of the Recapitalization and
Merger" of the Offer to Purchase is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
(a)-(j) The information set forth under the "Introduction--General,"
"Introduction--Elimination of Dividends," "The Tender Offer--Purpose of the
Offer; Recommendation of the Board of Directors," "The Tender Offer--
Background of the Transactions," "The Tender Offer--Certain Effects of the
Offer on the Common Stock; Registration Under the Exchange Act," "The Company,
Smitty's and Yucaipa," "Financial Data of the Company," "The Recapitalization
Agreement," "Certain Related Agreements," "Financing of the Recapitalization
and Merger," "Amendment and Restatement of Certificate of Incorporation" and
"Available Information" of the Offer to Purchase is incorporated herein by
reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth under the "Introduction--General," "The Tender
Offer--Interests of Certain Persons in the Transactions," "The
Recapitalization Agreement" and "Certain Related Agreements" of the Offer to
Purchase is incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth under "Introduction--General," "The Tender Offer--
Background of the Transactions," "The Tender Offer--Interests of Certain
Persons in the Transactions," "The Recapitalization Agreement," "Certain
Related Agreements" and "Financing of the Recapitalization and Merger" of the
Offer to Purchase is incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth under "The Tender Offer--Background of the
Transactions" and "The Tender Offer--Fees and Expenses" of the Offer to
Purchase is incorporated herein by reference.
1
<PAGE>
ITEM 7. FINANCIAL INFORMATION.
(a)-(b) The financial information set forth under "Financial Data of the
Company" and "Index to Audited Financial Statements" of the Offer to Purchase
is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) The information set forth under "The Tender Offer--Interest of Certain
Persons in the Transactions," "The Recapitalization Agreement" and "Certain
Related Agreements" of the Offer to Purchase is incorporated herein by
reference.
(b) The information set forth under "The Tender Offer--Certain Legal
Matters; Regulatory and Foreign Approvals" and "The Recapitalization
Agreement--Regulatory Approvals" of the Offer to Purchase is incorporated
herein by reference.
(c) The information set forth under "The Tender Offer--Certain Effects of
the Offer on the Common Stock; Registration under the Exchange Act" of the
Offer to Purchase is incorporated herein by reference.
(d) Not Applicable.
(e) Reference is hereby made to the Offer to Purchase and the related Letter
of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and
(a)(2), respectively, and incorporated in their entirety herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<C> <S>
(a)(1) Form of Offer to Purchase dated April 25, 1996.
(a)(2) Form of Letter of Transmittal.
(a)(3) Form of Notice of Guaranteed Delivery.
(a)(4) Form of letter to brokers, dealers, commercial banks, trust
companies and other nominees dated April 25, 1996.
(a)(5) Form of letter to clients for use by brokers, dealers, commercial
banks, trust companies and other nominees dated April 25, 1996.
(a)(6) Form of letter to stockholders from the Chairman of the Board of
the Company dated April 25, 1996.
(a)(7) Form of summary advertisement dated April 25, 1996.
(a)(8) Form of press release dated April 25, 1996.
(c)(1) Recapitalization Agreement and Plan of Merger dated as of January
29, 1996 by and among the Company, Cactus Acquisition, Inc.,
Smitty's Supermarkets, Inc. and The Yucaipa Companies
(incorporated by reference to Exhibit 2.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995).
(c)(2) Standstill Agreement dated as of January 29, 1996 by and among the
Company, The Yucaipa Companies, Yucaipa SSV Partners, L.P.,
Yucaipa Smitty's Partners, L.P., Yucaipa Smitty's Partners II,
L.P., Yucaipa Arizona Partners, L.P., Jeffrey P. Smith, Richard
D. Smith, Fred L. Smith, Ida Smith and the other shareholders of
the Company named therein (incorporated by reference to Exhibit
10.2 of the Company's Registration Statement on Form S-3
(Commission File No. 333-01601) which was initially filed on
April 17, 1996).
(c)(3) Smith's Shareholder Agreement dated as of January 29, 1996 by and
among Smitty's Supermarkets, Inc., The Yucaipa Companies and the
shareholders of the Company named therein (incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement
on Form S-3 (Commission File No. 333-01601) which was initially
filed on April 17, 1996).
</TABLE>
2
<PAGE>
<TABLE>
<C> <S> <C>
(c)(4) Smitty's Stockholder Agreement dated as of January 29, 1996
by and among the Company, Cactus Acquisition, Inc. and the
stockholders of Smitty's Supermarkets, Inc. named therein
(incorporated by reference to Exhibit 10.4 of the Company's
Registration Statement on Form S-3 (Commission
File No. 333-01601) which was initially filed on April 17,
1996).
(c)(5) Form of Registration Rights Agreement by and among the
Company and the holders of the Company's Common Stock named
therein (incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-3 (Commission
File No. 333-01601) which was initially filed on April 17,
1996).
(c)(6) Form of Management Services Agreement by and between the
Company and The Yucaipa Companies (incorporated by reference
to Exhibit 10.6 of the Company's Registration Statement on
Form S-3 (Commission File No. 333-01601) which was initially
filed on April 17, 1996).
(c)(7) Form of Warrant Agreement by and between the Company and The
Yucaipa Companies (incorporated by reference to Exhibit 10.7
of the Company's Registration Statement on Form S-3
(Commission File No. 333-01601) which was initially filed on
April 17, 1996).
(e) Not Applicable.
</TABLE>
3
<PAGE>
SIGNATURE
AFTER DUE INQUIRY AND TO THE BEST OF MY KNOWLEDGE AND BELIEF, I CERTIFY THAT
THE INFORMATION SET FORTH IN THIS STATEMENT IS TRUE, COMPLETE AND CORRECT.
Smith's Food & Drug Centers, Inc.
By:
/s/ Michael C. Frei
----------------------------
Michael C. Frei
Senior Vice President, General
Counsel and Secretary
Dated: April 25, 1996
4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
(a)(1) Form of Offer to Purchase dated April 25, 1996.........
(a)(2) Form of Letter of Transmittal..........................
(a)(3) Form of Notice of Guaranteed Delivery..................
(a)(4) Form of letter to brokers, dealers, commercial banks,
trust companies and other nominees dated April 25,
1996...................................................
(a)(5) Form of letter to clients for use by brokers, dealers,
commercial banks, trust companies and other nominees
dated April 25, 1996...................................
(a)(6) Form of letter to stockholders from the Chairman of the
Board of the Company dated April 25, 1996..............
(a)(7) Form of summary advertisement dated April 25, 1996.....
(a)(8) Form of press release dated April 25, 1996.............
(c)(1) Recapitalization Agreement and Plan of Merger dated as
of January 29, 1996 by and among the Company, Cactus
Acquisition, Inc., Smitty's Supermarkets, Inc. and The
Yucaipa Companies (incorporated by reference to Exhibit
2.1 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 1995)...................
(c)(2) Standstill Agreement dated as of January 29, 1996 by
and among the Company, The Yucaipa Companies, Yucaipa
SSV Partners, L.P., Yucaipa Smitty's Partners, L.P.,
Yucaipa Smitty's Partners II, L.P., Yucaipa Arizona
Partners, L.P., Jeffrey P. Smith, Richard D. Smith,
Fred L. Smith, Ida Smith and the other shareholders of
the Company named therein (incorporated by reference to
Exhibit 10.2 of the Company's Registration Statement on
Form S-3 (Commission File No. 333-01601) which was
initially filed on April 17, 1996).....................
(c)(3) Smith's Shareholder Agreement dated as of January 29,
1996 by and among Smitty's Supermarkets, Inc., The
Yucaipa Companies and the shareholders of the Company
named therein (incorporated by reference to Exhibit
10.3 of the Company's Registration Statement on Form S-
3 (Commission File No. 333-01601) which was initially
filed on April 17, 1996)...............................
(c)(4) Smitty's Stockholder Agreement dated as of January 29,
1996 by and among the Company, Cactus Acquisition, Inc.
and the stockholders of Smitty's Supermarkets, Inc.
named therein (incorporated by reference to Exhibit
10.4 of the Company's Registration Statement on Form S-
3 (Commission File No. 333-01601) which was initially
filed on April 17, 1996)...............................
(c)(5) Form of Registration Rights Agreement by and among the
Company and the holders of the Company's Common Stock
named therein (incorporated by reference to Exhibit
10.5 of the Company's Registration Statement on
Form S-3 (Commission File No. 333-01601) which was
initially filed on April 17, 1996).....................
(c)(6) Form of Management Services Agreement by and between
the Company and The Yucaipa Companies (incorporated by
reference to Exhibit 10.6 of the Company's Registration
Statement on Form S-3 (Commission File No. 333-01601)
which was initially filed on April 17, 1996)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
(c)(7) Form of Warrant Agreement by and between the Company
and The Yucaipa Companies (incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on
Form S-3 (Commission File No. 333-01601) which was
initially filed on April 17, 1996).....................
(e) Not Applicable.........................................
</TABLE>
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
OFFER TO PURCHASE FOR CASH
50% OF THE OUTSTANDING SHARES OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
AT
$36 NET PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED.
Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"),
is offering to purchase, in the aggregate, 50% of the outstanding shares of
its Class A Common Stock, par value $.01 per share ("Class A Common Stock"),
and its Class B Common Stock, par value $.01 per share ("Class B Common
Stock"; and, together with the Class A Common Stock, the "Common Stock" or the
"Shares") (excluding shares issuable in the Merger referred to below), at $36
per Share, net to the seller in cash (the "Purchase Price"), upon the terms
and subject to the conditions set forth in this Offer to Purchase and in the
related Letter of Transmittal (which together constitute the "Offer"). Based
on the outstanding 11,366,532 shares of Class A Common Stock and 13,705,191
shares of Class B Common Stock (excluding shares held in the Company's
treasury) as of April 15, 1996, the Company is offering to purchase 12,535,862
Shares pursuant to the Offer.
THE OFFER IS CONDITIONED UPON AMONG OTHER THINGS (I) AT LEAST 50% OF THE
OUTSTANDING SHARES BEING VALIDLY TENDERED AND NOT WITHDRAWN BEFORE THE
EXPIRATION OF THE OFFER, (II) THE COMPANY HAVING OBTAINED FINANCING NECESSARY
TO PURCHASE 50% OF THE SHARES, REPAY CERTAIN INDEBTEDNESS, AND PAY CERTAIN
FEES AND EXPENSES, AND (III) ALL OF THE CONDITIONS TO THE MERGER REFERRED TO
BELOW (OTHER THAN THE CONSUMMATION OF THE OFFER) HAVING BEEN SATISFIED OR
WAIVED. SEE INFORMATION BELOW AND "THE TENDER OFFER--CERTAIN CONDITIONS OF THE
OFFER."
The Offer relates to, among other things, the proposed recapitalization of
the Company pursuant to the Recapitalization Agreement and Plan of Merger,
dated as of January 29, 1996 (the "Recapitalization Agreement"), among the
Company, Cactus Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of the Company ("Acquisition"), Smitty's Supermarkets, Inc., a
Delaware corporation ("Smitty's"), and The Yucaipa Companies, a California
general partnership ("Yucaipa"). In the Recapitalization Agreement, the
Company has agreed subject to certain terms and conditions to (i) commence the
Offer and (ii) consummate the merger of Smitty's with Acquisition, pursuant to
which Smitty's will become a wholly owned subsidiary of the Company and the
stockholders of Smitty's will receive 3,038,888 shares of Class B Common Stock
of the Company (the "Merger"). The shares of Class B Common Stock to be
received by the stockholders of Smitty's are not eligible to be tendered in
the Offer. It is anticipated that the Offer and the Merger will close
simultaneously, except in certain limited circumstances described herein.
EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER
SHARES AND, IF SO, HOW MANY SHARES TO TENDER. SEE "INTRODUCTION--ADVANTAGES OF
TENDERING AND NOT TENDERING" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED IN EVALUATING THE OFFER. SEE ALSO "INTRODUCTION--RISK FACTORS."
PURSUANT TO AN AGREEMENT (THE "SMITH'S SHAREHOLDER AGREEMENT") ENTERED INTO AS
OF JANUARY 29, 1996 BY JEFFREY P. SMITH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
OF THE COMPANY, RICHARD SMITH, FRED SMITH (ALL OF WHOM ARE BROTHERS), IDA
SMITH (THEIR MOTHER), AND CERTAIN RELATED FAMILY TRUSTS AND RELATED
STOCKHOLDERS (COLLECTIVELY, THE "SMITH GROUP"), THE MEMBERS OF THE SMITH GROUP
HAVE AGREED TO PARTICIPATE IN THE OFFER AND TENDER A SUFFICIENT NUMBER OF
SHARES TO ENABLE THE COMPANY TO REPURCHASE 50% OF THE OUTSTANDING SHARES
PURSUANT TO THE OFFER. IN ADDITION, DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY WHO HAVE NOT EXECUTED THE SMITH'S SHAREHOLDER AGREEMENT, WHO OWN
APPROXIMATELY 7.6% OF THE OUTSTANDING SHARES, HAVE INDICATED THAT THEY INTEND
TO TENDER THEIR SHARES IN THE OFFER. BECAUSE THE SMITH GROUP AND SUCH
DIRECTORS AND OFFICERS OWN APPROXIMATELY 38% OF THE OUTSTANDING SHARES, THE
MINIMUM TENDER CONDITION WILL BE SATISFIED IF OTHER STOCKHOLDERS TENDER SHARES
REPRESENTING AT LEAST 12% OF THE OUTSTANDING SHARES. SEE "CERTAIN RELATED
AGREEMENTS--SMITH'S SHAREHOLDER AGREEMENT."
---------------
The Dealer Managers for the Offer are:
GOLDMAN, SACHS & CO.
---------------
The date of this Offer to Purchase is April 25, 1996
<PAGE>
IMPORTANT
Any stockholder desiring to tender all or any portion of his or her Shares
should either (1) complete and sign the Letter of Transmittal (or a facsimile
copy thereof) in accordance with the instructions in the Letter of
Transmittal, mail or deliver it and any other required documents to the
Depositary and either mail or deliver the stock certificates for such Shares
to the Depositary along with the Letter of Transmittal or tender such Shares
pursuant to the procedures for book-entry transfer set forth under "The Tender
Offer--Procedure for Tendering Shares--Book-Entry Transfer," or (2) request
his or her broker, dealer, commercial bank, trust company or other nominee to
effect the transaction for him or her. Holders of Shares which are registered
in the name of a broker, dealer, commercial bank, trust company or other
nominee should contact such broker, dealer, commercial bank, trust company or
other nominee if they desire to tender such Shares.
Any stockholder who desires to tender Shares and whose certificates for such
Shares are not immediately available or who cannot comply with the procedures
for book-entry transfer by the expiration of the Offer may tender Shares by
following the procedures for guaranteed delivery set forth under "The Tender
Offer--Procedure for Tendering Shares--Guaranteed Delivery." STOCKHOLDERS MUST
PROPERLY COMPLETE THE LETTER OF TRANSMITTAL IN ORDER TO EFFECT A VALID TENDER
OF THEIR SHARES.
Questions and requests for assistance or for additional copies of the Offer
to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery
may be directed to the Information Agent or the Dealer Managers at their
respective addresses and telephone numbers set forth on the back cover of this
Offer to Purchase.
NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO MAKE ANY RECOMMENDATION ON
BEHALF OF THE COMPANY TO ANY STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN
FROM TENDERING SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED BY
THE COMPANY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN
CONNECTION WITH THE OFFER ON BEHALF OF THE COMPANY OTHER THAN THOSE CONTAINED
HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION,
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
All information contained or incorporated by reference in this Offer to
Purchase relating to the Company was provided by the management and Board of
Directors of the Company. All information contained in this Offer to Purchase
relating to Smitty's was provided by the management and Board of Directors of
Smitty's. All information contained in this Offer to Purchase relating to
Yucaipa was provided by Yucaipa.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................. 1
General................................................................. 1
Recommendation of the Board of Directors................................ 4
Advantages of Tendering and Not Tendering............................... 4
Risk Factors............................................................ 5
Elimination of Dividends................................................ 9
THE TENDER OFFER.......................................................... 10
Number of Shares; Proration; Extension of the Offer..................... 10
Procedure for Tendering Shares.......................................... 10
Valid Tender.......................................................... 10
Signature Guarantees and Method of Delivery........................... 11
Book-Entry Transfer................................................... 11
Guaranteed Delivery................................................... 12
Appointment As Proxy After Acceptance for Payment..................... 12
Determination of Validity; Defects.................................... 12
Federal Income Tax Withholding........................................ 13
Tender Constitutes an Agreement....................................... 13
Other Requirements.................................................... 13
Withdrawal Rights....................................................... 14
Purchase of Shares; Payment of Purchase Price........................... 14
Certain Conditions of the Offer......................................... 15
Extension of Tender Period; Termination; Amendment...................... 17
Price Range of Common Stock; Dividends.................................. 18
Background of the Transactions.......................................... 18
Purpose of the Offer; Recommendation of Board of Directors.............. 25
Certain Information Provided............................................ 28
Interest of Certain Persons in the Transactions......................... 28
Certain Effects of the Offer on the Common Stock; Registration Under the
Exchange Act........................................................... 30
Certain Legal Matters; Regulatory and Foreign Approvals................. 31
Federal Income Tax Consequences......................................... 31
Fees and Expenses....................................................... 34
THE COMPANY, SMITTY'S AND YUCAIPA......................................... 36
The Company............................................................. 36
California Divestiture.................................................. 36
Recent Operating Results of the Company................................. 37
Smitty's................................................................ 37
Yucaipa................................................................. 38
Post-Recapitalization and Merger Company................................ 38
FINANCIAL DATA OF THE COMPANY............................................. 42
Pro Forma Capitalization................................................ 42
Selected Historical Financial Data...................................... 43
Unaudited Pro Forma Combined Financial Statements....................... 44
THE RECAPITALIZATION AGREEMENT............................................ 52
The Offer and Merger.................................................... 52
Conditions to the Merger................................................ 52
Repayment of Smitty's Indebtedness...................................... 54
Regulatory Approvals.................................................... 54
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Company's Stock Options; Deferred Compensation Plans.................. 55
Financing Arrangements by Yucaipa; Yucaipa Fee........................ 55
Composition of Board of Directors and Officers........................ 55
Termination........................................................... 56
Termination of Recapitalization....................................... 56
Amendment and Waiver.................................................. 57
Representations and Warranties........................................ 57
Conduct of Business Pending Merger.................................... 57
Additional Covenants.................................................. 59
CERTAIN RELATED AGREEMENTS.............................................. 61
<S>
Standstill Agreement.................................................. 61
Management Services Agreement......................................... 62
Warrant Agreement..................................................... 64
Registration Rights Agreement......................................... 65
Smith's Shareholder Agreement......................................... 66
Smitty's Stockholders' Agreement...................................... 66
FINANCING OF THE RECAPITALIZATION AND MERGER............................ 67
General............................................................... 67
New Credit Facility................................................... 69
New Senior Notes and New Senior Subordinated Notes.................... 71
New Preferred Stock................................................... 72
New Exchange Debentures............................................... 73
MANAGEMENT AFTER RECAPITALIZATION AND MERGER............................ 75
AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION............... 77
Description of Amendments............................................. 77
Antitakeover Effects of Certain Certificate of Incorporation Provi-
sions................................................................ 78
AVAILABLE INFORMATION................................................... 79
MISCELLANEOUS........................................................... 79
INDEX TO AUDITED FINANCIAL STATEMENTS................................... F-1
</TABLE>
ii
<PAGE>
TO THE HOLDERS OF COMMON STOCK OF
SMITH'S FOOD & DRUG CENTERS, INC.:
INTRODUCTION
GENERAL
Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"),
is offering to purchase, in the aggregate, 50% of the outstanding shares of
its Class A Common Stock, par value $.01 per share ("Class A Common Stock"),
and its Class B Common Stock, par value $.01 per share ("Class B Common
Stock"; and, together with the Class A Common Stock, the "Common Stock" or the
"Shares") (excluding shares issuable in the Merger referred to below), at $36
per Share, net to the seller in cash (the "Purchase Price"), upon the terms
and subject to the conditions set forth herein and in the related Letter of
Transmittal (which together constitute the "Offer"). Based on the outstanding
11,366,532 shares of Class A Common Stock and 13,705,191 shares of Class B
Common Stock (excluding shares held in the Company's treasury) as of April 15,
1996, the Company is offering to purchase 12,535,862 Shares pursuant to the
Offer.
THE OFFER IS CONDITIONED UPON AMONG OTHER THINGS (I) AT LEAST 50% OF THE
OUTSTANDING SHARES BEING VALIDLY TENDERED AND NOT WITHDRAWN BEFORE THE
EXPIRATION OF THE OFFER, (II) THE COMPANY HAVING OBTAINED FINANCING NECESSARY
TO PURCHASE 50% OF THE SHARES, REPAY CERTAIN INDEBTEDNESS, AND PAY CERTAIN
FEES AND EXPENSES, AND (III) ALL OF THE CONDITIONS TO THE MERGER REFERRED TO
BELOW (OTHER THAN THE CONSUMMATION OF THE OFFER) HAVING BEEN SATISFIED OR
WAIVED. SEE INFORMATION BELOW AND "THE TENDER OFFER--CERTAIN CONDITIONS OF THE
OFFER."
The Offer relates to, among other things, the proposed recapitalization of
the Company pursuant to the Recapitalization Agreement and Plan of Merger,
dated as of January 29, 1996 (the "Recapitalization Agreement"), among the
Company, Cactus Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of the Company ("Acquisition"), Smitty's Supermarkets, Inc., a
Delaware corporation ("Smitty's"), and The Yucaipa Companies, a California
general partnership ("Yucaipa"). In the Recapitalization Agreement, the
Company has agreed subject to certain terms and conditions to (i) commence the
Offer and (ii) consummate the merger of Smitty's with Acquisition, pursuant to
which Smitty's will become a wholly owned subsidiary of the Company and the
stockholders of Smitty's will receive 3,038,888 shares of Class B Common Stock
of the Company (the "Merger"). The shares of Class B Common Stock to be
received by the stockholders of Smitty's are not eligible to be tendered in
the Offer. It is anticipated that the closing of the Offer (the "Offer Closing
Date") and the closing of the Merger (the "Merger Closing Date"; together with
the Offer Closing Date, the "Closing Date") will occur simultaneously, except
in certain limited circumstances described herein.
The closing of the Merger is subject to various conditions, including among
other things the receipt of required regulatory approvals and the approval by
the Company's stockholders of the Recapitalization Agreement and the other
transactions contemplated thereby at the Stockholders' Meeting referred to
below, and, except in certain limited circumstances described herein, the
consummation of the Offer. See "The Recapitalization Agreement--Conditions to
the Merger." On March 5, 1996, the Federal Trade Commission and the Antitrust
Division granted early termination of the waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with
respect to the Merger effective immediately.
If the number of Shares properly tendered prior to the Expiration Date (as
defined under "The Tender Offer--Number of Shares; Proration; Extension of
Offer") and not withdrawn is more than 50% of the outstanding Shares, the
Company will, upon the terms and subject to the conditions of the Offer,
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purchase Shares on a pro rata basis from all stockholders who properly tender
and do not withdraw Shares. See "The Tender Offer--Number of Shares;
Proration; Extension of the Offer." All Shares not purchased pursuant to the
Offer, including Shares not purchased because of proration, will be returned.
Tendering stockholders will not be obligated to pay brokerage commissions,
solicitation fees or, subject to the instructions to the Letter of
Transmittal, stock transfer taxes on the purchase of Shares by the Company
pursuant to the Offer. The Company will pay all fees and expenses of Goldman,
Sachs & Co. ("Goldman Sachs" or the "Dealer Managers"), American Stock
Transfer & Trust Company (the "Depositary") and MacKenzie Partners, Inc. (the
"Information Agent") incurred in connection with the Offer.
The purpose of the Offer is to permit all of the Company's stockholders the
opportunity to exchange half of their Shares for a cash amount reflecting a
significant premium over the price at which the Company's Common Stock has
traded for some time and yet at the same time continue to participate in the
future performance of the Company. See "The Tender Offer--Price Range of
Common Stock; Dividends" and "The Tender Offer--Purpose of the Offer;
Recommendation of Board of Directors."
EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER
SHARES AND, IF SO, HOW MANY SHARES TO TENDER. SEE "INTRODUCTION--ADVANTAGES OF
TENDERING AND NOT TENDERING" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED IN EVALUATING THE OFFER. SEE ALSO "INTRODUCTION--RISK FACTORS."
PURSUANT TO THE SMITH'S SHAREHOLDER AGREEMENT, ENTERED INTO BY JEFFREY P.
SMITH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF THE COMPANY, RICHARD SMITH,
FRED SMITH (ALL OF WHOM ARE BROTHERS), IDA SMITH (THEIR MOTHER), AND CERTAIN
RELATED FAMILY TRUSTS AND RELATED STOCKHOLDERS (COLLECTIVELY, THE "SMITH
GROUP"), THE MEMBERS OF THE SMITH GROUP HAVE AGREED TO PARTICIPATE IN THE
OFFER AND TENDER A SUFFICIENT NUMBER OF SHARES TO ENABLE THE COMPANY TO
REPURCHASE 50% OF THE OUTSTANDING SHARES PURSUANT TO THE OFFER. IN ADDITION,
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY WHO HAVE NOT EXECUTED THE
SMITH'S SHAREHOLDER AGREEMENT, WHO OWN APPROXIMATELY 7.6% OF THE OUTSTANDING
SHARES, HAVE INDICATED THAT THEY INTEND TO TENDER THEIR SHARES IN THE OFFER.
BECAUSE THE SMITH GROUP AND SUCH DIRECTORS AND OFFICERS OWN APPROXIMATELY 38%
OF THE OUTSTANDING SHARES, THE MINIMUM TENDER CONDITION WILL BE SATISFIED IF
OTHER STOCKHOLDERS TENDER SHARES REPRESENTING AT LEAST 12% OF THE OUTSTANDING
SHARES. SEE "CERTAIN RELATED AGREEMENTS--SMITH'S SHAREHOLDER AGREEMENT."
The Recapitalization Agreement, including the issuance by the Company of
3,038,888 shares of Class B Common Stock to the stockholders of Smitty's
pursuant to the Merger, requires approval by the Company's stockholders at
their Annual Meeting scheduled for Thursday, May 23, 1996 (the "Stockholders'
Meeting"). At the Stockholders' Meeting, the Company's stockholders will also
be asked to: (i) approve and adopt an Amended and Restated Certificate of
Incorporation for the Company, creating a classified Board of Directors and a
new non-voting Class C Common Stock, par value $.01 per share (the "Class C
Common Stock"), and amending certain provisions with respect to the Company's
Series I Preferred Stock, par value $.01 per share (the "Series I Preferred
Stock"); (ii) elect a Board of Directors which will be divided into three
classes, with the term of one class expiring each year; and (iii) ratify the
selection of Ernst & Young LLP as the Company's independent auditors for 1996.
See "Amendment and Restatement of Certificate of Incorporation" and
"Management after Recapitalization and Merger." Concurrently with the mailing
of this Offer to Purchase, the Company has mailed its Proxy Statement, dated
April 25, 1996 (the "Proxy Statement"), to stockholders of record as of April
15, 1996.
The Offer does not constitute a solicitation of proxies for any meeting of
the Company's stockholders. Such solicitation by the Company will be made only
pursuant to the Proxy Statement mailed by the Company in compliance with the
requirements of Section 14(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). In addition, this Offer is neither an offer to
sell nor a solicitation of offers to buy any securities which may be issued in
the Merger. A tender of
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Shares does not constitute a vote, or the appointment of a proxy, in
connection with the Stockholders' Meeting. In order to vote at the
Stockholders' Meeting, stockholders of the Company are required to submit a
proxy or vote in person at the Stockholders' Meeting, or any postponement or
adjournment thereof.
Consummation of the Offer is subject to all of the conditions to the Merger
having been satisfied, including that the stockholders of the Company have
approved the Recapitalization Agreement and the other transactions
contemplated by the Recapitalization at the Stockholders' Meeting. As a result
the Company expects to extend the Expiration Date until after the
Stockholders' Meeting which is scheduled for May 23, 1996 at 9:00 a.m.
Mountain Time.
As part of the Recapitalization (as defined herein) and Merger contemplated
by the Recapitalization Agreement, the Company intends to: (i) purchase 50% of
the outstanding Shares for $36 in cash per share (or approximately $451.3
million in the aggregate); (ii) repay approximately $667.1 million (pro forma
at December 30, 1995) of indebtedness of the Company (the "Specified Company
Indebtedness") and approximately $103.3 million (pro forma at December 30,
1995) of indebtedness of Smitty's (the "Specified Smitty's Indebtedness");
(iii) purchase up to half of the outstanding management stock options (the
"Options") of the Company at a price per share of Common Stock covered by such
Options equal to $36 per share minus the exercise price per share (or
approximately $13.7 million in the aggregate); and (iv) purchase approximately
three million shares of its Series I Preferred Stock for $.33 1/3 per share
(or approximately $1 million in the aggregate). In addition, the Company will
pay related debt refinancing premiums, accrued interest and fees and expenses
in connection with the Recapitalization and Merger. The Offer, the Merger and
the repayment of outstanding indebtedness are expected to close concurrently
with the financing transactions referred to above.
To consummate the Recapitalization and the Merger, the Company will require
approximately $1,393.2 million (net of California Disposition proceeds of
$68.0 million) of financing. The Company plans to obtain the necessary funds
by (a) borrowings of approximately $818.2 million aggregate principal amount
under a new senior credit facility (the "New Credit Facility") to be provided
by a syndicate of banks led by Bankers Trust Company ("Bankers Trust") and The
Chase Manhattan Bank ("Chase Manhattan"); (b) the issuance of up to $150
million of new senior notes (the "New Senior Notes"); (c) the issuance of up
to $350 million of new senior subordinated notes (the "New Senior Subordinated
Notes"); and (d) the issuance of new cumulative redeemable exchangeable
preferred stock (the "New Preferred Stock") by the Company for gross proceeds
of $75 million. In addition, the Company will assume approximately $43.6
million (at December 30, 1995) of existing indebtedness of Smitty's upon
consummation of the Merger. See "Financing of the Recapitalization and Merger"
and "Financial Data of the Company."
As part of the Recapitalization, the Company will enter into a management
services agreement (the "Management Services Agreement") with Yucaipa pursuant
to which Yucaipa will provide certain management consulting services and
Ronald W. Burkle, the managing general partner of Yucaipa, will become Chief
Executive Officer of the Company. Mr. Burkle, along with another designee of
Yucaipa, will be nominated to become a member of the Company's Board of
Directors. The Company will also enter into a warrant agreement with Yucaipa
(the "Warrant Agreement") pursuant to which the Company will issue warrants to
Yucaipa to purchase shares of Class C Common Stock of the Company,
representing 10% of the aggregate common shares on a fully diluted basis, for
an initial exercise price of $50 per share, subject to certain conditions and
exceptions. See "Certain Related Agreements--Management Services Agreement,"
"--Standstill Agreement" and "--Warrant Agreement."
The "Recapitalization" as defined in the Recapitalization Agreement refers
collectively to: (i) the execution, delivery and receipt of the proceeds under
the Financing Agreements (as defined herein); (ii) the making and consummation
of the Offer; (iii) the execution and delivery of the Management Services
Agreement; (iv) the execution and delivery of, and the issuance of the
warrants provided for
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under, the Warrant Agreement; (v) the completion of certain transactions
contemplated by the Recapitalization Agreement regarding the composition of
the Company's Board of Directors, the election of Ronald Burkle as Chief
Executive Officer, the cash payment for a portion of, and the reduction of the
exercise price for a portion of, the Company's Options and the amendment of
the Company's deferred compensation agreements; and (vi) the filing of the
Amended and Restated Certificate of Incorporation for the Company.
STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN TRANSACTIONS CONTEMPLATED IN THE
RECAPITALIZATION AGREEMENT WILL INCREASE THE RISK ASSOCIATED WITH, AND MAY
OTHERWISE ADVERSELY AFFECT THE VALUE OF, THEIR INVESTMENT IN THE COMPANY.
STOCKHOLDERS SHOULD CONSIDER ALL OF THE INFORMATION CONTAINED IN THIS OFFER TO
PURCHASE PRIOR TO MAKING A DECISION WHETHER TO TENDER THEIR SHARES IN THE
OFFER. IN PARTICULAR, STOCKHOLDERS SHOULD CONSIDER THE FACTORS SET FORTH
HEREIN UNDER "INTRODUCTION--ADVANTAGES OF TENDERING AND NOT TENDERING" AND "--
RISK FACTORS."
RECOMMENDATION OF THE BOARD OF DIRECTORS
At its January 28, 1996 meeting, the Company's Board of Directors
unanimously determined that it was in the best interests of the Company and
its stockholders that the Company enter into the Recapitalization Agreement
and the related agreements and consummate all of the transactions contemplated
by those agreements, including the Recapitalization and the Merger. The Board
determined to recommend that the Company's stockholders approve the
Recapitalization Agreement and the transactions contemplated thereby,
including the issuance of 3,038,888 shares of the Company's Class B Common
Stock to the stockholders of Smitty's in the Merger. See "The Tender Offer--
Purpose of the Offer; Recommendation of Board of Directors." EACH STOCKHOLDER
SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW
MANY SHARES TO TENDER. SEE "INTRODUCTION--ADVANTAGES OF TENDERING AND NOT
TENDERING."
ADVANTAGES OF TENDERING AND NOT TENDERING
In deciding whether to tender their Shares pursuant to the Offer (and how
many Shares to tender), stockholders should consider the following possible
advantages of tendering and not tendering:
CERTAIN ADVANTAGES OF TENDERING
1. The Purchase Price of $36 in cash per share represents a significant
premium over market prices that had been prevailing prior to announcement of
the Offer.
2. After the Expiration Date, the Shares are expected to trade at prices
significantly below $36 per share.
3. The purchase of Shares pursuant to the Offer could have a significant
adverse effect on the liquidity and market value of the outstanding Shares
after the Offer.
4. The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including that the Company
will have significant cash requirements to service debt, reducing funds
available for operations and future business opportunities and increasing the
Company's vulnerability to adverse general economic and industry conditions
and to competitive pressures.
5. The financial covenants and other restrictions contained in the New
Credit Facility, the New Senior Notes and the New Senior Subordinated Notes
will require the Company to meet certain financial tests and will restrict its
ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, its Common Stock. In addition, funds available
for working capital, capital expenditures, acquisitions and general corporate
purposes will be limited.
6. The Company intends to discontinue the payment of cash dividends on the
Common Stock following the consummation of the Recapitalization and Merger and
the payment of future dividends will be severely restricted by the terms of
the Financing Agreements entered into by the Company in connection with the
Recapitalization and Merger.
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7. Because the volume of Shares that are typically traded on a daily basis
is not excessive, a stockholder wishing to sell a substantial block of Shares
may find it difficult to sell that block on the New York Stock Exchange (the
"NYSE") without adversely affecting the market price received for that block.
The Offer will enable holders of large blocks to avoid that problem in
disposing of a portion of their Shares.
8. The Offer gives all stockholders an opportunity to dispose of Shares
without incurring any transaction costs.
POSSIBLE ADVANTAGES OF NOT TENDERING
Stockholders who do not tender Shares will experience an increase in their
percentage ownership interest in the Company as a result of the Offer and thus
an increase in their proportionate interest in the Company's future earnings.
As a result such stockholders will benefit from any future growth in the
Company's business to a greater degree than if they do tender shares.
RISK FACTORS
LEVERAGE AND DEBT SERVICE. As a result of the Recapitalization and Merger
(including the Offer), the Company will be highly leveraged and the blended
average rates of interest on the Company's outstanding indebtedness is
expected to be higher than the rates of interest on the Company's indebtedness
outstanding immediately prior to such transactions. At December 30, 1995, pro
forma for the Recapitalization and Merger and the California Disposition (as
defined under "The Company, Smitty's and Yucaipa--California Divestiture"),
the Company's total debt and stockholders' equity (deficit) would have been
$1,356.8 million and $(121.6) million, respectively, compared to actual debt
and stockholders' equity of $746.2 million and $416.7 million, respectively,
on such date. The Company would also have had additional borrowing
availability under the New Credit Facility on a pro forma basis, subject to
the borrowing conditions contained therein. In addition, as of December 30,
1995, pro forma for the Recapitalization and Merger, scheduled payments under
net operating leases of the Company and its subsidiaries for the twelve months
following the Recapitalization and the Merger would have been approximately
$36.9 million. The Company's ability to make scheduled payments of the
principal of, or interest on, or to refinance its indebtedness (including the
New Senior Notes and the New Senior Subordinated Notes) and to make scheduled
payments under its operating leases depends on its future performance, which
is subject to economic, financial, competitive and other factors beyond its
control.
Based upon the current level of operations and anticipated cost savings and
future growth, the Company believes that its cash flow from operations,
together with borrowings under the New Credit Facility and its other sources
of liquidity, will be adequate to meet its anticipated requirements for
working capital, capital expenditures, lease payments, interest payments and
scheduled principal payments. There can be no assurance, however, that the
Company's business will continue to generate cash flow at or above current
levels or that anticipated cost savings or future growth can be achieved. In
addition, no assurances can be given as to the timing of, or the net proceeds
to be realized upon, the California Asset Disposition (as defined under "The
Company, Smitty's and Yucaipa--California Divestiture") and, therefore, as to
the timing or amount of receipts thereof as reflected in the unaudited pro
forma combined financial statements. See "--Ability to Achieve Anticipated
Cost Savings." If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt and make necessary capital or
other expenditures, or if its future cash flows are insufficient to amortize
all required principal payments out of internally generated funds, the Company
may be required to refinance all or a portion of its existing debt, sell
assets or obtain additional financing. There can be no assurance that any such
refinancing or asset sales would be possible or that any additional financing
could be obtained, particularly in view of the Company's high level of debt
following the Recapitalization and Merger and the fact that substantially all
of its assets will be pledged to secure borrowings under the New Credit
Facility and other secured obligations.
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The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following:
(a) the Company will have significant cash requirements to service debt,
reducing funds available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (b) the Company's leveraged position will
increase its vulnerability to competitive pressures; (c) the financial
covenants and other restrictions contained in the New Credit Facility, the New
Senior Notes and the New Senior Subordinated Notes will require the Company to
meet certain financial tests and will restrict its ability to borrow
additional funds, to dispose of assets or to pay cash dividends on, or
repurchase, its common stock or preferred stock; and (d) funds available for
working capital, capital expenditures, acquisitions and general corporate
purposes will be limited. The Company's continued growth depends, in part, on
its ability to continue its expansion and store conversion efforts, and
therefore its inability to finance capital expenditures through borrowed funds
or otherwise could have a material adverse effect on the Company's future
operations.
The Company's capital structure immediately after the Recapitalization and
Merger will include a significant amount of floating rate indebtedness,
causing the Company to be significantly more sensitive to prevailing interest
rates than has historically been the case. The Company intends to enter into
interest rate protection agreements which for the duration of such agreements
will effectively provide fixed rates of interest or ceiling rates of interest
on a portion of such floating rate indebtedness. There can be no assurance
that the Company will be able to enter into such agreements on favorable
terms.
In the event of a bankruptcy of the Company, the Common Stock will rank
below all claims of the Company's creditors, including those of the senior
lenders under the New Credit Facility and the holders of the New Senior Notes
and the New Senior Subordinated Notes. Because of the significantly increased
leverage of the Company following the Recapitalization and Merger, such
creditors' claims will be substantially greater than those now entitled to
priority over the Common Stock.
EFFECT ON TRADING MARKET OF COMMON STOCK. Following the consummation of the
Recapitalization and Merger, shares of the Company's Class B Common Stock will
trade at a value below their current level. In addition, the Company intends
to discontinue for the foreseeable future the payment of cash dividends on the
Common Stock following the Closing Date and the payment of future dividends
will be severely restricted by the terms of the Financing Agreements (as
defined) entered into by the Company in connection with the Recapitalization
and Merger. The consummation of the Recapitalization and Merger is expected to
cause the Company's credit ratings to be lowered. It is possible that the more
speculative investment quality of the Common Stock following the consummation
of the Recapitalization and Merger may increase the volatility of, decrease
the liquidity of, and otherwise adversely affect the trading market for the
Common Stock.
FRAUDULENT CONVEYANCE RISKS; DELAWARE LAW CONSIDERATIONS. If a court in a
lawsuit on behalf of any unpaid creditor of the Company or a representative of
the Company's creditors were to find that, at the time the Company purchased
Common Stock in the Offer or purchased management stock options and Series I
Preferred Stock as contemplated by the Recapitalization, the Company (x)
intended to hinder, delay or defraud any existing or future creditor or
contemplated insolvency with a design to prefer one or more creditors to the
exclusion in whole or in part of others or (y) did not receive fair
consideration in good faith or reasonably equivalent value in connection with
such distributions and the Company (i) was insolvent, (ii) was rendered
insolvent by reason of such stock purchases, (iii) was engaged or about to
engage in a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business, or (iv) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, such court could void such transactions, including
payments to stockholders in the Offer, and require that such holders return
such cash (or equivalent amounts) to the Company or to a fund for the benefit
of its creditors. The Company may be viewed as insolvent at the time of or as
a result of the Offer,
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purchase of options and Series I Preferred Stock if the fair value of its
assets does not exceed its probable liabilities at the time of or following
such transactions.
Section 160 of the Delaware General Corporation Law provides that a
corporation may not purchase or redeem any of its own shares for cash or other
property when the capital of the corporation is impaired or when such purchase
or redemption would cause the impairment of the capital of the corporation. In
case of any willful or negligent violation of such section, the Company's
directors will be jointly and severally liable to the Company and its
creditors for the full amount paid for such purchase or redemption.
Based upon financial and other information currently available to it,
management of the Company believes that the Recapitalization is being
undertaken for proper purposes and in good faith. Certain courts have held,
however, that a company's purchase of its own capital stock does not
constitute reasonably equivalent value or fair consideration for incurring
indebtedness. By extension, the purchase of options to purchase capital stock
of a company may also be viewed as not constituting reasonably equivalent
value or fair consideration to such company. The Company believes that it (i)
is solvent and will continue to be solvent after making the purchases
contemplated by the Recapitalization notwithstanding the fact that the
Company, after completion of the Offer and such purchase of options and
preferred stock, will have a negative net worth under generally accepted
accounting principles, because the Company believes that the fair value of the
Company's assets exceeds and will exceed its probable liabilities, (ii) will
have sufficient capital for carrying on the business it intends to conduct
after such distributions, and (iii) will be able to pay its debts as they
mature. There can be no assurance, however, that a court would concur with
such beliefs and positions.
It is a condition to the consummation of the Offer that the Company shall
have received an opinion from an independent valuation firm (i) as to the
value of the Company's assets and liabilities, after giving effect to the
consummation of the Recapitalization and Merger, and (ii) that the fair value
of the Company's assets would exceed its total stated liabilities and
identified contingent liabilities both before and after giving effect to the
Recapitalization and Merger by at least the aggregate par value of its issued
capital stock. Houlihan, Lokey, Howard & Zukin, Inc. has been retained by the
Company to deliver such an opinion.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS. Management of the Company has
estimated that approximately $25 million of annualized net cost savings (as
compared to such costs for the pro forma combined fiscal year ended December
30, 1995) can be achieved over a three-year period as a result of integrating
the Arizona operations of the Company and Smitty's. These estimates of
potential cost savings are forward looking statements that are inherently
uncertain. Actual cost savings, if any, could differ materially from those
projected. All of these forward looking statements are based on estimates and
assumptions made by management of the Company, which although believed to be
reasonable, are inherently uncertain and difficult to predict; therefore,
undue reliance should not be placed upon such estimates. There can be no
assurance that the savings anticipated in these forward looking statements
will be achieved. The following important factors, among others, could cause
the Company not to achieve the cost savings contemplated herein or otherwise
cause the Company's results of operations to be adversely affected in future
periods: (i) continued or increased competitive pressures from existing and
new competitors and new entrants, including price-cutting strategies;
(ii) unanticipated costs related to the Recapitalization and Merger and the
operations of the Company and Smitty's; (iii) loss or retirement of key
members of management or the termination of the Management Services Agreement
with Yucaipa; (iv) inability to negotiate more favorable terms with suppliers
or to improve working capital management; (v) increases in interest rates or
the Company's cost of borrowing or a default under any material debt
agreements; (vi) inability to develop new stores in advantageous locations or
to successfully convert existing stores; (vii) prolonged labor disruption;
(viii) deterioration in general or regional economic conditions; (ix) adverse
state or federal legislation or regulation that increases the costs of
compliance, or adverse findings by a regulator with respect to
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existing operations; (x) loss of customers as a result of the conversion of
store formats; (xi) adverse determinations in connection with pending or
future litigations or other material claims against the Company; (xii)
inability to achieve future sales levels or other operating results that
support the cost savings, and (xiii) the unavailability of funds for capital
expenditures. Many of such factors are beyond the control of the Company. In
addition, there can be no assurance that unforeseen costs and expenses or
other factors will not offset the projected cost savings in whole or in part.
ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE RECAPITALIZATION AND
MERGER. Upon consummation of the Recapitalization and Merger, the Company
anticipates that it would record charges to earnings in connection with: (i)
the adoption of a strategy to accelerate the disposition of certain real
estate assets in California pursuant to the California Asset Disposition; (ii)
the payment of certain refinancing premiums and the write-off of certain debt
issuance costs resulting from the refinancing of approximately $667.1 million
(pro forma at December 30, 1995) of the Company's indebtedness and
approximately $103.3 million (pro forma at December 30, 1995) of Smitty's
indebtedness; (iii) the purchase of certain management stock options; and (iv)
the integration of Arizona operations of the Company with Smitty's. As a
result of the foregoing, the Company anticipates that it would record a
substantial charge to earnings for the quarter in which the Transactions are
consummated. The Company currently estimates that the total charge for all
such items would be approximately $220 million (pre-tax). However, such
estimate is based on information available as of the date of this Offer to
Purchase and the actual total charge may differ materially from such estimate
if the actual information available to the Company at the time the charge is
recorded varies from the information currently available.
COMPETITION. The supermarket industry is highly competitive and
characterized by narrow profit margins. The Company's competitors include
national and regional supermarket chains, independent and specialty grocers,
drug and convenience stores and the newer "alternative format" food stores,
including warehouse-style supermarkets, club stores, deep discount drug stores
and "supercenters." The Company's competitors continue to open new stores in
the Company's existing markets. In addition, new competitors have entered the
Company's markets in the past and could do so in the future. Supermarket
chains generally compete on the basis of price, location, quality of products,
service, product variety and store condition. The Company regularly monitors
its competitors' prices and adjusts its prices and marketing strategy as
management deems appropriate in light of existing conditions. Some of the
Company's competitors have greater financial resources than the Company and
could use those resources to take steps which could adversely affect the
Company's competitive position. The Company's ability to respond to
competitive pressures could be adversely affected by its highly leveraged
financial condition.
CONTROL OF THE COMPANY; CHANGE OF CONTROL PROVISIONS. The Company's Class A
Common Stock and Series I Preferred Stock are each entitled to ten votes per
share and the Company's Class B Common Stock is entitled to one vote per
share. Upon consummation of the Recapitalization and Merger, members of the
Smith Group are expected to have beneficial ownership, in the aggregate, of
approximately 24.5% of the outstanding Common Stock and 31.6% of the
outstanding Series I Preferred Stock, representing approximately 41.8% of the
aggregate voting power of the Company's capital stock, and certain affiliates
of Yucaipa and each of the investment partnerships which own shares in
Smitty's for which Yucaipa acts as the general partner (the "Yucaipa Group")
will have beneficial ownership of approximately 13.6% of the outstanding
Common Stock of the Company, representing approximately 1.3% of the aggregate
voting power of the Company's outstanding shares of capital stock. Pursuant to
a standstill agreement (as amended, the "Standstill Agreement") entered into
by the Smith Group, the Yucaipa Group and the Company, upon consummation of
the Recapitalization, the Company will use its best efforts to reconstitute
its Board of Directors to consist of seven directors, and each of the Smith
Group and the Yucaipa Group will have the right to nominate two directors so
long as it holds at least 8% of the outstanding Common Stock and the right to
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nominate one director of the Company so long as it holds at least 5% of the
outstanding Common Stock. As a result of the ownership structure of the
Company and the contractual rights described above, the voting and management
control of the Company is highly concentrated. The Smith Group will continue
to have effective control of the Company and, subject to compliance with the
restrictions contained in the Financing Agreements, will have the ability to
direct the actions of the Company with respect to matters such as the payment
of dividends, material acquisitions and dispositions and other extraordinary
corporate transactions.
Changes contained in the Company's Amended and Restated Certificate of
Incorporation and the control of the Common Stock referred to above may have
the effect of making more difficult or discouraging a proxy contest involving
the Company, certain mergers, a tender offer, an open market purchase program,
or other purchases of Common Stock in circumstances that may be beneficial to
stockholders. The classification of the Board of Directors provided for in the
Company's Amended and Restated Certificate of Incorporation will make more
difficult a change of control of the Company that is not approved by the Board
of Directors. Such provision may tend to insulate current management against
the possibility of removal in a takeover bid and may also have the effect of
discouraging certain persons from purchasing Common Stock in circumstances
that would give stockholders an opportunity to sell some or all of their
Common Stock at a premium to prevailing market prices. See "Amendment and
Restatement of Certificate of Incorporation."
NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS. Upon consummation of the
Recapitalization and Merger, substantially all of the existing members of the
Company's Board of Directors will resign and be replaced by the new directors
elected at the Stockholders' Meeting. See "Management after Recapitalization
and Merger." Jeffrey Smith will remain as Chairman of the Board but will
resign as Chief Executive Officer of the Company. Ronald Burkle, the managing
general partner of Yucaipa, will be appointed Chief Executive Officer of the
Company and Allen Rowland will continue his recent appointment as President
and Chief Operating Officer. As a result, the Company's senior executive
officers and a majority of the members of the Board of Directors will be new
appointees. There can be no assurance that the changes in the Company's Board
of Directors or senior management will not adversely affect the Company's
operating performance. Mr. Burkle will provide his services as Chief Executive
Officer pursuant to the Management Services Agreement between the Company and
Yucaipa; however, such agreement does not require Mr. Burkle to spend any
specified amount of time on Company affairs. Yucaipa will receive an annual
fee of $1 million for providing the services of Mr. Burkle and the other
partners and employees of Yucaipa. The Management Services Agreement may be
terminated by the Company's Board of Directors on 90 days' notice or by either
party upon the occurrence of certain events. If the Company seeks to terminate
the Management Services Agreement, subject to limited exceptions, it is
required to pay Yucaipa a termination fee of between $5 million and $10
million, depending on the time of termination. Yucaipa will also receive
certain fees in connection with the consummation of the Recapitalization. See
"Certain Related Agreements--Management Services Agreement."
ELIMINATION OF DIVIDENDS
The Company intends to discontinue the payment of cash dividends on the
Common Stock following the consummation of the Recapitalization and Merger,
and the payment of future dividends will be severely restricted by the terms
of the Financing Agreements entered into by the Company in connection with the
Recapitalization and Merger. The resumption of cash dividends at any future
time will be dependent on various factors which the Board of Directors will
evaluate at the time, principally including whether the Company will have
sufficient excess cash on hand at the time after providing for its operating
needs, servicing debt and reserving an appropriate amount of funds for the
Company's expansion opportunities. There can be no assurance when or whether
the Board might decide to resume paying dividends on the Common Stock.
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THE TENDER OFFER
NUMBER OF SHARES; PRORATION; EXTENSION OF THE OFFER
Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment and thereby purchase 50% of its outstanding Shares (or
12,535,862 Shares based on the outstanding Shares as of April 15, 1996), which
Shares are required to be validly tendered prior to the Expiration Date and
not theretofore withdrawn in accordance with the withdrawal procedures set
forth below under "The Tender Offer--Withdrawal Rights." As used herein, the
term "Expiration Date" means 12:00 Midnight, New York City time, on May 22,
1996, unless and until the Company shall, in its sole discretion, have
extended the period of time during which the Offer is open, in which event the
term "Expiration Date" shall refer to the latest time and date at which the
Offer, as so extended by the Company, shall expire. See "The Tender Offer--
Extension of Tender Period; Termination; Amendment" for a description of the
Company's right to extend the period of time during which the Offer is open,
and to delay, terminate or amend the Offer. If the Offer is oversubscribed,
Shares tendered prior to the Expiration Date and not withdrawn will be subject
to proration. The proration period also expires on the Expiration Date. The
Company expects to extend the Expiration Date until after the Stockholders'
Meeting scheduled for May 23, 1996 at 9:00 a.m. Mountain Time.
All Shares purchased pursuant to the Offer will be purchased at the Purchase
Price, net to the seller in cash. The Company reserves the right, in its sole
discretion, to purchase more than 50% of its outstanding Shares pursuant to
the Offer, but it has no current intention to do so.
If the number of Shares validly tendered prior to the Expiration Date and
not withdrawn is greater than 50% of its outstanding Shares (and, as is most
likely, the Company elects not to purchase pursuant to the Offer any more than
50% of its outstanding Shares), the Company will, upon the terms and subject
to the conditions of the Offer, accept for purchase Shares properly tendered
and not withdrawn before the Expiration Date on a pro rata basis (with
adjustments to avoid purchases of fractional Shares). THEREFORE, STOCKHOLDERS
DESIRING TO PARTICIPATE FULLY IN THE OFFER SHOULD TENDER ALL OF THEIR SHARES
TO ENSURE THAT THE COMPANY WILL PURCHASE, SUBJECT TO THE TERMS AND CONDITIONS
THE OFFER, AT LEAST 50% OF SUCH STOCKHOLDERS' SHARES.
In the likely event that proration of tendered Shares is required, the
Company will determine the final proration factor as promptly as practicable
after the Expiration Date. Proration for each stockholder tendering Shares
will be based on the ratio of the number of Shares tendered by such
stockholder to the total number of Shares tendered by all stockholders.
Although the Company will announce preliminary results of proration by press
release as promptly as practicable after the Expiration Date, the Company does
not expect to be able to announce the final results of such proration until
approximately seven NYSE trading days after the Expiration Date. Stockholders
may obtain such preliminary information from the Information Agent and may be
able to obtain such information from their brokers.
The Company expressly reserves the right, in its sole discretion, at any
time or from time to time, to extend the period of time during which the Offer
is open by giving oral or written notice of such extension to the Depositary
and making a public announcement thereof. See "The Tender Offer--Extension of
Tender Period; Termination; Amendment." There can be no assurance that the
Company will exercise its right to extend the Offer.
PROCEDURE FOR TENDERING SHARES
VALID TENDER. Except as set forth below, for Shares to be validly tendered
pursuant to the Offer:
(a) certificates representing such Shares (or confirmation of receipt of
such Shares pursuant to the procedure for book-entry transfer set forth
below, or an Agent's Message (as defined below) if the tendering
stockholder has not delivered a Letter of Transmittal), together with a
properly
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completed and duly executed Letter of Transmittal (or manually executed
facsimile thereof) with any required signature guarantees, and any other
documents required by the Letter of Transmittal, must be received on or
prior to the Expiration Date by the Depositary at one of its addresses set
forth on the back cover of this Offer to Purchase, or
(b) the tendering stockholder must comply with the guaranteed delivery
procedures set forth below.
SIGNATURE GUARANTEES AND METHOD OF DELIVERY. No signature guarantee is
required on the Letter of Transmittal if the Letter of Transmittal is signed
by the registered holder of the Shares exactly as the name of the registered
holder appears on the certificate (which term includes any participant in The
Depository Trust Company or the Philadelphia Depository Trust Company
(collectively, the "Book-Entry Transfer Facilities") whose name appears on a
security position listing as the owner of the Shares) tendered therewith, and
payment and delivery are to be made directly to such registered holder at such
holder's address shown on the records of the Company, or if Shares are
tendered for the account of a member firm of a registered national securities
exchange, a member in good standing of the Stock Transfer Association's
approved Medallion Program (such as STAMP, SEMP or MSP) or a commercial bank,
broker, dealer, credit union, savings association or other entity having an
office, branch or agency in the United States (each such entity being
hereinafter referred to as an "Eligible Institution"). In all other cases, all
signatures on the Letter of Transmittal must be guaranteed by an Eligible
Institution. See Instruction 1 of the Letter of Transmittal. If a certificate
representing Shares is registered in the name of a person other than the
signatory to a Letter of Transmittal, or if payment is to be made, or Shares
not purchased or tendered are to be issued, to a person other than the
registered holder, the certificate must be endorsed or accompanied by an
appropriate stock power, in either case signed exactly as the name of the
registered holder appears on the certificate, with the signature on the
certificate or stock power guaranteed by an Eligible Institution.
Notwithstanding any other provision hereof, payment for Shares tendered and
accepted for payment pursuant to the Offer will be made only after timely
receipt by the Depositary of certificates for such Shares (or a timely
confirmation of a book-entry transfer of such Shares into the Depositary's
account at one of the Book-Entry Transfer Facilities, or an Agent's Message if
the tendering stockholder has not delivered a Letter of Transmittal), a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) or an Agent's Message, with any required signature guarantees and any
other documents required by the Letter of Transmittal. The term "Agent's
Message" means a message transmitted by a Book-Entry Transfer Facility to and
received by the Depositary and forming a part of a book-entry confirmation,
which states that such Book-Entry Transfer Facility has received an express
acknowledgement from the participant in such Book-Entry Transfer Facility
tendering the Shares which are the subject of such book-entry confirmation
that such participant has received and agrees to be bound by the Letter of
Transmittal and that the Company may enforce such agreement against such
participant. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING STOCK
CERTIFICATES, THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, IS
AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED.
BOOK-ENTRY TRANSFER. The Depositary will establish accounts with respect to
the Shares at each of the Book-Entry Transfer Facilities for purposes of the
Offer within two business days after the date of this Offer to Purchase. Any
financial institution which is a participant in any of the Book-Entry Transfer
Facility systems may make book-entry delivery of Shares by causing a Book-
Entry Transfer Facility to transfer the Shares into the Depositary's account
in accordance with such Book-Entry Transfer Facility's procedure for such
transfer. However, although delivery of Shares may be effected through book-
entry transfer into the Depositary's account at a Book-Entry Transfer
Facility, the Letter of Transmittal (or manually executed facsimile thereof),
properly completed and duly executed, with any required signature guarantees
or an Agent's Message, and any other required documents, must
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<PAGE>
in any case be transmitted to and received by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase on or prior to
the Expiration Date, or the stockholder must comply with the guaranteed
delivery procedures set forth below. DELIVERY OF THE LETTER OF TRANSMITTAL AND
ANY OTHER REQUIRED DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE
WITH SUCH FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE
DEPOSITARY.
GUARANTEED DELIVERY. If a stockholder desires to tender Shares pursuant to
the Offer and such stockholder's Share certificates are not immediately
available or time will not permit all required documents to reach the
Depositary on or prior to the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, such Shares may nevertheless
be tendered if all of the following guaranteed delivery procedures are duly
complied with:
1. such tender is made by or through an Eligible Institution;
2. the Depositary receives (by hand, mail, or facsimile transmission) by
the Expiration Date a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form provided by the Company; and
3. the certificates for all tendered Shares, in proper form for transfer
(or a confirmation of a book-entry transfer of such Shares into the
Depositary's account at a Book-Entry Transfer Facility) together with a
properly completed and duly executed Letter of Transmittal (or manually
executed facsimile thereof) with any required signature guarantees or an
Agent's Message, and all other documents required by the Letter of
Transmittal, are received by the Depositary within three NYSE trading days
after the receipt of such Notice of Guaranteed Delivery by the Depositary.
The Notice of Guaranteed Delivery must include a guarantee by an Eligible
Institution in the form set forth in such Notice.
DETERMINATION OF VALIDITY; DEFECTS. All questions as to the number of Shares
to be purchased, the form of documents and the validity, eligibility
(including time of receipt) and acceptance for payment of any tender of Shares
will be determined by the Company, in its sole discretion, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any or all tenders of Shares determined by it not to be in
proper form or the acceptance of or payment for which may, in the opinion of
the Company's counsel, be unlawful. The Company also reserves the absolute
right to waive any of the conditions of the Offer or any defect or
irregularity in any tender of Shares by any particular stockholder, whether or
not similar defects or irregularities are waived in the case of other
stockholders. The Company's interpretation of the terms and conditions of the
Offer (including the Letter of Transmittal and the instructions thereto) will
be final and binding. No tender of Shares will be deemed to have been validly
made until all defects and irregularities have been cured or waived. None of
the Company, its affiliates, the Dealer Managers, the Depositary, the
Information Agent or any other person will be under any duty to give notice of
any defects or irregularities in tenders and none of them will incur any
liability for failure to give any such notice.
FEDERAL INCOME TAX WITHHOLDING. Unless an exemption applies under the
applicable law and regulations concerning "backup withholding" of federal
income tax, the Depositary will be required to withhold, and will withhold,
31% of the gross proceeds otherwise payable to a stockholder or other payee
pursuant to the Offer unless the stockholder or other payee provides such
person's taxpayer identification number (social security number or employer
identification number) and certifies that such number is correct. If the
Depositary is not provided with the correct taxpayer identification number,
the Internal Revenue Service may subject the stockholder or other payee to a
$50 penalty. Each tendering stockholder, other than a noncorporate foreign
stockholder, should complete and sign the main signature form and the
Substitute Form W-9 included as part of the Letter of Transmittal so as to
provide the information and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to the Company and the Depositary. Noncorporate foreign
stockholders may be required to complete and sign a Form W-8, Certificate of
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<PAGE>
Foreign Status, a copy of which may be obtained from the Depositary, in order
to avoid backup withholding. In the case of any foreign stockholder, the
Depositary will withhold 30% of the gross proceeds paid to such stockholder in
order to satisfy certain withholding requirements, unless such foreign
stockholder proves in a manner satisfactory to the Company and the Depositary
that (i) the sale of its Shares pursuant to the Offer will qualify as a sale
or exchange, rather than a dividend, for Federal income tax purposes (see "The
Tender Offer--Federal Income Tax Consequences"), in which case no withholding
will be required, (ii) the foreign stockholder is eligible for a reduced tax
treaty rate with respect to dividend income, in which case the Depositary will
withhold at the reduced treaty rate, or (iii) no withholding is otherwise
required.
TENDER CONSTITUTES AN AGREEMENT. The tender of Shares pursuant to any one of
the procedures described above will constitute a binding agreement between the
tendering stockholder and the Company upon the terms and subject to the
conditions of the Offer.
OTHER REQUIREMENTS. It is a violation of Rule 14e-4 promulgated under the
Exchange Act for a person, directly or indirectly, to tender Shares for his or
her own account unless, at the time of the tender and at the Expiration Date,
the person so tendering (i) has a net long position equal to or greater than
the amount of (x) Shares tendered or (y) other securities immediately
convertible into, exercisable or exchangeable for the amount of Shares
tendered and upon acceptance of his or her tender will acquire such Shares for
tender by conversion, exercise or exchange of such other securities, and (ii)
will cause such Shares to be delivered in accordance with the terms of the
Offer. Rule 14e-4 provides a similar restriction applicable to the tender or
guarantee of a tender on behalf of another person. The tender of Shares
pursuant to any one of the procedures described above will constitute the
tendering stockholder's acceptance of the terms and conditions of the Offer as
well as the tendering stockholder's representation and warranty that (i) such
stockholder has a net long position in the Shares being tendered within the
meaning of Rule 14e-4 promulgated under the Exchange Act and (ii) the tender
of such Shares complies with Rule 14e-4.
WITHDRAWAL RIGHTS
Shares tendered may be withdrawn at any time prior to the Expiration Date
and, unless accepted for payment by the Company, such Shares may also be
withdrawn after June 21, 1996. Once accepted for payment, tenders of Shares
made pursuant to the Offer are irrevocable.
For a withdrawal to be effective, a written, telegraphic or facsimile notice
of withdrawal must be received in a timely manner by the Depositary at one of
its addresses set forth on the back cover of this Offer to Purchase. Any such
notice of withdrawal must specify the name of the person who tendered the
Shares to be withdrawn, the number of Shares to be withdrawn and the name of
the registered holder, if different from that of the person who tendered such
Shares. If the certificates for Shares have been delivered or otherwise
identified to the Depositary, then, prior to the release of such certificates,
the tendering stockholder must also submit to the Depositary the serial
numbers shown on the particular certificates evidencing the Shares to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by
an Eligible Institution (except in the case of Shares tendered by an Eligible
Institution). If Shares have been tendered pursuant to the procedure for book-
entry transfer set forth under "The Tender Offer--Procedure for Tendering
Shares," the notice of withdrawal must specify the name and number of the
account at the appropriate Book-Entry Transfer Facility to be credited with
the withdrawn Shares and must otherwise comply with such Book-Entry Transfer
Facility's procedures.
All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Company, in its sole
discretion, which determination shall be final and binding on all parties.
None of the Company, any of its affiliates, the Dealer Managers, the
Depositary, the Information Agent or any other person will be under any duty
to give any notice of any defects or
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<PAGE>
irregularities in any notice of withdrawal and none of them shall incur any
liability for failure to give any such notice. A withdrawal of a tender of
Shares may not be rescinded and any Shares properly withdrawn will not be
deemed to have been tendered for purposes of the Offer. However, withdrawn
Shares may be re-tendered prior to the Expiration Date by following any of the
procedures described under "The Tender Offer--Procedure for Tendering Shares."
PURCHASE OF SHARES; PAYMENT OF PURCHASE PRICE
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of such extension or
amendment), the Company will accept for payment and pay the Purchase Price in
respect of 50% of its outstanding Shares (12,535,862 Shares based on the
outstanding Shares as of April 15, 1996), which Shares are required to be
validly tendered by the Expiration Date and not withdrawn promptly after the
Expiration Date, subject to possible delay in the event of proration. For
purposes of the Offer, the Company will be deemed to have accepted for payment
and thereby purchased Shares which are validly tendered, subject to proration,
and not withdrawn when, as and if the Company gives oral or written notice to
the Depositary of its acceptance of such Shares for payment pursuant to the
Offer.
The Company will pay for Shares that it has purchased pursuant to the Offer
by depositing the aggregate Purchase Price therefor with the Depositary, which
will act as agent for the tendering stockholders for the purpose of receiving
payment from the Company and transmitting payment to the tendering
stockholders. In all cases, payment for Shares accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of
certificates for such Shares (or of a timely confirmation of a book-entry
transfer of such Shares into the Depositary's account at one of the Book-Entry
Transfer Facilities), a properly completed and duly executed Letter of
Transmittal and any other documents required by the Letter of Transmittal.
In the likely event of proration, the Company will determine the proration
factor and pay for those tendered Shares accepted for payment as promptly as
practicable after the Expiration Date. However, the Company does not expect to
be able to announce the final results of any such proration until
approximately seven NYSE trading days after the Expiration Date. Certificates
for all Shares not purchased, including Shares not purchased due to proration,
will be returned (or in the case of Shares tendered by book-entry transfer,
credited to the account maintained with one of the Book-Entry Transfer
Facilities by the participant therein which so delivered such Shares) as
promptly as practicable after the Expiration Date without expense to the
tendering stockholder. Under no circumstances will the Company pay interest on
the Purchase Price, regardless of any delay in making payment. In addition, if
certain events occur, the Company may not be obligated to purchase Shares
pursuant to the Offer. See "The Tender Offer--Certain Conditions of the
Offer."
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer. However, if payment
of the Purchase Price is to be made to, or (in the circumstances permitted by
the Offer) if unpurchased Shares are to be registered in the name of, any
person other than the registered holder, or if tendered certificates are
registered in the name of any person other than the person executing the
Letter of Transmittal, the amount of all stock transfer taxes (whether imposed
on the registered holder or such other person), if any, payable on account of
the transfer to such person will be deducted from the Purchase Price unless
satisfactory evidence of the payment of such taxes, or exemption therefrom, is
submitted. See Instruction 6 to the Letter of Transmittal.
ANY TENDERING STOCKHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY AND
SIGN THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL (OR, IN THE
CASE OF A FOREIGN INDIVIDUAL, FORM W-8 OBTAINABLE FROM THE DEPOSITARY) MAY BE
SUBJECT TO REQUIRED FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS
PROCEEDS PAID TO SUCH STOCKHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE
"THE TENDER OFFER--PROCEDURE FOR TENDERING SHARES--FEDERAL INCOME TAX
WITHHOLDING."
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CERTAIN CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, the Company will not be
required to accept for payment or pay for any Shares tendered, and may
terminate or amend the Offer or may postpone (subject to the requirements of
the Exchange Act for prompt payment for or return of Shares) the acceptance
for payment of, the purchase of and payment for, Shares tendered, if at any
time at or before the acceptance for payment of any such shares or the payment
therefor, any of the following events shall have occurred (or shall have been
determined by the Company to have occurred) and which in the Company's sole
judgment in any such case makes it inadvisable to proceed with the Offer or
with such acceptance, purchase or payment:
(a) The Company's stockholders shall not have validly tendered and not
withdrawn prior to the Expiration Date of the Offer at least 50% of the
outstanding Shares.
(b) The Company shall not have obtained, pursuant to the terms of the
Financing Agreements, all of the financing needed by the Company, together
with other funds available to the Company, to (i) purchase 50% of the
outstanding Shares, (ii) repay all outstanding principal and interest, and
other amounts payable, under the Specified Company Indebtedness and the
Specified Smitty's Indebtedness, and (iii) pay certain fees and expenses
incurred in connection with the Recapitalization and the transactions
contemplated by the Recapitalization Agreement.
(c) The Company shall not have received from an independent valuation
firm an opinion as to the value of the Company's assets and liabilities,
after giving effect to the consummation of the transactions contemplated by
the Recapitalization, that permits the Company to reasonably conclude that
it will not have violated any applicable fraudulent conveyance laws as a
result thereof and that the Company will not have violated any provisions
of Delaware Law governing the purchase of its equity.
(d) All of the conditions to the Merger (other than the satisfaction of
the consummation of the Offer) set forth under "The Recapitalization
Agreement--Conditions to the Merger" shall not have been satisfied.
(e) Any action or proceeding, order, decree or injunction shall have been
taken or threatened, instituted or pending, or any statute, rule,
regulation, judgment, order, stay, decree or injunction shall have been
sought, promulgated, enacted, entered, enforced or deemed applicable to the
Offer or the Company and its subsidiaries (including Smitty's)
(collectively, the "Combined Companies") taken as a whole, by or before any
court or governmental, regulatory or administrative authority or agency or
tribunal, which (i) challenges the making of the Offer, the acquisition of
Shares pursuant to the Offer or any of the other transactions comprising
part of the Recapitalization or might directly or indirectly prohibit,
prevent, restrict or delay consummation of the Offer or any of the other
transactions comprising part of the Recapitalization, or (ii) materially
adversely affects the business, operations, condition (financial or
otherwise), results of operations, prospects, assets, liabilities, working
capital or reserves of the Combined Companies taken as a whole, or
otherwise materially impairs in any way the contemplated future conduct of
the business of the Combined Companies taken as a whole.
(f) There shall have occurred (i) the declaration of any banking
moratorium or suspension of payments in respect of banks in the United
States, (ii) any general suspension of trading in, or limitation on prices
for, securities on any national securities exchange or in the over-the-
counter market, (iii) the commencement of a war, armed hostilities or any
other national or international crisis directly or indirectly involving the
United States, (iv) any limitation (whether or not mandatory) by any
government or governmental, regulatory or administrative agency or
authority on, or any event which in the Company's sole judgment might
adversely affect, the extension of credit by banks or other lending
institutions in the United States, (v) any significant decline in the
market price of the shares of Common Stock or any change in the general
political, market,
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economic or financial conditions in the United States or abroad that has a
material adverse effect on the ability to obtain financing generally or on
the trading in the shares of Common Stock or (vi) in the case of any of the
foregoing existing at the time of the commencement of the Offer, a material
acceleration or worsening thereof.
(g) There shall have occurred any event that has resulted, or may in the
sole judgment of the Company result, in an actual or threatened change in
the business, operations, condition (financial or otherwise), results of
operations, prospects, assets, liabilities, working capital or reserves of
the Combined Companies taken as a whole.
The Company has agreed in the Recapitalization Agreement that so long as it
has satisfied the financing condition described in clause (b) above, if so
requested by Yucaipa, the Company will waive the condition referred to in
clause (f) above.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company in its sole discretion regardless of the circumstances
(including any action or inaction by the Company) giving rise to any such
conditions, or may be waived by the Company, in its sole discretion, in whole
or in part at any time. The failure by the Company at any time to exercise its
rights under any of the foregoing conditions shall not be deemed a waiver of
any such right; the waiver of any such right with respect to particular facts
and other circumstances shall not be deemed a waiver with respect to any other
facts and circumstances; and each such right shall be deemed an ongoing right
which may be asserted at any time or from time to time. Any determination by
the Company concerning the events described above shall be final and binding
on all parties.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
The Company expressly reserves the right, in its sole discretion, at any
time and from time to time, and regardless of whether or not any of the events
set forth under "The Tender Offer--Certain Conditions of the Offer" have
occurred or are deemed by the Company to have occurred, to extend the period
of time during which the Offer is open and thereby delay acceptance for
payment of, and payment for, any Shares by giving oral or written notice of
such extension to the Depositary and making a public announcement thereof.
During any such extension, all Shares previously tendered and not purchased or
withdrawn will remain subject to the Offer, except to the extent that such
Shares may be withdrawn. The Company expects to extend the period of time
during which the Offer is open until after the Stockholders' Meeting scheduled
for May 23, 1996 at 9:00 a.m. Mountain Time. The Company also expressly
reserves the right, in its sole discretion, to terminate the Offer and not
accept for payment or pay for any Shares not theretofore accepted for payment
or, subject to applicable law, to postpone payment for Shares upon the
occurrence of any of the conditions specified in this Offer to Purchase by
giving oral or written notice of such termination to the Depositary and making
a public announcement thereof. The Company's reservation of the right to delay
payment for Shares which it has accepted for payment is limited by Rules 13e-
4(f)(2) and 13e-4(f)(5) promulgated under the Exchange Act. Rule 13e-4(f)(2)
requires that the Company permit Shares tendered pursuant to the Offer to be
withdrawn (i) at any time during the period the Offer remains open and (ii) if
not yet accepted for payment, after the expiration of 40 business days from
commencement of the Offer. Rule 13e-4(f)(5) requires that the Company pay the
consideration offered or return the Shares tendered promptly after termination
or withdrawal of a tender offer. Subject to compliance with applicable law,
the Company further reserves the right, in its sole discretion, and regardless
of whether or not any of the events set forth under "The Tender Offer--Certain
Conditions of the Offer" have occurred or are deemed by the Company to have
occurred, to amend the Offer in any respect (including without limitation by
decreasing or increasing the price to be paid for Shares tendered pursuant to
the Offer or by decreasing or increasing the number of Shares being sought in
the Offer) or to waive the limitation on the maximum number of Shares to be
purchased pursuant to the Offer. Amendments to the Offer may be made at any
time and from time to time effected by public
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<PAGE>
announcement thereof, such announcement, in the case of an extension, to be
issued no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Any public announcement made
pursuant to the Offer will be disseminated promptly to stockholders in a
manner reasonably designed to inform stockholders of such change. Without
limiting the manner in which the Company may choose to make a public
announcement, except as required by applicable law, the Company will have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by making a release to the Dow Jones News Service.
If (i) the Company increases or decreases the price to be paid for the
Shares, or the Company increases the number of Shares being sought by an
amount exceeding 2% of the outstanding Shares (250,718 Shares as of April 15,
1996), or the Company decreases the number of Shares being sought, and (ii)
the Offer is scheduled to expire earlier than the tenth business day from the
date that notice of such increase or decrease is first published, sent or
given, the Offer will be extended until such tenth business day. For purposes
of the Offer, a "business day" means any day other than a Saturday, Sunday or
federal holiday, and consists of the time period from 12:01 a.m. through
midnight, New York City time. If the Company otherwise materially changes the
terms of the Offer or the information concerning the Offer, or if it waives a
material condition of the Offer, the Company will extend the Offer to the
extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated under the
Exchange Act. These rules require that the minimum period during which a
tender offer must remain open following material changes in the terms of the
offer or material information concerning the offer (other than a change in
price or a change in the percentage of securities sought) will depend on the
facts and circumstances, including the relative materiality of such terms or
information.
PRICE RANGE OF COMMON STOCK; DIVIDENDS
The Class B Common Stock is listed and principally traded on the NYSE under
the symbol "SFD." The following table sets forth for the periods indicated the
high and low sales price per Share on the NYSE Composite Tape and cash
dividends paid per Share.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
YEAR HIGH LOW PER SHARE
---- ------- ------- ---------
<S> <C> <C> <C>
Fiscal 1994:
First Quarter....................................... $24 1/8 $20 1/8 $.13
Second Quarter...................................... 22 18 1/8 .13
Third Quarter....................................... 24 3/4 18 1/2 .13
Fourth Quarter...................................... 26 3/4 22 5/8 .13
Fiscal 1995:
First Quarter....................................... $27 5/8 $ 23 $.15
Second Quarter...................................... 24 19 1/4 .15
Third Quarter....................................... 20 1/4 18 1/8 .15
Fourth Quarter...................................... 27 3/4 19 3/8 .15
Fiscal 1996:
First Quarter....................................... $31 $23 1/4 $.15
</TABLE>
On January 5, 1996, the last trading day before public announcement that the
Company was in negotiations regarding a merger with Smitty's and considering a
repurchase of as much as 50% of its Common Stock at a premium to recent
trading levels, the high and low sales price of a share of the Company's Class
B Common Stock was $28 3/4 and $27 3/4, respectively. On January 26, 1996, the
last trading day before public announcement of the execution of the
Recapitalization Agreement, the high and low sales price of a share of the
Company's Class B Common Stock was $31 and $29 7/8,
17
<PAGE>
respectively. On April 24, 1996, the most recent practicable date prior to the
printing of this Offer to Purchase, the high and low sales price of a share of
the Company's Class B Common Stock was $24 3/4 and $24 3/8, respectively. The
Company urges stockholders to obtain current market quotations for the Class B
Common Stock. The Class A Common Stock is not registered or listed; however,
the Class A Common Stock can typically be converted into Class B Common Stock
upon the request of the holder.
After the Expiration Date, the Shares are expected to trade at prices
significantly below $36 per Share.
The Company intends to discontinue the payment of cash dividends on the
Common Stock following the consummation of the Recapitalization and Merger,
and the payment of future dividends will be severely restricted by the terms
of the Financing Agreements entered into by the Company in connection with the
Recapitalization and Merger. The resumption of cash dividends at any future
time will be dependent on various factors which the Board of Directors will
evaluate at the time, principally including whether the Company will have
sufficient excess cash on hand at the time after providing for its operating
needs, servicing debt and reserving an appropriate amount of funds for the
Company's expansion opportunities. There can be no assurance when or whether
the Board might decide to resume paying dividends on the Common Stock.
BACKGROUND OF THE TRANSACTIONS
At various times over the past two years various parties have expressed to
management of the Company an interest in submitting a proposal to acquire the
Company. In the spring and summer of 1994 two supermarket companies separately
held preliminary discussions with management of the Company concerning the
possible acquisition of the Company. In the summer of 1995 another supermarket
company and a leveraged buy-out firm separately held preliminary discussions
with management of the Company concerning the possible acquisition of the
Company. The Company provided all of those companies or firms with some
nonpublic information about the Company, and some of them conducted a due
diligence review of the Company. But the price range that each of those
companies or firms indicated to the Company on a preliminary basis for any
acquisition proposal that they might submit was not at a level that management
of the Company found to be sufficient to warrant continuation of the
discussions, and as a result discussions with each company or firm were
terminated.
Jeffrey Smith, Chairman and Chief Executive Officer of the Company and the
owner, along with the other members of the Smith Group, of 30.4% and 64.5% of
the outstanding shares of Common Stock and Series I Preferred Stock
respectively (and approximately 62.1% of the aggregate number of votes
eligible to be cast at the Stockholders' Meeting) did not believe that any of
the price indications expressed by those parties approached levels that would
cause the Smith Group to consider a sale of its shares.
In late September 1995, the Company decided to pursue the closure of its
entire Southern California Region. Pursuant to this determination, the Company
began to explore the possible disposition of its large distribution center and
dairy facility in Riverside, California and the subsequent closure and sale of
its stores in Southern California. At the Board meeting on October 26, 1995,
the Board authorized the Company's pursuit of the California Divestiture.
In connection with the divestiture of its Riverside distribution facility,
the Company conducted discussions with a number of California supermarket
companies and other parties to ascertain their interest in acquiring the
facility and those discussions resulted in an agreement reached in early
November 1995 to sublease the facility to Ralphs Grocery Company ("Ralphs"), a
California supermarket operator controlled by Yucaipa. The sublease of the
Riverside distribution facility to
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<PAGE>
Ralphs, which was consummated in January 1996, and the California Divestiture
were not related to the transactions comprising the Recapitalization or the
Merger.
In the course of the discussions that took place in late September and in
October 1995 concerning the Riverside facility between Jeffrey Smith and
Ronald Burkle, managing general partner of Yucaipa (which controls Smitty's)
and Chairman of Smitty's, Mr. Burkle expressed Yucaipa's interest in pursuing
the possible acquisition of the Company by Yucaipa and a group of investors to
be assembled by Yucaipa. At the same time Mr. Burkle proposed that prior to
such acquisition of the Company by Yucaipa and other investors, the Company
should acquire Smitty's. From October through mid-December 1995, Messrs. Smith
and Burkle and other representatives of the Company, Yucaipa and Smitty's had
numerous discussions about the possible acquisition of the Company by Yucaipa
and other investors, both with and without the prior or simultaneous
acquisition of Smitty's by the Company, as well as the possible acquisition of
the Company by Smitty's. During that period the Company, on the one hand, and
Smitty's and Yucaipa, on the other hand, exchanged nonpublic information and
conducted due diligence reviews of each other. In October 1995, the Company
retained Goldman Sachs to advise the Company and its Board of Directors in its
discussions with Yucaipa concerning a possible transaction involving the
Company.
The discussions in November and early December 1995 between Messrs. Burkle
and Smith and other representatives of the Company, Yucaipa and Smitty's
resulted in preliminary indications from Yucaipa that, subject to satisfactory
completion of its due diligence and satisfactory discussions with prospective
senior lenders and underwriters of securities as to their willingness to
provide the necessary financing for such a transaction, Yucaipa would be
interested in preparing a proposal under which either Yucaipa or Smitty's
would acquire the Company for consideration consisting of a combination of
cash and equity securities having an aggregate per share value roughly
estimated in the mid $30's (the "Original Yucaipa Acquisition Proposal").
However, in late December 1995, Mr. Burkle advised Mr. Smith that, having
completed its due diligence and its discussions with prospective senior
lenders and underwriters, any proposal that Yucaipa would make to acquire the
Company would involve considerably less cash consideration and more equity
securities than the Original Yucaipa Acquisition Proposal. After consulting
with the Company's financial advisors, Mr. Smith advised Mr. Burkle that the
Company would not be interested in the revised acquisition proposal because
the value of the revised proposal was below the level at which the Company and
the Smith Group would entertain the sale of the Company. Mr. Burkle then
proposed as an alternative that the Company engage in a series of transactions
comparable to the transactions contemplated by the Recapitalization and
Merger--namely that (a) the Company acquire Smitty's in exchange for the
issuance of 3,038,888 shares of Class B Common Stock, (b) the Company make a
tender offer pursuant to which it would purchase 50% of its outstanding shares
of Common Stock (excluding the shares to be issued to the stockholders of
Smitty's) for $36 in cash per share, (c) the Company enter into a five-year
agreement with Yucaipa calling for Yucaipa's provision of various management
services to the Company, and (d) the Company's Board of Directors be
reconstituted to comprise two representatives of the Smith Group, two
representatives of Yucaipa, one senior manager of the Company and two
independent directors. Mr. Burkle reported to Mr. Smith that the prospective
senior lenders and underwriters with whom Yucaipa had been in contact
concerning the possible acquisition of the Company by Yucaipa or Smitty's had
indicated their willingness to finance the proposed Recapitalization by the
Company.
A few days later in the last week of December 1995, after consulting with
the Company's financial and legal advisors and receiving the benefit of their
analyses of this new transaction proposal, Mr. Smith responded favorably to
the proposal and advised Mr. Burkle that he would submit it to the Company's
Board of Directors. On January 3, 1996, the Board of Directors held a special
meeting. At that meeting Mr. Smith reported on the preliminary discussions
that had taken place in the past two years with the four parties referred to
above concerning the possible acquisition of the Company, and explained that
none of these discussions had resulted in the receipt of any satisfactory
acquisition
19
<PAGE>
proposals at price levels that management of the Company believed to be worth
further discussion and that all such proposals had been at price levels that
were significantly below the Original Yucaipa Acquisition Proposal.
Mr. Smith further reported on the discussions with Yucaipa regarding the
proposed acquisition of Smitty's by the Company, the simultaneous tender offer
by the Company for 50% of its outstanding Common Stock and the other terms of
the series of transactions outlined above that Yucaipa had proposed. Mr. Smith
expressed his opinion that such transactions presented the best course of
action for the Company among all of the strategic options that were then
available to the Company. He expressed his belief that over time such
transactions would deliver more value to the Company's stockholders than any
acquisition proposal that the Company could reasonably expect to receive at
the present time or in the foreseeable future and that therefore approval of
the proposed transactions by the Board of Directors was in the best interests
of all of the Company's stockholders.
Mr. Smith advised the Board that he was interested in reducing his
management role at the Company and that the Company needed to find an
experienced individual to serve in the position of chief operating officer
with significantly expanded management responsibilities. Mr. Smith expressed
his view that in light of those developments the proposed management services
agreement with Yucaipa would be particularly beneficial to the Company.
Goldman Sachs discussed with the Board the financial aspects of the proposed
transactions and related matters and the Company's legal advisors, Simpson
Thacher & Bartlett, discussed the legal duties of the Company's directors and
various aspects of the proposed transactions, including the fact that no
change of control would result from the transactions under consideration since
the Company's existing stockholders would retain approximately 77.5% of the
Company's outstanding Common Stock following the Recapitalization and Merger,
the Smith Group would continue to be the Company's largest stockholder with
23.2% of the outstanding Common Stock and 41.8% of the vote and Yucaipa would
be entering into a standstill agreement with the Company which would limit
Yucaipa's ability for 10 years to (a) increase its beneficial ownership of
Common Stock beyond 20% of the outstanding votes, (b) sell its shares in large
blocks, (c) submit any proposal regarding a change of control of the Company,
(d) solicit proxies for any meeting of the Company's stockholders, or (e) take
any other actions to seek control of the Company.
The Board discussed the proposed transactions and related matters at length
and set a subsequent meeting for January 12, 1996 to discuss the transactions
further. In addition, the independent directors on the Board engaged separate
legal counsel to assist them in evaluating the proposed transaction.
On January 8, 1996, the Company issued the following press release:
"Smith's Food & Drug Centers, Inc. announced today that it is in
negotiations regarding a merger of Smitty's Super Valu, Inc., a regional
supermarket operator based in Phoenix, Arizona, into Smith's. Smitty's,
which operates 28 stores in the Phoenix and Tucson areas, is controlled by
The Yucaipa Companies. In connection with the merger transaction, Smith's
said it was also considering the repurchase of as much as 50% of its Class
A and Class B common stock at a premium to recent trading levels. It is not
anticipated that a change of control will result from any transaction under
consideration.
"Smith's cautioned that no agreement had been reached regarding the
proposed transaction with Smitty's and that discussions regarding the
transaction and the possible share repurchase are ongoing. No assurances
can be made that any agreement will be reached or that any of the
transactions will be consummated."
20
<PAGE>
Later on January 8, 1996, the Company announced the closure of its
operations in its Southern California Region. It reported that several of its
stores were to be sold or leased to various supermarket companies and that its
remaining California stores would be closed in the near future and that it was
anticipated that they would be sold or leased to other retail companies. The
announcement also reported that restructuring charges of approximately $85
million after taxes would be charged against earnings for the year ended
December 30, 1995 as a result of these actions.
On January 5, 1996, Rodney Brady submitted his resignation as a director of
the Company, citing the press of other business commitments that made it
impossible for him to attend the meetings of the Board that had been or would
be scheduled to consider the various matters then under study by the Board and
to devote sufficient attention to those important matters.
On January 12, 1996, the Board of Directors met to continue its deliberation
of the proposed series of transactions that had been presented to the Board at
its January 3 meeting. At the commencement of the Board meeting, Jeffrey Smith
received a faxed letter from Supermarket Company A expressing its interest in
pursuing the acquisition of the Company for a consideration consisting of
Supermarket Company A's stock, cash or some combination of Supermarket Company
A's stock and cash having an aggregate value ranging from $28 to $32 per share
of the Company's Common Stock, subject to satisfactory completion of a due
diligence review. (Supermarket Company A was one of the four companies or
firms that had expressed to management of the Company in 1994 or 1995 an
interest in making a proposal to acquire the Company.)
At the Board meeting on January 12, the Board discussed among various other
issues the alternative courses of action then available to the Company,
including effectuating the transactions contemplated by the Recapitalization
and Merger and pursuing the possible sale of the Company. Mr. Smith advised
the Board that the Smith family would not support a transaction involving the
sale of the Company unless it resulted in a higher price than that proposed by
Supermarket Company A or the prices that appeared to be obtainable from the
various other parties with whom the Company previously had discussions. Mr.
Smith expressed his view to the Board that based on those prior discussions
with other parties, he did not believe such price levels were attainable at
that time or in the foreseeable future.
After a lengthy discussion, including discussions with Goldman Sachs and
Simpson Thacher & Bartlett, it was the general consensus of the Board that
management of the Company and its advisors should continue their negotiations
with Yucaipa and Smitty's concerning the proposed transactions contemplated by
the Recapitalization and Merger in an effort to reach agreement on the final
terms of such transactions, but that at the same time management and the
Company's advisors should also contact those parties who might principally be
interested in making a proposal to acquire the Company and should provide
access to nonpublic information about the Company to any potential bidder who
demonstrated a serious interest and ability to make a bona fide proposal to
acquire the Company. It was also the general view of the directors that if
viable preliminary indications of interest for the acquisition of the Company
that met the price objectives of the Smith family and the Board could not be
obtained by the time of the Board's next regularly scheduled meeting on
January 25, 1996, then the Company should pursue the transactions contemplated
by the Recapitalization and Merger.
On January 13, 1996, after being informed of the decisions of the Company's
Board of Directors at its January 12 meeting, Mr. Burkle advised the Company's
advisors that Yucaipa was no longer interested in pursuing either the sale of
Smitty's to the Company or the other transactions contemplated by the
Recapitalization. Mr. Burkle based that decision on the potential adverse
effects to Smitty's operations if its executives, employees, customers and
suppliers had to endure a two-week period (and possibly longer) of uncertainty
as to whether Smitty's was being sold to the Company or would continue to
operate as an independent company.
21
<PAGE>
On January 15, 1996, the Company issued the following press release:
"Smith's Food & Drug Centers, Inc. said that Smith's and Smitty's Super
Valu, Inc. have terminated discussions concerning the possible merger of
Smitty's with Smith's.
"As a result, Smith's said it was terminating its plan to effectuate the
related transaction which contemplates Smith's repurchase of as much as 50%
of its Class A and Class B Common Stock at a significant premium over
recent trading prices.
"Smith's said that it is currently exploring various ways to enhance
shareholder value, including a possible significant repurchase of stock,
the possible sale of the Company or similar transactions. Smith's said
there can be no assurance that any such transaction would be effected.
"Smith's also reported that Rodney Brady has resigned as a director of
Smith's, citing the press of other business commitments."
During the week of January 15, 1996, Goldman Sachs contacted 10 supermarket
companies and six leveraged buy-out firms (including all four of the companies
or firms referred to earlier in this section which in 1994 or 1995 had
expressed an interest in making a proposal to acquire the Company) to
ascertain if they were interested in making a proposal to acquire the Company.
Five of the parties that were contacted executed confidentiality agreements
and received nonpublic information regarding the Company, and two of those
parties decided to pursue discussions with the Company following their review
of such information.
One of those two companies was Supermarket Company A, which conducted an
extensive due diligence review of the Company during the week of January 15,
1996 and advised Jeffrey Smith at the end of that week that any proposal it
might submit would be at the low end of the value range quoted in its January
12 letter. As a result, discussions between the Company and Supermarket
Company A were terminated.
The other company that pursued discussions with the Company during the week
of January 15, 1996 was Supermarket Company B, which conducted a preliminary
due diligence review of the Company during that week. During the weeks of
January 15 and January 22, representatives of Supermarket Company B met with
Jeffrey Smith regarding a recapitalization transaction they proposed that was
similar in many respects to the transactions contemplated by the
Recapitalization and Merger except that instead of acquiring Smitty's the
Company would acquire Supermarket Company B.
On January 24, 1996, Mr. Smith and the Company's advisors met with
representatives of Supermarket Company B to continue their discussions. At
that meeting the representatives of Supermarket Company B presented a specific
proposal for the recapitalization transaction referred to above. The parties
conducted negotiations as to certain key aspects of the proposal, but those
negotiations did not result in a proposal that Mr. Smith found to be as
advantageous to the Company and its stockholders as the transactions
contemplated by the Recapitalization and Merger. As a result, discussions
between the Company and Supermarket Company B were terminated.
On January 19, 1996, Alan Hoefer submitted his resignation as a director of
the Company, explaining that given the termination of negotiations between the
Company and Smitty's and given the fact that the Company was about to contact
other parties to explore other ways to enhance shareholder value, he believed
it best that he resign from the Board at that particular time.
During the weeks of January 15 and January 22, 1996, discussions between
representatives of the Company and representatives of Yucaipa resumed
concerning the transactions contemplated by the Recapitalization and Merger.
During the week of January 22, representatives of the Company, Yucaipa and
Smitty's returned to negotiating the specific terms of the Recapitalization
and Merger. Those negotiations advanced sufficiently that by January 24 the
Company, Yucaipa and Smitty's had
22
<PAGE>
reached agreement on many of the principal terms of the transactions
contemplated by the Recapitalization and Merger.
On January 25, 1996, the Company's Board of Directors held a regularly
scheduled meeting at which Jeffrey Smith reported on the results of the
Company's discussions with interested parties (as noted above) and its resumed
negotiations with Yucaipa and Smitty's concerning the transactions
contemplated by the Recapitalization and Merger. Mr. Smith reported that the
Company, Yucaipa and Smitty's were close to reaching agreement on most of the
principal terms of the transactions contemplated by the Recapitalization and
Merger and he recommended that the Board approve continued negotiations on
such transactions as the best course of action then available to the Company.
Ronald Burkle was then invited into the meeting to make a presentation to the
Board regarding Yucaipa's background, the potential benefits to the Company of
the acquisition of Smitty's and the potential benefits that the Company would
derive by entering into the Management Services Agreement with Yucaipa. After
Mr. Burkle left the meeting and following a discussion by Goldman Sachs of the
financial aspects of the transactions contemplated by the Recapitalization and
Merger, there was a lengthy discussion by the Board of the proposed
transactions and related matters. The general consensus of the Board was
favorable regarding those transactions and the Board set a meeting for January
28, 1996 for action on those transactions to give the Company's management and
advisors the opportunity to finalize negotiations with Yucaipa and Smitty's
concerning the terms of those transactions.
Later on January 25, the Company's management and financial and legal
advisors met with representatives of Yucaipa and Smitty's and continued their
negotiation of the principal terms of the transactions contemplated by the
Recapitalization and Merger. On January 26, 27 and 28, the parties and their
legal advisors finalized the terms of the Recapitalization Agreement and all
related agreements. The parties and their advisors also negotiated during that
period with senior lenders and securities firms concerning the terms of the
commitment letter from the senior lenders and highly confident letter from the
securities firms with respect to the financing for the Recapitalization. In
addition, subject to the review of the final documentation, Goldman Sachs
believed it would be in a position to deliver an opinion at the January 28
Board meeting to the effect that the Exchange Ratio pursuant to the
Recapitalization Agreement is fair to the Company.
On January 28, 1996, the Company's Board of Directors met. Jeffrey Smith
reported that the final terms of all of the proposed transactions and related
documentation had been agreed to by the Company, Yucaipa and Smitty's. The
Board then unanimously approved the Recapitalization Agreement and all related
agreements and the transactions contemplated by those agreements. Following
the Board meeting, the Recapitalization Agreement and certain related
agreements were executed by the Company, Yucaipa, Smitty's and the other
parties to those agreements. At the same time, the Company, Bankers Trust and
Chase Manhattan executed a commitment letter with respect to the senior bank
financing for the Recapitalization, and five securities firms delivered a
letter to the Company stating that, based upon their understanding of the
transactions, the financing, the then current market conditions and subject to
certain other conditions, they were highly confident of their ability to sell
or place the offering of senior and subordinated debt and preferred stock
required for the Recapitalization and Merger and the Company engaged those
five firms to assist the Company in effecting such offerings.
On January 29, 1996, the Company issued a press release a portion of which
is set forth below:
"Smith's Food & Drug Centers, Inc. made the following announcements
today:
Merger of Smitty's Supermarkets, Inc.
"Smith's has entered into a definitive merger agreement with Smitty's
Supermarkets, Inc. Smitty's, which operates 28 supermarkets in the
Phoenix and Tucson areas, is controlled by
23
<PAGE>
The Yucaipa Companies, a private investment company. Smitty's sales
totaled approximately $590 million in 1995. Under the merger agreement,
Smith's will issue 3,038,888 shares of its Class B Common Stock in
exchange for all of Smitty's outstanding common stock and it will
assume or refinance approximately $148 million of Smitty's debt.
Repurchase of Stock
"Smith's also said it will commence a self tender offer to purchase
50% of its Class A and Class B Common Stock for $36 per share,
excluding shares to be issued in connection with the Smitty's merger.
Consummation of the tender offer will be subject to the tender of at
least 50% of Smith's outstanding common stock, the receipt of financing
and various other conditions. Consummation of the Smitty's merger will
be conditioned on Smith's purchase of shares pursuant to the self
tender offer, receipt of financing, regulatory approvals, approval by
Smith's stockholders and various other conditions. Smith's has received
commitment letters and highly confident letters from several financial
institutions with respect to all of the financing necessary to
consummate the Smitty's merger and the self tender offer.
"The tender offer is expected to commence around April 1, 1996 and be
consummated around May 1, 1996. The Smitty's merger is expected to be
consummated concurrently with the closing of the tender offer.
"Upon consummation of the Smitty's merger and the self tender offer,
the Smith family will continue to be Smith's largest stockholder with
approximately 24% of the outstanding common stock and over 40% of the
vote. The Yucaipa Companies will own approximately 14% of Smith's
outstanding common stock and the other Smitty's stockholders will own
approximately 6%. The Yucaipa Companies will enter into a 10 year
standstill agreement with Smith's.
Management Changes
"Upon consummation of the Smitty's merger and the self tender offer,
Smith's will enter into a five year management services agreement with
The Yucaipa Companies under which Yucaipa will provide various
management services to Smith's. As part of that arrangement, Ronald W.
Burkle, managing partner of The Yucaipa Companies, will be appointed as
Chief Executive Officer of Smith's upon consummation of the Smitty's
merger and the self tender offer. In addition, at that time Smith's
board of directors will be reconstituted to consist of two
representatives of Yucaipa, two representatives of the Smith family,
one other member of management, and two independent directors.
"The Yucaipa Companies is a private investment company which in
addition to Smitty's also controls Ralphs Grocery Company, the largest
supermarket company in Southern California, operating stores under the
Ralphs and Food 4 Less names, which also operates stores in Northern
California under the Cala and Bell names and in the midwest under the
Falley's and Food 4 Less names; and Dominick's Finer Foods, Inc., a
leading Chicago area supermarket company, operating stores under the
Dominick's and Omni names.
"In addition, Smith's announced that it has hired Allen R. Rowland as
President and Chief Operating Officer of Smith's. Mr. Rowland spent 25
years at Albertson's Inc., holding various senior executive positions
at that company.
"Jeffrey P. Smith, Chairman and CEO of Smith's, said: 'I am very
excited about the transactions we are announcing today. The Smitty's
merger will significantly enhance the combined companies' position in
the Arizona market. The self tender offer will give all of Smith's
stockholders the opportunity to receive substantial cash proceeds while
permitting them at the same time to participate in Smith's future
growth. Additionally, our management arrangements with Yucaipa will
permit Smith's to benefit from Yucaipa's extensive management
experience in the supermarket industry. I am particularly pleased about
our
24
<PAGE>
good fortune in hiring Al Rowland. He is one of the most accomplished
senior executives in the supermarket industry and I believe Smith's
will benefit greatly from his experience.'
"Ron Burkle said: 'We look forward to consummating this exciting
transaction. I have admired Jeff Smith and his company and we are
delighted at the prospect of the combination of Smitty's and Smith's. I
am committed to continuing the expansion of the combined company to
benefit its shareholders, employees and customers."'
[Portions of the release dealing with financial results for the fourth
quarter of 1995 and the full 1995 fiscal year and other matters have
been omitted.]
PURPOSE OF THE OFFER; RECOMMENDATION OF BOARD OF DIRECTORS
The purpose of the Offer is to permit all of the Company's stockholders the
opportunity to exchange half of their Shares for a cash amount reflecting a
significant premium over the price at which the Company's Common Stock has
traded for some time and yet at the same time continue to participate in the
future performance of the Company.
At its meeting on January 28, 1996, the Company's Board of Directors
unanimously determined that it was in the best interests of the Company and
its stockholders that the Company enter into the Recapitalization Agreement
and related agreements and consummate all of the transactions contemplated by
those agreements, including the Recapitalization and Merger. The Board
determined to recommend that the Company's stockholders approve the
Recapitalization Agreement and the transactions contemplated thereby,
including the issuance of 3,038,888 shares of the Company's Class B Common
Stock to the stockholders of Smitty's in the Merger. In reaching this
determination, the Board of Directors considered a number of factors,
including without limitation the following:
1. The Board considered its knowledge of the management, business,
operations, properties, assets, financial condition, operating results and
prospects of the Company. See "The Tender Offer--Background of the
Transactions."
2. The Board considered the strategic and financial benefits which would
be derived from the combination of Smitty's operations with those of the
Company. In considering such benefits, the Board reviewed the presentations
of management and Ronald Burkle concerning the potential benefits to the
Company of the acquisition of Smitty's and the potential cost savings and
synergies in the Arizona markets. The Board also considered the
uncertainties and risks associated with achieving such potential cost
savings and synergies.
3. The Board considered the reports of management as to the results of
their due diligence investigation on Smitty's and the financial assessments
by management of Smitty's.
4. The Board considered the various reports from the Company's management
and financial and legal advisors and the legal, tax, accounting and
regulatory implications of the Recapitalization and Merger.
5. The Board considered the oral and written presentations of Goldman
Sachs and the opinion of Goldman Sachs that, as of the date of such
opinion, the Exchange Ratio pursuant to the Recapitalization Agreement is
fair to the Company.
6. The Board considered the negotiations that had taken place with
Smitty's and Yucaipa, and the results of discussions with other parties
over the past two years concerning possible transactions with the Company.
See "The Tender Offer--Background of the Transactions."
7. The Board considered the terms and conditions of the Recapitalization
Agreement, the Standstill Agreement, the Management Services Agreement, the
Warrant Agreement and the other agreements entered into or to be entered
into in connection with the Recapitalization Agreement. The Board
considered in particular the "Alternative Transaction" and termination
provisions of the Recapitalization Agreement, which permitted the Company
to terminate the
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Recapitalization (subject to completing the Merger upon satisfaction of the
conditions to the Merger) if in the exercise of the directors' fiduciary
duties (i) such termination was required by reason of its acceptance of an
Alternative Transaction, or (ii) the Board withdrew, modified or changed
its recommendation of the Recapitalization. See "The Recapitalization
Agreement--Termination of the Recapitalization." In considering such
provisions the Board considered the impact of the "no-solicitation"
provisions of the Recapitalization Agreement on the Company's ability to
negotiate with third parties that were interested in entering into an
acquisition or other significant transaction with the Company. While such
"no-solicitation" provisions prohibited the Company from soliciting third
party offers, it did not prohibit the Company from considering such offers
if any were made. The Board believed that such provisions, while responsive
to the requirements of Smitty's and Yucaipa that the Company be committed
to the proposed Recapitalization and Merger, permitted the Board to fulfill
its fiduciary duties in the event an unsolicited offer from a third party
were received or the Board were to withdraw its recommendation of the
Recapitalization. The Board considered the fact that if the
Recapitalization were terminated and it was not obligated to enter into the
Management Services Agreement or the Warrant Agreement, the Company would
continue to be obligated to complete the Merger. While the Board understood
that under such circumstances the Merger could have an adverse impact on
the ability of the Company to consummate an Alternative Transaction, it did
not believe that such adverse impact would preclude such an Alternative
Transaction. In that connection, the Board was aware that if the
Recapitalization were terminated and the Company consummated the Merger as
it was obligated to do under the terms of the Recapitalization Agreement,
the shares of the Company's Class B Common Stock to be issued to the
Smitty's stockholders in the Merger could be expected to trade at
considerably higher prices than if the Recapitalization were consummated,
and that such shares could be expected to trade at even higher prices if an
Alternative Transaction were to be effectuated by the Company in lieu of
consummating the Recapitalization. The Board also considered the fact that
in their negotiations Smitty's and Yucaipa had requested that the Company
pay a break-up fee in the event that the Recapitalization was terminated,
which request the Company had successfully rejected.
8. The Board considered the fact that the Recapitalization and Merger did
not result in a change of control of the Company, that the Smith Group
would continue to be the Company's largest stockholder with 24.5% of the
outstanding Common Stock and 41.8% of the aggregate voting power and that
Yucaipa and its affiliates would be subject to the significant restrictions
set forth in the Standstill Agreement.
9. The Board considered the fact that the Smith Group, the current
holders of 62.1% of the total votes represented by the Company's Common
Stock and Series I Preferred Stock, had expressed its strong support of the
Recapitalization and Merger.
10. The Board considered the commitment letter that was received from
Bankers Trust and Chase Manhattan Bank to provide lending commitments to
finance a portion of the Recapitalization and Merger, and the highly
confident letter received from five securities firms as to such firms'
confidence in their ability to raise the financing for a portion of the
Recapitalization and Merger and the anticipated terms of such financing.
11. The Board considered Yucaipa's experience with highly leveraged
transactions involving supermarket chains, including its experience and
success in negotiating and obtaining the proceeds of the financing for such
transactions.
12. The Board considered Yucaipa's experience in owning and operating
supermarket chains, and in particular the experience of Mr. Burkle in the
management of Yucaipa and its affiliated companies. The Board believed that
this experience could be extremely valuable to the Company and its
management in the integration of Smitty's operations with the Company's
operations, and in improving the Company's strategic planning.
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13. The Board considered the desire of Jeffrey Smith to reduce his
involvement in the management of the Company and the Company's need to
recruit an experienced candidate to serve as chief operating officer with
significantly expanded management responsibilities. The Board also
considered that Allen Rowland, a highly regarded supermarket executive with
25 years of experience at Albertson's, had agreed to become President and
Chief Operating Officer of the Company after he had learned of the proposed
Recapitalization and Merger.
14. The Board considered the fact that all stockholders would be
receiving the opportunity to exchange half of their shares of Common Stock
for a cash amount reflecting a significant premium over the price at which
the Company's Common Stock has traded for some time and yet at the same
time continue to participate in the future performance of the Company.
15. The Board considered the historical market price of the Class B
Common Stock, which had ranged from $18.25 per share to $30.13 per share
during the year ended January 26, 1996, the last trading day prior to
announcement of the signing of the Recapitalization Agreement, and from
$18.25 per share to $37.00 per share during the three years ended January
26, 1996.
16. The Board considered that the Recapitalization gave the Company's
stockholders the potential for capital gains treatment upon the sale of
their shares in the Offer. See "The Tender Offer--Federal Income Tax
Consequences."
The foregoing discussion of the information and factors considered and given
weight by the Board is not intended to be exhaustive. In view of the variety
of factors considered in connection with its evaluation of the
Recapitalization and Merger, the Board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determinations. In addition, individual members of
the Board may have given different weights to different factors.
CERTAIN INFORMATION PROVIDED
In connection with the negotiation of the Recapitalization Agreement, the
Company provided certain financial projections regarding its operations to
Smitty's and Yucaipa, as well as to Goldman Sachs. Smitty's also provided
certain financial projections regarding its operations to the Company and
Goldman Sachs. As a matter of course, the Company does not publicly disclose
projections as to future revenues, earnings or other financial information. In
addition, the referenced projections were not prepared with a view to public
disclosure or compliance with the published guidelines of the Commission
regarding projections, nor were they prepared in accordance with the
guidelines established by the American Institute of Certified Public
Accountants for preparation and presentation of financial projections. The
referenced projections were based upon a variety of estimates and assumptions
which involve judgments with respect to, among other things, future economic
and competitive conditions, financial market conditions and future business
decisions, which, though considered reasonable by the Company, may not be
realized, and are inherently subject to significant economic, competitive and
business uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company. While the Company believes that
the estimates and assumptions relating to the projections prepared by it are
reasonable, there can be no assurance that such projections will be realized,
and actual results may vary materially from those indicated in the
projections. The Company also makes no representation as to the reasonableness
of the estimates and assumptions used by Smitty's in preparing the projections
regarding Smitty's or the likelihood of those projections being realized.
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain directors and officers of the Company, Yucaipa and certain of their
affiliates and certain nominees have interests described herein that may
present them with potential conflicts of interest as a result of the
transactions contemplated by the Recapitalization Agreement. The Company's
Board of
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Directors was aware of such potential conflicts and considered them in
connection with the approval of the Recapitalization Agreement and the
transactions contemplated therein. See "The Tender Offer--Purpose of the
Offer; Recommendation of Board of Directors."
Except as otherwise described in this Offer to Purchase, during the 40
business days prior to the date of this Offer to Purchase, neither the Company
nor, to the best of its knowledge, any of the directors (including director
nominees) or executive officers of the Company, nor any associates of any of
the foregoing, has effected any purchases, sales or other dispositions of or
any other transactions in shares of Common Stock. Except as otherwise
described in this Offer to Purchase, neither the Company nor, to the best of
its knowledge, any of its directors (including director nominees), executive
officers or affiliates is a party to any contract, arrangement, understanding
or relationship with any other person relating, directly or indirectly, to the
Offer or with respect to any securities of the Company, including but not
limited to any contract, arrangement, understanding or relationship concerning
the transfer or the voting of any such securities, joint ventures, loan or
option arrangements, puts or calls, guarantees of loans, guarantees against
loss or the giving or withholding of proxies, consents or authorizations.
SMITH'S SHAREHOLDER AGREEMENT. In the Smith's Shareholder Agreement, each
member of the Smith Group has agreed to participate in the Offer and tender a
sufficient number of its shares of Common Stock to enable the Company to
repurchase 50% of the outstanding shares of Common Stock pursuant to the
Offer. In addition, directors and executive officers of the Company who have
not executed the Smith's Shareholder Agreement, who own approximately 7.6% of
the outstanding Shares, have indicated that they intend to tender their Shares
in the Offer. Because the Smith Group and such directors and officers own
approximately 38% of the outstanding Shares, the minimum tender condition will
be satisfied if other stockholders tender Shares representing at least 12% of
the outstanding Shares. See "Certain Related Agreements--Smith's Shareholder
Agreement."
COMPANY'S STOCK OPTIONS; BOARD MEMBERSHIP. As described under "The
Recapitalization Agreement--Company's Stock Options; Deferred Compensation
Plans," if the Recapitalization is consummated, the Company has agreed to
offer employees who hold, immediately prior to the Offer Closing Date, Options
to purchase Common Stock under the Company's 1989 Stock Option Plan the
opportunity to elect either to: (i) receive on the Offer Closing Date cash
payments for a portion of, and the reduction of the exercise price for a
portion of, the Company's management stock options; or (ii) have all such
employees' Options continue to vest in accordance with the stated terms of the
Options as in effect as of the date of the Recapitalization Agreement. The
Company has also agreed to use all reasonable efforts to amend its existing
deferred compensation agreements with a number of its senior managers to
provide for the full vesting of benefits under such manager's deferred
compensation agreement with the Company if such manager is terminated without
cause within two years of the Merger Closing Date.
Effective as of the Closing Date, the Company has agreed in the
Recapitalization Agreement to use all reasonable efforts, subject to the
provisions of the Certificate of Incorporation and By-laws of the Company and
the approval of the Company's stockholders at the Stockholders' Meeting, to:
(i) cause the Company's Board of Directors to be reduced to seven directors
and have nominated and elected as directors two designees of Jeffrey Smith,
two designees of Yucaipa, one senior manager of the Company and two
independent directors; and (ii) cause the Company's Board of Directors to
elect Ronald Burkle as the Chief Executive Officer of the Company. Mr. Smith
has designated himself and Fred Smith as his designees, Yucaipa has designated
Mr. Burkle and Linda McLoughlin Figel as its designees, Allen Rowland,
President and Chief Operating Officer of the Company, has been nominated for
election as a director, and Bruce Karatz and Bertram R. Zweig have been
nominated as independent directors. In addition, pursuant to the Standstill
Agreement, each of the Smith Group and
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the Yucaipa Group have agreed to vote all shares of stock of the Company
beneficially owned by such Group in favor of the election to the Company's
Board of Directors of the designees designated by such other Group. See
"Certain Related Agreements--Standstill Agreement." For information concerning
the nominees for election to the Board of Directors, see "Management After
Recapitalization and Merger."
CEO SEVERANCE DISCUSSIONS. The Company and Jeffrey Smith, the Chairman and
Chief Executive Officer of the Company, have held limited discussions regarding
the termination of his employment with the Company and the continuing role he
might have with the Company. While he is not expected to continue to be
actively engaged in the management of the Company, he will continue as Chairman
of the Board after the consummation of the Transactions and may provide
consulting services to the Company. In addition, Mr. Smith and the Company have
had tentative discussions regarding an arrangement to provide Mr. Smith with
the use and possible ownership of the Company airplane after the consummation
of the Recapitalization and Merger. It is anticipated that a definitive
agreement regarding such matters will be reached prior to the consummation of
the Recapitalization and Merger.
DIRECTORS' AND OFFICERS' INDEMNIFICATION. The Recapitalization Agreement
provides that the Company will indemnify to the fullest extent permitted by law
each current and former director and officer of each of the Company, Smitty's
and their subsidiaries from any claims or other losses arising out of any
matter existing or occurring at or prior to the Closing Date. Subject to
certain conditions and exceptions, the Company will maintain in effect for at
least four years after the Closing Date the current policies of directors' and
officers' liability insurance maintained by the Company or Smitty's, as the
case may be. See "The Recapitalization Agreement--Additional Covenants."
REGISTRATION RIGHTS AGREEMENT; YUCAIPA AGREEMENTS. On the Merger Closing
Date, the Company has agreed to enter into the Registration Rights Agreement
(as defined herein) granting certain registration rights to each of the Smith
Holder Group and the Yucaipa Holder Group for the Registrable Securities (as
defined in such agreement) held by such Groups. See "Certain Related
Agreements--Registration Rights Agreement." In addition, if the
Recapitalization is consummated, the Company will: (i) enter into the
Management Services Agreement and the Warrant Agreement with Yucaipa; (ii)
appoint Ronald Burkle as the Chief Executive Officer of the Company; (iii)
grant Yucaipa certain rights under the Standstill Agreement, including the
right to nominate up to two directors of the Company; and (iv) pay to Yucaipa a
fee in an amount equal to $15 million, in each case in the manner described
herein. See "The Recapitalization Agreement--Financing Arrangements by Yucaipa;
Yucaipa Fee," "Certain Related Agreements--Standstill Agreement," "--Management
Services Agreement" and "--Warrant Agreement." The Company has also recently
entered into an agreement with Ralphs, a California supermarket operator
controlled by Yucaipa, for the sale or lease of certain of the Company's
properties to Ralphs in connection with the Company's divestiture of its
Southern California operations. See "The Company, Smitty's and Yucaipa--
California Divestiture."
CERTAIN EFFECTS OF THE OFFER ON THE COMMON STOCK; REGISTRATION UNDER THE
EXCHANGE ACT
The purchase of Shares pursuant to the Offer will reduce the number of shares
of Class B Common Stock that might otherwise trade publicly, is likely to
reduce the number of holders of Common Stock and could adversely affect the
liquidity and market value of the Shares after the Offer. The adverse effect on
the liquidity and market value of the Class B Common Stock after the Offer
could be significant. Nonetheless, the Company anticipates that there will
still be a sufficient number of shares of Class B Common Stock outstanding and
publicly traded following the Offer to ensure a continued trading market in the
Class B Common Stock. Based upon the requirements of the NYSE, the Company does
not believe that the purchase of Shares pursuant to the Offer will cause the
Company's remaining shares of Class B Common Stock to be delisted from the
NYSE. The Class A
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Common Stock is not registered or listed; however, the Class A Common Stock
can typically be converted into Class B Common Stock upon the request of the
holder. As of April 15, 1996, there were 11,366,532 shares of Class A Common
Stock outstanding and 13,705,191 shares of Class B Common Stock outstanding
(excluding shares held in the Company's treasury).
Shares of Class B Common Stock are currently "margin securities" under the
rules of the Federal Reserve Board, which has the effect, among other things,
of allowing brokers to extend credit on the collateral of shares of Class B
Common Stock. The Company believes that, following the purchase of Shares
pursuant to the Offer, shares of Class B Common Stock will continue to be
margin securities for purposes of the Federal Reserve Board's margin
regulations.
Shares acquired by the Company pursuant to the Offer will be retired, will
become authorized but unissued Shares and will be available for issuance by
the Company without further stockholder action (except as required by
applicable law). Shares acquired pursuant to the Offer could be issued without
stockholder approval for general or other corporate purposes, including stock
splits or dividends, the acquisition of other businesses, the raising of
additional capital for use in the Company's business and the implementation of
employee benefit plans.
The Company's purchase of Shares pursuant to the Offer will prevent it from
accounting for any acquisitions which it may effect during the two-year period
following the Expiration Date as "pooling of interests" transactions.
The Class B Common Stock is registered under the Exchange Act which
requires, among other things, that the Company furnish certain information to
its stockholders and to the Commission and comply with the Commission's proxy
rules in connection with meetings of the Company's stockholders. See
"Available Information." The Company believes that the purchase of Shares
pursuant to the Offer will not result in the Class B Common Stock becoming
eligible for deregistration under the Exchange Act.
CERTAIN LEGAL MATTERS; REGULATORY AND FOREIGN APPROVALS
The Company is not aware of any license or regulatory permit that it
believes is material to the Company's business that might be adversely
affected by the Company's purchase of Shares as contemplated by the Offer or
of any approval or other action by any government or governmental,
administrative or regulatory authority or agency, domestic or foreign, that
would be required for the Company's purchase of Shares as contemplated by the
Offer. Should any such approval or other action be required, the Company
currently contemplates that it will seek such approval or other action. The
Company cannot predict whether it may be required to delay the acceptance for
payment of, or payment for, Shares tendered pursuant to the Offer pending the
outcome of any such matter. There can be no assurance that any such approval
or other action, if needed, would be obtained or would be obtained without
substantial conditions or that the failure to obtain any such approval or
other action might not result in adverse consequences to the Company's
business. The Company's obligations under the Offer to accept for payment and
pay for Shares is subject to certain conditions. See "The Tender Offer--
Certain Conditions of the Offer."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the principal United States ("U.S.")
federal income tax consequences that may be relevant to a Company stockholder
who tenders shares of Class A or Class B Common Stock to the Company pursuant
to the Offer (a "Tendering Stockholder"). The discussion assumes that the
Common Stock tendered to the Company by a Tendering Stockholder pursuant to
the Offer is held as a capital asset by such Tendering Stockholder and does
not take into account any
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rules or provisions of the Internal Revenue Code of 1986, as amended (the
"Code") that may apply to Tendering Stockholders who are subject to special
treatment under the Code (including, without limitation, insurance companies,
dealers in securities, certain retirement plans, financial institutions, tax
exempt organizations, Tendering Stockholders who acquired shares of Common
Stock pursuant to the exercise of an employee stock option or otherwise as
compensation or foreign persons). This discussion is based upon the Code,
Treasury regulations promulgated thereunder and Internal Revenue Service
("IRS") rulings and pronouncements and judicial decisions thereunder, all as
in effect on the date hereof and all of which are subject to change at any
time, possibly with retroactive effect.
The following discussion is intended to be only a general summary of the
U.S. federal income tax consequences that may be relevant to a Tendering
Stockholder who tenders shares of Common Stock to the Company pursuant to the
Offer. The actual U.S. federal income tax consequences to a Tendering
Stockholder of a disposition of such Shares pursuant to the Offer will be
determined on a stockholder-by-stockholder basis and, thus, will depend upon
each Tendering Stockholder's particular facts and circumstances. Consequently,
this discussion cannot possibly describe the U.S. federal income tax
consequences of a disposition of shares pursuant to the Offer to a particular
Tendering Stockholder, nor does it address every U.S. federal income tax
concern which may be applicable to a particular Tendering Stockholder. In
addition, the discussion does not address the state, local or foreign tax
consequences of the Offer to a Tendering Stockholder.
ACCORDINGLY, EACH TENDERING STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR TO DETERMINE THE ACTUAL U.S. FEDERAL INCOME TAX CONSEQUENCES, AND
THE STATE, LOCAL OR FOREIGN TAX CONSEQUENCES, TO SUCH TENDERING STOCKHOLDER OF
A DISPOSITION OF COMMON STOCK PURSUANT TO THE OFFER.
If the Company's repurchase of Common Stock from a Tendering Stockholder
pursuant to the Offer is treated as a sale or exchange under section 302(b) of
the Code, that particular Tendering Stockholder will recognize either capital
gain or loss equal to the difference between the cash proceeds received from
the Company by such stockholder in exchange for the Common Stock repurchased
by the Company from such stockholder and the Tendering Stockholder's adjusted
tax basis in such Common Stock. Such gain or loss generally will be long-term
capital gain or loss if the Common Stock has been held as a capital asset by
the Tendering Stockholder for more than one year. Under section 302(b) of the
Code, the Company's repurchase of Common Stock pursuant to the Offer generally
will be treated as a sale or exchange if such repurchase (a) is "substantially
disproportionate" with respect to the Tendering Stockholder, (b) results in a
"complete termination" of the Tendering Stockholder's stock ownership interest
in the Company or (c) is "not essentially equivalent to a dividend" with
respect to the Tendering Stockholder.
These Code section 302(b) tests are applied on a stockholder-by-stockholder
basis and thus the application of these tests to each Tendering Stockholder
depends upon that stockholder's particular facts and circumstances. To a large
degree however, the application of these Code section 302(b) tests to a
particular Tendering Stockholder depends upon such stockholder's stock
ownership in the Company immediately before and immediately after the
Company's repurchase of Common Stock pursuant to the Offer. Moreover, in
determining whether any of these Section 302(b) tests are satisfied, a
Tendering Stockholder must take into account not only the stock of the Company
that the stockholder actually owns, but also any stock of the Company that
such stockholder is deemed to own under the constructive ownership rules set
forth in section 318 of the Code. Pursuant to these constructive ownership
rules, a Tendering Stockholder is deemed to constructively own any stock of
the Company that is owned by certain related individuals or entities (each a
"Related Party") and any stock of the Company that the stockholder has a right
to acquire by exercise of an option or by conversion or exchange of a
security.
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In addition, a stockholder should be able to qualify a repurchase of his or
her stock for capital gain treatment under Code section 302(b) by selling or
otherwise disposing of (by gift or otherwise) some or all of the remaining
shares of stock that the stockholder owns in the redeeming corporation
concurrent with or immediately before or after such repurchase, provided that
such repurchase and such sale or other disposition is part of a single,
integrated plan. Moreover, an issuance or exchange of shares pursuant to a
corporate reorganization also should be taken into account in determining a
redeeming stockholder's stock ownership if the reorganization and the
redemption are each part of an "integrated" transaction. An issuance of new
shares of stock by the redeeming corporation also should be taken into account
in determining a stockholder's stock ownership in the redeeming corporation
after a redemption of such stockholder's stock if the redemption and issuance
are integral parts of a single plan. The Recapitalization Agreement indicates
that the Company's issuance of new shares of Class B Common Stock to the
stockholders of Smitty's pursuant to the Merger and its issuance of shares of
New Preferred Stock as part of the financing for the Recapitalization are all
integral parts of a single plan, no part of which will be completed unless the
other parts also are consummated (unless the Company's repurchase of Common
Stock is abandoned by the Company in order to effect an Alternative
Transaction). Accordingly, although the matter is not free from doubt, a
Tendering Stockholder's actual and constructive stock ownership in the Company
after the Offer should be determined by reference to the total amount of
Company stock that is outstanding after the Offer, the Merger and any other
related issuances or repurchases of stock by the Company have been
consummated. In addition, such determination also should take into account any
sales or other dispositions of Company stock made by a Tendering Stockholder
(or a Related Party) in connection with the transactions described herein.
The Company's repurchase of a Tendering Stockholder's Common Stock will be
"substantially disproportionate" with respect to such stockholder if (i) the
Tendering Stockholder's actual and constructive voting power immediately after
the repurchase is less than 80% of his or her actual and constructive voting
power immediately before the repurchase; (ii) the Common Stock actually and
constructively owned by the Tendering Stockholder (based upon the aggregate
fair market value of such Common Stock) immediately after the repurchase is
less than 80% of his or her actual and constructive percentage ownership of
such Common Stock immediately before the repurchase; and (iii) immediately
after the repurchase, the Tendering Stockholder actually and constructively
owns less than 50% of the total combined voting power of all classes of the
Company stock that is entitled to vote. Tendering Stockholders should consult
their own tax advisors with respect to the application of the Code section
302(b) "substantially disproportionate" test to their particular facts and
circumstances.
The Company's repurchase of a Tendering Stockholder's Common Stock will
result in a "complete termination" of such Tendering Stockholder's interest in
the Company if either (a) all the Company stock actually and constructively
owned by the stockholder is repurchased by the Company pursuant to the Offer
(or is sold or otherwise disposed of in connection with the Offer) or (b) all
the Company stock actually owned by the Tendering Stockholder is repurchased
by the Company pursuant to the Offer (or is sold or otherwise disposed of in
connection with the Offer) and the stockholder is eligible to waive, and does
effectively waive in accordance with section 302(c) of the Code, attribution
of the ownership of any stock of the Company that otherwise would be
considered to be constructively owned by such Tendering Stockholder. Tendering
Stockholders should consult their own tax advisors with respect to the
application of the Code section 302(b) "complete termination" test to their
particular facts and circumstances.
Even if the Company's repurchase of a Tendering Stockholder's Common Stock
fails to satisfy the "substantially disproportionate" test or the "complete
termination" test described above, the Company's repurchase of a Tendering
Stockholder's Common Stock may nevertheless satisfy the "not essentially
equivalent to a dividend" test if the stockholder's disposition of Common
Stock pursuant to the Offer results in a "meaningful reduction" of such
stockholder's proportionate stock ownership
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interest in the Company. Whether the receipt of cash by a Tendering
Stockholder will be considered "not essentially equivalent to a dividend" will
depend upon such stockholder's facts and circumstances. In certain
circumstances, even a small reduction in a stockholder's proportionate stock
interest may satisfy this test. For example, the IRS has indicated in a
published ruling that a 3.3% reduction in the proportionate stock interest of
a small (substantially less than 1%) stockholder in a publicly held
corporation who exercises no control over corporate affairs constitutes such a
"meaningful reduction." Tendering Stockholders should consult with their own
tax advisors as to the application of this test in their particular situation.
A Tendering Stockholder may not be able to satisfy one of the above three
tests because of contemporaneous acquisitions of Common Stock or other Company
stock by such stockholder or a Related Party. Tendering Stockholders should
consult their own tax advisors regarding the tax consequences of such
acquisitions in their particular circumstances.
In addition, a Tendering Stockholder may not be able to satisfy either the
"substantially disproportionate" test or the "not essentially equivalent to a
dividend" test if all of the Class A stockholders were to convert the
remaining shares of their outstanding Class A Common Stock into shares of
Class B Common Stock contemporaneously with or in close proximity to the Offer
or the other transactions described herein. However, a Tendering Stockholder
should be able to qualify the Company's repurchase of his or her Common Stock
pursuant to the Offer for sale or exchange treatment under the "not
essentially equivalent to a dividend" test if such Tendering Stockholder
(x) owns (actually and constructively) less than 1% of the voting power of the
Company's outstanding capital stock immediately prior to the Offer and
exercises no control over the Company or its affairs, (y) the Smith family
members and Smith family trusts that own shares of Class A Common Stock do not
convert any of their remaining outstanding shares of such stock into shares of
Class B Common Stock and (z) such Tendering Stockholder or a Related Party
does not make any contemporaneous acquisitions of any capital stock of the
Company. Smith family members and the trustees of the Smith family trusts that
own shares of Class A Common Stock have represented to the Company that they
have no present plan or intention to convert any shares of their Class A
Common Stock into shares of Class B Common Stock.
If a particular Tendering Stockholder cannot satisfy any of the three tests
described above and to the extent the Company has sufficient current and/or
accumulated earnings and profits, such stockholder will be treated as having
received a dividend which will be includible in gross income (and treated as
ordinary income) in an amount equal to the aggregate cash proceeds paid by the
Company to such stockholder in exchange for such stockholder's Common Stock
(without regard to gain or loss, if any).
In the case of a Tendering Stockholder that is a corporation (a "corporate
stockholder"), if the cash paid by the Company to such corporate stockholder
in exchange for such stockholder's Common Stock is treated as a dividend, such
dividend income may be eligible for the 70% dividends-received deduction. The
dividends-received deduction is subject to certain limitations, and may not
be available if the corporate stockholder does not satisfy certain holding
period requirements with respect to its Common Stock or if its Common Stock is
treated as "debt financed portfolio stock" within the meaning of Code Section
246A(c). It should be noted that recent legislative proposals, if enacted,
would reduce the dividends-received deduction from 70% to 50%. In addition,
such proposals would provide that a corporate stockholder would not be
entitled to a dividends-received deduction on distributions on the Common
Stock if such stockholder protects itself from risk of loss immediately before
or immediately after the stockholder becomes entitled to the dividend. It is
unclear whether, or in what form, such proposals will be enacted.
Additionally, if a dividends-received deduction is available, the dividend may
be treated as an "extraordinary dividend" under section 1059(a) of the Code,
in which case a corporate stockholder's adjusted tax basis in the Common Stock
retained by such stockholder would be reduced, but not below zero, by the
amount of the nontaxed portion of
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such dividend. Any amount of the nontaxed portion of the dividend in excess of
the corporate stockholder's adjusted tax basis generally will be subject to
tax upon a sale or other taxable disposition of such Common Stock. However,
recently introduced legislation would require gain on the nontaxed portion of
an extraordinary dividend to be recognized at the time when the extraordinary
dividend is paid rather than at the time of the sale or other taxable
disposition of the Common Stock. It is unclear whether, or in what form, such
legislation will be enacted. Corporate stockholders are urged to consult their
own tax advisors as to the effect of section 1059 of the Code on the adjusted
tax basis of their Common Stock.
FEES AND EXPENSES
The Recapitalization Agreement provides that if (i) the Recapitalization and
Merger are consummated, or (ii) the Merger is consummated but the
Recapitalization is terminated, the fees and expenses of the Company, Yucaipa
and Smitty's in connection with the transactions contemplated thereby
(including all Financing Expenses (as defined below)) will be paid by the
Company. In the event that neither the Recapitalization nor the Merger are
consummated, each of the parties thereto will pay its own fees and expenses;
provided, however, that the Company will bear 65% of the Financing Expenses
and Smitty's will bear 35% of the Financing Expenses. Each of the Company and
Smitty's will indemnify and hold harmless the other party to the extent it
pays any portion of the Financing Expenses in excess of such percentages.
"Financing Expenses" means all fees, costs and expenses incurred by the
Company in connection with the Financing Agreements, including without
limitation all fees, costs and expenses: (i) identified in the related
financing letters (including without limitation the fees and expenses of
counsel to the bank lenders), (ii) of counsel to the Company and Smitty's for
the allocable portion of such counsel's time spent working on matters related
to the Financing Agreements and the Recapitalization, (iii) of the Company's
independent certified public accountants, and (iv) in connection with
printing, engraving, messenger and delivery services customarily incurred in
financing transactions similar to the Financing Agreements.
Pursuant to a letter agreement dated January 10, 1996 (the "January
Engagement Letter"), the Company engaged Goldman Sachs to undertake a study to
enable it to render its opinion with respect to the fairness of the Merger.
Pursuant to the terms of the January Engagement Letter, the Company paid
Goldman Sachs $500,000 for rendering its opinion. In addition, pursuant to a
letter agreement dated December 20, 1995 (the "December Engagement Letter"),
the Company engaged Goldman Sachs to act as its financial advisor in its
discussions with Yucaipa concerning a possible transaction with the Company.
Pursuant to the terms of the December Engagement Letter, the Company has
agreed to pay Goldman Sachs upon consummation of the Merger a transaction fee
of 0.45% multiplied by the product of (i) the average of the last sales prices
of the Common Stock for the ten trading days ending five days prior to the
consummation of the Merger and (ii) the fully diluted shares outstanding of
the Company plus the principal amount of all indebtedness for borrowed money
as set forth on the most recent consolidated balance sheet of the Company
prior to the consummation of the Merger. Pursuant to the January Engagement
Letter and the December Engagement Letter, the Company has agreed to reimburse
Goldman Sachs for its reasonable out-of-pocket expenses, including attorney's
fees, and to indemnify Goldman Sachs against certain liabilities, including
certain liabilities under the federal securities laws. The Company has
retained Goldman Sachs as Dealer Managers in connection with the Offer. In
connection with Goldman Sachs acting as Dealer Managers, the Company has
agreed to reimburse Goldman Sachs for certain reasonable out-of-pocket
expenses incurred in connection with the Offer, including reasonable fees and
disbursements of counsel, and to indemnify Goldman Sachs against certain
liabilities, including certain liabilities under the federal securities laws.
The Company has retained MacKenzie Partners, Inc. as Information Agent and
American Stock Transfer & Trust Company as Depositary in connection with the
Offer. The Information Agent may contact holders of Shares by mail, telephone,
telex, telegraph and personal interview and
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may request brokers, dealers and other nominee security holders to forward
materials relating to the Offer to beneficial owners. The Depositary and the
Information Agent will receive reasonable and customary compensation for their
services in connection with the Offer. The Company will also reimburse the
Depositary and the Information Agent for reasonable out-of-pocket expenses,
including reasonable attorneys' fees, and has agreed to indemnify the
Depositary and the Information Agent against certain liabilities in connection
with the Offer, including certain liabilities under the federal securities
laws.
The Company will not pay fees or commissions to any broker, dealer,
commercial bank, trust company or other person (other than as described above)
for soliciting the tender of any Shares pursuant to the Offer. However, the
Company will on request reimburse such persons for customary handling and
mailing expenses incurred in forwarding materials in respect of the Offer to
the beneficial owners for which they act as nominees or in a fiduciary
capacity. No such broker, dealer, commercial bank or trust company has been
authorized to act as the Company's agent for purposes of the Offer. The
Company will pay (or cause to be paid) any stock transfer taxes on its
purchase of Shares pursuant to the Offer, except as otherwise provided in
Instruction 6 of the Letter of Transmittal. Other than as described above, no
solicitation or similar fees will be paid to brokers, dealers or others by the
Company in connection with the Offer. See "The Tender Offer--Purchase of
Shares; Payment of Purchase Price."
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THE COMPANY, SMITTY'S AND YUCAIPA
THE COMPANY
The Company is a leading supermarket company in the Intermountain and
Southwestern regions of the United States, operating 120 stores located in
Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and
Wyoming (collectively, 14). Substantially all of the Company's stores offer
one-stop shopping convenience through a food and drug combination format which
features 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. The
Company's 114 food and drug combination stores averaged approximately 63,000
square feet and $420,000 per week in sales volume in fiscal 1995. The Company
has recently opened four price impact warehouse stores and also operates two
conventional supermarkets. Through its 48 years of operations, the Company
believes it has developed a valuable and strategically located store base,
strong name recognition, customer loyalty and a reputation for quality and
service. At December 30, 1995, the Company had 16,000 employees (excluding
employees in California).
The Company is a Delaware corporation with its principal executive offices
located at 1550 South Redwood Road, Salt Lake City, Utah 84104 (telephone
(801) 974-1400)).
CALIFORNIA DIVESTITURE
The Company has completed the sale, lease or closure of its Southern
California regional operations (the "California Divestiture"). In December
1995, the Company entered into an agreement to sublease its Riverside,
California distribution center and dairy plant to Ralphs, an affiliate of
Yucaipa, for the remaining 23-year term of the Company's lease. Ralphs also
agreed to purchase certain related equipment and inventory. The Company has
completed the sale or lease of 16 stores and related equipment and inventory
and three non-operating properties to various supermarket companies (including
Ralphs) and others. As of March 16, 1996, the Company had closed its remaining
California stores. It is anticipated that these closed stores will be sold or
leased to other retail companies. Following the consummation of the
Transactions, the Company intends to accelerate the disposition of its closed
stores and excess land in California (the "California Asset Disposition", and
together with the California Divestiture, the "California Disposition"). Since
December 30, 1995, the Company has received net cash proceeds of approximately
$67.2 million from the California Divestiture and expects to receive an
additional $10.6 million shortly after the consummation of the
Recapitalization and Merger. In connection with the California Divestiture,
the Company recorded pre-tax restructuring charges of $140 million (the
"California Divestiture Charge") for the year ended December 30, 1995 and
classified the assets to be leased or sold as "assets held for sale." The
California Divestiture Charge reflected (i) a provision for anticipated future
lease obligations, (ii) the anticipated cost to the Company of closing its
California stores and distribution center (primarily termination payments and
inventory), and (iii) asset valuation adjustments for the equipment in all of
the stores and the distribution center and for the land and buildings
associated with the properties being sold or leased. The California
Divestiture, including the transactions with Ralphs, was unrelated to the
Recapitalization and Merger.
In connection with the California Divestiture, the Company entered into a
settlement agreement with the California Attorney General (the "CAG") relating
to the stores that were sold, leased or closed. Under the settlement
agreement, the Company agreed that, for a period of five years, it would not
operate any of the closed stores as supermarkets without the permission of the
CAG. In addition, for the same five-year period, the Company agreed not to (i)
transfer the closed stores to third parties for supermarket use without the
CAG's approval, (ii) transfer such stores for non-supermarket use without
prior notice to the CAG, and (iii) sell any of such stores subject to
restrictions as to future supermarket use.
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After completion of the California Divestiture, the Company continues to own
real estate assets in California having an aggregate book value at December
30, 1995 of approximately $260 million. These assets include the stores leased
or subleased as part of the California Divestiture (having an aggregate book
value at December 30, 1995 of $42.5 million), the closed stores (aggregate
book value--$115.3 million) and certain non-operating stores and other excess
real estate (aggregate book value--$102.2 million). These properties have
annual carrying costs of approximately $7 million (excluding depreciation and
amortization). Management's present policy is to own and manage its real
estate assets, including those in California, in order to maximize their long-
term values, and, as a result, the Company maintains a fully staffed real
estate, construction and property management capability. The Company believes
that there are several viable strategies for maximizing the value of its
remaining California real estate assets over the next five years and that the
implementation of these policies would not have any material negative impact
on future earnings. Following the consummation of the Recapitalization and
Merger, management, however, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to accelerate the disposition of its remaining real
estate assets in California, including its non-operating stores and excess
land. The Company would use the net cash proceeds from the sales of these
assets to either reinvest in the Company's business or reduce indebtedness
incurred in connection with the Recapitalization and Merger. If this strategy
is adopted, as anticipated, the Company would record a charge to earnings,
presently estimated to be approximately $125 million (pre-tax) (the
"California Asset Disposition Charge"), to reflect the difference between the
anticipated cash proceeds from the accelerated dispositions and the Company's
existing book values for such assets. This charge will cause a substantial
decrease in the Company's earnings for such period and net worth, but is not
otherwise anticipated to adversely affect the Company's liquidity or ongoing
results of operations. See "Financial Data of the Company--Unaudited Pro Forma
Combined Financial Statements."
In order to finance its Riverside, California distribution center and eight
of its California stores, the Company completed a sale-leaseback financing
(the "Sale-Leaseback Financing") in 1994. Pursuant to such financing, the
Company sold a portion of its interest in the properties to an owner trustee
and entered into an operating lease for each property. In order to provide the
financing for the owner trustee's purchase of the properties, the Company
filed a registration statement with the Commission pertaining to a public
offering of $152.4 million of pass through certificates. Each of the pass
through trusts issuing the certificates used the proceeds of the offering to
acquire notes from the owner trustee (which in turn used the proceeds to
acquire its interest in the properties from the Company). Neither the notes
nor the pass through certificates are obligations of, nor are they guaranteed
by, the Company and, accordingly, are not reflected as indebtedness or other
liabilities of the Company under generally accepted accounting principles.
Under the terms of the Sale-Leaseback Financing, the Company may terminate
its lease with respect to the various California properties if it deems such
properties to be obsolete, uneconomic for use or surplus to the Company's
needs. In connection with any such termination, the Company may elect to
satisfy all of the rights and obligations of the owner trustee in respect of
the related notes by exchanging such notes for (a) if the property is sold to
a party other than the Company, unsecured, full recourse securities of the
Company or (b) if such property is sold to the Company, secured, full recourse
securities of the Company. In addition, the Company may substitute other
properties (including properties located outside California) for properties
which it deems to be obsolete, uneconomic for use or surplus to its needs. The
substitute properties must have a fair market value, utility and useful life
equal to or greater than that of the substituted property. The Company would
not be required to assume any indebtedness in connection with such a
substitution. Any such exchange or substitution may be made by the Company
only if certain conditions are satisfied.
In April 1996, the Company received a letter from a holder of pass through
certificates pointing out an inaccurate statement in the 1994 pass through
certificate prospectus. The letter referred to a
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statement in the prospectus disclosing that holders of the certificates would
not receive any covenant protection in the event of a highly leveraged
transaction involving the Company, including any transaction resulting in a
change of control. The prospectus went on to state that none of the then-
outstanding indebtedness of the Company contained provisions affording holders
of such indebtedness protection in the event of a change of control, which was
characterized in the letter as a material representation. At the date of such
prospectus a substantial amount of the Company's then-existing indebtedness
did contain such change of control provisions. The Company has pointed out to
the holder that consummation of the Recapitalization and Merger will not
result in a change of control of the Company under the terms of such existing
debt instruments, although the indebtedness under such debt instruments will
be repaid in order to remove certain financial and other covenants contained
therein that would otherwise hinder the Company's ability to consummate the
Recapitalization and Merger. The Company is currently reviewing the relevant
facts and circumstances. The letter suggested that all interested parties be
made aware of the existence of the alleged misrepresentation, but made no
specific claim or demand on the Company. Although no assurances can be given,
the Company does not believe that any claims by the holders of the pass
through certificates, if made, would have a material adverse effect on the
Company or its ability to complete the California Disposition.
RECENT OPERATING RESULTS OF THE COMPANY
Net sales decreased $53.5 million, or 7.2%, from $746.7 million for the
thirteen weeks ended April 1, 1995 to $693.2 million for the thirteen weeks
ended March 30, 1996. The sales decrease in 1996 was attributable to the
closure of 34 stores in California, offset in part by the addition of 14 new
stores outside of California from the same period a year ago. Same store sales
for the thirteen week period decreased 5.6% in 1996. As adjusted to exclude
the Company's California stores, net sales increased $35.7 million, or 6.1%,
from $584.4 million in 1995 to $620.1 million in 1996. As adjusted to exclude
the Company's California stores, same store sales for the thirteen week period
decreased 2.7% in 1996, caused primarily by the Company's discontinuance of
its "ad match" program in the Phoenix and Tucson markets.
Earnings from operations decreased on a comparative basis from the first
quarter of 1995 to the first quarter of 1996, primarily as a result of the
winding down of the California retail operations. The California stores, which
were operated during the first quarter and all closed by the end of the
quarter, incurred losses connected with additional inventory clearance sales
and other expenses affected by the disposal process. A California regional
pre-tax loss of approximately $25 million significantly impacted first quarter
earnings. Earnings from continuing operations in the Company's Intermountain
and Southwest regions for the first quarter of 1996 were comparable to those
in the first quarter of 1995.
SMITTY'S
Smitty's is a leading regional supermarket operator based in Phoenix,
Arizona which through its wholly owned subsidiary, Smitty's Super Valu,
operates 25 stores in the Phoenix area and three stores in the Tucson area.
Smitty's stores provide high quality fresh and prepared foods, groceries,
general merchandise, restaurants and ancillary services in a shopping
environment which emphasizes service, convenience, quality, selection and
customer satisfaction. Smitty's Super Valu's 35-year presence in the Phoenix
community has enabled it to locate its stores in strategic and convenient
sites. These locations, together with Smitty's unique super combination store
format, have provided it with high name recognition and customer loyalty.
On June 29, 1994, Smitty's acquired all of the outstanding shares of
Smitty's Super Valu from Steinberg International, Inc. Smitty's was organized
by Yucaipa prior to the acquisition for the purpose of acquiring Smitty's
Super Valu. Smitty's is a holding company whose only material asset is the
common stock of Smitty's Super Valu.
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Store Formats. Smitty's currently operates (i) 21 food and general
merchandise "super combination" stores which average 105,000 square feet in
size, (ii) six food and drug combination stores, which average 52,000 square
feet in size, and (iii) one conventional supermarket. Smitty's "super
combination" stores offer a full line of supermarket items, a broad range of
drug store and pharmaceutical items and an expanded selection of general
merchandise. These stores offer numerous services and specialty departments,
including fresh produce, full-service fresh meat, delicatessen, seafood,
bakery, prepared foods, fresh-cut flowers and video and photo departments,
pharmacies, food courts, restaurants and full-service bank branches, family
style hair salons and airline ticket counters. The food and drug combination
stores offer a full selection of products and services, including full-service
fresh meat, delicatessen, seafood and bakery departments, an expanded line of
health care and beauty aids, a restaurant, snack bar or food court and full-
service banking.
Purchasing and Distribution. Smitty's currently makes approximately 60% of
its annual purchases from Fleming Companies, Inc. ("Fleming") under a supply
agreement which by its original terms expires in June 1997. Smitty's is
negotiating with Fleming to amend the supply agreement, subject to certain
conditions, whereby Fleming will become a secondary supplier to Smitty's and,
following the Merger, to the Company through the end of 1997. Pursuant to its
discussions with Fleming, Smitty's would purchase inventory from Fleming in an
amount not less than approximately $10 million per month through December 31,
1997. Notwithstanding the foregoing, it is anticipated that Smitty's would
have the right to terminate the supply agreement at any time if its aggregate
purchases of inventory from Fleming exceeded $200 million.
Employees and Labor Relations. As of January 14, 1996, Smitty's employed
4,600 people, of whom approximately 36% were full-time and approximately 64%
were part-time. Approximately 4,100 employees working in the stores,
constituting approximately 89% of Smitty's employees, are covered by a
collective bargaining agreement that expires in October 1997. Smitty's has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
Trade Names, Service Marks and Trademarks. Smitty's uses a variety of trade
names, service marks and trademarks. Except for Smitty's and "Shopper's
Passport," Smitty's does not believe any of such tradenames, service marks or
trademarks is material to its business.
YUCAIPA
Yucaipa is a private investment group specializing in the supermarket
industry. In addition to Smitty's, Yucaipa also controls Ralphs, the largest
supermarket company in Southern California, and Dominick's Finer Foods, Inc.,
a leading Chicago area supermarket company. Yucaipa is controlled by Ronald
Burkle, its managing general partner.
POST-RECAPITALIZATION AND MERGER COMPANY
Company Strengths. Management believes the Company has the following
principal strengths: (i) leading market positions, (ii) attractive markets,
(iii) new and recently remodeled stores, (iv) prime store locations, (v)
advanced backstage operations, and (vi) substantial owned real estate.
Leading Market Positions. Pro forma for the Merger, the Company will
operate 148 stores and will have the largest or second largest market share
in each of its principal markets: Salt Lake City (31%), Phoenix (24%), Las
Vegas (24%), and Albuquerque (23%). The Company believes its reputation for
offering a broad selection of quality products combined with a high level
of customer service has created a valuable franchise with strong name
recognition and customer loyalty.
Attractive Markets. The Company's stores are located predominantly in
Utah, Arizona, Nevada and New Mexico, which are among the fastest growing
states in population and
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employment. According to the U.S. Bureau of the Census, the population of
those four states has increased at a compound annual growth rate of 3.0%
since 1990, compared to the national average of 1.1% over the same period.
According to the U.S. Bureau of Labor Statistics, employment in the same
four states has increased at a compound annual growth rate of 4.0% since
1990, compared to the national average of 1.3% over the same period. In
addition, management believes that operating in distinct markets in several
states provides advantages due to their differences in economic cycles,
demographic and competitive conditions.
New and Recently Remodeled Stores. After giving effect to the Merger and
the California Divestiture, approximately 84% of the Company's stores will
have been opened or remodeled within the last seven years. During the five
fiscal years ended December 30, 1995, the Company spent approximately $414
million in capital expenditures (excluding capital expenditures associated
with California operations), which have been primarily used to build new
stores, and to expand and remodel existing stores. During the five-year
period ended December 30, 1995, Smitty's spent approximately $72 million in
capital expenditures, including approximately $42 million since mid-1994 to
remodel substantially all of its Phoenix-area stores.
Prime Store Locations. The Company's 48 years of operation have allowed
it to choose its store locations selectively as new residential areas have
been developed. The Company believes that many of its stores are in
developed areas where land values and the unavailability of suitable
parcels would make it difficult to replicate the Company's existing store
base.
Advanced Backstage Operations. The Company owns and operates one of the
most modern and efficient backstage operations in the industry. During the
five fiscal years ended December 30, 1995, the Company spent approximately
$163 million (excluding the divested California operations) to build,
expand or remodel its warehousing, distribution and processing facilities.
Management believes that the Company's approximately 3,000,000 square feet
of backstage facilities will be able to accommodate the Smitty's volume
following the Merger and support anticipated future growth.
Substantial Owned Real Estate. The Company will own 108 of the 148 stores
it will operate upon consummation of the Merger. The Company also owns its
primary warehousing, distribution and processing facilities. In addition,
the Company owns land for development, expansion or sale, as well as other
non-operating real estate assets.
Operating Strategy. Management, in conjunction with Yucaipa, has developed a
strategic plan for the Company following the consummation of the
Recapitalization and Merger. Under such plan, the Company expects to: (i)
expand operations in existing and adjacent markets, (ii) realize operating
synergies and cost savings resulting from the Merger, (iii) improve working
capital management, (iv) grow its recently introduced price impact warehouse
stores, and (v) dispose of remaining California real estate subject to the
completion of the Recapitalization and Merger.
Expand Operations in Existing and Adjacent Markets. Management believes
that there are significant opportunities to increase the Company's sales
and gain efficiencies in its existing markets through new store openings
and store remodels. From 1991 through 1994, management primarily focused on
the Southern California market, opening 32 new stores in Southern
California compared to a net of 10 new stores in its other markets. In
1995, the Company opened a net of 17 new stores, only two of which were
located in California. In an effort to more fully realize its market
potential in its non-California markets, in 1995 the Company began opening
smaller combination stores (54,000 to 60,000 square feet) in existing
markets as part of a "fill-in" strategy. By pursuing a growth strategy
which emphasizes opening new stores within its existing and adjacent
markets, the Company believes it can increase its market share and improve
its distribution and other efficiencies, while taking advantage of such
markets' favorable growth prospects.
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Realize Operating Synergies and Cost Savings Resulting from the
Merger. Management believes that approximately $25 million of net annual
cost savings are achievable over a three-year period following the Merger.
The majority of such cost savings opportunities relate to its Arizona
operations and are believed to be achievable (on an annualized basis) by
the end of the first full year of operations following the Merger. The
estimates of potential cost savings resulting from the Merger contained in
this Offer to Purchase are forward looking statements that involve risks
and inherent uncertainties that could cause actual net annual cost savings
to differ materially from those projected. See "Introduction--Risk
Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. The Company and Smitty's advertising
programs in the Phoenix and Tucson markets substantially overlap and,
as a result of the Merger, management expects that the Company will
be able to eliminate a substantial portion of the combined
advertising expenses. Management estimates that annualized
advertising cost savings of approximately $7 million are achievable
by the end of the first full year of operations following the Merger.
. General and Administrative Cost Savings. Management expects the
Company to achieve savings from the elimination of duplicative
administrative staff and headquarters facilities and the
consolidation of management information systems. Management estimates
that annualized general and administrative cost savings to the
Company of approximately $13 million are achievable by the end of the
first full year of operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently
operates without any of its own distribution facilities. By
incorporating the Smitty's volume into the Company's Tolleson,
Arizona warehousing and distribution facilities, the Company expects
to eliminate the expense associated with Smitty's being supplied
primarily by an independent wholesaler, as well as reduce average
unit costs resulting from improved capacity utilization. Management
estimates that annualized warehousing and transportation cost savings
of approximately $4 million are achievable by the end of the second
full year of operations following the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to utilize the Company's electronic direct
store receiving system in all Smitty's stores, resulting in increased
control over direct store deliveries and corresponding payments. In
addition, by utilizing the Company's front-end systems in Smitty's
stores, improvements in the efficiency of Smitty's stores are
expected. Management estimates that annualized cost savings to the
Company of approximately $2 million related to such direct store
delivery and store systems are achievable by the end of the second
full year of operations following the Merger.
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with an aggregate annual sales (when combined with
the Company) in excess of $11 billion. Management estimates that
annualized cost savings of approximately $6 million are achievable
from such purchasing improvements by the end of the third full year
of operations following the Merger.
The sum of the components of the estimated annual cost savings exceeds $25
million; however, management expects that a portion of the savings will be
reinvested in the Company's operations. In connection with the
Recapitalization and Merger, the Company and Smitty's are evaluating the
format mix of the combined Arizona store base and are assessing the
possibility of modifying the formats of certain stores. It is anticipated that
approximately $17 million of capital expenditures and approximately $15
million of other expenses will be required to integrate the Arizona operations
over the next two years and realize such cost savings.
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Improve Working Capital Management. Management believes that the Company
can improve its working capital management. Under Yucaipa's management,
other supermarket companies have achieved working capital improvements;
however there can be no assurance that similar improvements can be achieved
by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company
recently developed a price impact warehouse store format and during 1995
opened four of these stores in the Las Vegas area operating under the name
"PriceRite Grocery Warehouse." Management believes that a number of the
Company's markets are underserved by price impact warehouse stores and that
there are substantial opportunities for expansion of the Company's
PriceRite format through the conversion of existing stores and the opening
of new stores. Yucaipa, through its management of other supermarket
companies, has extensive experience in expanding and profitably operating
price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation
of the Recapitalization and Merger, management, in conjunction with
Yucaipa, anticipates that it will pursue a strategy to dispose of its
remaining real estate assets in California which consist of 18 non-
operating stores and excess land. The Company would use the net cash
proceeds from the California Asset Disposition to either reinvest in the
Company's business or reduce indebtedness incurred in connection with the
Recapitalization and Merger. At December 30, 1995, the aggregate book value
of such assets was approximately $260 million. If this strategy is adopted,
as anticipated, the Company would record a pre-tax charge to earnings,
which is presently estimated to be approximately $125 million, to reflect
the difference between the anticipated cash proceeds from the accelerated
dispositions and the Company's existing book values for such assets. See
"Introduction--Risk Factors--Anticipated Charges to Earnings Following the
Recapitalization and Merger."
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FINANCIAL DATA OF THE COMPANY
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated pro forma capitalization of
the Company at December 30, 1995, giving effect to the Recapitalization and
Merger and the California Disposition. This table should be read in
conjunction with the Unaudited Pro Forma Combined Financial Statements and the
historical consolidated financial statements of the Company and Smitty's, and
the related notes thereto, included elsewhere in this Offer to Purchase.
<TABLE>
<CAPTION>
PRO FORMA
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Current portion of long-term debt:
New Term Loans.......................................... $ 12.3
Other indebtedness...................................... 1.4
--------
Total current portion of long-term debt............... $ 13.7
========
Long-term debt:
New Term Loans (a)...................................... $ 792.7
New Revolving Facility (a)(b)........................... --
New Senior Notes........................................ 150.0
New Senior Subordinated Notes........................... 350.0
Other indebtedness...................................... 50.4
--------
Total long-term debt.................................. 1,343.1
--------
Redeemable preferred stock, $.01 par value................ 3.3
New Preferred Stock, $.01 par value....................... 71.2
Common stockholders' equity:
Common Stock, $.01 par value (c)........................ 0.2
Additional paid-in capital.............................. 164.9
Retained earnings (deficit)............................. (286.7)
--------
Total common stockholders' equity (deficit)........... (121.6)
--------
Total capitalization................................ $1,296.0
========
</TABLE>
- - --------
(a) The Company has obtained a commitment from Bankers Trust Company and The
Chase Manhattan Bank for the New Credit Facility that will provide up to
$805 million aggregate principal amount of New Term Loans and a $190
million New Revolving Facility. A portion of the New Revolving facility
may be used to support letters of credit, approximately $28 million of
which are anticipated to be issued at the Closing Date. The New Credit
Facility will be guaranteed by all subsidiaries of the Company, including
Smitty's. See "Financing of the Recapitalization and Merger--New Credit
Facility."
(b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures (each
as defined under "The Recapitalization Agreement--Repayment of Smitty's
Indebtedness") are tendered and accepted for purchase in connection with
the Smitty's Debt Offer. If all of the outstanding Smitty's Notes and
Smitty's Debentures are not tendered and accepted for purchase, the
Company anticipates that it would reduce other borrowings. As a result of
the assumed application of a portion of the proceeds of the California
Disposition to eliminate pro forma revolving credit balances, pro forma
total debt at December 30, 1995 does not reflect anticipated revolving
credit facility borrowings upon consummation of the Recapitalization and
Merger of $13.2 million.
(c) Does not reflect (i) management options to purchase up to an aggregate of
808,250 shares of Class B Common Stock expected to be outstanding upon
consummation of the Recapitalization and Merger, or (ii) Warrants to
purchase shares of Class C Common Stock of the Company (to be issued at an
initial exercise price of $50.00 per share) to be issued to Yucaipa upon
consummation of the Recapitalization and Merger. See "Certain Related
Agreements."
43
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical financial
and other data of the Company for the five fiscal years ended December 30,
1995, which have been derived from the financial statements of the Company
audited by Ernst & Young LLP, independent auditors. The following information
should be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and the historical consolidated financial statements of the Company
and related notes thereto included elsewhere in this Offer to Purchase.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $ 2,217.4 $ 2,649.9 $ 2,807.2 $ 2,981.4 $ 3,083.7
Gross profit............ 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative
expenses............... 344.4 419.7 430.3 440.8 461.4
Depreciation and
amortization........... 50.5 67.8 82.2 94.5 105.0
Interest expense........ 30.3 36.1 44.6 53.7 60.5
Restructuring
charges(a)............. -- -- -- -- 140.0
Net income (loss)....... 45.1 53.7 45.8 48.8 (40.5)
Net income (loss) per
common share........... $ 1.65 $ 1.79 $ 1.52 $ 1.73 $ (1.62)
Weighted average common
shares outstanding..... 27,397,973 29,962,011 30,238,811 28,176,907 25,030,882
BALANCE SHEET DATA
(END OF PERIOD):
Working capital......... $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets............ 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt(b)........... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock.................. 8.5 7.5 6.5 5.4 4.3
Total stockholders'
equity................. $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(c).............. 109 119 129 137 154
Capital expenditures.... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
Ratio of earnings to
fixed charges(d)....... 3.02x 3.06x 2.55x 2.18x --
</TABLE>
- - --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of the Company included
elsewhere herein.
(b) Total debt includes long-term debt and current maturities of long-term
debt.
(c) After giving effect to the California Divestiture, the Company will
operate 120 stores. See "The Company, Smitty's and Yucaipa--California
Divestiture."
(d) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs and one-third of rental expense (the portion
deemed by the Company to be representative of the interest factor). For
the five-year period ended December 30, 1995, the Company has not paid any
preferred stock dividends. For the 52 weeks ended December 30, 1995, 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.
44
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of the
Company for the 52 weeks ended December 30, 1995 give effect to (a) the
Transactions and the application of the proceeds therefrom and (b) the
California Disposition and the retention of the anticipated proceeds therefrom
as cash (after reducing pro forma revolving credit balances to zero), in each
case as if such transactions occurred on January 1, 1995, with respect to the
pro forma operating and other data, and as of December 30, 1995, with respect
to the pro forma balance sheet data. Such pro forma information: (i)
eliminates the results of operations of the Company's California retail
division and the related assets and liabilities as of and for the 52 weeks
ended December 30, 1995 from the Company's results of operations and balance
sheet data as of and for the 52 weeks ended December 30, 1995 and (ii)
combines the operating results and balance sheet data of the Company, pro
forma for the elimination of the Company's California retail division and the
related assets and liabilities, as of and for the 52 weeks ended December 30,
1995 with the operating results and balance sheet data of Smitty's for the 52
weeks ended January 14, 1996.
As indicated above, the unaudited pro forma combined financial statements
give effect to the California Divestiture and the California Asset Disposition
and the retention of the anticipated proceeds therefrom as cash. In connection
with the California Divestiture, the Company entered into agreements to sell
or lease 16 stores and related equipment and three non-operating properties.
These transactions are expected to generate net cash proceeds of $77.8
million, of which $67.2 million has been received to date. The remaining 18
stores in California have been closed. In connection with the California
Divestiture, the Company recorded the $140 million (pre-tax) California
Divestiture Charge for the year ended December 30, 1995 and classified the
assets to be leased or sold as assets held for sale. The California
Divestiture Charge reflected (i) a provision for anticipated future lease
obligations, (ii) the anticipated cost to the Company of closing its
California stores and distribution center (primarily termination payments and
inventory), and (iii) certain asset valuation adjustments. The asset valuation
adjustments included in the California Divestiture Charge reflected the
reduction in net realizable values for the equipment in all of the Company's
California stores and distribution center and for the land and buildings
associated with those properties being sold or leased. Pursuant to the
California Asset Disposition, following the consummation of the Transactions
the Company intends to accelerate the disposition of its 18 non-operating
stores and its excess land in California. As a result of the adoption of this
strategy, the Company intends to record a pre-tax charge to earnings of
approximately $125 million (the California Asset Disposition Charge) to
reflect the difference between the anticipated cash proceeds from the
accelerated dispositions and the Company's existing book values for such
assets. For purposes of the Unaudited Pro Forma Combined Balance Sheet, the
Company has given effect to the California Asset Disposition as if each of the
relevant properties had been sold for a cash amount equal to its net book
value after giving effect to the California Asset Disposition Charge. The
proceeds of such assumed sales, together with the proceeds of the California
Divestiture, are reflected in the Company's pro forma cash balances (net of
pro forma revolving credit borrowings, which have been eliminated) at December
30, 1995. INVESTORS ARE CAUTIONED THAT THE COMPANY HAS NOT ENTERED INTO ANY
CONTRACTS RELATING TO THE CALIFORNIA ASSET DISPOSITION AND THAT THERE CAN BE
NO ASSURANCE AS TO THE TIMING OR THE AMOUNT OF NET PROCEEDS, IF ANY, WHICH THE
COMPANY WILL ACTUALLY RECEIVE FROM SUCH DISPOSITION.
The pro forma adjustments to give effect to the California Disposition and
the Transactions are based upon currently available information and upon
certain assumptions that management believes are reasonable. The statement of
results of operations used to derive the adjustments to eliminate the
California results of operations differs from a complete statement in that
allocations for interest expense and certain services provided by the Company,
including, but not limited to, portions of legal assistance, employee benefits
administration, treasury, accounting, auditing, tax functions and real estate,
have not been made. The Merger will be accounted for by the Company as a
purchase of Smitty's by the Company and Smitty's assets and liabilities will
be recorded at their estimated fair market values at the date of the Merger.
The adjustments included in the Unaudited Pro Forma Combined Financial
Statements represent the Company's preliminary determination of these
adjustments based upon available information. There can be no assurance that
the actual adjustments will not differ significantly from the pro forma
adjustments reflected in
45
<PAGE>
the pro forma financial information. The Unaudited Pro Forma Combined
Financial Statements are not necessarily indicative of either future results
of operations or results that might have been achieved if the foregoing
transactions had been consummated as of the indicated dates. The Unaudited Pro
Forma Combined Financial Statements should be read in conjunction with the
historical consolidated financial statements of the Company, together with the
related notes thereto, included elsewhere in this Offer to Purchase.
The Unaudited Pro Forma Combined Financial Statements do not reflect (i) any
of the net annual cost savings which management believes are achievable by the
end of the third full year of operations following the Merger, or (ii) the
anticipated costs to be incurred in connection with the integration of
operations in Arizona. The Unaudited Pro Forma Combined Statement of
Operations included herein does not reflect the California Divestiture Charge,
California Asset Disposition Charge, an extraordinary loss on extinguishment
of debt, an anticipated charge relating to certain costs expected to be
incurred by the Company in connection with the Merger, a potential severance
payment to the Chairman and Chief Executive Officer of the Company or
compensation expense in connection with the repurchase of certain management
stock options as part of the Recapitalization. See Note (g) to the Unaudited
Pro Forma Combined Statement of Operations.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------------
JANUARY 14,
DECEMBER 30, 1995 1996
--------------------------------------- ------------ ADJUSTMENTS PRO FORMA
PRO FORMA FOR CALIFORNIA COMBINED FOR
THE COMPANY ADJUSTMENTS COMPANY FOR SMITTY'S DISPOSITION CALIFORNIA
(HISTORICAL) FOR CALIFORNIA CALIFORNIA (HISTORICAL) AND DISPOSITION
(AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
------------ -------------- ----------- ------------ -------------- ----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 3,083.7 $(674.6) $ 2,409.1 $ 584.3 $ -- $ 2,993.4
Cost of goods sold...... 2,386.7 (516.2) 1,870.5 419.6 2,290.1
---------- ------- ---------- --------- ------ ----------
697.0 (158.4) 538.6 164.7 703.3
Expenses:
Operating, selling and
administrative........ 461.4 (145.6) 315.8 136.0 0.4 (b) 452.2
Depreciation and
amortization.......... 105.0 (27.0) 78.0 12.3 (1.3)(c)
0.9 (d) 89.9
Restructuring charges.. 140.0 (140.0)
Interest............... 60.0 60.0 18.4 53.9 (e) 132.3
Amortization of debt
issuance costs........ 0.4 0.4 1.0 8.4 (e) 9.8
---------- ------- ---------- --------- ------ ----------
Income (loss) before
income taxes........... (69.8) 154.2 84.4 (3.0) (62.3) 19.1
Income tax expense
(benefit).............. (29.3) 63.2 33.9 (0.7) (23.9)(f) 9.3
---------- ------- ---------- --------- ------ ----------
Net income (loss)(g).... (40.5) 91.0 50.5 (2.3) (38.4) 9.8
Preferred stock
accretion.............. (10.2)(h) (10.2)
---------- ------- ---------- --------- ------ ----------
Income (loss) applicable
to common shares....... $ (40.5) $ 91.0 $ 50.5 $ (2.3) $(48.6) $ (0.4)
========== ======= ========== ========= ====== ==========
Net income (loss) per
common share(g)........ $ (1.62) $ 2.00 $ (2.30) $ -- $ (0.03)(i)
========== ========== ========= ====== ==========
Weighted average common
shares outstanding..... 25,031,000 25,284,000 1,001,000 15,530,000
========== ========== ========= ====== ==========
Ratio of earnings to
fixed charges(j)(k).... -- 2.27x 1.13x
Ratio of earnings to
fixed charges and
preferred stock
dividends(j)(k)........ -- 2.27x 1.01x
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
46
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(a) Reflects the elimination of the 1995 operating results for the California
stores, excess real estate and distribution center which were sold, leased
or closed, and the reversal of the restructuring charge recorded, in
connection with the California Divestiture and the anticipated sale of the
Company's remaining California real estate pursuant to the California
Asset Disposition, but does not reflect the California Asset Disposition
Charge of $125 million (pre-tax) which is anticipated to be recorded in
connection with the adoption of a strategy to dispose of such remaining
California assets following the consummation of the Transactions.
(b) Represents fees payable to Yucaipa pursuant to the Management Services
Agreement ($1.0 million) and the elimination of the historical Yucaipa
management fees ($0.6 million) paid by Smitty's.
(c) Represents a reduction in depreciation expense associated with the $14.1
million write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
(d) Reflects the amortization of excess costs over net assets acquired in the
Merger ($2.0 million) and the elimination of Smitty's historical
amortization ($1.1 million). Amortization has been allocated on the
straight line basis over a period of 40 years.
(e) The following table presents a reconciliation of pro forma interest
expense and amortization of debt issuance costs:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Interest expense:
Smitty's........................................... $ 18.4
Pro forma Company.................................. 60.0
------
78.4
------
Plus:Interest on:
New Term Loans..................................... 71.5
Bank fees.......................................... 0.3
New Senior Notes................................... 15.4
New Senior Subordinated Notes...................... 38.5
Less:Interest on:
Old bank term loans:
Pro forma Company................................ (59.5)
Smitty's......................................... (3.1)
Bank fees.......................................... (0.4)
Smitty's Notes..................................... (6.5)
Accretion of Smitty's Debentures................... (2.3)
------
Pro forma adjustment................................ 53.9
------
Pro forma interest expense............................ $132.3
======
Historical amortization of debt issuance costs........ $ 1.4
Plus:
Financing fees--New Credit Facility................ 6.8
Financing fees--New Senior Notes and New Senior
Subordinated Notes................................ 3.0
Less:
Historical financing costs: (1.4)
------
Pro forma adjustment................................ 8.4
------
Pro forma amortization of debt issuance costs......... $ 9.8
======
</TABLE>
(f) The pro forma adjustment to income tax benefit is based upon an assumed
blended rate of 39% applied to the pro forma net loss adjusted for
permanent differences between book and tax income. The deferred tax asset
recognized in the unaudited pro forma financial statements is more likely
than not to be realized due to the expected future reversal of taxable
temporary differences and the existence of taxable income in each of the
prior three carryback years available.
(g) The unaudited pro forma results of operations does not reflect the
California Asset Disposition Charge, the California Divestiture Charge or
costs related to (i) expenses to be incurred in connection with the
purchase of certain management stock options as part of the
Recapitalization which are estimated to be $12.5 million, (ii) the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period and (iii) a potential severance payment to
the Chairman and Chief Executive Officer of the Company (definitive
agreements with respect to which have not yet been reached). The unaudited
pro forma results of operations does not include an extraordinary item for
the loss on extinguishment of debt of $42.5 million, net of $27.2 million
income tax benefit.
(h) Reflects the accretion of dividends compounded quarterly for the New
Preferred Stock.
47
<PAGE>
(i) Loss per common share has been computed using the weighted average number
of shares of Common Stock outstanding after giving effect to the issuance
of 3,038,888 shares of Class B Common Stock of the Company to the
stockholders of Smitty's as consideration in the Merger and the purchase
of 50% of the outstanding Common stock (excluding shares issuable in the
Merger) in the Offer. Common stock equivalents in the form of stock
options are excluded from the weighted average number of common shares due
to the net loss.
(j) For purposes of computing the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred stock dividends,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor). "Preferred stock dividends" reflects the amount
representing the pre-tax earnings that would be required to cover such
dividend requirements.
48
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
52 WEEKS ENDED
---------------------------------------------------- PRO FORMA
JANUARY 14, ADJUSTMENTS COMBINED
DECEMBER 30, 1995 1996 FOR FOR
--------------------------------------- ------------ CALIFORNIA CALIFORNIA
PRO FORMA DISPOSITION DISPOSITION
THE COMPANY ADJUSTMENTS COMPANY FOR SMITTY'S AND AND
(HISTORICAL) FOR CALIFORNIA CALIFORNIA (HISTORICAL) RECAPITALIZATION RECAPITALIZATION
(AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) AND MERGER AND MERGER
------------ -------------- ----------- ------------ ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 16.1 $ $ 16.1 $ 11.5 $ 82.7 (b)(c) $ 110.3
Rebates and accounts
receivable............ 23.8 (5.0) 18.8 9.3 28.1
Inventories............ 395.0 (76.0) 319.0 56.7 1.0 (d) 376.7
Prepaid expenses and
deposits.............. 21.3 (2.0) 19.3 3.3 22.6
Refundable income
taxes................. 1.9 1.9
Deferred tax assets.... 23.9 13.1 37.0 18.0 (e) 55.0
Assets held for sale... 125.0 (125.0)
-------- ------- -------- ------ ------ --------
Total current assets... 605.1 (194.9) 410.2 82.7 101.7 594.6
Property and equipment:
Land................... 276.6 276.6 18.6 (128.3)(c) 166.9
Building............... 610.0 610.0 50.6 (107.2)(c)(f) 553.4
Leasehold improvements. 55.8 55.8 9.8 (20.2)(c)(f) 45.4
Furniture and
equipment............. 509.5 509.5 69.9 (27.9)(c)(f) 551.5
-------- ------- -------- ------ ------ --------
Less allowances for
depreciation and
amortization.......... (390.9) (390.9) (14.1) 23.3 (c)(f) (381.7)
-------- ------- -------- ------ ------ --------
Net property and
equipment............ 1,061.0 1,061.0 134.8 (260.3) 935.5
Goodwill, net........... 31.5 46.6 (g) 78.1
Other assets............ 20.1 (4.6) 15.5 11.0 74.9 (h)(i) 101.4
-------- ------- -------- ------ ------ --------
$1,686.2 $(199.5) $1,486.7 $260.0 $(37.1) $1,709.6
======== ======= ======== ====== ====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable. $ 214.2 $ (42.0) $ 172.2 $ 39.6 $ 0.0 $ 211.8
Accrued sales and other
taxes and other
liabilities........... 50.7 (12.0) 38.7 12.0 (12.6)(j)
10.0 (k) 48.1
Accrued payroll and
related benefits...... 97.5 (32.0) 65.5 19.2 84.7
Current maturities of
long-term debt........ 20.9 20.9 6.2 (13.4)(l) 13.7
Current maturities of
Redeemable Preferred
Stock................. 1.0 1.0 (1.0)(m)
Accrued restructuring
costs................. 58.0 (58.0)
-------- ------- -------- ------ ------ --------
Total current
liabilities........... 442.3 (144.0) 298.3 77.0 (17.0) 358.3
Long-term debt, less
current maturities..... 725.3 (28.6) 696.7 139.8 536.4 (n)
(39.4)(c)
(0.9)(n)
4.6 (i)
13.4 (l)
(7.5)(o) 1,343.1
Accrued restructuring
costs, less current
portion................ 40.0 (40.0)
Deferred income taxes... 58.6 13.1 71.7 13.8 (27.2)(p)
(30.7)(e) 27.6
Other liabilities....... 20.2 7.5 (o) 27.7
Redeemable Preferred
Stock, less current
maturities............. 3.3 3.3 3.3
Cumulative Redeemable
Exchangeable Preferred
Stock.................. 71.2 (m) 71.2
Common Stockholders'
Equity:
Convertible Class A
Common Stock........... 0.1 0.1 0.1
Class B Common Stock.... 0.2 0.2 (0.1)(q) 0.1
Additional paid-in
capital................ 285.2 285.2 11.0 (11.0)(r)
(165.8)(q)
45.5 (s) 164.9
Retained earnings(t).... 238.0 238.0 (1.8) (35.2)(u)
(405.9)(q)
(76.3)(e)
(7.3)(v)
1.8 (r) (286.7)
-------- ------- -------- ------ ------ --------
523.5 523.5 9.2 (654.3) (121.6)
Less cost of common
stock in the treasury.. (106.8) (106.8) (464.9)(q)
571.7 (q)
-------- ------- -------- ------ ------ --------
416.7 416.7 9.2 (547.5) (121.6)
-------- ------- -------- ------ ------ --------
$1,686.2 $(199.5) $1,486.7 $260.0 $(37.1) $1,709.6
======== ======= ======== ====== ====== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
49
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects the sale of the California stores and other related assets,
excess real estate and distribution center in connection with the
California Divestiture. The Company has received $67.2 million subsequent
to December 30, 1995 and expects to receive an additional $10.6 million
shortly after the consummation of the Recapitalization and Merger. The net
proceeds of such sale is reflected as a reduction of the historical
revolving credit balance ($28.6 million) and payment of certain
liabilities in the Company's pro forma balance sheet at December 30, 1995.
(b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New
Revolving Credit Facility, and (iii) the offerings used to finance the
Recapitalization and Merger and pay related costs and fees as set forth in
the following table:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans..................................... $ 805.0
New Senior Notes................................... 150.0
New Senior Subordinated Notes...................... 350.0
New Preferred Stock................................ 75.0
Repay Smitty's Notes............................... (50.0)
Discount on Smitty's Notes......................... 0.4
Repay Smitty's Debentures.......................... (18.4)
Discount on Smitty's Debentures.................... 0.5
Repay Smitty's Bank Credit Facility................ (34.9)
Repay Company's Mortgage Notes and Other
Indebtedness...................................... (667.1)
Purchase existing Series I Preferred Stock......... (1.0)
Purchase 50% of Common Stock....................... (451.3)
Purchase Management Options........................ (13.7)
Accrued Interest................................... (12.6)
Fees and Expenses.................................. (145.1)
-------
Use of California Proceeds (See Note (c)).......... $ 13.2
=======
</TABLE>
(c) Assumes the anticipated sale of the Company's remaining California real
estate pursuant to the California Asset Disposition. Also reflects the
California Asset Disposition Charge of $125 million (pre-tax) in
connection with the adoption of a strategy to dispose of such remaining
California assets following the consummation of the Recapitalization and
Merger.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Disposal of Property and Equipment
Land.............................................. $ 128.3
Buildings......................................... 104.0
Leasehold improvements............................ 19.6
Furniture and equipment........................... 17.6
-------
269.5
Depreciation and amortization..................... (9.2)
-------
Net book value of property and equipment.......... 260.3
Write-down of California assets to net realizable
value............................................ (125.0)
-------
Proceeds from California Asset Disposition........ 135.3
Reduction in historical revolving credit balance
................................................. (39.4)
Reduction of anticipated indebtedness under the
New Revolving Facility
(See Note (b))................................... (13.2)
-------
Cash provided by the California Asset Disposi-
tion........................................... $ 82.7
=======
</TABLE>
(d) Reflects the elimination of Smitty's historical LIFO reserve which adjusts
Smitty's inventory to reflect current estimated selling prices less costs
of disposal and a reasonable profit allowance for the acquiring company.
(e) Represents the $125 million California Asset Disposition Charge, tax
effected at 39% tax rate and the recognition of the related deferred tax
asset. The California Asset Disposition Charge reflects the write-down of
California assets, other than assets held for sale at December 30, 1995,
under the Company's strategy to accelerate the disposition of its 18 non-
operating stores and excess land in California following the consummation
of the Recapitalization and Merger.
(f) Reflects the write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
(g) Reflects the excess of costs over the fair value of net assets of Smitty's
acquired in connection with the Merger ($78.1 million) and the elimination
of Smitty's historical goodwill ($31.5 million). The purchase price for
Smitty's will be determined by reference to the trading price of the
Company's Class B Common Stock following the consummation of the Merger.
The purchase price and preliminary calculation of the excess of costs over
the fair value of net assets acquired is as follows:
50
<PAGE>
Purchase Price:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Company equity received in exchange for Smitty's
equity with an assumed market value of
$15.00/share....................................... $ 45.5
Fees and expenses................................... 1.3
------
Total purchase price................................ 46.8
Fair value of assets acquired....................... 229.5
Fair value of liabilities assumed................... 260.8
------
(31.3)
------
Goodwill............................................ $ 78.1
======
</TABLE>
(h) Reflects the debt issuance costs associated with the New Credit Facility
($50.0 million), the New Senior Notes ($11.3 million), and the New Senior
Subordinated Notes ($21.0 million). These amounts have been capitalized as
deferred financing costs.
(i) Reflects the elimination of deferred financing costs associated with the
Smitty's Bank Credit Facility ($1.8 million), the Smitty's Notes ($3.1
million), the Smitty's Debentures ($0.6 million), the Company's Mortgage
Notes and Other Indebtedness ($1.9 million) and the write-off of an
interest rate swap agreement ($4.6 million), included in historical long-
term debt, to be refinanced in connection with the Merger.
(j) Reflects the payment of accrued interest on Smitty's Bank Credit Facility
($0.1 million), Smitty's Notes ($0.6 million) and the Company's Mortgage
Notes and Other Indebtedness ($11.9 million) to be repaid in connection
with the Merger.
(k) Represents severance payments and other costs associated with the
integration of the Company and Smitty's.
(l) Reflects the repayment and cancellation of the current maturities of the
Smitty's Bank Credit Facility ($4.9 million) and the Company's Mortgage
Notes and Other Indebtedness ($20.8 million) and the recording of the
current maturities of the New Term Loans ($12.3 million).
(m) Reflects the issuance of $75 million of New Preferred Stock, net of
related issuance costs ($3.8 million), and the retirement of 3,000,000
shares of Series I Preferred Stock.
(n) Reflects the repayment and cancellation of the Smitty's Bank Credit
Facility, the Smitty's Notes, the Smitty's Debentures, the Company's
Revolving Credit Facility, the Company's Mortgage Notes and Other
Indebtedness and records borrowings under the New Term Loans and New
Revolving Facility and the issuance of the New Senior Notes and New Senior
Subordinated Notes.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
New Term Loans.......... $ 805.0
New Senior Notes........ 150.0
New Senior Subordinated
Notes.................. 350.0
Repay Smitty's Notes.... (50.0)
Discount on Smitty's
Notes.................. 0.4
Repay Smitty's
Debentures............. (18.4)
Discount on Smitty's
Debentures............. 0.5
Repay Smitty's Bank
Credit Facility........ (34.9)
Repay Company's Mortgage
Notes and Other
Indebtedness........... (667.1)
-------
$ 535.5
=======
</TABLE>
(o) Represents a reclassification of $7.5 million of the Company's deferred
compensation and other long-term liabilities to conform to the pro forma
combined classification.
(p) Represents the deferred tax asset associated with the write-off of the
deferred debt issuance costs and the premium over book value on the
Company's and Smitty's debt to be refinanced. The deferred tax asset
recognized in the unaudited pro forma financial statements is more likely
than not to be realized due to the expected future reversal of taxable
temporary differences and the existence of taxable income in each of the
prior three carryback years available.
(q) Reflects redemption of 50% of outstanding Common Stock prior to the Merger
at $36.00 in cash per share, the retirement of all treasury shares and the
purchase of certain outstanding management stock options.
(r) Reflects the elimination of Smitty's historical equity.
(s) Represents the issuance of 3,038,888 shares of Common Stock at an assumed
market value of $15.00 per share as consideration in the Merger.
(t) The unaudited pro forma balance sheet does not include (i) certain costs
related to the purchase of certain management stock options as part of the
Recapitalization which are estimated to be $12.5 million, (ii) the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period and (iii) a potential severance payment to
the Chairman and Chief Executive Officer of the Company (definitive
agreements with respect to which have not yet been reached).
51
<PAGE>
(u) Represents the premium over book value attributable to "make whole"
payments and other premiums payable in connection with the retirement of
the Company's Mortgage Notes and Other Indebtedness and the Smitty's Notes
and Debentures, net of 39% tax rate. The actual amount of such payments may
vary substantially based on the yields of certain U.S. Treasury debt
securities at the time such indebtedness is actually repaid.
(v) Represents the write-off of the historical deferred debt issuance costs of
the Company and Smitty's related to its refinanced debt, net of 39% tax
rate.
52
<PAGE>
THE RECAPITALIZATION AGREEMENT
The following is a brief summary of the material provisions of the
Recapitalization Agreement, a copy of which has been incorporated by reference
in the Schedule 13E-4 of which this Offer to Purchase is a part. The
description set forth below of the terms of the Recapitalization Agreement is
qualified in its entirety by reference thereto. See "Available Information"
for instructions in obtaining a copy of the Recapitalization Agreement.
THE OFFER AND MERGER
The Recapitalization Agreement provides among other things for: (i) the
Offer to be made by the Company for the purchase of 50% of the outstanding
Shares (excluding Shares issuable in the Merger) at $36.00 in cash per share;
and (ii) the Merger of Smitty's with Acquisition, a wholly owned subsidiary of
the Company, with Smitty's continuing as the surviving corporation and a
wholly owned subsidiary of the Company, subject in each case to certain terms
and conditions described herein. The consummation of the Offer and the Merger
will occur simultaneously, except in certain limited circumstances described
herein.
CONDITIONS TO THE MERGER
COMPANY'S OBLIGATION TO CLOSE. The obligation of the Company to effect the
Merger will be subject to the fulfillment of the following conditions on or
prior to the effective time of the Merger (the "Effective Time"):
(a) The representations and warranties of Smitty's and Yucaipa contained
in the Recapitalization Agreement are true and correct in all material
respects as of the Merger Closing Date with the same effect as though such
representations and warranties had been made as of such date, except for
representations and warranties that speak as of a specific date other than
the Merger Closing Date (which need only be true and correct as of such
date).
(b) The covenants and agreements of Smitty's and Yucaipa to be performed
or complied with prior to the Merger Closing Date have been performed and
complied with in all material respects.
(c) The waiting period and any extension thereof under the HSR Act and
any other applicable federal or state antitrust or fair trade law has
expired. There (i) is not in effect a temporary restraining order or a
preliminary or permanent injunction or other order, decree or ruling by a
court or a governmental, regulatory or administrative agency or commission
which (A) restrains or prohibits the Merger or the consummation of any of
the other transactions contemplated by the Recapitalization Agreement, (B)
(1) prohibits or restricts the ownership or operation by the Company or any
of its subsidiaries of any portion of their or Smitty's business or assets
or (2) compels the Company or any of its subsidiaries to dispose of or hold
separate any portion of their or Smitty's business or assets which in
either case would be reasonably likely to have a material adverse effect on
the Company and its subsidiaries taken as a whole or on Smitty's and its
subsidiaries taken as a whole, (C) imposes any limitations on the ability
of the Company or any of its subsidiaries effectively to control in any
material respect the business and operations of Smitty's, or (D) is
otherwise reasonably likely to have a material adverse effect on the
Company and its subsidiaries taken as a whole, the value of Smitty's and
its subsidiaries taken as a whole, the consummation of the transactions
contemplated by the Recapitalization Agreement or on the Combined Companies
taken as a whole; or (ii) is not pending before any court or administrative
law judge or governmental, regulatory or administrative agency or
commission, any action or proceeding which seeks as a relief a result
described in clause (i) above; or (iii) has not been promulgated or enacted
by a governmental authority a statute, rule, regulation or executive order
which has an effect described in clause (i)(A), (B), (C) or (D) above.
(d) All approvals, consents, authorizations and waivers from governmental
and other regulatory agencies and other third parties disclosed to the
Recapitalization Agreement (including
53
<PAGE>
the expiration of any applicable waiting period under any regulation or
statute other than the HSR Act and any other federal or state antitrust or
fair trade law) have been obtained which, either individually or in the
aggregate, if not obtained prior to the Merger Closing Date would have a
material adverse effect on the Company and its subsidiaries taken as a
whole or on Smitty's and its subsidiaries taken as a whole, or would
adversely affect the validity or enforceability of the Recapitalization
Agreement or the transactions contemplated thereby.
(e) The stockholders of the Company have approved the Recapitalization
Agreement and the other transactions contemplated by the Recapitalization
at the Stockholders' Meeting, provided that, if the Company terminates the
Recapitalization but not the Merger as described below under "The
Recapitalization Agreement--Termination of the Recapitalization," then this
condition will automatically be deemed to have been satisfied without any
further action required by the Company.
(f) The Standstill Agreement is in full force and effect.
(g) The Offer has been consummated concurrently in accordance with its
terms, resulting in the purchase of 50% of the outstanding Common Stock by
the Company pursuant to the Offer, provided that, if the Company terminates
the Recapitalization but not the Merger as described below under "The
Recapitalization Agreement--Termination of the Recapitalization," then this
condition will automatically be deemed to have been satisfied without any
further action required by the Company.
SMITTY'S OBLIGATION TO CLOSE. The obligation of Smitty's to effect the
Merger will be subject to the fulfillment of the following conditions on or
prior to the Effective Time:
(a) The representations and warranties of the Company and Acquisition
contained in the Recapitalization Agreement are true and correct in all
material respects as of the Merger Closing Date with the same effect as
though such representations and warranties had been made as of such date,
except for representations and warranties that speak as of a specific date
other than the Merger Closing Date (which need only be true and correct as
of such date).
(b) The covenants and agreements of the Company and Acquisition to be
performed or complied with prior to the Merger Closing Date have been
performed and complied with in all material respects.
(c) The waiting period and any extension thereof under the HSR Act and
any other applicable federal or state antitrust or fair trade law has
expired. There (i) is not in effect a temporary restraining order or a
preliminary or permanent injunction or other order, decree or ruling by a
court or a governmental, regulatory or administrative agency or commission
which (A) restrains or prohibits the Merger or the consummation of any of
the other transactions contemplated by the Recapitalization Agreement, (B)
(1) prohibits or restricts the ownership or operation by the Company or any
of its subsidiaries of any portion of their or Smitty's business or assets
or (2) compels the Company or any of its subsidiaries to dispose of or hold
separate any portion of their or Smitty's business or assets which in
either case would be reasonably likely to have a material adverse effect on
the Company and its subsidiaries taken as a whole or on Smitty's and its
subsidiaries taken as a whole, (C) imposes any limitations on the ability
of the Company or any of its subsidiaries effectively to control in any
material respect the business and operations of Smitty's, or (D) is
otherwise reasonably likely to have a material adverse effect on the
Smitty's stockholders, the value of the Merger Consideration, the
consummation of the transactions contemplated by the Recapitalization
Agreement or on the Combined Companies taken as a whole; or (ii) is not
pending before any court or administrative law judge or governmental,
regulatory or administrative agency or commission, any action or proceeding
which seeks as relief a result described in clause (i) above; or (iii) has
not been promulgated or enacted by a
54
<PAGE>
governmental authority a statute, rule, regulation or executive order which
has an effect described in clause (i)(A) or (B) above.
(d) All approvals, consents, authorizations and waivers from governmental
and other regulatory agencies and other third parties disclosed in the
Recapitalization Agreement (including the expiration of any applicable
waiting period under any regulation or statute other than the HSR Act and
any other federal or state antitrust or fair trade law) have been obtained
which, either individually or in the aggregate, if not obtained prior to
the Merger Closing Date would have a material adverse effect on the
Combined Companies taken as a whole.
(e) The Registration Rights Agreement and, unless the Recapitalization
has been terminated, the Management Services Agreement and the Warrant
Agreement have been duly executed by the Company and are in full force and
effect.
REPAYMENT OF SMITTY'S INDEBTEDNESS
In the Recapitalization Agreement, the Company has agreed that on the Merger
Closing Date it will assume, repay, or cause to be repaid all outstanding
principal and interest, and other amounts payable, under the Specified
Smitty's Indebtedness (as defined below). As a result, (i) Smitty's will(A)
offer to purchase all of the $29.025 million principal amount (accreted value
of approximately $18.4 million at December 30, 1995) of its 13 3/4% Senior
Discount Debentures due 2006 (the "Smitty's Debentures"), and (B) soliciting
consents from the holders of Smitty's Debentures to certain amendments to the
indenture under which the Smitty's Debentures were issued; and (ii) Smitty's
Super Valu will (A) offer to purchase all of the $50.0 million principal
amount of its 12 3/4% Senior Subordinated Notes due 2004 (the "Smitty Notes"),
and (B) soliciting consents from the holders of Smitty's Notes, to certain
amendments to the indenture under which the Smitty's Notes were issued. Such
offers to purchase Smitty's Debentures and Smitty's Notes and the related
consent solicitations are referred to as the "Smitty's Debt Offers."
Consummation of the Smitty's Debt Offers is subject to consummation of the
tender of, and receipt of consents from, a majority of the outstanding
aggregate principal amount of Smitty's Notes and a majority of the aggregate
principal amount at maturity of Smitty's Debentures, and offers to purchase
will be conditioned on the receipt of financing and certain other conditions.
The Offer and the Smitty's Debt Offers are expected to close concurrently with
the closing of the Merger and the financing transactions described below.
As used herein, "Specified Smitty's Indebtedness" means the collective
reference to the Smitty's Notes, the Smitty's Debentures and all indebtedness
under the Credit Agreement dated as of June 29, 1994 among Smitty's Super
Valu, Chase Manhattan and the other lenders party thereto. As of December 30,
1995, there was $103.3 million aggregate principal amount outstanding of
Specified Smitty's Indebtedness.
Although the Company believes that it will be able to successfully repay or
cause the repayment of the Specified Smitty's Indebtedness on terms reasonably
satisfactory to the Company, there can be no assurance that the Company will
in fact be able to do so.
REGULATORY APPROVALS
On March 5, 1996, the Federal Trade Commission and the Antitrust Division
granted early termination of the waiting period under the HSR Act, with
respect to the Merger effective immediately.
Except for approvals otherwise described in this Offer to Purchase, the
Company is not aware of any other government or regulatory approvals required
for the consummation of the transactions contemplated by the Recapitalization
Agreement.
55
<PAGE>
COMPANY'S STOCK OPTIONS; DEFERRED COMPENSATION PLANS
In the Recapitalization Agreement, the Company has agreed to offer employees
who hold Options, immediately prior to the Offer Closing Date, the opportunity
to elect either to: (i) receive on the Offer Closing Date cash payments with
respect to half of the shares subject to the Options in an amount equal to (A)
the number of shares of Common Stock that would be received by such holder
upon exercise of one-half of such Options multiplied by $36.00 per share minus
(B) the aggregate exercise price of such Options, and, in consideration of
such payments, to execute amendments to each existing option agreement such
that the remaining half of the shares subject to the Options will not be
exercisable prior to the exercise date stated therein (without regard to the
transactions contemplated by the Recapitalization Agreement) and will have the
exercise price reduced from $19.00 to $15.00 per share of Common Stock; or
(ii) have all such employees' Options continue to vest in accordance with the
stated terms of the Options as in effect as of the date of the
Recapitalization Agreement. Assuming that all of the Company's employees who
hold Options make the election set forth in clause (i) above, the estimated
aggregate value of the Company's proposed treatment of the Options will be
approximately $16.9 million (comprised of approximately $13.7 million
representing the cash payment for half of the Options and $3.2 million
representing the exercise price reduction for the remaining Options). Of such
estimated aggregate value, approximately $252,000 will be for the account of
members of the Smith Group and approximately $5.2 million will be for the
account of the Company's other directors and executive officers who are not
members of the Smith Group but have indicated their intention to vote in favor
of the Recapitalization Agreement.
In addition, the Company has agreed to use all reasonable efforts to amend
its deferred compensation agreements in effect as of the date of the
Recapitalization Agreement with each of Frederick F. Urbanek, James A. Acton,
Richard C. Bylski, Larry R. McNeill, Kenneth A. White, Matthew G. Tezak, Paul
D. Tezak, James W. Hallsey, Michael C. Frei, Harry M. Moskal and Robert C.
Bolinder to provide that if within two years after the Closing Date the
Company terminates such officer's employment without cause (as such term will
be defined in such amendments to the reasonable satisfaction of such officers,
the Company and Yucaipa), all of such officer's unvested benefits under his
deferred compensation agreement will become immediately and fully vested.
FINANCING ARRANGEMENTS BY YUCAIPA; YUCAIPA FEE
Yucaipa has agreed in the Recapitalization Agreement to use all reasonable
efforts to consult with the Company concerning and, as appropriate, assist the
Company in arranging for the Company to enter into one or more Financing
Agreements, with terms and conditions which are consistent with the related
financing letters and are otherwise reasonably satisfactory to the Company.
See "Financing of the Recapitalization and Merger" for additional information
with respect to the Company's Financing Agreements.
The Recapitalization Agreement also provides that if the Offer is
consummated, the Company will pay to Yucaipa a fee of $15 million on the
Closing Date.
COMPOSITION OF BOARD OF DIRECTORS AND OFFICERS
Effective as of the Closing Date, the Company has agreed in the
Recapitalization Agreement to use all reasonable efforts, subject to the
provisions of the Certificate of Incorporation and By-laws of the Company and
the approval of the Company's stockholders at the Stockholders' Meeting,
to:(i) cause the Company's Board of Directors to be reduced to seven directors
and have nominated and elected as directors two designees of Jeffrey Smith,
two designees of Yucaipa, one senior manager of the Company and two
independent directors; and (ii) cause the Company's Board of Directors to
elect
56
<PAGE>
Ronald Burkle as the Chief Executive Officer of the Company. Mr. Smith has
designated himself and Fred Smith as his designees, Yucaipa has designated Mr.
Burkle and Linda McLoughlin Figel as its designees, Allen Rowland, President
and Chief Operating Officer of the Company, has been nominated for election as
a director, and Bruce Karatz and Bertram R. Zweig have been nominated as
independent directors. For information concerning the nominees for election to
the Board of Directors, see "Management After Recapitalization and Merger."
TERMINATION
The Recapitalization Agreement may be terminated at any time prior to the
Closing Date: (a) by mutual consent of the Company and Smitty's in a written
instrument; (b) by either the Company or Smitty's, if neither the Merger nor
the Offer has been consummated by July 30, 1996 (the "Termination Date"); or
(c) by the Company, if Smitty's or Yucaipa is in material breach of its
obligations under the Recapitalization Agreement, or by Smitty's, if the
Company or Acquisition is in material breach of its obligations under the
Recapitalization Agreement; provided that no party will be entitled to
terminate the Recapitalization Agreement by reason of clause (c) if it or any
of its affiliates is in material breach of its obligations under the
Recapitalization Agreement.
In the event of termination of the Recapitalization Agreement, the
Recapitalization Agreement will become void and no party will have any
liability or further obligation to any other party under the Recapitalization
Agreement or the transactions contemplated thereby, except as otherwise
provided in the Recapitalization Agreement.
TERMINATION OF RECAPITALIZATION
At any time prior to the Offer Closing Date, if in the exercise of its
fiduciary duties to the Company's stockholders under applicable law, the
Company's Board of Directors (i) determines that the termination of the
Recapitalization is required by reason of the Company's acceptance of an
Alternative Transaction, or (ii) withdraws or materially modifies or changes
its recommendation of the Recapitalization, the Company may terminate the
Company's obligation to consummate the Recapitalization. However, in such
event the Company will be obligated to consummate the Merger and the Company's
stockholders will not be required to approve the Recapitalization Agreement
and the transactions contemplated thereby. In addition, under such
circumstances, the Company will not approve and adopt the separate amendments
to the Company's Certificate of Incorporation, including the classification of
the Board of Directors in the manner contemplated thereby.
The "Recapitalization" as defined in the Recapitalization Agreement refers
to: (i) the execution, delivery and receipt of the proceeds under the
Financing Agreements; (ii) the making and consummation of the Offer; (iii) the
execution and delivery of the Management Services Agreement; (iv) the
execution and delivery of, and the issuance of the warrants provided for
under, the Warrant Agreement; (v) the completion of certain transactions
contemplated by the Recapitalization Agreement regarding the composition of
the Company's Board of Directors, the election of Mr. Burkle as Chief
Executive Officer, the cash payment for a portion of, and the reduction of the
exercise price for a portion of, the Company's management stock options and
the amendment of the Company's deferred compensation agreements; and (vi) the
filing of the Amended and Restated Certificate of Incorporation for the
Company.
An "Alternative Transaction" as defined in the Recapitalization Agreement
means any tender or exchange offer involving the capital stock of the Company
or any subsidiary of the Company, any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the
business or assets of, the Company or any subsidiary of the Company, any
proposal or offer with respect to any recapitalization or restructuring with
respect to the Company or any subsidiary of the
57
<PAGE>
Company or any proposal or offer with respect to any other transaction similar
to any of the foregoing with respect to the Company or any subsidiary of the
Company, other than pursuant to the transactions to be effected pursuant to
the Recapitalization Agreement.
AMENDMENT AND WAIVER
The Recapitalization Agreement may not be amended except by action of each
of the parties thereto set forth in a written instrument signed by each of the
parties thereto.
At any time prior to the Closing Date, any party to the Recapitalization
Agreement may (i) extend the time for the performance of any of the
obligations or other acts of any other party thereto; (ii) waive any
inaccuracies in the representations and warranties of any other party
contained therein or in any document delivered pursuant thereto; or (iii)
waive compliance with any of the agreements of any other party or with any
conditions to its own obligations. No waiver of any of the provisions of the
Recapitalization Agreement will be deemed to constitute a waiver of any other
provision (whether or not similar), nor will such waiver constitute a
continuing waiver, unless otherwise expressly provided.
REPRESENTATIONS AND WARRANTIES
The Recapitalization Agreement contains customary representations and
warranties (subject to certain conditions and exceptions) of the Company
relating among other things to (a) corporate organization and similar
corporate matters; (b) the capital structure of the Company; (c)
authorization, execution, delivery, performance and enforceability of the
Recapitalization Agreement and the other related agreements; (d) absence of
certain material changes or events since the end of the last fiscal year of
the Company; (e) no material conflicts or violations with organizational
documents, applicable laws or material contracts or agreements and no material
consents or approvals; (f) the absence of material litigation; (g) compliance
with applicable laws; (h) the accuracy of documents filed with the Commission;
(i) retirement and other employee plans and matters relating to the Employee
Retirement Income Security Act of 1974, as amended; (j) filing of tax returns
and payment of taxes; (k) brokers' and finders' fees; and (l) the accuracy of
information supplied by the Company in connection with this Offer to Purchase
and other documents to be publicly filed by the Company in connection with the
Offer and the Merger.
The Recapitalization Agreement also contains customary representations and
warranties of Smitty's, including representations and warranties that are
similar to those provided by the Company and in addition representations and
warranties relating to: (a) ownership of or valid leasehold interests in
Smitty's properties and stores; (b) material contracts; (c) labor relations;
and (d) insurance.
The Recapitalization Agreement further contains representations and
warranties of Yucaipa relating among other things to (a) due organization and
proper authorization; (b) ownership of Smitty's Common Stock; (c) no material
conflicts or violations and no material consents or approvals; and (d) no
agreements to sell or dispose of Smitty's Common Stock or any material portion
of Smitty's assets.
CONDUCT OF BUSINESS PENDING MERGER
Pursuant to the Recapitalization Agreement, the Company and Smitty's have
each agreed to carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as conducted prior to the
execution of the Recapitalization Agreement.
THE COMPANY. In addition, the Company has agreed that until the Merger
Closing Date, neither the Company nor any of its subsidiaries will, except as
otherwise provided in the Recapitalization Agreement: (a) (i) amend its
Certificate of Incorporation or By-laws (other than
58
<PAGE>
amendments to defer the redemption of the Series I Preferred Stock for up to
five years), (ii) split, combine or reclassify any of its outstanding equity
securities or declare, set aside or pay any dividend payable in cash, stock or
property or make any other distribution with respect to any of its equity
securities, except regularly scheduled dividends on its Common Stock
consistent with past practice, or (iii) redeem, purchase or otherwise acquire,
directly or indirectly, any shares of its equity securities (other than
redemptions of Series I Preferred Stock in accordance with the Company's
certificate of incorporation); (b)(i) issue or sell or agree to issue or sell
any additional shares of, or options, warrants or rights of any kind to
acquire any shares of, its capital stock of any class or series, (ii) enter
into any 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 it or any material claims held by it),
(iv) acquire (by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof or
make any material investment, either by purchase of stock or securities,
contribution to capital, property transfer or purchase of any material amount
of property or assets, in any other individual or entity, or (v) enter into
any contract, commitment or arrangement with respect to any of the foregoing;
(c) 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 employee or increase in any manner the compensation or fringe
benefits of any employee or pay any benefit not required by any existing plan,
arrangement or agreement; (d) incur any material amount of indebtedness for
borrowed money, or make any loans or advances or capital contributions to any
other person other than a wholly owned subsidiary of the Company, or issue or
sell any debt securities, other than borrowings under existing lines of credit
in the ordinary course of business or acquire any debt instruments of others;
(e) make or commit to make any capital expenditures in excess of $1,000,000 in
the aggregate, other than expenditures for (i) routine maintenance and repair
or (ii) pursuant to existing contracts or commitments; (f) enter into or amend
any contract for the purchase of inventory which is not cancelable within 90
days without penalty, cost or liability or any other contract in excess of
$100,000 which is not cancelable within 30 days without penalty, cost or
liability; (g) grant any severance or termination pay (other than pursuant to
policies or agreements in effect on the date of the Recapitalization
Agreement) or increase the benefits payable under its severance or termination
pay policies or agreements in effect on the date of the Recapitalization
Agreement; and (h) take or permit any action which would prevent the Merger
from qualifying as a reorganization under Section 368 of the Code.
Notwithstanding the foregoing provisions, if the Recapitalization has been
terminated, the Company will not be required to comply with the provisions
referred to in clause (b) through (h) above following the date of such
termination.
SMITTY'S. Smitty's has agreed that, until the Merger Closing Date, Smitty's
will and will cause its subsidiaries to: (i) maintain reasonably comparable
advertising and promotional expenditures; (ii) maintain reasonably comparable
overall levels of inventory subject to seasonal variation and changes in sales
volume; (iii) maintain comparable insurance coverage at commercially
reasonable rates; (iv) pay amounts due to vendors consistent with past
practices; and (v) perform customary maintenance on its properties and provide
for the security of such properties in accordance with past practices.
In addition, Smitty's has agreed that until the Merger Closing Date, neither
Smitty's nor any of its subsidiaries will, except as otherwise provided in the
Recapitalization Agreement or as the Company may specifically consent in
writing, which consent will not be unreasonably withheld: (a) close any
facility, except as required by applicable law or in the event of casualty or
as a result of the expiration of any lease which after reasonable efforts is
not renewed; (b) enter into any new lease, lease termination agreement or
material amendment (excluding any extension or renewal of any lease in
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accordance with past practices) of any agreement to lease such real property;
(c) sell, assign or sublease any facility or property; (d) (1) sell, assign or
sublease any fixtures and equipment or other material assets, the aggregate
sales prices and the annual rental payments of which are $100,000 or more in
the aggregate, other than in the ordinary course of business, or (2) enter
into any sale-leaseback transaction resulting in annual rental payments in
excess of $100,000, except for sale-leaseback transactions for fixtures and
equipment in the ordinary course of business consistent with past practice;
(e) make any capital expenditures in excess of $250,000 in the aggregate,
other than expenditures for routine maintenance and repair or pursuant to
existing contracts or commitments; (f) incur any material amount of
indebtedness for borrowed money, or make any loans or advances or capital
contributions to any other person other than a wholly owned subsidiary of
Smitty's, or issue or sell any debt securities, other than borrowings under
existing lines of credit in the ordinary course of business or acquire any
debt instruments of others; (g) make any transfer of assets from Smitty's or
any of its subsidiaries to any affiliate; (h) materially reduce any store
operating hours except as consistent with past practices as a result of
security concerns, material changes in sales volume or as required by law; (i)
(1) amend its certificate of incorporation or by-laws or the charter or by-
laws of any of its subsidiaries, (2) split, combine or reclassify the
outstanding shares of its capital stock 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, (3) redeem, purchase or
otherwise acquire, directly or indirectly, any shares of its capital stock, or
(4) sell or pledge any stock of any of its subsidiaries; (j) (1) issue or sell
or agree to issue or sell any additional shares of, or options, warrants or
rights of any kind to acquire any shares of, its capital stock of any class,
(2) enter into any 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, (3) except in the ordinary course of
business, sell, pledge, dispose of or encumber any material assets, (4)
acquire any corporation, partnership or other business organization or
division thereof or make any material investment, either by purchase of stock
or securities, contribution to capital, property transfer or purchase of any
material amount of property or assets, in any other person, or (5) enter into
any agreement, commitment or arrangement with respect to any of the foregoing;
(k) fail to preserve intact its business organization, or fail to keep
available the services of its present officers and key employees, and fail to
preserve the good will of customers and other persons having business
relationships with it; (l) grant any severance or termination pay (other than
pursuant to policies or agreements in effect on the date of the
Recapitalization Agreement) or increase the benefits payable under its
severance or termination pay policies or agreements in effect on the date of
the Recapitalization Agreement; (m) 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 employee or increase in any
manner the compensation or fringe benefits of any employee or pay any benefit
not required by any existing plan, arrangement or agreement; (n) enter into or
amend any contract for the purchase of inventory which is not cancelable
within 90 days without penalty, cost or liability or any other contract in
excess of $100,000 which is not cancelable within 30 days without penalty,
cost or liability; (o) 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; (p) take or permit any action
which would prevent the Merger from qualifying as a reorganization under
Section 368 of the Code; and (q) make any material change in its tax or
accounting policies or any material reclassification of assets or liabilities.
ADDITIONAL COVENANTS
FURTHER ASSURANCES AND COOPERATION. Each of the parties to the
Recapitalization Agreement has agreed 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
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as practicable the transactions contemplated by the Recapitalization 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 Smitty's will not 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 Company), (b) to effect all necessary
registrations and filings, (c) to negotiate and enter into the Financing
Agreements on terms reasonably satisfactory to the Company and to satisfy all
conditions thereto, and (d) to fulfill all conditions to the Recapitalization
Agreement.
CERTAIN FILINGS AND CONSENTS. Each party to the Recapitalization Agreement
has agreed that it will (a) as promptly as practicable make any required
filings and submissions under the HSR Act with respect to the Merger, (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 transactions contemplated by the
Financing Agreements, the Offer, the Merger and the other transactions
contemplated by the Recapitalization Agreement, and (c) actively assist each
other in obtaining any consents, permits, authorizations, approvals or waivers
which are required. The parties have agreed to cooperate in connection with
reaching any understandings, undertakings or agreements involving the Federal
Trade Commission, the Department of Justice or any other governmental
authority in connection with the transactions contemplated by the
Recapitalization Agreement. The Company has agreed to use all reasonable
efforts to resolve such objections, if any, as may be asserted with respect to
the transactions contemplated by the Recapitalization Agreement under any
applicable federal or state antitrust laws; provided, however, that in no
event will the Company be required in that connection to (i) effect any
divestitures of any material assets of the Company, Smitty's or their
respective subsidiaries, (ii) hold separate any such material assets or
(iii) agree to any material restrictions on the operations of the Company,
Smitty's or their respective subsidiaries of any material portion of the
business or assets of the Company, Smitty's or their respective subsidiaries.
ACCESS TO INFORMATION. Each party to the Recapitalization Agreement has
agreed that it will upon reasonable notice, afford the other parties and their
representatives, full access during normal business hours to all of its
officers, agents, properties, books, contracts, commitments and records
(including but not limited to tax returns) and during such period will furnish
promptly to such persons all information concerning its business, properties
and personnel as such persons may reasonably request.
ALTERNATIVE PROPOSALS. Each of the Company and Smitty's (each, a "Restricted
Party") have agreed not to, and to use their best efforts to ensure that their
respective officers, directors, employees, investment bankers, attorneys,
accountants and other agents do not, directly or indirectly: (i) initiate,
solicit or encourage, or take any action to facilitate the making of, any
offer or proposal which constitutes or is reasonably likely to lead to any
Alternative Transaction or an inquiry with respect thereto, or (ii) in the
event of an unsolicited Alternative Transaction for such Restricted Party or
any subsidiary or affiliate of such Restricted Party, engage in negotiations
or discussions with, or provide any information or data to, any corporation,
partnership, person or other entity or group relating to any Alternative
Transaction, except in the case of clause (ii) above to the extent that (x)
the Alternative Transaction is a bona fide written proposal submitted to the
Restricted Party's Board of Directors and (y) the Restricted Party's Board of
Directors determines, after having received the oral or written opinion of
outside legal counsel, that the failure to engage in such negotiations or
discussions or provide such information would result in a breach of the Board
of Directors' fiduciary duties under applicable law.
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Pursuant to the Smith's Shareholder Agreement, the members of the Smith
Group have also agreed to refrain from soliciting anyone other than Smitty's
to purchase interests in the Company or transferring their shares of Company's
capital stock without consent from the Company and Smitty's. See "Certain
Related Agreements--Smith's Shareholder Agreement."
Pursuant to the Smitty's Stockholders' Agreement, each of the parties to
such agreement has agreed to refrain from soliciting anyone other than the
Company or Acquisition to purchase interests in Smitty's or transferring their
shares of Smitty's Common Stock without consent from the Company and Smitty's.
See "Certain Related Agreements--Smitty's Stockholders' Agreement."
DIRECTORS AND OFFICERS' INSURANCE AND INDEMNIFICATION. The Company has
agreed that after the Closing Date, with respect to each person who is or has
been a director or officer of the Company, any of its subsidiaries (including
Smitty's), or its successors and assigns, the Company will indemnify each such
person to the fullest extent permitted by law against any claim, liability,
loss, damage, judgment, fine, penalty, amount paid in settlement or
compromise, cost or expense, including reasonable fees and expenses of legal
counsel, arising out of any matter existing or occurring on or prior to the
Closing Date, whether commenced, asserted or claimed before or after the
Closing Date. The Company will maintain in effect for not less than four years
after the Closing Date, the current policies of directors' and officers'
liability insurance maintained by the Company or its subsidiaries on the date
the Recapitalization Agreement was signed (provided that the Company may
substitute therefor policies having at least the same coverage and containing
terms and conditions which are no less advantageous to the persons currently
covered by such policies as insured) with respect to matters existing or
occurring prior to the Closing Date and the Company will use its best efforts
to prepay premiums with respect to the foregoing insurance for the four-year
period following the Closing Date; provided, however, that if the aggregate
annual premiums for such insurance during such period exceed 200% of the per
annum rate of the aggregate premium currently paid by the Company or its
subsidiaries for such insurance on the date the Recapitalization Agreement was
signed, then the Company will cause the Surviving Corporation to provide the
maximum coverage then available at an annual premium equal to 200% of such
rate.
CERTAIN RELATED AGREEMENTS
STANDSTILL AGREEMENT
On January 29, 1996, the Company and each member of the Yucaipa Group (which
is comprised of Yucaipa and each of the limited partnerships which own shares
in Smitty's for which Yucaipa acts as the general partner) entered into the
Standstill Agreement.
STANDSTILL PROVISION; NO SOLICITATION. The Yucaipa Group has agreed that for
a 10-year period ending on January 29, 2006, it will not acquire, offer to
acquire, agree to acquire, become the beneficial owner of, or obtain any
rights in respect of any Company Voting Securities (as defined below), by
purchase or otherwise, or take any action in furtherance thereof, if the
effect of such action would be to increase its aggregate beneficial ownership
of securities that are entitled to vote generally for the election of
directors (the "Company Voting Securities") above (x) 20% of the total number
of votes that could be cast at a stockholders' meeting of the Company (the
"Combined Voting Power") or (y) 25% of the total number of Company Voting
Securities outstanding. In addition, without the approval of a majority of the
Disinterested Directors (defined as directors of the Company who are not
employees or officers of the Company, are not serving as designees of the
Yucaipa Group, and are not associates of Yucaipa or its affiliates) and
subject to certain limited exceptions, no member of the Yucaipa Group will
during such 10-year period (i) submit any proposals to acquire a majority of
the Combined Voting Power of Company Voting Securities (a "Change of Control
Proposal"), (ii) directly or indirectly sell, transfer any beneficial interest
in, pledge, hypothecate or otherwise dispose of any
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Company Voting Securities or any shares of Company Common Stock to be acquired
from the Company pursuant to the Warrant Agreement, other than to another
member of the Yucaipa Group or their respective affiliates in any transaction
or series of transactions that would result in a transfer of greater than 3%
of the Combined Voting Power or would result in any person having or having
the right to acquire beneficial ownership greater than 5% of the Combined
Voting Power, (iii) solicit any proxies, or assist any other person in any way
in solicitation of proxies, or submit any proposal for the vote of
stockholders of the Company, or induce another person to take any such actions
with respect to the voting of any of the Company Voting Securities, (iv)
directly or indirectly solicit or induce any person to bid for or acquire
Company Voting Securities in excess of 5% of the Combined Voting Power of
Company Voting Securities, (v) engage in certain affiliate transactions, or
(vi) form, join in or in any other way participate in any partnership, pooling
agreement, syndicate, voting trust or other group (other than the Yucaipa
Group) with respect to Company Voting Securities.
BOARD COMPOSITION. In the Standstill Agreement the Company has agreed to use
its best efforts to cause to be elected to the Company's Board of Directors
two designees of the Smith Group, two designees of the Yucaipa Group, one
member of the senior management of the Company and two "independent directors"
(as required by the rules of the NYSE) who are also Disinterested Directors.
BOARD NOMINEES. Subject to the provisions of the Certificate of
Incorporation and By-laws of the Company and the approval of the Company's
stockholders, as long as the members of the Smith Group and the Yucaipa Group
and their respective affiliates each beneficially own at least 8% of the
outstanding shares of Common Stock, each such Group will have the right to
designate two directors of the Company, and so long as the members of the
Smith Group and the Yucaipa Group and their respective affiliates each
beneficially own at least 5% of the outstanding shares of Common Stock, each
such Group will have the right to designate one director of the Company.
However, no individual who is an officer, director, partner, or principal
stockholder of any Significant Competitor (as defined in the Management
Services Agreement) of the Company or any of its subsidiaries will serve as
director. At any time when the Yucaipa Group and its affiliates or the Smith
Group and its affiliates no longer beneficially own at least 5% of the
outstanding shares of Common Stock, such Group will not have the right to
designate any director of the Company, such Group's rights with regard to the
voting of Company securities will terminate and such Group will cause its
designees to the Board of Directors to resign.
Jeffrey Smith and Fred Smith have been nominated to be directors of the
Company as designees of the Smith Group and Ronald Burkle and Linda McLoughlin
Figel have been nominated to be directors of the Company as designees of the
Yucaipa Group.
In addition, each of the Smith Group and the Yucaipa Group has agreed that
they each will, at any annual or special meeting of the stockholders at which
the directors of the Company are to be elected or in connection with a
solicitation of consents through which directors of the Company are to be
selected, to vote (or give a written consent with respect to) all of their
respective Company Voting Securities in favor of the election to the Company's
Board of Directors of the nominees designated by such other Group.
TERMINATION; AMENDMENT. The Standstill Agreement will terminate at any time
that the Yucaipa Group and its affiliates own less than 2% of the outstanding
shares of Common Stock. The Standstill Agreement may be amended or waived if
such amendment or waiver is in writing and executed by all parties thereto;
provided that any amendment or waiver requires the approval of a majority of
the Disinterested Directors of the Company.
MANAGEMENT SERVICES AGREEMENT
On the Closing Date, the Company will enter into the Management Services
Agreement with Yucaipa.
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TERM, DUTIES, FEES AND EXPENSES. Yucaipa through its partners, employees or
other designated representatives or agents, will agree to provide, the Company
and its subsidiaries, subject to the supervision of the Board of Directors of
the Company, management consultation and advice regarding strategic planning
and development, budgeting, future financing plans, selection and retention of
management employees, integration strategy, legal and government affairs, and
such other similar management services as may be requested by the Board of
Directors from time to time for a term of five years. In return, the Company
will agree to pay Yucaipa an annual management fee of $1 million and will
reimburse Yucaipa for its reasonable out-of-pocket costs and expenses incurred
in connection with the performance of its obligations under the Management
Services Agreement. In the event that during the term of the Management
Services Agreement, the Board of Directors 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 such agreement, Yucaipa will be entitled to such
additional compensation for such services as may be agreed upon by Yucaipa and
the Company (and approved by a majority of the Company's disinterested
directors). Under certain circumstances, the Company may prepay a portion of
the management fees payable to Yucaipa under the Management Services Agreement
through the issuance of up to 100,000 shares of the Company's Class B Common
Stock at its then current fair market value.
The Company will also agree that in connection with Yucaipa's services,
Ronald Burkle will have the right to serve as the Chief Executive Officer of
the Company during the term of the Management Services Agreement and will have
all the rights and responsibilities customarily vested in a chief executive
officer. Mr. Burkle will not receive any compensation for serving in such
capacity beyond the compensation paid to Yucaipa under the Management Services
Agreement.
TERMINATION RIGHTS. The Management Services Agreement will be terminable by
the Company (i) at any time following the determination of the Company's Board
of Directors 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 Management Services Agreement following 60
days' notice, (iii) at any time if, in connection with its performance under
the Management Services Agreement, Yucaipa or any of its partners commits any
act of fraud, dishonesty or gross negligence which is materially detrimental
to the business or reputation of the Company, (iv) if certain payment or other
defaults occur under the Company's New Credit Facility or new senior or senior
subordinated debt indentures entered into in connection with the
Recapitalization or any other material debt agreements entered into to
refinance such indebtedness, subject to certain cure periods and conditions,
(v) if Yucaipa or any member of the Yucaipa Group is in material default under
the Standstill Agreement which default will not have been cured or waived
within 90 days' notice, or (vi) if at any time, Yucaipa or any member of the
Yucaipa Group owns less than 50% of the shares of Class B Common Stock of the
Company originally acquired by them in the Merger.
The Management Services Agreement will be terminable by Yucaipa (i) if the
Company fails to reasonably perform any material covenant, agreement, term or
provisions of the Management Services Agreement following 60 days' notice,
(ii) if the Company fails to make any payment due to Yucaipa under the
Management Services Agreement, if such payments are not made in full within 30
days' notice, (iii) if the designees of the Yucaipa Group cease to be members
of the Board of Directors as required by the Standstill Agreement, (iv) if the
Board of Directors fails to approve certain material recommendations by
Yucaipa or if the Board of Directors otherwise takes action which materially
interferes with the ability of Yucaipa to perform its responsibilities under
the Management Services Agreement and such interference will continue for 60
days after notice is given, or (v) if Ronald Burkle ceases to be Chief
Executive Officer of the Company, other than by reason of his death,
disability, termination due to his commission of any act of fraud, dishonesty
or gross negligence which is
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materially detrimental to the business or reputation of the Company, or any
felony conviction or voluntary resignation.
The Management Services Agreement may be terminated, at the election of
either party if during its term there is a "change of control" of the Company
(defined generally as either (i) the acquisition of beneficial ownership by
any person or group of any securities of the Company such that, as a result
such group or person beneficially owns 40% or more of the Company's then
outstanding voting securities entitled to vote on a regular basis for a
majority of the Board of Directors of the Company, or (ii) the sale of
substantially all of the Company's assets or capital stock in a transaction or
series of related transactions (excluding any transaction with Yucaipa or any
of its partners or affiliates or any member of the Smith Group).
TERMINATION FEE. In the event the Management Services Agreement is
terminated by (i) the Company without cause, (ii) Yucaipa for cause in
accordance with such agreement, or (iii) pursuant to a change of control of
the Company, the Company has agreed to pay or cause to be paid to Yucaipa a
termination payment equal to the greater of (x) $5 million and (y) twice the
total consulting fees that would have been earned by Yucaipa during the
remaining term of the Management Services Agreement as if such agreement had
not been terminated, without regard to sums previously paid by the Company to
Yucaipa as part of its management fee.
NON-COMPETE. Yucaipa will agree that during the term of the Management
Services Agreement it will not, without the Company's prior written consent,
provide management or consulting services to, or make equity investments over
5% in, any business which operates in excess of five retail supermarket stores
in any market in which the Company operates in excess of five retail
supermarket stores (a "Significant Competitor"), subject to certain exceptions
and conditions.
INDEMNIFICATION. The Company will agree to indemnify and hold harmless
Yucaipa and each of its affiliates, partners, 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 become subject which is
related to or arising out of the performance of the services to be provided
under the Management Services Agreement or the Recapitalization 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 Management Services Agreement, or (ii)
any settlement effected without the written consent of the Company, which
consent will not be unreasonably withheld.
WARRANT AGREEMENT
On the Closing Date, the Company and Yucaipa will enter into the Warrant
Agreement, pursuant to which the Company will issue Yucaipa the Warrants to
purchase shares of the Company's newly designated Class C Common Stock
("Warrant Shares") representing 10% of the aggregate shares of the outstanding
Common Stock on a fully diluted basis upon consummation of the
Recapitalization and Merger. The Warrants will be exercisable at an initial
exercise price of $50 per share, subject to adjustment (the "Exercise Price").
Half of the Warrants will be exercisable for a term of four years and the
remaining half of the Warrants will be exercisable for a term of five years,
subject in each case to extension for a five-year period if the market price
of the Class B Common Stock is at least equal to the Exercise Price for a
period of not less than 60 consecutive trading days.
Each holder of Warrants, upon exercise, may elect to either receive from the
Company, (i) the number of fully paid and nonassessable Warrant Shares which
the holder may be entitled to receive upon exercise of the Warrants and
payment of the Exercise Price then in effect, or (ii) the number of
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Warrant Shares, on a net basis, equal to the number of Warrant Shares
otherwise issuable upon exercise of the Warrants less the number of Warrant
Shares having a fair market value equal to the aggregate Exercise Price that
would have been paid by the holder of the Warrants, without the exchange of
any funds.
The Class C Common Stock to be issued to Yucaipa upon exercise of its
Warrants will be identical in all respects to the Class B Common Stock, except
that the Class C Common Stock will be non-voting. Shares of Class C Common
Stock will be convertible into an equal number of shares of 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 issued upon exercise of the Warrants and the Exercise
Price are subject to adjustment under standard anti-dilution provisions.
REGISTRATION RIGHTS AGREEMENT
On the Closing Date, the Company will enter into a registration rights
agreement (the "Registration Rights Agreement") with Jeffrey Smith, Yucaipa,
and certain holders of Smitty's Common Stock who will receive Class B Common
Stock in the Merger. Under the terms of the Registration Rights Agreement,
each of (i) the holders of a majority of the Registrable Securities (as
defined in such agreement) held by Yucaipa, its affiliates and the holders of
Smitty's Common Stock receiving Class B Common Stock in the Merger, 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 and his affiliates, and transferees of the foregoing, as a group (the
"Smith Holder Group") will each be entitled to two written requests (the
"Demand Registrations") upon the Company for the registration under the
Securities Act of all or a part (but not less than 20% of the original number
of the Registrable Securities held by the persons making such demand) of their
shares of Registrable Securities. Such Demand Registration may at the election
of the demanding holders be in the form of an underwritten offering and such
demanding holders shall be entitled to select the underwriters. The Company
will only be required to effect one Demand Registration during any six-month
period.
If at any time the Company proposes to file a registration statement under
the Securities Act with respect to an offering by the Company 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 herein) or (iii) a registration statement filed
in connection with an offer of securities solely to existing security holders
of the Company), the Company 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 (the
"Piggyback Registrations").
Upon the request of holders of a majority of the Registrable Securities held
by the Yucaipa Holder Group at any time prior to the second anniversary of the
Closing Date, the Company 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 (the "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. The Company 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 120 days
following the date on which it becomes effective under the Securities Act,
provided that if the Registrable Securities received by the Yucaipa Holder
Group are "restricted securities" within the meaning of Rule 144 of the
Securities Act, any Shelf Registration Statement shall be kept continuously
effective until such Registrable Securities are no longer subject to the two-
year holding period imposed under Rule 144(c). However, in no event will
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the Company be required to keep the Shelf Registration in effect after the
second anniversary of the Closing Date.
In the event the Company is not able to fulfill all requests for the
Registrable Securities to be included in any Demand Registration or Piggyback
Registration, the Company has granted certain priority rights to the Smith
Holder Group which enables the Smith Holder Group to have its Registrable
Securities up to certain designated amounts included in such registrations
before the Yucaipa Holder Group is entitled to include its Registrable
Securities in such registrations.
The Company 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
effective, and the reasonable fees and disbursements of the holders of
Registrable Securities of not more than one counsel chosen by the holders of a
majority in number of such Registrable Securities. In addition, the Company
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 Merger and the Recapitalization (except with respect to any holder that
is an "affiliate" of the Company within the meaning of the Securities Act).
SMITH'S SHAREHOLDER AGREEMENT
On January 29, 1996, each member of the Smith Group entered into the Smith's
Shareholder Agreement with Smitty's and Yucaipa. The Smith Group consists of
Jeffrey Smith, Chairman and Chief Executive Officer of the Company, Richard
Smith, Vice Chairman of the Company, Fred Smith, a director of the Company
(all of whom are brothers), and Ida W. Smith (their mother) and certain other
related stockholders, along with certain family trusts controlled by those
persons.
In the Smith's Shareholder Agreement, members of the Smith Group, who are
holders of approximately 30.4% and 64.5% of the outstanding shares of Common
Stock and Series I Preferred Stock respectively (and approximately 62.1% of
the aggregate number of votes eligible to be cast at the Stockholders'
Meeting), have agreed to: (i) take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied; (ii) in the event the Company commences an
Offer, tender a sufficient number of their shares of Common Stock to enable
the Company to repurchase 50% of the outstanding shares of Common Stock
pursuant to the Offer; (iii) refrain from soliciting, from any person other
than Smitty's, offers relating to any acquisition or purchase of all, or any
material portion of the assets of, or any equity interest in the Company; (iv)
refrain from transferring their shares of the Company's capital stock without
consent from the Company or Smitty's, and (v) vote their shares in favor of
the Merger.
SMITTY'S STOCKHOLDERS' AGREEMENT
On January 29, 1996, the Smitty's Principal Stockholders entered into, and
Smitty's and Yucaipa have agreed to use their best efforts to cause each other
stockholder of Smitty's to enter into, an agreement (the "Smitty's
Stockholders' Agreement") with the Company. As of the date of this Offer to
Purchase, holders of 70% of the outstanding shares of Smitty's Common Stock
have entered into the Smitty's Stockholders' Agreement.
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Each Smitty's stockholder who is a party to the Smitty's Stockholders'
Agreement has agreed to (i) take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied, (ii) vote its shares in favor of the
Recapitalization Agreement and the transactions contemplated thereby,
including the Merger, at the meeting of the stockholders called for such
purpose (and every adjournment thereof) or by written action without a meeting
or otherwise, (iii) refrain from directly or indirectly soliciting offers from
any person other than the Company or Acquisition relating to any acquisition
or purchase of all or any material portion of the assets of, or any equity
interest in Smitty's or its subsidiaries or transferring their shares of the
Company's capital stock, without the consent of the Company and Smitty's. On
April 10, 1996, holders of a majority of the outstanding shares of Smitty's
Common Stock approved the Recapitalization Agreement and the transactions
contemplated thereby, including the Merger, by delivering to Smitty's a
written consent in accordance with Smitty's bylaws and Delaware law.
FINANCING OF THE RECAPITALIZATION AND MERGER
GENERAL
To consummate the Recapitalization and the Merger, the Company will require
approximately $1,393.2 million (net of California Disposition proceeds of
$68.0 million) of financing to purchase Common Stock in the Offer, repay
certain outstanding indebtedness of the Company and Smitty's, purchase shares
of Series I Preferred Stock, purchase management stock options, and pay
related fees and expenses. The Company plans to obtain the necessary funds by
(a) borrowings of approximately $818.2 million aggregate principal amount
under the New Credit Facility to be provided by a syndicate of banks led by
Bankers Trust and Chase Manhattan; (b) the issuance of up to $150 million of
New Senior Notes; (c) the issuance of up to $350 million of New Senior
Subordinated Notes; and (d) the issuance of New Preferred Stock by the Company
for gross proceeds of $75 million. In addition, the Company will assume
approximately $43.6 million (at December 30, 1995) of existing indebtedness of
Smitty's upon consummation of the Merger.
Yucaipa has caused to be delivered to the Company and the Company has
accepted, a commitment letter dated January 25, 1996 (as amended, the "Bank
Commitment Letter") from Bankers Trust and Chase Manhattan, as arrangers,
providing for borrowings by the Company in an aggregate principal amount of
approximately $995 million under the New Credit Facility. Yucaipa has also
caused to be delivered to the Company and the Company has accepted a letter
dated January 25, 1996 (the "Highly Confident Letter") from BT Securities
Corporation, CS First Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman, Sachs & Co. and Chase Securities Inc. (the
"Investment Banks") relating to the issuance and sale by the Company of the
following new securities (the "New Securities"): (i) $150 million aggregate
principal amount of New Senior Notes, (ii) $350 million aggregate principal
amount of New Senior Subordinated Notes, and (iii) $75 million in gross
proceeds of New Preferred Stock. In the Highly Confident Letter, the
Investment Banks stated that, based upon their understanding of the
transactions and financing summarized in such letter and current market
conditions and subject to the conditions contained in such letter, they are
highly confident of their ability to sell or place the New Securities.
Yucaipa has agreed in the Recapitalization Agreement to use all reasonable
efforts to consult with the Company concerning and, as appropriate, assist the
Company in arranging for the Company to enter into one or more agreements
providing for financing (collectively the "Financing Agreements"), with terms
and conditions which are consistent with the related Commitment Letter and the
Highly Confident Letter and are otherwise reasonably satisfactory to the
Company.
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The following table illustrates the pro forma sources and uses of funds to
consummate the Recapitalization and Merger, assuming such transactions are
consummated as of December 30, 1995. Although management believes the pro
forma amounts estimated below are reasonable under the circumstances, actual
sources and uses may differ from those set forth below:
SOURCES AND USES
(dollars in millions)
<TABLE>
<CAPTION>
SOURCES
-------
<S> <C>
New Term Loans(a).............. $ 805.0
New Revolving Facility(a)(b)... 13.2
New Senior Notes............... 150.0
New Senior Subordinated Notes.. 350.0
New Preferred Stock............ 75.0
California Disposition
Proceeds(b)................... 68.0
--------
Total Sources................ $1,461.2
========
</TABLE>
<TABLE>
<CAPTION>
USES
----
<S> <C>
Purchase Company's Common
Stock......................... $ 451.3
Purchase Company's Management
Options....................... 13.7
Purchase Company's Series I
Preferred Stock............... 1.0
Repay Company's Mortgage Notes. 257.1
Repay Company's Unsecured
Notes......................... 410.0
Repay Company's Revolving
Credit Facility(b)............ 68.0
Repay Smitty's Notes(c)........ 50.0
Repay Smitty's Debentures(c)... 18.4
Repay Smitty's Bank Credit Fa-
cility........................ 34.9
Debt Refinancing Premiums...... 56.8
Accrued Interest............... 12.6
Fees and Expenses.............. 87.4
--------
Total Uses................... $1,461.2
========
</TABLE>
- - --------
(a) The Company has obtained a commitment from Bankers Trust and Chase
Manhattan for the New Credit Facility that will provide up to $805 million
aggregate principal amount of term loans ("New Term Loans") and a $190
million revolving credit facility (the "New Revolving Facility") which
will be available for working capital requirements and general corporate
purposes. A portion of the New Revolving Facility may be used to support
letters of credit, approximately $28 million of which are anticipated to
be issued upon consummation of the Recapitalization and Merger. The New
Credit Facility will be guaranteed by all subsidiaries of the Company,
including Smitty's. See "Financing of Recapitalization and Merger--New
Credit Facility."
(b) The information presented is derived from the Unaudited Pro Forma
Financial Statements contained elsewhere herein which reflect (i) the
receipt of cash proceeds from the California Divestiture and the assumed
receipt of cash proceeds from the sale of the Company's remaining
California assets, pursuant to the California Asset Disposition, in an
amount equal to the net book value of such assets after giving effect to
the California Asset Disposition Charge; and (ii) the application of a
portion of the cash proceeds therefrom to repay (A) the Company's
historical revolving credit balances at December 30, 1995 ($68.0 million)
and (B) $13.2 million of indebtedness anticipated to be incurred under the
New Revolving Facility in connection with the consummation of the
Recapitalization and Merger. Subsequent to December 30, 1995, the Company
has received net cash proceeds from the California Divesture of $67.2
million and expects to receive an additional $10.6 million in proceeds
from the California Divesture shortly after the Closing Date. The Company
intends to use such additional proceeds to reduce revolving loans under
the New Revolving Facility. The Company has not entered into any contracts
relating to the California Asset Disposition and there can be no assurance
as to the timing or the amount of net proceeds, if any, which the Company
will actually receive from such disposition. See "Unaudited Pro Forma
Combined Financial Statements" and "The Company, Smitty's and Yucaipa--The
California Divestiture."
(c) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's Debt
Tenders. If all of the outstanding Smitty's Notes and Smitty's Debentures
are not tendered and accepted for purchase, the Company anticipates that
it would reduce other borrowings.
On or prior to the Offer Closing Date, the Company has agreed in the
Recapitalization Agreement to effect the borrowings and issuances and sales,
as applicable, under the Financing Agreements, the funds of which will be used
upon expiration of the Offer together with other funds available to: (i)
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purchase 50% of its outstanding Common Stock for approximately $451.3 million;
(ii) repay approximately $667.1 million (pro forma at December 30, 1995) of
indebtedness of the Company and $103.3 million (pro forma at December 30,
1995) of indebtedness of Smitty's; (iii) purchase up to half of the
outstanding management stock options of the Company for approximately $13.7
million; and (iv) purchase approximately $1 million of its outstanding Series
I Preferred Stock.
In connection therewith, the Company has agreed to use all reasonable
efforts to negotiate, prepare and enter into definitive Financing Agreements
to provide for the financing on terms and conditions which are consistent with
those contained in the Commitment Letter and the Highly Confident Letter and
are otherwise reasonably satisfactory to the Company. The Company,
Acquisition, Smitty's and Yucaipa agreed in the Recapitalization Agreement to
use all reasonable efforts to satisfy, on or before the Offer Closing Date,
all requirements of the Financing Agreements which are conditions to closing
the transactions constituting the financings. The Company has agreed to
prepare registration statements for filing pursuant to the Securities Act in
order to permit the public offering of the New Securities and to take such
other actions in connection therewith as may be appropriate to complete such
public offerings.
NEW CREDIT FACILITY
In connection with the Recapitalization and Merger, the Company will enter
into the New Credit Facility with a syndicate of financial institutions for
whom Bankers Trust will act as administrative agent. The Company has accepted
the Bank Commitment Letter from Bankers Trust and Chase Manhattan pursuant to
which Bankers Trust and Chase Manhattan, as arrangers (the "Arrangers"), have
agreed, subject to certain conditions, to provide the Company $995 million of
financing under the New Credit Facility. The following is a summary of the
anticipated material terms and conditions of the New Credit Facility. This
summary does not purport to be a complete description of the New Credit
Facility and is subject to the detailed provisions of the loan agreement (the
"Loan Agreement") and various related documents to be negotiated and entered
into in connection with the New Credit Facility.
GENERAL. The New Credit Facility will provide for (i) the New Term Loans in
the aggregate amount of $805 million, comprised of the $325 million Tranche A
Loans, the $160 million Tranche B Loans, the $160 million Tranche C Loans and
the $160 million Tranche D Loans; and (ii) the $190 million New Revolving
Facility under which working capital loans may be made and commercial or
standby letters of credit in the maximum aggregate amount to be agreed upon
among the Company and the Arrangers, under which approximately $28 million of
letters of credit are expected to be issued upon consummation of the
Recapitalization and Merger.
Proceeds of the New Term Loans and loans under the New Revolving Facility on
the Closing Date, together with proceeds from the New Securities and the
California Divestiture will be used to fund the cash requirements for the
Offer, refinance certain existing indebtedness of the Company and Smitty's,
purchase a portion of the Series I Preferred Stock, purchase certain of the
Company's management options and pay various refinancing premium fees,
expenses and other costs associated with the Recapitalization and Merger. The
New Revolving Facility will be available to provide for the working capital
requirements and general corporate purposes of the Company and to issue
commercial and standby letters of credit.
INTEREST RATE; FEES. Borrowings under (i) the New Revolving Facility and the
Tranche A Loans will bear interest at a rate equal to the Base Rate (as
defined in the Loan Agreement) plus 1.50% per annum or the reserve adjusted
Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.75% per annum; (ii)
the Tranche B Loans will bear interest at the Base Rate plus 2.00% per annum
or the reserve adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the
Tranche C Loans will bear interest at the Base Rate plus 2.50% per annum or
the reserve adjusted Euro-Dollar Rate plus 3.75% per annum; and (iv) the
Tranche D Loans will bear interest at the Base Rate plus 2.75% per annum or
the
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reserve adjusted Euro-Dollar Rate plus 4.00% per annum, in each case as
selected by the Company. Applicable interest rates on Tranche A Loans and the
New Revolving Facility and the fees payable under the New Revolving Facility
on letters of credit, will be reduced in increments of 0.25% per annum, up to
an aggregate of 0.50% per annum, after the New Term Loans have been reduced by
such amounts and if the Company meets certain financial tests to be agreed
upon among the Company and the Arrangers. Up to $30 million of the New
Revolving Facility will be available as a swingline facility and loans
outstanding under the swingline facility shall bear interest at the Base Rate
plus 1.00% per annum (subject to adjustment as described in the preceding
sentence). After the occurrence of a default under the New Credit Facility,
interest will accrue at the rate equal to the rate on loans bearing interest
at the rate determined by reference to the Base Rate plus an additional 2.00%
per annum. The Company will pay the issuing bank a fee of 0.25% per annum on
each standby letter of credit and each commercial letter of credit and will
pay the lenders under the New Credit Facility a fee equal to the margin on
Eurodollar Rate loans under the Revolving Credit Facility (the "Eurodollar
Margin") for standby letters of credit and a fee equal to the Eurodollar
Margin minus 1.00% per annum for commercial letters of credit. Each of these
fees will be calculated based on the amount available to be drawn under a
letter of credit. In addition, the Company will pay a commitment fee of 0.50%
per annum on the unused portions of the New Revolving Facility and for
purposes of calculating this fee, loans under the swingline facility shall not
be deemed to be outstanding. The New Credit Facility will require the Company
to enter into hedging agreements to limit its exposure to increases in
interest rates for a period of not less than two years after the Closing Date.
The New Credit Facility may be prepaid in whole or in part without premium or
penalty.
AMORTIZATION; PREPAYMENTS. The Tranche A Loans will mature six and one-
quarter years after the Closing and will be subject to amortization,
commencing on the nine month anniversary of the Closing in the amount of $7.5
million, and thereafter commencing on the first anniversary of the Closing on
a quarterly basis in aggregate annual amounts of $45 million in the second
year, $55 million in the third year, $65 million in the fourth year, $65
million in the fifth year, $60 million in the sixth year, and $13.75 million
on the sixth anniversary of the Closing and in the first quarter of the
seventh year. The Tranche B Loan will mature seven and one-half years after
the Closing and will be subject to amortization on a quarterly basis in
aggregate annual amounts of $1.6 million for the first six years and in the
seventh year payable in installments of $4.0 million in the first quarter and
$18 million in each of the last three quarters and in the eighth year payable
in installments of $22.7 million in the first quarter and $69.7 million in the
second quarter. The Tranche C Loans will mature eight and one-half years after
the Closing and will be subject to amortization on a quarterly basis in
aggregate annual amounts of $1.6 million for the first seven years and in the
eighth year payable in installments of $0.4 million in each of the first two
quarters and $25 million in each of the last two quarters and in the ninth
year payable in installments of $25 million in the first quarter and $73
million in the second quarter. The Tranche D Loans will mature nine and one-
quarter years after the Closing and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.6 million for the first
eight years and in the ninth year payable in installments of $0.4 million in
each of the first two quarters, and $29 million in the third quarter and $32
million in the last quarter and in the tenth year in an installment of $85.4
million in the first quarter. The New Revolving Facility will mature on the
same date as the Tranche A Loans. The Company will be required to reduce loans
outstanding under the New Revolving Facility to $85 million for a period of
not less than 30 consecutive days during the first 12-month period following
the Closing and to $75 million for a period of not less than 30 consecutive
days during each consecutive 12-month period thereafter. The Company will be
required to make certain prepayments, subject to certain exceptions, on the
New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in
the Loan Agreement) and with the proceeds from certain asset sales, issuances
of debt and equity securities and any pension plan reversion. Such prepayments
will be allocated pro rata between the Tranche A Loans, Tranche B Loans,
Tranche C Loans and the Tranche D Loans and to scheduled amortization payments
of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche
D Loans pro rata, provided that at the election of the Company mandatory
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<PAGE>
prepayments of Tranche A Loans made with Excess Land Proceeds (as defined in
the Loan Agreement) may be applied to the Tranche A Loans in forward order of
maturity up to $50 million. At the option of the Company, mandatory
prepayments on the Tranche B Loans, the Tranche C Loans and the Tranche D
Loans will be used to make an offer to repay such Loans and to the extent not
accepted by the holders of such loans (x) in the event such mandatory
prepayments are to be made from Excess Land Proceeds, such mandatory
prepayments not so accepted will be applied to the prepayment of the Tranche A
Loans and (y) in the event of all other mandatory prepayments, 50% of such
amount will be applied to reduce Tranche A Loans on a pro rata basis and the
remaining 50% may be retained by the Company.
GUARANTEES AND COLLATERAL. All subsidiaries of the Company will guarantee
the Company's obligations under the New Credit Facility. The Company's
obligations and the guarantees of its subsidiaries will be secured by a first
priority lien on all existing and after-acquired personal property of the
Company and its subsidiaries, including a pledge of the stock of all
subsidiaries of the Company and by first priority liens on all unencumbered
real property fee interests of the Company and its subsidiaries and the
Company and its subsidiaries will use their reasonable economic efforts to
provide the lenders with a first priority lien on all unencumbered leasehold
interests of the Company and its subsidiaries.
COVENANTS. The obligation of the lenders under the New Credit Facility to
advance funds is subject to the satisfaction of certain conditions customary
in agreements of this type. In addition, the Company will be subject to
certain customary affirmative and negative covenants in the New Credit
Facility, including, without limitation, covenants that restrict, subject to
specified exceptions, (i) the incurrence of additional indebtedness and other
obligations, (ii) mergers and acquisitions, (iii) asset sales, (iv) the
granting of liens, (v) prepayment or repurchase of other indebtedness, (vi)
engaging in transactions with affiliates, (vii) capital expenditures, (vii)
the making of investments, (ix) dividends and other payments with respect to
equity interests, or (x) rental payments. In addition, the New Credit Facility
will require that the Company maintain certain specified financial covenants,
including a minimum fixed charge coverage, a minimum operating cash flow, a
maximum ratio of total debt to operating cash flow and a minimum net worth.
EVENTS OF DEFAULT. The New Credit Facility also provides for customary
events of default. The occurrence of any of such events of default could
result in acceleration of the Company's obligations under the New Credit
Facility and foreclosure on the collateral securing such obligations, which
could have material adverse results to holders of the New Securities.
NEW SENIOR NOTES AND NEW SENIOR SUBORDINATED NOTES
As part of the financing required to consummate the Recapitalization and the
Merger, it is anticipated that the Company will offer $150 million aggregate
principal amount of its New Senior Notes and $350 million aggregate principal
amount of its New Senior Subordinated Notes (the New Senior Subordinated
Notes, together with the New Senior Notes, the "New Notes"). The New Senior
Notes will mature on the tenth anniversary of the Closing Date and the New
Senior Subordinated Notes will mature on the eleventh anniversary of the
Closing Date. The New Notes will bear interest, payable semiannually, at the
respective rates to be determined by the Company and the Investment Banks
prior to the consummation of the Recapitalization. The following is a summary
of the anticipated material terms and conditions of the New Notes. This
summary does not purport to be a complete description of the New Notes and is
subject to the detailed provisions of the indentures and various related
documents to be negotiated and entered into in connection with the New Notes.
It is anticipated that the New Notes will be redeemable, in whole or in
part, at the option of the Company, at any time on and after the fifth
anniversary of their issue date at the respective redemption prices,
representing a premium that declines ratably to par over an anticipated four-
year period, to be
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determined by the Company and the Investment Banks. In addition, it is
expected that on or prior to the third anniversary of the issue date of the
New Notes, the Company may, at its option, use the net cash proceeds of public
equity offerings to redeem up to an aggregate of 35% of the New Senior Notes
originally issued and up to 35% of the New Senior Subordinated Notes
originally issued, at the respective redemption prices to be determined by the
Company and the Investment Banks. Upon a change of control of the Company (as
defined in the indentures pursuant to which the New Notes will be issued),
each holder of New Notes will have the right to require the Company to
repurchase such holder's New Notes at a price equal to 101% of their principal
amount plus accrued and unpaid interest to the date of repurchase.
The New Senior Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with other senior unsecured
indebtedness of the Company. However, the New Senior Notes will be effectively
subordinated to all secured indebtedness of the Company, including
indebtedness under the New Credit Facility. The New Senior Notes will rank
senior in right of payment to all subordinated indebtedness of the Company,
including the New Senior Subordinated Notes. The New Senior Subordinated Notes
will be senior subordinated unsecured obligations of the Company and will be
subordinated in right of payment to all Senior Indebtedness (as defined in the
indentures) of the Company, including the Company's obligations under the New
Credit Facility and the New Senior Notes.
It is anticipated that the indenture pursuant to which the New Senior Notes
will be issued will contain certain covenants, including, but not limited to,
covenants with respect to the following:(i) limitation on restricted payments;
(ii) limitation on incurrences of additional indebtedness;(iii) limitation on
liens; (iv) limitation on asset sales; (v) limitation on dividend and other
payment restrictions affecting subsidiaries; (vi) limitation on transactions
with affiliates; (vii) limitation on subsidiary assets and indebtedness;
(viii) limitation on mergers and certain other transactions; and (ix)
limitation on preferred stock of subsidiaries. It is anticipated that the
indenture pursuant to which the New Senior Subordinated Notes will be issued
will contain the foregoing covenants, as well as a prohibition on incurrence
of any indebtedness subordinated to any other indebtedness but senior to the
New Senior Subordinated Notes.
NEW PREFERRED STOCK
As part of the financing required to consummate the Recapitalization and the
Merger, it is anticipated that the Company will offer $75 million liquidation
preference of New Preferred Stock. The following is a summary of the
anticipated material terms and conditions of the New Preferred Stock. This
summary does not purport to be a complete description of the New Preferred
Stock and is subject to the detailed provisions of the certificate of
designation and various related documents to be entered into in connection
with the New Preferred Stock.
The New Preferred Stock will be nonvoting, except as otherwise required by
law and except in certain circumstances described herein, including (i)
amending certain rights of the holders of the New Preferred Stock and (ii) the
issuance of any class of equity securities that ranks on parity with or senior
to the New Preferred Stock. In addition, if the Company (i) fails to pay
dividends in respect of more than six quarters in the aggregate (or if after
the fifth anniversary of the issue date such dividends are not paid in cash),
(ii) fails to discharge any redemption obligation, or (iii) fails to make a
required change of control offer, holders of a majority of the outstanding
shares of New Preferred Stock, voting as a class, will be entitled to elect
two additional members to the Company's Board of Directors.
The New Preferred Stock will, with respect to dividend rights, rights on
liquidation and winding-up and dissolution of the Company, rank, subject to
certain conditions, (i) senior to (a) all classes of Common Stock of the
Company and (b) each other class of capital stock or series of preferred stock
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issued by the Company after the issuance of the New Preferred Stock the terms
of which specifically provide that such class or series will rank junior to
the New Preferred Stock or junior or on parity with any class of Common Stock
or which do not specify their rank, (ii) on parity with the Series I Preferred
Stock and each other class of capital stock or series of preferred stock
issued by the Company after the issuance of the New Preferred Stock the terms
of which specifically provide that such class or series will rank on parity
with the New Preferred Stock as to dividend distributions and distributions
upon liquidation, winding-up and dissolution of the Company and (iii) junior
to each other class of capital stock or other series of preferred stock issued
by the Company after the issuance of the New Preferred Stock the terms of
which specifically provide that such series will rank senior to the New
Preferred Stock.
Dividends on the New Preferred Stock will accrue from the date of issuance
and will be payable quarterly at a rate per annum to be determined by the
Company and the Investment Banks. The Company, at its option, may pay
dividends on any dividend payment date occurring on or before the fifth
anniversary of the issue date by adding an amount equal to such dividends to
the then effective liquidation preference of the New Preferred Stock. The New
Credit Facility and the indentures governing the Notes will restrict the
payment of cash dividends on the New Preferred Stock.
The New Preferred Stock will be redeemable, subject to certain conditions,
at the option of the Company, in whole at any time or in part from time to
time on or after the fifth anniversary of the issue date at the redemption
prices to be determined by the Company and the Investment Banks, plus, without
duplication, an amount equal to accrued and unpaid dividends to the date of
redemption. In addition, on or prior to the third anniversary of the Closing
Date, the Company may, at its option and subject to certain conditions, use
the net cash proceeds of one or more public equity offerings to redeem up to
an aggregate of 35% of the shares of New Preferred Stock originally issued at
a redemption price to be determined by the Company and the Investment Banks,
plus, without duplication, an amount equal to accrued and unpaid dividends to
the date of redemption. The Company will be required, subject to certain
conditions, to redeem all of the shares of New Preferred Stock outstanding on
the twelfth anniversary of the Closing Date at a redemption price equal to
100% of the then effective liquidation preference thereof, plus, without
duplication, an amount equal to accrued and unpaid dividends to the date of
redemption.
Upon the occurrence of a change of control (as defined), the Company will,
subject to certain conditions, offer to purchase all outstanding shares of New
Preferred Stock at a price equal to 101% of the then effective liquidation
preference thereof, plus, without duplication, an amount equal to accrued and
unpaid dividends to the date of purchase. The New Credit Facility and the
indentures governing the New Notes will limit the ability of the Company to
make an offer to purchase the New Preferred Stock in the event of a change of
control.
NEW EXCHANGE DEBENTURES
Subject to certain conditions, the New Preferred Stock will be exchangeable
in whole, but not in part, at the option of the Company, on any dividend
payment date, for the Company's Subordinated Exchange Debentures due 2008
(including any such securities paid in lieu of cash interest, as described
herein, the "New Exchange Debentures"). Interest on the New Exchange
Debentures will be payable at a rate to be determined by the Company and the
Investment Banks and will accrue from the date of exchange thereof. Interest
on the New Exchange Debentures will be payable semi-annually in cash or, at
the option of the Company, on or prior to the fifth anniversary of the Closing
Date, in additional New Exchange Debentures, commencing on the first such date
after the exchange of the New Preferred Stock for the New Exchange Debentures.
The New Exchange Debentures will mature on the twelfth anniversary of the
Closing Date and are, subject to certain conditions, redeemable, at the option
of the Company, in whole or in part, on or after the fifth anniversary of the
Closing Date, at the redemption prices to be determined by the Company and the
Investment Banks, plus accrued and
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<PAGE>
unpaid interest to the date of redemption. In addition, on or prior to the
third anniversary of the Closing Date, the Company may, at its option and
subject to certain conditions, use the net cash proceeds of one or more public
equity offerings to redeem up to an aggregate of 35% of the principal amount
of the New Exchange Debentures originally issued.
The New Exchange Debentures will be subordinated to all existing and future
Senior Indebtedness of the Company, including the New Credit Facility and the
New Notes. In addition, the New Exchange Debentures will be effectively
subordinated to all existing and future liabilities, including indebtedness,
of the subsidiaries of the Company.
In the event of a change of control, the Company will, subject to certain
conditions, offer to purchase all outstanding New Exchange Debentures at a
purchase price of 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. The New Credit Facility and the
indentures governing the New Notes will limit the Company's ability to make an
offer to purchase the New Exchange Debentures in the event of a change of
control.
75
<PAGE>
MANAGEMENT AFTER RECAPITALIZATION AND MERGER
The following table sets forth certain information with respect to the
persons who are expected to serve as the executive officers and directors of
the Company following the consummation of the Recapitalization and Merger.
Following the Recapitalization, the Board of Directors will be comprised of
seven directors, including two designees of the Smith Group and two designees
of the Yucaipa Group. See "Certain Related Agreements--Standstill Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Jeffrey P. Smith....... 46 Chairman of the Board
Ronald W. Burkle....... 43 Chief Executive Officer, Director
Allen R. Rowland....... 51 President, Chief Operating Officer, Director
Robert D. Bolinder..... 65 Executive Vice President--Corporate Planning and
Development
Matthew G. Tezak....... 40 Senior Vice President, Chief Financial Officer
J. Craig Gilbert....... 48 Senior Vice President, Regional Manager--
Intermountain Region
James W. Hallsey....... 53 Senior Vice President, Regional Manager--Southwest
Region
Richard C. Bylski...... 57 Senior Vice President, Human Resources
Michael C. Frei........ 50 Senior Vice President, General Counsel and
Secretary
Kenneth A. Martindale.. 36 Senior Vice President, Marketing
Fred F. Urbanek........ 60 Senior Vice President, Facility Engineering
John T. Standley....... 32 Senior Vice President, Administration
Fred L. Smith.......... 48 Director
Linda McLoughlin Figel. 32 Director
Bruce Karatz........... 50 Director
Bertram R. Zweig....... 61 Director
</TABLE>
JEFFREY P. SMITH has been a director of the Company since 1971. He has been
Chairman and Chief Executive Officer of the Company since 1988. He served as
Chief Operating Officer and President of the Company from 1984 to 1988.
RONALD W. BURKLE has been the Chairman of the Board of Smitty's and a
director of Smitty's Super Valu since 1994 and Chairman of the Board of
Smitty's Super Valu since October 1995. It is intended that Mr. Burkle will be
appointed as the Company's Chief Executive Officer in connection with the
Recapitalization and Merger. Mr. Burkle co-founded Yucaipa in 1986 and has
served as a director of Ralphs Grocery Company since 1995. Mr. Burkle served
as Chairman of the Board of Ralphs Grocery Company from 1995 to January 1996
and as Chief Executive Officer and a director of its predecessor, Food 4 Less
Supermarkets, Inc. since 1987. Mr. Burkle served as Chief Executive Officer
and a director of Dominick's Supermarkets, Inc. from 1995 to 1996 and
currently serves as its Chairman of the Board. From 1986 to 1988, Mr. Burkle
was Chairman and Chief Executive Officer of Jurgensen's, a Southern California
gourmet food retailer. Mr. Burkle has served as a director of Kaufman and
Broad Home Corporation since March 1995.
ALLEN R. ROWLAND has been President and Chief Operating Officer since
joining the Company in January 1996. Prior to that time, from 1989 to 1996 he
served as a Senior Vice President/Regional Manager of Albertson's Inc. From
1982 to 1989, he was a Vice President/Division Manager with the Florida and
Texas Divisions of Albertson's, Inc.
ROBERT D. BOLINDER has been a director of Smith's since 1985. He has served
as Executive Vice President, Corporate Planning and Development of Smith's
since 1993. He served as Executive Vice President and Chief Financial Officer
of Smith's from 1988 to 1993, after serving four years as a supermarket
industry management consultant. He is also a director of Hannaford Bros.
Company, Inc., a regional supermarket chain, and Idaho Power Company, a public
utility company. Prior to 1984, Mr. Bolinder was Vice Chairman and a director
of Albertson's, Inc. for many years.
76
<PAGE>
MATTHEW G. TEZAK has been Senior Vice President and Chief Financial Officer
of Smith's since 1993. He served as Senior Vice President, Finance and
Treasurer from 1992 to 1993 and Vice President, Finance and Treasurer from
1987 to 1992. Mr. Tezak, a certified public accountant, joined Smith's in 1979
as Assistant Controller.
J. CRAIG GILBERT has served as Senior Vice President, Regional Manager,
Intermountain Region of Smith's since 1993. From 1992 to 1993 he served as
Senior Vice President, Regional Manager, Southwest Region. From 1991 to 1992
he was Vice President, Regional Manager, Southwest Region and from 1985 to
1991 he served as Vice President, Sales and Merchandising, Intermountain
Region.
JAMES W. HALLSEY has served as Senior Vice President, Regional Manager,
Southwest Region since 1995. He rejoined Smith's in 1994 as Senior Vice
President, Special Projects after serving most of 1994 as Senior Vice
President at McKesson Drug Company, a pharmacy company. In 1993, Mr. Hallsey
retired as a director of Smith's (a capacity in which he served since 1985)
and Senior Vice President, Corporate Nonfoods Director (a capacity in which he
served since 1992). From 1980 to 1992 he served as Vice President, Corporate
Nonfoods Director of the Company.
RICHARD C. BYLSKI has been Senior Vice President, Human Resources of Smith's
since 1992. He served as Vice President, Human Resources of Smith's from 1985
to 1992.
MICHAEL C. FREI joined Smith's in 1990 as Senior Vice President, General
Counsel and Secretary. Prior to that time, Mr. Frei served as Vice President
and General Counsel of Price Development Company, a commercial real estate
developer, since 1981.
KENNETH A. MARTINDALE has served as Senior Vice President, Marketing of
Smith's since 1995. He served as Vice President, Merchandising, California
Region from 1991 to 1995. From 1984 to 1991, he served as a district manager
in the Intermountain Region.
FRED F. URBANEK has been Senior Vice President, Facility Engineering of
Smith's since 1992. He served as Vice President, Facility Engineering of
Smith's from 1985 to 1992.
JOHN T. STANDLEY is the Chief Financial Officer, Vice President and
Assistant Secretary of Smitty's and SSV, and upon consummation of the Merger,
will be the Senior Vice President, Administration of the Company. Mr. Standley
joined Smitty's in December 1994. Prior to that time, Mr. Standley was Vice
President of Finance for Food 4 Less Supermarkets, Inc. from 1991 to 1994.
Prior to 1991, he was a manager at Arthur Andersen & Company.
FRED L. SMITH has been a director of the Company since 1968. Since 1988, he
has been President of Fred Smith's Honda Automobiles of Palm Springs, an auto
dealership, prior to which time he was a private investor. Since 1989, he has
also been President of Fred Smith's Jaguar/Rolls Royce of Rancho Mirage, an
auto dealership.
LINDA MCLOUGHLIN FIGEL joined Yucaipa in 1989 and became a general partner
in 1991. Prior to that time, she was employed by Bankers Trust Company in its
Structured Finance Group.
BRUCE KARATZ has been the President, Chief Executive Officer and a director
of Kaufman and Broad Home Corporation since 1986 and its Chairman of the Board
since July 1993. 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.
BERTRAM R. ZWEIG is a partner in the Los Angeles office of Jones, Day,
Reavis & Pogue. Mr. Zweig was with Jones, Day from 1962 to 1978, and rejoined
the firm in 1995. Between August 1992 and June 1995, Mr. Zweig was a partner
with the law firm of Graham and James, and from January 1988 to July 1992 he
was a partner with the law firm of Stroock & Stroock & Lavan. He is a member
of the Board of Directors of Wedbush Corporation, the parent of Wedbush Morgan
Securities, Inc., a regional investment banking firm in Los Angeles. Mr. Zweig
is a member of the Board of Directors of Aquatic Water Systems Incorporated.
Jeffrey Smith and Fred Smith are brothers.
77
<PAGE>
The Company has nominated for election at the Stockholders' Meeting each of
(i) Jeffrey Smith, Ronald Burkle and Allen Rowland for a one-year term
expiring at the Company's 1997 Annual Meeting of Stockholders, (ii) Fred Smith
and Linda McLoughlin Figel for a two-year term expiring at the Company's 1998
Annual Meeting of Stockholders, and (iii) Bruce Karatz and Bertram R. Zweig
for a three-year term expiring at the Company's 1999 Annual Meeting of
Stockholders.
AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION
DESCRIPTION OF AMENDMENTS
In connection with the consummation of the Recapitalization, the Company's
Board of Directors proposes to adopt the Amended and Restated Certificate of
Incorporation. The Amended and Restated Certificate of Incorporation includes
among other things the following changes from the Company's Certificate of
Incorporation as in effect as of the date hereof.
(a) The authorization of 20,000,000 shares of Class C Common Stock, par
value $.01 per share, of the Company;
(b) The reduction in the number of directors to seven and the
classification of the Board of Directors into three classes of directors
serving staggered three-year terms; and
(c) The amendment of certain redemption and voting provisions with
respect to the Series I Preferred Stock.
CLASS C COMMON STOCK. The Class C Common Stock will be issuable to the
holders of the Warrants which are to be issued to Yucaipa pursuant to the
Warrant Agreement. See "Certain Related Agreements--Warrant Agreement." The
Class C Common Stock will have all 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 such stock is owned by an "Original Class C
Stockholder" (as such term is defined in the Amended and Restated Certificate
of Incorporation). Upon any transfer of shares of Class C Common Stock by an
Original Class C Stockholder to a third party other than another Original
Class C Stockholder, the transferee of such Class C Stockholder may convert
such shares of Class C Common Stock into an equal number of shares of Class B
Common Stock. No conversion of Class C Common Stock into Class B Common Stock
will be permitted for shares of Class C Common Stock held by an Original Class
C Stockholder or any party bound by the terms of the Standstill Agreement as a
member of the Yucaipa Group.
CLASSIFIED BOARD OF DIRECTORS. The Amended and Restated Certificate of
Incorporation will provide that upon the adoption thereof the full Board of
Directors will be comprised of seven directors and without the unanimous
approval of the directors then in office the number of directors may not be
altered. The Board of Directors will be divided into three classes as nearly
equal in number as possible, with the term of office of one class expiring
each year and each director serving for a term ending at the third annual
meeting of stockholders of the Company following the annual meeting at which
such director was elected, except for the directors to be elected at the
Stockholders' Meeting, who shall have the term for which such directors are
elected at such meeting.
Any increase in the number of directors or vacancy on the Board of Directors
may be filled, subject to the rights of any holders of any series of Preferred
Stock to elect additional directors, only by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board. Any director elected in accordance with the preceding
sentence will hold office for the remainder of the full term of the class of
directors in which the new directorship was created or such vacancy occurred.
SERIES I PREFERRED STOCK AMENDMENTS. The Amended and Restated Certificate of
Incorporation will include certain provisions with respect to the Series I
Preferred Stock providing for:
78
<PAGE>
(i) the elimination for a five-year period of the annual mandatory redemption
of original outstanding shares of Series I Preferred Stock, (ii) the
restriction for a two-year period of the optional redemption of shares of
Series I Preferred Stock, and (iii) the addition of transfer or sale
restrictions which reduce the number of allocated votes per share of Series I
Preferred Stock from ten votes to one vote per share in the event of transfers
or sales not made to a Permitted Series I Transferee (as defined below). A
"Permitted Series I Transferee" is defined generally as either (x) a family
member or an affiliate of the holder of Series I Preferred Stock, (y) any
person to whom shares of Series I Preferred Stock were originally issued, or
(z) any person which is an original party to the Standstill Agreement.
The Company is seeking stockholders' approval and adoption of the Amended
and Restated Certificate of Incorporation at the Stockholders' Meeting. The
Offer does not constitute a solicitation of proxies for the Stockholders'
Meeting. Such solicitation by the Company will be made only pursuant to the
Proxy Statement. A copy of the form of the Amended and Restated Certificate of
Incorporation has been filed as an annex to the Proxy Statement.
ANTITAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION PROVISIONS
GENERAL. Certain provisions of the Company's Certificate of Incorporation
and the By-laws could have an antitakeover effect. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions described below which may involve an actual or threatened change
of control of the Company. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover of the
Company that does not contemplate the acquisition of all of its outstanding
shares or an unsolicited proposal for the restructuring or sale of all or part
of the Company. The provisions are also intended to discourage certain tactics
that may be used in proxy fights. The Board of Directors believes that as a
general rule such takeover proposals would not be in the best interests of the
Company and its stockholders.
CLASSIFIED BOARD. The Amended and Restated Certificate of Incorporation will
provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-
third of the Board of Directors will be elected each year. The overall effect
of the provisions in the Amended and Restated Certificate of Incorporation
with respect to the staggered Board may be to render more difficult a change
in control of the Company or the removal of incumbent management. In addition,
under Delaware law, stockholders in a company with a classified board of
directors may only remove directors for cause.
OWNERSHIP OF SHARES BY SMITH GROUP AND YUCAIPA GROUP. Upon consummation of
the Recapitalization and the Merger, (i) 24.5% of the outstanding shares of
Common Stock and 31.6% of the outstanding shares of Series I Preferred Stock
(and 41.8% of the aggregate number of votes eligible to be cast at any meeting
of the Company's stockholders) will be beneficially owned by the Smith Group
and its affiliates and (ii) approximately 13.6% of the outstanding shares of
Class B Common Stock (and approximately 1.3% of the aggregate number of votes
eligible to be cast at any meeting of the Company's stockholders) will be
beneficially owned by the Yucaipa Group and its affiliates. Pursuant to the
Standstill Agreement, each of the Smith Group and the Yucaipa Group have
agreed among other things to vote their shares in favor of director nominees
designated by the other Group. As a result of the ownership structure of the
Company and the contractual rights described above, the voting and management
control of the Company will be highly concentrated. The Smith Group is
expected to continue to have effective control of the Company and, subject to
compliance with the restrictions contained in the Financing Agreements, is
expected to continue to have the ability to direct the actions of the Company
with respect to such matters as the payment of dividends, material
acquisitions and dispositions and other extraordinary corporate transactions.
79
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting and other informational requirements
of the Exchange Act and the rules and regulations promulgated thereunder, and
in accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at its offices at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, 500 West Madison Street, CitiCorp Center, Suite 1400, Chicago, Illinois
60661 and 5670 Wilshire Boulevard, Suite 500, Los Angeles, California 90036-
3648. Copies of such materials can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, material filed by the Company may be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company has filed an Issuer Tender Offer on Schedule 13E-4, which
includes this Offer to Purchase, as well as its Proxy Statement, with the
Commission. Statements contained in this Offer to Purchase as to the contents
of any contract or other document filed as an exhibit to the Company's Issuer
Tender Offer on Schedule 13E-4 are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed therewith as an exhibit.
MISCELLANEOUS
The Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Shares residing in any jurisdiction in which the making
of the Offer or the acceptance thereof would not be in compliance with the
laws of such jurisdiction. The Company is not aware of any jurisdiction where
the making of the Offer or the tender of Shares would not be in compliance
with applicable law. If the Company becomes aware of any jurisdiction where
the making of the Offer or the tender of Shares is not in compliance with any
applicable law, the Company will make a good faith effort to comply with such
law. If after such good faith effort the Company cannot comply with such law,
the Offer will not be made to (nor will tenders be accepted from or on behalf
of) the holders of Shares residing in such jurisdiction. In any jurisdiction
in which the securities, blue sky or other laws require the Offer to be made
by a licensed broker or dealer, the Offer will be deemed to be made on behalf
of the Company by the Dealer Managers one or more registered brokers or
dealers licensed under the laws of such jurisdiction. The Offer is not being
made to, nor will the Company accept tenders from or on behalf of, holders of
Shares in any jurisdiction in which the Offer or the acceptance thereof would
not be in compliance with the securities or blue sky or other laws of such
jurisdiction.
Smith's Food & Drug Centers, Inc.
April 25, 1996
80
<PAGE>
INDEX TO AUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors (Ernst & Young LLP)......................... F-2
Consolidated balance sheets at December 30, 1995 and December 31, 1994..... F-3
Consolidated statements of income for the years ended December 30, 1995,
December 31, 1994 and January 1, 1994..................................... F-4
Consolidated statements of common stockholders' equity for the years ended
December 30, 1995, December 31, 1994 and January 1, 1994.................. F-5
Consolidated statements of cash flows for the years ended December 30,
1995, December 31, 1994 and January 1, 1994............................... F-6
Notes to consolidated financial statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the 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 30, 1995 and December 31,
1994, 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 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our 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 30, 1995 and December 31,
1994, and the consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended December 30, 1995, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
January 29, 1996
F-2
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 16,079 $ 14,188
Rebates and accounts receivable.................... 23,802 25,596
Inventories........................................ 394,982 389,564
Prepaid expenses and deposits...................... 21,255 15,858
Deferred tax assets................................ 23,900 1,400
Assets held for sale............................... 125,000
---------- ----------
Total Current Assets............................. 605,018 446,606
Property and Equipment
Land............................................... 276,626 303,701
Buildings.......................................... 610,049 619,056
Leasehold improvements............................. 55,830 42,369
Fixtures and equipment............................. 509,524 589,480
---------- ----------
1,452,029 1,554,606
Less allowances for depreciation and amortization.. 390,933 364,741
---------- ----------
1,061,096 1,189,865
Other Assets........................................ 20,066 16,996
---------- ----------
$1,686,180 $1,653,467
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable............................. $ 214,152 $ 235,843
Accrued sales and other taxes...................... 50,749 44,379
Accrued payroll and related benefits............... 97,455 84,083
Current maturities of long-term debt............... 20,932 19,011
Current maturities of Redeemable Preferred Stock... 1,008 1,017
Accrued restructuring costs........................ 58,000
---------- ----------
Total Current Liabilities......................... 442,296 384,333
Long-term debt, less current maturities............ 725,253 699,882
Accrued restructuring costs, less current portion.. 40,000
Deferred income taxes.............................. 58,600 89,500
Redeemable Preferred Stock, less current maturi-
ties.............................................. 3,311 4,410
Common Stockholders' Equity
Convertible Class A Common Stock (shares issued
and outstanding, 11,613,043 in 1995 and
12,140,317 in 1994).............................. 116 121
Class B Common Stock (shares issued, 18,348,968 in
1995 and 17,821,694 in 1994)..................... 183 178
Additional paid-in capital......................... 285,236 285,592
Retained earnings.................................. 238,027 293,456
---------- ----------
523,562 579,347
Less cost of Common Stock in the treasury
(4,890,302 shares in 1995 and 4,772,822 shares in
1994)............................................. 106,842 104,005
---------- ----------
416,720 475,342
---------- ----------
$1,686,180 $1,653,467
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Net sales................................. $3,083,737 $2,981,359 $2,807,165
Cost of goods sold........................ 2,386,707 2,312,228 2,169,987
---------- ---------- ----------
697,030 669,131 637,178
Expenses:
Operating, selling and administrative.... 461,401 440,844 430,258
Depreciation and amortization............ 104,963 94,491 82,173
Interest................................. 60,478 53,715 44,627
Restructuring charges.................... 140,000
---------- ---------- ----------
766,842 589,050 557,058
---------- ---------- ----------
Income (loss) before income taxes......... (69,812) 80,081 80,120
Income taxes.............................. (29,300) 31,300 34,300
---------- ---------- ----------
Net income (loss)......................... $ (40,512) $ 48,781 $ 45,820
---------- ---------- ----------
Net income (loss) per share of Common
Stock.................................... $ (1.62) $ 1.73 $ 1.52
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
----------------- ---------------- ADDITIONAL
NUMBER OF PAR NUMBER OF PAR PAID-IN RETAINED TREASURY
SHARES VALUE SHARES VALUE CAPITAL EARNINGS STOCK TOTAL
---------- ----- ---------- ----- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 3,
1993................... 13,403,132 $134 16,558,879 $165 $285,980 $229,110 $515,389
Net income for 1993.... 45,820 45,820
Conversion of shares
from Class A to Class
B..................... (785,687) (8) 785,687 8
Purchase of Class B
Common Stock for the
treasury.............. $ (11,074) (11,074)
Shares sold to the Em-
ployee Stock Profit
Sharing Plan.......... (212) 3,237 3,025
Shares sold under the
Employee Stock Pur-
chase Plan............ (771) 4,853 4,082
Cash dividends--$.52
per share............. (15,530) (15,530)
Other.................. 485 485
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at January 1,
1994................... 12,617,445 126 17,344,566 173 285,482 259,400 (2,984) 542,197
Net income for 1994.... 48,781 48,781
Conversion of shares
from Class A to Class
B..................... (477,128) (5) 477,128 5
Purchase of Class B
Common Stock for the
treasury.............. (109,239) (109,239)
Shares sold to the Em-
ployee Stock Profit
Sharing Plan.......... 143 1,505 1,648
Shares sold under the
Employee Stock Pur-
chase Plan............ (668) 6,713 6,045
Cash dividends--$.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 Em-
ployee Stock Profit
Sharing Plan.......... 2 108 110
Shares sold under the
Employee Stock Pur-
chase 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
========== ==== ========== ==== ======== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................ $ (40,512) $ 48,781 $ 45,820
Adjustments to reconcile net income
(loss) to cash provided by operating ac-
tivities:
Depreciation and amortization........... 104,963 94,491 82,173
Deferred income taxes................... (53,400) 10,500 15,400
Restructuring charges................... 140,000
Other................................... 568 635 485
Changes in operating assets and liabili-
ties:
Rebates and accounts receivable......... 1,794 (4,758) (4,038)
Inventories............................. (5,418) (11,625) (36,523)
Prepaid expenses and deposits........... (5,397) (1,324) (518)
Trade accounts payable.................. (21,691) 50,618 1,119
Accrued sales and other taxes........... 6,370 5,616 6,625
Accrued payroll and related benefits.... 13,372 10,616 8,007
--------- --------- ---------
Cash provided by operating activities.... 140,649 203,550 118,550
Investing Activities
Additions to property and equipment..... (149,035) (146,676) (322,301)
Sale/leaseback arrangements and other
property and equipment sales........... 5,841 20,949 159,137
Other................................... (3,070) (1,649) (1,258)
--------- --------- ---------
Cash used in investing activities........ (146,264) (127,376) (164,422)
Financing Activities
Additions to long-term debt............. 45,978 27,000 262,000
Payments on long-term debt.............. (18,686) (33,594) (149,197)
Redemptions of Redeemable Preferred
Stock.................................. (1,108) (1,042) (1,039)
Purchases of Treasury Stock............. (9,039) (109,239) (11,074)
Proceeds from sales of Treasury Stock... 5,278 7,693 7,107
Payment of dividends.................... (14,917) (14,725) (15,530)
--------- --------- ---------
Cash provided by (used in) financing ac-
tivities................................ 7,506 (123,907) 92,267
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 1,891 (47,733) 46,395
Cash and cash equivalents at beginning of
year.................................... 14,188 61,921 15,526
========= ========= =========
Cash and cash equivalents at end of year. $ 16,079 $ 14,188 $ 61,921
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
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 95% of inventories in 1995
and 1994 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 $8.1 million in 1995 and $4.1 million in 1994. The
pretax LIFO charge was $4.0 million in 1995, $2.5 million in 1994, and $1.6
million in 1993.
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.
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. Claims expense is recorded through the accrual of claims reserves
based on estimates of ultimate claim costs including claims incurred but not
reported. The liabilities for accrued insurance claims were $31.8 million and
$25.3 million at the end of 1995 and 1994, 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
F-7
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $1.4 million in 1995, $5.8 million in 1994 and $14.5 million in
1993) amounted to $60.7 million in 1995, $54.0 million in 1994 and $39.8
million in 1993.
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
25,030,882 in 1995, 28,176,907 in 1994 and 30,238,811 in 1993. Common Stock
equivalents in the form of stock options are excluded from the weighted
average number of common shares in 1995 due to the net loss.
ADOPTION OF ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Due to
the nature of the Company's operations and the number of estimates required to
assess the impact of Statement 121, the financial statement impact of adoption
has not yet been determined.
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 1993 and 1994 financial
statements to conform with the 1995 presentation.
F-8
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--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 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
ALLOWANCES FOR CURRENT YEAR
DEPRECIATION DEPRECIATION
COST AND AMORTIZATION NET BOOK VALUE AND AMORTIZATION
---------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
December 30, 1995
Land.................. $ 276,626 $ 276,626
Buildings............. 610,049 $108,985 501,064 $ 19,907
Leasehold improve-
ments................ 55,830 12,556 43,274 2,970
Fixtures and equip-
ment................. 509,524 269,392 240,132 82,086
---------- -------- ---------- --------
$1,452,029 $390,933 $1,061,096 $104,963
========== ======== ========== ========
December 31, 1994
Land.................. $ 303,701 $ 303,701
Buildings............. 619,056 $ 92,542 526,514 $ 18,334
Leasehold improve-
ments................ 42,369 10,122 32,247 1,842
Fixtures and equip-
ment................. 589,480 262,077 327,403 74,315
---------- -------- ---------- --------
$1,554,606 $364,741 $1,189,865 $ 94,491
========== ======== ========== ========
</TABLE>
NOTE C--LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Mortgage notes, collateralized by property and
equipment with a cost of $420.7 million in
1995 and $413.0 million in 1994, due through
2011 with interest at an average rate of 9.68%
in 1995 and 9.73% in 1994..................... $254,385 $ 270,082
Unsecured notes, due in 2002 through 2015 with
varying annual installments starting in 2000
which accrue interest at an average rate of
7.68% in 1995 and 1994........................ 410,000 410,000
Revolving credit bank loans.................... 68,000 27,000
Industrial revenue bonds, collateralized by
property and equipment with a cost of $11.7
million in 1995 and $11.6 million in 1994 due
in 2000 through 2010 plus interest at an aver-
age rate of 7.44% in 1995 and 7.47% in 1994... 6,308 6,597
Other.......................................... 7,492 5,214
-------- ---------
746,185 718,893
Less current maturities........................ 20,932 19,011
-------- ---------
$725,253 $699,882
======== =========
</TABLE>
F-9
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest rates on the revolving credit bank loans averaged 6.06% in 1995 and
5.89% in 1994. The agreements are reviewed annually with the banks, at which
time the date each installment is due is generally extended one year. At
December 30, 1995, the Company had unused lines of credit related to unsecured
revolving credit bank loans of $60.0 million.
The Company's loan agreements contain provisions which require the Company
to maintain a specified level of consolidated net worth, fixed charge coverage
and ratio of debt to net worth.
Maturities of the Company's long-term debt for the five fiscal years
succeeding December 30, 1995 are approximately $20.9 million in 1996, $22.1
million in 1997, $23.7 million in 1998, $45.4 million in 1999 and $28.9
million in 2000.
The amounts classified as revolving credit bank loans approximate their fair
value. 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 D--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 12,956,747 shares and 16,281,777 shares
were issued and outstanding in 1995 and 1994, respectively. The redeemable
Series I Preferred Stock has no dividend requirement.
All shares of the Company's Series I Preferred Stock are subject to
redemption at any time 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 Series I Preferred Stock are
approximately $1.0 million each year 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 Class A Common Stock or Class B Common Stock. Each share of Series
I Preferred Stock is entitled to ten votes. Series I Preferred Stock is stated
at redemption value in the balance sheet.
The amount included in the balance sheet for Series I Preferred Stock
approximates its fair value.
NOTE E--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. At December 30, 1995 there were 20,000,000 shares of $.01
per share par value Class A Common Stock and 100,000,000 shares of $.01 per
share par value Class B Common Stock authorized.
F-10
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--INCOME TAXES
Income tax expense (benefit) consists of the following (dollar amounts in
thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Current:
Federal............................... $ 20,220 $17,211 $15,715
State................................. 3,880 3,589 3,185
-------- ------- -------
24,100 20,800 18,900
Deferred:
Federal............................... (46,681) 9,247 13,012
State................................. ( 6,719) 1,253 2,388
-------- ------- -------
(53,400) 10,500 15,400
-------- ------- -------
$(29,300) $31,300 $34,300
======== ======= =======
</TABLE>
Income tax expense included a charge of $1.95 million in 1993 resulting from
applying the increased federal tax rate to deferred tax items. Cash
disbursements for income taxes were $19.2 million in 1995, $21.7 million in
1994 and $17.3 million in 1993.
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:
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Statutory federal income tax rate...... (35.0%) 35.0% 35.0%
State income tax rate, net of federal
income tax effect..................... (4.3) 4.7 5.2
Effect of income tax rate changes on
deferred taxes........................ (3.6) 2.4
Other.................................. .9 (.6) .2
----- ---- ----
(42.0%) 39.1% 42.8%
===== ==== ====
</TABLE>
F-11
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effect of temporary differences that give rise to deferred tax balances
are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................... $ 81,008 $ 98,186
Other............................................ 13,572 11,935
-------- --------
94,580 110,121
Deferred tax assets:
Accrued restructuring costs...................... (33,305)
Accrued insurance claims......................... (12,271) (10,126)
Rent............................................. (8,138) (6,006)
Other............................................ (6,166) (5,889)
-------- --------
(59,880) (22,021)
-------- --------
34,700 88,100
Net current deferred tax assets.................... 23,900 1,400
-------- --------
Net non-current deferred tax liabilities........... $ 58,600 $ 89,500
======== ========
</TABLE>
NOTE G--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related fair values of the Company's financial
instruments are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 31, 1994
----------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 16,079 $ 16,079 $ 14,188 $ 14,188
Long-term debt........................ 746,185 803,613 718,893 680,460
Redeemable Preferred Stock............ 4,319 4,319 5,427 5,427
</TABLE>
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 H--LEASE 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
(dollar amounts in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Minimum rentals......................... $46,460 $39,852 $19,539
Contingent rentals...................... 235 293 281
------- ------- -------
46,695 40,145 19,820
Less sublease rental income............. 7,334 5,953 5,506
------- ------- -------
$39,361 $34,192 $14,314
======= ======= =======
</TABLE>
F-12
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 30, 1995, 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 (dollar amounts in thousands):
<TABLE>
<CAPTION>
MINIMUM LESS
RENTAL SUBLEASE
PAYMENTS RENTALS TOTAL
-------- -------- --------
<S> <C> <C> <C>
1996.............................................. $ 48,781 $ 16,419 $ 32,362
1997.............................................. 40,223 16,932 23,291
1998.............................................. 43,759 16,934 26,825
1999.............................................. 46,205 16,600 29,605
2000.............................................. 45,998 16,433 29,565
Thereafter........................................ 697,832 201,864 495,968
-------- -------- --------
$922,798 $285,182 $637,616
======== ======== ========
</TABLE>
At December 30, 1995 the Company had contract commitments of approximately
$3.6 million for future construction and a contract for information technology
services requiring payments of approximately $19.6 million in 1996, $21.3
million in 1997, $24.1 million in 1998, $26.7 million in 1999 and $35.0
million in 2000.
NOTE I--EMPLOYEE STOCK PLANS
In 1993 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, $1.6 million
in 1994 and $3.0 million in 1993.
In 1993 the Company established 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 282,485 shares, 309,553 shares and 180,950 shares from the
Treasury during 1995, 1994 and 1993, respectively.
F-13
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 890,671 shares and 973,419 shares at the end of 1995
and 1994, respectively. The options may be either incentive stock options or
non-qualified stock options. Stock options granted to key employees and
options outstanding are as follows:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
------------ ---------
<S> <C> <C>
Balance at January 3, 1993........................... $19.00 1,107,500
Granted............................................ 19.00 622,000
Forfeited.......................................... 19.00 (232,000)
------ ---------
Balance at January 1, 1994........................... 19.00 1,497,500
Granted............................................ 19.00 81,000
Forfeited.......................................... 19.00 (33,000)
------ ---------
Balance at December 31, 1994......................... 19.00 1,545,500
Granted............................................ 19.00 317,000
Forfeited.......................................... 19.00 (246,000)
------ ---------
Balance at December 30, 1995......................... $19.00 1,616,500
====== =========
</TABLE>
The options are exercisable as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Options exercisable in the future
1997............................................................. 25,000
1999............................................................. 453,000
2000............................................................. 130,000
2001............................................................. 207,000
2002............................................................. 64,500
2003............................................................. 528,000
2004............................................................. 11,000
2005............................................................. 138,000
---------
1,556,500
Options currently exercisable.................................... 60,000
---------
1,616,500
=========
</TABLE>
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 amount charged to operations
in 1995, 1994 and 1993 was immaterial.
NOTE J--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
F-14
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company contributes. The costs charged to operations for these plans
amounted to approximately $4.6 million in 1995, $4.2 million in 1994 and $3.3
million in 1993. 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 funding policy is to
contribute annually up to the maximum amount deductible for federal income tax
purposes. Net pension cost includes the following components (dollar amounts
in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Service cost--present value of benefits
earned during the period............... $ 2,119 $ 2,326 $ 1,869
Interest cost on projected benefit obli-
gation................................. 1,966 1,725 1,350
Actual return on plan assets............ (9,692) 237 (1,053)
Net amortization and deferral........... 7,598 (1,615) (304)
------- ------- -------
$ 1,991 $ 2,673 $ 1,862
======= ======= =======
</TABLE>
The following table presents the plan's funded status and amounts recognized
in the Company's consolidated balance sheets (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Actuarial present value of accumulated benefits
based on service rendered to date:
Vested.......................................... $29,649 $16,965
Non-vested...................................... 3,482 3,438
------- -------
33,131 20,403
Fair value of plan assets (primarily in equity and
fixed income funds and real estate).............. 37,934 20,993
------- -------
Fair value of plan assets in excess of projected
benefit obligation............................... 4,803 590
Unrecognized net loss............................. 7,473 5,737
Prior service cost................................ 133 160
Unrecognized net asset............................ (978) (1,141)
------- -------
Net prepaid pension cost.......................... $11,431 $ 5,346
======= =======
</TABLE>
The weighted average discount rate used to determine the actuarial present
value of the projected benefit obligation was 7.25% in 1995 and 8.5% in 1994.
The expected long-term rate of return on plan assets was 8.5% in 1995 and
1994, and 9.5% in 1993.
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.
F-15
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K--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 $675 million,
$653 million and $473 million in 1995, 1994 and 1993, respectively, and
recognized operating losses of $14.2 million, $18.8 million and $12.9 million
in 1995, 1994 and 1993, respectively. These losses do not include allocations
for interest expense and corporate overhead. The restructuring charges include
the following components.
<TABLE>
<CAPTION>
ACCRUED RESTRUCTURING
TOTAL ADJUSTMENTS COSTS
RESTRUCTURING TO ----------------------
CHARGES CARRYING VALUE CURRENT LONG-TERM
------------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Charges for lease obliga-
tions..................... $ 65,600 $ 25,600 $ 40,000
Asset valuation adjust-
ments:
Closed stores............ 21,700 $21,700
Assets sold.............. 20,300 20,300
Inventory.................. 16,000 16,000
Termination payments....... 10,000 10,000
Other...................... 6,400 6,400
-------- ------- ---------- ----------
$140,000 $42,000 $ 58,000 $ 40,000
======== ======= ========== ==========
</TABLE>
The lease rental obligations primarily relate to closed stores and consist
of average annual lease expense over a five-year period net of any sublease
income, discounted at a rate of 9%. Also included is a $15 million charge for
certain fees associated with the sublease of the distribution center which is
expected to be paid by March 1996. The distribution center and nine stores
have been leased or subleased to another supermarket company controlled by the
same group of investors that controls Smitty's Supermarkets, Inc., with whom
the Company has entered into a definitive merger agreement (see Note L).
The charges for store and distribution center inventories represent
incremental losses for shrinkage, damage and liquidation sales expected to be
incurred during the closing process.
The termination payments relate to substantially all of the Company's 3,900
store and distribution center employees in the Southern California Region. The
termination payments are expected to be made by the end of March 1996 and have
been estimated based on existing employment contracts and involuntary
termination statutes.
The other costs represent charges for taxes, fees, contractual obligations,
and other costs associated with closing the region.
The restructuring charges include management's best estimates of the amounts
expected to be realized on the disposal of the remaining stores and closure of
the region. At December 30, 1995, the Company's carrying value of closed
stores and excess land in California was approximately $260 million. The
Company's current management has not determined the ultimate disposition or
use of these real estate assets and believes that their disposal in the
ordinary course of business would not result in a significant impact on
carrying values. However, should the Company complete the subsequent event
(see Note L), management may decide to pursue the sale of these assets. The
amounts the Company may realize on disposal could differ significantly in the
near term from the carrying values.
F-16
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE L--SUBSEQUENT EVENT
On January 29, 1996, the Company announced it had entered into a definitive
merger agreement with Smitty's Supermarkets, Inc. ("Smitty's") in which
Smitty's will become a wholly owned subsidiary of the Company. The merger will
be completed by issuing 3,038,888 shares of the Company's Class B Common Stock
for all of Smitty's outstanding common stock, subject to adjustment under
certain circumstances. The Company will assume or refinance approximately $148
million of Smitty's debt.
The Company also announced it will commence a self tender offer to purchase
50% of its outstanding Class A and Class B Common Stock for $36 per share,
excluding shares to be issued in connection with the Smitty's merger. Debt of
approximately $1.4 billion is expected to be issued at various interest rates
to finance the stock purchase, repay certain existing indebtedness, and
premiums related to early repayment. In addition, the Company plans to offer
preferred stock to raise approximately $75 million.
Completion of the tender offer will be subject to the tender of at least 50%
of the Company's outstanding Common Stock, the receipt of adequate financing
and various other conditions. Completion of the merger with Smitty's will be
conditioned on the Company's purchase of shares pursuant to the self tender
offer, receipt of adequate financing, regulatory approvals, approval by the
Company's stockholders and various other conditions. The tender offer is
expected to commence in April 1996 and be consummated in May 1996. The merger
with Smitty's is expected to be consummated concurrently with the closing of
the tender offer.
F-17
<PAGE>
Facsimile copies of the Letter of Transmittal, properly completed and duly
executed, will be accepted from Eligible Institutions. The Letter of
Transmittal, certificates for Shares and any other required documents should
be sent or delivered by each stockholder of the Company or his or her broker,
dealer, commercial bank, trust company or other nominee to the Depositary at
one of its addresses set forth below:
The Depositary is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By Mail: By Facsimile: By Hand:
40 Wall Street (718) 234-5001 40 Wall Street
New York, New York 10005 (For Eligible New York, New York 10005
Institutions
Only)
Any questions or requests for assistance may be directed to the Information
Agent or the Dealer Managers at their respective addresses and telephone
numbers set forth below. Additional copies of this Offer to Purchase, the
Letter of Transmittal or the Notice of Guaranteed Delivery may be obtained
from the Information Agent as set forth below, and will be furnished promptly
at the Company's expense. You may also contact your local broker, dealer,
commercial bank, trust company or other nominee for assistance concerning the
Offer.
The Information Agent is:
[LOGO] MacKenzie
Partners, Inc.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
Call Toll Free (800) 322-2885
The Dealer Managers are:
GOLDMAN, SACHS & CO.
85 Broad Street
New York, New York 10004
In New York State: (212) 902-1000 (collect)
Other Areas: (800) 323-5678 (toll free)
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER SHARES OF
CLASS A COMMON STOCK AND
CLASS B COMMON STOCK OF
SMITH'S FOOD & DRUG CENTERS, INC.
PURSUANT TO ITS OFFER TO PURCHASE
DATED APRIL 25, 1996
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED.
To: American Stock Transfer & Trust Company, Depositary
By Mail: By Facsimile By Hand or Overnight
Transmission: Courier:
40 WALL STREET, (FOR ELIGIBLE 40 WALL STREET,
NEW YORK, NEW YORK INSTITUTIONS ONLY) NEW YORK, NEW YORK
10005 (718) 234-5001 10005
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be used by stockholders if certificates for
Shares (as defined below) are to be forwarded herewith or, unless an Agent's
Message (as defined in the Offer to Purchase) is utilized, if delivery of
Shares is to be made by book-entry transfer to the Depositary's account at The
Depository Trust Company or the Philadelphia Depository Trust Company
(hereinafter collectively referred to as the "Book-Entry Transfer Facilities")
pursuant to the procedures set forth under "The Tender Offer--Procedure for
Tendering Shares" in the Offer to Purchase dated April 25, 1996.
Stockholders who cannot deliver the certificates for their Shares and all
other documents required hereby to the Depositary on or prior to the
Expiration Date (as defined in the Offer to Purchase) or who cannot complete
the procedures for book-entry transfer on a timely basis, or who cannot
deliver a Letter of Transmittal and all other required documents to the
Depositary on or prior to the Expiration Date, must tender their Shares
pursuant to the guaranteed delivery procedure set forth under "The Tender
Offer--Procedure for Tendering Shares" in the Offer to Purchase. See
Instruction 2. DELIVERY OF DOCUMENTS TO ONE OF THE BOOK-ENTRY TRANSFER
FACILITIES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
The name(s) and address(es) of the registered holder(s) should be printed
below, if they are not already printed below, exactly as they appear on the
certificate(s) representing the Shares tendered herewith. The certificate(s)
and the number of Shares that the registered holder(s) wish(es) to tender
should be indicated in the appropriate boxes below.
DESCRIPTION OF SHARES TENDERED
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S)
APPEAR(S) ON SHARE CERTIFICATES) SHARES TENDERED (ATTACH ADDITIONAL LIST IF NECESSARY)
- - ----------------------------------------------------------------------------------------------------------------
<C> <C> <C>
CLASS AND TOTAL NUMBER OF
CERTIFICATE SHARES REPRESENTED NUMBER OF SHARES
NUMBER(S)* BY CERTIFICATE(S)* TENDERED**
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
TOTAL SHARES
</TABLE>
- - -------------------------------------------------------------------------------
* NEED NOT BE COMPLETED BY STOCKHOLDERS TENDERING BY BOOK-ENTRY TRANSFER.
** UNLESS OTHERWISE INDICATED, IT WILL BE ASSUMED THAT ALL SHARES
REPRESENTED BY ANY CERTIFICATES DELIVERED TO THE DEPOSITARY ARE BEING
TENDERED. See Instruction 4.
<PAGE>
[_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
TO THE DEPOSITARY'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER FACILITIES
AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ___________________________________________
Account No. _____________________________________________________________
Check Box of Book-Entry Transfer Facility:
[_] The Depository Trust Company
[_] Philadelphia Depository Trust Company
Transaction Code No. ____________________________________________________
[_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE
FOLLOWING:
Name(s) of Tendering Stockholder(s) _____________________________________
Window Ticket Number (if any) ___________________________________________
Date of Execution of Notice of Guaranteed Delivery ______________________
Name of Institution which Guaranteed Delivery ___________________________
If delivery is by book entry transfer:
Name of Tendering Institution ___________________________________________
[_] DTC [_] PHILADEP (check one) Account No. _________________________
Transaction Code No. _________________________________________________
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to Smith's Food & Drug Centers, Inc., a
Delaware corporation (the "Company"), the above-described shares of Class A
Common Stock, par value $.01 per share ("Class A Common Stock"), and/or Class
B Common Stock, par value $.01 per share ("Class B Common Stock"; and,
together with the Class A Common Stock, the "Shares") pursuant to the
Company's offer to purchase 50% of the outstanding Shares at a price of $36
per share (the "Purchase Price"), net to the seller in cash, upon the terms
and subject to the conditions set forth in the Offer to Purchase dated April
25, 1996 (the "Offer to Purchase"), receipt of which is hereby acknowledged,
and in this Letter of Transmittal (which together constitute the "Offer").
Subject to, and effective upon, acceptance for payment of the Shares
tendered herewith in accordance with the terms of the Offer, including, if the
Offer is extended or amended, the terms and conditions of any such extension
or amendment, the undersigned hereby sells, assigns and transfers to or upon
the order of the Company all right, title and interest in and to all the
Shares that are being tendered hereby, or orders the registration of such
Shares delivered by book-entry transfer, that are purchased pursuant to the
Offer and hereby irrevocably constitutes and appoints the Depositary the true
and lawful agent and attorney-in-fact of the undersigned with respect to such
Shares, with full power of substitution (such power of attorney being deemed
to be an irrevocable power coupled with an interest), to (a) deliver
certificates for such Shares, or transfer ownership of such Shares on the
account books maintained by any of the Book-Entry Transfer Facilities,
together, in any such case, with all accompanying evidences of transfer and
authenticity, to or upon the order of the Company, upon receipt by the
Depositary, as the undersigned's agent, of the Purchase Price, (b) present
certificates for such Shares for cancellation and transfer on the books of the
Company and (c) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Shares, all in accordance with the terms of the
Offer.
A tender of Shares does not constitute a vote, or the appointment of a
proxy, in connection with the Annual Meeting scheduled for Thursday, May 23,
1996 (the "Stockholders' Meeting"). In order to vote at the Stockholders'
Meeting, stockholders of the Company are required to submit a proxy or vote in
person at the Stockholders' Meeting, or any postponement or adjournment
thereof.
The undersigned hereby represents and warrants that (a) the undersigned
"owns" the Shares tendered hereby within the meaning of Rule 14e-4 promulgated
under the Securities Exchange Act of 1934, as amended, and has full power and
authority to validly tender, sell, assign and transfer the Shares tendered
hereby; (b) the tender of Shares by the undersigned complies with Rule 14e-4;
(c) when and to the extent the Shares are accepted for payment by the Company,
the Company will acquire good and marketable title and unencumbered ownership
thereto, free and clear of all liens, restrictions, charges, security
interests, conditional sales agreements, encumbrances or other obligations
relating to their sale or transfer, and not subject to any adverse claims; and
(d) the undersigned has read and agrees to all the terms of the Offer. For a
description of certain provisions of Rule 14e-4, see "The Tender Offer-
Procedure for Tendering Shares--Other Requirements" in the Offer to Purchase.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Depositary or the Company to be necessary or desirable
to complete the sale, assignment and transfer of the Shares tendered hereby.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned, and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Except as stated in the Offer, this
tender is irrevocable.
The undersigned understands that tenders of Shares pursuant to any one of
the procedures described under "The Tender Offer--Procedure for Tendering
Shares" in the Offer to Purchase and in the instructions hereto will
constitute a binding agreement between the undersigned and the Company upon
the terms and subject to the conditions of the Offer.
The undersigned recognizes that, under certain circumstances set forth in
the Offer to Purchase, the Company may terminate or amend the Offer or may not
be required to accept for payment any of the Shares tendered herewith or may
accept for payment, pro rata with Shares tendered by other stockholders, fewer
than all of the Shares tendered herewith.
<PAGE>
Unless otherwise indicated under "Special Payment Instructions" below,
please issue the check for the Purchase Price and/or return or issue the
certificate(s) evidencing any Shares included herewith but not tendered or not
accepted for payment in the name(s) of the undersigned. Similarly, unless
otherwise indicated under "Special Delivery Instructions" below, please mail
the check for the Purchase Price and/or return the certificate(s) evidencing
any Shares not tendered or not accepted for payment (and accompanying
documents, as appropriate) to the undersigned at the address shown below the
undersigned's signature(s). In the event that both "Special Payment
Instructions" and "Special Delivery Instructions" are completed, please issue
the check for the Purchase Price and/or return the certificate(s) evidencing
any Shares not tendered or not accepted for payment in the name(s) of, and
deliver said check and/or return said certificate(s) to, the person or persons
so indicated. Stockholders tendering Shares by book-entry transfer may request
that any Shares not accepted for payment be returned by crediting such account
maintained at such Book-Entry Transfer Facility as such stockholder may
designate by making an appropriate entry under "Special Payment Instructions."
The undersigned recognizes that the Company has no obligation pursuant to the
"Special Payment Instructions" to transfer any Shares from the name of the
registered holder thereof if the Company does not accept for payment any of
the Shares so tendered.
<PAGE>
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 4, 5, 6 AND 7) (SEE INSTRUCTIONS 1, 4, 5, 6 AND 7)
To be completed ONLY if the To be completed ONLY if the
check for the aggregate Purchase check for the aggregate Purchase
Price of Shares purchased and/or Price of Shares purchased and/or
certificates for Shares not ten- certificates for Shares not ten-
dered or not purchased are to be dered or not purchased are to be
issued in the name of someone mailed to someone other than the
other than the undersigned. undersigned or to the undersigned
at an address other than that
shown below the undersigned's
signature(s).
Issue [_] check, and or
[_] certificates to:
Name _____________________________ Mail [_] check,
(Please Print) and/or [_] certificates to:
Address __________________________
__________________________________ Name______________________________
(Include Zip Code) (Please Print)
__________________________________ Address __________________________
(Taxpayer Identification No. or __________________________________
Social Security No.) (Complete (Include Zip Code)
Substitute Form W-9)
SIGN HERE
(SEE INSTRUCTIONS 1 AND 5)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW)
X _______________________________________________________________ SIGN HERE
Signature(s) of Owner(s)
X
----------------------------------------------------------------------------
Dated_________________________,_1996________________________________________
Name(s) ____________________________________________________________________
(Please Print)
----------------------------------------------------------------------------
Capacity (full title) ______________________________________________________
Address ____________________________________________________________________
----------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone No. ________________________________________________
Tax Identification or Social Security No. __________________________________
(Complete Substitute W-9 Below)
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) or on a security position listing or by person(s) authorized
to become registered holder(s) by certificates and/or documents transmitted
herewith. If signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, please set forth such person's full
title and see Instruction 5.)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 5)
Name of Firm _______________________________________________________________
Authorized Signature _______________________________________________________
Name _______________________________________________________________________
Address ____________________________________________________________________
Area Code and Telephone Number _____________________________________________
Dated _________________________ , 1996
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by an "Eligible Institution" (as defined in the
Offer to Purchase). Signatures on this Letter of Transmittal need not be
guaranteed if (a) this Letter of Transmittal is signed by the registered
holder(s) of the Shares exactly as the name of the registered holder(s)
appears on the certificate (which term, for purposes of this Letter of
Transmittal, shall include any participant in one of the Book-Entry Transfer
Facilities whose name appears on a security position listing as the owner of
Shares) tendered herewith and such holder(s) have not completed either of the
boxes entitled "Special Payment Instructions" or "Special Delivery
Instructions" on this Letter of Transmittal or (b) such Shares are tendered
for the account of an Eligible Institution. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARES
This Letter of Transmittal is to be used either if certificates are to be
forwarded herewith or if delivery of Shares is to be made by Agent's Message
in connection with a book-entry transfer pursuant to the procedures set forth
in "The Tender Offer--Procedure for Tendering Shares" in the Offer to
Purchase. Certificates for all Shares, or a confirmation of a book-entry
transfer into the Depositary's account at one of the Book-Entry Transfer
Facilities of all Shares delivered electronically, as well as a properly
completed and duly executed Letter of Transmittal (or manually executed
facsimile thereof) and any other documents required by this Letter of
Transmittal, must be received by the Depositary at one of its addresses set
forth on the front page of this Letter of Transmittal on or prior to the
Expiration Date. Delivery of documents to one of the Book-Entry Transfer
Facilities does not constitute delivery to the Depositary.
Stockholders who cannot deliver the certificates for their Shares and all
other documents required hereby to the Depositary on or prior to the
Expiration Date or who cannot complete the procedures for book-entry transfer
on a timely basis or who cannot deliver a Letter of Transmittal and all other
required documents to the Depositary on or prior to the Expiration Date must
tender their Shares pursuant to the guaranteed delivery procedure set forth in
"The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase.
Pursuant to such procedure: (a) such tender must be made by or through an
Eligible Institution, (b) a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company must be
received by the Depositary on or prior to the Expiration Date and (c) the
certificates for all physically delivered Shares, in proper form for transfer,
or a confirmation of a book-entry transfer into the Depositary's account at
one of the Book-Entry Transfer Facilities of such Shares delivered
electronically, as well as a properly completed and duly executed Letter of
Transmittal (or manually executed facsimile thereof with any required
signature guarantees) (or, in the case of a book-entry delivery, an Agent's
Message) and any other documents required by this Letter of Transmittal, must
be received by the Depositary within three New York Stock Exchange trading
days after the receipt of such Notice of Guaranteed Delivery by the
Depositary, all as provided in "The Tender Offer--Procedure for Tendering
Shares" in the Offer to Purchase. If Shares are forwarded separately to the
Depositary, each must be accompanied by a duly executed Letter of Transmittal
(or facsimile thereof).
THE METHOD OF DELIVERY OF SHARES, THIS LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH BOOK-ENTRY TRANSFER FACILITIES,
IS AT THE OPTION AND SOLE RISK OF THE TENDERING STOCKHOLDER AND THE DELIVERY
WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY
IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
No alternative, conditional or contingent tenders will be accepted, and no
fractional Shares will be purchased. By executing this Letter of Transmittal
(or manually executed facsimile thereof), the tendering stockholder waives any
right to receive any notice of the acceptance for payment of such Shares.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Shares Tendered"
is inadequate, the certificate numbers and/or the number of Shares should be
listed on a separate schedule attached hereto and separately signed on each
page thereof in the same manner as this Letter of Transmittal is signed.
<PAGE>
4. PARTIAL TENDERS (NOT APPLICABLE TO STOCKHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER)
If fewer than all the Shares represented by any certificate delivered to the
Depositary are to be tendered, fill in the number of Shares that are to be
tendered in the box entitled "Number of Shares Tendered." If such Shares are
purchased, a new certificate for the remainder of the Shares represented by
the old certificate will be sent to and in the name of the person(s) signing
this Letter of Transmittal, unless otherwise provided in either of the boxes
entitled "Special Payment Instructions" or "Special Delivery Instructions" on
this Letter of Transmittal, as promptly as practicable following the
expiration or termination of the Offer. All Shares represented by the
certificates listed and delivered to the Depositary in accordance with the
procedures set forth in the Offer to Purchase and this Letter of Transmittal
will be deemed to have been tendered unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares tendered hereby, the signature(s) must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
If any of the Shares tendered hereby are held of record by two or more
persons, all such persons must sign this Letter of Transmittal.
If any of the Shares tendered hereby are registered in different names on
different certificates, the holder thereof must complete, sign and submit as
many separate Letters of Transmittal as there are different registrations of
certificates.
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares tendered hereby, no endorsements of certificates or separate stock
powers are required unless payment of the Purchase Price is to be made in the
name of, and/or the certificates for Shares not tendered or not purchased are
to be returned to, any person other than the registered holder(s). Signatures
on any such certificates or stock powers must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Shares tendered hereby, certificates must be
endorsed or accompanied by appropriate stock powers, in either case signed
exactly as the name(s) of the registered holder(s) appear(s) on the
certificates for such Shares. Signature(s) on any such certificates or stock
powers must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificate or stock power is signed by
a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory
to the Company of the authority of such person so to act must be submitted.
6. STOCK TRANSFER TAXES
The Company will pay any stock transfer taxes with respect to the sale and
transfer of any Shares to it or its order pursuant to the Offer. However, if
(i) payment of the Purchase Price is to be made to, or if certificates for
Shares not tendered or not purchased are to be returned in the name of, any
person other than the registered holder(s), (ii) tendered certificates are
registered in the name of any person other than the person(s) signing this
Letter of Transmittal, or (iii) a transfer tax is imposed for any reason other
than the sale or transfer of Shares to the Company pursuant to the Offer, then
the amount of any stock transfer taxes (whether imposed on the registered
holder(s), such other person or otherwise) will be deducted from the Purchase
Price unless satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted herewith.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THE BOX
ENTITLED "DESCRIPTION OF SHARES TENDERED" ON THIS LETTER OF TRANSMITTAL.
<PAGE>
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS
If the check for the Purchase Price of any Shares purchased is to be issued,
or any Shares not tendered or not purchased are to be returned in the name of,
a person other than the person(s) signing this Letter of Transmittal or if the
check or any certificates for Shares not tendered or not purchased are to be
mailed to someone other than the person(s) signing this Letter of Transmittal
or to the person signing this Letter of Transmittal at an address other than
that shown in the box entitled "Description of Shares Tendered", the boxes
entitled "Special Payment Instructions" and/or "Special Delivery Instructions"
on this Letter of Transmittal should be completed. Stockholders tendering
Shares by book-entry transfer may request that Shares not purchased be
credited to such account at any of the Book-Entry Transfer Facilities as such
stockholder may designate under "Special Payment Instructions." If no such
instructions are given, any such Shares not purchased will be returned by
crediting the account at the Book-Entry Transfer Facilities designated above.
8. SUBSTITUTE FORM W-9
Under the federal income tax laws, the Depositary will be required to backup
withhold 31% of the amount of any payments made to certain stockholders
pursuant to the Offer. In order to avoid such backup withholding, each
tendering stockholder, and, if applicable, each other payee, must provide the
Depositary with such stockholder's or payees's correct taxpayer identification
number and certify that such stockholder or payee is not subject to such
backup withholding by completing the Substitute Form W-9 set forth below. In
general, if a stockholder or payee is an individual, the taxpayer
identification number is the Social Security number of such individual. If the
Depositary is not provided with the correct taxpayer identification number,
the stockholder or payee may be subject to a $50 penalty imposed by the
Internal Revenue Service ("IRS"). Certain stockholders or payees (including,
among others, all corporations and certain foreign individuals) are not
subject to these backup withholding and reporting requirements. In order to
satisfy the Depositary that a foreign individual qualifies as an exempt
recipient, such stockholder or payee must submit a statement, signed under
penalties of perjury, attesting to that individual's exempt status. Such
statements may be obtained from the Depositary. For further information
concerning backup withholding and instructions for completing the Substitute
Form W-9 (including how to obtain a taxpayer identification number if you do
not have one and how to complete the Substitute Form W-9 if Shares are held in
more than one name), consult the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.
Failure to complete the Substitute Form W-9 will not, by itself, cause
Shares to be deemed invalidly tendered, but may require the Depositary to
withhold 31% of the amount of any payments made pursuant to the Offer. Backup
withholding is not an additional federal income tax. Rather, the federal
income tax liability of a person subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of
taxes, a refund may be obtained provided that the required information is
furnished to the IRS.
NOTE: FAILURE TO COMPLETE AND RETURN THE SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
9. WITHHOLDING ON FOREIGN STOCKHOLDERS
The Depositary will withhold federal income taxes equal to 30% of the gross
payments to a foreign stockholder or his agent with respect to purchases by
the Company pursuant to the Offer unless the Depositary determines that a
reduced rate of withholding is available pursuant to a tax treaty or an
exemption from withholding is applicable because such gross proceeds are
effectively connected with the conduct of a trade or business in the United
States. The Depositary may require a foreign stockholder to deliver to the
Depositary a properly executed IRS Form 1001 in order for the stockholder to
claim a reduced rate of withholding under any such treaty. (Exemption from
backup withholding does not exempt a foreign stockholder from the 30%
withholding.) For this purpose, a foreign stockholder is any stockholder that
is not (i) a citizen or resident of the
<PAGE>
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof, or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of the source of
such income. The Depositary will determine a stockholder's status as a foreign
stockholder and eligibility for a reduced rate of, or an exemption from,
withholding by reference to the stockholder's address and to any outstanding
certificates or statements concerning eligibility for a reduced rate of, or
exemption from, withholding unless facts and circumstances indicate that
reliance is not warranted. In order to obtain an exemption from withholding on
the grounds that the gross proceeds paid pursuant to the Offer are effectively
connected with the conduct of a trade or business within the United States, a
foreign stockholder must deliver to the Depositary a properly executed IRS
Form 4224 before the date of payment of gross proceeds. Such forms may be
obtained from the Depositary or Information Agent. A foreign stockholder who
has not previously submitted the appropriate certificates or statements with
respect to a reduced rate of, or exemption from, withholding for which such
stockholder may be eligible should consider doing so in order to avoid excess
withholding. A foreign stockholder may be eligible to obtain a refund of all
or a portion of any tax withheld if the sale to the Company pursuant to the
Offer is not treated as a dividend for federal income tax purposes (see "The
Tender Offer--Federal Income Tax Consequences" in the Offer to Purchase) or is
otherwise able to establish that no tax or a reduced amount of tax was due.
Foreign stockholders are strongly urged to consult their tax advisors
regarding the application of federal income tax withholding, including
eligibility for a withholding tax reduction or exemption and the refund
procedures.
10. IRREGULARITIES
All questions as to the number of Shares to be purchased, the form of
documents and the validity, (eligibility including time of receipt) and
acceptance for payment of any tender of Shares will be determined by the
Company, in its sole discretion, and its determination will be final and
binding on all parties. The Company reserves the absolute right to reject any
or all tenders which it determines not to be in proper form or the acceptance
of or payment for which may, in the opinion of the Company's counsel, be
unlawful. The Company also reserves the absolute right to waive any of the
conditions of the Offer or any defect or irregularity in the tender of Shares
by any particular stockholder, whether or not similar defects or
irregularities are waived in the case of other stockholders. The Company's
interpretation of the terms and conditions of the Offer (including this Letter
of Transmittal and the instructions hereto) will be final and binding. No
tender of Shares will be deemed to be validly made until all defects and
irregularities have been cured or waived. Unless waived, any defects or
irregularities in connection with tenders must be cured within such time as
the Company will determine. None of the Company, its affiliates, the Dealer
Managers, the Depositary, the Information Agent or any other person will be
obligated to give notice of any defects or irregularities in tenders, and none
of them will incur any liability for failure to give any such notice.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES
Requests for assistance or additional copies of the Offer to Purchase, this
Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained
from the Information Agent or the Dealer Managers at their respective
addresses or telephone numbers set forth below.
12. LOST, DESTROYED OR STOLEN CERTIFICATES
If any certificate(s) representing Shares has been lost, destroyed or
stolen, the stockholder should promptly notify the Depositary. Instructions
will then be given as to what steps must be taken to obtain a replacement
certificate(s). The Letter of Transmittal and related documents cannot be
processed until the procedures for replacing such missing certificate(s) have
been followed.
<PAGE>
TO BE COMPLETED BY ALL TENDERING STOCKHOLDERS
(SEE INSTRUCTION 8)
PAYOR'S NAME: ______________________________________________
PART 1--PLEASE PROVIDE YOUR
SUBSTITUTE TIN IN THE BOX AT RIGHT AND ----------------------
FORM W-9 CERTIFY BY SIGNING AND Social Security Number
DATING BELOW.
OR -------------------
PAYOR'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
PART 2--Awaiting TIN [_] Employer Identification
Number
--------------------------------------------------------
- - -------------------------------------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE
INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE
- - -------------------------------------------------------------------------------
Name _______________________________________________________________________
(PLEASE PRINT)
Address ____________________________________________________________________
(INCLUDING ZIP CODE)
Signature __________________________ Date _____________________________
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER
IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered
an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security
Administration Office, or (b) I intend to mail or deliver an application in
the near future. I understand that, notwithstanding that I have checked the
box on Part 2 (and have completed this Certificate of Awaiting Taxpayer
Identification Number), all reportable payments made to me prior to the
time I provide the Depositary with a properly certified taxpayer
identification number will be subject to a 31% backup withholding tax.
Signature __________________________ Date _____________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A BACKUP
WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
<PAGE>
Facsimile copies of the Letter of Transmittal, properly completed and duly
executed, will be accepted. The Letter of Transmittal, certificates of Shares
and any other required documents should be sent or delivered by each
stockholder of the Company or his broker, dealer, commercial bank, trust
company or other nominee to the Depositary at one of its addresses set forth
below:
Depositary for the Offer is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By Mail: By Facsimile By Hand or Overnight
Transmission: Courier:
40 Wall Street (718) 234-5001 40 Wall Street
New York, New York (For Eligible New York, New York
10005 Institutions Only) 10005
Questions and requests for assistance may be directed to the Information
Agent or the Dealer Managers at their respective addresses and telephone
numbers listed below. Additional copies of the Offer to Purchase, this Letter
of Transmittal and other tender offer materials may be obtained from the
Information Agent as set forth below, and will be furnished promptly at the
Company's expense. You may also contact your broker, dealer, commercial bank,
trust company or other nominee for assistance concerning this Offer.
The Information Agent is:
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
CALL COLLECT
(212) 929-5500
or
CALL TOLL FREE
(800) 322-2885
The Dealer Managers are:
GOLDMAN, SACHS & CO.
85 Broad Street
New York, New York 10004
In New York State: (212) 902-1000 (collect)
Other Areas: (800) 323-5678 (toll free)
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.
Social Security numbers have nine digits separated by two hyphens, i.e., 000-
00-0000. Employer identification numbers have nine digits separated by only
one hyphen, i.e., 00-0000000. The table below will help determine the number
to give the payer.
- - ----------------------------------- -----------------------------------
<TABLE>
<CAPTION>
GIVE THE SOCIAL
SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF:
- - ---------------------------------------------
<S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account
or, if combined
funds, any one
of the
individuals(1)
3. Husband and wife (joint The actual owner
account) of the account
or, if joint
funds, either
person(1)
4. Custodian account of a The minor(2)
minor (Uniform Gifts to
Minors Act)
5. Adult and minor (joint The adult or, if
account) the minor is the
only
contributor, the
minor(1)
6. Account in the name of The ward, minor,
guardian or committee or incompetent
for the designated ward, person(3)
minor, or incompetent
person
7. a. The unusual revocable The grantor-
savings trust account trustee(1)
(grantor is also
trustee)
b. So-called trust
account that is not legal
or valid trust under
state law
8. Sole proprietorship The owner(4)
account
- - ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF:
---
<S> <C>
9. A valid trust, estate or The legal entity
pension trust. (Do not furnish
the identifying
number of the
personal
representative
or trustee
unless the legal
entity itself is
not designated
in the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, The organization
or educational
organization account
12. Partnership account The partnership
held in the name of the
business
13. Association, club, or The organization
other tax-exempt
organization
14. A broker or registered The broker or
nominee nominee
15. Account with the The public
Department of entity
Agriculture in the name
of a public entity
(such as a State or
local government,
school district, or
prison) that receives
agricultural program
payments
---
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and apply
for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
. A corporation.
. A financial institution.
. An organization exempt from tax under section 501(a), or an individual
retirement plan.
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
. An international organization or any agency, or instrumentality thereof.
. A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under section 584(a).
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
. An entity registered at all times under the Investment Company Act of
1940.
. A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S.
and which have at least one nonresident partner.
. Payments of patronage dividends where the amount received is not paid in
money.
. Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
. Payments described in section 6049(b)(5) to non-resident aliens.
. Payments on tax-free covenant bonds under section 1451.
. Payments made by certain foreign organizations.
Exempt payees described above must still complete the Substitute Form W-9
enclosed herewith to avoid possible erroneous backup withholding. FILE
SUBSTITUTE FORM W-9 WITH THE PAYER, REMEMBERING TO CERTIFY YOUR TAXPAYER
IDENTIFICATION NUMBER ON THE FORM AND WRITE "EXEMPT" ON THE FACE OF THE FORM.
Certain payments other than interest, dividends, and patronage dividends, that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Beginning January 1, 1993, payers
must generally withhold 31% of taxable interest, dividend and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income and such failure is due to negligence, a
penalty of 20% is imposed on any portion of an under-payment attributable to
that failure.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE>
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
TO TENDER SHARES OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
OF
SMITH'S FOOD & DRUG CENTERS, INC.
PURSUANT TO THE OFFER TO PURCHASE DATED APRIL 25, 1996
This Notice of Guaranteed Delivery, or a facsimile hereof, must be used to
accept the Offer (as defined in the Company's Offer to Purchase dated April
25, 1996 (the "Offer to Purchase")) if (i) certificates for shares of Class A
Common Stock, par value $.01 per share ("Class A Common Stock"), and/or Class
B Common Stock, par value $.01 per share ("Class B Common Stock"; and,
together with the Class A Common Stock, the "Common Stock" or the "Shares") of
Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), and
all other documents required by the Letter of Transmittal cannot be delivered
to the Depositary by the expiration of the Offer, or (ii) the procedures for
delivery of book-entry transfer cannot be completed on a timely basis. This
Notice of Guaranteed Delivery may be delivered by hand or sent by facsimile
transmission or mail to the Depositary. See "The Tender Offer--Procedure for
Tendering Shares" in the Offer to Purchase.
THE DEPOSITARY FOR THE OFFER IS:
American Stock Transfer & Trust Company
By Facsimile By Hand or Overnight
By Mail: Transmission: Courier:
40 Wall Street (718) 234-5001 40 Wall Street
New York, New York 10005 (For Eligible New York, New York 10005
Institutions Only)
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an "Eligible Institution" (as defined in the Offer to Purchase)
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Offer to Purchase and the related Letter of
Transmittal (which together constitute the "Offer"), receipt of which is
hereby acknowledged, the number (indicated below) of Shares pursuant to the
guaranteed delivery procedure set forth in "The Tender Offer--Procedure for
Tendering Shares" in the Offer to Purchase.
Number of Shares Being Tendered SIGN HERE
Hereby ______________________________ _____________________________________
(SIGNATURE(S))
Certificate No.(s). _____________________________________
(if available): (SIGNATURE(S))
_____________________________________
_____________________________________ (NAME(S) OF RECORD HOLDERS)
(PLEASE PRINT)
_____________________________________ _____________________________________
(ADDRESS)
If shares will be tendered by book- _____________________________________
entry transfer: (ZIP CODE)
_____________________________________
Name of Tendering Institution________ (AREA CODE AND TELEPHONE NO.)
_____________________________________
Account No. _________________________
at:
[_] The Depository Trust Company
[_] Philadelphia Depository Trust
Company
<PAGE>
GUARANTEE
(not to be used for signature guarantee)
The undersigned, an "Eligible Institution", guarantees (a) that the above
named person(s) "own(s)" the Shares tendered hereby within the meaning of Rule
14e-4 under the Securities Exchange Act of 1934, as amended, (b) that such
tender of Shares complies with Rule 14e-4 and (c) to deliver to the Depositary
either the stock certificates representing the Shares tendered hereby,
together with a properly completed and duly executed Letter(s) of Transmittal
(or manually executed facsimile(s) thereof) with any required signature
guarantees or an Agent's Message (as defined in the Offer to Purchase) in the
case of a book-entry delivery, and any other required documents, all within
three New York Stock Exchange trading days of the date hereof.
_____________________________________
(NAME OF FIRM)
_____________________________________
(AUTHORIZED SIGNATURE)
_____________________________________
(NAME)
_____________________________________
(ADDRESS)
_____________________________________
(ZIP CODE)
Dated: ______________________ , 1996. _____________________________________
(AREA CODE AND TELEPHONE NO.)
DO NOT SEND STOCK CERTIFICATES WITH THIS FORM. YOUR STOCK CERTIFICATES MUST BE
SENT WITH THE LETTER OF TRANSMITTAL.
<PAGE>
GOLDMAN, SACHS & CO.
85 BROAD STREET
NEW YORK, NEW YORK 10004
OFFER TO PURCHASE FOR CASH
50% OF THE OUTSTANDING SHARES OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
OF
SMITH'S FOOD & DRUG CENTERS, INC.
AT
$36 NET PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED.
April 25, 1996
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
We have been appointed by Smith's Food & Drug Centers, Inc., a Delaware
corporation (the "Company"), to act as Dealer Managers in connection with the
Company's offer to purchase, in the aggregate, 50% of the outstanding shares
of its Class A Common Stock, par value $.01 per share ("Class A Common
Stock"), and Class B Common Stock, par value $.01 per share ("Class B Common
Stock; and, together with the Class A Common Stock, the "Shares"), at $36 per
share, net to the seller in cash, upon the terms and subject to the conditions
set forth in the Company's Offer to Purchase dated April 25, 1996 (the "Offer
to Purchase") and the related Letter of Transmittal (which together constitute
the "Offer").
For your information and for forwarding to your clients for whom you hold
Shares registered in your name or in the name of your nominee, we are
enclosing the following documents:
1. Offer to Purchase dated April 25, 1996;
2. Letter of Transmittal to tender Shares for your use and for the
information of your clients, together with Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 providing information
relating to backup federal income tax withholding (facsimile copies of the
Letter of Transmittal may be used to tender Shares);
3. Notice of Guaranteed Delivery to be used to accept the Offer if the
certificates for the Shares being tendered and all other required documents
cannot be delivered to the Depositary by the Expiration Date (as defined in
the Offer to Purchase) or if procedures for book-entry transfer cannot be
completed by the Expiration Date;
4. A printed form of letter which may be sent to your clients for whose
accounts you hold Shares registered in your name or in the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Offer; and
5. A letter to the Company's stockholders from Jeffrey P. Smith, Chairman
and Chief Executive Officer of the Company.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER, PRORATION PERIOD AND
WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT NEW YORK CITY TIME, ON
WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED.
<PAGE>
EACH STOCKHOLDER SHOULD MAKE ITS OWN DECISION WHETHER TO TENDER SHARES AND,
IF SO, HOW MANY SHARES TO TENDER.
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Company will accept for payment and pay for the Shares
which are validly tendered prior to the Expiration Date and not theretofore
properly withdrawn when, as and if the Company gives oral or written notice to
the Depositary of the Company's acceptance of such Shares for payment pursuant
to the Offer. Payment for Shares purchased pursuant to the Offer will in all
cases be made only after timely receipt by the Depositary of certificates for
the Shares or timely confirmation of a book-entry transfer of such Shares into
the Depositary's account at The Depository Trust Company or the Philadelphia
Depository Trust Company, pursuant to the procedures described in "The Tender
Offer--Procedure for Tendering Shares" in the Offer to Purchase, a properly
completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) or an Agent's Message in connection with a book-entry
transfer, and all other documents required by the Letter of Transmittal.
If holders of Shares wish to tender, but it is impracticable for them to
forward their certificates or other required documents to the Depositary on or
prior to the Expiration Date or to comply with the book-entry transfer
procedure on a timely basis, a tender may be effected by following the
guaranteed delivery procedures specified in "The Tender Offer--Procedure for
Tendering Shares" in the Offer to Purchase.
The Company will not pay any fees or commissions to any broker or dealer or
other person (other than to the Dealer Managers as described in the Offer to
Purchase) for soliciting tenders of Shares pursuant to the Offer. The Company
will, however, upon request, reimburse such persons for customary handling and
mailing expenses incurred by them in forwarding materials with respect to the
Offer to their customers. The Company will pay all stock transfer taxes
applicable to its purchase of Shares pursuant to the Offer, subject to
Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Offer should be addressed to,
and additional copies of the enclosed materials may be obtained from, the
Information Agent or the Dealer Managers at the addresses and telephone
numbers set forth on the back cover of the Offer to Purchase and the Letter of
Transmittal.
Very truly yours,
GOLDMAN, SACHS & CO.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY PERSON AS AN AGENT OF THE COMPANY, THE DEALER MANAGERS, THE INFORMATION
AGENT OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY
DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE
OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED
THEREIN.
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
OFFER TO PURCHASE FOR CASH
50% OF THE OUTSTANDING SHARES OF
CLASS A COMMON STOCK
AND CLASS B COMMON STOCK
OF SMITH'S FOOD & DRUG CENTERS, INC.
AT $36 NET PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED.
April 25, 1996
To our Clients:
Enclosed for your consideration are the Offer to Purchase dated April 25,
1996 (the "Offer to Purchase") and the related Letter of Transmittal (which,
together with any amendments or supplements thereto, constitute the "Offer")
in connection with the offer by Smith's Food & Drug Centers, Inc., a Delaware
corporation (the "Company"), to purchase, in the aggregate, 50% of the
outstanding shares of its Class A Common Stock, par value $.01 per share
("Class A Common Stock"), and Class B Common Stock, par value $.01 per share
("Class B Common Stock"; and, together with the Class A Common Stock, the
"Shares"), at a price of $36 per share, net to the seller in cash, upon the
terms and conditions set forth in the Offer. We are the holder of record of
Shares held for your account. A tender of such Shares can be made only by us
as the holder of record and pursuant to your instructions. THE LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED
BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT.
EACH STOCKHOLDER SHOULD MAKE ITS OWN DECISION WHETHER TO TENDER SHARES AND,
IF SO, HOW MANY SHARES TO TENDER.
We request instructions as to whether you wish us to tender any or all of
the Shares held by us for your account, upon the terms and subject to the
conditions set forth in the Offer.
Please note carefully the following:
1. The tender price is $36 per share, net to the seller in cash, upon the
terms and subject to the conditions set forth in the Offer.
2. The Offer, proration period and withdrawal rights will expire at 12:00
midnight, New York City time, on Wednesday, May 22, 1996, unless extended.
3. The Offer is being made for an aggregate of 50% of the outstanding Shares
(or 12,535,862 Shares based on Shares outstanding at April 15, 1996). If the
number of Shares validly tendered prior to the Expiration Date (as defined in
the Offer to Purchase) and not withdrawn is greater than 50% of its
outstanding Shares (and, as is most likely, the Company elects not to purchase
pursuant to the Offer any more than 50% of its outstanding Shares), the
Company will, upon the terms and subject to the conditions of the Offer,
accept for purchase all Shares properly tendered and not withdrawn before the
Expiration Date on a pro rata basis (with adjustments to avoid purchases of
fractional Shares).
4. The Offer is conditioned upon, among other things, (1) at least 50% of
the outstanding Shares being validly tendered and not withdrawn before the
expiration of the Offer, (2) the Company having obtained sufficient financing
necessary to purchase 50% of the Shares, repay certain indebtedness and pay
certain fees and expenses, and (3) all of the conditions to the Merger (as
defined in the Offer to Purchase), other than the consummation of the Offer,
having been satisfied or waived. See "Tender Offer--Certain Conditions of the
Offer" in the Offer to Purchase.
5. Any brokerage fees, commissions or stock transfer taxes applicable to the
sale of Shares to the Company pursuant to the Offer will be paid by the
Company, except as otherwise provided in Instruction 6 of the Letter of
Transmittal.
If you wish to have us tender any or all of your Shares, please so instruct
us by completing, executing, detaching and returning to us the attached
instruction form. An envelope to return your instructions to us is enclosed.
If you authorize tender of your Shares, all such Shares will be tendered
unless otherwise specified on the attached instruction form.
YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO
SUBMIT A TENDER ON YOUR BEHALF BY THE EXPIRATION OF THE OFFER. THE OFFER,
PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK
CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS THE COMPANY EXTENDS THE OFFER.
THE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON
BEHALF OF, HOLDERS OF SHARES IN ANY JURISDICTION IN WHICH THE MAKING OF THE
OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION. IN THOSE JURISDICTIONS THE LAWS OF WHICH REQUIRE THAT THE OFFER
BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE DEEMED TO BE MADE
ON BEHALF OF THE COMPANY BY ONE OR MORE REGISTERED BROKERS OR DEALERS LICENSED
UNDER THE LAWS OF SUCH JURISDICTION.
<PAGE>
INSTRUCTIONS WITH RESPECT TO OFFER TO PURCHASE FOR CASH
50% OF THE OUTSTANDING SHARES OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
OF
SMITH'S FOOD & DRUG CENTERS, INC.
AT $36 NET PER SHARE
The undersigned acknowledge(s) receipt of your letter and the enclosed Offer
to Purchase dated April 25, 1996 and the related Letter of Transmittal in
connection with the offer by Smith's Food & Drug Centers, Inc., a Delaware
corporation, to purchase, in the aggregate, of 50% of the outstanding shares
of its Class A Common Stock, par value $.01 per share, and Class B Common
Stock, par value $.01 per share (collectively, the "Shares").
This will instruct you to tender the number of Shares indicated below held
by you for the account of the undersigned, upon the terms and subject to the
conditions set forth in the Offer to Purchase and the related Letter of
Transmittal.
Number of Shares to be Tendered: _____ Shares*
Account Number: ___________________
Dated: ______________________ ,1996
___________________________________
* Unless otherwise indicated, it will be assumed that all Shares held by us
for your account are to be tendered.
SIGN HERE
___________________________________ ___________________________________
Signature(s)
___________________________________ ___________________________________
___________________________________ ___________________________________
___________________________________ ___________________________________
Please print name(s) and address(es) here
<PAGE>
[SMITH'S FOOD & DRUG LOGO APPEARS HERE]
April 25, 1996
To our Stockholders:
Smith's Food & Drug Centers, Inc. is offering to purchase, in the aggregate,
50% of the outstanding shares of its Class A Common Stock, par value $.01 per
share ("Class A Common Stock"), and its Class B Common Stock, par value $.01
per share ("Class B Common Stock"; and, together with the Class A Common
Stock, the "Common Stock" or the "Shares"), at $36 per Share, net to the
seller in cash. Based on the outstanding 11,366,532 shares of Class A Common
Stock and 13,705,191 shares of Class B Common Stock (excluding shares held in
the Company's treasury) as of April 15, 1996, the Company is offering to
purchase 12,535,862 Shares pursuant to the tender offer.
The tender offer relates to, among other things, the proposed
recapitalization of the Company pursuant to a Recapitalization Agreement and
Plan of Merger, dated as of January 29, 1996, among the Company, Cactus
Acquisition, Inc., a wholly owned subsidiary of the Company, Smitty's
Supermarkets, Inc., and The Yucaipa Companies. In the Recapitalization
Agreement, the Company has agreed subject to certain terms and conditions to
(i) commence the tender offer, and (ii) consummate the merger of Smitty's with
Acquisition, pursuant to which Smitty's will become a wholly owned subsidiary
of the Company and the stockholders of Smitty's will receive 3,038,888 shares
of Class B Common Stock of the Company. The shares of Class B Common Stock to
be received by the stockholders of Smitty's are not eligible to be tendered in
the tender offer.
At its January 28, 1996 meeting, the Company's Board of Directors
unanimously determined that it was in the best interests of the Company and
its stockholders that the Company enter into the Recapitalization Agreement
and the related agreements and consummate all of the transactions contemplated
by those agreements, including the tender offer. The Board determined to
recommend that the Company's stockholders approve the Recapitalization
Agreement and the transactions contemplated thereby, including the issuance of
3,038,888 shares of the Company's Class B Common Stock to the stockholders of
Smitty's in the Merger.
The purpose of the tender offer is to permit all of the Company's
stockholders the opportunity to exchange half of their Shares for a cash
amount reflecting a significant premium over the price at which the Company's
Common Stock has traded for some time and yet at the same time continue to
participate in the future performance of the Company.
The tender offer is explained in detail in the enclosed Offer to Purchase
and Letter of Transmittal. If you wish to tender Shares, the instructions for
tendering are also set forth in detail in the enclosed materials. I urge you
to read these materials carefully before making any decision with respect to
the tender offer. In particular, please see "Introduction--Advantages of
Tendering and Not Tendering" in the Offer to Purchase for a discussion of
certain factors that should be considered in evaluating the offer; "Financial
Data of the Company" in the Offer to Purchase for important historical, pro
forma and other financial information; and "The Tender Offer--Interest of
Certain Persons in the Transactions" in the Offer to Purchase for information
as to the intentions of the Company's directors, executive officers and
principal stockholders with respect to tendering shares (including the
intentions of the members of the Smith Group (as defined in the Offer to
Purchase) and the Company's directors and executive officers to participate in
the tender offer and tender a sufficient number of Shares to enable the
<PAGE>
Company, pursuant to a shareholder's agreement, to repurchase 50% of the
outstanding Shares pursuant to the Offer). Because the Smith Group and such
directors and officers own approximately 38% of the outstanding Shares, the
minimum tender condition will be satisfied if other stockholders tender Shares
representing at least 12% of the outstanding Shares.
EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER
SHARES AND, IF SO, HOW MANY SHARES TO TENDER.
If you have any questions regarding the tender offer, please call Mackenzie
Partners, Inc., the Information Agent for the tender offer, or Goldman, Sachs
& Co., the Dealer Managers for the tender offer, at the appropriate telephone
number set forth on the back cover of the Offer to Purchase.
Very truly yours,
/s/ Jeffrey P. Smith
Jeffrey P. Smith
Chairman and Chief Executive Officer
2
<PAGE>
This announcement is neither an offer to purchase nor a solicitation of an offer
to sell Shares. The Offer is made solely by the Offer to Purchase dated April
25, 1996 and the related Letter of Transmittal and is not being made to (nor
will tenders be accepted from or on behalf of) holders of Shares residing
in any jurisdiction in which the making of the Offer or the acceptance
thereof would not be in compliance with the laws of such jurisdiction.
In those jurisdictions whose laws require that the Offer be made by a
licensed broker or dealer, the Offer shall be deemed made on behalf
of the Company by Goldman, Sachs & Co. or one or more registered
brokers or dealers licensed under the laws of such jurisdiction.
Notice of Offer to Purchase for Cash
50% of the Outstanding Shares of Class A Common Stock
and Class B Common Stock
of
Smith's Food & Drug Centers, Inc.
at
$36 Net Per Share
Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"),
is offering to purchase 50% of the outstanding shares of its Class A Common
Stock, par value $.01 per share ("Class A Common Stock"), and its Class B
Common Stock, par value $.01 per share ("Class B Common Stock"; and, together
with the Class A Common Stock, the "Common Stock" or the "Shares") (excluding
shares issuable in the Merger referred to below), at $36 per Share, net to the
seller in cash (the "Purchase Price"), upon the terms and subject to the
conditions set forth in the Offer to Purchase dated April 25, 1996 and in the
related Letter of Transmittal (which together constitute the "Offer"). Based on
the outstanding 11,366,532 shares of Class A Common Stock and 13,705,191 shares
of Class B Common Stock as of April 15, 1996, the Company is offering to
purchase 12,535,862 Shares pursuant to the Offer.
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED.
THE OFFER IS CONDITIONED UPON AMONG OTHER THINGS (i) AT LEAST 50% OF THE
OUTSTANDING SHARES BEING VALIDLY TENDERED AND NOT WITHDRAWN BEFORE THE
EXPIRATION OF THE OFFER, (ii) THE COMPANY HAVING OBTAINED FINANCING NECESSARY
TO PURCHASE 50% OF THE SHARES, REPAY CERTAIN INDEBTEDNESS, AND PAY CERTAIN FEES
AND EXPENSES, AND (iii) ALL OF THE CONDITIONS TO THE MERGER REFERRED TO BELOW
(OTHER THAN THE CONSUMMATION OF THE OFFER) HAVING BEEN SATISFIED OR WAIVED.
The Offer relates to, among other things, the proposed recapitalization of
the Company pursuant to the Recapitalization Agreement and Plan of Merger,
dated as of January 29, 1996 (the "Recapitalization Agreement"), among the
Company, Cactus Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of the Company ("Acquisition"), Smitty's Supermarkets, Inc., a
Delaware corporation ("Smitty's"), and The Yucaipa Companies, a California
general partnership. In the Recapitalization Agreement, the Company has agreed
subject to certain terms and conditions to (i) commence the Offer and (ii)
consummate the merger of Smitty's with Acquisition, pursuant to which Smitty's
will become a wholly owned subsidiary of the Company and the stockholders of
Smitty's will receive 3,038,888 shares of Class B Common Stock of the Company
(the "Merger"). The shares of Class B Common Stock to be received by the
stockholders of Smitty's are not eligible to be tendered in the Offer. It is
anticipated that the Offer and the Merger will close simultaneously, except in
certain limited circumstances described in the Offer to Purchase.
The purpose of the Offer is to permit all of the Company's stockholders the
opportunity to exchange half of their Shares for a cash amount reflecting a
significant premium over the price at which the Company's Common Stock has
traded for some time and yet at the same time continue to participate in the
future performance of the Company.
Each stockholder should make his or her own decision whether to tender Shares
and, if so, how many Shares to tender. Pursuant to the Smith's Shareholder
Agreement entered into by Jeffrey P. Smith, Chairman and Chief Executive Officer
of the Company, Richard Smith, Fred Smith (all of whom are brothers), Ida Smith
(their mother), and certain related family trusts and related stockholders
(collectively, the "Smith Group"), the members of the Smith Group have agreed to
participate in the Offer and tender a sufficient number of Shares to enable the
Company to repurchase 50% of the outstanding Shares pursuant to the Offer. In
addition, directors and executive officers of the Company who have not executed
the Smith's Shareholder Agreement, who own approximately 7.6% of the outstanding
Shares, have indicated that they intend to tender their Shares in the Offer.
Because the Smith Group and such directors and officers own approximately 38% of
the outstanding Shares, the minimum tender condition will be satisfied if other
stockholders tender Shares representing at least 12% of the outstanding Shares.
Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment and thereby purchase 50% of its outstanding Shares, which
Shares are required to be validly tendered prior to the Expiration Date and not
theretofore withdrawn in accordance with the withdrawal procedures set forth in
the Offer to Purchase. The term "Expiration Date" means 12:00 Midnight, New York
City time, on May 22, 1996, unless and until the Company shall, in its sole
discretion, have extended the period of time during which the Offer is open, in
which event the term "Expiration Date" shall refer to the latest time and date
at which the Offer, as so extended by the Company, shall expire. If the Offer is
oversubscribed, Shares tendered prior to the Expiration Date and not withdrawn
will be subject to proration. The proration period also expires on the
Expiration Date. The Company reserves the right, in its sole discretion, to
purchase more than 50% of its outstanding Shares pursuant to the Offer, but it
has no current intention to do so.
If the number of Shares validly tendered prior to the Expiration Date and not
withdrawn is greater than 50% of its outstanding Shares (and, as is most likely,
the Company elects not to purchase pursuant to the Offer any more than 50% of
its outstanding Shares), the Company will, upon the terms and subject to the
conditions of the Offer, accept for purchase Shares properly tendered and not
withdrawn before the Expiration Date on a pro rata basis (with adjustments to
avoid purchases of fractional Shares).
In the likely event that proration of tendered Shares is required, the Company
will determine the final proration factor as promptly as practicable after the
Expiration Date. Proration for each stockholder tendering Shares will be based
on the ratio of the number of Shares tendered by such stockholder to the total
number of Shares tendered by all stockholders. Although the Company will
announce preliminary results of proration by press release as promptly as
practicable after the Expiration Date, the Company does not expect to be able to
announce the final results of such proration until approximately seven NYSE
trading days after the Expiration Date. Stockholders may obtain such preliminary
information from the Information Agent and may be able to obtain such
information from their brokers.
The Company expressly reserves the right, in its sole discretion, at any time
or from time to time, to extend the period of time during which the Offer is
open by giving oral or written notice of such extension to American Stock
Transfer & Trust Company (the "Depositary") and making a public announcement
thereof.
The Company will be deemed to have accepted for payment, and thereby
purchased, Shares properly tendered to the Company and not withdrawn as, if and
when the Company gives oral or written notice to the Depositary of the Company's
acceptance for payment of such Shares. Payment for Shares accepted for payment
pursuant to the Offer will be made only after timely receipt by the Depositary
of certificates for such Shares (or a confirmation of book-entry transfer of
such Shares into the Depositary's account at a Book-Entry Transfer Facility (as
defined in the Offer to Purchase)), a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) with any required signature
guarantees and any other required documents. Under no circumstances will
interest be paid by the Company on the Purchase Price of the Shares, regardless
of any delay in making such payment.
Shares tendered may be withdrawn at any time prior to the Expiration Date and,
unless accepted for payment by the Company, such Shares may also be withdrawn
after June 21, 1996. Once accepted for payment, tenders of Shares made pursuant
to the Offer are irrevocable. For a withdrawal to be effective, a written,
telegraphic or facsimile transmission notice of withdrawal must be received in a
timely manner by the Depositary at one of its addresses set forth on the back
cover of the Offer to Purchase and must specify the name of the person having
tendered the Shares to be withdrawn, the number of Shares to be withdrawn and
the name of the registered holder, if different from the name of the person who
tendered such Shares. If the certificates for Shares have been delivered or
otherwise identified to the Depositary, then, prior to the release of such
certificates, the tendering stockholder must also submit to the Depositary the
serial numbers shown on the particular certificates evidencing the Shares to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
Eligible Institution (as defined in the Offer to Purchase). If Shares have been
tendered by book-entry transfer, any notice of withdrawal must also specify the
name and number of the account at the appropriate Book-Entry Transfer Facility
to be credited with the withdrawn Shares and otherwise comply with such Book-
Entry Transfer Facility's procedures.
The Offer to Purchase and the related Letter of Transmittal and other relevant
materials will be mailed to record holders of Shares and furnished to brokers,
dealers, banks, trust companies and similar persons whose names, or the names of
whose nominees, appear on the stockholder lists or, if applicable, who are
listed as participants in a clearing agency's security position listing, for
subsequent transmittal to beneficial owners of Shares.
The information required to be disclosed by Rule 13e-4(d)(1) under the
Securities Exchange Act of 1934, as amended, is contained in the Offer to
Purchase and is incorporated herein by reference.
The Offer to Purchase and the related Letter of Transmittal contain important
information and should be read in their entirety before any decision is made
with respect to the Offer.
Requests for copies of the Offer to Purchase and the Letter of Transmittal may
be directed to the Information Agent or the Dealer Managers as set forth below,
and copies will be furnished promptly at the Company's expense.
The Information Agent for the Offer is:
[MACKENZIE LOGO]
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
Call Toll-Free (800) 322-2885
The Dealer Managers for the Offer are:
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
in New York State: (212) 902-1000 (collect)
Other Areas: (800) 323-5678 (toll free)
April 25, 1996
23181 MacKenzie Partners, Inc.
Farrington & Favia Inc. (212) 475-7600
Description: Smith's Food & Drug Centers, Inc.
April96/MacKenzie/23181-D-01
4/24/96 jn/et/jn Proof 5 4
<PAGE>
APRIL 25, 1996
SMITH'S FOOD & DRUG CENTERS, INC. COMMENCES OFFER
TO PURCHASE 50% OF ITS CLASS A COMMON STOCK AND
CLASS B COMMON STOCK AT $36 PER SHARE
(Salt Lake City, UT) - Smith's Food & Drug Centers, Inc. (NYSE: SFD) ("Smith's")
announced today that it has commenced an offer to purchase 50%, in the
aggregate, of its outstanding Class A Common Stock and Class B Common Stock (the
"Shares") at a price of $36 per share in cash. The offer is scheduled to expire
at 12:00 midnight, New York City time, on Wednesday, May 22, 1996. The offer is
being made pursuant to a previously announced Recapitalization Agreement and
Plan of Merger entered into by Smith's. In connection with the proposed
recapitalization, a subsidiary of Smith's will consummate a merger with Smitty's
Supermarkets, Inc. ("Smitty"s). Smitty's operates 28 supermarkets in the Phoenix
and Tucson areas and is controlled by The Yucaipa Companies, a private
investment group.
Smith's said that the offer will be made only by an Offer to Purchase and other
offering documents, copies of which are being filed today with the Securities
and Exchange Commission and mailed to Smith's stockholders. The offer is
conditioned on the tender of 50% of the Shares, the receipt of financing for the
recapitalization, as well as certain other conditions. Smith's will also file
definitive proxy materials with the SEC today in connection with its annual
stockholders meeting to be held May 23, 1996.
Goldman, Sachs & Co. are dealer managers for the offer and MacKenzie Partners,
Inc. is the information agent.
Smith's also announced that it intends to refile a registration statement with
the Securities and Exchange Commission relating to the issuance and sale of $150
million of Senior Notes due 2006, $350 million of Senior Subordinated Notes due
2007 (collectively, the "Notes") and 750,000 shares of Cumulative Redeemable
Exchangeable Preferred Stock (the "Preferred Stock"). The amount of Notes
(MORE)
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
Press Release -- Smith's Commences Offer
Page 2
proposed to be offered has been reduced from the amount previously filed as a
result of a corresponding increase in the size of the new credit facility which
Smith's will obtain in connection with the recapitalization.
BT Securities Corporation; CS First Boston Corporation; Donaldson, Lufkin &
Jenrette Securities Corporation; Goldman, Sachs & Co. and Chase Securities Inc.
will act as underwriters in connection with the offering of Notes and Preferred
Stock.
A registration statement relating to the Notes and Preferred Stock has been
filed with the Securities and Exchange Commission but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This press
release shall not constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any state in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
# # #
