<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1996
REGISTRATION NO. 333-01601
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SMITH'S FOOD & DRUG CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1550 SOUTH REDWOOD ROAD 87-0258768
(STATE OR OTHER SALT LAKE CITY, UTAH 84104 (IRS EMPLOYER
JURISDICTION OF (801) 974-1400 IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
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, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
THOMAS C. SADLER, ESQ. MICHAEL A. BECKER, ESQ.
LATHAM & WATKINS CAHILL GORDON & REINDEL
633 WEST FIFTH STREET 80 PINE STREET
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10005
(213) 485-1234 (212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE(b)
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<S> <C> <C> <C> <C>
% Senior Notes due
2006.................. $ 250,000,000 100% $250,000,000 $86,207
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% Senior Subordinated
Notes due 2007........ $ 400,000,000 100% $400,000,000 $137,931
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% Cumulative Redeem-
able Exchangeable
Preferred Stock....... 750,000 shares $100 $75,000,000 $25,862
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% Subordinated Ex-
change Debentures due
2008.................. (a) -- -- --
</TABLE>
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(a) The Exchange Debentures are being registered to cover the maximum face
amount of Exchange Debentures issuable upon exchange of the Cumulative
Redeemable Exchangeable Preferred Stock. Pursuant to Rule 457(i), no
registration fee is required.
(b) The registration fees were paid in connection with the original filing of
the Registration Statement on March 11, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses, one to be
used in connection with the offering of Senior Notes and Senior Subordinated
Notes and one to be used in connection with a concurrent offering of
Cumulative Redeemable Exchangeable Preferred Stock. The two prospectuses will
be identical in all respects except for the outside front cover page, inside
front cover page, summary of the offerings, "Summary Historical Financial Data
of Smith's" section, the "Risk Factors" section, the "Selected Historical
Financial Data of Smith's" section, the "Description of Notes" section, the
"Description of New Preferred Stock and Exchange Debentures" section, the
"Description of Other Indebtedness" section, the "Description of Capital
Stock" section, the "Certain Federal Income Tax Considerations" section, the
"Underwriting" section and the back cover page. The form of prospectus to be
used for the Senior Notes and Senior Subordinated Notes is included herein and
is followed by alternate pages for the form of prospectus to be used for the
Cumulative Redeemable Exchangeable Preferred Stock.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 17, 1996
PROSPECTUS
[LOGO OF SMITH'S FOOD & DRUG CENTERS, INC.]
SMITH'S FOOD & DRUG CENTERS, INC.
$250,000,000 % SENIOR NOTES DUE 2006
$400,000,000 % SENIOR SUBORDINATED NOTES DUE 2007
----------
The offering by Smith's Food & Drug Centers, Inc. ("Smith's" or the
"Company") of its % Senior Notes due 2006 (the "Senior Notes") and its %
Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes" and,
together with the Senior Notes, the "Notes") is part of the financing required
to consummate the Recapitalization (as defined) of Smith's and the Merger (as
defined) of Smitty's Supermarkets, Inc. ("Smitty's") with a subsidiary of
Smith's. Concurrently with this offering, the Company is offering 750,000
shares of its Cumulative Redeemable Exchangeable Preferred Stock, par value
$.01 per share (the "New Preferred Stock"), for estimated gross proceeds of
$75.0 million (the "Stock Offering," and together with this offering, the
"Offerings"). Consummation of each of the Offerings is conditioned upon the
closing of the Merger and the Recapitalization.
Interest on the Notes will be payable semiannually on each May 15 and
November 15, commencing on November 15, 1996. The Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on and after May
15, 2001, at the respective redemption prices set forth herein. In addition, on
or prior to May 15, 1999, the Company may, at its option, use the Net Cash
Proceeds (as defined) of one or more Public Equity Offerings (as defined) to
redeem up to an aggregate of 35% of the Senior Notes originally issued and up
to 35% of the Senior Subordinated Notes originally issued, at the respective
redemption prices set forth herein. Upon a Change of Control (as defined), each
holder of Notes will have the right to require the Company to repurchase such
holder's Notes at a price equal to 101% of their principal amount plus accrued
and unpaid interest to the date of repurchase.
The 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 Senior Notes will be effectively subordinated to all
secured indebtedness of the Company, including indebtedness under the New
Credit Facility (as defined). The Senior Notes will rank senior in right of
payment to all subordinated indebtedness of the Company, including the Senior
Subordinated Notes. At December 30, 1995, on a pro forma basis after giving
effect to the Transactions (as defined) and the California Disposition (as
defined), the Company would have had outstanding $663.2 million aggregate
principal amount of secured indebtedness. The 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) of the
Company, including the Company's obligations under the New Credit Facility and
the Senior Notes. At December 30, 1995, on a pro forma basis after giving
effect to the Transactions and the California Disposition, the aggregate
outstanding amount of Senior Indebtedness of the Company would have been
approximately $913.2 million, which amount excludes any borrowings or amounts
available to be borrowed under the New Revolving Facility (as defined). The
Notes will be effectively subordinated to all existing and future liabilities,
including indebtedness, of the Company's subsidiaries. At December 30, 1995, on
a pro forma basis after giving effect to the Transactions and the California
Disposition, the Company's subsidiaries would have had indebtedness and other
liabilities reflected on the Company's consolidated balance sheet, including
trade payables and accrued expenses (but excluding guarantees of Senior
Indebtedness), of approximately $148.4 million.
The Company does not intend to apply for listing of any of the Securities (as
defined) on any national securities exchange. See "Underwriting."
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
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<S> <C> <C> <C>
Per Senior Note............................ % % %
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Per Senior Subordinated Note............... % % %
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Total...................................... $650,000,000 $ $
</TABLE>
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(1) Plus accrued interest, if any, from date of original issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses of the Offerings payable by the Company,
estimated at $ .
----------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval
of certain legal matters by counsel. It is expected that delivery of the Notes
will be made on or about , 1996, at the offices of BT Securities
Corporation, One Bankers Trust Plaza, New York, New York.
----------
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
----------
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR NOTES,
THE SENIOR SUBORDINATED NOTES OR THE NEW PREFERRED STOCK AT LEVELS ABOVE THOSE
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Notes and the New Preferred Stock. Each of the
Company and Smitty's is subject to the reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder, and in accordance
therewith files reports and other information with the Commission. Such
reports and other information filed by the Company or Smitty's with the
Commission can be inspected without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street. N.W., Room 1024, Washington,
D.C. 20549, and at the regional offices of the Commission located at Seven
World Trade Center, Suite 1300, New York, New York 10048; 500 West Madison
Street, Chicago, Illinois 60601; and 5670 Wilshire Boulevard, Suite 500, Los
Angeles, California 90036. 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. The Class B Common Stock of the
Company is listed on the New York Stock Exchange and reports, proxy statements
and other information concerning the Company can also be inspected at the
office of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
This Prospectus summarizes the contents and terms of documents not included
herewith. These documents are available upon request from Smith's Food & Drug
Centers, Inc. at 1550 South Redwood Road, Salt Lake City, Utah 84104,
telephone number (801) 974-1400, Attn: Michael C. Frei, General Counsel and
Secretary.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Smith's with the Commission under the
Exchange Act are incorporated herein by reference: (i) Smith's Annual Report
on Form 10-K for its fiscal year ended December 30, 1995; (ii) Smith's current
report on Form 8-K dated February 19, 1996, and (iii) the sections of Smith's
1996 Proxy Statement for its Annual Meeting of Stockholders entitled "The
Recapitalization Agreement," and "Executive Compensation." In addition, all
documents filed by Smith's with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior
to the termination of the Offerings shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing
of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document that also is, or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Copies of documents incorporated herein by reference (excluding exhibits
unless such exhibits are specifically incorporated herein by reference) may be
obtained without charge upon request from Smith's Food & Drug Centers, Inc. at
1550 South Redwood Road, Salt Lake City, Utah 84104, telephone number
(801) 974-1400, Attn: Michael C. Frei, General Counsel and Secretary.
i
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the Financial Statements and notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise stated, references in this Prospectus to
numbers of stores prior to the consummation of the Merger are as of March 1,
1996. References to the "pro forma" number of stores to be operated by the
Company following the consummation of the Merger are based on the March 1, 1996
totals for Smith's and Smitty's, but give effect to the California Divestiture,
as described herein. Unless otherwise noted, the market share data contained
herein has been prepared by management of the Company based upon internal
research.
THE COMPANY
Smith's 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 Smith'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.
The Company is pursuing a series of transactions designed to enhance
stockholder value and liquidity:
. Arizona Merger and Consolidation. The Company has entered into an
agreement to acquire Smitty's Supermarkets, Inc. ("Smitty's"), a
regional supermarket operator with 28 stores in the Phoenix and Tucson
markets, in a stock-for-stock exchange (the "Merger"). The Merger will
significantly enhance the Company's market position in Arizona. Smitty's
is controlled by affiliates of The Yucaipa Companies ("Yucaipa"), a
private investment group specializing in the supermarket industry.
Affiliates of Yucaipa will own approximately 13.6% of the Company's
outstanding common stock following the Merger and the Recapitalization
(as defined).
. California Disposition. The Company has completed the sale or lease of
16 stores, three non-operating properties and its primary distribution
facility in Southern California and has closed its remaining 18 stores
(the "California Divestiture"). Management determined that because of
the attractive growth prospects in the Company's principal markets and
the competitive environment in Southern California, it would redeploy
Company resources from California into such other markets. 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".)
. New Senior Management. The Company will enter into a five-year
management services agreement (the "Management Services Agreement") with
Yucaipa. Ronald W. Burkle, the managing general partner of Yucaipa, will
be appointed as Chief Executive Officer of the Company. In addition,
Allen R. Rowland recently joined Smith's as President and Chief
Operating Officer. Mr. Rowland was employed by Albertson's, Inc. for 25
years and had senior executive responsibilities for all of the principal
regions in which Smith's operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding common stock (excluding shares issuable in the Merger) for
$36.00 in cash per share (the "Tender Offer"). In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
1
<PAGE>
For the fiscal year ended December 30, 1995, after giving pro forma effect to
the Transactions and the California Disposition, the Company would have had net
sales and EBITDA (as defined) of approximately $3.0 billion and $255.4 million,
respectively. See "Unaudited Pro Forma Combined Financial Statements." In
addition, management believes that the Company will benefit from significant
operating synergies and cost saving opportunities following the Merger.
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
terms of population and 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,
demographics 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, Smith's 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
2
<PAGE>
THE CALIFORNIA DIVESTITURE
Smith's has substantially completed the sale, lease or closure of its
Southern California regional operations. In December 1995, Smith's entered into
an agreement to sublease its Riverside, California distribution center and
dairy plant to Ralphs Grocery Company ("Ralphs"), an affiliate of Yucaipa, for
the remaining 23-year term of Smith's lease. Ralphs also agreed to purchase
certain related equipment and inventory. In January 1996, Smith's entered into
agreements to sell or lease 16 stores and related equipment and three non-
operating properties to various supermarket companies (including Ralphs) and
others. Smith's has closed the remaining 18 stores and it is anticipated that
these closed stores will be sold or leased to other retail companies. 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 Transactions. 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 California 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 Merger or the Recapitalization.
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed 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
following the consummation of the Transactions.
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 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.
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 Prospectus are forward
looking statements that involve risks and inherent uncertainties that could
cause actual net annual cost savings to differ materially from those projected.
See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's 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.
3
<PAGE>
. 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 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 Smith'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 Smith'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 Smith's front-end systems in Smitty's stores, improvements in
the efficiency of Smitty's stores are expected. Management estimates
that annualized cost savings 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 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 Transactions,
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.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
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 Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of its remaining real estate assets in
California, consisting 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
4
<PAGE>
reduce indebtedness incurred in connection with the Transactions. 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 (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. See "Risk
Factors--Anticipated Charges to Earnings Following the Transactions."
THE TRANSACTIONS
The Merger. On January 29, 1996, Smith's and a wholly owned subsidiary of
Smith's ("Acquisition"), entered into a Recapitalization Agreement and Plan of
Merger (the "Recapitalization Agreement") with Smitty's and Yucaipa. Pursuant
to the terms of the Recapitalization Agreement, Smitty's will merge with
Acquisition, as a result of which Smitty's will become a wholly owned
subsidiary of Smith's. The consideration payable to the stockholders of
Smitty's in the Merger will consist of 3,038,888 shares of Class B Common Stock
of the Company.
Tender Offer. Smith's is offering to purchase 50% of its outstanding Class A
Common Stock and Class B Common Stock (collectively, the "Common Stock") for
$36.00 per share in cash in the Tender Offer. The shares issuable to the
stockholders of Smitty's will not be eligible to participate in the Tender
Offer. Smith's is also offering to purchase for cash certain outstanding
options to purchase Common Stock held by certain officers and employees of
Smith's for an aggregate purchase price estimated to be approximately $13.7
million.
Smith's Debt Refinancing and Preferred Stock Redemption. Smith's will repay
in full substantially all of its existing indebtedness ($667.1 million at
December 30, 1995), including all outstanding borrowings under its existing
revolving credit facilities, and will purchase approximately $1.0 million of
its outstanding Series I Preferred Stock.
Smitty's Debt Refinancing. At the time the Merger is consummated, the Company
will cause Smitty's and its subsidiary, Smitty's Super Valu, Inc. ("SSV"), to
repay in full certain existing indebtedness (approximately $34.9 million
principal amount at December 30, 1995), including all outstanding borrowings
under SSV's bank credit facility. Smitty's will also make an offer to purchase
all of the $29.025 million principal amount (accreted value of $18.4 million at
December 30, 1995) of its Senior Discount Debentures due 2006 (the "Smitty's
Debentures"), and SSV will make an offer to purchase all of the $50.0 million
principal amount of its Senior Subordinated Notes due 2004 (the "Smitty's
Notes"). Smitty's and SSV will concurrently solicit consents from the holders
of such securities to certain amendments to the respective indentures under
which such securities were issued. The foregoing debt refinancing transactions
of Smitty's and SSV are referred to herein collectively as the "Smitty's
Refinancing."
The Offerings, the Tender Offer, the purchase of certain management stock
options, the Series I Preferred Stock purchase, the Smith's debt refinancings
described above and the closing under a new senior credit facility (the "New
Credit Facility") to be provided to the Company are collectively referred to
herein as the "Recapitalization." The Recapitalization, the Merger and the
Smitty's Refinancing are collectively referred to herein as the "Transactions."
5
<PAGE>
The following table illustrates the pro forma sources and uses of funds to
consummate the Transactions, assuming the Transactions and the California
Disposition had been 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 USES
------- ----
<S> <C> <C> <C>
New Term Loans (a)...... $ 655.0 Purchase Smith's Common Stock............... $ 451.3
New Revolving Facility
(a)(b)................. 13.2 Purchase Smith's Management Options......... 13.7
Senior Notes............ 250.0 Purchase Smith's Series I Preferred Stock... 1.0
Senior Subordinated
Notes.................. 400.0 Repay Smith's Mortgage Notes................ 257.1
New Preferred Stock..... 75.0 Repay Smith's Unsecured Notes............... 410.0
California Disposition
Proceeds (b)........... 68.0 Repay Smith'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 Facility......... 34.9
Debt Refinancing Premiums................... 56.8
Accrued Interest............................ 12.6
Fees and Expenses........................... 87.4
-------- --------
Total Sources........... $1,461.2 Total Uses.................................. $1,461.2
======== ========
</TABLE>
- --------
(a) The Company has obtained a commitment from Bankers Trust Company ("Bankers
Trust") and The Chase Manhattan Bank ("Chase Manhattan") for a new senior
credit facility that will provide up to $655 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
Transactions (the "Closing"). The New Credit Facility will be guaranteed by
all subsidiaries of the Company, including Smitty's. See "Description of
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 anticipated 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 Transactions. Subsequent to
December 30, 1995, the Company has received net cash proceeds from the
California Divestiture of $67.2 million and expects to receive an
additional $10.6 million in proceeds from the California Divestiture at, or
shortly after, the Closing. 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
"Business--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
Refinancing. 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.
6
<PAGE>
THE OFFERINGS
SENIOR NOTES:
Securities Offered...... $250,000,000 aggregate principal amount of % Senior
Notes due 2006.
Maturity Date...........
May 15, 2006.
Interest Rate........... The Senior Notes will bear interest at the rate of %
per annum.
Interest Payment Dates..
May 15 and November 15, commencing on November 15,
1996.
Optional Redemption.....
The Senior Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after , 2001, at the following redemption prices
if redeemed during the 12-month period commencing on
May 15 of the year set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001................................................. %
2002................................................. %
2003................................................. %
2004 and thereafter.................................. 100.0%
</TABLE>
in each case plus accrued and unpaid interest to the
date of redemption.
In addition, on or prior to May 15, 1999, the Company
may, at its option, use the net cash proceeds from
one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the
Senior Notes originally issued, at a redemption price
equal to % of the principal amount thereof plus
accrued and unpaid interest to the date of
redemption.
Ranking.................
The 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. The Senior Notes will rank senior in
right of payment to all subordinated indebtedness of
the Company including the Senior Subordinated Notes.
However, the Senior Notes will be effectively
subordinated to all secured indebtedness of the
Company and its subsidiaries, including indebtedness
under the New Credit Facility. At December 30, 1995,
on a pro forma basis after giving effect to the
Transactions and the California Disposition, the
Company would have had outstanding $663.2 million
aggregate principal amount of secured indebtedness,
which amount excludes any borrowings or amounts
available to be borrowed under the New Revolving
Facility. The Senior Notes will be effectively
subordinated to all existing and future liabilities,
including indebtedness of the Company's subsidiaries.
At December 30, 1995, on a pro forma basis after
giving effect to the Transactions and the California
Disposition, the Company's subsidiaries would have
had indebtedness and other liabilities reflected on
the Company's consolidated balance sheet, including
trade payables and accrued expenses (but excluding
guarantees of Senior Indebtedness), of approximately
$148.4 million.
7
<PAGE>
Change of Control....... Upon the occurrence of a Change of Control (as
defined), each holder will have the right to require
the Company to repurchase such holder's Senior Notes
at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to
the date of repurchase.
Certain Covenants....... The indenture pursuant to which the Senior Notes will
be issued (the "Senior Note Indenture") will contain
certain covenants that, among other things, limit the
ability of the Company and its Restricted
Subsidiaries (as defined) to make restricted
payments, incur additional indebtedness, create
liens, sell assets, create dividend or other payment
restrictions affecting Restricted Subsidiaries, enter
into transactions with affiliates or, consummate
mergers or certain other transactions and the ability
of the Restricted Subsidiaries to issue preferred
stock.
SENIOR SUBORDINATED NOTES:
Securities Offered...... $400,000,000 aggregate principal amount of % Senior
Subordinated Notes due 2007.
Maturity Date...........
May 15, 2007.
Interest Rate........... The Senior Subordinated Notes will bear interest at
the rate % per annum.
Interest Payment Dates..
May 15 and November 15 commencing on November 15,
1996.
Optional Redemption.....
The Senior Subordinated Notes will be redeemable at
the option of the Company, in whole or in part, at
any time on or after May 15, 2001, at the following
redemption prices if redeemed during the 12-month
period commencing on May 15 of the year set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001................................................. %
2002................................................. %
2003................................................. %
2004 and thereafter.................................. 100.0%
</TABLE>
in each case plus accrued and unpaid interest to the
date of redemption.
In addition, on or prior to May 15, 1999, the Company
may, at its option, use the net cash proceeds from
one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the
Senior Subordinated Notes originally issued, at a
redemption price equal to % of the principal amount
thereof plus accrued and unpaid interest to the date
of redemption.
Ranking.................
The 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) of the Company,
including the Company's obligations under the New
Credit Facility and the Senior Notes. At December 30,
1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the
aggregate outstanding amount of Senior Indebtedness
of the Company would have been
8
<PAGE>
approximately $913.2 million, which amount excludes
any borrowings or amounts available to be borrowed
under the New Revolving Facility. The Senior
Subordinated Notes will be effectively subordinated
to all existing and future liabilities, including
indebtedness of the Company's subsidiaries. At
December 30, 1995, on a pro forma basis after giving
effect to the Transactions and the California
Disposition, the Company's subsidiaries would have
had indebtedness and other liabilities reflected on
the Company's consolidated balance sheet, including
trade payables and accrued expenses (but excluding
guarantees of Senior Indebtedness), of approximately
$148.4 million.
Change of Control....... Upon the occurrence of a Change of Control (as
defined), each holder will have the right to require
the Company to repurchase such holder's Senior
Subordinated Notes at a purchase price equal to 101%
of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase.
The indenture pursuant to which the Senior
Certain Covenants.. Subordinated Notes will be issued (the "Senior
Subordinated Note Indenture") will contain certain
covenants that, among other things, limit the ability
of the Company and its Restricted Subsidiaries to
make restricted payments, incur additional
indebtedness, create liens, sell assets, create
dividend or other payment restrictions affecting
Restricted Subsidiaries, enter into transactions with
affiliates, consummate mergers or certain other
transactions or incur indebtedness subordinated to
any other indebtedness but senior to the Senior
Subordinated Notes and the ability of the Restricted
Subsidiaries to issue Preferred Stock.
CONCURRENT OFFERING:
New Preferred Stock.....
Concurrently with the offering of Notes, the Company
is offering 750,000 shares of its % Convertible
Redeemable Exchangeable Preferred Stock. The
Offerings are conditioned upon each other. In
addition, the consummation of each of the Offerings
is a condition to the Company's simultaneous
obligation to consummate the Merger and the
Recapitalization. See "Summary--The Transactions."
The Company does not intend to apply for listing of any of the Securities (as
defined) on any national securities exchange. See "Underwriting."
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth summary unaudited pro forma combined financial
data for the 52 weeks ended December 30, 1995, after giving effect to the (a)
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 they had 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 Smith'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 Smith's, 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 as of and for the 52 weeks ended January 14,
1996. The pro forma financial data set forth below is not necessarily
indicative of the results that actually would have been achieved had such
transactions been consummated as of the dates indicated, or that may be
achieved in the future. The pro forma combined financial data does 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 expected to be incurred in connection with the
integration of operations in Arizona following the Merger. In addition, the
summary pro forma combined operating data does not reflect the California
Divestiture Charge, the California Asset Disposition Charge, an extraordinary
loss on extinguishment of debt 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. The
following pro forma financial data should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Smith's and Smitty's, and related notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS ENDED
DECEMBER 30, 1995(A)
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
OPERATING DATA:
Net sales........................................... $2,993.4
Gross profit........................................ 703.3
Operating, selling and administrative expenses...... 452.2
Depreciation and amortization....................... 89.9
Interest............................................ 134.2
Net income.......................................... $ 8.6
Ratio of earnings to fixed charges(b)............... 1.11x
Ratio of earnings to fixed charges and preferred
stock dividends(b)................................. 1.00x
BALANCE SHEET DATA (END OF PERIOD):
Total assets........................................ $1,709.5
Total debt(c)....................................... 1,356.8
Redeemable preferred stock.......................... 3.3
New Preferred Stock................................. 71.2
Common stockholders' equity (deficit)............... $ (121.6)
OTHER DATA:
Capital expenditures................................ $ 159.7
EBITDA (as defined)(d)(e)........................... $ 255.4
EBITDA margin(f).................................... 8.53%
Ratio of EBITDA (as defined) to interest expense.... 1.90x
Ratio of total debt to EBITDA (as defined).......... 5.31x
</TABLE>
10
<PAGE>
- --------
(a) For purposes of the Unaudited Pro Forma Combined Financial Data, 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 balances, 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.
(b) 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.
(c) Total debt includes long-term debt and current maturities of long-term
debt. As a result of the assumed application of a portion of the proceeds
of the California Disposition (see note (a) above) 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 Transactions of $13.2 million.
(d) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of a
company's ability to service debt and, with certain variations in
definition, is an indicator of compliance with various covenants in the
Company's debt agreements. However, EBITDA should not be construed as an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) or to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles)
and should not be construed as an indication of the Company's operating
performance or as a measure of liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For additional
information concerning the Company's historical cash flows, see "Selected
Historical Financial Data of Smith's" and the Consolidated Statements of
Cash Flows included elsewhere herein.
(e) Pro forma EBITDA (as defined) does not give effect to net annual cost
savings (as compared to such costs for the pro forma combined fiscal year
ended December 30, 1995) which management believes are achievable by the
end of the third full year of combined operations following the Merger. The
sum of the components of the estimated annual cost savings exceeds $25
million; however, management's estimate of $25 million in net annual cost
savings gives effect to an offsetting adjustment to reflect its expectation
that a portion of the savings will be reinvested in the Company's
operations. The estimates of potential cost savings resulting from the
Merger contained in this Prospectus are forward looking statements that
involve risks and inherent uncertainties that could cause actual net annual
cost savings to differ materially from those projected. See "Risk Factors--
Ability to Achieve Anticipated Cost Savings." The sum of the Company's pro
forma EBITDA (as defined) ($255.4 million) and the full amount of the
estimated net annual cost savings to be realizable by the end of the third
full year of operations following the Merger ($25.0 million) is $280.4
million. See "--Operating Strategy--Realize Operating Synergies and Cost
Savings Resulting from the Merger."
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth summary historical financial data of Smith's
for the five fiscal years ended December 30, 1995, which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Smith's and related notes thereto included
elsewhere in this Prospectus.
<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)
<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 amor-
tization.............. 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)
Ratio of earnings to
fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x --
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(c).......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(d)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included elsewhere
herein.
(b) 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 of
annual rental expense deemed by the Company to be representative of the
interest factor). 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 include non-cash charges of $105.4 million, primarily
consisting of depreciation and amortization, and restructuring charges of
$140.0 million.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of a
company's ability to service debt. However, EBITDA should not be construed
as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of Smith's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
For additional information concerning the Company's historical cash flows,
see "Selected Historical Financial Data of Smith's" and the Consolidated
Statements of Cash Flows included elsewhere herein.
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
the securities being sold in the Offerings.
LEVERAGE AND DEBT SERVICE
Following the consummation of the Transactions, the Company will be highly
leveraged. At December 30, 1995, pro forma for the Transactions and the
California Disposition, 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 Revolving Facility on a pro
forma basis, subject to the borrowing conditions contained therein. In
addition, as of December 30, 1995, after giving effect to the Transactions,
scheduled payments under net operating leases of the Company and its
subsidiaries for the twelve months following 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 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 Revolving Facility and its other
sources of liquidity (including leases), will be adequate to meet its
anticipated requirements for working capital, capital expenditures, lease
payments, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate 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 and,
therefore, as to the timing or amount of receipts thereof as reflected in the
unaudited pro forma combined financial statements. 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 Transactions and the
fact that substantially all of its assets will be pledged to secure the
borrowings under the New Credit Facility and other secured obligations.
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 and
other agreements relating to the Company's indebtedness and in the Indentures
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, preferred or common 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. Moreover, any default under the documents governing the
indebtedness of the Company could have a significant adverse effect on the
market value of the Notes.
The Company's capital structure immediately after the Transactions 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
13
<PAGE>
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. See
"Description of New Credit Facility." In addition, following the Transactions,
the Company's blended average rates of interest are anticipated to be higher
than the rates of interest on the Company's indebtedness outstanding
immediately prior to the Transactions.
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 Smith's and
Smitty's. The estimates of potential cost savings contained in this Prospectus
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 (principally those set forth in
"Summary--Operating Strategy" and "Business-- Operating Strategy") or
otherwise cause the Company's results of operations to be adversely affected
in future periods: (i) continued or increased competitive pressures from
existing competitors and new entrants, including price-cutting strategies;
(ii) unanticipated costs related to the Transactions and the integration
strategy; (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 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 TRANSACTIONS
Upon consummation of the Transactions, 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, (iii)
the purchase of certain management stock options, and (iv) the integration of
its Arizona operations 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 Prospectus 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
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
14
<PAGE>
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. See "Business--
Competition."
CONTROL OF THE COMPANY
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 Transactions, members
of the Smith Group (as defined) 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 of the Company, representing
approximately 41.8% of the aggregate voting power of the Company's capital
stock, and certain affiliates of Yucaipa will have beneficial ownership of
approximately 13.6% of the total outstanding Common Stock of the Company,
representing approximately 1.3% of the aggregate voting power of the Company's
outstanding capital stock. Pursuant to a standstill agreement (the "Standstill
Agreement") entered into by such Smith family members (the "Smith Group"),
certain affiliates of Yucaipa (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 nominate one director 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 has effective
control of the Company and will effectively be able 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.
See "Certain Relationships and Related Transactions," "Principal Stockholders"
and "Description of Capital Stock."
NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS
Upon consummation of the Transactions, substantially all of the existing
members of the Company's Board of Directors will resign and be replaced by the
new directors identified in this Prospectus. Jeffrey P. Smith will remain as
Chairman of the Board but will resign as Chief Executive Officer of the
Company. Ronald W. Burkle, the managing general partner of Yucaipa, will be
appointed Chief Executive Officer of the Company and Allen R. 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 "Management" and "Certain Relationships and Related
Transactions."
15
<PAGE>
CONTINGENT LIABILITIES RELATING TO CALIFORNIA DIVESTITURE
In connection with closing stores and otherwise redeploying assets, the
Company has assigned leases and subleased stores and other facilities at
various times, including the sublease to Ralphs of the Company's Riverside,
California distribution center and dairy plant and the assignment or sublease
of 10 stores to various supermarket companies (including 6 to Ralphs) in
connection with the California Divestiture. Since the Company will generally
remain either primarily or secondarily liable for the underlying lease
obligations with respect to these stores and other facilities, the Company has
a contingent liability to the extent the Company's sublessees or assignees
default in the performance of their obligations under their respective
sublease or underlying lease. See "Business--California Divestiture."
FRAUDULENT CONVEYANCE RISKS
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Notes in
favor of other existing or future creditors of the Company.
Proceeds of the Offerings are being used, in part, to purchase shares of
Smith's Common Stock in the Tender Offer, to redeem options to purchase Common
Stock held by Smith's management, and to purchase shares of Smith's Series I
Preferred Stock. 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 issued the Notes, 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 for issuing such Notes and the Company (i) was
insolvent, (ii) was rendered insolvent by reason of such stock purchases and
redemptions, (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 Notes and void such transactions. Alternatively, in such event,
claims of the holders of such Notes could be subordinated to claims of other
creditors of the Company. The Company may be viewed as insolvent at the time
of or as a result of the Tender Offer, redemption of options and preferred
stock, if the fair value of its assets does not exceed its probable
liabilities at the time of, or following such transactions.
Based upon financial and other information currently available to it,
management of the Company believes that the Notes are being incurred 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 redemption of options to purchase capital stock of a company
may also be viewed as not constituting reasonably equivalent value or fair
consideration to the company. The Company believes that it (i) is solvent and
will continue to be solvent after issuing the Notes notwithstanding the fact
that the Company, after completion of the Tender Offer, redemption of options
and redemption of preferred stock, will have a negative net worth under
generally accepted accounting principles, because the Company believes that
the fair value of the Companys' assets exceeds and will exceed its probable
liabilities, (ii) will have sufficient capital for carrying on the business it
intends to conduct after such issuance, and (iii) will be able to pay its
debts as they mature. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." 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 Tender 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 Transactions, 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 Transactions
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.
16
<PAGE>
EFFECTIVE SUBORDINATION OF THE NOTES
The Notes will be effectively subordinated to all secured indebtedness of
the Company and its subsidiaries to the extent of the value of the assets
securing such indebtedness. The borrowings and obligations under the New
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiaries. At December 30, 1995, on a pro forma basis after giving
effect to the Transactions and the California Disposition, the Company would
have had approximately $663.2 million aggregate amount of secured indebtedness
and other obligations outstanding, which amount excludes any borrowings or
amounts available to be borrowed under the New Revolving Facility.
The Notes will also be effectively subordinated to all existing and future
liabilities, including indebtedness, of the Company's subsidiaries. The
obligations of the Company under the New Credit Facility will be guaranteed,
jointly and severally, by the Company's subsidiaries, including Smitty's. At
December 30, 1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the Company's subsidiaries would
have had indebtedness and other liabilities reflected on the Company's
consolidated balance sheet, including trade payables and accrued expenses (but
excluding guarantees of Senior Indebtedness), of approximately $148.4 million.
Claims of creditors of the Company's subsidiaries, including trade creditors,
will generally have priority as to the assets of such subsidiaries over the
claims of the Company and the holders of the Company's indebtedness, including
the Notes.
SUBORDINATION OF THE SENIOR SUBORDINATED NOTES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Senior Subordinated Notes will be
subordinated to the prior payment in full of all existing and future Senior
Indebtedness, including indebtedness under the New Credit Facility and the
Senior Notes. As of December 30, 1995, on a pro forma basis after giving
effect to the Transactions and the California Disposition, the aggregate
outstanding amount of Senior Indebtedness of the Company would have been
approximately $913.2 million, which amount excludes any borrowings or amounts
available to be borrowed under the New Revolving Facility. In the event of the
bankruptcy, liquidation, dissolution, reorganization or other winding up of
the Company, the assets of the Company will be available to pay obligations on
the Senior Subordinated Notes only after all Senior Indebtedness has been paid
in full, and there may not be sufficient assets remaining to pay amounts due
on any or all of the Senior Subordinated Notes. In addition, under certain
circumstances, the Company may not pay principal of, premium, if any, or
interest on, or any other amounts owing in respect of, the Senior Subordinated
Notes, or purchase, redeem or otherwise retire the Senior Subordinated Notes,
if a payment default or a non-payment default exists with respect to certain
Senior Indebtedness and, in the case of a non-payment default, a payment
blockage notice has been received by the Senior Subordinated Note Trustee (as
defined). See "Description of the Notes-- Subordination of the Senior
Subordinated Notes."
ABSENCE OF ESTABLISHED MARKET FOR THE NOTES
There is no established market for the Notes and there can be no assurance
as to the liquidity of any markets that may develop for the Notes, the ability
of holders of the Notes to sell their Notes, or the price at which holders
would be able to sell their Notes. Future trading prices of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes. However, the Underwriters are not obligated to do so and
any market-making may be discontinued at any time, by any or all of them,
without notice.
17
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated pro forma capitalization of
the Company at December 30, 1995, giving effect to the Transactions 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 Smith's and Smitty's, and the related
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Current portion of long-term debt:
New Term Loans.................................... $ 10.8
Other indebtedness................................ 1.4
--------
Total current portion of long-term debt......... $ 12.2
========
Long-term debt:
New Term Loans(a)................................. $ 644.2
New Revolving Facility(a)(b)...................... --
Senior Notes...................................... 250.0
Senior Subordinated Notes......................... 400.0
Other indebtedness................................ 50.4
--------
Total long-term debt............................ 1,344.6
--------
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.......................... $1,297.5
========
</TABLE>
- --------
(a) The Company has obtained a commitment from Bankers Trust and Chase
Manhattan for the New Credit Facility that will provide up to $655 million
aggregate principal amount of New Term Loans and a $190 million 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 at Closing. The New
Credit Facility will be guaranteed by all subsidiaries of the Company,
including Smitty's. See "Description of New Credit Facility."
(b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's
Refinancing. 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 Transactions 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 Transactions or (ii) Warrants to purchase shares of
Class C Common Stock of the Company (at an initial exercise price of
$50.00 per share) to be issued to Yucaipa upon consummation of the
Transactions. See "Certain Relationships and Related Transactions."
18
<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 Smith'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 Smith's, 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 as of and 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, Smith's 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 only 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 Smith's 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 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
19
<PAGE>
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 Smith's and Smitty's, together with the related notes thereto,
included elsewhere in this Prospectus.
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview." The Unaudited Pro Forma
Combined Statement of Operations included herein does not reflect the
California Divestiture Charge, the California Asset Disposition Charge, an
extraordinary loss on extinguishment of debt, an anticipated charge relating
to certain costs expected to be incurred by Smith's in connection with the
Merger 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.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------------------
JANUARY 14,
DECEMBER 30, 1995 1996 PRO FORMA
---------------------------------------------- ------------ COMBINED FOR
SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S ADJUSTMENTS CALIFORNIA
(HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) FOR DISPOSITION
(AUDITED) DISPOSITION(A) DISPOSITION (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
------------ --------------- ----------------- ------------ ------------ ----------------
<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 55.8 (e) 134.2
Amortization of debt
issuance costs....... 0.4 0.4 1.0 8.5 (e) 9.9
---------- ------- ---------- --------- ------ ----------
Income (loss) before
income taxes........... (69.8) 154.2 84.4 (3.0) (64.3) 17.1
Income tax expense
(benefit).............. (29.3) 63.2 33.9 (0.7) (24.7)(f) 8.5
---------- ------- ---------- --------- ------ ----------
Net income (loss) (g)... (40.5) 91.0 50.5 (2.3) (39.6) 8.6
Preferred stock
accretion.............. (10.2)(h) (10.2)
---------- ------- ---------- --------- ------ ----------
Income (loss) applicable
to common shares....... $ (40.5) $ 91.0 $ 50.5 $ (2.3) $(49.8) $ (1.6)
========== ======= ========== ========= ====== ==========
Net income (loss) per
common
share (g).............. $ (1.62) $ 2.00 $ (2.30) $ (0.10)(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 1.11x
Ratio of earnings to
fixed charges and
preferred stock
dividends (j)(k)....... -- 2.27x 1.00x
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
21
<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. See "Certain
Relationships and Related Transactions--Management Services Agreement."
(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 Smith's................................ 60.0
------
78.4
------
Plus: Interest on:
New Term Loans................................... 57.6
Bank fees........................................ 0.3
Senior Notes..................................... 25.7
Senior Subordinated Notes........................ 44.0
Less: Interest on:
Old bank term loans:
Pro forma Smith's.............................. (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.............................. 55.8
------
Pro forma interest expense......................... $134.2
======
Historical amortization of debt issuance costs..... $ 1.4
Plus:
Financing fees--New Credit Facility.............. 6.5
Financing fees--Senior Notes and Senior
Subordinated Notes.............................. 3.4
Less:
Historical financing costs:...................... (1.4)
------
Pro forma adjustment.............................. 8.5
------
Pro forma amortization of debt issuance costs...... $ 9.9
======
</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 and (ii) the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period. See "Business--Operating Strategy." The
unaudited pro forma results of operations also 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. See "Description of Capital Stock--New Preferred Stock."
(i) Loss per common share has been computed using the weighted average number
of shares of Smith's 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 Smith's Common Stock (excluding shares issuable
in the Merger) in the Tender 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.
22
<PAGE>
(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.
(k) EBITDA (as defined) represents loss before income taxes, plus interest
expense, depreciation and amortization, LIFO provision and restructuring
charges. EBITDA is a widely accepted financial indicator of a company's
ability to service debt and, with certain variations in definition, is an
indicator of compliance with various covenants in the Company's debt
agreements. However, EBITDA should not be construed as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles) or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles)
and should not be construed as an indication of the Company's operating
performance or as a measure of liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The following table presents a reconciliation of pro forma EBITDA (as
defined):
<TABLE>
<CAPTION>
52 WEEKS ENDED
DECEMBER 30, 1995
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
EBITDA (as defined):
Pro forma Smith's EBITDA (as defined)............. $226.8
Historical Smitty's EBITDA (as defined)........... 29.0
Less: Pro forma adjustments......................... 0.4
------
Pro forma EBITDA (as defined)....................... $255.4
======
</TABLE>
23
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------------------
JANUARY 14,
DECEMBER 30, 1995 1996 PRO FORMA
---------------------------------------------- ------------ COMBINED FOR
SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S ADJUSTMENTS CALIFORNIA
(HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) FOR DISPOSITION
(AUDITED) DISPOSITION(A) DISPOSITION (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
----------- -------------- ---------------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 16.1 $ 95.8 $ 111.9 $ 11.5 $ (13.2)(b) $ 110.2
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 (c) 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 31.1 55.0 55.0
Assets held for sale... 125.0 (125.0)
-------- ------- -------- ------ ------- --------
Total current assets. 605.1 (81.1) 524.0 82.7 (12.2) 594.5
Property and equipment:
Land................... 276.6 (128.3) 148.3 18.6 166.9
Building............... 610.0 (104.0) 506.0 50.6 (3.2)(e) 553.4
Leasehold
improvements.......... 55.8 (19.6) 36.2 9.8 (0.6)(e) 45.4
Furniture and
equipment............. 509.5 (17.6) 491.9 69.9 (10.3)(e) 551.5
-------- ------- -------- ------ ------- --------
Less allowances for
depreciation and
amortization......... (390.9) 9.2 (381.7) (14.1) 14.1 (e) (381.7)
-------- ------- -------- ------ ------- --------
Net property and
equipment........... 1,061.0 (260.3) 800.7 134.8 935.5
Goodwill, net........... 31.5 46.6 (f) 78.1
Other assets............ 20.1 (4.6) 15.5 11.0 74.9 (g)(h) 101.4
-------- ------- -------- ------ ------- --------
$1,686.2 $(346.0) $1,340.2 $260.0 $ 109.3 $1,709.5
======== ======= ======== ====== ======= ========
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)(i)
10.0 (j) 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 (14.9)(k) 12.2
Current maturities of
Redeemable Preferred
Stock................. 1.0 1.0 (1.0)(l)
Accrued restructuring
costs................. 58.0 (58.0)
-------- ------- -------- ------ ------- --------
Total current
liabilities......... 442.3 (144.0) 298.3 77.0 (18.5) 356.8
Long-term debt, less
current maturities..... 725.3 (68.0) 657.3 139.8 536.4 (m)
(0.9)(m)
4.6 (h)
14.9 (k)
(7.5)(n) 1,344.6
Accrued restructuring
costs, less current
portion................ 40.0 (40.0)
Deferred income taxes... 58.6 (17.7) 40.9 13.8 (27.2)(d) 27.5
Other liabilities....... 20.2 7.5 (n) 27.7
Redeemable Preferred
Stock, less current
maturities............. 3.3 3.3 3.3
Cumulative Redeemable
Exchangeable Preferred
Stock.................. 71.2 (l) 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)(o) 0.1
Additional paid-in
capital................ 285.2 285.2 11.0 (11.0)(p)
(165.8)(o)
45.5 (q) 164.9
Retained earnings(r).... 238.0 (76.3)(s) 161.7 (1.8) (35.2)(t)
(405.9)(o)
(7.3)(u)
1.8 (p) (286.7)
-------- ------- -------- ------ ------- --------
523.5 (76.3) 447.2 9.2 (578.0) (121.6)
Less cost of common
stock in the treasury.. (106.8) (106.8) (464.9)(o)
571.7 (o)
-------- ------- -------- ------ ------- --------
416.7 (76.3) 340.4 9.2 (471.2) (121.6)
-------- ------- -------- ------ ------- --------
$1,686.2 $(346.0) $1,340.2 $260.0 $ 109.3 $1,709.5
======== ======= ======== ====== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects the sale of the California stores, excess real estate and
distribution center which were sold or leased in connection with the
California Divestiture and assumes the anticipated sale of the Company's
remaining California real estate pursuant to the California Asset
Disposition. The net proceeds of such sales, leases and anticipated sales
are reflected in the Company's pro forma cash balances at December 30,
1995 (net of pro forma revolving credit balances of $(81.2) million). Also
reflects (i) 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 pursuant to the California Asset Disposition
following the consummation of the Transactions and (ii) the recognition of
a deferred tax asset in connection with the recording of the California
Asset Disposition Charge.
(b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New
Revolving Facility, and (iii) the Offerings used to finance the
Transactions and pay related costs and fees as set forth in the following
table:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans..................................... $ 655.0
Senior Notes....................................... 250.0
Senior Subordinated Notes.......................... 400.0
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 Smith's Mortgage Notes and Other
Indebtedness...................................... (667.1)
Purchase existing Smith's Series I Preferred Stock. (1.0)
Purchase 50% of Smith's Common Stock............... (451.3)
Purchase Management Options........................ (13.7)
Accrued Interest................................... (12.6)
Fees and Expenses.................................. (145.1)
-------
Use of California Proceeds........................ $ 13.2
=======
</TABLE>
(c) 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.
(d) Represents the deferred tax asset associated with the write-off of the
deferred debt issuance costs and the premium over book value on Smith'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.
(e) Reflects the write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
(f) 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:
Purchase Price:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Smith's 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>
(g) Reflects the debt issuance costs associated with the New Credit Facility
($46.0 million), the Senior Notes ($14.0 million), and the Senior
Subordinated Notes ($22.3 million). These amounts have been capitalized as
deferred financing costs.
(h) 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 Smith'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.
(i) Reflects the payment of accrued interest on Smitty's Bank Credit Facility
($0.1 million), Smitty's Notes ($0.6 million) and Smith's Mortgage Notes
and Other Indebtedness ($11.9 million) to be repaid in connection with the
Merger.
(j) Represents severance payments and other costs associated with the
integration of Smith's and Smitty's.
25
<PAGE>
(k) Reflects the repayment and cancellation of the current maturities of the
Smitty's Bank Credit Facility ($4.9 million) and Smith's Mortgage Notes
and Other Indebtedness ($20.8 million) and the recording of the current
maturities of the New Term Loans ($10.8 million).
(l) 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.
(m) Reflects the repayment and cancellation of the Smitty's Bank Credit
Facility, the Smitty's Notes, the Smitty's Debentures, the Smith's
Revolving Credit Facility, the Smith's Mortgage Notes and Other
Indebtedness and records borrowings under the New Term Loans and New
Revolving Facility and the issuance of the Notes.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans..................................... $ 655.0
Senior Notes....................................... 250.0
Senior Subordinated Notes.......................... 400.0
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 Smith's Mortgage Notes and Other
Indebtedness...................................... (667.1)
-------
$ 535.5
=======
</TABLE>
(n) Represents a reclassification of $7.5 million of Smith's deferred
compensation and other long-term liabilities to conform to the pro forma
combined classification.
(o) Reflects redemption of 50% of Smith's outstanding Common Stock prior to
the Merger at $36.00 per share, the retirement of all treasury shares and
the purchase of certain outstanding management stock options.
(p) Reflects the elimination of Smitty's historical equity.
(q) Represents the issuance of 3,038,888 shares of Smith's Common Stock at an
assumed market value of $15.00 per share as consideration in the Merger.
(r) The unaudited pro forma balance sheet does not include certain costs
related to the purchase of certain management stock options as part of the
Recapitalization which are estimated to be $12.5 million and the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period.
(s) Represents the $125 million California Asset Disposition Charge tax
effected at 39% tax rate. The $125 million additional 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 Transactions.
(t) Represents the premium over book value attributable to "make whole"
payments and other premiums payable in connection with the retirement of
Smith'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.
(u) Represents the write-off of the historical deferred debt issuance costs of
Smith's and Smitty's related to its refinanced debt, net of 39% tax rate.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth selected historical financial data of Smith's
for the five fiscal years ended December 30, 1995 which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical consolidated financial statements of Smith's and related notes
thereto included elsewhere in this Prospectus.
<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
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
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 ex-
penses................ 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization.............. 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)
Ratio of earnings to
fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x --
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(c).......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(d)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
Cash provided by oper-
ating activities...... 61.9 84.6 118.6 203.6 140.6
Cash used in investing
activities............ (277.4) (286.6) (164.4) (127.4) (146.3)
Cash provided by (used
in) financing
activities............ 212.8 203.1 92.3 (123.9) 7.5
EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included
elsewhere herein.
(b) 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 of
annual rental expense deemed by the Company to be representative of the
interest factor). 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 include non-cash charges of $105.4 million, primarily
consisting of depreciation and amortization, and restructuring charges of
$140.0 million.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of
a company's ability to service debt. However, EBITDA should not be
construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
Smith's operating performance or as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITTY'S
The following table sets forth certain selected consolidated historical
financial and operating data of Smitty's and its Predecessor. The operating
and balance sheet data of Smitty's as of and for the year ended July 30, 1995
and the period from June 29, 1994 to July 31, 1994, and of the Predecessor as
of for the period from August 2, 1993 to June 28, 1994, the 52 weeks ended
August 1, 1993, the 53 weeks ended August 2, 1992 and the 52 weeks ended July
28, 1991 set forth in the table below have been derived from the financial
statements of Smitty's and its Predecessor audited by Coopers & Lybrand,
L.L.P., independent accountants. The operating and balance sheet data of
Smitty's as of and for the 24 weeks ended January 14, 1996 and the 24 weeks
ended January 15, 1995 have been derived from unaudited financial statements
of Smitty's which, in the opinion of management, reflect all material
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of such data. The following information should be read in
conjunction with the Unaudited Pro Forma Combined Financial Statements,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the historical consolidated financial statements of Smitty's
and its predecessor, and related notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR SMITTY'S
---------------------------------------- --------------------------------------------
PERIOD FROM PERIOD FROM
52 WEEKS 53 WEEKS 52 WEEKS AUGUST 2, JUNE 29, 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED 1993 TO 1994 TO ENDED ENDED ENDED
JULY 28, AUGUST 2, AUGUST 1, JUNE 28, JULY 31, JULY 30, JANUARY 15, JANUARY 14,
1991 1992 1993 1994 1994 1995 1995 1996
-------- --------- --------- ----------- ----------- -------- ----------- -----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales(a)............... $625.3 $599.1 $605.1 $551.7 $ 48.4 $594.0 $286.2 $276.5
Gross profit........... 158.9 160.9 150.5 138.0 12.9 162.0 73.7 76.4
Operating, selling,
general
and administrative
expenses(b)(c)(d)..... 143.9 138.8 147.5 117.4 10.8 131.4 59.0 63.6
Depreciation and
amortization.......... 10.2 10.2 9.5 8.0 1.0 10.9 4.6 6.0
Interest expense(e).... 10.1 7.3 6.5 6.4 1.5 18.7 7.9 8.6
Net income (loss)...... $ (3.0) $ 2.3 $ (8.2) $ 3.1 $ (0.4) $ 0.3 $ 0.9 $ (1.8)
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 0.8 $ 5.0 $ 5.3 $ 31.5 $ 27.9 $ 17.3 $ 23.6 $ 5.7
Total assets(f)........ 245.1 242.8 242.8 204.8 235.3 265.7 258.2 260.0
Total debt(g)(h)....... 72.5 59.9 66.6 140.3 143.9 147.9 154.0 146.0
Total stockholders'
equity(h)............. $126.4 $128.7 $120.5 $ 11.2 $ 10.6 $ 10.9 $ 11.4 $ 9.3
OTHER DATA:
Stores open at end of
period................ 24 24 28 27 27 28 29 28
Capital expenditures... $ 3.1 $ 7.2 $ 16.2 $ 3.7 $ 0.3 $ 22.9 $ 6.2 $ 18.7
Cash provided by
operating activities.. 10.7 18.9 16.6 9.0 1.1 18.2 7.1 1.1
Cash provided by (used
in) investing
activities............ (2.0) (7.2) (4.2) 7.9 (0.3) (9.0) (5.1) (12.4)
Cash provided by (used
in) financing
activities............ (7.3) (13.2) (10.3) (13.4) 4.4 (3.5) (2.0) (2.9)
EBITDA (as defined)
(i)................... $ 13.6 $ 22.9 $ 26.9 $ 26.1 $ 2.4 $ 29.0 $ 13.2 $ 13.2
EBITDA margin (j)...... 2.2% 3.8% 4.5% 4.7% 5.0% 4.9% 4.6% 4.8%
</TABLE>
- -------
(a) In fiscal 1993, Smitty's leased its food service operations to Morrison,
Incorporated, thereby increasing operating income but decreasing sales and
gross profit. In September 1994, Smitty's resumed its food service
operations. As a result, food service sales and attributable costs are
included in the consolidated results of operation subsequent to such date.
Food service sales were $9.6 million, $6.6 million, $17.8 million, $0,
$2.5 million and $24.9 million for the 24 weeks ended January 14, 1996,
the 24 weeks ended January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993
and fiscal 1992, respectively. Food service gross profit was $6.0 million,
$4.3 million, $11.4 million, $0, $1.5 million and $16.5 million for the 24
weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, fiscal
1995, fiscal 1994, fiscal 1993 and fiscal 1992, respectively.
(b) In November 1993, Smitty's agreed to a settlement of a litigation which
required Smitty's to pay $4.75 million in cash and issue a $6.25 million
two-year mortgage note. Fiscal 1993 results of operations include an $11.0
million charge for the settlement, plus a $1.8 million charge for Smitty's
litigation costs. Smitty's used the proceeds from a four-year term loan to
finance the cash payment. Also in November 1993, Smitty's reached a
settlement of a litigation filed by a former supplier providing for a $0.5
million cash payment and a $0.5 million one-year mortgage note. Fiscal
1993 results of operations include a $1.0 million charge for this
settlement. Both mortgage notes were repaid on June 29, 1994.
28
<PAGE>
(c) Included in operating, selling, general and administrative expenses are
parent reorganization costs incurred by Smitty's in connection with
efforts initiated by its former stockholder, Steinberg International,
Inc., to sell its interest in Smitty's. Reorganization costs were $0.7
million and $0.6 million for fiscal 1994 and 1993, respectively. There
were no reorganization costs for the 24 weeks ended January 14, 1996, the
24 weeks ended January 15, 1995, fiscal 1995, fiscal 1992 and fiscal 1991.
In fiscal 1995, Smitty's had a $1.9 million benefit resulting from the
Morrison litigation settlement.
(d) A real estate development partnership in which Smitty's was a partner was
liquidated in July 1993. In connection with this liquidation, Smitty's
obtained ownership of an operating shopping center property and an
undeveloped shopping center property in exchange for the forgiveness of
notes and accrued interest receivable from the partnership and its
managing partner. Fiscal 1993 results of operations include an
$8.9 million charge representing the difference between the current value
of these two properties and the carrying value of the notes and accrued
interest receivable. Such properties were transferred to Steinberg
International, Inc. prior to the acquisition of SSV by Smitty's.
(e) Includes amortization of deferred financing costs of $0.4 million, $0.4
million, $0.9 million, $0.2 million, $0.2 million, $0.2 million, and $0.2
million for the 24 weeks ended January 14, 1996, the 24 weeks ended
January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, and
fiscal 1991, respectively. Interest expense for the 24 weeks ended January
14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995 and fiscal 1994
includes $1.1 million, $1.0 million, $2.1 million and $0.2 million,
respectively, of non-cash interest expense attributable to the Smitty's
Debentures.
(f) Except at January 14, 1996, January 15, 1995, July 30, 1995 and July 31,
1994, total assets includes certain properties which were not purchased by
Smitty's in the acquisition from Steinberg International, Inc. that had a
net book value of $27.5 million at August 1, 1993.
(g) Total debt includes total long-term debt and current maturities of long-
term debt.
(h) During fiscal 1991, Smitty's issued 688 shares of common stock to
Steinberg International, Inc. in exchange for $1.2 million cash and the
cancellation of $65.6 million of indebtedness.
(i) EBITDA (as defined) represents income (loss) before income taxes, plus
interest expense, depreciation and amortization, severance and employment
contract termination costs, loss on store closing, LIFO provision and Non-
Operating Expenses. Non-Operating Expenses are defined as parent
reorganization costs, gain (loss) on real estate disposals, loss on
partnership liquidation, and litigation settlements, all of which are
included in operating, selling, general and administrative expenses.
EBITDA is a widely accepted financial indicator of a company's ability to
service debt and, with certain variations in definition, is an indicator
of compliance with various covenants in Smitty's debt agreements. However,
EBITDA should not be construed as an alternative to operating income (as
determined in accordance with generally accepted accounting principles) or
to cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as
an indication of Smitty's operating performance or as a measure of
liquidity.
(j) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Due to the Transactions and the California Divestiture, the Company believes
that its future operating results may not be directly comparable to its
historical operating results. Certain factors which are expected to affect the
future operating results of the Company (or their comparability to prior
periods) are discussed below.
California Divestiture. Smith's has historically focused on expansion into
high growth markets, which led to its entrance into Southern California in
1991. During the period from 1991 through 1995, Smith's opened 34 stores in
Southern California and a 1,100,000 square foot distribution center and dairy
plant in Riverside, California. Management determined that because of the
attractive growth prospects in the Company's principal markets and the
competitive environment in Southern California, it would redeploy Company
resources from California into such other markets. In December 1995 the
Company executed a sublease with Ralphs Grocery Company pursuant to which
Ralphs agreed to sublease the Riverside distribution center and dairy plant
for the remaining 23-year term of Smith's lease. Ralphs also agreed to
purchase certain related equipment and inventory. The sublease term commenced
and the related purchases were consummated on January 29, 1996. In January
1996, the Company entered into agreements to sell or lease 16 of its
California stores and related equipment and three non-operating properties to
various supermarket companies (including Ralphs) and others. Smith's has
closed the remaining 18 stores and it is anticipated that these stores will be
sold or leased to other retail companies. Of the stores being sold or leased,
four stores owned by Smith's are being sold outright, two store leases are
being assigned, three stores owned by Smith's are being leased and seven
leased stores are being subleased. Since December 30, 1995, the Company has
received net cash proceeds of approximately $67.2 million from the store,
equipment and property sales and expects to receive an additional
approximately $10.6 million shortly after the consummation of the
Transactions. All of the remaining California stores were closed by March 16,
1996. In connection with its decision to cease operations in California,
Smith's recorded the California Divestiture Charge of $140 million (pre-tax)
for the year ended December 30, 1995 and classified the assets to be leased or
sold pursuant to the California Divestiture as "assets held for sale" on its
balance sheet at such date. 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 only with those properties
being sold or leased. See Note K of the Notes to Consolidated Financial
Statements of Smith's.
Certain information pertaining to the Company's California operations is
summarized below:
<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)
<S> <C> <C> <C> <C> <C>
California stores at end
of period.............. 9 18 26 32 34
Net sales............... $ 35.9 $320.4 $472.8 $652.9 $674.6
Capital expenditures:
Stores................ 118.4 160.0 136.1 53.0 23.4
Backstage facilities.. 1.1 33.8 80.6 2.7 1.3
------ ------ ------ ------ ------
Total capital
expenditures....... $119.5 $193.8 $216.7 $ 55.7 $ 24.7
====== ====== ====== ====== ======
</TABLE>
Remaining California Real Estate. After completion of the California
Divestiture, Smith's 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
30
<PAGE>
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 Transactions, however,
management, 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 Transactions. If this strategy is adopted, as anticipated,
the Company would record a charge to earnings, presently estimated to be
approximately $125 million (pre-tax), 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 the "Unaudited Pro Forma Combined Financial
Statements" included elsewhere herein.
Debt Refinancing and Recapitalization Charges. In connection with the
anticipated consummation of the Transactions, the Company will refinance
substantially all of its existing mortgage notes and unsecured indebtedness
(approximately $667.1 million at December 30, 1995), including all outstanding
borrowings under its existing revolving credit facilities. The Company will
also refinance approximately $103.3 million of existing indebtedness of
Smitty's (pro forma at December 30, 1995 and assuming a 100% tender of the
existing Smitty's Notes and Smitty's Debentures). In connection with such debt
refinancings, the Company will pay make-whole and other premiums estimated at
approximately $56.8 million. These refinancing premiums, together with
approximately $12.0 million of debt issuance costs, will be written off upon
the consummation of the Transactions and reflected as an extraordinary charge
for the quarter in which the Transactions are consummated. It is estimated
that this charge, net of taxes, will be approximately $42.5 million. The
Company will also record approximately $12.5 million of pre-tax compensation
expense in connection with the purchase of certain management stock options as
part of the Recapitalization.
Integration of Arizona Operations. Following the Merger, management of the
Company has estimated that approximately $25 million of net annual cost
savings (as compared to costs for the pro forma combined fiscal year ended
December 30, 1995) are achievable by the end of the third year of combined
operations. Management believes that approximately $17 million in Merger-
related capital expenditures and approximately $15 million of other expenses
will be required to integrate Arizona operations over the next two years and
realize such cost savings. Management anticipates that a charge related to
such costs will be recorded in the quarter in which the Transactions are
consummated.
Purchase Accounting. The Merger will be accounted for as a purchase of
Smitty's by Smith's. As a result, the assets and liabilities of Smitty's will
be recorded at their estimated fair value as of the date the Merger is
consummated. 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 in excess of the fair value of
Smitty's assets will be recorded as goodwill and amortized over a 40-year
period. The purchase price allocation reflected in the pro forma statements is
based on management's preliminary estimates. The actual purchase accounting
adjustments will be determined following the Merger and may vary from the
amounts reflected in the Unaudited Pro Forma Combined Financial Statements
included elsewhere herein.
RECENT OPERATING RESULTS OF SMITH'S
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
31
<PAGE>
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.
RESULTS OF OPERATIONS OF SMITH'S
The Company's fiscal year ends on the Saturday closest to December 31. The
following table sets forth the selected historical operating results of
Smith's for the three fiscal years ended December 30, 1995:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 1, DECEMBER 31, DECEMBER 30,
1994 1994 1995 1994 1994 1995
---------- ------------ ------------ ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $2,807.2 $2,981.4 $3,083.7 100.0% 100.0% 100.0%
Gross profit............ 637.2 669.1 697.0 22.7 22.4 22.6
Operating, selling and
administrative
expenses............... 430.3 440.8 461.4 15.3 14.8 15.0
Depreciation and
amortization........... 82.2 94.5 105.0 2.9 3.2 3.4
Operating income........ 124.7 133.8 130.7 4.4 4.5 4.2
Interest expense........ 44.6 53.7 60.5 1.6 1.8 2.0
Restructuring charges... -- -- 140.0 -- -- 4.5
Income taxes (benefit).. 34.3 31.3 (29.3) 1.2 1.1 (1.0)
Net income (loss)....... 45.8 48.8 (40.5) 1.6 1.6 (1.3)
</TABLE>
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
30, 1995 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
31, 1994
Net Sales. Net sales increased $102.3 million, or 3.4%, from $2,981.4
million in 1994 to $3,083.7 million in 1995. The sales increase in 1995 was
attributable to a net increase of 17 stores as of the end of 1995, offset in
part by a 3.4% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales increased $80.7 million, or 3.5%, from
$2,328.5 million in 1994 to $2,409.2 million in 1995. As adjusted to exclude
the Company's California stores, same store sales decreased 3.2% in 1995,
caused primarily by the Company's discontinuance of its "ad match" program in
the Phoenix and Tucson markets and new stores opened by competitors in the
Company's markets.
Gross Profit. Gross profit increased $27.9 million, or 4.2%, from $669.1
million in 1994 to $697.0 million in 1995. Gross margins during 1995 and 1994
were 22.6% and 22.4%, respectively. The increase in 1995 is due primarily to
less aggressive promotional activity in the Phoenix and Tucson markets
following the discontinuance of the Company's "ad match" program, reduced
charges for inventory shrinkage and improved competitive conditions in Utah,
which were partially offset by the increase in the LIFO charge and increased
new store openings. The pre-tax LIFO charge was $4.0 million in 1995 compared
to $2.5 million in 1994. Newly opened stores apply pressure on gross margins
until the stores become established in their respective markets. Smith's
opened 19 new stores during 1995 (including two in California) compared to
eight stores in 1994 (including six in California).
32
<PAGE>
Operating, Selling and Administrative Expenses. Operating, selling and
administrative expenses ("OS&A") increased $20.6 million, or 4.7%, from $440.8
million in 1994 to $461.4 million in 1995. As a percent of net sales, OS&A
increased from 14.8% in 1994 to 15.0% in 1995. The increase was caused
principally by the increase in new store opening costs compared to the prior
year. The decrease in same store sales also contributed to the increase of
OS&A as a percentage of net sales.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $10.5 million, or 11.1%, from $94.5 million in 1994 to
$105.0 million in 1995, primarily due to the addition of new combination
stores and equipment replacements in remodeled stores.
Interest Expense. Interest expense increased $6.8 million from $53.7 million
in 1994 to $60.5 million in 1995 primarily as a result of net increases in the
average debt amounts for each period.
Restructuring Charges. As a result of the California Divestiture, the
Company recorded $140.0 million of pre-tax restructuring charges to reflect
the estimated costs associated with the sale, lease or closure of its Southern
California stores and the Riverside distribution center. See Note K of the
Notes to Consolidated Financial Statements of the Company included elsewhere
herein.
Income Taxes. The Company recorded a tax benefit of $29.3 million in 1995
compared to an expense of $31.3 million in 1994. The benefit recorded in 1995
reflects an adjustment (benefit) of $53.4 million of the Company's deferred
taxes as a result of losses incurred in connection with the California
Divestiture.
Net Income (Loss). Net income before restructuring charges decreased by $5.3
million, or 10.9%, from $48.8 million in 1994 to $43.5 million in 1995. Income
per common share before restructuring charges decreased 0.6% from $1.73 in
1994 to $1.72 in 1995. Primarily as a result of the restructuring charges, the
Company recorded a net loss of $40.5 million for 1995 ($1.62 per share)
compared to net income of $48.8 million in 1994 ($1.73 per share). The
weighted average number of common shares outstanding was 25,030,882 in 1995
and 28,176,907 in 1994.
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
31, 1994 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 1,
1994
Net Sales. Net sales increased $174.2 million, or 6.2%, from $2,807.2
million in 1993 to $2,981.4 million in 1994. The sales increase in 1994 was
attributable to a net increase of eight stores as of the end of 1994, offset
in part by a 2.3% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales decreased $5.9 million, or 0.3%, from
$2,334.4 million in 1993 to $2,328.5 million in 1994. As adjusted to exclude
the Company's California stores, same store sales decreased 1.3% in 1994. The
decrease in same store sales (excluding California) in 1994 was caused
primarily by competitive new store openings in the Company's principal market
areas and increased overall price competition in Utah.
Gross Profit. Gross profit increased $31.9 million, or 5.0%, from $637.2
million in 1993 to $669.1 million in 1994. Gross margins during 1994 and 1993
were 22.4% and 22.7%, respectively. The decrease in gross margin in 1994 was
caused primarily by Smith's aggressive Utah pricing program which commenced in
the second half of 1993 and continued through most of 1994. To reinforce
Smith's everyday low price program, prices in Utah stores were lowered on more
than 10,000 grocery, meat and produce items. Smith's opened eight new stores
during 1994 (including six in California) compared to ten new stores during
1993 (including eight in California).
Operating, Selling and Administrative Expenses. OS&A increased $10.5
million, or 2.4%, from $430.3 million in 1993 to $440.8 million in 1994. As a
percent of net sales, OS&A decreased from 15.3% in 1993 to 14.8% in 1994. The
decrease in 1994, resulting primarily from Smith's program to reduce operating
costs, was somewhat offset by the higher operating and labor costs associated
with the expansion into Southern California.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $12.3 million, or 15.0%, from $82.2 million in 1993 to
$94.5 million in 1994, due to the addition of new food and drug combination
stores and distribution and processing facilities.
Interest Expense. Interest expense increased $9.1 million from $44.6 million
in 1993 to $53.7 million in 1994 as a result of net increases in the average
debt amounts for each period.
33
<PAGE>
Income Taxes. Income taxes as a percent of income before income taxes were
39.1% in 1994 and 42.8% in 1993. The Omnibus Budget Reconciliation Act of 1993
increased Smith's Federal tax rate from 34% to 35%. As a result of the
increased tax rate, net income for 1993 was reduced by $2.75 million, or $0.09
per common share. This reduction consisted of $0.8 million, or $0.03 per
common share, for the rate increase on income earned in 1993 and $1.95
million, or $.06 per common share, for the increase in recorded deferred
taxes.
Net Income. Net income increased 6.6% from $45.8 million in 1993 to $48.8
million in 1994. However, as a result of a reduction in the number of shares
outstanding through Smith's buy-back programs, net income per common share
increased 14% from $1.52 to $1.73. During 1994, Smith's repurchased 4.9
million shares of Common Stock in the open market. The weighted average number
of shares of Common Stock outstanding in 1994 was reduced by approximately 1.9
million shares, which increased net income per common share by $0.11.
RESULTS OF OPERATIONS OF SMITTY'S
Smitty's is a leading regional supermarket operator based in Phoenix,
Arizona with 25 stores in the Phoenix area and three stores in the Tucson
area. Smitty's stores offer high quality fresh and prepared foods, groceries
and general merchandise, restaurants and ancillary services in a shopping
environment which emphasizes service, convenience, quality, selection and
customer satisfaction. On June 29, 1994, Smitty's became the sole stockholder
of SSV when it acquired all of the outstanding shares of common stock of SSV
from Steinberg International, Inc. ("Steinberg"). Smitty's was formed in April
1994 by affiliates of Yucaipa for the purpose of effecting such acquisition.
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. The "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 video and photo
departments, pharmacies, food courts, restaurants and full-service bank
branches, family style hair salons and America West Airlines ticket counters.
Smitty's 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.
At the end of the second quarter of fiscal 1996, Smitty's had completed its
comprehensive remodel program which included 18 stores and resulted in 93% of
its stores being new or remodeled within the last three years. Upon completion
of the remodel program, Smitty's launched an extensive marketing program to
promote its newly remodeled stores which included an increase of 50% in both
broadcast and print media, a billboard campaign estimated to have been seen by
50% of the Phoenix population and a customer service training program that
included substantially all of Smitty's employees. Smitty's management believes
the extensive marketing program and the newly remodeled stores were
significant factors in the reduction of the decline in same store sales from
10.8% in the first quarter to 2.4% in the second quarter of fiscal 1996. The
remodel program includes an increased allocation of floor space to the
supermarket section of each store resulting in at least 60% of the square
footage in each super combination store being devoted to supermarket items
compared to 40% prior to the remodel. The expanded supermarket selling areas
provide increased display and shelf space and enlarged self-service bakeries,
dairy, frozen food and produce departments. Display cases and related
refrigeration in meat, deli, bakery, produce, frozen foods and dairy
departments have generally been replaced and upgraded.
On September 25, 1994, the lease by which Morrison, Incorporated
("Morrison") leased and operated Smitty's food service operations was
rescinded in connection with the litigation between Smitty's and Morrison. In
connection with such rescission, Morrison paid Smitty's $2.6 million and
transferred title to all of the inventories, fixtures and equipment to
Smitty's and Smitty's began operating food service operations. Rental income
from Morrison was $1.4 million in the 24 weeks ended January 15, 1995. Food
service sales and gross profit were $9.6 million and $6.0 million,
respectively, in the 24 weeks ended January 14, 1996.
34
<PAGE>
Smitty's fiscal year ends on the Sunday closest to July 31. The following
table sets forth the selected historical operating results of Smitty's for the
24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, the 52
weeks ended July 30, 1995 ("fiscal 1995"), the 52 weeks ended July 31, 1994
("fiscal 1994") and the 52 weeks ended August 1, 1993 ("fiscal 1993"):
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
---------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14, AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14,
1993 1994(1) 1995 1995 1996 1993 1994 1995 1995 1996
--------- -------- -------- ----------- ----------- --------- -------- -------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales........... $605.1 $600.1 $594.0 $286.2 $276.5 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.... 150.5 150.9 162.0 73.7 76.4 24.9 25.1 27.3 25.7 27.6
Operating,
selling,
general and
administrative
expenses....... 147.5 128.2 131.4 59.0 63.6 24.4 21.4 22.1 20.6 22.9
Depreciation and
amortization... 9.5 9.0 10.9 4.6 6.0 1.6 1.5 1.8 1.6 2.2
Operating income
(loss)......... (6.5) 13.8 19.7 10.2 6.8 (1.1) 2.3 3.3 3.6 2.5
</TABLE>
- --------
(1) The operating results for the 52-week period ended July 31, 1994 combines
the results of operations of Smitty's for the period from June 29, 1994 to
July 31, 1994 with the results of operations of its predecessor for the
period from August 2, 1993 to June 28, 1994.
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY
14, 1996 WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY
15, 1995
Sales. Sales decreased $9.7 million, or 3.4%, from $286.2 million in the 24
weeks ended January 15, 1995 to $276.5 million in the 24 weeks ended January
14, 1996. The decrease is primarily the result of a decline in same store
sales and the closure of one store in the third quarter of fiscal 1995,
partially offset by sales from food service operations and sales increases
from the opening of two stores in the second quarter of fiscal 1995. Although
same store sales decreased 6.6% in the 24 weeks ended January 14, 1996, the
decline in same store sales has improved from 10.8% in the 12 weeks ended
October 22, 1995 to 2.4% in the 12 weeks ended January 14, 1996 due in part to
the completion of the remodel program and increased advertising and promotions
associated with the grand re-opening of the remodeled stores.
Gross Profit. Gross profit increased $2.7 million from $73.7 million, or
25.7% of sales, in the 24 weeks ended January 15, 1995 to $76.4 million, or
27.6% of sales, in the 24 weeks ended January 14, 1996. The increase in gross
profit margin in the 24 weeks ended January 14, 1996, is primarily
attributable to increased vendor allowances and rebates arising from improved
procurement practices and the operation of food service for an additional
eight weeks compared to the prior year.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses ("OSG&A") were $59.0 million, or 20.6% of
sales, in the 24 weeks ended January 15, 1995 and $63.6 million, or 22.9% of
sales, in the 24 weeks ended January 14, 1996. This increase was primarily
attributable to the fixed cost component of OSG&A being compared to a lower
sales base, the addition of food service operations, and increased rent
expense associated with new and remodeled stores. In addition, Smitty's
incurred $1.8 million of advertising and promotional expenses for an extensive
marketing program implemented in the second quarter of fiscal 1996. These
additional expenses were offset by advertising allowances received in
connection with the marketing program. In the 24 weeks ended January 15, 1995,
Smitty's had a $1.9 million benefit resulting from the favorable Morrison
litigation settlement.
Depreciation and Amortization. Depreciation and amortization was $4.6
million in the 24 weeks ended January 15, 1995, and $6.0 million in the 24
weeks ended January 14, 1996. The increase relates primarily to the
depreciation of new stores, property and equipment, depreciation on new
fixtures and equipment in newly remodeled stores and additional depreciation
on the equipment Smitty's received in the Morrison settlement.
Operating Income. Operating income decreased $3.4 million from $10.2 million
in the 24 weeks ended January 15, 1995 to $6.8 million in the 24 weeks ended
January 14, 1996. The decrease in operating income is primarily attributable
to the factors described above.
35
<PAGE>
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 30,
1995 (FISCAL 1995) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
JULY 31, 1994 (FISCAL 1994).
Sales. Sales decreased $6.1 million, or 1.0%, from $600.1 million in fiscal
1994 to $594.0 million in fiscal 1995. The decrease was primarily the result
of a 6.7% decline in same store sales and the closure of one store partially
offset by sales from food service operations and sales increases from the
opening of two new stores in Phoenix and the new store that opened in fiscal
1994. The same store sales decline was attributable to sales lost at stores
undergoing remodels and competitive factors, including an increase in new
stores opened by competitors and pricing and promotional activities.
Gross Profit. Gross profit increased $11.1 million from $150.9 million, or
25.1% of sales, in fiscal 1994 to $162.0 million, or 27.3% of sales, in fiscal
1995. Excluding food service, gross profit as a percentage of sales increased
from 25.1% in fiscal 1994 to 26.1% in fiscal 1995. These increases were
primarily attributable to reduced cost of goods sold, reduced inventory
shortages and additional vendor allowances and rebates arising from improved
procurement practices.
Operating, Selling, General and Administrative Expenses. OSG&A was $131.4
million and $128.2 million in fiscal 1995 and 1994, respectively. Excluding
food service expenses and rental income from Morrison, OSG&A decreased $0.2
million from $127.1 million in fiscal 1994 to $126.9 million in fiscal 1995.
On this basis, OSG&A as a percentage of sales increased from 21.4% in fiscal
1994 to 22.1% in fiscal 1995. This increase was primarily attributable to
increased advertising and promotional expenditures, new union pension fund
contributions and increased rent expense associated with new stores.
Additionally, in fiscal 1994, Smitty's incurred severance and employment
termination costs consisting of a $2.0 million payment to the former Chief
Executive Officer of Smitty's in connection with the termination of certain
rights under his employment contract, a $0.5 million loss relating to closing
a store which was subleased, and a $2.9 million expense primarily from real
estate disposals and reorganization costs. In fiscal 1995 Smitty's had a $1.9
million benefit resulting from the favorable Morrison litigation settlement.
Depreciation and Amortization. Depreciation and amortization increased by
$1.9 million from $9.0 million in fiscal 1994 to $10.9 million in fiscal 1995.
These increases related primarily to depreciation of new stores property and
equipment and increased amortization of beneficial leaseholds.
Operating Income. Operating income increased $5.9 million from $13.8 million
in fiscal 1994 to $19.7 million in fiscal 1995. The increase in operating
income was primarily attributable to the factors described above.
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 31,
1994 (FISCAL 1994) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
AUGUST 1, 1993 (FISCAL 1993).
Sales. Sales decreased $5.0 million, or 0.8%, from $605.1 million in fiscal
1993 to $600.1 million in fiscal 1994. The decrease was primarily the result
of a 5.8% decline in same store sales and the closure of two stores in 1994,
partially offset by the opening of one new store in Tucson, and sales
increases from four new stores opened in fiscal 1993. The same store sales
decline was attributable to competitive factors, including an increase in new
stores opened by competitors and pricing and promotional activities.
Gross Profit. Gross profit increased $0.4 million from $150.5 million or
24.9% of sales in fiscal 1993 to $150.9 million or 25.1% of sales in fiscal
1994. These increases were primarily attributable to additional vendor
allowances and rebates earned during fiscal 1994.
Operating, Selling, General and Administrative Expenses. OSG&A was $128.2
million and $147.5 million in fiscal 1994 and 1993, respectively. OSG&A was
affected by severance and employment contract termination costs in fiscal 1994
consisting of a $2.0 million payment to the Chief Executive Officer of
Smitty's in connection with the termination of certain rights under his
employment contract and a charge of $0.5 million relating to the loss on the
closing of a store which was subleased during the period. In addition,
Smitty's incurred other expense of $23.3 million and $2.9 million in fiscal
1993 and fiscal 1994, respectively. The fiscal 1993 expense consisted
primarily of $8.9 million arising from the liquidation of a partnership whose
former properties have been
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transferred to Steinberg and $13.8 million related to litigation settlements.
The fiscal 1994 expense consisted primarily of a $2.2 million loss on real
estate disposals. Excluding the items noted above, OSG&A decreased by $1.4
million from $124.2 million in fiscal 1993 to $122.8 million in fiscal 1994.
On this basis, OSG&A, as a percentage of sales, remained constant at 20.5% for
both periods. The decrease in OSG&A primarily reflected reductions in supplies
expenses and liability insurance costs and a lower sales base.
Depreciation and Amortization. Depreciation and amortization decreased by
$0.5 million due to the sale and leaseback in fiscal 1993 of certain fixtures
and equipment related to four stores and the completion of the amortization of
deferred Shoppers Passport card costs in fiscal 1993. Shoppers Passport is
Smitty's "frequent shopper" program.
Operating Income. Operating income increased $20.3 million from an operating
loss of $6.5 million in fiscal 1993 to operating income of $13.8 million in
fiscal 1994. The increase in operating income was primarily attributable to
the factors described above.
COMPANY LIQUIDITY AND CAPITAL RESOURCES
Smith's cash flow from operating activities was $140.6 million for fiscal
1995 and $203.6 million for fiscal 1994. The decrease in cash flow from
operating activities was due primarily to balance fluctuations in operating
assets and liabilities resulting from the execution of cash management
policies based upon cash availability. Trade accounts payable decreased cash
provided by operating activities by $21.7 million in 1995 and increased cash
provided by operating activities by $50.6 million in 1994. One of the
Company's principal uses of cash in its operating activities is inventory
purchases. However, supermarket operators typically require small amounts of
working capital since inventory is generally sold prior to the time that
payments to suppliers are due. This reduces the need for short-term borrowings
and allows cash from operations to be used for non-current purposes such as
financing capital expenditures and other investing activities.
Smith's cash used in investing activities was $146.3 million during fiscal
1995 and $127.4 million during fiscal 1994. Investing activities consisted
primarily of additions to property and equipment for new stores, remodels and
equipment purchases.
Smith's received approximately $7.5 million of cash from financing
activities for fiscal 1995 and used approximately $123.9 million of cash in
financing activities in fiscal 1994. The primary difference in financing
activities from 1994 to 1995 of $131.4 million was the repurchase of Common
Stock in 1994. In 1994, the Company purchased approximately $109.2 million of
its Common Stock under its stock buy-back program.
In order to consummate the Transactions, Smith's expects to utilize total
new financing proceeds in the amount of approximately $1.4 billion. The
Company will enter into the New Credit Facility pursuant to which it will
borrow up to $655 million of New Term Loans and will have available a $190
million New Revolving Facility, of which approximately $13.2 million is
anticipated to be borrowed in connection with the Transactions. The Company
will also issue $250 million principal amount of Senior Notes, $400 million
principal amount of Senior Subordinated Notes and $75 million liquidation
preference of New Preferred Stock. The proceeds from the New Credit Facility
and the Offerings will provide the sources of financing required to consummate
the Transactions and pay related fees and expenses (including debt refinancing
premiums). The Company will also assume certain existing indebtedness of
Smitty's. See "Summary--The Transactions--Sources and Uses."
The New Revolving Facility will be available, subject to the satisfaction of
customary borrowing conditions, 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 outstanding upon consummation of the Transactions. The New Revolving
Facility will be non-amortizing and will have a six and one-quarter year term.
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 months following the Merger and to $75 million for a
period of not less than 30 consecutive days during each consecutive 12-month
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period thereafter. At December 30, 1995, on a pro forma basis, giving effect
to the Transactions and the California Disposition and letter of credit
issuances, the Company's remaining borrowing availability under the New
Revolving Facility would have been approximately $162.0 million. Pursuant to
the New Credit Facility, the New Term Loans will be issued in four tranches:
(i) Tranche A, in the amount of $325 million, will have a six and one-quarter
year term; (ii) Tranche B, in the amount of $110 million, will have a seven
and one-half year term; (iii) Tranche C, in the amount of $110 million, will
have an eight and one-half year term; and (iv) Tranche D, in the amount of
$110 million, will have a nine and one-quarter year term. The New Term Loans
will require quarterly amortization payments. The New Credit Facility will be
guaranteed by each of the Company's subsidiaries and secured by liens on
substantially all of the unencumbered assets of the Company and its
subsidiaries and by a pledge of the Company's stock in such subsidiaries. The
New Credit Facility will contain financial covenants which are expected to
require, among other things, the maintenance of specified levels of cash flow
and stockholders' equity. See "Description of New Credit Facility."
The capital expenditures of the Company (excluding expenditures in
California) were $91.0 million for fiscal 1994 and $124.3 million for fiscal
1995. The Company currently anticipates that its aggregate capital
expenditures for fiscal 1996 will be approximately $100.0 million, excluding
the approximately $17 million of capital expenditures which are estimated to
be required in connection with the integration of Arizona operations. The
Company intends to finance these capital expenditures primarily with cash
provided by operations and other sources of liquidity including borrowings and
leases. No assurance can be given that sources of financing for capital
expenditures will be available or sufficient. However, the capital expenditure
program has substantial flexibility and is subject to revision based on
various factors. Management believes that if the Company were to substantially
reduce or postpone these programs, there would be no substantial impact on
short-term operating profitability. In the long term, however, if these
programs were substantially reduced, management believes its operating
businesses, and ultimately its cash flow, would be adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing
markets or to enter other markets. Future acquisitions may require the Company
to seek additional debt or equity financing depending on the size of the
transaction. With the exception of the Transactions, the Company is not
currently engaged in discussions concerning any material acquisition which it
considers probable.
Following the consummation of the Transactions, the Company will be highly
leveraged. Based upon current levels of operations and anticipated cost
savings and future growth, the Company believes that its cash flow from
operations, together with available borrowings under the New Revolving
Facility and its other sources of liquidity (including leases), 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 estimated
cost savings or growth can be achieved. See "Risk Factors--Leverage and Debt
Service."
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed Of." The Company will be
required to adopt this standard in the first quarter of 1996. The adoption of
SFAS No. 121 will not have a significant impact on the Company's financial
condition.
EFFECTS OF INFLATION
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain gross profit margins by adjusting retail
prices, but competitive conditions may from time to time render the Company
unable to do so while maintaining its market share.
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BUSINESS
GENERAL
Smith's 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 Smith'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.
The Company is pursuing a series of transactions designed to enhance
stockholder value and liquidity:
. Arizona Merger and Consolidation. The Company has entered into an
agreement to acquire Smitty's, a regional supermarket operator with 28
stores in the Phoenix and Tucson markets, in a stock-for-stock exchange.
The Merger will significantly enhance the Company's market position in
Arizona. Smitty's is controlled by affiliates of Yucaipa, a private
investment group specializing in the supermarket industry. Such
affiliates of Yucaipa will own approximately 13.6% of the Company's
outstanding Common Stock following the Merger. Following the Merger, the
Company will consolidate its Arizona operations with those of Smitty's.
See "--Operating Strategy."
. California Disposition. The Company has completed the sale or lease of
16 stores, three non-operating properties and its primary distribution
facility in Southern California and has closed its remaining 18 stores
there. Management determined that because of the attractive growth
prospects in the Company's principal markets and the competitive
environment in Southern California, it would redeploy Company resources
from California into such other markets. Following the consummation of
the Transactions, the Company intends to accelerate the disposition of
its closed stores and excess land in California pursuant to the
California Asset Disposition.
. New Senior Management. The Company will enter into the five-year
Management Services Agreement with Yucaipa. Ronald W. Burkle, the
managing general partner of Yucaipa, will be appointed as Chief
Executive Officer of the Company. In addition, Allen R. Rowland recently
joined Smith's as President and Chief Operating Officer. Mr. Rowland was
employed by Albertson's, Inc. for 25 years and had senior executive
responsibilities for all of the principal regions in which Smith's
operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding Common Stock (excluding shares issuable in the Merger) for
$36.00 per share in cash in the Tender Offer. In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
For the fiscal year ended December 30, 1995, after giving pro forma effect
to the Transactions and the California Disposition, the Company would have had
net sales and EBITDA (as defined) of approximately $3.0 billion and $255.4
million, respectively. See "Unaudited Pro Forma Combined Financial
Statements." In addition, management believes that the Company will benefit
from significant operating synergies and cost saving opportunities following
the Merger.
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing and adjacent markets, (ii)
realize operating synergies and cost savings resulting from the Merger, (iii)
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improve working capital management, (iv) grow its recently introduced price
impact warehouse stores and (v) dispose of remaining California real estate
following consummation of the Transactions.
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 10 new stores in its other markets. In 1995, the Company opened a net 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.
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 Prospectus are
forward looking statements that involve risks and inherent uncertainties that
could cause actual net annual cost savings to differ materially from those
projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's 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 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 Smith'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 Smith'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 Smith's front-end systems in Smitty's stores, improvements in
the efficiency of Smitty's stores are expected. Management estimates
that annualized cost savings 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 aggregate annual sales (including 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.
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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 Transactions,
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.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
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 Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of certain real estate assets in California,
including 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
Transactions. 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 "Risk Factors--Anticipated
Charges to Earnings Following the Transactions."
PRINCIPAL MARKETS
The Company's stores are located predominantly in Utah, Arizona, Nevada and
New Mexico, which are among the fastest growing states in terms of population
and 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 the differences in economic cycles, demographics and
competitive conditions among such markets.
The Company has achieved strong competitive positions in each of its
principal markets. Smith's currently has leading market shares in Salt Lake
City (31%), Las Vegas (24%) and Albuquerque (23%) and, after giving effect to
the Merger, the Company will also have a leading market share in Phoenix
(24%). The Company believes its reputation for offering a broad product
selection and low pricing combined with quality customer service has created a
valuable franchise with strong name recognition and customer loyalty.
STORE FORMATS
Smith's operates three types of retail stores: (i) 114 food and drug
combination stores; (ii) four warehouse stores; and (iii) two conventional
supermarkets. The food and drug combination stores range in size from 30,000
to 88,000 square feet (with an average size of 63,000 square feet) and offer
an extensive line of supermarket, non-food and drug products. A typical
Smith's food and drug combination store offers approximately 50,000 SKUs, in
comparison to approximately 20,000 SKUs offered at the average conventional
supermarket
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nationwide. All stores carry a full line of supermarket products, including
groceries, meat, poultry, produce, dairy products, bakery goods, frozen foods
and health and beauty aids. In addition, combination stores carry a wide
variety of general merchandise, including drugs, toys, hardware, giftware and
small appliances. Within each category of merchandise, the stores offer
multiple selections of nationally advertised brand name items. In addition,
the stores carry an extensive selection of private label merchandise, which
provides comparable quality products priced lower than national brands. The
Company also carries a variety of bulk merchandise and generic brand products
which enhance the Company's low price image. These stores feature modern
layouts with wide aisles and well-lighted spaces to facilitate convenient
shopping, a variety of specialty departments along the periphery and
centralized checkout facilities. The Company's four price impact warehouse
stores operating under the PriceRite Grocery Warehouse name, average 55,000
square feet in size, and are targeted to price-conscious consumers rather than
conventional supermarket consumers. The PriceRite stores offer lower prices,
fewer SKUs and fewer service departments than the Company's food and drug
combination stores and conventional stores. The Company's conventional stores
average 26,000 square feet in size and have the appearance of traditional
supermarkets.
Smitty's, which will become a subsidiary of the Company upon consummation of
the Merger, 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. The "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. Smitty's 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. In
connection with the Merger, the Company and Smitty's are evaluating the format
mix of the combined Arizona store base and are assessing the possibility of
converting the format of certain stores.
STORE DEVELOPMENT AND EXPANSION
The following table sets forth information concerning changes in the store
base of the Company and Smitty's over the last five years.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STORES OPENED (NET):
Smith's:
Intermountain and Southwest...................... 5 1 2 2 15
California....................................... 9 9 8 6 2
Smitty's.......................................... 0 2 3 0 (1)
TOTAL NUMBER OF STORES (END OF PERIOD):
Smith's:
Intermountain and Southwest...................... 100 101 103 105 120
California....................................... 9 18 26 32 34
Smitty's.......................................... 24 26 29 29 28
</TABLE>
After giving effect to the Merger, approximately 84% of the Company's stores
will have been opened or remodeled within the last seven years. Over the past
five fiscal years, the Company's capital expenditures for the construction of
new and remodeled stores (not including California operations) totaled
approximately $414 million. In addition, during the same period the Company
invested approximately $163 million in distribution, processing and other
support facilities (not including California operations). 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.
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The Company's real estate department locates, acquires and develops sites
for future stores. 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 difficulties in locating suitable parcels would make
it difficult to replicate the Company's existing store base. The Company has
historically sought to purchase the best potential new store locations
available in any target market. If the Company cannot purchase the best
potential locations, however, it will consider leasing a location from its
owner or a local developer. As a result of this strategy, after giving effect
to the Merger, the Company will own 108 of its 148 stores, including the
underlying land with respect to 97 of such owned stores. See "Business--
Properties." In order to maximize its future capital expenditure resources,
the Company intends to place a greater emphasis on leasing new stores
following the consummation of the Transactions.
MERCHANDISING
The Company's merchandising strategy is to offer customers the ability to
fulfill a significant portion of their daily and weekly shopping needs at one
convenient location and to establish and promote its reputation as a low price
leader in the trade area of each of its stores. The cornerstones of this
strategy include:
Everyday Low Pricing. The Company offers its products on an everyday low
pricing ("EDLP") basis in all markets other than Phoenix and Tucson, where the
Company offers a combination of EDLP and promotional pricing. The Company
offers an EDLP program in most markets because the Company believes that it
generally allows for higher overall profitability than a promotional pricing
program. An EDLP program allows for more consistent prices over time than a
promotional program, which entails variable pricing and higher levels of
demand for sale products. As a result, EDLP simplifies inventory management
and lowers operating costs.
Quality Customer Service. The Company believes a key to its success is its
emphasis on quality customer service. The Company provides courteous and
efficient customer service by placing a high degree of emphasis on employee
training. Most stores have a customer service counter located near the store
entrance to answer questions and to assist customers in locating merchandise.
The Company also provides rapid in-store checkout services, aided by the use
of computerized scanning devices and the bagging of groceries at checkout. In
most locations, stores are open 24 hours each day.
Advertising and Promotion. The Company reinforces its low price image
through extensive television advertising and through print advertising in
newspapers and circulars. The Company divides its advertising budgets in a
similar manner across its markets, with approximately 80% committed to print
advertising and approximately 20% committed to radio and television
advertising. The Company also takes an active interest in the communities in
which its stores are located and maintains programs designed to contribute
funds, products and manpower to local charities and civic groups.
Specialty Departments. Each combination store provides certain specialty
departments designed to provide one-stop shopping convenience to customers and
to increase the frequency with which customers return to the store. The
specialty departments, which vary depending upon store size and location,
include delicatessens with prepared foods, full-service fresh fish and meat
departments, bakeries, dry cleaning drop-off facilities, U.S. Post Office
branches, pharmacies, video rental departments, take-out food counters, camera
and photo departments with on-site film processing, floral departments and in-
store banking provided by a regional or local bank.
Private Label Program. Through its private label program, the Company offers
in excess of one thousand items under the "Smith's," "Mountain Dairy," "Creek
View" and other brand names. These products provide customers with quality
comparable to that of national brands but at lower prices. Management believes
that the Company's private label program is one of the most successful
programs in the industry. The Company's owned manufacturing and processing
facilities, including its milk and beverage plants, cultured dairy products
plant, ice cream processing plant and frozen dough plant, supply the Company's
stores with private label milk, milk products, fruit punches, sour cream,
yogurt, cottage cheese, chip dip products, ice cream and novelty items, baked
goods and other products and allow the Company to generate gross margins on
such private label items that are generally higher than on national brands.
43
<PAGE>
Frequent Shopper Program. Smitty's has developed a proprietary information
system that updates and maintains a comprehensive customer database used for
its unique frequent shopper program, Shopper's Passport. Customers obtain a
Shopper's Passport bar-coded scan readable card which entitles them to receive
a number of benefits, including discounts on certain purchases, check cashing
authorization and participation in special promotions held throughout the
calendar year. Management believes that as a result of this program, Shopper's
Passport has established one of the most comprehensive supermarket customer
data bases in the country. The Company is evaluating plans to utilize the
Shoppers Passport program in Smith's stores throughout the Phoenix and Tucson
markets following the Merger.
OPERATIONS
The Company is divided into two major operating regions, the Intermountain
Region and the Southwest Region, which are segmented into eight geographic
districts. The Intermountain Region consists of stores in Utah, Idaho, Nevada
and Wyoming. The Southwest Region consists of stores in Arizona, New Mexico
and Texas. The districts are staffed with operational managers who are given
as much autonomy as possible while retaining the advantages of central control
over accounting, real estate, legal, data processing and other functions at
the Company's headquarters. This operational autonomy enables management to
react quickly to changes in local markets.
District and store managers are responsible for store operations, local
advertising formats, employee relations and development, customer relations,
community affairs and other functions relating to local operations. The
regional staff includes supervisors responsible for the meat, produce, bakery,
non-food, pharmacy, one-hour photo, deli and prepared foods departments, who
help each regional manager.
PURCHASING, DISTRIBUTION AND PROCESSING
The Company's purchasing activities are regionally centralized, with most
food products and all general merchandise being purchased in volume through
regional buyers supervised by headquarters' management. Certain specialized or
perishable products are purchased at regional warehouse levels. Management
believes that, following the Merger, the Company can achieve increased
promotional allowances and discounts through a coordinated buying effort with
Yucaipa-affiliated supermarket chains with aggregate annual sales (when
combined with the Company) in excess of $11 billion.
The Company owns and operates one of the most modern and efficient backstage
operations in the industry. The Company's warehousing, distribution and
processing facilities, which comprise approximately 3,000,000 square feet,
have all been built, expanded or remodeled in the last five years. Central
distribution facilities in Salt Lake City and Layton, Utah supply products to
all stores in the Intermountain Region and distributes the majority of non-
food merchandise, pharmaceutical products and certain bulk products to stores
in the Southwest Region. An integrated distribution and processing center in
Tolleson, Arizona includes complete warehousing operations and a dairy
processing plant. The facility supplies products to all stores in the
Southwest Region and Las Vegas. The Company also operates two produce
warehouses, one in Ontario, California and the other in Albuquerque, New
Mexico. See "--Properties." Approximately 80% of products sold in 1995 were
shipped through the Company's distribution network.
The Company transports food and merchandise from its distribution centers
primarily through a Company-owned fleet of tractors and trailers which
primarily serve nearby stores and through common carriers for stores located
at greater distances. As of December 30, 1995, the Company's owned fleet
included 158 tractors and 406 trailers. The Company seeks to lower costs on
shipments by taking advantage of backhauling opportunities where available.
The Company's processing facilities located in Tolleson, Arizona and Layton,
Utah produce a variety of products under the Company's private label for
distribution to Company stores. The Company's dairy plants process a variety
of milk, milk products and fruit punches. The Company's automated frozen dough
plant produces frozen bakery goods for final baking at in-store bakeries. The
Company's cultured dairy products plant
44
<PAGE>
produces sour cream, yogurt, cottage cheese and chip dip products. The
Company's ice cream processing plant supplies all stores with Smith's private
label ice cream and novelty items.
The Company believes that its central distribution facilities provide
several advantages. Management is able to control inventory levels throughout
its system in order to maximize the Company's in-stock position, while at the
same time optimizing the use of store shelf space. Costs of products are
reduced through centralized volume purchases and effective management of per-
item transportation costs. Stores are also served more efficiently through
central control of delivery schedules. By managing overall inventory levels,
the Company seeks to maximize inventory turns and minimize investments in
inventory. Management believes the Company's backstage operations will be able
to accommodate the increased volume resulting from the integration of the
Smitty's operations in Arizona following the Merger and to support anticipated
future growth.
Smitty's currently makes approximately 60% of its annual purchases from the
Arizona division of Fleming Foods West, Inc. ("Fleming"). Smitty's has reached
an agreement in principle with Fleming to amend the supply agreements, subject
to certain conditions, to make Fleming a secondary supplier to Smitty's and,
following the Merger, to the Company through the end of 1997. Pursuant the
terms of such agreement in principle, Smitty's would purchase inventory,
including grocery, frozen, non-fluid milk, dairy products, meat, produce,
regular and service deli, specialty foods, health and beauty care and general
merchandise, from Fleming in an amount not less than approximately $10 million
per month through December 31, 1997. Notwithstanding the foregoing, Smitty's
would have the right to terminate the agreement at any time if its aggregate
purchases of inventory from Fleming exceeded $200 million.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company is currently supported by a full range of advanced management
systems. Smith's has implemented store-level inventory and item management
systems developed on UNIX in-store processors using the Informix relational
database. This application includes direct store delivery store receiving,
which allows goods to be scanned electronically upon arrival at each store
receiving dock. This system also includes price verification and order entry
using hand-held personal computers. Store checkout is supported by NCR point-
of-sale scanning. Smith's stores are supported by pharmacy, video rental,
labor scheduling and time and attendance systems which help the Company
facilitate customer service while managing labor costs.
The Company's buying operations are supported by the AS/400-based E3
forecasting and purchasing system which uses statistical models of
seasonality, promotions and buying behavior to optimize inventory levels. The
Company's distribution centers operate utilizing leading software of the
Dallas Systems Company. The key components are the Distribution Center
Management Control System, which is used for all inventory processing, and the
Distribution Center Assignment Monitoring System (DCAMS), which is used for
labor standards management. To increase operating efficiency and decrease
labor costs, the DCAMS system transmits work assignments to lift drivers and
order selectors through a radio-frequency terminal. Smith's is currently
installing the OMI purchasing and forecasting system which will be used for
distribution center replenishment. The installation is expected to be
completed during 1996.
Smith's computer operations and applications development activities were
outsourced to Electronic Data Systems in 1992 under a ten-year outsourcing
agreement.
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."
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 and variety of products, service and store
condition. The Company regularly monitors
45
<PAGE>
its competitors' prices and adjusts its prices and marketing strategy 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 principal supermarket competitors in the Salt Lake City market
are Albertson's, Ream's Food Stores, Harmons, Fred Meyer, and Dan's Foods. In
the Phoenix market, the Company's principal supermarket competitors include
Fry's, Bashas Markets, Safeway, ABCO, Albertson's and Mega Foods and, prior to
the Merger, Smitty's. In Albuquerque, the Company's principal supermarket
competitors are Furr's, Jewel Osco and Albertson's, and in Las Vegas, the
Company's main supermarket competitors are Lucky, Vons and Albertson's. The
Company also competes with various drug chains and other non-food operators in
each of its markets. See "Risk Factors--Competition."
EMPLOYEES AND LABOR RELATIONS
The Company's policy is to train and develop its employees and promote from
within. The Company generally prefers to promote its own employees to store
manager positions. Management-level employees, including store department
managers, participate in incentive compensation programs tied to
profitability, and such compensation programs can represent a significant
percentage of such managers' total compensation. The Company believes that its
employee retention rate is high within the industry, especially at the store-
manager level and above.
Excluding California operations, as of December 30, 1995, Smith's employed
approximately 16,000 persons, approximately 53% of whom were full-time and 47%
of whom were part-time. Approximately 42% of the Company's employees are
unionized. The Company's unionized employees work under 15 collective
bargaining agreements with local labor unions, primarily in Arizona, Nevada
and New Mexico, which typically have three-year terms. Management of the
Company believes that it will be able to renew existing agreements on terms
satisfactory to the Company. If it is unable to do so, however, there could be
a material adverse effect on the Company's operations. The wages and benefits
provided in the Company's collective bargaining agreements are substantially
similar to those of its supermarket competitors. The Company has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
As of January 14, 1996, Smitty's employed approximately 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.
PROPERTIES
As of December 30, 1995, after giving effect to the Merger and the
California Divestiture, the Company would have owned 108 of its 148 operating
stores, including the underlying land with respect to 97 of such owned stores.
The Company's stores are located throughout a seven-state area as follows:
<TABLE>
<CAPTION>
STATE STORES OWNED STORES LEASED TOTAL
----- ------------ ------------- -----
<S> <C> <C> <C>
Arizona.................................. 40 18 58
Utah..................................... 30 5 35
Nevada................................... 12 10 22
New Mexico............................... 15 4 19
Idaho.................................... 4 1 5
Wyoming.................................. 3 2 5
Texas.................................... 4 0 4
--- --- ---
Total.................................. 108 40 148
=== === ===
</TABLE>
46
<PAGE>
The Company leases or subleases 40 of its operating stores from third
parties under leases expiring between 1997 and 2023. Eleven of the Company-
owned stores are located on property which is ground-leased from third parties
under leases expiring between 2007 and 2045. In most cases, such building and
ground leases are subject to customary renewal options.
The Company owns a 1,180,000 square-foot distribution and dairy processing
center in Tolleson, Arizona, 573,000 square feet of grocery warehousing
facilities and 348,000 square feet of processing plants in Layton, Utah and a
226,000 square foot non-food warehouse in Salt Lake City, Utah. The Company
also leases a 40,000 square-foot produce and forward-purchasing warehouse in
Albuquerque, New Mexico, a 408,000 square-foot non-foods warehouse in Salt
Lake City, Utah and a 205,000 square-foot produce warehouse in Ontario,
California, under leases expiring in 1997, 1997 and 1999, respectively.
The Company's corporate offices, data processing and records storage
facilities are located in over 100,000 square feet of office and warehouse
space owned by the Company in Salt Lake City, Utah.
CALIFORNIA DIVESTITURE
In late 1995, management determined that because of the attractive growth
prospects of the Company's principal markets and the competitive environment
in California, the Company would attempt to sell its California operations and
redeploy its resources into its non-California markets.
In December 1995, Smith's entered into an agreement to sublease its
Riverside, California distribution center to Ralphs. On January 29, 1996,
Ralphs commenced the sublease of the Riverside distribution center and dairy
plant for an initial term of 23 years. Ralphs also purchased certain equipment
and inventory for an aggregate purchase price (net of certain offsetting
payments) of approximately $8.7 million. The sublease provides for a subrental
of approximately $8.8 million per annum, which is substantially the same
amount as is payable by Smith's under the master lease, and requires Ralphs to
fulfill substantially all of the other monetary obligations of Smith's under
the master lease.
In January 1996, the Company entered into agreements to sell or lease 16 of
its California stores and three non-operating properties. The Company has
substantially completed the sale of these stores, including related equipment
and inventory. Of the 16 sold stores, the Company has leased or subleased
eight operating stores and one non-operating store to Ralphs. The non-
operating store, located in Beaumont, California, is partially completed, and
has been subleased by Ralphs in "as is" condition. The subleases to Ralphs are
for terms, and at subrentals, that are substantially equivalent to the terms
of, and the rentals payable under, the master store leases (except that Ralphs
is not responsible for rent escalations in the master store lease of one of
the subleased stores). The remaining eight stores were sold to other
supermarket companies, four pursuant to outright sales, two pursuant to
assignments of underlying leases and two pursuant to subleases. The two
subleases are subject to early termination if the Company has not satisfied
certain conditions within 18 months. See "Risk Factors--Contingent Liabilities
Relating to California Divestiture."
The Company has substantially completed the California Divestiture
transactions described above and, since December 30, 1995, has received net
cash proceeds of approximately $67.2 million (excluding store inventory). The
Company expects to receive approximately $10.6 million of additional cash
proceeds from the sale of certain undeveloped real estate shortly following
the consummation of the Transactions. All of the unsold California stores were
closed by March 16, 1996. In connection with its decision to cease operations
in California, Smith's recorded pre-tax restructuring charges of $140 million
for the year ended December 30, 1995 to reflect the anticipated cost to
Smith's of the California Divestiture. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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
47
<PAGE>
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.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental laws, rules,
regulations and investigative or enforcement activities, as are other
companies in the same or similar business. The Company believes it is in
substantial compliance with such laws, rules and regulations. These laws,
rules, regulations and agency activities change from time to time, and such
changes may affect the ongoing business and operations of the Company. The
Company, from time to time, has or may in the future receive requests from
environmental regulatory authorities to provide information or to conduct
investigation or remediation activities. None of these requests is expected by
management to have a material adverse effect on the Company's business.
GOVERNMENTAL REGULATION
The Company is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies which regulate the
distribution and sale of alcoholic beverages, pharmaceuticals, milk and other
agricultural products, as well as various other food and drug items and also
regulate trade practices, advertising, building standards, labor, health,
safety and environmental matters. The Company from time to time receives
inquiries from state and federal regulatory authorities with respect to its
comparative advertising practices, pricing policies, employment practices and
other trade practices. None of these inquiries, individually or in the
aggregate, has resulted, or is expected by management to result, in any order,
judgment, fine or other action that has, or would have, a material adverse
effect on the business or financial position of the Company.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses a variety of trade names, service marks and trademarks in
its business including "Smith's," "Smith's Food & Drug Centers," "Mountain
Dairy," "Creek View," "PriceRite," and numerous others. While the Company
believes its trademarks are important to its business, except for "Smith's,"
"Smith's Food & Drug Centers," "PriceRite" and, following the Merger,
"Smitty's," "Smitty's Super Valu" and "Shoppers Passport," the Company does
not believe any of such trademarks are, or will be, critical to its business.
LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to various
legal actions. Management believes these are routine in nature and incidental
to the operations of the Company. Management believes that the outcome of any
proceedings to which the Company is currently a party will not, individually
or in the aggregate, have a material adverse effect on the operations or
financial condition of the Company.
48
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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 Transactions. Following the
Recapitalization, the Board of Directors will be comprised of seven directors,
including two nominees of the Smith Group (as defined) and two nominees of the
Yucaipa Group (as defined). See "Certain Relationships and Related
Transactions--Standstill Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Jeffrey P. Smith.................... 45 Chairman of the Board
Ronald W. Burkle.................... 43 Chief Executive Officer, Director
Allen R. Rowland.................... 51 President, Chief Operating Officer,
Director
Robert D. Bolinder.................. 64 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................... 56 Senior Vice President, Human
Resources
Michael C. Frei..................... 49 Senior Vice President, General
Counsel and Secretary
Kenneth A. Martindale............... 36 Senior Vice President, Marketing
Fred F. Urbanek..................... 60 Senior Vice President, Facility
Engineering
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 Smith's since 1971. He has served as
Chairman of the Board and Chief Executive Officer since 1988. He served as
Chief Operating Officer of Smith's from 1984 to 1988.
Ronald W. Burkle has been the Chairman of the Board of Smitty's and a
director of SSV since 1994 and Chairman of the Board of SSV since October
1995. 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 Smith's in January 1996. 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.
49
<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.
Fred L. Smith has been a director of Smith's 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 with the law firm 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 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, a
manufacturer of fluid handling systems for reverse osmosis water treatment
systems and other applications.
50
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Amended and Restated Certificate of Incorporation of the Company will
provide that 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 Company's 1996 annual meeting of stockholders,
who shall have the one, two or three-year term for which such directors are
elected at such meeting.
Any increase in the number of directors or any 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.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding ownership of the
Company's voting securities as of April 15, 1996, giving effect to the
Transactions. The table has been prepared based on the assumptions that (a)
50% of the outstanding Common Stock of each holder is purchased pursuant to
the Tender Offer, (b) 3,000,000 shares of Series I Preferred Stock are
purchased by the Company from the Dee Glen Smith Marital Trust I (2,100,000
shares) and Ida Smith (900,000 shares), and (c) 2,206,000 shares of Series I
Preferred Stock are directly or indirectly conveyed by the Dee Glen Smith
Marital Trust I to certain charitable organizations. Based on such assumptions
and giving effect to the foregoing events, the following table sets forth the
ownership of Common Stock and Series I Preferred Stock of the Company by each
person who to the knowledge of Smith's will own 5% or more of any class of the
Company's outstanding voting stock, by each person who will be a director or
executive officer of the Company, and by all executive officers and directors
of the Company as a group. Share amounts and percentage ownership information
set forth below are subject to change pending finalization of the
Recapitalization and may vary depending on the actual number and class of
shares tendered in the Tender Offer.
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES I
COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF
----------------- ------------- ------------------- ALL VOTES OF
NUMBER NUMBER NUMBER ALL CLASSES
OF SHARES % OF SHARES % OF SHARES % OF STOCK
--------- ---- --------- --- ----------- ----- ------------
BENEFICIAL OWNER(A)
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P. Smith
1550 S. Redwood Rd.
Salt Lake City, UT
84104................... 1,670,954(b) 29.4 5,300 * 3,149,000(c) 31.6 29.0
Dee Glen Smith Marital
Trust I
c/o Ida W. Smith
1066 North East Capital
Blvd.
Salt Lake City, UT
84103................... 231,210(d) 4.1 -- -- 3,149,000(d) 31.6 20.3
Richard D. Smith
1550 South Redwood Road
Salt Lake City, UT
84104................... 1,174,463(e) 20.7 -- -- -- -- 7.1
Fred L. Smith
74285 Quail Lake Dr.
Indian Wells, CA 92210.. 957,498(f) 16.8 -- -- -- -- 5.8
Trust for the Children
of
Jeffrey P. Smith
2551 Brentwood Circle
Salt Lake City, UT
84121................... 577,650(d) 10.2 -- -- -- -- 3.5
Trust for the Children
of
Fred L. Smith
74285 Quail Lake Dr.
Indian Wells, CA 92210.. 577,650(g) 10.2 -- -- -- -- 3.5
Trust for the Children
of
Richard D. Smith
1038 North East Capital
Blvd.
Salt Lake City, UT
84103................... 557,650(h) 9.8 -- -- -- -- 3.4
Corporation of the
President of
the Church of Jesus
Christ of
Latter-day Saints
50 East North Temple
Salt Lake City, UT
84150................... -- -- -- -- 2,000,009 20.1 12.0
University of Utah
Medical School
407 Park Building
Salt Lake City, UT
84112................... -- -- -- -- 1,000,000 10.0 6.0
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES I
COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF
----------------- ----------------- --------------- ALL VOTES OF
NUMBER NUMBER NUMBER ALL CLASSES
OF SHARES % OF SHARES % OF SHARES % OF STOCK
--------- ---- --------- ---- --------------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
City of Hope
1500 East Duarte Road
Duarte, CA 91010........ -- -- -- -- 500,004 5.0 3.0
Ronald W. Burkle
c/o The Yucaipa
Companies
10000 Santa Monica Blvd.
Los Angeles, CA 90067... -- -- 2,125,406(i) 21.5 -- -- 1.3
Allen P. Martindale..... 310,000(j) 5.5 -- -- -- -- 1.9
Allen R. Rowland........ -- -- -- -- -- -- --
Kenneth A. Martindale... 53,500(k) * 9,497(l) * -- -- *
Robert D. Bolinder...... 50,000 * 15,000(m) * -- -- *
J. Craig Gilbert........ 32,500(n) * -- -- -- -- *
Matthew G. Tezak........ 30,000 * 16,048 * -- -- *
James W. Hallsey........ 16,750(o) * -- -- -- -- *
Michael C. Frei......... -- -- 1,584 * -- -- *
Richard C. Bylski....... 28,009(p) * 983 * -- -- *
Fred F. Urbanek......... 22,500 * 505 * -- -- *
Linda McLoughlin Figel.. -- -- -- (i) -- -- -- --
All directors and
officers as a group (15
persons)............... 2,861,711 50.4 2,174,323 22.0 3,149,000 31.6 37.5
</TABLE>
- --------
* Less than one-percent.
(a) Each person has sole investment and voting power with respect to the
shares indicated, except as otherwise set forth in the footnotes to this
table. 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.
(b) Includes 771,055 shares which are held of record by four trusts of which
Jeffrey P. Smith is the trustee and of which his children and the children
of Richard D. Smith are beneficiaries, and 231,210 shares held of record
by a trust for benefit of Ida W. Smith and of which Mr. Smith is trustee.
(c) Such shares are held of record by a trust for the benefit of Ida W. Smith
and of which Jeffrey P. Smith is trustee.
(d) Included in the shares shown for Jeffrey P. Smith.
(e) Includes 733,501 shares which are held of record by four trusts of which
Richard D. Smith is trustee and of which his children and the children of
Jeffrey P. Smith are beneficiaries and 5,871 shares held of record by Mr.
Smith's wife.
(f) Includes 679,389 shares which are held of record by four trusts of which
Fred L. Smith is trustee and of which his children are beneficiaries, and
17,600 shares held of record by Mr. Smith's wife.
(g) Included in the shares shown for Fred L. Smith.
(h) Included in the shares shown for Richard D. Smith.
(i) Such shares are held of record by the following four limited partnerships
of which Yucaipa is the general partner: Yucaipa SSV Partners, L.P.
(1,140,816); Yucaipa Smitty's Partners, L.P. (300,667); Yucaipa Smitty's
Partners II, L.P. (136,793); and Yucaipa Arizona Partners, L.P. (547,130).
Mr. Burkle is a limited partner in two of those partnerships and is also
the controlling general partner of Yucaipa. Linda McLoughlin Figel, a
nominee for director of the Company, is a limited partner in Yucaipa SSV
Partners, L.P. Under certain circumstances, the Company may prepay a
portion of the management fees payable to Yucaipa for its initial year of
services 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.
(j) Such shares are held of record by a trust for the benefit of Mr.
Martindale and his wife and of which Mr. Martindale is trustee.
(k) Includes 3,500 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(l) Includes 4,800 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(m) Includes 15,000 shares issuable upon exercise of vested options as of
April 15, 1996.
(n) Such shares are held of record by a trust for the benefit of Mr. Gilbert
and his wife and of which Mr. Gilbert is trustee.
(o) Includes 500 shares held of record by a child of Mr. Hallsey and of which
Mr. Hallsey is custodian.
(p) Includes 5,119 shares held of record by a partnership of which Mr. Bylski
is a general partner and 600 shares held of record by children of Mr.
Bylski and of which Mr. Bylski is custodian.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT
Yucaipa will provide certain management services to the Company pursuant to
the Management Services Agreement to be executed upon consummation of the
Transactions. The Management Services Agreement will have a five-year term and
will provide for annual management fees of $1,000,000, plus reimbursement of
all of Yucaipa's reasonable out-of-pocket costs and expenses. Under the
Management Services Agreement, Yucaipa, through its partners, employees or
other designated agents, will provide the Company with management consultation
and advice regarding strategic planning and development, budgeting and future
financing plans, selection and retention of management personnel, integration
strategy, legal and governmental affairs, board presentations and similar
management services as may be requested from time to time. In addition, the
Company may retain Yucaipa in an advisory capacity in connection with certain
acquisitions or sale transactions, debt and equity financings, or any other
services not otherwise covered by the Management Services Agreement, for which
the Company will pay Yucaipa additional compensation in an amount to be agreed
upon by the Company and Yucaipa (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 for its initial year of
services 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.
During the term of the Management Services Agreement, Ronald W. Burkle, the
managing general partner of Yucaipa, will, if he so elects, have the right to
serve as the Chief Executive Officer of the Company and will have all rights
and responsibilities customarily vested in a Chief Executive Officer. Mr.
Burkle will not receive any compensation for serving in such capacity beyond
the management fees paid to Yucaipa under the Management Services Agreement.
The Management Services Agreement may be terminated by the Company: (a) at
any time by giving Yucaipa at least 90 days' written notice; (b) if Yucaipa
shall fail to reasonably perform any material covenant, agreement, term or
provision under the Management Services Agreement following 60 days' written
notice of such failure; (c) at any time if Yucaipa commits any act of fraud,
dishonesty or gross negligence in connection with its performance under the
Management Services Agreement which is materially detrimental to the Company's
business or reputation; (d) upon the occurrence of certain defaults or events
of default under the Indentures, the New Credit Facility, or any other
material debt agreements entered into to refinance such indebtedness, if such
default is not cured or waived within a specified period; (e) if Yucaipa is in
material default under the Standstill Agreement following 90 days' written
notice of such default; or (f) at any time if Yucaipa and its affiliates own
less than 50% of the shares of Class B Common Stock acquired by them in the
Merger. Yucaipa may terminate the Management Services Agreement: (a) if the
Company fails to reasonably perform any material covenant, agreement, term or
provision under the Management Services Agreement following 60 days' written
notice; (b) if the Company fails to make any payment to Yucaipa under the
Management Services Agreement following 30 days' written notice of such
failure; (c) if the Yucaipa nominees cease to hold Board seats as required by
the Standstill Agreement; (d) if the Board of Directors fails to approve two
or more material recommendations by Yucaipa to the Board (provided that
Yucaipa may not designate more than four such matters during any calendar year
as material) or the Board otherwise takes action which materially interferes
with the ability of Yucaipa to perform its responsibilities under the
Management Services Agreement following 60 days' written notice; or (e) if Mr.
Burkle ceases to be Chief Executive Officer of the Company, other than by
reason of his death, disability, termination for cause or voluntary
resignation. Either Yucaipa or the Company may terminate the Management
Services Agreement upon a change of control of the Company (defined generally,
subject to certain exceptions and conditions, as either (i) the acquisition of
beneficial ownership of 40% or more of the Company's outstanding shares of
voting stock, or (ii) the sale of substantially all of the Company's assets or
capital stock, excluding any transaction with Yucaipa or any of its partners
or affiliates or any member of the Smith Group). If the Management Services
Agreement is terminated (i) by the Company for the reason set forth in clause
(a) of the first sentence of this paragraph, (ii) by Yucaipa in accordance
with the Management Services Agreement, or (iii) pursuant to a change of
control of the Company, Yucaipa will be entitled to the greater of (x) $5
million, or (y) twice the total fees that would have been earned by Yucaipa
under the then remaining term of the Management Services Agreement.
54
<PAGE>
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 in excess of 5% in, any
business which operates in excess of five retail supermarkets in any market in
which the Company operates in excess of five retail supermarket stores,
subject to certain exceptions and conditions.
During the term of the Management Services Agreement, 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.
STOCKHOLDERS' AGREEMENTS
On January 29, 1996, Smith's, Acquisition and certain stockholders of
Smitty's entered into a stockholders agreement (the "Smitty's Stockholders
Agreement") and Smitty's, Yucaipa and certain stockholders of Smith's entered
into a similar shareholders agreement (the "Smith's Shareholders Agreement").
Under the terms of the Smitty's Stockholders Agreement and the Smith's
Shareholders Agreement, each of the parties thereto agreed (i) to vote its
respective shares of Smitty's Common Stock or Smith's Common Stock, as
applicable, in favor of approval of the Recapitalization Agreement; (ii) to
refrain from soliciting any person other than Smitty's or Smith's, as
applicable, to purchase all or any material portion of the assets of, or
equity interests in, the Company; (iii) to refrain from transferring their
shares of the Company's stock without consent from Smith's or Smitty's, as
applicable, and the Company; and (iv) to take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied. Under the terms of the Smith's Shareholders
Agreement, the Smith's stockholders parties thereto have agreed to tender a
sufficient number of their shares of Common Stock in the Tender Offer to
enable Smith's to purchase 50% of the outstanding shares of Common Stock in
the Tender Offer.
STANDSTILL AGREEMENT
On January 29, 1996, the Company, Yucaipa and each of the limited
partnerships which own shares in Smitty's for which Yucaipa acts as the
general partner (the "Smitty's Principal Stockholders"; together with Yucaipa,
the "Yucaipa Group") entered into the Standstill Agreement. Pursuant to the
Standstill Agreement, 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, subject to
certain exceptions. 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 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,
55
<PAGE>
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, or (v) engage in certain affiliate
transactions.
Pursuant to the Standstill Agreement, the Company will 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. 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.
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.
YUCAIPA WARRANT
Upon closing of the Recapitalization, the Company has agreed to issue Yucaipa
warrants to purchase shares of Class C Common Stock of the Company (the
"Warrants") representing approximately 10% of the outstanding Common Stock on a
fully diluted basis upon consummation of the Transactions. The initial exercise
price of the Warrants will be $50.00 per share. One-half of the Warrants will
be designated "Series A Warrants" and will be exercisable at the election of
Yucaipa on or prior to the fourth anniversary of the Closing, and one-half of
the Warrants will be designated "Series B Warrants" and will be exercisable at
the election of Yucaipa on or prior to the fifth anniversary of the Closing.
The foregoing expiration dates will each be extended by five years in the event
that, prior to such respective dates, the market price of Class B Common Stock
equals or exceeds the exercise price (as adjusted from time to time) for a
period of not less than 60 consecutive trading days. The cashless exercise
provisions of the Warrants allow the holder to elect to exercise the Warrants
without the payment of cash consideration, provided that the Company will
withhold from the shares otherwise issuable upon such exercise a number of
shares having a fair market value as of the exercise date equal to the
aggregate exercise price. 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
56
<PAGE>
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 to be
issued upon exercise of the Warrants and the exercise price are each subject
to adjustment under standard anti-dilution provisions.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Recapitalization Agreement, upon consummation of the Merger
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 as consideration
in the Merger (collectively, the "Holders"). Under the terms of the
Registration Rights Agreement, each of (i) Yucaipa and the holders of Smitty's
Common Stock receiving Class B Common Stock in the Merger and their
transferees, as a group (the "Yucaipa Holder Group"), and (ii) Jeffrey Smith
and his affiliates and transferees, as a group (the "Smith Holder Group"),
will be entitled to require the Company to effect a registration under the
Securities Act (a "Demand Registration") of all or a portion (but not less
than 20%) of the Registrable Securities (as defined) held by such Holders,
subject to certain limitations. Upon such demand, the Company will give prompt
notice thereof to each registered holder of Registrable Securities and will
prepare, file and use its best efforts to cause to become effective a
registration statement in respect of all Registrable Securities requested to
be included therein. Each of the Smith Holder Group and the Yucaipa Holder
Group will be entitled to two Demand Registrations. Notwithstanding the
foregoing, the Company will not be required to effect more than one Demand
Registration during any six-month period. Such Demand Registration may, at the
election of the demanding Holders, be in the form of an underwritten offering
and such demanding Holders shall be entitled to select the underwriters.
Members of the Yucaipa Holder Group may at any time prior to the second
anniversary of the Closing Date demand that the Company promptly file a shelf
registration statement pursuant to Rule 415 under the Securities Act which
will provide for resales of Registrable Securities held by the Yucaipa Group.
The Company will keep such Shelf Registration statement continuously effective
for at least 120 days following the effective date (or such longer period as
such Holders' Registrable Securities constitute "restricted securities" under
Rule 144 and are subject to the two-year holding period for affiliates under
Rule 144(c)); provided that in no event will the Company be required to keep
such shelf registration statement effective after the second anniversary of
the Closing Date.
Holders of Registrable Securities will also have the right to include such
Registrable Securities in any registration statement under the Securities Act
filed by the Company for its own account or for the account of any of its
securityholders (other than (i) a registration statement on Form S-4 or S-8,
(ii) a registration statement filed in connection with a Demand Registration
or a Shelf Registration or (iii) a registration statement filed in connection
with an offer of securities solely to existing securityholders) for sale on
the same terms and conditions as the securities of Smitty's or any other
selling securityholder included therein (a "Piggy-Back Registration"). In the
event that, pursuant to any Demand Registration or any Piggy-Back
Registration, the Company is advised by the managing underwriter therefor that
the total number of shares proposed to be included therein is such as to
materially and adversely affect the success of the offering, the Company has
granted certain priority rights to the Smith Group which enables the Smith
Group to have its Registrable Securities (up to certain designated amounts)
included in such registrations before the Yucaipa 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 expenses of any party to the
Registration Rights Agreement who participates in any registration effected
thereunder. In addition, the Company will provide a customary securities law
indemnification to any party who participates in any registration effected
under the Registration Rights Agreement.
57
<PAGE>
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 Smith
Holder Group or the Yucaipa Holder Group, the date on which the aggregate
number of shares of outstanding Registrable Securities held by the Smith
Holder Group or the Yucaipa Holder Group, as applicable, is less than 20% of
the Registrable Shares originally held by the Smith Holder Group or the
Yucaipa Holder Group, as applicable, immediately following the consummation of
the Transactions (except with respect to any Holder that is an "affiliate" of
the Company within the meaning of the Securities Act).
OTHER TRANSACTIONS WITH YUCAIPA OR ITS AFFILIATES
Pursuant to the Recapitalization Agreement, Yucaipa will receive a success
fee of $15 million upon consummation of the Offerings and the
Recapitalization.
In December 1995, the Company entered into an agreement to sublease its
Riverside, California distribution center and dairy processing plant to
Ralphs, an affiliate of Yucaipa. Pursuant to the sublease, Ralphs will pay the
Company annual rent of approximately $8.8 million for the remaining 23-year
term of the lease. In connection with such transaction, Ralphs purchased
certain inventory, fixtures and equipment from the Company for an aggregate
purchase price (net of certain offsetting payments) of approximately $8.7
million. As part of the California Divestiture, in January 1996 the Company
entered into agreements to lease or sublease certain of its real property
located in California, including eight operating stores and one non-operating
store, to Ralphs, an affiliate of Yucaipa. See "Business--California
Divestiture."
CEO'S 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 Transactions.
It is anticipated that a definitive agreement regarding such matters will be
reached prior to the consummation of the Transactions.
OTHER TRANSACTIONS
During fiscal 1995, Smith's paid $217,524 in advertising fees to radio and
television stations operated by subsidiary companies of Bonneville
International Corporation ("Bonneville"). Rodney H. Brady, a former director
of Smith's, serves as President and Chief Executive Officer of Bonneville, but
has no role in Smith's advertising decisions. Also during fiscal 1995, Smith's
paid $15,385 to an automobile dealership owned by Fred Smith, one of Smith's
directors, in connection with the purchase of an automobile for use by
Smith's.
In January 1996, Alan R. Hoefer, a former director of Smith's, received
consulting fees from the Company in an aggregate amount equal to $250,000 in
connection with certain financial consulting services rendered by him in 1995.
Smith's believes that the terms of the foregoing transactions were no less
favorable to Smith's than those which could have been obtained from
unaffiliated third parties.
58
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Senior Notes will be issued under an indenture (the "Senior Note
Indenture"), to be dated as of , 1996, by and among the Company and
, as Trustee (the "Senior Note Trustee").
The Senior Subordinated Notes will be issued under an Indenture (the "Senior
Subordinated Note Indenture," and together with the Senior Note Indenture, the
"Indentures") to be dated as of , 1996, by and among the Company and
, as Trustee (the "Senior Subordinated Note Trustee," and together
with the Senior Note Trustee, the "Trustees").
The following summary of certain provisions of the Notes and the Indentures
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and to all of the provisions of the Notes and the Indentures,
including the definitions of certain terms therein and those terms made a part
of the Indentures by reference to the TIA. The definitions of certain
capitalized terms used in the following summary are set forth below under "--
Certain Definitions." Copies of the forms of the Indentures have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Available Information."
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Senior
Note Trustee will act as Paying Agent and Registrar for the Senior Notes, and
the Senior Subordinated Note Trustee will act as Paying Agent and Registrar
for the Senior Subordinated Notes. The Senior Notes and the Senior
Subordinated Notes may be presented for registration or transfer and exchange
at the offices of their respective Registrar, which for the Senior Notes
initially will be the Senior Note Trustee's corporate trust office and for the
Senior Subordinated Notes initially will be the Senior Subordinated Note
Trustee's corporate trust office. The Company may change any Paying Agent and
Registrar without notice to holders of either the Senior Notes (the "Senior
Noteholders") or of the Senior Subordinated Notes (the "Senior Subordinated
Noteholders," and together with the Senior Noteholders, the "Holders"). The
Company will pay principal (and premium, if any) on the Senior Notes at the
Senior Note Trustee's corporate office, and will pay principal (and premium,
if any) on the Senior Subordinated Notes at the Senior Subordinated Note
Trustee's corporate office, each such office located in New York, New York. At
the Company's option, interest may be paid at the Senior Note Trustee's
corporate trust office (in the case of interest payments on the Senior Notes)
or the Senior Subordinated Note Trustee's corporate trust office (in the case
of interest payments on the Senior Subordinated Notes) or by check mailed to
the registered address of the relevant Holders.
As used below in this "Description of Notes," the "Company" means Smith's
Food & Drug Centers, Inc., but not any of the Subsidiaries.
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NOTES
The Senior Notes are limited in aggregate principal amount to $250,000,000
and will mature on , 2006. The Senior Subordinated Notes are limited in
aggregate principal amount to $400,000,000 and will mature on , 2007.
Interest on the Notes will accrue at the rates per annum set forth on the
cover page of this Prospectus. Interest on the Notes will be payable semi-
annually on each and , commencing on , 199 , to the Holders of
record on the immediately preceding and .
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
issuance. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months.
OPTIONAL REDEMPTION OF THE SENIOR NOTES
The Senior Notes will be redeemable, at the option of the Company, in whole
at any time or in part from time to time, on and after , 2001, at the
following redemption prices (expressed as percentages of
59
<PAGE>
the principal amount) if redeemed during the twelve-month period commencing on
of the year set forth below, plus, in each case, accrued and unpaid
interest, if any, to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option, 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 Senior Notes originally
issued, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12 months commencing on of the
year set forth below plus, in each case, accrued and unpaid interest, if any,
to the date of redemption (provided that the redemption notice shall have been
sent not later than 60 days after the consummation of such Public Equity
Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
OPTIONAL REDEMPTION OF THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes will be redeemable, at the option of the
Company, in whole at any time or in part from time to time, on and after
, 2001, at the following redemption prices (expressed as percentages of
the principal amount) if redeemed during the twelve-month period commencing on
of the year set forth below, plus, in each case, accrued and unpaid
interest to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option, 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 Senior Subordinated Notes
originally issued, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12 months
commencing on of the year set forth below, plus, in each case, accrued
and unpaid interest, if any, to the date of redemption (provided that the
redemption notice shall have been sent not later than 60 days after the
consummation of such Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
The documents evidencing Senior Indebtedness will restrict the Company's
ability to optionally redeem Senior Subordinated Notes.
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<PAGE>
NOTICES AND SELECTION
In the event of a redemption of less than all of the Senior Notes or the
Senior Subordinated Notes, as the case may be, such Notes will be selected for
redemption by the appropriate Trustee pro rata, by lot or by any other method
that such Trustee considers fair and appropriate and, if such Notes are listed
on any securities exchange, by a method that complies with the requirements of
such exchange; provided, however, that any redemption of the Senior Notes or
the Senior Subordinated Notes pursuant to the provisions relating to a Public
Equity Offering shall be made on a pro rata basis (with respect to the
applicable class of Notes) unless such method is otherwise prohibited. Notice
of redemption will be mailed at least 30 days but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at such Holder's
registered address. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption (unless the Company
shall default in the payment of the redemption price or accrued interest).
Notes that are redeemed by the Company or that are purchased by the Company
pursuant to a Net Proceeds Offer (to be defined) or pursuant to a Change of
Control Offer as described under "--Change of Control" below or that are
otherwise acquired by the Company will be surrendered to the appropriate
Trustee for cancellation.
RANKING OF THE SENIOR NOTES
The Senior Notes are senior unsecured obligations of the Company. The Senior
Notes will rank senior in right of payment to all Subordinated Indebtedness of
the Company, including the Senior Subordinated Notes. The Senior Notes will
rank pari passu in right of payment with all unsubordinated Indebtedness and
other liabilities of the Company, but will be effectively subordinated to all
secured Indebtedness of the Company. The borrowings and obligations under the
Credit Agreement (and the related guarantees) are secured by substantially all
of the assets of the Company and the Subsidiaries. At December 30, 1995, on a
pro forma basis after giving effect to the Transactions and the California
Disposition, the Company would have had approximately $663.2 million aggregate
amount of secured Indebtedness and other obligations outstanding (other than
guarantees of the New Credit Facility), which amount excludes any borrowings
or amounts available to be borrowed under the New Revolving Facility.
The Senior Notes will be effectively subordinated to all existing and future
liabilities, including Indebtedness, of the Subsidiaries. At December 30,
1995, after giving pro forma effect to the Transactions and the California
Disposition, the Subsidiaries would have had Indebtedness and other
liabilities reflected on the Company's consolidated balance sheet (other than
guarantees of the New Credit Facility), including trade payables and accrued
expenses, of approximately $148.4 million.
SUBORDINATION OF THE SENIOR SUBORDINATED NOTES
The payment of the Obligations on the Senior Subordinated Notes will be
subordinated in right of payment, as set forth in the Senior Subordinated Note
Indenture, to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness, whether outstanding on the Issue Date or thereafter
Incurred, including, with respect to Designated Senior Indebtedness, any
interest accruing subsequent to a bankruptcy or other similar proceeding
whether or not such interest is an allowed claim enforceable against the
Company in a bankruptcy case under Title 11 of the United States Code.
Upon any distribution of assets of the Company of any kind or character,
whether in cash, property or securities upon any dissolution, winding up,
total or partial liquidation or reorganization of the Company (including,
without limitation, in bankruptcy, insolvency, or receivership proceedings or
upon any assignment for the benefit of creditors or any other marshalling of
the Company's assets and liabilities), the holders of Senior Indebtedness
shall first be entitled to receive payment in full in cash or Cash Equivalents
of all amounts then due and payable under Senior Indebtedness (including, with
respect to Designated Senior Indebtedness, any interest accruing after the
commencement of any such proceeding at the rate specified in the applicable
Designated Senior Indebtedness whether or not such interest is an allowed
claim enforceable against the Company in any such proceeding) before the
Holders of Senior Subordinated Notes will be entitled to receive
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<PAGE>
any payment with respect to the Senior Subordinated Notes, and until all
Obligations with respect to Senior Indebtedness then due are paid in full in
cash or Cash Equivalents, any distribution to which the Holders of Senior
Subordinated Notes would be entitled shall be made to the holders of Senior
Indebtedness.
No direct or indirect payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) by or on behalf of the Company of Obligations on the Senior
Subordinated Notes whether pursuant to the terms of the Senior Subordinated
Notes or upon acceleration or otherwise shall be made if, at the time of such
payment, there exists a default in the payment of all or any portion of
principal of, premium, if any, or interest on (i) any Designated Senior
Indebtedness or (ii) any other Senior Indebtedness which, at the time of
determination, is equal to or greater than $50 million in aggregate principal
amount ("Significant Senior Indebtedness") (and the Senior Subordinated Note
Trustee has received written notice thereof), and such default shall not have
been cured or waived by or on behalf of the holders of such Designated Senior
Indebtedness or Significant Senior Indebtedness, as the case may be, or shall
have ceased to exist, until such default shall have been cured or waived or
shall have ceased to exist or such Designated Senior Indebtedness or
Significant Senior Indebtedness, as the case may be, shall have been
discharged or paid in full in cash or Cash Equivalents, after which the
Company shall resume making any and all required payments in respect of the
Senior Subordinated Notes, including any missed payments.
In addition, during the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon the earliest to occur of (a) receipt by the
Senior Subordinated Note Trustee of written notice from the holders of a
majority of the outstanding principal amount of the Designated Senior
Indebtedness or their representative, or (b) if such event of default results
from the acceleration of the Senior Subordinated Notes, the date of such
acceleration, no such payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) may be made by the Company upon or in respect of the Senior
Subordinated Notes for a period ("Payment Blockage Period") commencing on the
earlier of the date of receipt of such notice or the date of such acceleration
and ending 179 days thereafter (unless (x) such Payment Blockage Period shall
be terminated by written notice to the Senior Subordinated Note Trustee from
the holders of a majority of the outstanding principal amount of such
Designated Senior Indebtedness or their representative who delivered such
notice or (y) such default is cured or waived, or ceases to exist or such
Designated Senior Indebtedness is discharged or paid in full in cash or Cash
Equivalents), after which the Company shall resume making any and all required
payments in respect of the Senior Subordinated Notes, including any missed
payments. Notwithstanding anything herein to the contrary, in no event will a
Payment Blockage Period extend beyond 179 days from the date on which such
Payment Blockage Period was commenced. Not more than one Payment Blockage
Period may be commenced with respect to the Senior Subordinated Notes during
any period of 365 consecutive days. No event of default which existed or was
continuing on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period shall be, or be made, the basis for the commencement of a second
Payment Blockage Period by the holders of such Designated Senior Indebtedness
or their representative whether or not within a period of 365 consecutive days
unless such event of default shall have been cured or waived for a period of
not less than 90 consecutive days.
If the Company fails to make any payment on the Senior Subordinated Notes
when due or within any applicable grace period, whether or not on account of
the payment blockage provisions referred to above, such failure would
constitute an Event of Default under the Senior Subordinated Note Indenture
and would enable the Senior Subordinated Noteholders to accelerate the
maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of the insolvency of the
Company, Senior Subordinated Noteholders may recover less, ratably, than
holders of Senior Indebtedness.
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the Company would have had
approximately $913.2 million aggregate amount of Senior Indebtedness
outstanding, which amount excludes any borrowings or amounts available to be
borrowed under the New Revolving Facility.
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<PAGE>
In addition, the Senior Subordinated Notes will be effectively subordinated
to all existing and future liabilities, including Indebtedness, of the
Subsidiaries. At December 30, 1995, after giving pro forma effect to the
Transactions, the Subsidiaries would have had Indebtedness and other
liabilities reflected on the Company's consolidated balance sheet (other than
guarantees of the Senior Indebtedness), including trade payables and accrued
expenses, of approximately $148.4 million.
CHANGE OF CONTROL
Each of the Indentures will provide that, upon the occurrence of a Change of
Control, each Holder of Notes issued thereunder will have the right to require
the repurchase of such Holder's Notes pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase (the "Change of Control Offer Price").
Each of the Indentures will provide that no later than 30 days following the
date upon which the Change of Control occurred, the Company must send, by
first class mail, a notice to each Holder of Notes issued under such
Indenture, with a copy to the applicable Trustee, which notice shall govern
the terms of the Change of Control Offer. The Indentures shall require that
notice of an event giving rise to a Change of Control shall be given on the
same date and in the same manner to all Holders. Such notice shall state,
among other things, the purchase date, which must be no earlier than 30 days
nor later than 40 days from the date such notice is mailed, other than as may
be required by law (the "Change of Control Payment Date"). Each Indenture
shall provide that the Change of Control Payment Date under the Senior Note
Indenture with respect to any Change of Control shall be one business day
prior to the Change of Control Payment Date under the Senior Subordinated Note
Indenture with respect to such Change of Control. Holders electing to have a
Note purchased pursuant to a Change of Control Offer will be required to
surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the applicable Paying Agent
at the address specified in the notice prior to the close of business on the
Business Day prior to the applicable Change of Control Payment Date. Each
Change of Control Offer is required to remain open for at least 20 Business
Days or such longer period as may be required by law.
The Senior Subordinated Note Indenture will further provide that,
notwithstanding the foregoing, prior to the mailing of the notice of a Change
of Control Offer referred to above, within 30 days following a Change of
Control the Company shall either (a) repay in full all Indebtedness, and
terminate all commitments, under the Credit Agreement to the extent required
upon a change of control pursuant to the terms thereof (or offer to repay in
full all such Indebtedness and terminate all such commitments and repay all
such Indebtedness owed to each lender which has accepted such offer and
terminate all such commitments of each such lender), or (b) obtain the
requisite consents under the Credit Agreement, the terms of which require
repayment upon a change of control, to permit the repurchase of the Senior
Subordinated Notes as provided above. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Senior Subordinated Notes pursuant to the provisions described
above. The Company's failure to comply with the covenants described in this
paragraph shall constitute an Event of Default under the Senior Subordinated
Note Indenture.
In addition, the Senior Subordinated Note Indenture will provide that prior
to purchasing Senior Subordinated Notes tendered in a Change of Control Offer,
the Company shall purchase all Senior Notes (or permitted refinancings
thereof) which it is required to purchase by reason of such Change of Control
pursuant to the provisions of the Senior Note Indenture as in effect on the
Issue Date.
Notwithstanding the foregoing, the Company shall not be required to make a
Change of Control Offer, as provided above, if, in connection with any Change
of Control, it has made an offer to purchase (an "Alternate Offer") any and
all Notes validly tendered at a cash price equal to or higher than the Change
of Control Offer Price and has purchased all Notes properly tendered in
accordance with the terms of such Alternate Offer.
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<PAGE>
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of state and federal securities laws to the extent applicable in
connection with a Change of Control Offer or an Alternate Offer.
CERTAIN COVENANTS
Except as otherwise specified below, each of the Indentures will contain,
among other things, the following covenants:
Limitation on Restricted Payments. Each of the Indentures will provide that
the Company shall not, and shall cause each of the Restricted Subsidiaries not
to, directly or indirectly, make any Restricted Payment if, at the time of
such proposed Restricted Payment, or after giving effect thereto, (a) a
Default or an Event of Default shall have occurred and be continuing, (b) the
Company could not Incur $1.00 of additional Indebtedness pursuant to the
proviso in the covenant described under "--Limitation on Incurrences of
Additional Indebtedness" below or (c) the aggregate amount expended for all
Restricted Payments, including such proposed Restricted Payment (the amount of
any Restricted Payment, if other than cash, to be the fair market value
thereof at the date of payment as determined in good faith by the Board of
Directors of the Company as evidenced by a Board Resolution), subsequent to
the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated
Net Income (or if such aggregate Consolidated Net Income is a loss, minus 100%
of such loss) earned during the period beginning on the Issue Date and ending
on the date of the proposed Restricted Payment (the "Reference Date") plus
(ii) 100% of the aggregate Net Proceeds received by the Company from any
Person (other than a Subsidiary) from the issuance and sale (including upon
exchange or conversion for other securities of the Com pany) subsequent to the
Issue Date and on or prior to the Reference Date of Qualified Capital Stock
(excluding (A) Qualified Capital Stock paid as a dividend on any Capital Stock
or as interest on any Indebtedness and (B) any Net Proceeds from issuances and
sales financed directly or indirectly using funds borrowed from the Company or
any Subsidiary, until and to the extent such borrowing is repaid), plus (iii)
100% of the Net Proceeds from (a) the sale or other disposition of Investments
(other than Permitted Investments described in clauses (i)-(vi) inclusive)
made by the Company and any Restricted Subsidiary or (b) the sale of the
Capital Stock of any Unrestricted Subsidiary or the sale of all or
substantially all of the assets of any Unrestricted Subsidiary to the extent
that a liquidating dividend is paid to the Company or any Restricted
Subsidiary from the proceeds of such sale.
The Indentures will provide that the provisions set forth in the immediately
preceding paragraph will not prevent (1) the payment of any dividend within 60
days after the date of its declaration if the dividend would have been
permitted on the date of declaration, (2) the acquisition of any shares of
Capital Stock of the Company or the repurchase, redemption or other repayment
of any Subordinated Indebtedness in exchange for or solely out of the Net Cash
Proceeds of the substantially concurrent sale (other than to a Subsidiary) of
shares of Qualified Capital Stock of the Company, provided that no proceeds of
such sale of Qualified Capital Stock shall be included in clause (ii) of the
preceding paragraph, (3) the repurchase, redemption or other repayment of any
Subordinated Indebtedness in exchange for or solely out of the Net Cash
Proceeds of the substantially concurrent sale (other than to a Subsidiary) of
Subordinated Indebtedness of the Company with an Average Life equal to or
greater than the then remaining Average Life of the Subordinated Indebtedness
repurchased, redeemed or repaid, and (4) Permitted Payments; provided,
however, that, at the time of, and after giving effect to, any Restricted
Payment made under clause (3) or (4), no Default or Event of Default shall
have occurred and be continuing; provided, further, however, that the
declaration of each dividend paid in accordance with clause (1) above and each
payment under clause (ii), (iv) or (vii) of the definition of "Permitted
Payments" shall each be counted for purposes of computing amounts expended
pursuant to subclause (c) in the immediately preceding paragraph, and no
amounts expended pursuant to clause (2) or (3) above or clause (i), (iii),
(v), (vi), (viii), (ix) or (x) of the definition of "Permitted Payments" shall
be so counted.
Limitation on Incurrences of Additional Indebtedness. Each of the Indentures
will provide that the Company shall not, and shall not permit any of the
Restricted Subsidiaries to, directly or indirectly, Incur any Indebtedness
other than Permitted Indebtedness; provided, however, that if no Default with
respect to payment
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<PAGE>
of principal of, or interest on, the Notes issued under such Indenture or
Event of Default under such Indenture shall have occurred and be continuing at
the time or as a consequence of the Incurrence of any such Indebtedness, (x)
the Company or any Restricted Subsidiary may Incur Indebtedness if immediately
after giving effect to the Incurrence of such Indebtedness the Operating
Coverage Ratio would be greater than 2.0 to 1.0.
Limitation on Liens. The Senior Note Indenture will provide that the Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or suffer to exist any Liens upon any asset
or property of the Company or any Restricted Subsidiary unless the Senior
Notes are equally and ratably secured by the Liens covering such asset or
property. The foregoing shall not prohibit (i) existing and future Liens
securing Indebtedness and other obligations of the Company and the Restricted
Subsidiaries under the Credit Agreement and related documents or any
refinancing or replacement thereof in whole or in part permitted under the
Senior Note Indenture; (ii) Permitted Liens; (iii) Liens securing Acquired
Indebtedness Incurred in accordance with the Senior Note Indenture; provided
that such Liens (x) are not incurred in connection with, or in contemplation
of the acquisition of the property or assets acquired and (y) do not extend to
or cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets so acquired; (iv) Liens to secure
Capitalized Lease Obligations and certain other Indebtedness that is otherwise
permitted under the Senior Note Indenture; provided that (A) any such Lien is
created solely for the purpose of securing such other Indebtedness
representing, or Incurred to finance, refinance or refund, the cost (including
sales and excise taxes, installation and delivery charges and other direct
costs of, and other direct expenses paid or charged in connection with, the
purchase (whether through stock or asset purchase, merger or otherwise) or
construction) or improvement of the property subject thereto (whether real or
personal, including fixtures and other equipment), (B) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such costs and
(C) such Lien does not extend to or cover any property other than such item of
property and any improvements on such item; (v) Liens existing on the Issue
Date (after giving effect to the Transactions); (vi) Liens in favor of the
Trustees under the Senior Note Indenture and any substantially equivalent Lien
granted to any trustee or similar institution under any indenture governing
Indebtedness permitted to be Incurred or outstanding under the Senior Note
Indenture; and (vii) any replacement, extension or renewal, in whole or in
part, of any Lien described in this or the foregoing clauses including in
connection with any refinancing of the Indebtedness, in whole or in part,
secured by any such Lien; provided that to the extent any such clause limits
the amount secured or the assets subject to such Liens, no extension or
renewal shall increase the amount or the assets subject to such Liens, except
to the extent that the Liens associated with such additional assets are
otherwise permitted hereunder.
The Senior Subordinated Note Indenture will provide that the Company shall
not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or suffer to exist any Lien that secures
obligations under any Indebtedness of the Company which is expressly by its
terms subordinated in right of payment to any other Indebtedness of the
Company on any asset or property of the Company or any Restricted Subsidiary,
or any proceeds therefrom, or assign or convey any right to receive proceeds
therefrom, unless the Senior Subordinated Notes are secured by a Lien on such
asset, property or proceeds that is (x) pari passu with such other
Indebtedness if such other Indebtedness is pari passu with the Senior
Subordinated Notes or (y) if such other Indebtedness is so subordinated to the
Senior Subordinated Notes, senior in priority to such Liens in each case,
until such time as such obligations are no longer secured by a lien.
Limitation on Asset Sales. Each of the Indentures will provide that neither
the Company nor any Restricted Subsidiary shall consummate an Asset Sale
unless (a) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets sold or otherwise disposed of (as determined
in good faith by the Company) and (b) upon consummation of an Asset Sale, the
Company will within 365 days of the receipt of the proceeds therefrom: (i)
apply or cause such Restricted Subsidiary to apply the Net Cash Proceeds of
such Asset Sale to (A) a Related Business Investment, (B) an investment in
properties and assets that replace the properties and assets that are the
subject of such Asset Sale or (C) an investment in properties and assets that
will be used in the business of the Company and the Restricted Subsidiaries
existing on the Issue Date or in businesses reasonably related thereto; (ii)
in the case of a
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<PAGE>
sale of a store or stores, deem such Net Cash Proceeds to have been applied to
the extent of any capital expenditures made to acquire or construct a
replacement store in the general vicinity of the store sold within 365 days
preceding the date of the Asset Sale; (iii) apply such Net Cash Proceeds (or
cause such Net Cash Proceeds to be applied) to the permanent repayment of Pari
Passu Indebtedness or any Indebtedness of any Restricted Subsidiary or, in the
case of the Senior Subordinated Note Indenture, Senior Indebtedness; provided,
however, that the repayment of any revolving loan (under the Credit Agreement
or otherwise) shall result in a permanent reduction in the commitment
thereunder; (iv) use such Net Cash Proceeds to secure Letter of Credit
Obligations to the extent the related letters of credit have not been drawn
upon or returned undrawn; or (v) after such time as the accumulated Net Cash
Proceeds not applied pursuant to the foregoing clauses (i) through (iv) equals
or exceeds $20.0 million, apply such Net Cash Proceeds (or cause such Net Cash
Proceeds to be applied) to the purchase of Notes issued under such Indenture
tendered to the Company for purchase at a price equal to 100% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase pursuant to an offer to purchase made by the Company as set forth
below (a "Net Proceeds Offer"); provided, however, that the Company shall have
the right to exclude from the foregoing provisions Asset Sales subsequent to
the Issue Date, the proceeds of which are derived from the sale and
substantially concurrent lease-back of a supermarket and/or related assets or
equipment which are acquired or constructed by the Company or a Restricted
Subsidiary subsequent to the date that is six months prior to the Issue Date,
provided that such sale and substantially concurrent lease-back occurs within
270 days following such acquisition or the completion of such construction, as
the case may be. Pending the utilization of any Net Cash Proceeds in the
manner (and within the time period) described above, the Company may use any
such Net Cash Proceeds to repay revolving loans (under the Credit Agreement or
otherwise) without a permanent reduction of the commitment thereunder.
Each Net Proceeds Offer will be mailed to the record Holders of Senior Notes
or Senior Subordinated Notes, as the case may be, as shown on the register of
Holders of such Notes not less than 325 nor more than 365 days after the
relevant Asset Sale, with a copy to the applicable Trustee, shall specify the
purchase date (which shall be no earlier than 30 days nor later than 40 days
from the date such notice is mailed) and shall otherwise comply with the
procedures set forth in the applicable Indenture. Upon receiving notice of the
Net Proceeds Offer, Holders of Senior Notes or Senior Subordinated Notes, as
the case may be, may elect to tender their Notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender Senior Notes or Senior Subordinated Notes, as the case may be,
in an amount exceeding the Net Proceeds Offer, Notes of tendering Holders will
be repurchased on a pro rata basis (based on amounts tendered). A Net Proceeds
Offer shall remain open for a period of 20 Business Days or such longer period
as may be required by law.
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of State and federal securities laws to the extent applicable in
connection with a Net Proceeds Offer.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. Each of the Indentures will provide that the Company shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly,
create or suffer to exist, or allow to become effective any consensual Payment
Restriction with respect to any of the Restricted Subsidiaries, except for (a)
any such restrictions contained in (i) the Credit Agreement and related
documents as any such Payment Restriction may apply to any present or future
Subsidiary, (ii) the Indentures, (iii) any agreement in effect at or entered
into on the Issue Date, as each of the agreements referred to in the foregoing
clauses (i), (ii) or (iii) is in effect on the Issue Date or as thereafter
amended, supplemented or amended and restated in a manner, as it relates to
such restrictions, not materially adverse to the Holders of the Notes issued
under such Indenture and (iv) Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary (provided that (x) such
Indebtedness is not Incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary, (y) such restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person so acquired and (z) such Indebtedness is otherwise permitted
to be Incurred pursuant to the provisions of the covenant described under "--
Limitation on Incurrences of Additional Indebtedness" above); (b) limitations
contained in agreements governing secured Indebtedness otherwise permitted to
be Incurred pursuant to the provisions of the covenants described under "--
Limitation on Incurrences of Additional Indebtedness" and "--Limitation on
Liens" above on the right of
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<PAGE>
the debtor to dispose of the assets securing such Indebtedness; (c) customary
non-assignment provisions restricting subletting or assignment of any lease or
other agreement entered into by a Restricted Subsidiary; (d) customary net
worth or similar provisions contained in leases and other agreements entered
into by a Restricted Subsidiary in the ordinary course of business; (e)
customary restrictions with respect to a Restricted Subsidiary pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted
Subsidiary; (f) customary provisions in joint venture agreements and other
similar agreements; (g) restrictions contained in Indebtedness Incurred to
refinance, refund, extend or renew Indebtedness referred to in clauses (a) and
(b) above; provided that the restrictions contained therein are not materially
more restrictive taken as a whole than those provided for in such Indebtedness
being refinanced, refunded, extended or renewed; and (h) Payment Restrictions
contained in any other Indebtedness permitted to be Incurred subsequent to the
Issue Date pursuant to the provisions of the covenant described under "--
Limitation on Incurrences of Additional Indebtedness" above; provided that any
such Payment Restrictions are ordinary and customary with respect to the type
of Indebtedness being Incurred (under the relevant circumstances).
Limitation on Transactions with Affiliates. Each of the Indentures will
provide that neither the Company nor any of the Restricted Subsidiaries shall,
in a single transaction or series of related transactions, (i) sell, lease,
transfer or otherwise dispose of any of its properties or assets or issue
securities (other than equity securities which do not constitute Disqualified
Capital Stock) to, (ii) purchase any property, assets or securities from,
(iii) make any Investment in, or (iv) enter into or suffer to exist any
contract or agreement with or for the benefit of, an Affiliate or Significant
Stockholder (or any Affiliate of such Significant Stockholder) of the Company
or any Subsidiary (an "Affiliate Transaction"), unless (A) such Affiliate
Transaction is in the ordinary course of business or otherwise on terms that
are at least as favorable to the Company or such Restricted Subsidiary, as the
case may be, as might reasonably have been obtainable at such time from an
unaffiliated party; (B) in the case of an Affiliate Transaction involving
aggregate payments in excess of $2.0 million and less than or equal to $5.0
million, the Company or such Restricted Subsidiary, as the case may be, shall
have delivered an officers' certificate to the applicable Trustee certifying
that such Affiliate Transaction is on terms that are at least as favorable to
the Company or such Restricted Subsidiary, as the case may be, as might
reasonably have been obtainable at such time from an unaffiliated party; and
(C) in the case of an Affiliate Transaction involving aggregate payments in
excess of $5.0 million and less than or equal to $15.0 million, the Company or
such Restricted Subsidiary, as the case may be, shall have delivered an
officers' certificate to the applicable Trustee certifying to the same effect
as specified in clause (B) above and also that such Affiliate Transaction has
received the approval of a majority of the disinterested members of the Board
of Directors of the Company or such Restricted Subsidiary, as the case may be,
or, in the absence of any such approval, that an Independent Financial Advisor
has provided the Board of Directors with written confirmation to the effect
specified in the clause (viii) below.
The provisions of the foregoing paragraph shall not apply to (i) any
Permitted Payment, (ii) any Restricted Payment that is made in compliance with
the provisions of the covenant described under "--Limitation on Restricted
Payments" above, (iii) reasonable and customary fees and compensation paid to,
and indemnity provided on behalf of, officers, directors, consultants or
employees of the Company or any Restricted Subsidiary, as determined in good
faith by the Board of Directors of the Company or such Restricted Subsidiary
or the senior management thereof, (iv) transactions exclusively between or
among the Company and any of its wholly owned Restricted Subsidiaries or
exclusively between or among such wholly owned Restricted Subsidiaries;
provided such transactions are not otherwise prohibited by the applicable
Indenture, (v) the Standstill Agreement and any other agreement in effect on
the Issue Date as in effect on such date (or any transaction contemplated
thereby) or as amended thereafter (including transactions contemplated
pursuant to such amendment) so long as any such amendment is not
disadvantageous to the Holders of the Senior Notes or the Senior Subordinated
Notes, as the case may be, in any material respect, (vi) the existence of, or
the performance by the Company or any of the Restricted Subsidiaries of its
obligations under the terms of, any stockholders agreement (including any
registration rights agreement or purchase agreement related thereto) to which
it is a party as of the Issue Date and any similar agreements which it may
enter into thereafter; provided, however, that the existence of, or the
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performance by the Company or any Restricted Subsidiaries of obligations under
any future amendment to, any such existing agreement or under any similar
agreement entered into after the Issue Date shall only be permitted by this
clause (vi) to the extent that the terms of any such amendment or new
agreement are not otherwise disadvantageous to the Holders of the Senior Notes
or the Senior Subordinated Notes, as the case may be, in any material respect,
(vii) transactions permitted by, and complying with, the provisions of the
covenant described under "--Limitation on Mergers and Certain Other
Transactions" below, (viii) any transaction in which the Company or a
Restricted Subsidiary, as the case may be, delivers to the Holders of the
Senior Notes or the Senior Subordinated Notes, as the case may be, a written
opinion of an Independent Financial Advisor that such transaction is fair to
the Company or such Restricted Subsidiary from a financial point of view and
(ix) transactions with suppliers or other purchases or sales of goods or
services, in each case in the ordinary course of business (including, without
limitation, pursuant to joint venture agreements) and otherwise in compliance
with the terms of the applicable Indenture which are fair to the Company, in
the reasonable determination of the Board of Directors of the Company or the
senior management thereof, or are on terms at least as favorable as might
reasonably have been obtained at such time from an unaffiliated party.
Limitation on Subsidiary Assets and Indebtedness. If at any time subsequent
to the Issue Date (i)(a) the Company transfers any of its property, plant or
equipment to one or more of the Restricted Subsidiaries (other than
Guarantors) and (b) as a result of such transfer or transfers, the book value
of the total property, plant and equipment of the Company and the Guarantors,
as reported in any filing made with the Commission, is less than [75]% of the
then book value of the total property, plant and equipment of the Company and
the Restricted Subsidiaries; or (ii) any Restricted Subsidiary (other than a
Guarantor) incurs Indebtedness (other than Permitted Indebtedness pursuant to
clause (b), (c), (d), (i) or (m) of the definition thereof) that, together
with any other Indebtedness (including Permitted Indebtedness) incurred
subsequent to the Issue Date by all Restricted Subsidiaries (other than those
that are then Guarantors) then outstanding, would represent more than [25%] of
the consolidated total long-term Indebtedness of the Company and the
Restricted Subsidiaries as reported in any filing made with the Commission
(each of the foregoing clauses (i) and (ii) being referred to herein as a
"Guarantee Condition"), then the Company shall, promptly following any such
filing with the Commission, cause one or more of the Restricted Subsidiaries
to unconditionally guarantee, jointly and severally, (x) the Company's
obligations under the Senior Notes on a senior unsecured basis (the "Senior
Note Guarantees") and (y) the Company's obligations under the Senior
Subordinated Notes on a senior subordinated unsecured basis (the "Senior
Subordinated Note Guarantees", and together with the Senior Note Guarantees,
the "Guarantees"), pursuant to supplemental indentures satisfactory in form to
the applicable Trustees, so that following the issuance of such Guaranties,
neither of the Guarantee Conditions shall exist. The Indebtedness represented
by each Senior Subordinated Note Guarantee (including the payment of
Obligations on the Senior Subordinated Notes) will be subordinated on the same
basis to senior indebtedness of the Guarantors as the Senior Subordinated
Notes are subordinated to Senior Indebtedness. So long as no Default or Event
of Default shall have occurred and be continuing, one or more Guarantors may
be released within 10 Business Days following any filing with the Commission
from their Guarantees pursuant to supplemental indentures or such other
instruments satisfactory in form to the applicable Trustees if after giving
effect to such release neither of the Guarantee Conditions shall exist.
Upon the sale or disposition (whether by merger, stock sale, asset sale or
otherwise) to any Person which is not a Restricted Subsidiary of all of the
Company's or any Subsidiary's Capital Stock in, or all or substantially all of
the assets of, any Guarantor, which sale or disposition is otherwise in
compliance with the Indentures, in each case, so long as no Default or Event
of Default shall have occurred and be continuing, such Guarantor shall be
deemed released from all its obligations under its Senior Note Guarantee and
its Senior Subordinated Note Guarantee; provided, however, that any such
termination shall occur only to the extent that all obligations of such
Guarantor under all of its guarantees of, and under all of its pledges of
assets or other security interests which secure, such Indebtedness of the
Company shall also terminate upon such release, sale or transfer.
The obligations of each Guarantor under each of its Senior Note Guarantee
and its Senior Subordinated Note Guarantee would be limited to the maximum
amount as will, after giving effect to all other contingent and
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fixed liabilities of such Guarantor (other than liabilities of such Guarantor
under Indebtedness which constitutes Subordinated Indebtedness with respect to
its Senior Note Guarantee or its Senior Subordinated Note Guarantee, as the
case may be) and after giving effect to any collections from or payments made
by or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its Senior Note Guarantee or Senior Subordinated Note
Guarantee, as the case may be, or pursuant to its contribution obligations
under the applicable Indenture, result in the obligations of such Guarantor
under such Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Guarantor that makes a payment or
distribution under a Senior Note Guarantee or Senior Subordinated Note
Guarantee, as the case may be, shall be entitled to a contribution from each
other Guarantor in a pro rata amount based on the relative net assets of each
Guarantor.
Limitations on Preferred Stock of Restricted Subsidiaries. Each of the
Indentures will provide that the Company shall not permit any of the
Restricted Subsidiaries to issue any Preferred Stock (other than to the
Company or to a wholly owned Restricted Subsidiary) or permit any Person
(other than the Company or a wholly owned Restricted Subsidiary) to own any
Preferred Stock of any Restricted Subsidiary.
Limitation on Mergers and Certain Other Transactions. Each of the Indentures
will provide that the Company, in a single transaction or through a series of
related transactions, shall not (i) consolidate with or merge with or into any
other Person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to another Person or group of affiliated Persons or (ii) adopt
a Plan of Liquidation, unless, in either case, (1) either the Company shall be
the continuing Person, or the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which all or
substantially all of the properties and assets of the Company as an entirety
or substantially as an entirety are transferred (or, in the case of a Plan of
Liquidation, any Person to which assets are transferred) (the Company or such
other Person being hereinafter referred to as the "Surviving Person") shall be
a corporation organized and validly existing under the laws of the United
States, any state thereof or the District of Columbia, and shall expressly
assume, by supplemental indenture, all the obligations of the Company under
such Indenture and the Notes issued thereunder; (2) immediately after and
giving effect to such transaction and the assumption contemplated by clause
(1) above and the Incurrence or anticipated Incurrence of any Indebtedness to
be Incurred in connection therewith, the Surviving Person shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately preceding the transaction; and (3) immediately before
and immediately after and giving effect to such transaction and the assumption
of the obligations as set forth in clause (1) above and the Incurrence or
anticipated Incurrence of any Indebtedness to be Incurred in connection
therewith, no Default or Event of Default shall have occurred and be
continuing.
Each of the Indentures will provide that upon any consolidation or merger or
any transfer of all or substantially all of the assets of the Company or any
adoption of a Plan of Liquidation by the Company in accordance with the
foregoing, the surviving Person formed by such consolidation or into which the
Company is merged or to which such transfer is made (or, in the case of a Plan
of Liquidation, to which assets are transferred) shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
such Indenture with the same effect as if such surviving Person had been named
as the Company therein; provided, however, that solely for purposes of
computing amounts described in subclause (c) of the first paragraph of the
covenant described under "--Limitation on Restricted Payments" above, any such
surviving Person shall only be deemed to have succeeded to and be substituted
for the Company with respect to periods subsequent to the effective time of
such merger, consolidation or transfer of assets.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Capital Stock of which constitutes all or substantially
all of the properties and assets of the Company shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
Limitation on Other Senior Subordinated Indebtedness. The Senior Note
Indenture will provide that the Company shall not, directly or indirectly,
Incur any Indebtedness that by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinate in right of payment to any other
Indebtedness of the
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Company unless such Indebtedness is also by its terms (or by the terms of the
agreement governing such Indebtedness) made expressly subordinate in right of
payment to the Senior Notes in the same manner and at least to the same extent
as such Indebtedness is subordinated pursuant to subordination provisions that
are most favorable to the holders of any other Indebtedness of the Company.
The Senior Subordinated Note Indenture will provide that the Company shall
not, directly or indirectly, incur any Indebtedness that by its terms (or by
the terms of the agreement governing such Indebtedness) is subordinate in
right of payment to any other Indebtedness of the Company unless such
Indebtedness is also by its terms (or the terms of the agreement governing
such Indebtedness) made expressly either (a) pari passu in right of payment
with the Senior Subordinated Notes or (b) subordinate in right of payment to
the Senior Subordinated Notes in the same manner and at least to the same
extent as the Senior Subordinated Notes are subordinate to Senior
Indebtedness.
Limitation on Restricted and Unrestricted Subsidiaries. Each of the
Indentures will provide that the Board of Directors of the Company may, if no
Default or Event of Default shall have occurred and be continuing or would
result therefrom, designate an Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that (i) any such redesignation shall be deemed
to be an Incurrence as of the date of such redesignation by the Company and
the Restricted Subsidiaries of the Indebtedness (if any) of such redesignated
Subsidiary for purposes of "--Limitation on Incurrences of Additional
Indebtedness" above; and (ii) unless such redesignated Subsidiary shall not
have any Indebtedness outstanding, other than Indebtedness which would be
Permitted Indebtedness, no such designation shall be permitted if immediately
after giving effect to such redesignation and the Incurrence of any such
additional Indebtedness, the Company could not incur $1.00 of additional
Indebtedness pursuant to the proviso of the covenant described under "--
Limitation on Incurrences of Additional Indebtedness" above. The Board of
Directors of the Company also may, if no Default or Event of Default shall
have occurred and be continuing or would result therefrom, designate any
Restricted Subsidiary to be an Unrestricted Subsidiary if such designation is
at that time permitted under "--Limitation on Restricted Payments" above. Any
such designation by the Board of Directors of the Company shall be evidenced
to the Trustee by the filing with the Trustee of a certified copy of the Board
Resolution of the Company's Board of Directors giving effect to such
designation or redesignation and an officers' certificate certifying that such
designation or redesignation complied with the foregoing conditions and
setting forth in reasonable detail the underlying calculations.
Each of the Indentures will provide that Subsidiaries that are not
designated by the Board of Directors as Restricted or Unrestricted
Subsidiaries will be deemed to be Restricted Subsidiaries. Notwithstanding any
provisions of this covenant, all subsidiaries of an Unrestricted Subsidiary
will be Unrestricted Subsidiaries.
REPORTS TO HOLDERS
Each Indenture will provide that the Company shall deliver to the Trustee
thereunder within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual report and other reports, if any, which the
Company is required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. Each Indenture will further provide that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall
file with the Commission, to the extent permitted, and provide the Trustee
under such Indenture and Holders of the Notes issued thereunder with such
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act. The Company will also comply with
the other provisions of TIA (S) 314(a).
EVENTS OF DEFAULT
The following events constitute "Events of Default" under each of the
Indentures: (i) failure to make any interest payment on the applicable Notes
when due and the continuance of such default for a period of 30 days,
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in the case of the Senior Subordinated Note Indentures, whether or not
prohibited by the provisions described under "--Subordination of the Senior
Subordinated Notes"; (ii) failure to pay principal of, or premium, if any, on
the applicable Notes when due, whether at maturity, upon acceleration,
redemption, required repurchase or otherwise, in the case of the Senior
Subordinated Note Indentures, whether or not prohibited by the provisions
described under "--Subordination of the Senior Subordinated Notes"; (iii)
failure to comply with any other agreement contained in the applicable Notes
or the applicable Indenture, if such failure continues unremedied for 30 days
after written notice given by the applicable Trustee or the Holders of at
least 25% in principal amount of the applicable Notes then outstanding (except
in the case of a default with respect to certain covenants, which shall
constitute Events of Default with notice but without passage of time); (iv) a
default under any Indebtedness of the Company or any Restricted Subsidiary,
whether such Indebtedness now exists or shall hereinafter be created, if both
(A) such default either (1) results from the failure to pay any such
Indebtedness at its stated final maturity or (2) relates to an obligation
other than the obligation to pay such Indebtedness at its stated final
maturity and results in the holder or holders of such Indebtedness causing
such Indebtedness to become due prior to its stated maturity and (B) the
principal amount of such Indebtedness, together with the principal amount of
any other such Indebtedness in default for failure to pay principal at stated
final maturity or the maturity of which has been so accelerated, aggregate $20
million or more at any one time outstanding; (v) any final judgment or order
for payment of money in excess of $20 million shall be entered against the
Company or any Significant Subsidiary and shall not be discharged for a period
of 60 days after such judgment becomes final and nonappealable; (vi) either
the Company or any Significant Subsidiary pursuant to or within the meaning of
any Bankruptcy Law: (a) commences a voluntary case or proceeding; (b) consents
to the entry of an order for relief against it in an involuntary case or
proceeding; (c) consents to the appointment of a Custodian of it or for all or
substantially all of its property; or (d) makes a general assignment for the
benefit of its creditors; (vii) a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that: (a) is for relief against the
Company or any Significant Subsidiary, in an involuntary case or proceeding;
(b) appoints a Custodian of the Company or any Significant Subsidiary, or for
all or any substantial part of their respective properties; or (c) orders the
liquidation of the Company or any Significant Subsidiary, and in each case the
order or decree remains unstayed and in effect for 60 days; or (viii) the
lenders under the Credit Agreement shall commence judicial proceedings to
foreclose upon any material portion of the assets of the Company and the
Subsidiaries.
In the event of a declaration of acceleration because an Event of Default
set forth in clause (iv) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
either (x) the holders of the Indebtedness which is the subject of such Event
of Default have waived such failure to pay at maturity or have rescinded the
acceleration in respect of such Indebtedness within 90 days of such maturity
or declaration of acceleration, as the case may be, and no other Event of
Default has occurred during such 90-day period which has not been cured or
waived, or (y) such Indebtedness shall have been discharged or the maturity
thereof shall have been extended such that it is not then due and payable, or
the underlying default has been cured (and any acceleration based thereon of
such other Indebtedness has been rescinded), within 90 days of such maturity
or declaration of acceleration, as the case may be.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, receivership or reorganization of the Company or a
Significant Subsidiary) occurs and is continuing under an Indenture, the
Trustee under such Indenture or the Holders of at least 25% in principal
amount of the then outstanding Notes issued under such Indenture may declare
due and payable all unpaid principal and interest accrued and unpaid on the
then outstanding Notes issued under such Indenture by notice in writing to the
Company, the administrative agent under the Credit Agreement and the
applicable Trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice"), and the same (i) shall
become immediately due and payable or (ii) if there is any Indebtedness
outstanding under the Credit Agreement, shall become due and payable upon the
first to occur of an acceleration under the Credit Agreement, or five business
days after receipt by the Company and the administrative agent under the
Credit Agreement of such Acceleration Notice. If an Event of Default resulting
from certain events of bankruptcy, insolvency, receivership or reorganization
of the Company or a Significant Subsidiary shall occur under an Indenture, all
unpaid principal of and accrued interest on all then outstanding Notes issued
under such Indenture shall be immediately due and
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payable without any declaration or other act on the part of the applicable
Trustee or any of the Holders of such Notes. After a declaration of
acceleration under an Indenture, subject to certain conditions, the Holders of
a majority in principal amount of the then outstanding Notes issued
thereunder, by notice to the applicable Trustee, may rescind such declaration
if all existing Events of Default under such Indenture are remedied. In
certain cases the Holders of a majority in principal amount of outstanding
Notes issued under such Indenture may waive a past default under such
Indenture and its consequences, except a default in the payment of or interest
on any of the Notes issued thereunder.
Each Indenture provides that if a Default or Event of Default occurs and is
continuing thereunder and if it is known to the applicable Trustee, such
Trustee shall mail to each Holder of Notes issued thereunder notice of the
Default or Event of Default within 90 days after such Default or Event of
Default occurs; provided, however, that, except in the case of a Default or
Event of Default in the payment of the principal of or interest on any such
Notes, including the failure to make payment on a Change of Control Payment
Date pursuant to a Change of Control Offer or payment when due pursuant to a
Net Proceeds Offer the applicable Trustee may withhold such notice if it in
good faith determines that withholding such notice is in the interest of the
Holders of such Notes.
Each Indenture provides that no Holder of Notes issued thereunder may pursue
any remedy thereunder unless the applicable Trustee (i) shall have failed to
act for a period of 60 days after receiving written notice of a continuing
Event of Default under such Indenture by such Holder and a request to act by
Holders of at least 25% in principal amount of Notes issued under such
Indenture and (ii) has received indemnification satisfactory to it; provided,
however, that such provision does not affect the right of any Holder to sue
for enforcement of any overdue payment of Notes issued under such Indenture.
Each Indenture provides that two officers of the Company are required to
certify to the applicable Trustee within 120 days after the end of each fiscal
year of the Company whether or not they know of any Default that occurred
under such Indenture during such fiscal year and, if applicable, describe such
Default and the status thereof.
DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Senior
Notes or the Senior Subordinated Notes ("Legal Defeasance"). Legal Defeasance
means that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the applicable Notes except for (i) the rights of
Holders of such Notes to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due solely
from the funds held by the applicable Trustee in the trust referred to below;
(ii) the Company's obligations to issue temporary Notes, register the transfer
or exchange of such Notes, replace mutilated, destroyed, lost or stolen Notes
and maintain an office or agency for payments in respect of such Notes and
money for security payments held in trust in respect of such Notes; (iii) the
rights, powers, trusts, duties and immunities of the applicable Trustee and
the Company's obligations in connection therewith; and (iv) the Legal
Defeasance provisions of the Indentures. In addition, the Company may, at its
option and at any time elect to have the obligations of the Company released
with respect to certain covenants described above under "--Certain Covenants"
("Covenant Defeasance"), and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
such Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to either issue of Notes, (i) the Company must have irrevocably
deposited with the applicable Trustee, in trust, for the benefit of the
Holders of such Notes, cash in U.S. dollars, U.S. Government Obligations (as
defined in the Indentures), or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the applicable outstanding Notes to redemption or maturity provided that the
applicable Trustee shall have been irrevocably instructed to apply such money
or the proceeds of such U.S. Government Obligations to said payments with
respect to the
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Notes on the maturity date or such redemption date, as the case may be; (ii)
the Company shall have delivered to the applicable Trustee one or more
opinions of independent counsel to the effect that (A) the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance or Covenant Defeasance, as the case may be, and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance or
Covenant Defeasance, as the case may be, had not occurred (which opinion, in
the case of Legal Defeasance, shall be based upon a change in the applicable
federal income tax law since the Issue Date or a ruling received from or
published by the Internal Revenue Service), (B) after the 91st day following
the deposit the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and in the case of the Senior Note Indenture, will
not be subject to any rights of holders of Senior Indebtedness, including,
without limitation, those arising under the Senior Subordinated Note
Indenture, and (C) the deposit will not cause the applicable Trustee or the
trust so created to be subject to the Investment Company Act of 1940; (iii) no
Default or Event of Default shall have occurred and be continuing under the
applicable Indenture on the date of such deposit or insofar as clauses (vi)
and (vii) under the first paragraph under "--Events of Default" above are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (iv) such Legal Defeasance or Covenant Defeasance shall not cause the
applicable Trustee to have a conflicting interest with respect to the Notes;
(v) such Legal Defeasance or Covenant Defeasance shall not result in a breach
or violation of, or constitute a default under, the applicable Indenture or
any other material agreement or instrument to which the Company is a party or
by which it is bound (and in that connection, the Trustee shall have received
a certificate from the administrative agent under the Credit Agreement to that
effect with respect to such Credit Agreement if then in effect); (vi) the
Company shall have delivered to the applicable Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of the Notes over other creditors of the
Company or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (vii) the Company shall have delivered
to the applicable Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or Covenant Defeasance, have been complied with.
SATISFACTION AND DISCHARGE
Each Indenture will be discharged and will cease to be of further effect as
to all outstanding Notes issued thereunder, when either (a) all such Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Notes which have been replaced or paid and Notes for whose payment money has
theretofore been deposited in trust and thereafter repaid to the Company) have
been delivered to the appropriate Trustee for cancellation; or (b)(i) all such
Notes not theretofore delivered to such Trustee for cancellation have become
due and payable by reason of the making of a notice of redemption or otherwise
and the Company has irrevocably deposited or caused to be deposited with such
Trustee as trust funds in trust for the purpose an amount of money sufficient
to pay and discharge the entire indebtedness on such Notes not theretofore
delivered to such Trustee for cancellation for principal, premium, if any, and
accrued interest to the date of maturity or redemption; (ii) no Default or
Event of Default with respect to the applicable Indenture or the applicable
Notes shall have occurred and be continuing on the date of such deposit or
shall occur as a result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other instrument to
which the Company is a party or by which it is bound; (iii) the Company has
paid all sums payable by it under such Indenture; and (iv) the Company has
delivered irrevocable instructions to the Trustee under such Indenture to
apply the deposited money toward the payment of such Notes at maturity or the
redemption date, as the case may be. In addition, the Company must deliver an
officers' certificate and an opinion of counsel to the appropriate Trustee
stating that all conditions precedent to satisfaction and discharge have been
complied with.
MODIFICATION OF THE INDENTURES
Each of the Indentures and the Notes issued thereunder may be amended or
supplemented (and compliance with any provision thereof may be waived) by the
Company, the Trustee thereunder and the Holders of not less than a majority in
aggregate principal amount of such Notes then outstanding, except that (i)
without the consent
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of each Holder of such Notes affected, no such amendment, supplement or waiver
may (1) change the principal amount of the applicable Notes the Holders of
which must consent to an amendment, supplement or waiver of any provision of
the applicable Indenture or the applicable Notes, (2) reduce the rate or
extend the time for payment of interest on any applicable Notes, (3) reduce
the principal amount of any applicable Notes, (4) change the Maturity Date of
any applicable Notes or alter the redemption provisions in the applicable
Indenture or the applicable Notes in a manner adverse to any Holder of such
Notes, (5) make any changes in the provisions concerning waivers of Defaults
or Events of Default by Holders or the rights of Holders to recover the
principal of, interest on or redemption payment with respect to any applicable
Notes, (6) make the principal of, or interest on, any applicable Notes payable
with anything or in any manner other than as provided for in the applicable
Indenture and the applicable Notes or (7) in the case of the Senior
Subordinated Note Indenture, modify the subordination provisions of the Senior
Subordinated Note Indenture (including the related definitions) so as to
adversely affect the ranking of any Senior Subordinated Note; provided,
however, that it is understood that any amendment the purpose of which is to
permit the Incurrence of additional Indebtedness under the Senior Subordinated
Note Indenture shall not be construed as adversely affecting the ranking of
any Senior Subordinated Note and (ii) without the consent of Holders of not
less than 66 2/3% in aggregate principal amount of such Notes then
outstanding, no such amendment, supplement or waiver may change the Change of
Control Payment Date or the purchase price in connection with any repurchase
of such Notes pursuant to the covenant described under "--Change of Control"
above in a manner adverse to any Holder or waive a Default or Event of Default
resulting from a failure to comply with the covenant described under "--Change
of Control" above.
In addition, each of the Indentures and the Notes issued thereunder may be
amended by the Company and the applicable Trustee (a) to cure any ambiguity,
defect or inconsistency therein; provided that such amendment or supplement
does not adversely affect the rights of any Holder thereof or (b) to make any
other change that does not adversely affect the rights of any Holder
thereunder in any material respect.
THE TRUSTEES
Each Indenture will provide that the Holders of a majority in principal
amount of the outstanding Notes issued thereunder may remove the Trustee
thereunder and appoint a successor trustee with the Company's consent, by so
notifying the trustee to be so removed and the Company. In addition, the
Holders of a majority in principal amount of the outstanding Notes issued
under an Indenture have the right, subject to certain limitations, to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee under such Indenture or of exercising any trust or
power conferred on such Trustee.
Each of the Indentures will provide that, if a Default or an Event of
Default has occurred and is continuing thereunder, the Trustee thereunder
shall exercise such of the rights and powers vested in it by such Indenture,
and use the same degree of care and skill in the exercise thereof, as a
prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs. Subject to the latter provision, the Trustee under
each Indenture is under no obligation to exercise any of its rights or powers
under the applicable Indenture at the request, order or direction of any of
the Holders of the Notes issued thereunder, unless they shall have offered to
such Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred thereby. If the Company fails to pay such
amounts of principal of, premium, if any, or interest on, the Senior Notes or
the Senior Subordinated Notes as shall have become due and payable upon demand
as specified in the applicable Indenture, the Trustee thereunder, at the
request of the Holders of a majority in aggregate principal amount of such
Notes at the time outstanding, and upon being offered such reasonable
indemnity as it may be required against the costs, expenses and liabilities
incurred by it, except as a result of its negligence or bad faith, shall
institute any actions or proceedings at law or in equity for the collection of
the sums so due and unpaid, and collect in the manner provided by law the
monies adjudged or decreed to be payable.
Each Indenture contains limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to be realized on certain property received by it in respect
of any such claims, securities or otherwise. Each Trustee is permitted to
engage in other transactions; however, if a Trustee acquires any "conflicting
interest," it must eliminate such conflict or resign.
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CERTAIN DEFINITIONS
"Acquired Indebtedness" means (i) with respect to any Person that becomes a
Restricted Subsidiary (or is merged into the Company or any Restricted
Subsidiary) after the Issue Date, Indebtedness of such Person or any
subsidiary of such Person existing at the time such Person becomes a
Restricted Subsidiary (or is merged into the Company or any Restricted
Subsidiary) and which was not Incurred in connection with, or in contemplation
of, such Person becoming a Restricted Subsidiary (or being merged into the
Company or any Restricted Subsidiary) and (ii) with respect to the Company or
any Restricted Subsidiary, any Indebtedness assumed by the Company or any
Restricted Subsidiary in connection with the acquisition of any assets from
another Person (other than the Company or any Restricted Subsidiary), and
which was not Incurred by such other Person in connection with, or in
contemplation of, such acquisition.
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "affiliated," "controlling" and "controlled" have meanings correlative
to the foregoing. So long as the Management Services Agreement is in effect or
Yucaipa (together with its Affiliates) owns voting securities representing
more than 10% of the total voting power of the then outstanding voting
securities entitled to vote on a regular basis for the Board of Directors of
the Company, Yucaipa and its Affiliates shall be deemed Affiliates of the
Company.
"Asset Sale" means any sale, transfer or other disposition or series of
sales, transfers or other dispositions by the Company or any Restricted
Subsidiary (including, without limitation, any merger or consolidation of any
Restricted Subsidiary with or into another Person (other than the Company or
any wholly owned Restricted Subsidiary) whereby such Restricted Subsidiary
shall cease to be a Restricted Subsidiary) to any Person (other than to the
Company or a wholly owned Restricted Subsidiary) of any assets of the Company
or any Restricted Subsidiary, including, without limitation, assets consisting
of any Capital Stock or other securities held by the Company or any Restricted
Subsidiary, and any Capital Stock issued by any Restricted Subsidiary, in each
case, outside of the ordinary course of business, excluding, however, any
sale, transfer or other disposition, or series of related sales, transfers or
other dispositions (i) resulting in Net Proceeds to the Company and the
Restricted Subsidiaries of $500,000 or less, (ii) pursuant to any foreclosure
of assets or other remedy provided by applicable law to a creditor of the
Company or any Subsidiary with a Lien on such assets, which Lien is permitted
under the Indentures; provided that such foreclosure or other remedy is
conducted in a commercially reasonable manner or in accordance with any
Bankruptcy Law, (iii) involving only Cash Equivalents or inventory in the
ordinary course of business or obsolete equipment in the ordinary course of
business consistent with past practices of the Company; (iv) involving only
the lease or sub-lease of any real or personal property in the ordinary course
of business; (v) of the Company's real estate interests (developed or
undeveloped) and personal property in the State of California; or (vi)
resulting from (a) the designation of any Restricted Subsidiary as an
Unrestricted Subsidiary in accordance with the applicable provisions of the
Indentures or (b) the sale of the Capital Stock of any Unrestricted Subsidiary
or the sale of all or substantially all of the assets of any Unrestricted
Subsidiary.
"Average Life" means, as of any date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products
of the number of years from the date of determination to the dates of each
successive scheduled principal payments of such debt security multiplied by
the amount of each such principal payment by (ii) the sum of all such
principal payments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or
foreign law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or of a subsidiary of such Person or any duly
authorized committee of that Board.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
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"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such Person.
"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or
obligations issued by any agency or instrumentality thereof and backed by the
full faith and credit of the United States of America, (ii) commercial paper
rated the highest grade by Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group and maturing not more than one year from the date of
creation thereof, (iii) time deposits with, and certificates of deposit and
banker's acceptances issued by, any bank having capital surplus and undivided
profits aggregating at least $500 million and maturing not more than one year
from the date of creation thereof, (iv) repurchase agreements that are secured
by a perfected security interest in an obligation described in clause (i) and
are with any bank described in clause (iii), (v) shares of any money market
mutual fund that (a) has at least 95% of its assets invested continuously in
the types of investments referred to in clauses (i) and (ii) above, (b) has
net assets of not less than $500 million, and (c) has the highest rating
obtainable from either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. and (vi) readily marketable direct obligations issued by any
state of the United States of America or any political subdivision thereof
having one of the two highest rating categories obtainable from either Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group.
"Change of Control" means the acquisition after the Issue Date, in one or
more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) by (i) any Person (other than any Permitted Holder) or
(ii) any group (within the meaning of Section 13(d)(3) of the Exchange Act) of
Persons (excluding any Permitted Holders), in either case, of any securities
of the Company such that, as a result of such acquisition, such Person or
group beneficially owns (within the meaning of Rule 13d-3 under the Exchange
Act), directly or indirectly, voting securities representing % or more of the
total voting power of the then outstanding voting securities entitled to vote
on a regular basis for the Board of Directors of the Company (but only to the
extent that such beneficial ownership is not shared with any Permitted Holder
who has the power to direct the vote thereof); provided, however, that no such
Change of Control shall be deemed to have occurred if (A) the Permitted
Holders beneficially own, in the aggregate, at such time, voting securities
representing a greater percentage of such voting power than such other Person
or group or (B) at the time of such acquisition, the Permitted Holders (or any
of them) possess the ability (by contract or otherwise) to elect, or cause the
election, of a majority of the members of the Company's Board of Directors.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however
designated and whether voting or nonvoting) of, such Person's common stock,
whether outstanding at the Issue Date or issued after the Issue Date, and
includes, without limitation, all series and classes of such common stock.
"Consolidated Interest Expense" means for any period, the aggregate amount
of interest, whether expensed or capitalized, paid, accrued or scheduled to be
paid or accrued during such period (except to the extent accrued in a prior
period) in respect of all Indebtedness of the Company and the Restricted
Subsidiaries (including (a) original issue discount on any Indebtedness
(including (without duplication), in the case of the Company, any original
issue discount on the applicable Notes but excluding amortization of debt
issuance costs) and (b) the interest portion of all deferred payment
obligations, calculated in accordance with the effective interest method, in
each case to the extent attribut able to such period but excluding the
amortization of debt issuance costs). For purposes of this definition, (a)
interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by the Board of Directors of the Company
(as evidenced by a Board Resolution) to be the rate of interest implicit in
such Capitalized Lease Obligation in accordance with GAAP, (b) interest on
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Indebtedness that is determined on a fluctuating basis shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest of such
Indebtedness in effect on the date Consolidated Interest Expense is being
calculated, (c) interest on Indebtedness that may optionally be determined at
an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have
been based upon the rate actually chosen, or, if none, then based upon such
optional rate chosen as the Company may designate, and (d) Consolidated
Interest Expense shall be increased or reduced by the net cost (including
amortization of discount) or benefit associated with Inter est Swap
Obligations attributable to such period.
"Consolidated Net Income" means for any period, the aggregate of the net
income (or loss) of the Company and the Restricted Subsidiaries for such
period, but before preferred stock dividend requirements with respect to the
New Preferred Stock on a consolidated basis, determined in accordance with
GAAP; provided that (a) the net income of any other Person in which the
Company or any Restricted Subsidiary has an interest (which interest does not
cause the net income of such other Person to be consolidated with the net
income of the Company and the Restricted Subsidiaries in accordance with GAAP)
shall be included only to the extent of the amount of dividends or
distributions actually paid to the Company or such Restricted Subsidiary by
such other Person in such period; (b) the net income of any Restricted
Subsidiary that is subject to any Payment Restriction shall be excluded to the
extent such Payment Restriction would actually prevent the payment of an
amount that otherwise could have been paid to, or received by, the Company or
a Restricted Subsidiary not subject to any Payment Restriction; and (c)(i) the
net income (or loss) of any other Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) all
gains and losses realized on any Asset Sale or any other sale of assets that
would constitute an "Asset Sale" but for the exception set forth in clause
(i), (ii), (v), or (vi) of the definition thereof; (iii) all gains realized
upon or in connection with or as a consequence of the issuance of the Capital
Stock of the Company or any Restricted Subsidiary and any gains on pension
reversions received by the Company or any Restricted Subsidiary, (iv) all
gains and losses realized on the purchase or other acquisition by the Company
or any Restricted Subsidiary of any securities of the Company or any
Restricted Subsidiary, (v) all gains and losses resulting from the cumulative
effect of any accounting change pursuant to the application of Accounting
Principles Board Opinion No. 20, as amended, (vi) all other extraordinary
gains and losses, (vii) (A) all non-cash income and non-cash charges, (B) up
to $[10] million of severance costs and (C) any other restructuring reserves
or charges (provided, however, that any cash payments actually made with
respect to the liabilities for which such restructuring reserves or charges
were created shall be deducted from Consolidated Net Income in the period when
made), in each case, recorded by the Company or any Restricted Subsidiary in
connection with the Transactions, including, without limitation, the
divestiture of the Company's operations and assets in the State of California,
debt refinancing premiums and the integration of operations in the State of
Arizona, (viii) losses incurred by the Company and the Restricted Subsidiaries
resulting from earthquakes and (ix) with respect to the Company, all deferred
financing costs written off in connection with the early extinguishment of any
Indebtedness, shall each be excluded.
"Consolidated Net Worth" means, with respect to any Person, the total
stockholders' equity (exclusive of any Disqualified Capital Stock) of such
Person and its Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP.
"Credit Agreement" means the Credit Agreement, dated as of the Issue Date,
by and among Smith's as borrower, its subsidiaries as guarantors, the Lenders
referred to therein, Bankers Trust Company and The Chase Manhattan Bank, N.A.,
as arrangers, and Bankers Trust Company, as administrative agent, as the same
may be amended, extended, renewed, restated, supplemented or otherwise
modified (in each case, in whole or in part, and without limitation as to
amount, terms, condi tions, covenants and other provisions) from time to time,
and any agreement governing Indebtedness Incurred to refund, replace or
refinance any borrowings and commitments then outstanding or permitted to be
outstanding under such Credit Agreement or any such prior agreement as the
same may be amended, extended, renewed, restated, supplemented or otherwise
modified (in each case, in whole or in part, and without limitation as to
amount, terms, conditions, covenants and other provisions). The term "Credit
Agreement" shall include all related or ancillary documents, including,
without limitation, any guarantee agreements and security documents. The
Company shall promptly notify the Trustees of any such refunding or
refinancing of the Credit Agreement.
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"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Designated Senior Indebtedness" means (i) in the event any Indebtedness is
outstanding under the Credit Agreement, all Senior Indebtedness under the
Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit
Agreement, any other issue of Senior Indebtedness which (a) at the time of the
determination is equal to or greater than $[50] million in aggregate principal
amount and (b) is specifically designated in the instrument evidencing such
Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For
purposes of this definition, the term "Credit Agreement" shall not include any
agreement governing Indebtedness Incurred to refund, replace or refinance
borrowings or commitments under the Credit Agreement other than any such
agreements governing Indebtedness Incurred to refund, replace or refinance the
entirety of the borrowings and commitments then outstanding or permitted to be
outstanding thereunder.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person or its subsidiaries that, by its terms, by the terms of
any agreement related thereto or by the terms of any security, into which it
is convertible, puttable or exchangeable is, or upon the happening of any
event or the passage of time would be, required to be redeemed or repurchased
by such Person or its subsidiaries, including at the option of the holder
thereof, in whole or in part, or has, or upon the happening of an event or
passage of time would have, a redemption or similar payment due, on or prior
to the Maturity Date of the Senior Notes, in the case of the Senior Note
Indenture, or the Senior Subordinated Notes, in the case of the Senior
Subordinated Note Indenture, or any other Capital Stock of such Person or its
subsidiaries designated as Disqualified Capital Stock by such Person at the
time of issuance; provided, however, that if such Capital Stock is either (i)
redeemable or repurchasable solely at the option of such Person or (ii) issued
to employees of the Company or the Subsidiaries or to any plan for the benefit
of such employees, such Capital Stock shall not constitute Disqualified
Capital Stock unless so designated; provided, further, however, that the New
Preferred Stock shall not be deemed Disqualified Preferred Stock by reason of
the change of control put thereof.
"EBITD" means, for any period, the Consolidated Net Income for such period,
plus, in each case to the extent deducted in computing Consolidated Net Income
for such period (without duplication) (i) provisions for income taxes or
similar charges recognized by the Company and the Restricted Subsidiaries
accrued during such period, (ii) depreciation and amortization expense of the
Company and the Restricted Subsidiaries accrued during such period (but only
to the extent not included in Consolidated Interest Expense), (iii)
Consolidated Interest Expense of the Company and the Restricted Subsidiaries
for such period, (iv) LIFO charges (credits) of the Company and the Restricted
Subsidiaries for such period, (v) the amount of any restructuring reserve or
charge recorded during such period in accordance with GAAP, including any such
reserve or charge related to the Transactions, and (vi) any other non-cash
charges reducing Consolidated Net Income for such period (excluding any such
charge which requires an accrual of or a cash reserve for cash charges for any
future period), less, without duplication, (x) non-cash items increasing
Consolidated Net Income for such period (excluding any such items which
represent the reversal of any accrual of, or cash reserve for, anticipated
cash charges in any prior period to the extent any such item previously
decreased Consolidated Net Income) in each case determined in accordance with
GAAP and (y) the amount of all cash payments made by the Company and the
Restricted Subsidiaries during such period to the extent that such cash
payment has been provided for in a restructuring reserve or charge referred to
in clause (v) above (and were not otherwise deducted in the computation of
Consolidated Net Income for such period).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Existing Indebtedness" means all indebtedness of the Company and the
Restricted Subsidiaries to the extent outstanding on the Issue Date after
giving effect to the Transactions (other than Indebtedness under the Credit
Agreement and the Indentures) and includes operating leases outstanding on the
Issue Date that are required under GAAP to be reported or reclassified after
the Issue Date as Capital Lease Obligations.
"Foreign Exchange Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
against fluctuations in currency values.
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"Guarantor" means each Restricted Subsidiary, if any, which becomes a
guarantor of the Senior Notes and the Senior Subordinated Notes in compliance
with the provisions set forth under "--Certain Covenants--Limitation on
Subsidiary Assets and Indebtedness."
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise,
including the exchange of the New Preferred Stock into Exchange Debentures),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligations or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing).
"Indebtedness" means with respect to any Person, without duplication, (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures, drafts accepted or similar instruments or letters of credit or
representing the balance deferred and unpaid of the purchase price of any
property (other than any such balance that represents an account payable or
any other monetary obligation to a trade creditor (whether or not an
Affiliate) Incurred by such Person in the ordinary course of business of such
Person in connection with obtaining goods, materials or services and due
within twelve months (or such longer period for payment as is customarily
extended by such trade creditor) of the Incurrence thereof, which account is
not overdue by more than 90 days, according to the original terms of sale,
unless such account payable is being contested in good faith), or (c) for the
payment of money relating to a Capitalized Lease Obligation; (ii) the maximum
fixed repurchase price of all Disqualified Capital Stock of such Person; (iii)
reimbursement obligations of such Person with respect to letters of credit;
(iv) obligations of such Person with respect to Interest Swap Obligations and
Foreign Exchange Agreements; (v) all liabilities of others of the kind
described in the preceding clause (i), (ii), (iii) or (iv) that such Person
has guaranteed or that is otherwise its legal liability; and (vi) all
obligations of others secured by a Lien to which any of the properties or
assets (including, without limitation, leasehold interests and any other
tangible or intangible property rights) of such Person are subject, whether or
not the obligations secured thereby shall have been assumed by such Person or
shall otherwise be such Person's legal liability (provided that if the
obligations so secured have not been assumed by such Person or are not
otherwise such Person's legal liability, such obligations shall be deemed to
be in an amount equal to the fair market value of such properties or assets,
as determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution). For purposes of the
preceding sentence, the "maximum fixed repurchase price" of any Disqualified
Capital Stock that does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such
price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock (or any equity security for which it may be
exchanged or converted), such fair market value shall be determined in good
faith by the Board of Directors of such Person, which determination shall be
evidenced by a Board Resolution.
"Independent Financial Advisor" means a reputable accounting, appraisal or
nationally recognized investment banking or consulting firm that is, in the
reasonable judgment of the Board of Directors of the Company, qualified to
perform the tasks for which such firm has been engaged and independent with
respect to the Company and its Affiliates.
"Interest Swap Obligation" means any obligation of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a fixed or floating rate of interest on a stated notional
amount in exchange for periodic payments made by such Person calculated by
applying a fixed or floating rate of interest on the same notional amount;
provided that the term "Interest Swap Obligation" shall also include interest
rate exchange, collar, cap, swap option or similar agreements providing
interest rate protection.
"Investment" by any Person in any other Person means any investment by such
Person in such other Person, whether by share purchase, capital contribution,
loan, advance (other than reason able loans and advances
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to employees for moving and travel expenses, as salary advances or to permit
the purchase of Qualified Capital Stock of the Company and other similar
customary expenses incurred, in each case in the ordinary course of business
consistent with past practice) or similar credit extension constituting
Indebtedness of such other Person, and any guarantee of Indebtedness of any
other Person. In addition, for purposes of the covenant described under "--
Limitation on Restricted Payments" above, (i) an "Investment" shall be deemed
to have been made at the time any Restricted Subsidiary is designated as an
Unrestricted Subsidiary in an amount (proportionate to the Company's equity
interest in such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated as an
Unrestricted Subsidiary; and (ii) at any date the aggregate of all Restricted
Payments made as Investments since the Issue Date shall exclude and be reduced
by an amount (proportionate to the Company's equity interest in such
Subsidiary) equal to the net worth of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated a Restricted Subsidiary (in
each case "net worth" to be calculated based upon the fair market value of the
assets and liabilities of such Subsidiary as of any such date of designation,
as determined by the Company's Board of Directors).
"Issue Date" means the date of original issuance of the Notes under the
Indentures.
"Letter of Credit Obligations" means Indebtedness of the Company or any of
the Subsidiaries with respect to letters of credit issued pursuant to the
Credit Agreement, and for purposes of determining the aggregate amount of
Indebtedness at any time, shall be deemed to consist of (a) the aggregate
maximum amount then available to be drawn under all such letters of credit
(the determination of such maximum amount to assume compliance with all
conditions for drawing), and (b) the aggregate amount that has then been paid
by, and not reimbursed to, the issuers under such letters of credit.
"Lien" means, with respect to any asset or property, any mortgage, pledge,
lien, encumbrance, charge or security interest of any kind in respect of such
asset or property, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest, and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction); provided, however, that in no event shall an operating
lease be deemed to constitute a Lien.
"Management Services Agreement" means that certain Management Services
Agreement dated as of the Issue Date, between Smith's and Yucaipa (as such
Management Services Agreement may be amended or replaced, so long as such
amendment or replacement has been approved by a majority of the Independent
Directors (as defined in the Standstill Agreement) and is not disadvantageous
to the Holders of the Senior Notes or the Senior Subordinated Notes, as the
case may be, in any material respect).
"Maturity Date" means (i) with respect to the Senior Notes, , 2006 and
(ii) with respect to the Senior Subordinated Notes, , 2007.
"Net Cash Proceeds" means Net Proceeds received in the form of cash or Cash
Equivalents.
"Net Proceeds" means (a) in the case of any Asset Sale or any issuance and
sale by any Person of Qualified Capital Stock, the aggregate net proceeds
received by such Person after payment of expenses, taxes, commissions and the
like incurred in connection therewith (and, in the case of any Asset Sale, net
of the amount of cash applied to repay Indebtedness secured by the asset
involved in such Asset Sale), whether such proceeds are in cash or in property
(valued at the fair market value thereof at the time of receipt as determined
with respect to any Asset Sale resulting in Net Proceeds in excess of $[5]
million in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution) and (b) in the case of
any conversion or exchange of any outstanding Indebtedness or Disqualified
Capital Stock of such Person for or into shares of Qualified Capital Stock of
the Company, the sum of (i) the fair market value of the proceeds received by
the Company in connection with the issuance of such Indebtedness or
Disqualified Capital Stock on the date of such issuance and (ii) any
additional amount paid by the Holder to the Company upon such conversion or
exchange.
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"Obligations" means all obligations of every nature whether for principal,
reimburse ments, interest, fees, expenses, indemnities or otherwise, and
whether primary, secondary, direct, indirect, contingent, fixed or otherwise
(including obligations of performance) under the documentation governing any
Indebtedness.
"Operating Coverage Ratio" means the ratio of (1) EBITD for the period (the
"Pro Forma Period") consisting of the most recent four full fiscal quarters
for which financial information in respect thereof is available immediately
prior to the date of the transaction giving rise to the need to calculate the
Operating Coverage Ratio (the "Transaction Date") to (2) the Consolidated
Interest Expense for the fiscal quarter in which the Transaction Date occurs
and the three fiscal quarters immediately subsequent to such fiscal quarter
(the "Forward Period") reasonably anticipated by the Board of Directors of the
Company to become due from time to time during such period. For purposes of
this definition, if the Transaction Date occurs prior to the first anniversary
of the Transactions, "EBITD" for the Pro Forma Period shall be calculated
after giving effect on a pro forma basis to the Transactions as if they had
occurred on the first day of the Pro Forma Period. In addition to, but without
duplication of, the foregoing, for purposes of this definition, "EBITD" shall
be calculated after giving effect (without duplication), on a pro forma basis
for the Pro Forma Period (but no longer), to (a) any Investment, during the
period commencing on the first day of the Pro Forma Period to and including
the Transaction Date (the "Reference Period"), in any other Person that, as a
result of such Investment, becomes a Restricted Subsidiary, (b) the
acquisition, during the Reference Period (by merger, consolidation or purchase
of stock or assets) of any business or assets, which acquisition is not
prohibited by the applicable Indenture, and (c) any sales or other
dispositions of any Restricted Subsidiary or any line of business (or
geographical area thereof) of the Company or any Restricted Subsidiary
occurring during the Reference Period, in each case as if such incurrence,
Investment, repayment, acquisition or asset sale had occurred on the first day
of the Reference Period. In addition, for purposes of this definition,
"Consolidated Interest Expense" shall be calculated after giving effect
(without duplication), on a pro forma basis for the Forward Period, to any
Indebtedness Incurred or repaid on or after the first day of the Forward
Period and prior to the Transaction Date. If the Company or any Restricted
Subsidiary directly or indirectly guarantees any Indebtedness of a third
Person, the Operating Coverage Ratio shall give effect to the Incurrence of
such Indebtedness as if the Company or such Restricted Subsidiary had directly
Incurred such guaranteed Indebtedness.
"operating lease" means any lease the obligations under which do not
constitute Capitalized Lease Obligations.
"Pari Passu Indebtedness" means (i) in the case of the Senior Note
Indenture, Indebtedness of the Company which ranks pari passu in right of
payment to the Senior Notes (whether or not secured by any Lien) and (ii) in
the case of the Senior Subordinated Note Indenture, Indebtedness of the
Company which ranks pari passu in right of payment to the Senior Subordinated
Notes.
"Payment Restriction" means, with respect to a subsidiary of any Person, any
encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation, on the ability of (i) such
subsidiary to (a) pay dividends or make other distributions on its Capital
Stock or make payments on any obligation, liability or Indebtedness owed to
such Person or any other subsidiary of such Person, (b) make loans or advances
to such Person or any other subsidiary of such Person or (c) transfer any of
its properties or assets to such Person or any other subsidiary of such
Persons, or (ii) such Person or any other subsidiary of such Person to receive
or retain any such (a) dividends, distributions or payments, (b) loans or
advances or (c) transfer of properties or assets.
"Permitted Holder" means (i) Yucaipa, or any entity controlled thereby or
any of the partners thereof, (ii) Jeffrey P. Smith, Richard Smith and Fred L.
Smith and their respective family members, (iii) an employee benefit plan of
the Company, or any of its subsidiaries or any participant therein, (iv) a
trustee or other fiduciary holding securities under an employee benefit plan
of the Company or any of its subsidiaries or (v) any Permitted Transferee of
any of the foregoing Persons.
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"Permitted Indebtedness" means:
a. Indebtedness of the Company and the Restricted Subsidiaries (and the
Company and each Restricted Subsidiary (to the extent it is not the primary
obligor thereof) may guarantee such Indebtedness) (i) under the Credit
Agreement (including the Letter of Credit Obligations) in an aggregate
principal amount at any time outstanding not to exceed $875.0 million, less
all principal repayments of Term Loans and all permanent commitment
reductions under the revolving credit facility, in each case, pursuant to
and in accordance with the covenant described under "--Certain Covenants--
Limitation on Asset Sales" above or (ii) Incurred under the Credit
Agreement pursuant to and in compliance with clause (n) of this definition
and the proviso in the covenant described under the caption "--Limitation
on Incurrence of Additional Indebtedness" above;
b. Indebtedness of a Restricted Subsidiary owed to and held by the
Company or a Restricted Subsidiary; or Indebtedness of the Company owed to
and held by a Restricted Subsidiary;
c. Indebtedness Incurred by the Company or any Restricted Subsidiary in
connection with the purchase or improvement of property (real or personal)
or equipment or other capital expenditures in the ordinary course of
business (including for the purchase of assets or stock of any retail
grocery store or business) or consisting of Capitalized Lease Obligations,
provided that (i) at the time of the Incurrence thereof, such Indebtedness,
together with any other Indebtedness Incurred during the most recently
completed four fiscal quarter period in reliance upon this clause (c) does
not exceed, in the aggregate, 3% of net sales of the Company and the
Restricted Subsidiaries during the most recently completed four fiscal
quarter period on a consolidated basis (calculated on a pro forma basis if
the date of Incurrence is prior to the end of the fourth fiscal quarter
following the Transactions) and (ii) such Indebtedness, together with all
then outstanding Indebtedness Incurred in reliance upon this clause (c)
does not exceed, in the aggregate, 3% of the aggregate net sales of the
Company and the Restricted Subsidiaries during the most recently completed
twelve fiscal quarter period on a consolidated basis (calculated on a pro
forma basis if the date of Incurrence is prior to the end of the twelfth
fiscal quarter following the Transactions);
d. Indebtedness Incurred by the Company or any Restricted Subsidiary in
connection with expenditures in an aggregate principal amount not to exceed
$25.0 million; provided that such expenditures relate solely to the
integration of the operations of Smith's, Smitty's and their respective
subsidiaries as described in this Prospectus;
e. Indebtedness of the Company Incurred under Foreign Exchange Agreements
and Interest Swap Obligations entered into with respect to Indebtedness
otherwise permitted to be Incurred under the covenant described under "--
Certain Covenants--Limitation on Incurrences of Additional Indebtedness"
above, including this definition of "Permitted Indebtedness" (other than
this clause (e)), in a notional amount not exceeding the aggregate
principal amount of such Indebtedness;
f. guarantees Incurred in the ordinary course of business by the Company
or a Restricted Subsidiary of Indebtedness of any other Person in aggregate
not to exceed $20.0 million at any time outstanding;
g. Refinancing Indebtedness;
h. Indebtedness of the Company or any Restricted Subsidiary for letters
of credit relating to workers' compensation claims and self-insurance or
similar requirements in the ordinary course of business;
i. Existing Indebtedness;
j. Indebtedness arising from guarantees of Indebtedness of the Company or
any Restricted Subsidiary or other agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary, other than
guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose
of financing
such acquisition; provided that the maximum aggregate liability in respect
of all such Indebtedness shall at no time exceed the gross proceeds
actually received by the Company and the Restricted Subsidiary in
connection with such disposition;
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k. obligations in respect of performance bonds and completion guarantees
provided by the Company or any Restricted Subsidiary in the ordinary course
of business;
l. guarantees by the Company or a Restricted Subsidiary of Indebtedness
Incurred by the Company or a Restricted Subsidiary so long as the
Incurrence of such Indebtedness by the Company or any such Restricted
Subsidiary is otherwise permitted by the terms of the applicable Indenture;
m. Indebtedness Incurred by the Company in connection with the transfer
to the Company or a third party of the California assets leased by the
Company from certain trusts and securing such trusts' obligations to the
Smith's Food & Drug Centers Inc. 1994-A Pass Through Trusts (the "Related
Assets"); provided, however, that (i) if the Related Assets are transferred
to the Company, the Company shall consummate an Asset Sale with respect to
such Related Assets within [90] days after the Incurrence of such
Indebtedness and shall apply the Net Proceeds of such Asset Sale to
permanently reduce Pari Passu Indebtedness or Indebtedness of any
Restricted Subsidiary, and (ii) if the Related Assets are transferred to
any Person other than the Company or any Subsidiary, the Company shall,
within [90] days after the Incurrence of such Indebtedness, apply any
proceeds received from the owner trust in respect of such transfer of the
Related Assets to permanently reduce Pari Passu Indebtedness or
Indebtedness of any Restricted Subsidiary; provided, further, however, that
up to $5.0 million in aggregate amount of Net Proceed under clause (i) or
proceeds under clause (ii) may be applied to repay outstanding borrowings
under the revolving credit facility pursuant to the Credit Agreement
without a corresponding reduction in commitments; and
n. additional Indebtedness of the Company or any Restricted Subsidiary
(together with the Indebtedness Incurred pursuant to clause (a)(ii) above)
in an aggregate amount not to exceed $140.0 million at any time
outstanding.
"Permitted Investment" by any Person means (i) any Related Business
Investment, (ii) Investments in securities not constituting cash or Cash
Equivalents and received in connection with an Asset Sale made pursuant to the
provisions of the cove nant described under "--Certain Covenants--Limitation
on Asset Sales" above or any other disposition of assets not constituting an
Asset Sale by reason of the exceptions contained in the definition thereof,
(iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date,
(v) Investments specifically permitted by and made in accordance with the
second paragraph of the covenant described under "--Certain Covenants--
Limitation on Transactions with Affiliates," (vi) Investments in the Company
or the wholly owned Restricted Subsidiaries and (vii) additional Investments
in an aggregate amount not exceeding $15.0 million.
"Permitted Liens" shall mean (i) Liens for taxes, assessments and
governmental charges or claims not yet due or which are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted and if a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made therefor; (ii) statutory
Liens of landlords and carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen or other like Liens arising in the ordinary course of
business, deposits made to obtain the release of such Liens, and with respect
to amounts not yet delinquent for a period of more than 60 days or being
contested in good faith by an appropriate process of law, and for which a
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made; (iii) Liens incurred or pledges or deposits made in the
ordinary course of business to secure obligations under workers' compensation,
unemployment insurance and other types of social security or similar
legislation; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, zoning or other restrictions, minor defects or irregularities
in title and other similar charges or encumbrances not interfering in any
material respect with the business of the Company or any of the Restricted
Subsidiaries incurred in the ordinary course of business; (vi) Liens upon
specific items of inventory or other goods and proceeds of any Person securing
such Person's obligations in respect of bankers' acceptances issued or created
for the account of such Person to facilitate the purchase, shipment or storage
of such inventory or other goods in the ordinary course
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of business; (vii) Liens securing reimbursement obligations with respect to
letters of credit which encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (viii) Liens in favor
of customs and revenue authorities arising as a matter of law to secure
payment of nondelinquent customs duties in connection with the importation of
goods; (ix) judgment and attachment Liens not giving rise to a Default or
Event of Default; (x) leases or subleases granted to others not interfering in
any material respect with the business of the Company or any Restricted
Subsidiary; (xi) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that are
within the general parameters customary in the industry, in each case securing
Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements
and forward contracts, option futures contracts, futures options or similar
agreements or arrangements designed to protect the Company or any Subsidiary
from fluctuations in the price of commodities; (xii) Liens encumbering
deposits made in the ordinary course of business to secure
nondelinquent obligations arising from statutory, regulatory, contractual or
warranty requirements of the Company or the Restricted Subsidiaries for which
a reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made; (xiii) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Company or any
Restricted Subsidiary in the ordinary course of business in accordance with
past practices; (xiv) any interest or title of a lessor in the property
subject to any lease, whether characterized as capitalized or operating other
than any such interest or title resulting from or arising out of a default by
the Company or any Restricted Subsidiary of its obligations under such lease;
(xv) Liens arising from filing UCC financing statements for precautionary
purposes in connection with true leases of personal property that are
otherwise permitted under the applicable Indenture and under which the Company
or any Restricted Subsidiary is lessee; and (xvi) additional Liens securing
Indebtedness at any one time outstanding not exceeding the sum of (i) $15.0
million and (ii) 10% of the aggregate Consolidated Net Income of the Company
earned subsequent to the Issue Date and on or prior to such time.
"Permitted Payments" means
(i) the consummation of the Transactions as described herein;
(ii) after 2001, the payment of cash dividends on the New Preferred Stock
in accordance with the Certificate of Designation relating thereto;
(iii) the exchange of New Preferred Stock for Exchange Debentures if, and
to the extent that, the Company is permitted to Incur the Indebtedness
resulting from the issuance of the Exchange Debentures under the terms of
the Indentures;
(iv) payments by the Company to effect the mandatory redemption of its
Series I Preferred Stock; provided, however, that such payments shall not
be made on any date earlier, or in any amount greater, than the dates and
amounts provided for in the Company's Certificate of Incorporation as in
effect on the Issue Date;
(v) any payment by the Company or any Subsidiary to Yucaipa or the
principals or any Affiliates thereof for consulting, management, investment
banking or similar services, or for reimbursement of costs and expenses (x)
pursuant to the Management Services Agreement or (y) as approved by a
majority of the Independent Directors (as defined in the Standstill
Agreement);
(vi) for purposes of the Senior Note Indenture, (I) Restricted Debt
Prepayments in an aggregate amount not to exceed $10.0 million and (II) any
other Restricted Debt Prepayment if, both before and after giving pro forma
effect to such Prepayment under this clause (II) (including any related or
contemplated financing), (x) the Company's Operating Coverage Ratio would
be greater than 2.5 to 1 and (y) the ratio of the principal amount of
Senior Notes outstanding to Senior Subordinated Notes outstanding both
immediately before and immediately after giving effect to such Prepayment
has not changed. (For this purpose Senior Notes and Senior Subordinated
Notes held by or on behalf of the Company or any of the Restricted
Subsidiaries shall not be deemed outstanding);
(vii) any payment to pay for the purchase, retirement or other
acquisition for value of any Equity Interests of the Company held by any
future, present or former employee or director of the Company or any
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Subsidiary pursuant to any management equity plan or stock option plan or
any other agreement, provided that the aggregate amount of Restricted
Payments made under this clause does not exceed $5 million in any fiscal
year (provided that any unused amounts may be carried over to any
subsequent fiscal year subject to a maximum amount of $10 million in any
fiscal year);
(viii) pro rata dividends paid by any Restricted Subsidiary that is not
wholly owned by the Company or another wholly owned Restricted Subsidiary;
(ix) Investments in Unrestricted Subsidiaries in an aggregate amount not
to exceed $10.0 million; and
(x) other Restricted Payments in an aggregate amount not to exceed $25.0
million.
"Permitted Transferees" means, with respect to any Person, (i) any Affiliate
of such Person, (ii) the heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership, the stockholders or
general or limited partners of which, include only such Person or his or her
spouse or lineal descendants, in each case to whom such Person has transferred
the beneficial ownership of any securities of the Company, (iv) any investment
account whose investment managers and investment advisors consist solely of
such Person and/or Permitted Transferees of such Person and (v) any investment
fund or investment entity that is a subsidiary of such Person or a Permitted
Transferee of such Person.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Plan of Liquidation" means, with respect to any Person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety
or substantially as an entirety and (ii) the distribution of all or
substantially all of the proceeds of such sale, lease, conveyance or other
disposition and all or substantially all of the remaining assets of such
Person to holders of Capital Stock of such Person.
"Preferred Stock" means, with respect to any Person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indentures, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as
interpreted by the Company's chief financial officer or Board of Directors in
consultation with its independent certified public accountants.
"Public Equity Offering" means an underwritten public offering of Common
Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act.
"Qualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person that is not Disqualified Capital Stock.
"Refinancing Indebtedness" means, with respect to any Person, Indebtedness
of such Person issued in exchange for, or the proceeds from the issuance and
sale or disbursement of which are used to substantially concurrently repay,
redeem, refund, refinance, discharge or otherwise retire for value, in whole
or in part (collectively, "repay"), or constituting an amendment, modification
or supplement to, or a deferral or renewal of (collectively, an "amendment"),
any Indebtedness of such Person existing on the Issue Date or Indebtedness
(other than Permitted Indebtedness, except Permitted Indebtedness Incurred
pursuant to clauses (c), (d), (g) and (i) of the definition thereof) Incurred
in accordance with the applicable Indenture (a) in a principal amount (or, if
such Refinancing Indebtedness provides for an amount less than the principal
amount thereof to be due and
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payable upon the acceleration thereof, with an original issue price) not in
excess of (without duplication) (i) the principal amount or the original issue
price, as the case may be, of the Indebtedness so refinanced (or, if such
Refinancing Indebtedness refinances Indebtedness under a revolving credit
facility or other agreement providing a commitment for subsequent borrowings,
with a maximum commitment not to exceed the maximum commitment under such
revolving credit facility or other agreement) plus (ii) unpaid accrued
interest on such Indebtedness plus (iii) premiums, penalties, fees and
expenses actually incurred by such Person in connection with the repayment or
amendment thereof and (b) with respect to Refinancing Indebtedness that repays
or constitutes an amendment to Subordinated Indebtedness, such Refinancing
Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund
requirement in an amount greater than or at a time prior to the amounts and
times specified in such repaid or amended Subordinated Indebtedness, except to
the extent that any such requirement applies on a date after the Maturity Date
of the applicable Notes and (y) shall contain subordination and default
provisions no less favorable in any material respect to Holders of the
applicable Notes than those contained in such repaid or amended Subordinated
Indebtedness.
"Related Business Investment" means (i) any Investment by a Person in any
other Person a majority of whose revenues are derived from the operation of
one or more retail grocery stores or supermarkets or any other line of
business engaged in by the Company or any of the Subsidiaries as of the Issue
Date; (ii) any Investment by such Person in any cooperative or other supplier,
including, without limitation, any joint venture which is intended to supply
any product or service useful to the business of the Company and the
Restricted Subsidiaries as it is conducted as of the Issue Date and as such
business may thereafter evolve or change; and (iii) any capital
expenditure or Investment, in each case reasonably related to the business of
the Company and the Restricted Subsidiaries as it is conducted as of the Issue
Date and as such business may thereafter evolve or change.
"Restricted Debt Prepayment" means, for purposes of the Senior Note
Indenture, any purchase, redemption, defeasance (including, but not limited
to, in substance or legal defeasance) or other acquisition or retirement for
value, directly or indirectly, by the Company or a Restricted Subsidiary,
prior to the scheduled maturity or prior to any scheduled repayment of
principal or sinking fund payment, as the case may be, in respect of the
Senior Subordinated Notes.
"Restricted Payment" means any (i) Stock Payment, (ii) Investment (other
than a Permitted Investment), (iii) any cash payment in respect of the
Exchange Debentures prior to the fifth anniversary of the Issue Date or (iv)
in the case of the Senior Notes, Restricted Debt Prepayment.
"Restricted Subsidiary" means any Subsidiary that, as of the date of
determination, is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, and all other Obligations with respect to, any Indebtedness of the
Company, whether outstanding on the Issue Date or thereafter Incurred, unless,
in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Senior Subordinated Notes. Without limiting the generality of the foregoing,
"Senior Indebtedness" shall include (x) the principal of, premium, if any, and
interest on all obligations of every nature of the Company from time to time
owed to the lenders under the Credit Agreement, including, without limitation,
the Letter of Credit Obligations and principal of and interest on, all fees
and expenses payable under the Credit Agreement, and (y) interest accruing
thereon subsequent to the occurrence of any Event of Default specified in
clause (vi) or (vii) under "-- Events of Default" relating to the Company,
whether or not the claim for such interest is allowed under any applicable
Bankruptcy Law. Notwithstanding the foregoing, "Senior Indebtedness" shall not
include (a) Indebtedness evidenced by the Senior Subordinated Notes, (b)
Indebtedness that is expressly subordinate or junior in right of payment to
any Indebtedness of the Company, (c) Indebtedness which, when Incurred and
without respect to any election under Section 1111(b) of Title 11, United
States Code, is without recourse to the
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Company (other than Capitalized Lease Obligations), (d) Indebtedness which is
represented by Disqualified Capital Stock, (e) obligations for goods,
materials or services purchased in the ordinary course of business or
obligations consisting of trade payables, (f) Indebtedness of or amounts owed
by the Company for compensation to employees or for services rendered to the
Company, (g) any liability for federal, state, local or other taxes owed or
owing by the Company, (h) Indebtedness of the Company to a Subsidiary of the
Company, and (i) that portion of any Indebtedness which is Incurred by the
Company in violation of the Senior Subordinated Note Indenture.
"Significant Stockholder" means, with respect to any Person, any other
Person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 10% of any class of equity securities of such
Person that are entitled to vote on a regular basis for the election of
directors of such Person.
"Significant Subsidiary" means each Restricted Subsidiary that is either (a)
a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under
the Securities Act of 1933, as amended, and the Exchange Act (as such
regulation is in effect on the Issue Date) or (b) material to the financial
condition or results of operations of the Company and the Restricted
Subsidiaries taken as a whole.
"Standstill Agreement" means the Standstill Agreement dated as of January
29, 1996 among the Company, Yucaipa and each of the limited partnerships that
owns shares in Smitty's for which Yucaipa acts as the general partner (as such
Standstill Agreement may be amended or replaced, so long as such amendment or
replacement has been approved by a majority of the Independent Directors (as
defined in the Standstill Agreement as in effect prior to such amendment or
replacement) and is not disadvantageous to the Holders of the Senior Notes or
the Senior Subordinated Notes, as the case may be, in any material respect).
"Stock Payment" means, with respect to any Person, (a) the declaration or
payment by such Person, either in cash or in property, of any dividend on
(except, in the case of the Company, dividends payable solely in
Qualified Capital Stock of the Company), or the making by such Person or any
of its subsidiaries of any other distribution in respect of, such Person's
Qualified Capital Stock or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock (other than exchangeable or
convertible Indebtedness of such Person), or (b) the redemption, repurchase,
retirement or other acquisition for value by such Person or any of its
subsidiaries, directly or indirectly, of such Person's Qualified Capital Stock
(and, in the case of a Subsidiary, Qualified Capital Stock of the Company) or
any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock (other than exchangeable or convertible Indebtedness of
such Person), other than, in the case of the Company, through the issuance in
exchange therefor solely of Qualified Capital Stock of the Company; provided,
however, that in the case of a Restricted Subsidiary, the term "Stock Payment"
shall not include any such payment with respect to its Capital Stock or
warrants, rights or options to purchase or acquire shares of any class of its
Capital Stock that are owned solely by the Company or a wholly owned
Restricted Subsidiary.
"Subordinated Indebtedness" means (i) in the case of the Senior Note
Indenture, Indebtedness of the Company which is subordinated in right of
payment to the Senior Notes, and (ii) in the case of the Senior Subordinated
Note Indenture, Indebtedness of the Company which is subordinated in right of
payment to the Senior Subordinated Notes.
"subsidiary" of any Person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such Person, by one or more subsidiaries of such Person or by such Person and
one or more subsidiaries of such Person or (ii) a partnership in which such
Person or a subsidiary of such Person is, at the date of determination, a
general partner of such partnership, but only if such Person or its subsidiary
is entitled to receive more than fifty percent of the assets of such
partnership upon its dissolution, or (iii) any other Person (other than a
corporation or a partnership) in which such Person, a subsidiary of such
Person or such Person and one or more subsidiaries of such Person, directly or
indirectly, at the date of determination, has (x) at least a majority
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ownership interest or (y) the power to elect or direct the election of a
majority of the directors or other governing body of such Person.
"Subsidiary" means any subsidiary of the Company.
"Term Loans" means the term loan facility under the Credit Agreement and any
agreement governing Indebtedness Incurred to refund, replace or refinance any
borrowings outstanding under such facility or under any prior refunding,
replacement or refinancing thereof (in each case, in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions).
"Unrestricted Subsidiary" means any Subsidiary be deemed to be redesignated
a Restricted Subsidiary so designated by a Board Resolution adopted by the
Board of Directors of the Company in accordance with "--Certain Covenants--
Limitation on Restricted and Unrestricted Subsidiaries" above. Notwithstanding
the foregoing, an Unrestricted Restricted Subsidiary shall be deemed to be
redesignated a Restricted Subsidiary at any time if (a) the Company or any
other Restricted Subsidiary (i) provides credit support for, or a guarantee
of, any Indebtedness of such Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness) or (ii) is
directly or indirectly liable for any Indebtedness of such Unrestricted
Subsidiary, (b) a default with respect to any Indebtedness of such
Unrestricted Subsidiary (including any right which the holders thereof may
have to take enforcement action against such Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its final scheduled maturity or (c) such Unrestricted Subsidiary Incurs
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any Restricted Subsidiary.
"Yucaipa" means The Yucaipa Companies, a California general partnership, or
any successor thereto which is an affiliate of Ronald W. Burkle or his
Permitted Transferees.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon filing of the Amended and Restated Certificate of Incorporation, the
Company's authorized capital stock will consist of (i) 20,000,000 shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
(ii) 100,000,000 shares of Class B Common Stock, par value $.01 per share (the
"Class B Common Stock"), (iii) 20,000,000 shares of Class C Common Stock, par
value $.01 (the "Class C Common Stock"), and (iv) 85,000,000 shares of
Preferred Stock, par value $.01 per share, of which 34,524,579 shares are
designated as Series I Preferred Stock and 750,000 shares will be designated
Cumulative Redeemable Exchangeable Preferred Stock. As of April 15, 1996,
there were 11,366,532 shares of Class A Common Stock outstanding, 13,705,191
shares of Class B Common Stock outstanding and 12,956,747 shares of Series I
Preferred Stock outstanding.
COMMON STOCK
All holders of shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Company's Board of Directors in its
discretion from funds legally available therefor, and upon liquidation or
dissolution are entitled to receive all assets available for distribution to
the holders of Common Stock. Under the Delaware Corporation Law, the Company
may declare and pay dividends only out of its surplus, or out of its net
profits for the fiscal year in which the dividend is declared or the preceding
year. Under certain of the Company's credit agreements, the Company's ability
to pay dividends is restricted based on various measures, including the
Company's net income for designated period. All of the outstanding shares of
Common Stock are legally issued, fully paid and nonassessable. Holders of
Common Stock have no preemptive or other rights to subscribe for additional
shares which the Company may issue and there are no redemption provisions or
sinking fund provisions applicable to any class of Common Stock, nor is the
Common Stock subject to calls or assessments by the Company.
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except the holders of
Class A Common Stock are entitled to ten votes per share and the holders of
Class B Common Stock are entitled to one vote per share on all matters
submitted to the vote of stockholders for their vote or approval, including
the election of directors. The holders of Class C Common Stock will not be
entitled to vote on matters submitted to the vote of Company stockholders.
However, if shares of Class C Common Stock are transferred to a holder other
than an Original Class C Holder (as defined in the Amended and Restated
Certificate of Incorporation), such transferred shares of Class C Common Stock
will be convertible, at the option of the holder, into shares of voting Class
B Common Stock. There is no provision made for cumulative voting, and no class
of outstanding Common Stock or Preferred Stock alone is entitled to elect any
directors. The holders of Class A Common Stock and the holders of Series I
Preferred Stock, voting together have, and after consummation of the
Transactions will continue to have, effective control of the Company through
holding approximately 94% of the combined voting power of the outstanding
capital stock and will have the ability to elect all the directors of the
Company and to effect or prevent certain corporate transactions which require
majority approval of the combined classes, including mergers and other
business combinations.
Under the Company's bylaws, directors may be removed with or without cause
by the holders of a majority of the votes entitled to be cast for the election
of directors. A vacancy on the Board created by the removal or resignation of
a director or by expansion of the authorized number of directors may be filled
by the remaining directors then in office or by the stockholders at a special
meeting.
Under the Delaware General Corporation Law, the holders of Class A Common
Stock, Class B Common Stock and Class C Common Stock are entitled to vote as
separate classes on any amendment to the Company's Amended and Restated
Certificate of Incorporation that would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value
of the shares of such class, or alter or change the powers, preferences or
special rights of the shares of such class so as to affect them adversely.
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Each share of Class A Common Stock is convertible at any time at the option
of the holder into Class B Common Stock on a share-for-share basis. 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. The Class B Common Stock
has no conversion rights.
Shares of Class A Common Stock may not be sold, gifted, or transferred
except to and among the Company, a spouse, child, grandchild, sibling or
parent of the person to whom the Class A Common Stock was issued originally (a
"Permitted Transferee"), and certain entities controlled or owned by one or
more Permitted Transferees. The Company's Certificate of Incorporation
provides that any holder of shares of Class A Common Stock desiring to
transfer such shares to a person other than a Permitted Transferee or such
transferee must present such shares to the Company for conversion into an
equal number of shares of Class B Common Stock upon such transfer. Thereafter,
such shares of Class B Common Stock may be freely transferred to persons other
than Permitted Transferees.
SERIES I PREFERRED STOCK
Except as described below, each share of Series I Preferred Stock is
entitled to ten votes per share on all matters submitted to the vote of the
stockholders, including the election of directors, for their vote or approval.
Except as described below, holders of Series I Preferred Stock vote together
with the holders of Common Stock, including the election of directors. The
affirmative vote of the holders of a majority of the Series I Preferred Stock,
voting as a class, is required upon any amendment to the Company's Certificate
of Incorporation adversely affecting in any manner the rights of such holders.
Under the Company's Certificate of Incorporation, 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 ranking on parity with the Series I Preferred Stock, before any
distribution to the holders of any class of Common Stock.
All shares of Series I Preferred Stock are subject to redemption at any time
upon 60 days' notice at the option of the Board of Directors, in such numbers
as the Board may determine, at a redemption price of $.33 1/3 per share (the
"Redemption Price"). In addition, on December 1 of each year commencing in
1989, one-eleventh of the total authorized number of shares of Series I
Preferred Stock is subject to mandatory redemption at the Redemption Price.
The Series I Preferred Stock has no dividend requirement. If approved by a
majority of the outstanding shares of Series I Preferred Stock, the Amended
and Restated Certificate of Incorporation will include certain provisions with
respect to the Series I Preferred Stock which: (i) eliminate for a five-year
period the annual mandatory redemption of original outstanding shares of
Series I Preferred Stock (with mandatory redemptions of one-eleventh of the
outstanding shares of Series I Preferred Stock resuming thereafter), and (ii)
restrict for two-year period 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 certain affiliated or other designated transferees.
NEW PREFERRED STOCK
As part of the financing required to consummate the Transactions, 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 to be entered into in
connection with the New Preferred Stock (the "Certificate of Designation") and
various related documents.
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The New Preferred Stock will be non-voting, 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.
The New Preferred Stock, will, with respect to dividend rights and rights on
liquidation, 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
issued by the Company after the Offerings, 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 Offerings, 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 Offerings, 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 Underwriters. 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 such dividends to the then effective liquidation
preference of 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 third anniversary of the issue date at the redemption
prices to be determined by the Company and the Underwriters, plus, without
duplication, accrued and unpaid dividends to the date of redemption. In
addition, on or prior to the third anniversary of the issue date, the Company
may, at its option and subject to certain conditions, use the net cash
proceeds of one or more Public Equity Offerings (as defined in the Certificate
of Designation) 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 Underwriters, plus, without duplication, 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 issue date at a redemption
price equal to 100% of the then effective liquidation preference thereof,
plus, without duplication, 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, accrued and unpaid
dividends to the date of purchase.
Subject to certain conditions, the New Preferred Stock is 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
"Exchange Debentures"). Interest on the Exchange Debentures will be payable at
a rate to be determined by the Company and the Underwriters and will accrue
from the date of issuance thereof. Interest on the 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 issue date, in additional Exchange Debentures,
commencing on the first such date after the exchange of the Exchange
Debentures for the New Preferred Stock. The Exchange Debentures will mature on
the twelfth anniversary of the issue date and are, subject to certain
conditions, redeemable, at the option of the Company, in whole or in part, on
or after the third anniversary of the issue date, at the redemption prices to
be determined by the Company and the Underwriters, plus accrued and unpaid
interest to the date of redemption. In addition, on or prior to the third
anniversary of the issue 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
Exchange Debentures originally issued.
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The Exchange Debentures will be subordinated to all existing and future
Senior Indebtedness of the Company, including the New Credit Facility and the
Notes. In addition, the 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 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 Notes will limit the Company's ability to make an
offer to purchase the Exchange Debentures in the event of a Change of Control.
UNDESIGNATED PREFERRED STOCK
Additional Preferred Stock may be issued from time to time in one or more
series and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking funds and any other rights, preferences, privileges and restrictions
applicable to each such series of Preferred Stock. However, under the
Company's Amended and Restated Certificate of Incorporation, no series of
Preferred Stock may have rights or preferences superior to the Series I
Preferred Stock, and no share of Preferred Stock other than shares designated
as Series I Preferred Stock may be entitled to more than one vote upon any
matter presented to the Company's stockholders for vote or approval, including
the election of directors.
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DESCRIPTION OF NEW CREDIT FACILITY
In connection with the Transactions, Smith's will enter into the New Credit
Facility with a syndicate of financial institutions for whom Bankers Trust
will act as administrative agent. Smith's has accepted a commitment letter
(the "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 $845 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 entered into in
connection with the New Credit Facility.
GENERAL
The New Credit Facility will provide for (i) term loans in the aggregate
amount of $655 million, comprised of the $325 million Tranche A Loans, the
$110 million Tranche B Loans, the $110 million Tranche C Loans and the $110
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 Transactions.
Proceeds of the New Term Loans and loans under the Revolving Credit Facility
on the Closing Date, together with proceeds from the Offerings and the
California Divestiture will be used to fund the cash requirements for the
Tender Offer and the Smitty's Refinancing, refinance certain other existing
indebtedness of Smith's, redeem a portion of Smith's Series I Preferred Stock,
redeem Smith's management options and pay various refinancing premiums fees,
expenses and other costs associated with the Transactions. 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 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
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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. 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 $1.1 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 each of the first two
quarters. 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 $1.1 million for the first seven years and in the eighth
year payable in installments of $0.275 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 $25.875 million in each of the first two
quarters. 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 $1.1 million for the first eight years and in the ninth year
payable in installments of $0.275 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 $39.65 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 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.
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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 contained 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. Certain of these covenants may be
more restrictive than those in favor of holders of the Notes as described
herein and as set forth in the New Indentures. In addition, the New Credit
Facility will require that the Company maintain certain specified financial
covenants, including a minimum fixed charge coverage, a minimum EBITDA, a
maximum ratio of total debt to EBITDA 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 Notes.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among Smith's and BT Securities Corporation ("BT
Securities"), CS First Boston Corporation ("CS First Boston"), Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), Goldman, Sachs & Co.
("Goldman Sachs") and Chase Securities Inc. ("Chase") (collectively, the
"Underwriters"), the Underwriters have agreed to purchase, and the Company has
agreed to sell to the Underwriters, the entire principal amount of the Notes
offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to the approval of
certain legal matters by counsel and to various other conditions. The nature
of each Underwriter's obligation is such that each is severally committed to
purchase the aggregate principal amount of Notes set forth opposite its name
if it purchases any.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
PRINCIPAL AMOUNT OF SENIOR
UNDERWRITERS OF SENIOR NOTES SUBORDINATED NOTES
------------ ---------------- ------------------
<S> <C> <C>
BT Securities Corporation............... $ $
CS First Boston Corporation.............
Donaldson, Lufkin & Jenrette
Securities Corporation.................
Goldman, Sachs & Co. ...................
Chase Securities Inc. ..................
------------ ------------
Total............................... $250,000,000 $400,000,000
</TABLE>
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page hereof, and to certain
dealers at such price less a concession not in excess of $ per $1,000
principal amount of the Notes. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per $1,000 principal amount of
the Notes. After the initial public offering of the Notes, the public offering
prices and other selling terms may be changed.
The Company does not intend to apply for listing of the Notes on a national
securities exchange, but has been advised by each of the Underwriters that it
presently intends to make a market in the Notes, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Notes, and any such market making may be discontinued at any
time by one or all of the Underwriters at the sole discretion of such
Underwriters. There can be no assurance that an active public market for the
Notes will develop.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
BT Securities and CS First Boston have been engaged by Smitty's to act as
dealer managers and consent solicitation agents in connection with the
Smitty's Refinancing. BT Securities and CS First Boston will receive customary
fees in connection with such services.
Chase Manhattan, an affiliate of Chase, has been the administrative agent
and a lender under SSV's existing credit facilities. Proceeds of the Offerings
will be used, in part, to repay indebtedness to Chase Manhattan and the other
lenders under such credit facilities. Bankers Trust, an affiliate of BT
Securities, and Chase Manhattan are the Arrangers of the New Credit Facility,
and Bankers Trust will act as administrative agent for the New Credit
Facility. Bankers Trust and Chase Manhattan will receive customary fees in
connection with such services.
An affiliate of Chase is a limited partner in a partnership controlled by
Yucaipa which owns shares of Smitty's Class A Common Stock. The partnership
will receive shares of Smith's Class B Common Stock in the Merger in exchange
for such shares.
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Goldman Sachs is serving as financial advisor to the Company in connection
with the Transactions and has delivered a written opinion to the Company's
Board of Directors that, as of January 29, 1996, the exchange ratio pursuant
to the Recapitalization Agreement is fair to the Company. Goldman Sachs has
been engaged by the Company to act as dealer manager in connection with the
Tender Offer. Goldman Sachs will receive customary fees in connection with
such services.
Affiliates of CS First Boston own shares of Smitty's Class B Common Stock
and will receive shares of Smith's Common Stock in the Merger in exchange for
such shares of Smitty's Class B Common Stock.
Each of the Underwriters has from time to time provided investment banking
and financial advisory services to one or more of Smith's, Smitty's, Yucaipa
and/or their respective affiliates and may continue to do so in the future.
The Underwriters have received customary fees for such services.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Latham & Watkins, Los Angeles, California. Certain legal matters in
connection with the Offerings will be passed upon for the Underwriters by
Cahill Gordon and Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The consolidated financial statements of Smith's Food & Drug Centers, Inc.
at December 30, 1995 and December 31, 1994 and for each of three years in the
period ended December 30, 1995 included in this Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated balance sheet of Smitty's Supermarkets, Inc. as of July 30,
1995 and July 31, 1994 and the related consolidated statements of operations,
stockholder's equity, and cash flows for year ended July 31, 1995, and for the
period from June 29, 1994 (date of inception) to July 31, 1994 (Smitty's), and
for the period from August 2, 1993 to June 28, 1994 and the year ended August
1, 1993 (Predecessor), included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
----
SMITH'S FOOD & DRUG CENTERS, INC.:
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 January 1, 1994,
December 31, 1994 and December 30, 1995................................. F-4
Consolidated statements of common stockholders' equity for the years
ended January 1, 1994, December 31, 1994 and December 30, 1995.......... F-5
Consolidated statements of cash flows for the years ended January 1,
1994, December 31, 1994 and December 30, 1995........................... F-6
Notes to consolidated financial statements............................... F-7
SMITTY'S SUPERMARKETS, INC.:
Report of Independent Auditors (Coopers & Lybrand L.L.P.)................ F-17
Consolidated balance sheets as of July 31, 1994 and July 30, 1995 and
January 14, 1996 (unaudited)............................................ F-18
Consolidated statements of operations for the 52 weeks ended July 30,
1995 and for the period from June 29, 1994 (date of inception) to July
31, 1994; for the period from August 2, 1993 to June 28, 1994 and the
year ended August 1, 1993 (Predecessor); for the 24 weeks ended January
14, 1996 (unaudited) and the 24 weeks ended January 15, 1995
(unaudited)............................................................. F-19
Consolidated statements of stockholders' equity for the 52 weeks ended
July 30, 1995 and for the period from June 29, 1994 (date of inception)
to July 31, 1994; for the period from August 2, 1992 to June 29, 1994
and the year ended August 1, 1993 (Predecessor); for the 24 weeks ended
January 14, 1996 (unaudited)............................................ F-20
Consolidated statements of cash flows for the 52 weeks ended July 30,
1995 and for the period from June 29, 1994 (date of inception) to July
31, 1994; for the period from August 2, 1993 to June 28, 1994 and the
year ended August 1, 1993 (Predecessor); for the 24 weeks ended January
14, 1996 (unaudited) and the 24 weeks ended January 15, 1995
(unaudited)............................................................. F-21
Notes to consolidated financial statements............................... F-23
</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,
ASSETS 1995 1994
------ ------------ ------------
<S> <C> <C>
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
========== ==========
<CAPTION>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
-------------------------------------------
<S> <C> <C>
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 maturities... 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 PAIDIN 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
Employee Stock Profit
Sharing Plan.......... (212) 3,237 3,025
Shares sold under the
Employee Stock
Purchase Plan......... (771) 4,853 4,082
Cash dividends--$.52
per share............. (15,530) (15,530)
Other.................. 485 485
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at January 1,
1994................... 12,617,445 126 17,344,566 173 285,482 259,400 (2,984) 542,197
Net income for 1994.... 48,781 48,781
Conversion of shares
from
Class A to Class B.... (477,128) (5) 477,128 5
Purchase of Class B
Common Stock for the
treasury.............. (109,239) (109,239)
Shares sold to the
Employee Stock Profit
Sharing Plan.......... 143 1,505 1,648
Shares sold under the
Employee Stock
Purchase Plan......... (668) 6,713 6,045
Cash dividends--$.52
per share............. (14,725) (14,725)
Other.................. 635 635
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at December 31,
1994................... 12,140,317 121 17,821,694 178 285,592 293,456 (104,005) 475,342
Net loss for 1995...... (40,512) (40,512)
Conversion of shares
from
Class A to Class B.... (527,274) (5) 527,274 5
Purchase of Class B
Common Stock for the
treasury.............. (9,039) (9,039)
Shares sold to the
Employee Stock Profit
Sharing Plan.......... 2 108 110
Shares sold under the
Employee Stock
Purchase Plan......... (926) 6,094 5,168
Cash dividends--$.60
per share............. (14,917) (14,917)
Other.................. 568 568
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at December 30,
1995................... 11,613,043 $116 18,348,968 $183 $285,236 $238,027 $(106,842) $416,720
========== ==== ========== ==== ======== ======== ========= ========
</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
activities:
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
liabilities:
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
activities............................... 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.
F-7
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pre-Operating and Closing Costs
Costs incurred in connection with the opening of new stores and distribution
facilities are expensed as incurred. The remaining net investment in stores
closed, less salvage value, is charged against earnings in the period of
closing. For leased stores that are closed and subleased to third parties, a
provision is made for the remaining lease liability, net of expected sublease
rental. For leased stores that are closed but not yet subleased, a provision
is made based on discounted lease payments through the estimated period until
subleased.
Interest Costs
Interest costs are expensed as incurred, except for interest costs which
have been capitalized as part of the cost of properties under development. The
Company's cash payments for interest (net of capitalized interest of
approximately $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 AND NET DEPRECIATION AND
COST AMORTIZATION BOOK VALUE AMORTIZATION
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
DECEMBER 30, 1995
Land.................. $ 276,626 $ 276,626
Buildings............. 610,049 $108,985 501,064 $ 19,907
Leasehold
improvements......... 55,830 12,556 43,274 2,970
Fixtures and
equipment............ 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
improvements......... 42,369 10,122 32,247 1,842
Fixtures and
equipment............ 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 average 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 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
======== ======= =======
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:
<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 de-
ferred taxes............................. (3.6) 2.4
Other..................................... .9 (.6) .2
-------- ------- -------
(42.0)% 39.1 % 42.8%
======== ======= =======
</TABLE>
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>
F-11
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
======== ======== ========
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):
<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.
F-12
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-13
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 obliga-
tion..................................... 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 bene-
fits 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 pro-
jected 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-14
<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, leased 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-15
<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-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Smitty's Supermarkets, Inc.
We have audited the accompanying consolidated balance sheets of Smitty's
Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and
the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended July 30, 1995 and the period from June 29, 1994
(date of inception) to July 31, 1994. We have also audited the consolidated
statements of operations, stockholders' equity and cash flows of the Company's
predecessor (the "Predecessor") for the period from August 2, 1993 to
June 28, 1994 and the year ended August 1, 1993. 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 Smitty's
Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and
the consolidated results of their operations and their cash flows for the year
ended July 30, 1995 and the period from June 28, 1994 (date of inception) to
July 31, 1994 and the consolidated results of the Predecessor's operations and
cash flows for the period from August 2, 1993 to June 28, 1994 and the year
ended August 1, 1993 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Phoenix, Arizona
October 3, 1995, except for Note 18
as to which the date is January 29, 1996
F-17
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 14, JULY 30, JULY 31,
ASSETS 1996 1995 1994
------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and short-term investments............... $ 11,505 $ 25,653 $ 19,969
Accounts and notes receivable, net of allow-
ances of $440, $506
and $683..................................... 9,290 7,700 7,994
Inventories................................... 56,726 55,475 51,013
Prepaid expenses.............................. 3,279 3,767 2,177
Refundable income taxes....................... 1,895 2,471 546
-------- -------- --------
Total current assets......................... 82,695 95,066 81,699
Property and equipment, net.................... 134,843 128,289 119,218
Goodwill, net of accumulated amortization of
$1,296, $917 and $40.......................... 31,520 31,899 17,500
Property held for sale......................... 3,209 2,360 2,154
Other assets................................... 7,769 8,108 14,741
-------- -------- --------
$260,036 $265,722 $235,312
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................. $ 39,620 $ 35,247 $ 25,396
Accrued compensation.......................... 5,335 6,514 4,876
Taxes, other than income taxes................ 7,372 5,482 4,781
Deferred income taxes......................... 4,642 4,642 3,356
Other accrued expenses........................ 13,851 19,764 12,805
Current portion of long-term debt............. 6,216 6,089 2,560
-------- -------- --------
Total current liabilities.................... 77,036 77,738 53,774
Long-term debt................................. 139,830 141,835 141,356
Deferred income taxes.......................... 13,767 13,767 15,658
Other liabilities.............................. 20,147 21,449 13,937
-------- -------- --------
Total liabilities............................ 250,780 254,789 224,725
Stockholders' Equity
Preferred stock, $.01 par value; 10,000 shares
authorized
Class A common stock, $.01 par value;
1,000,000 shares authorized; 696,700 shares
issued and outstanding at July 30, 1995 and
July 31, 1994; 705,697 shares issued and
outstanding at January 14, 1996.............. 7 7 7
Class B common stock, $.01 par value; 500,000
shares authorized; 303,300 shares issued and
outstanding.................................. 3 3 3
Additional paid-in capital.................... 11,036 10,936 10,936
Retained earnings (deficit)................... (1,790) (13) (359)
-------- -------- --------
Total stockholders' equity................... 9,256 10,933 10,587
-------- -------- --------
$260,036 $265,722 $235,312
======== ======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
--------------------------------------------------- -----------------------------
24 WEEKS 24 WEEKS PERIOD FROM PERIOD FROM
ENDED ENDED JUNE 29, 1994 AUGUST 2, 1993
JANUARY 14, JANUARY 15, YEAR ENDED TO TO YEAR ENDED
1996 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
----------- ----------- ------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Sales................... $ 276,507 $ 286,245 $ 594,019 $ 48,411 $551,681 $605,132
Cost of sales........... 200,100 212,579 432,067 35,476 413,696 454,672
--------- --------- --------- --------- -------- --------
Gross profit............ 76,407 73,666 161,952 12,935 137,985 150,460
Operating, selling,
general, and
administrative
expenses............... 63,596 60,832 133,242 10,828 117,350 147,472
Litigation settlement... (1,866) (1,866)
Depreciation and
amortization........... 6,010 4,566 10,855 959 8,022 9,461
--------- --------- --------- --------- -------- --------
Operating income (loss). 6,801 10,134 19,721 1,148 12,613 (6,473)
Interest expense:
Interest expense,
excluding amortization
of deferred financing
costs................. 8,136 7,508 17,797 1,422 6,219 6,364
Amortization of
deferred financing
costs................. 442 407 923 83 134 182
--------- --------- --------- --------- -------- --------
8,578 7,915 18,720 1,505 6,353 6,546
--------- --------- --------- --------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (1,777) 2,219 1,001 (357) 6,260 (13,019)
Income taxes (benefit).. 1,360 655 2 2,492 (4,822)
--------- --------- --------- --------- -------- --------
Income (loss) before
extraordinary item..... (1,777) 859 346 (359) 3,768 (8,197)
Extraordinary item:
Loss on extinguishment
of debt, net of $413
income tax benefit.... (628)
--------- --------- --------- --------- -------- --------
Net income (loss)....... $ (1,777) $ 859 $ 346 $ (359) $ 3,140 $ (8,197)
========= ========= ========= ========= ======== ========
Income (loss) per share:
Income (loss) before
extraordinary item.... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,716 $ (8,084)
Extraordinary item..... (619)
--------- --------- --------- --------- -------- --------
Income (loss).......... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,097 $ (8,084)
========= ========= ========= ========= ======== ========
Weighted average common
shares outstanding..... 1,002,196 1,000,000 1,000,000 1,000,000 1,014 1,014
========= ========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-19
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------- ------------- ADDITIONAL RETAINED TOTAL
PAR PAR PAID-IN EARNINGS STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) EQUITY
------- ----- ------- ----- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
THE COMPANY
BALANCE AT JUNE 29, 1994
(INCEPTION)
Sale of common stock... 696,700 $7 303,300 $ 3 $10,936 $ 0 $10,946
Net loss............... (359) (359)
------- --- ------- --- ------- ------- -------
BALANCE AT JULY 31,
1994................... 696,700 7 303,300 3 10,936 (359) 10,587
Net income............. 346 346
------- --- ------- --- ------- ------- -------
BALANCE AT JULY 30,
1995................... 696,700 7 303,300 3 10,936 (13) 10,933
Sale of common stock... 8,997 100 100
Net loss (unaudited)... (1,777) (1,777)
------- --- ------- --- ------- ------- -------
BALANCE AT JANUARY 14,
1996................... 705,697 $ 7 303,300 $ 3 $11,036 $(1,790) $ 9,256
======= === ======= === ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
------------- ADDITIONAL RETAINED TOTAL
PAR PAID-IN EARNINGS STOCKHOLDERS'
SHARES VALUE CAPITAL (DEFICIT) EQUITY
------ ----- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
BALANCE AT AUGUST 2, 1992...... 1,014 $ 1 $126,420 $ 2,260 $128,681
Net loss...................... (8,197) (8,197)
----- ---- -------- ------- --------
BALANCE AT AUGUST 1, 1993...... 1,014 1 126,420 (5,937) 120,484
Purchase of common stock...... (284) (27,823) (27,823)
Net income.................... 3,140 3,140
----- ---- -------- ------- --------
BALANCE AT JUNE 29, 1994
(pre-acquisition)............. 730 1 98,597 (2,797) 95,801
Cancellation of Predecessor
equity....................... (730) (1) (98,597) 2,797 (95,801)
----- ---- -------- ------- --------
BALANCE AT JUNE 29, 1994
(post-acquisition)............ -- $-- $ -- $ -- $ --
===== ==== ======== ======= ========
</TABLE>
See accompanying notes.
F-20
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
---------------------------------------------------------------- -------------------------------
PERIOD FROM PERIOD FROM
24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 AUGUST 2, 1993 YEAR ENDED
JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 TO JULY 31, 1994 TO JUNE 28, 1994 AUGUST 1, 1993
---------------- ---------------- ------------- ---------------- ---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash provided (used) by
operating activities:
Net income (loss)....... $(1,777) $ 859 $ 346 $ (359) $3,140 $(8,197)
Adjustments to reconcile
net income (loss) to
net cash provided
by operating
activities:
Depreciation and amor-
tization............. 6,010 4,566 10,855 959 8,286 9,461
Amortization of de-
ferred
financing costs and
discount on long-term
debt................. 489 454 1,025 92 1,236 587
LIFO provision........ 359 359 325 270 228 708
Deferred income taxes. 81 374 26 3,172 (6,825)
Accreted interest on
debentures........... 1,085 973 2,136 195
Loss (gain) on
disposals of assets.. (344) (69) 590 (88)
Loss on partnership
liquidation.......... 8,900
Litigation settle-
ments................ (1,866) (1,866) 13,805
Adjust rentals to
straight-line........ 75 (220) (169) 75 51 (904)
Changes in operating
assets and
liabilities, net of
acquisition
adjustments:
Accounts and notes
receivable......... (1,599) (709) 184 (340) (225) (413)
Inventories, net of
LIFO............... (1,610) (9,385) (4,514) 4,147 (5,953) (504)
Prepaid expenses.... (360) (494) (2,067) 400 (354) (919)
Refundable income
taxes.............. 576 546 (1,925) (24) (157) (410)
Other assets........ 2 54 165
Accounts payable.... 4,373 7,170 9,851 (4,261) (1,340) 2,315
Accrued expenses and
other liabilities.. (6,504) 4,022 3,938 (33) 285 (299)
Income taxes pay-
able............... 733 (775)
------- ------ ------- ------ ------ -------
Net cash provided by
operating
activities............. $ 1,117 $7,089 $18,151 $1,078 $9,013 $16,607
======= ====== ======= ====== ====== =======
</TABLE>
See accompanying notes.
F-21
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
----------------------------------------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
---------------- ---------------- ------------- ----------------- ----------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash provided (used) by
investing activities:
Purchase of property
and equipment....... $(18,714) $(6,192) $(22,855) $ (271) $ (3,729) $(16,233)
Proceeds from sale of
assets.............. 7,656 681 8,464 4 6,074 13,745
Deferred gain on sale
of real estate...... 1,877
Payments for other
assets.............. (1,334) (1,183) (392) (35) (375)
Repayment of notes
receivable.......... 37 1,625 5,811 3,871 538
Advances to
partnerships........ (169) (1,901)
-------- ------- -------- ------- -------- --------
Net cash provided
(used) by investing
activities............ (12,355) (5,069) (8,972) (267) 7,889 (4,226)
-------- ------- -------- ------- -------- --------
Cash provided (used) by
financing activities:
Proceeds from
borrowings.......... 6,500 10,601
Principal payments on
borrowings.......... (3,010) (1,863) (3,178) (108) (19,303) (20,712)
Payments of debt
issuance costs...... (166) (317) (915) (226)
Proceeds from sale of
stock............... 100
Proceeds from
acquisition
financing, net...... 8,401
Payment of
acquisition costs... (2,947)
Purchase of preferred
stock from
affiliate........... (585)
-------- ------- -------- ------- -------- --------
Net cash provided
(used) by financing
activities............ (2,910) (2,029) (3,495) 4,431 (13,388) (10,337)
-------- ------- -------- ------- -------- --------
Increase (decrease) in
cash and short- term
investments........... (14,148) (9) 5,684 5,242 3,514 2,044
Cash and short-term
investments, beginning
of period............. 25,653 19,969 19,969 14,727 11,213 9,169
-------- ------- -------- ------- -------- --------
Cash and short-term
investments, end of
period................ $ 11,505 $19,960 $ 25,653 $19,969 $ 14,727 $ 11,213
======== ======= ======== ======= ======== ========
Supplemental cash flow
disclosures:
Interest paid......... $ 7,518 $ 5,811 $ 14,299 $ 1,025 $ 7,232 $ 5,959
Income taxes paid..... 2,643 573 3,198
Income tax refunds
received............. 576 1,958 1,578 11
Non-cash investing and
financing activities:
Capital lease
obligations entered
into................ $10,889 $ 4,948 $ 10,933 $ 4,929
Notes receivable
obtained through
sales of property
and equipment....... 11,126
Assets transferred to
affiliate in
exchange for
preferred stock..... 27,238
Notes receivable
obtained in exchange
for preferred stock. 27,823
Common stock acquired
from cancellation of
note receivable..... 27,823
</TABLE>
See accompanying notes.
F-22
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Smitty's
Supermarkets, Inc. (the "Company") and its wholly-owned subsidiaries. All
intercompany transactions and accounts are eliminated in consolidation. The
Company is a partner in a real estate development partnership which is being
accounted for under the equity method.
Statement Presentation
On June 29, 1994, the Company acquired Smitty's Super Valu, Inc. (the
"Predecessor"). The financial statements for both the Company and the
Predecessor are included herein.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest the last day of July.
The 1995, 1994 and 1993 fiscal years consisted of 52 weeks each.
Interim Financial Statements
The consolidated balance sheet of the Company as of January 14, 1996 and the
consolidated statements of operations and cash flows for the interim periods
ended January 14, 1996 and January 15, 1995 are unaudited, but include all
adjustments (consisting of only normal recurring accruals) which the Company
considers necessary for a fair presentation of its consolidated financial
position, results of operations and cash flows for these periods. These
interim financial statements do not include all disclosures required by
generally accepted accounting principles, and, therefore, should be read in
conjunction with the Company's financial statements and notes thereto included
herein. Results of operations for interim periods are not necessarily
indicative of the results for a full fiscal year.
Short-Term Investments
Short-term investments consist of highly liquid investments with original
maturities of three months or less. The Company considers such investments to
be cash equivalents for purposes of determining cash flow.
Inventories
Merchandise inventories are valued at LIFO (last-in, first-out) cost, which
is lower than market, for about 95% of the total inventory, and at the lower
of FIFO (first-in, first-out) cost or market for the balance of the inventory.
Property and Equipment
Owned property and equipment are stated at cost and capital lease assets are
stated at the present value of future rentals, less accumulated depreciation
and amortization.
Maintenance and repairs are charged against operations in the year incurred
and major additions to property and equipment are capitalized.
Depreciation and amortization are computed by the straight-line method based
upon the following lives:
<TABLE>
<S> <C>
Buildings and improvements................................. 40 years
Store fixtures and equipment............................... 10 years
Transportation equipment................................... 6 to 12 years
Leasehold improvements, capital leases and beneficial
leaseholds................................................ Term of lease
</TABLE>
F-23
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
acquired assets, less accumulated amortization. Goodwill is amortized on the
straight-line method over forty years. It is the Company's policy to
periodically review and evaluate the recoverability of the acquired
intangibles by assessing current and future profitability and cash flows and
to determine whether the amortization of the balance over its remaining life
can be recovered through expected future results and cash flows.
Deferred Charges
Deferred debt issuance costs are amortized using the interest method.
Property Held for Sale
Property held for sale is comprised of several undeveloped properties and is
valued at the lower of cost or estimated net realizable value.
Self-Insurance
The Company self-insures, with certain stop loss insurance coverage, for
workers' compensation, non-union employee health care and general liability
claims. Claims expense is recorded in the year of occurrence through the
accrual of claim reserves based on estimates of ultimate claims costs and
settlement expenses discounted at a rate of 8%.
Pre-opening and Remodel Costs
All costs associated with store openings and promotional costs associated
with major store remodels are charged to operations ratably over the twelve
months following store openings and remodel completion dates, respectively.
Income Taxes
Effective August 2, 1993, the Predecessor adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
the provisions of SFAS 109, deferred tax assets and liabilities are recognized
for the expected future tax consequences of events that have been included in
the financial statements or income tax returns. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the presentation in the 1995 financial statements.
2. BUSINESS ACQUISITION
On June 29, 1994, the Company acquired the Predecessor for $24,768 net of
transaction costs and the repayment or assumption of certain liabilities (the
"Acquisition").
The Acquisition has been accounted for by the purchase method. Accordingly,
the costs of the Acquisition were allocated to the assets acquired and
liabilities assumed based upon their respective fair values. The
F-24
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
allocation of the purchase price was finalized during 1995. Because of the
effects of the Acquisition, the consolidated financial statements of the
Company are not comparable to the consolidated financial statements of the
Predecessor.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $ 218,046
Fair value of liabilities assumed.............................. (226,094)
Excess costs over acquired net assets.......................... 32,816
---------
Total purchase price........................................... $ 24,768
=========
</TABLE>
In connection with the Acquisition on April 28, 1994, the Predecessor paid
$585 and transferred property and equipment and property held for sale with a
net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly-
owned subsidiary of the Predecessor's former sole shareholder, Steinberg
International, Inc. ("International"), in exchange for Holdings' preferred
stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased
certain shares of its common stock from International in consideration of a
$27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior
to the Acquisition, the Company transferred Holdings' preferred stock to
International in consideration of the repayment of the promissory note.
3. CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of short-term investments and receivables.
The Company's short-term investments are in high quality securities placed
with major banks and financial institutions. The Company's investment policy
limits its exposure to concentrations of credit risk.
The Company's receivables result primarily from vendor rebates and
allowances, and redemption of manufacturer coupons. The vendor rebates and
allowances reflect a broad base, while the coupons are concentrated with one
processor. As a consequence, concentrations of credit risk are limited. The
Company routinely assesses the financial strength of its vendors and coupon
processor.
4. INVENTORIES
If inventories had been valued using the FIFO method, inventories would have
been higher (lower) and gross profit and operating income would have been
greater as follows:
<TABLE>
<CAPTION>
GROSS
PROFIT AND
OPERATING
INVENTORIES INCOME
----------- ----------
<S> <C> <C>
THE COMPANY
July 30, 1995 and the year then ended............... $(4,370) $325
July 31, 1994 and the period from June 29, 1994to
July 31, 1994...................................... $(4,695) $270
PREDECESSOR
June 28, 1994 and the period from August 2, 1993to
June 28, 1994...................................... $ 4,776 $228
August 1, 1993 and the year then ended.............. $ 4,548 $708
</TABLE>
F-25
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
5. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases consist of
the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Land and improvements........................ $ 19,861 $ 24,332
Buildings and improvements................... 76,528 69,748
Store fixtures and equipment................. 32,163 16,697
Beneficial leaseholds........................ 9,233 9,233
-------- --------
137,785 120,010
Less accumulated depreciation and amortiza-
tion........................................ (9,496) (792)
-------- --------
$128,289 $119,218
======== ========
</TABLE>
Included in property and equipment above are assets recorded under capital
leases consisting of the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Land and improvements......................... $ 1,358 $ 1,358
Buildings and improvements.................... 21,211 21,296
Store fixtures and equipment.................. 4,948
Beneficial leaseholds......................... 9,233 9,233
------- -------
36,750 31,887
Less accumulated amortization................. (1,982) (165)
------- -------
$34,768 $31,722
======= =======
</TABLE>
At July 31, 1994, store fixtures and equipment and accumulated depreciation
and amortization includes $1,295 and $28, respectively, relating to subleased
equipment. At July 30, 1995 there were no store fixtures and equipment
subleased.
Depreciation expense relating to property and equipment are as follows:
<TABLE>
<S> <C>
THE COMPANY
Year ended July 30, 1995.......................................... $9,432
Period from June 29, 1994 to July 31, 1994........................ $ 792
PREDECESSOR
Period from August 2, 1993 to June 28, 1994....................... $7,324
Year ended August 1, 1993......................................... $8,261
</TABLE>
F-26
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Term loan payable to banks, interest at LIBOR rate
plus 2%, 8% at July 30, 1995, maturities to 1999. $ 37,382 $ 40,000
Senior subordinated notes, 12 3/4% interest, net
of debt discount of $496 and $552, respectively,
due 2004......................................... 49,504 49,448
Senior discount debentures, 13 3/4% interest, net
of debt discount of $506 and $552, respectively,
due 2006......................................... 16,819 14,637
Sinking fund bonds, 10 1/2% interest, semi-annual
maturities to 2016............................... 12,123 12,198
Mortgage notes payable, repaid in 1995............ 77
Capital lease obligations......................... 32,096 27,556
-------- --------
147,924 143,916
Less current portion.............................. (6,089) (2,560)
-------- --------
$141,835 $141,356
======== ========
</TABLE>
In July, 1994, the Company's subsidiary entered into a Credit Agreement
whereby the lender agreed to provide a $40,000 Term Loan Facility (the "Term
Loan") and a $20,000 Revolving Credit Facility (the "Revolving Loan"). At July
30, 1995, $37,382 was outstanding under the term loan and $1,640 of the
revolving loan was utilized for various outstanding letters of credit. No
compensating balances are required. The interest rate for both facilities is
equal to, at the Company's option, the bank's prime rate plus 0.75% or LIBOR
rate plus 2%.
In connection with the Acquisition described in Note 2, the Company issued
$29,025 Senior Discount Debentures (the "Debentures"). The Debentures are
issued at a discount to their aggregate principal amount and the original
issue discount in the Debenture accretes from the issue date until June 15,
1999. Cash interest will not accrue on the Debentures prior to June 15, 1999.
The Debentures will bear cash interest payable semi-annually in arrears on
June 15 and December 15. The Debentures may be redeemed beginning in 1999 at a
redemption price of 105%. The redemption price declines ratably to 100% in
2004.
The Company's subsidiary issued $50,000 principal amount of Senior
Subordinated Notes (the "Subordinated Notes") in connection with the
Acquisition described in Note 2. The Subordinated Notes bear interest, payable
semi-annually on June 15 and December 15 at an annual rate of 12.75%. The
Subordinated Notes are subordinated to all Senior Indebtedness (as defined) of
the Company's subsidiary, and may be redeemed on or after June 15, 1999 at a
redemption price of 105%. The redemption price declines ratably to 100% in
2000.
Under the most restrictive covenants of the Company's long-term debt
agreements, payments of cash dividends and acquisition of capital stock are
not permitted. Additionally, the agreements require maintenance of specified
ratios.
At July 30, 1995, substantially all of the Company's assets were pledged as
collateral for the Term Loan, the Revolving Loan and the Sinking fund bonds.
F-27
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Maturities of the long-term obligations as of July 30, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 6,089
1997........................................................... 10,194
1998........................................................... 12,169
1999........................................................... 14,282
2000........................................................... 1,755
Thereafter..................................................... 103,435
--------
$147,924
========
</TABLE>
7. LEASES
The Company is a party to a number of non-cancelable lease agreements for
store and warehouse facilities with remaining lease terms ranging from 1 to 25
years and, in certain instances, providing for renewal periods of 5 to 30
years. The Company also subleases store departments, warehouse facilities and
properties with remaining lease terms ranging from 1 to 10 years. At July 30,
1995, future minimum lease payments under capital leases and future minimum
rental payments under operating leases having initial or remaining non-
cancelable terms of more than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUBLEASE
LEASES LEASES RENTALS TOTALS
-------- --------- -------- --------
<S> <C> <C> <C> <C>
1996................................ $ 5,014 $ 10,253 $(1,669) $ 13,598
1997................................ 5,051 9,264 (1,108) 13,207
1998................................ 4,922 7,075 (903) 11,094
1999................................ 4,925 5,442 (861) 9,506
2000................................ 5,024 4,965 (828) 9,161
Thereafter.......................... 64,380 68,570 (2,042) 130,908
-------- -------- ------- --------
89,316 $105,569 $(7,411) $187,474
======== ======= ========
Less amount representing
executory costs.................... (5,658)
Less amount representing interest... (51,562)
--------
$ 32,096
========
</TABLE>
F-28
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Effective September, 1992, the Predecessor entered into an agreement to
lease its restaurant, snack bar/food court and candy departments to Morrison
Incorporated ("Morrison"). The agreement provided for an initial lease term of
ten years and three five-year renewal options. Minimum rentals under the lease
were $2,525 in the first year, $3,500 in the second year, and $4,000 per year
thereafter. In addition, Morrison was obligated to pay electricity and
property taxes for the leased premises. In September, 1994, the Company
resumed its food service operations and sales and costs attributed to such
operations are included in the Company's financial statements for the year
ended July 30, 1995. Results of operations prior to the agreement and
subsequent to September 24, 1994, for these departments are as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------- --------------
YEAR ENDED YEAR ENDED
JULY 30, 1995 AUGUST 1, 1993
------------- --------------
<S> <C> <C>
Sales........................................ $17,753 $2,476
Cost of sales................................ 6,329 933
------- ------
Gross profit................................. 11,424 1,543
Expenses..................................... 10,478 1,351
------- ------
Operating profit............................. $ 946 $ 192
======= ======
</TABLE>
Rental income from Morrison, determined on the basis of the straight-line
amounts of the total rentals during the ten-year lease term, are as follows:
<TABLE>
<S> <C>
THE COMPANY
Year ended July 30, 1995......................................... $2,783
Period from June 29, 1994 to July 31, 1994....................... $ 273
PREDECESSOR
Period from August 2, 1993 to June 28, 1994...................... $3,068
Year ended August 1, 1993........................................ $3,293
</TABLE>
Rent expense for all leases is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Minimum rentals......... $ 7,913 $ 625 $ 6,518 $ 5,169
Contingent rentals:
Capital................ 393 34 318 410
Operating.............. 31 6 34 176
Less sublease.......... (5,229) (471) (5,779) (5,891)
------- ----- ------- -------
$ 3,108 $ 194 $ 1,091 $ (136)
======= ===== ======= =======
</TABLE>
Contingent rental payments are principally determined on the basis of store
sales volume.
F-29
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
8. PENSION AND PROFIT-SHARING PLANS
The Company maintains a profit-sharing/401(k) plan for employees.
Contributions are made to the plan at the discretion of the Company's Board of
Directors. The Company also contributes to a multi-employer defined benefit
union pension plan covering union employees. Contributions to these plans are
as follows:
<TABLE>
<CAPTION>
PROFIT MUTLI-
SHARING EMPLOYER
401(K) PLAN PENSION PLAN
----------- ------------
<S> <C> <C>
THE COMPANY
Year ended July 30, 1995........................ $525 $1,402
Period from June 29, 1994 to July 31, 1994...... $ 38 $ 3
PREDECESSOR
Period from August 2, 1993 to June 28, 1994..... $386 $ 26
Year ended August 1, 1993....................... $360 $ 268
</TABLE>
At September 30, 1993, the date of the most recent actuarial valuation, the
assets of the union pension fund exceeded the liability for vested benefits.
The Company's relative position with the union plan is not determinable.
9. SEVERANCE AND EMPLOYMENT CONTRACT TERMINATION COSTS
During 1993, the Predecessor underwent a reorganization which resulted in
the elimination of various office, store and warehouse positions. The 1993
results of operations include charges of $329 for severance payments and
related benefits for employees whose positions were eliminated.
In February, 1994, the Predecessor and the Predecessor's chairman entered
into an amendment to the chairman's employment contract. Results of operations
for the period from August 2, 1993 to June 28, 1994 include a $2 million
charge for a payment to the chairman under the terms of the amendment.
10. LITIGATION SETTLEMENTS
In November, 1993, the Predecessor agreed to a settlement of a lawsuit in
which an adverse jury verdict had been rendered. Under the terms of the
settlement agreement, the Predecessor agreed to pay $4.75 million cash and
issue a $6.25 million two-year mortgage note. Fiscal 1993 results of
operations include an $11 million charge for the settlement, plus a $1.8
million charge for the Predecessor's litigation costs incurred in fiscal 1993
and expected to be incurred in fiscal 1994. The Predecessor used the proceeds
from a four-year term loan payable to bank to finance the cash payment. Also
in November, 1993, the Predecessor reached a settlement of a lawsuit filed by
a former supplier providing for a $500 cash payment and a $500 one-year
mortgage note. Fiscal 1993 results of operations include a $1 million charge
for this settlement. Both mortgage notes were repaid on June 29, 1994.
In October, 1993, the Predecessor was served with proceedings in Maricopa
County, Arizona Superior Court instituted by Morrison seeking rescission of
the 1992 lease agreement and damages of not less than $3,000. In August, 1994,
the Company settled its litigation with Morrison. The settlement provided for
the cancellation of the lease agreement on September 25, 1994, in
consideration for which Morrison paid the Company $2.6 million and transferred
title to all of its inventories and fixtures and equipment in the restaurant,
snack bar/food court and candy departments.
F-30
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
11. STEINBERG REORGANIZATION
In May, 1992, International's sole shareholder Steinberg, Inc. ("Steinberg")
filed for protection under Section C-36 of the CCAA. During the period from
June 29, 1994 to July 31, 1994, the period from August 2, 1993 to June 28,
1994 and fiscal 1993, the Predecessor incurred $50, $635 and $631,
respectively, of costs arising from the filing by Steinberg for protection
under Section C-36 of the CCAA and the subsequent reorganization of Steinberg.
In connection with the Acquisition, on April 28, 1994, the Predecessor paid
$585 and transferred property and equipment and property held for sale with a
net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly-
owned subsidiary of the Predecessor's former sole shareholder, Steinberg
International, Inc. ("International"), in exchange for Holdings' preferred
stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased
certain shares of its common stock from International in consideration of a
$27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior
to the Acquisition, the Predecessor transferred Holdings preferred stock to
International in consideration of the repayment of the promissory note.
12. LOSS ON PARTNERSHIP LIQUIDATION
A real estate development partnership in which the Predecessor was a partner
was liquidated in July, 1993. In connection with this liquidation, the
Predecessor obtained ownership of an operating shopping center property and an
undeveloped shopping center property in exchange for the forgiveness of notes
and accrued interest receivable from the partnership and its managing partner.
Fiscal 1993 results of operations include a $8,900 charge representing the
difference between the current value of the properties and the carrying value
of the notes and accrued interest receivable. The properties were transferred
to Holdings on April 28, 1994.
13. INCOME TAXES
In February, 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"), which supersedes Statement of Financial Accounting Standards No. 96
with the same title ("SFAS 96"). SFAS 96 was never adopted by the Predecessor.
The Predecessor adopted the provisions of SFAS 109 on August 2, 1993 and
elected not to restate prior year financial statements. The effect from prior
years of adopting SFAS 109 as of August 2, 1993 was not material.
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Current........ $281 $(24) $(1,093) $ 2,003
Deferred....... 374 26 3,172 (6,825)
---- ---- ------- -------
$655 $ 2 $ 2,079 $(4,822)
==== ==== ======= =======
</TABLE>
The provision for income taxes for the period from August 2, 1993 to June
28, 1994 is net of $413 income tax benefit relating to the loss on
extinguishment of debt.
F-31
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
A reconciliation of the provision (benefit) for income taxes and the amount
that would be computed using statutory federal income tax rates on income
before income taxes is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Income taxes computed at
statutory federal
income tax rates....... $ 340 $(121) $1,774 $(4,426)
State income taxes...... 56 (9) 293 (684)
Amortization of
intangible assets...... 298 16 (104) 259
Deduction of tax
goodwill............... (425)
Amortization of discount
on capital lease
obligations............ 77 70
Increase in valuation
allowance.............. 336
Other................... 50 116 39 (41)
----- ----- ------ -------
$ 655 $ 2 $2,079 $(4,822)
===== ===== ====== =======
</TABLE>
At July 30, 1995 the Company had minimum tax credit and general business
credit carryovers for tax purposes of $2,956 and $488, respectively. Upon
recognition, the minimum tax credit carryover will be credited to the
valuation allowance.
The income tax effects of loss carryforwards, tax credit carryforwards and
temporary differences between financial and income tax reporting that give
rise to the deferred income tax assets and liabilities under the provisions of
SFAS 109 are as follows:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................ $ 649 $ 547
Inventories........................................ 298 332
Other assets....................................... 59 59
Accrued liabilities................................ 15,145 9,425
Capital Leases..................................... 2,313
Net operating loss carryovers and credits.......... 11,515 12,587
-------- --------
Gross deferred tax assets......................... 29,979 22,950
Valuation allowance............................... (29,979) (19,998)
-------- --------
Net deferred tax assets........................... 2,952
-------- --------
Deferred tax liabilities:
Inventories........................................ (4,642) (4,686)
Property and equipment............................. (13,767) (16,922)
Other assets....................................... (358)
-------- --------
Gross deferred tax liability...................... (18,409) (21,966)
-------- --------
Net deferred tax liability........................ $(18,409) $(19,014)
======== ========
</TABLE>
The changes in deferred tax assets and liabilities during 1995 primarily
resulted from the Company's finalization of the allocation of the Acquisition
purchase price. See Note 2.
F-32
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
14. FAIR VALUE OF INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short Term Investments
The carrying amount approximates fair value because of the short maturity of
these instruments.
Accounts and Notes Receivable
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on quoted
market prices or if market prices are not available, the present value of the
underlying cash flows discounted at the Company's incremental borrowing rates.
The carrying amounts and fair values of the Company's significant financial
instruments at July 30, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Cash and short-term investments................ $25,653 $25,653
Accounts and Notes receivable.................. 7,700 7,700
Long-term debt................................. 147,924 143,888
</TABLE>
15. CONTINGENCIES
The Company or its subsidiaries are defendants in a number of cases
currently in litigation or potential claims encountered in the ordinary course
of business which are being vigorously defended. The Company believes that the
ultimate resolution of these matters will not have a material adverse effect
on the financial position of the Company.
16. RELATED PARTY TRANSACTIONS
The Company has a five-year consulting agreement with an affiliated company,
effective June 29, 1994 for management services. The agreement is
automatically renewed on January 1 of each year for a five-year term unless
ninety (90) days' notice is given by either party. The contract provides for
annual management fees in an amount equal to one-tenth of one percent of
consolidated sales of the Company and advisory fees for acquisition and
financing transactions.
Fees paid for management services were $600 and $50 for fiscal years ended
July 30, 1995 and the period from June 29, 1994 to July 31, 1994,
respectively. Advisory fees paid or accrued for financing transactions are
capitalized and amortized over the term of the related financing. In
connection with the Acquisition, capitalized fees of $3 million were paid to
this affiliated company in fiscal 1994 for acquisition services.
F-33
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(THOUSANDS OF DOLLARS)
17. OTHER INCOME (EXPENSE)--NET
The components of other income (expense) included in operating, selling,
general and administration expense are as follows:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Gain (loss) on real
estate disposals....... $(2,173) $ 41
Steinberg reorganization
costs.................. $(50) (635) (631)
Loss on partnership
liquidation............ (8,900)
Litigation settlements.. $1,866 (13,805)
Other................... 387
------ ---- ------- --------
$1,866 $(50) $(2,808) $(22,908)
====== ==== ======= ========
</TABLE>
18. SUBSEQUENT EVENT
On January 29, 1996, the Company entered into a definitive Recapitalization
Agreement and Plan of Merger (the "Recapitalization Agreement") by and among
Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's"), Cactus
Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of
Smith's ("Acquisition"), the Company and The Yucaipa Companies, a California
general partnership, pursuant to which Acquisition will be merged with and
into the Company (the "Merger"), subject to the satisfaction or waiver of
various conditions. The Company, as the surviving corporation in the Merger,
will become a wholly owned subsidiary of Smith's. Consummation of the Merger
is subject to various conditions, including the receipt of regulatory
approvals and other necessary consents, receipt of financing and consummation
of the Recapitalization described below.
Upon effectiveness of the Merger, each share of common stock of the Company,
without distinction as to class, will be exchanged for 3.011803 shares of
Smith's Class B Common Stock, par value $.01 per share, subject to adjustment
under certain circumstances. This represents an aggregate of 3,038,888 shares
of Smith's Class B Common Stock issuable as consideration in the Merger.
Pursuant to the Recapitalization Agreement, on the closing date of the
Merger, Smith's shall assume, repay, or cause to be repaid, all outstanding
principal and interest, and other amounts payable, under the 12 3/4% Senior
Subordinated Notes due 2004 of Smitty's Super Valu, Inc., a wholly owned
subsidiary of the Company, the 13 3/4% Senior Discount Debentures due 2006 of
the Company, and the Company's existing credit facility with The Chase
Manhattan Bank, N.A.
Pursuant to the Recapitalization Agreement, Smith's will, subject to various
conditions, commence a tender offer to purchase 50% of its outstanding Class A
and Class B Common Stock; issue an aggregate of approximately $650 million of
new senior and senior subordinated notes and approximately $75 million of new
preferred stock; borrow approximately $700 million under a new $845 million
bank credit facility; repay certain existing indebtedness and engage in
certain other recapitalization transactions (collectively, the
"Recapitalization") concurrently with the Merger. Smith's will also use its
reasonable efforts to cause Ronald W. Burkle, the Chairman of the Board of the
Company, to be elected Chief Executive Officer of Smith's upon the
consummation of the Merger and the Recapitalization.
F-34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... i
Summary................................................................... 1
Risk Factors.............................................................. 13
Pro Forma Capitalization.................................................. 18
Unaudited Pro Forma Combined Financial Statements......................... 19
Selected Historical Financial Data of Smith's............................. 27
Selected Historical Financial Data of
Smitty's................................................................. 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 39
Management................................................................ 49
Principal Stockholders.................................................... 52
Certain Relationships and Related Transactions............................ 54
Description of Notes...................................................... 59
Description of Capital Stock.............................................. 89
Description of New Credit Facility........................................ 93
Underwriting.............................................................. 96
Legal Matters............................................................. 97
Experts................................................................... 97
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-----------------
PROSPECTUS
-----------------
[LOGO OF SMITH'S FOOD & DRUG CENTER, INC.]
SMITH'S FOOD & DRUG
CENTERS, INC.
$250,000,000 % SENIOR NOTES DUE 2006
$400,000,000 % SENIOR SUBORDINATED NOTES DUE 2007
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 17, 1996
PROSPECTUS
[LOGO OF SMITH'S FOOD & DRUG CENTER, INC.]
SMITH'S FOOD & DRUG CENTERS, INC.
750,000 SHARES
% CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
-----------
Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's" or the
"Company"), is offering 750,000 shares of Cumulative Redeemable Exchangeable
Preferred Stock, par value $.01 per share (the "New Preferred Stock"), as part
of the financing required to consummate the Recapitalization (as defined) of
Smith's and the Merger (as defined) of Smitty's Supermarkets, Inc., a Delaware
corporation ("Smitty's"), with a subsidiary of Smith's. Concurrently with this
offering, the Company is offering (the "Notes Offering," and together with this
offering, the "Offerings") $250,000,000 aggregate principal amount of its %
Senior Notes due 2006 (the "Senior Notes") and $400,000,000 aggregate principal
amount of its % Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes," and together with the Senior Notes, the "Notes"). Consummation of each
of the Offerings is conditioned upon the closing of the Merger and the
Recapitalization.
Dividends on the New Preferred Stock will accrue from , 1996 and will be
payable quarterly, commencing on , 1996, at the rate per annum of % of
the then effective liquidation preference per share. The Company, at its
option, may pay dividends on any dividend payment date occurring on or before
, 2001 by adding such dividends to the then effective liquidation
preference of the New Preferred Stock. The initial liquidation preference of
each share of the New Preferred Stock will be $ per share. The New Preferred
Stock will be, subject to certain conditions, redeemable, at the option of the
Company, in whole at any time or in part from time to time on or after ,
2001 at the redemption prices set forth herein, plus, without duplication,
accrued and unpaid dividends to the date of redemption. In addition, on or
prior to , 1999, the Company may, at its option and subject to certain
conditions, use the Net Cash Proceeds (as defined) of one or more Public Equity
Offerings (as defined) to redeem up to an aggregate of 35% of the shares of New
Preferred Stock originally issued at a redemption price equal to % of the
effective liquidation price thereof, plus, without duplication, accrued and
unpaid dividends to the date of redemption. The Company is required, subject to
certain conditions,
(continued on next page)
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- ------------------------------------------------------------------------------
Total...................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from date of original issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses of the Offerings payable by the Company,
estimated at $ .
-----------
The shares of New Preferred Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the New Preferred Stock will be made on or about , 1996, at the
offices of BT Securities Corporation, One Bankers Trust Plaza, New York, New
York.
-----------
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
-----------
The date of this Prospectus is , 1996.
<PAGE>
(continued from previous page)
to redeem all of the shares of New Preferred Stock outstanding on , 2008
at a redemption price equal to 100% of the then effective liquidation
preference thereof, plus, without duplication, 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,
accrued and unpaid dividends to the date of purchase.
Subject to certain conditions, the New Preferred Stock is 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 "Exchange Debentures"). Interest on the Exchange Debentures will
be payable at a rate of % per annum and will accrue from the date of
issuance thereof. Interest on the Exchange Debentures will be payable semi-
annually on and , in cash or, at the option of the Company, on or
prior to , 2001, in additional Exchange Debentures, commencing on the
first such date after the exchange of the Exchange Debentures for the New
Preferred Stock. The Exchange Debentures will mature on , 2008 and are,
subject to certain conditions, redeemable, at the option of the Company, in
whole or in part, on or after , 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. In
addition, on or prior to , 1999, 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 Exchange Debentures originally issued.
The Exchange Debentures will be subordinated to all existing and future
Senior Indebtedness (as defined) of the Company, including the New Credit
Facility (as defined) and the Notes. At December 30, 1995, on a pro forma
basis after giving effect to the Transactions (as defined) and the California
Disposition (as defined), the Company would have had approximately
$913.2 million aggregate principal amount of Senior Indebtedness outstanding.
In addition, the Exchange Debentures will be effectively subordinated to all
existing and future liabilities, including indebtedness, of the subsidiaries
of the Company. At December 30, 1995, on a pro forma basis after giving effect
to the Transactions and the California Disposition, the Company's subsidiaries
would have had indebtedness and other liabilities reflected on the Company's
consolidated balance sheet, including trade payables and accrued expenses (but
excluding guarantees of Senior Indebtedness), of approximately $148.4 million.
The Company does not intend to apply for listing of the Notes, the New
Preferred Stock or the Exchange Debentures on any national securities
exchange. See "Underwriting."
<PAGE>
THE OFFERINGS
THE NEW PREFERRED STOCK:
Securities Offered..........
750,000 shares of % Cumulative Redeemable
Exchangeable Preferred Stock, par value $.01 per
share.
Issue Price................. $ per share plus accrued dividends.
Liquidation Preference...... Initially $ per share. See "Dividends" below.
Optional Redemption.........
The New Preferred Stock is, subject to
contractual and other restrictions, redeemable,
at the option of the Company, in whole at any
time or in part from time to time, on or after
, 2001 at the redemption prices set forth
herein plus, without duplication, accrued and
unpaid dividends to the date of redemption. In
addition, on or prior to , 1999, 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 the New
Preferred Stock originally issued at a redemption
price equal to % of the then effective
liquidation preference thereof, plus, without
duplication, accrued and unpaid dividends to the
date of redemption.
Mandatory Redemption........ The Company is required, subject to certain
conditions, to redeem all of the shares of New
Preferred Stock outstanding on , 2008 at a
redemption price equal to 100% of the then
effective liquidation preference thereof, plus,
without duplication, accrued and unpaid dividends
to the date of redemption.
Dividends...................
At a rate equal to % per annum of the then
effective liquidation preference per share,
cumulative and, when declared, payable quarterly
beginning , 1996 and accumulating from the
date of issuance of the New Preferred Stock. The
Company, at its option, may pay dividends on any
dividend payment date occurring on or before
, 2001 by adding 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.
Dividend Payment Dates......
, , and , commencing on ,
1996.
Voting......................
The New Preferred Stock will be non-voting,
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 creation,
authorization or issuance of any class of equity
securities that ranks on parity with or senior to
the New Preferred Stock.
Exchange Provisions......... The New Preferred Stock is exchangeable into the
Exchange Debentures, at the Company's option,
subject to certain conditions, in whole, but not
in part, on any scheduled dividend payment date.
P-7
<PAGE>
Ranking..................... The New Preferred Stock, will, with respect to
dividend rights and rights on liquidation,
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 issued by the Company after
the Offerings 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 of the Company and each
other class of capital stock or series of
preferred stock issued by the Company after the
Offerings, 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 Offerings the
terms of which specifically provide that such
series will rank senior to the New Preferred
Stock.
Change of Control........... In the event of a Change of Control, the Company
will, subject to certain conditions, offer to
purchase all outstanding New Preferred Stock at a
purchase price of 101% of the then effective
liquidation preference thereof, plus, without
duplication, accrued and unpaid dividends to the
date of repurchase. The New Credit Facility and
the indentures governing the 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.
Use of Proceeds............. The net proceeds of this offering will be used to
provide a portion of the funds necessary to
consummate the Transactions.
THE EXCHANGE DEBENTURES:
Issue.......................
Up to $ of % Subordinated Exchange
Debentures due 2008, issuable in exchange for the
New Preferred Stock in an aggregate principal
amount equal to the then effective liquidation
preference of the New Preferred Stock on the date
fixed for the exchange thereof (including any and
all accrued and unpaid dividends whether or not
added to the liquidation preference since the
issue date). The New Credit Facility will
prohibit the Company from issuing the Exchange
Debentures and the indentures governing the Notes
will permit such issuance only to the extent that
the indebtedness resulting from such issuance
could otherwise be incurred under such
indentures.
Maturity.................... , 2008.
Interest Rate and Payment
Dates....................... The Exchange Debentures will bear interest at a
rate of % per annum. Interest will accrue from
the date of issuance and will be payable, on
and of each year, commencing with the first
such date to occur after issuance, in cash or, at
the option of the Company, on or before 2001, in
additional Exchange Debentures.
P-8
<PAGE>
Optional Redemption......... The Exchange Debentures are, subject to
contractual and other restrictions, redeemable,
at the option of the Company, in whole at any
time or in part from time to time on or after
, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest to the
date of redemption. In addition, on or prior to
, 1999, 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 Exchange Debentures
originally issued, at a redemption price equal to
% of the principal amount thereof plus accrued
and unpaid interest, if any, to the redemption
date.
Ranking..................... The Exchange Debentures will be subordinated to
all existing and future Senior Indebtedness of
the Company, including the New Credit Facility
and the Notes. At December 30, 1995 on a pro
forma basis after giving effect to the
Transactions and the California Disposition, the
Company would have had approximately
$913.2 million aggregate principal amount of
Senior Indebtedness outstanding.
In addition, the Exchange Debentures will be
effectively subordinated to all existing and
future liabilities, including indebtedness, of
the subsidiaries of the Company. At December 30,
1995 on a pro forma basis after giving effect to
the Transactions, the Company's subsidiaries
would have had indebtedness and other liabilities
reflected on the Company's consolidated balance
sheet, including trade payables and accrued
expenses (excluding guarantees of Senior
Indebtedness), of approximately $148.4 million.
Change of Control........... In the event of a Change of Control, the Company
will, subject to certain conditions, offer to
purchase all outstanding 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 Notes will prohibit the
Company from making an offer to purchase the
Exchange Debentures in the event of a Change of
Control unless such other indebtedness has been
previously repaid or amended to permit such offer
to purchase.
CONCURRENT OFFERINGS:
Senior Notes and Senior
Subordinated Notes.......... Concurrently with the offering of New Preferred
Stock, the Company is offering $250,000,000
aggregate principal amount of % Senior Notes due
2006 and $400,000,000 aggregate principal amount
of % Senior Subordinated Notes due 2007. The
Offerings are conditioned upon each other. In
addition, the consummation of each of the
Offerings is a condition to the Company's
simultaneous obligation to consummate the Merger
and the Recapitalization. See "Summary--The
Transactions."
The Company does not intend to list any of the Securities (as defined) on any
national securities exchange. See "Underwriting."
P-9
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth summary historical financial data of Smith's
for the five fiscal years ended December 30, 1995, which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Smith's and related notes thereto included
elsewhere in this Prospectus.
<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
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
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 ex-
penses................ 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization.............. 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)
Ratio of earnings to
fixed charges
and preferred stock
dividends (b)......... 3.02x 3.06x 2.55x 2.18x --
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 (c)......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period (d)............ 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
EBITDA (as defined)
(e)................... $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin (f)...... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included elsewhere
herein.
(b) For purposes of computing 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). 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 include non-cash charges
of $105.4 million, primarily consisting of depreciation and amortization,
and restructuring charges of $140.0 million.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of a
company's ability to service debt. However, EBITDA should not be construed
as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of Smith's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
For additional information concerning the Company's historical cash flows,
see "Selected Historical Financial Data of Smith's" and the Consolidated
Statements of Cash Flows included elsewhere herein.
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
P-12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
the securities being sold in the Offerings.
LEVERAGE AND DEBT SERVICE
Following the consummation of the Transactions, the Company will be highly
leveraged. At December 30, 1995, pro forma for the Transactions and the
California Disposition, 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 Revolving Facility on a pro
forma basis, subject to the borrowing conditions contained therein. In
addition, as of December 30, 1995, after giving effect to the Transactions and
the California Disposition, scheduled payments under net operating leases of
the Company and its subsidiaries for the twelve months following 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 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 Revolving Facility and its other
sources of liquidity (including leases), will be adequate to meet its
anticipated requirements for working capital, capital expenditures, lease
payments, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate cash flow at or
above current levels or that anticipated cost savings or future growth can be
achieved. 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 Transactions and the fact that substantially all of its assets
will be pledged to secure the borrowings under the New Credit Facility and
other secured obligations.
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 and
other agreements relating to the Company's indebtedness and in the Indentures
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, preferred or common 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. Moreover, any default under the documents governing the
indebtedness of the Company could have a significant adverse effect on the
market value of the Notes.
P-13
<PAGE>
The Company's capital structure immediately after the Transactions 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. See
"Description of New Credit Facility." In addition, following the Transactions,
the Company's blended average rates of interest are anticipated to be higher
than the rates of interest on the Company's indebtedness outstanding
immediately prior to the Transactions.
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 Smith's and
Smitty's. The estimates of potential cost savings contained in this Prospectus
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 (principally those set forth in
"Summary--Operating Strategy" and "Business--Operating Strategy") or otherwise
cause the Company's results of operations to be adversely affected in future
periods: (i) continued or increased competitive pressures from existing
competitors and new entrants, including price-cutting strategies; (ii)
unanticipated costs related to the Transactions and the integration strategy;
(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 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 TRANSACTIONS
Upon consummation of the Transactions, 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, (iii)
the purchase of certain management stock options and (iv) the integration of
its Arizona operations 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 would be approximately $220 million (pre-tax).
However, such estimate is based on information available as of the date of
this Prospectus and the actual 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
P-14
<PAGE>
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. See "Business--Competition."
CONTROL OF THE COMPANY
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 Transactions, members
of the Smith Group (as defined) 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 of the Company, representing
approximately 41.8% of the aggregate voting power of the Company's capital
stock, and certain affiliates of Yucaipa will have beneficial ownership of
approximately 13.6% of the total outstanding Common Stock of the Company,
representing approximately 1.3% of the aggregate voting power of the Company's
outstanding capital stock. Pursuant to a standstill agreement (the "Standstill
Agreement") entered into by such Smith family members (the "Smith Group"),
certain affiliates of Yucaipa (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 nominate one director 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 has effective
control of the Company and will effectively be able 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.
See "Certain Relationships and Related Transactions," "Principal Stockholders"
and "Description of Capital Stock."
NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS
Upon consummation of the Transactions, substantially all of the existing
members of the Company's Board of Directors will resign and be replaced by the
new directors identified in this Prospectus. Jeffrey P. Smith will remain as
Chairman of the Board but will resign as Chief Executive Officer of the
Company. Ronald W. Burkle, the managing general partner of Yucaipa, will be
appointed Chief Executive Officer of the Company and Allen R. 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
P-15
<PAGE>
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 "Management" and
"Certain Relationships and Related Transactions."
CONTINGENT LIABILITIES RELATING TO CALIFORNIA DIVESTITURE
In connection with closing stores and otherwise redeploying assets, the
Company has assigned leases and subleased stores and other facilities at
various times, including the sublease to Ralphs of the Company's Riverside,
California distribution center and dairy plant and the assignment or sublease
of 10 stores to various supermarket companies (including 6 to Ralphs) in
connection with the California Divestiture. Since the Company will generally
remain either primarily or secondarily liable for the underlying lease
obligations with respect to these stores and other facilities, the Company has
a contingent liability to the extent the Company's sublessees or assignees
default in the performance of their obligations under their respective
sublease or underlying lease. See "Business--California Divestiture."
LIMITATIONS ON ABILITY OF THE COMPANY TO PAY DIVIDENDS
The Company's ability to pay dividends on the New Preferred Stock and to
issue the Exchange Debentures will be limited by restrictions in agreements
governing the Company's indebtedness, including the New Credit Facility and
the Notes. See "Description of New Credit Facility--Covenants" and
"Description of Other Indebtedness--Senior Notes and Senior Subordinated
Notes."
In addition to contractual restrictions, under Delaware law, the Company may
declare and pay dividends or make other distributions on its capital stock,
including the New Preferred Stock, only out of surplus, as defined by the
Delaware General Corporation Law, or, in case there shall be no surplus, out
of its net profits for the fiscal year in which the dividend or distribution
is declared or for the immediately preceding fiscal year. Surplus is defined
as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. In order to
pay dividends in cash, the Company must have surplus or net profits equal to
the full amount of the cash dividend at the time such dividend is declared.
In determining the Company's ability to pay dividends, Delaware law permits
the Board of Directors of the Company to revalue the Company's assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the New
Preferred Stock.
RANKING OF THE NEW PREFERRED STOCK AND THE EXCHANGE DEBENTURES
The New Preferred Stock will rank junior in right of payment to all existing
and future liabilities and obligations of the Company (other than Common Stock
or any other preferred stock of the Company which by its terms is on parity
with or junior to the New Preferred Stock).
The Exchange Debentures, if issued, will be general unsecured obligations of
the Company and will be subordinated to all existing and future Senior
Indebtedness of the Company, including the New Credit Facility and the Notes.
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the Company would have had
approximately $913.2 million aggregate principal amount of Senior Indebtedness
outstanding. In addition, the Exchange Debentures will be effectively
subordinated to all existing and future liabilities, including indebtedness,
of the subsidiaries of the Company. At December 30, 1995, on a pro forma basis
after giving effect to the Transactions and the California Disposition, the
Company's subsidiaries would have had indebtedness and other liabilities
reflected on the Company's consolidated balance sheet (other than guarantees
of the New Credit Facility), including trade payables and accrued expenses, of
approximately $148.4 million. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company and/or its
subsidiaries will only be available to pay the obligations of the Exchange
P-16
<PAGE>
Debentures after the Senior Indebtedness of the Company and the liabilities of
the Company's subsidiaries have been paid in full. See "Description of the New
Preferred Stock and Exchange Debentures--The Exchange Debentures--
Subordination." The Exchange Indenture will contain certain covenants that,
among other things, limit the ability of the Company and its subsidiaries to
merge or consolidate with or transfer all or substantially all of their assets
to any other person. See "Description of the New Preferred Stock and Exchange
Debentures--The Exchange Debentures--Covenants."
FEDERAL INCOME TAXATION OF NEW PREFERRED STOCK
Dividends paid on the New Preferred Stock, to the extent paid out of the
Company's current and/or accumulated earnings and profits for tax purposes,
will be ordinary income and, subject to certain limitations and risks
discussed under "Certain Federal Income Tax Considerations," will be eligible
for any dividend received deduction generally allowed to corporations that
meet certain requirements. The Company is not in a position at the present
time to state whether there will be current or accumulated earnings and
profits in 1996 and future years sufficient to result in dividend treatment on
distributions on the New Preferred Stock. Further, the holders of the New
Preferred Stock will bear the risk that the Company will elect to exchange the
New Preferred Stock for the Exchange Debentures; after such exchange, the
interest paid on the Exchange Debentures will not qualify for any dividends-
received deduction. See "Certain Federal Income Tax Considerations."
ABSENCE OF ESTABLISHED MARKET FOR THE NEW PREFERRED STOCK OR EXCHANGE
DEBENTURES
There is no established market for the New Preferred Stock or the Exchange
Debentures and there can be no assurance as to the liquidity of any markets
that may develop for such securities, the ability of holders of the New
Preferred Stock or Exchange Debentures to sell their New Preferred Stock or
Exchange Debentures, or the price at which holders would be able to sell such
securities. Future trading prices of the Preferred Stock and the Exchange
Debentures will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. The Underwriters have advised the Company that they
currently intend to make a market in the New Preferred Stock. However, the
Underwriters are not obligated to do so and any market-making may be
discontinued at any time, by any or all of them, without notice.
P-17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth selected historical financial data of Smith's
for the five fiscal years ended December 30, 1995 which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical consolidated financial statements of Smith's and related notes
thereto included elsewhere in this Prospectus.
<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)
<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 ex-
penses............... 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization............... 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)
Ratio of earnings to
fixed charges (b).... 3.02x 3.06x 2.55x 2.18x --
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 (c)......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock.................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................. $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period (d)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
Cash provided by oper-
ating activities...... 61.9 84.6 118.6 203.6 140.6
Cash used in investing
activities............ (277.4) (286.6) (164.4) (127.4) (146.3)
Cash provided by (used
in) financing
activities............ 212.8 203.1 92.3 (123.9) 7.5
EBITDA (as defined)
(e).................... $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin (f)...... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included
elsewhere herein.
(b) For purposes of computing 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). 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 include non-cash charges
of $105.4 million, primarily consisting of depreciation and amortization,
and restructuring charges of $140.0 million.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of
a company's ability to service debt. However, EBITDA should not be
construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
Smith's operating performance or as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
P-26
<PAGE>
DESCRIPTION OF NEW PREFERRED STOCK
AND EXCHANGE DEBENTURES
THE NEW PREFERRED STOCK
The summary contained herein of certain provisions of the New Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Certificate of Designation relating
thereto, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part, to which exhibit reference is
hereby made. The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions."
As used in this "Description of New Preferred Stock and Exchange
Debentures," the "Company" means Smith's Food & Drug Centers, Inc., but not
any of the Subsidiaries.
GENERAL
The Company is authorized to issue 85,000,000 shares of preferred stock,
$0.01 par value per share. As of the date of this Prospectus, shares
of preferred stock are outstanding. The Certificate of Incorporation of the
Company authorizes the Board of Directors of the Company, without stockholder
approval, to issue preferred stock from time to time in one or more series,
with such designations, preferences and relative, participating, optional or
other special rights, qualifications, limitations or restrictions as may be
determined by the Board of Directors; provided, however, that (i) no series so
designated shall have rights or preferences superior to the rights and
preferences of the Series I Preferred Stock and (ii) no share of preferred
stock other than Series I Preferred Stock shall be entitled to more than one
vote for the election of directors of the Company or more than one vote upon
any other matter presented to the stockholders of the Company for their vote
or approval. The Board of Directors of the Company has adopted resolutions
creating shares of New Preferred Stock and will file a Certificate of
Designation with respect thereto (the "Certificate of Designation") with the
Secretary of State of the State of Delaware as required by Delaware law.
Subject to certain conditions, the New Preferred Stock will be exchangeable
for Exchange Debentures at the option of the Company on any Dividend Payment
Date (as defined below). The New Preferred Stock, when issued and paid for by
the Underwriters in accordance with the terms of the Underwriting Agreement
(as defined herein), will be fully paid and non-assessable, and the holders
thereof will not have any subscription or preemptive rights related thereto.
will be the transfer agent and registrar for the New Preferred Stock (the
"Registrar").
Neither the stated value nor the liquidation preference of the New Preferred
Stock is necessarily indicative of the price at which shares of the New
Preferred Stock will actually trade after their issuance, and the New
Preferred Stock may trade at prices below its stated value or liquidation
price. The market price of the New Preferred Stock can be expected to
fluctuate with changes in the financial markets and economic conditions, the
financial condition and prospects of the Company and other factors that
generally influence the market prices of securities.
RANKING
With respect to dividend rights and rights on liquidation, winding up and
dissolution of the Company, the New Preferred Stock will rank (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 issued by the Company after the
Offerings the terms of which specifically provide that such class or series
will rank junior to the New Preferred Stock as to dividend distributions and
distributions upon liquidation, winding up and dissolution of the Company or
junior to or on a parity with any class of Common Stock or which do not
specify their rank (collectively referred to with the Common Stock of the
Company as "Junior Securities"), (ii) on a 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 Offerings the terms of which specifically
provide that such class or series will rank on a parity with the New Preferred
Stock as to dividend distributions and distributions upon liquidation, winding
up and dissolution of the Company (collectively referred to as "Parity
Securities"); and (iii) junior to each other class of capital stock or other
series of preferred stock issued by the Company after the Offerings the terms
of which specifically provide that such
P-57
<PAGE>
series will rank senior to the New Preferred Stock as to dividend
distributions and distributions upon liquidation, winding up and dissolution
of the Company (collectively referred to as "Senior Securities"). The New
Preferred Stock will be subject to the issuance of Junior Securities, Parity
Securities and Senior Securities; provided, however, that the Company may not
issue any Parity Securities or Senior Securities without the approval of the
holders of a majority of the shares of New Preferred Stock then outstanding,
except that without the approval of any holders of New Preferred Stock, the
Company may issue or have outstanding shares of Parity Securities issued from
time to time in exchange for, or all of the proceeds of which are used to
redeem or repurchase, any or all of the shares of the Series I Preferred Stock
or the New Preferred Stock.
DIVIDENDS
Holders of outstanding shares of New Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Company,
out of funds legally available therefor, dividends on the New Preferred Stock,
at a rate per annum equal to % of the then effective liquidation preference
per share of New Preferred Stock. Dividends will accrue from the date of
issuance and will be payable quarterly in arrears on , , and of each year
(each, a "Dividend Payment Date"), commencing on . Dividends, whether or not
earned or declared, will cumulate without interest until declared and paid,
which declaration may be for all or part of the accumulated dividends. If any
dividend payable on any Dividend Payment Date on or before is not declared or
paid in full in cash on such Dividend Payment Date the amount payable that is
not paid in cash on such Dividend Payment Date will be added to the
liquidation preference of the New Preferred Stock on such Dividend Payment
Date and will be deemed declared and paid in full. The Company does not expect
to pay dividends on the New Preferred Stock in cash on or prior to . The
Credit Agreement will permit the Company to pay cash dividends on the New
Preferred Stock only to the extent the Company could make a restricted payment
thereunder and only if no default or event of default thereunder shall have
occurred and be continuing or would result therefrom. See "Description of New
Credit Facility."
Each dividend on the New Preferred Stock will be payable to the holders of
record of the New Preferred Stock as they appear on the register of the
Registrar on such record date as may be fixed by the Board of Directors of the
Company, which record date will not be less than 10 nor more than 60 days
prior to the applicable Dividend Payment Date. All dividends paid with respect
to shares of New Preferred Stock shall be paid pro rata to the holders
thereof. Dividends will cease to accrue in respect of shares of the New
Preferred Stock on the Exchange Date (as defined below) or on the date of
their earlier redemption or repurchase by the Company, unless the Company
fails to issue the appropriate aggregate principal amount of Exchange
Debentures in respect of the New Preferred Stock on the Exchange Date or fails
to pay the relevant redemption or repurchase price on the date fixed for
redemption or repurchase.
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Securities (other than the Series I Preferred
Stock) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid (or are deemed declared and paid) in
full or declared and, if payable in cash, a sum in cash or set apart
sufficient for such payment on the New Preferred Stock. If full cumulative
dividends have not been so paid, the New Preferred Stock will share dividends
pro rata with the Parity Securities based upon the relative liquidation
preference of the outstanding shares of the New Preferred Stock and such
Parity Securities. No dividends may be declared or paid, nor may funds be set
aside for such payment, on Junior Securities, except dividends on Junior
Securities which are paid in additional Junior Securities (other than
Disqualified Stock), and no Parity Securities or Junior Securities may be
repurchased, redeemed or otherwise retired, nor may funds be set apart for
such payment, if full cumulative dividends have not been paid (or deemed to
have been paid) on the New Preferred Stock.
Cumulative dividends may be declared and paid at any time, without reference
to any regular Dividend Payment Date, to holders of record, not more than
sixty (60) days prior to payment thereof, as may be fixed by the Board of
Directors of the Company.
P-58
<PAGE>
REDEMPTION OF NEW PREFERRED STOCK
OPTIONAL. The New Preferred Stock will be redeemable for cash (subject to
contractual and other restrictions with respect thereto and to legal
availability of funds therefor), at the option of the Company, in whole at any
time or in part from time to time, at the following redemption prices
(expressed as percentages of the then effective liquidation preference
thereof) if redeemed during the 12-month period commencing on of the year
set forth below, plus, in each case, without duplication, all accrued and
unpaid dividends (including an amount in cash equal to a prorated dividend
from the last Dividend Payment Date immediately prior to the redemption date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option, use the
Net Cash Proceeds of one or more Public Equity Offerings to redeem for cash up
to an aggregate of 35% of the shares of New Preferred Stock originally issued,
at the following redemption prices (expressed as percentages of the then
effective liquidation preference) if redeemed during the 12 months commencing
on of the year set forth below plus, in each case, without duplication, all
accrued and unpaid dividends, including an amount equal to a prorated dividend
from the last Dividend Payment Date immediately prior to the date of
redemption (provided that the redemption notice shall have been sent not later
than 60 days after the consummation of such Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
In the event of a partial redemption of the New Preferred Stock, the shares
to be redeemed will be selected on a pro rata basis, except that the Company
may redeem all shares of New Preferred Stock held by any holder of fewer than
100 shares (or all shares of New Preferred Stock owned by any holder who would
hold less than 100 shares as a result of such redemption), as determined by
the Company. No partial redemption of the New Preferred Stock may be
authorized or made unless prior thereto full unpaid cumulative dividends
thereon shall have been paid in cash or declared and a sum set apart for such
payment. The indentures governing the Notes (the "Note Indentures") and the
Credit Agreement will restrict the Company from redeeming the New Preferred
Stock and will prohibit any such redemption if there exists a default or an
event of default thereunder or would result from such redemption, and future
agreements may provide the same.
MANDATORY. On , 2008, the Company will be required to redeem (subject
to contractual and other restrictions with respect thereto and to legal
availability of funds therefor) all outstanding shares of New Preferred Stock
at a price equal to the then effective liquidation preference thereof plus,
without duplication, an amount in cash equal to all accrued and unpaid
dividends (including an amount equal to a prorated dividend from the last
Dividend Payment Date immediately prior to the date of redemption). The Notes
Indentures and the Credit Agreement will restrict the Company from redeeming
the New Preferred Stock and will prohibit any such redemption if there exists
a default or an event of default thereunder or would result from such
redemption, and future agreements may provide the same.
PROCEDURE FOR REDEMPTION. On and after a redemption date, unless the Company
defaults in the payment of the applicable redemption price (or the related
accrued and unpaid dividends), dividends will cease to accrue with respect to
shares of New Preferred Stock called for redemption and all rights of holders
of such shares will
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terminate except for the right to receive the redemption price (and the
related accrued and unpaid dividends) without interest. The Company will send
a written notice of redemption by first class mail, postage prepaid, at least
15 days and not more than 60 days prior to the date fixed for any redemption
to each holder of record at its registered address on the record date fixed
for such redemption; provided, however, that no failure to give such notice
nor any deficiency therein shall affect the validity of the procedure for the
redemption of any shares of New Preferred Stock to be redeemed except as to
the holder or holders to whom the Company has failed to give said notice or
except as to the holder or holders whose notice was defective. If any New
Preferred Stock is to be redeemed in part only, the notice of redemption that
relates to such New Preferred Stock will state the number of shares thereof to
be redeemed. Shares of New Preferred Stock that have been issued and
reacquired in any manner, including shares purchased or redeemed or exchanged,
will (upon compliance with any applicable provisions of Delaware law) have the
status of authorized but unissued shares of preferred stock of the Company
undesignated as to series and may, with any and all other authorized but
unissued shares of preferred stock of the Company, be designated or
redesignated and issued or reissued, as the case may be, as part of any series
of preferred stock of the Company, except that such shares may not be reissued
or sold as shares of the New Preferred Stock (other than in payment of
dividends on the New Preferred Stock).
EXCHANGE
On any Dividend Payment Date, the Company may, at its option but subject to
certain conditions, exchange the New Preferred Stock, in whole but not in
part, for the Exchange Debentures. See "--The Exchange Debentures" below for a
summary of the terms of the Exchange Debentures. Each holder of New Preferred
Stock so exchanged will be entitled to receive $1.00 in principal amount of
Exchange Debentures for each $1.00 of the then effective liquidation
preference of New Preferred Stock held by such holder at the time of exchange.
In connection with any such exchange, dividends on shares of New Preferred
Stock exchanged which have accrued on or prior to , 2001 which have not
been paid as of the Exchange Date will be paid, at the Company's option, in
cash or in additional Exchange Debentures in an equivalent principal amount of
such accrued and unpaid dividends. Dividends on any shares of New Preferred
Stock accruing after , 2001 which have not been paid as of the Exchange
Date must be paid in cash on the Exchange Date. Interest will accrue on
Exchange Debentures from the Exchange Date. On the date fixed for exchange,
all dividends on the New Preferred Stock will cease to accrue, the rights of
the holders of the New Preferred Stock as stockholders of the Company with
respect to the shares exchanged will cease and the Person or Persons entitled
to receive the Exchange Debentures issuable upon exchange will be treated as
the registered Holder or Holders (as defined herein) of such Exchange
Debentures. Exchange Debentures issued in exchange for New Preferred Stock
will be issued in principal amounts of $1,000 and integral multiples thereof,
and will also be issued in principal amounts of less than $1,000 so that each
holder of New Preferred Stock will receive certificates representing the
entire amount of Exchange Debentures to which its shares of New Preferred
Stock entitle it; provided, however, that the Company may, at its option, pay
cash in lieu of issuing an Exchange Debenture in a principal amount less than
$1,000. The Company will mail to each holder of record of the shares of New
Preferred Stock written notice of its intention to exchange the New Preferred
Stock for Exchange Debentures at least 30 and not more than 60 days prior to
the Exchange Date. Each notice must state (i) the Exchange Date, (ii) the
place or places where certificates for shares of New Preferred Stock are to be
surrendered for exchange into Exchange Debentures, (iii) that dividends on the
shares of New Preferred Stock to be exchanged will cease to accrue on the
Exchange Date and (iv) that interest on the Exchange Debentures shall accrue
from the Exchange Date whether or not certificates for shares of New Preferred
Stock are surrendered for exchange on such Exchange Date.
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if at the time of the Company's
payment of dividends on, redemption of, or issuance of Exchange Debentures in
exchange for, New Preferred Stock, (i) the Company is insolvent or rendered
insolvent by reason thereof or (ii) the Company is engaged in a business or
transaction for which the Company's remaining assets constitute unreasonably
small capital or (iii) the Company intends to incur or believes that it will
incur debts beyond its ability to pay such debts as they mature, then the
relevant distribution to holders of New Preferred Stock could be avoided in
whole or in part as a fraudulent conveyance and such holders could be required
to
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return the same or equivalent amounts to or for the benefit of existing or
future creditors of the Company. The measure of insolvency for purposes of the
foregoing will vary depending on the law of the jurisdiction which is being
applied. Generally, the Company would be considered insolvent if the sum of
its debts, including contingent liabilities, was greater than the fair
saleable value of its assets at a fair valuation or if the present fair
saleable value of its assets was less than the amount that would be required
to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured.
The New Credit Facility and the Notes Indentures will restrict the Company's
ability to exchange New Preferred Stock for Exchange Debentures. See
"Description of New Credit Facility" and "Description of Other Indebtedness--
Senior Notes and Senior Subordinated Notes."
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of New Preferred Stock then outstanding will be entitled
to be paid, out of the assets of the Company available for distribution to its
stockholders, an amount in cash equal to the then effective liquidation
preference thereof, plus an amount in cash equal to accrued and unpaid
dividends thereon, if any, to the date fixed for liquidation, dissolution or
winding up (including an amount equal to a prorated dividend from the last
Dividend Payment Date to the date fixed for liquidation, dissolution or
winding up), before any distribution is made on any Junior Securities,
including, without limitation, any Common Stock of the Company. Except as
provided in the preceding sentence, holders of New Preferred Stock shall not
be entitled to any distribution in the event of liquidation, dissolution or
winding up of the Company. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the application of all amounts
available for payments with respect to the New Preferred Stock and all other
Parity Securities would not result in payment in full of the New Preferred
Stock and such other Parity Securities, holders of the New Preferred Stock and
the Parity Securities will share equally and ratably in any distribution of
assets of the Company in proportion to the full liquidation preference to
which each is entitled. After payment in full of the liquidation preference to
which holders of New Preferred Stock are entitled, such holders will not be
entitled to any further participation in any distribution of assets of the
Company. However, neither the sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with one or more corporations will
itself be deemed to be a voluntary or involuntary liquidation, dissolution or
winding up of the Company.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the liquidation preference of the New
Preferred Stock, although such liquidation preference will be substantially in
excess of the par value of such shares of the New Preferred Stock. In
addition, the Company is not aware of any provision of Delaware law or any
controlling decision of the courts of the State of Delaware that requires a
restriction upon the surplus of the Company solely because the liquidation
preference of the New Preferred Stock will exceed the par value. Consequently,
there will be no restriction upon the surplus of the Company solely because
the liquidation preference of the New Preferred Stock will exceed the par
value thereof and there will be no remedies available to holders of the New
Preferred Stock before or after the payment of any dividend, other than in
connection with the liquidation of the Company, solely by reason of the fact
that such dividend would reduce the surplus of the Company to an amount less
than the difference between the liquidation preference of the New Preferred
Stock and its par value.
CHANGE OF CONTROL
The Certificate of Designation will provide that, upon the occurrence of a
Change of Control, each holder of New Preferred Stock will have the right to
require the Company to repurchase such holder's shares of New Preferred Stock
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price in cash (the "Change of Control Offer Price") equal to 101% of
the then effective liquidation preference of the New Preferred Stock plus,
without duplication, accrued and unpaid dividends (including an amount equal
to a prorated dividend from the last Dividend Payment Date immediately prior
to the Change of Control Payment Date (as defined herein)).
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The Certificate of Designation will provide that not later than 90 days
following the date upon which the Change of Control occurred, the Company must
send, by first class mail, a notice to holders of New Preferred Stock at their
last registered address, with a copy to the Registrar, which notice shall
govern the terms of the Change of Control Offer. Notice of an event giving
rise to a Change of Control shall be given on the same date and in the same
manner to all holders of New Preferred Stock. Such notice shall state, among
other things, the purchase date, which must be no earlier than 30 days nor
later than 60 days from the date such notice is mailed, other than as may be
required by law (the "Change of Control Payment Date"). Each Change of Control
Offer is required to remain open for at least 20 business days or such longer
period as may be required by law.
Prior to the mailing of the notice of a Change of Control Offer referred to
above, the Company shall (i) within 60 days following a Change of Control,
either (a) repay in full all Indebtedness, and terminate all commitments,
under the Credit Agreement to the extent required upon a change of control
pursuant to the terms thereof (or offer to repay in full all such Indebtedness
and terminate all such commitments and repay all such Indebtedness owed to
each lender which has accepted such offer and terminate all such commitments
of each such lender), or (b) obtain the requisite consents under the Credit
Agreement, the terms of which require repayment upon a change of control, to
permit the repurchase of the New Preferred Stock as provided above and (ii)
within 90 days following a Change of Control, purchase all Senior Notes and
Senior Subordinated Notes (or permitted refinancings thereof) which it is
required to purchase by reason of such change of control pursuant to the
provisions of the applicable Note Indenture. The Company shall first comply
with the covenant described in the immediately preceding sentence before it
shall be required to repurchase New Preferred Stock pursuant to the provisions
described above.
Notwithstanding the foregoing, the Company shall not be required to make a
Change of Control Offer, as provided above, if, in connection with any Change
of Control, it has made an offer to purchase (an "Alternate Offer") any and
all shares of New Preferred Stock validly tendered at a cash price equal to or
higher than the Change of Control Offer Price and has purchased all shares of
New Preferred Stock properly tendered in accordance with the terms of such
Alternate Offer.
None of the provisions in the Certificate of Designation relating to a
purchase upon a Change of Control are waivable by the Board of Directors of
the Company. The Company could in the future enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute
a Change of Control under the New Preferred Stock, but would increase the
amount of Indebtedness outstanding at such time. If a Change of Control were
to occur, there can be no assurance that the Company would have sufficient
funds to pay the purchase price for the New Preferred Stock that the Company
is required to purchase. Moreover, as of December 30, 1995, after giving
effect to the Transactions and the California Disposition, the Company would
not have sufficient funds available to purchase all of the outstanding shares
of New Preferred Stock pursuant to a Change of Control Offer. In the event
that the Company is required to purchase outstanding shares of New Preferred
Stock pursuant to a Change of Control Offer, the Company expects that it would
need to seek third-party financing to the extent it does not have available
funds to meet its purchase obligations. However, there can be no assurance
that the Company would be able to obtain such financing. In addition, the
Company may be prohibited under the Credit Agreement, the Notes Indentures and
other agreements from purchasing the New Preferred Stock pursuant to a Change
of Control Offer. See "Description of New Credit Facility" and "Description of
other Indebtedness."
The Company must comply with Rules 13e-4 and 14e-4 and 14e-1 under the
Exchange Act and other provisions of state and federal securities laws and
regulations thereunder to the extent applicable in connection with a Change of
Control Offer or an Alternative Offer.
VOTING RIGHTS
Holders of the New Preferred Stock will have no general voting rights,
except as otherwise required under Delaware law or as set forth in the
Certificate of Designation. The Certificate of Designation will provide that
if (a) dividends on the New Preferred Stock are in arrears and unpaid (or if
after , 2001, such
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dividends are not paid in cash) for six quarterly periods (whether or not
consecutive), (b) the Company fails to effect a redemption of the New
Preferred Stock when required by, and in accordance with, the provisions
described under "Redemption of New Preferred Stock--Mandatory" or (c) the
Company fails to make an offer to purchase all of the outstanding shares of
New Preferred Stock following a Change of Control, if such offer to purchase
is required by the provisions set forth above under "--Change of Control" or
fails to purchase all of the shares of New Preferred Stock validly tendered
pursuant thereto (each such event described in clauses (a) through (c) above
being referred to herein as a "Voting Rights Triggering Event"), then the
number of directors constituting the Board of Directors of the Company will be
increased by two and the holders of the majority of the then outstanding
shares of New Preferred Stock, voting separately as a class, will be entitled
to elect the two additional directors. Such voting rights will continue until
such time as, in the case of a default under clause (a), all accumulated
dividends on the New Preferred Stock are paid in full and, in all other cases,
any failure, breach or default referred to in clause (b) or (c) is remedied,
at which time the term of any directors elected pursuant to the provisions of
this paragraph shall immediately terminate. Any vacancy occurring in the
office of a director elected by holders of the New Preferred Stock may be
filled by the remaining director elected by such holders unless and until such
vacancy shall be filled by such holders. Regardless of the number of Voting
Rights Triggering Events, in no event shall the holders of New Preferred Stock
have the right to elect and have serve more than two members of the Board of
Directors of the Company at any one time. The voting rights provided above
shall be the holders' exclusive remedy at law or in equity with respect to the
matters described above.
In any case in which the holders of New Preferred Stock shall be entitled to
vote as described herein or pursuant to Delaware law, each holder of shares of
New Preferred Stock shall be entitled to one vote for each share of New
Preferred Stock held.
The Certificate of Designation will also provide that, except as stated
above under "--Ranking," the Company shall not, without the affirmative vote
or consent of holders of a majority of the shares of New Preferred Stock then
outstanding, voting or consenting, as the case may be, separately as one
class, (i) create, authorize or issue any class of Senior Securities or Parity
Securities or (ii) amend the Certificate of Designation so as to affect
adversely the specified rights, preferences, privileges or voting rights of
holders of New Preferred Stock or authorize the issuance of any additional
shares of New Preferred Stock (other than in payment of dividends on the New
Preferred Stock); provided, however, that the Company may, without the
approval of any holders of New Preferred Stock, issue or have outstanding
shares of Parity Securities issued from time to time in exchange for, or all
of the proceeds of which are used to redeem or repurchase, any or all of the
shares of the Series I Preferred Stock or New Preferred Stock. The holders of
a majority of the outstanding shares of New Preferred Stock, voting or
consenting, as the case may be, separately as one class, may waive compliance
with any provision of the Certificate of Designation.
The Certificate of Designation will also provide that, except as set forth
in the preceding paragraph, neither (a) the creation, authorization or
issuance of any shares of Junior Securities, Parity Securities or Senior
Securities, including the designation of a series thereof within the existing
class of New Preferred Stock nor (b) the increase or decrease in the amount of
authorized capital stock of any class, including any preferred stock, shall
require the consent of any holders of New Preferred Stock or shall be deemed
to affect adversely the rights, preferences, privileges or voting rights of
shares of New Preferred Stock.
Under Delaware law, the holders of New Preferred Stock are entitled to vote
separately as a class upon a proposed amendment to the Certificate of
Designation, whether or not entitled to vote thereon by the Certificate of
Incorporation, if the amendment would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value
of the shares of such class, or alter or change the powers, preferences or
special rights of the shares of the New Preferred Stock so as to affect them
adversely.
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REPORTS TO HOLDERS
The Certificate of Designation will further provide that, so long as any
shares of New Preferred Stock are outstanding, the Company shall file with the
Commission, to the extent permitted, the annual reports, quarterly reports and
the information, documents and other reports specified in Sections 13 and
15(d) of the Exchange Act, whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, at the time
it is or would be required to file the same with the Commission, and within 15
days after the Company is or would be required to file such reports,
information or documents with the Commission, shall mail such reports,
information and documents to the holders of the New Preferred Stock at their
registered addresses.
THE EXCHANGE DEBENTURES
GENERAL
The Exchange Debentures will, if and when issued, be issued under an
indenture (the "Exchange Indenture"), to be dated as of the date of first
issuance (the "Exchange Date") of the Exchange Debentures, between the Company
and , as trustee (the "Exchange Debenture Trustee"). The following summary
of certain provisions of the Exchange Indenture does not purport to be
complete and is qualified in its entirety by reference to the Trust Indenture
Act of 1939 (the "Trust Indenture Act") as in effect on the date of the
Exchange Indenture, and to all of the provisions of the Exchange Debentures
and the Exchange Indenture, including the definitions therein and those terms
made a part of the Exchange Indenture by reference to the Trust Indenture Act.
The Exchange Debentures are subject to all such terms and holders of the
Exchange Debentures are referred to the Exchange Indenture and the Trust
Indenture Act for a statement thereof. A copy of the form of the Exchange
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Exchange Debentures will be issued in fully registered form only,
without coupons, initially in denominations of $1,000 and integral multiples
thereof (except as described under "--Description of New Preferred Stock--
Exchange"). The Exchange Debentures will represent general unsecured
obligations of the Company and will rank junior in right of payment to all
Senior Indebtedness.
Each Exchange Debenture will mature on , 2008 and will bear interest
from the Exchange Date at a rate per annum of %, payable quarterly on ,
, , and of each year, commencing with the first such date to
occur after the Exchange Date.
Interest on the Exchange Debentures will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the
original date of issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. The Exchange Debentures will be
payable as to principal, premium, and interest at the office or agency of the
Company maintained for such purpose within or without the City of New York,
or, at the option of the Company, payment of interest may be made by check
mailed to the registered holders of the Exchange Debentures (the "Holders") at
their respective addresses set forth in the register of Holders. Until
otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Trustee maintained for such purpose. Interest
on the Exchange Debentures accruing on or prior to , 2001 may, at the
option of the Company, be paid in cash or by issuing additional Exchange
Debentures (the "Additional Debentures") valued at 100% of their principal
amount. Interest on the Exchange Debentures accruing after , 2001 must be
paid in cash. See "Certain Federal Income Tax Considerations." The Company
does not expect to pay interest on the Exchange Debentures in cash on or prior
to .
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SUBORDINATION
The payment of the Obligations on the Exchange Debentures will be
subordinated in right of payment, as set forth in the Exchange Indenture, to
the prior payment in full in cash or Cash Equivalents of all Senior
Indebtedness, whether outstanding on the Exchange Date or thereafter Incurred,
including, with respect to Designated Senior Indebtedness, any interest
accruing subsequent to a bankruptcy or other similar proceeding whether or not
such interest is an allowed claim enforceable against the Company in a
bankruptcy case under Title 11 of the United States Code.
Upon any distribution of assets of the Company of any kind or character,
whether in cash, property or securities upon any dissolution, winding up,
total or partial liquidation or reorganization of the Company (including,
without limitation, in bankruptcy, insolvency, or receivership proceedings or
upon any assignment for the benefit of creditors or any other marshalling of
the Company's assets and liabilities), the holders of Senior Indebtedness
shall first be entitled to receive payment in full in cash or Cash Equivalents
of all amounts then due and payable under Senior Indebtedness (including, with
respect to Designated Senior Indebtedness, any interest accruing after the
commencement of any such proceeding at the rate specified in the applicable
Designated Senior Indebtedness whether or not such interest is an allowed
claim enforceable against the Company in any such proceeding) before the
Holders will be entitled to receive any payment with respect to the Exchange
Debentures, and until all Obligations with respect to Senior Indebtedness then
due are paid in full in cash or Cash Equivalents, any distribution to which
the Holders would be entitled shall be made to the holders of Senior
Indebtedness.
No direct or indirect payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) by or on behalf of the Company of Obligations on the
Exchange Debentures whether pursuant to the terms of the Exchange Debentures
or upon acceleration or otherwise shall be made if, at the time of such
payment, there exists a default in the payment of all or any portion of
principal of, premium, if any, or interest on (i) any Designated Senior
Indebtedness or (ii) any other Senior Indebtedness which, at the time of
determination, is equal to or greater than $50 million in aggregate principal
amount ("Significant Senior Indebtedness") (and the Exchange Debenture Trustee
has received written notice thereof), and such default shall not have been
cured or waived by or on behalf of the holders of such Designated Senior
Indebtedness or Significant Senior Indebtedness, as the case may be, or shall
have ceased to exist, until such default shall have been cured or waived or
shall have ceased to exist or such Designated Senior Indebtedness or
Significant Senior Indebtedness, as the case may be, shall have been
discharged or paid in full in cash or Cash Equivalents, after which the
Company shall resume making any and all required payments in respect of the
Exchange Debentures, including any missed payments.
In addition, during the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon the earliest to occur of (a) receipt by the
Exchange Debenture Trustee of written notice from the holders of a majority of
the outstanding principal amount of the Designated Senior Indebtedness or
their representative, or (b) if such event of default results from the
acceleration of the Exchange Debentures, the date of such acceleration, no
such payment (other than payments by a trust previously established pursuant
to the provisions described under "--Defeasance of Indenture" below) may be
made by the Company upon or in respect of the Exchange Debentures for a period
("Payment Blockage Period") commencing on the earlier of the date of receipt
of such notice or the date of such acceleration and ending 179 days thereafter
(unless (x) such Payment Blockage Period shall be terminated by written notice
to the Exchange Debenture Trustee from the holders of a majority of the
outstanding principal amount of such Designated Senior Indebtedness or their
representative who delivered such notice or (y) such default is cured or
waived, or ceases to exist or such Designated Senior Indebtedness is
discharged or paid in full in cash or Cash Equivalents), after which the
Company shall resume making any and all required payments in respect of the
Exchange Debentures, including any missed payments. Notwithstanding anything
herein to the contrary, in no event will a Payment Blockage Period extend
beyond 179 days from the date on which such Payment Blockage Period was
commenced. Not more than one Payment Blockage Period may be commenced with
respect to the Exchange Debentures during any period of 365 consecutive days.
No event of default which
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existed or was continuing on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period shall be, or be made, the basis for the
commencement of a second Payment Blockage Period by the holders of such
Designated Senior Indebtedness or their representative whether or not within a
period of 365 consecutive days unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days.
If the Company fails to make any payment on the Exchange Debentures when due
or within any applicable grace period, whether or not on account of the
payment blockage provisions referred to above, such failure would constitute
an Event of Default under the Exchange Indenture and would enable the Holders
to accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of the insolvency of the
Company, the Holders may recover less, ratably, than holders of Senior
Indebtedness. See "Risk Factors--Ranking of the New Preferred Stock and the
Exchange Debentures."
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the Company would have had
approximately $913.2 million aggregate amount of Senior Indebtedness
outstanding, which amount excludes any borrowings or amounts available to be
borrowed under the New Revolving Facility.
In addition, the Exchange Debentures will be effectively subordinated to all
existing and future liabilities, including Indebtedness, of the Subsidiaries.
At December 30, 1995, after giving pro forma effect to the Transactions and
the California Disposition, the Subsidiaries would have had Indebtedness and
other liabilities reflected on the Company's consolidated balance sheet (other
than guarantees of Senior Indebtedness), including trade payables and accrued
expenses, of approximately $148.4 million.
OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable, at the option of the Company, in
whole at any time or in part from time to time, on and after , 2001, at
the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on of the
year set forth below, plus, in each case, accrued and unpaid interest, if any,
to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option,
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 Exchange Debentures
originally issued, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing on of the year set forth below plus, in each case,
accrued and unpaid interest, if any, to the date of redemption (provided that
the redemption notice shall have been sent not later than 60 days after the
consummation of such Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
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NOTICES AND SELECTION
In the event of a redemption of less than all of the Exchange Debentures,
such Exchange Debentures will be selected for redemption by the Exchange
Debenture Trustee pro rata, by lot or by any other method that the Exchange
Debenture Trustee considers fair and appropriate and, if the Exchange
Debentures are listed on any securities exchange, by a method that complies
with the requirements of such exchange; provided, however, that any redemption
of the Exchange Debentures pursuant to the provisions relating to a Public
Equity Offering shall be made on a pro rata basis unless such method is
otherwise prohibited. Notice of redemption will be mailed at least 30 days but
not more than 60 days before the redemption date to each Holder of Exchange
Debentures to be redeemed at such Holder's registered address. On and after
the redemption date, interest will cease to accrue on Exchange Debentures or
portions thereof called for redemption (unless the Company shall default in
the payment of the redemption price or accrued interest). Exchange Debentures
that are redeemed by the Company or that are purchased by the Company pursuant
to a Change of Control Offer as described under "--Change of Control" below or
that are otherwise acquired by the Company will be surrendered to the Exchange
Trustee for cancellation.
CERTAIN COVENANTS
Except as otherwise specified below, the Exchange Indenture will contain,
among other things, the following covenants:
Change of Control. The Exchange Indenture will provide that, upon the
occurrence of a Change of Control, each Holder will have the right to require
the repurchase of such Holder's Exchange Debentures pursuant to the offer
described below (the "Change of Control Offer"), at a purchase price equal to
101% of the principal amount thereof plus accrued and unpaid interest to the
date of repurchase (the "Change of Control Offer Price").
The Exchange Indenture will provide that no later than 90 days following the
date upon which the Change of Control occurred, the Company must send, by
first class mail, a notice to each Holder, with a copy to the Exchange
Debenture Trustee, which notice shall govern the terms of the Change of
Control Offer. The Exchange Indenture shall require that notice of an event
giving rise to a Change of Control shall be given on the same date and in the
same manner to all Holders. Such notice shall state, among other things, the
purchase date, which must be no earlier than 30 days nor later than 60 days
from the date such notice is mailed, other than as may be required by law (the
"Change of Control Payment Date"). Holders electing to have Exchange
Debentures purchased pursuant to a Change of Control Offer will be required to
surrender the Exchange Debentures, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Exchange Debentures completed, to the
paying agent for the Exchange Debentures at the address specified in the
notice prior to the close of business on the Business Day prior to the
applicable Change of Control Payment Date. Each Change of Control Offer is
required to remain open for at least 20 Business Days or such longer period as
may be required by law.
The Exchange Indenture will further provide that, notwithstanding the
foregoing, prior to the mailing of the notice of a Change of Control Offer
referred to above, within 60 days following a Change of Control the Company
shall either (a) repay in full all Indebtedness, and terminate all
commitments, under the Loan Agreement to the extent required upon a change of
control pursuant to the terms thereof (or offer to repay in full all such
Indebtedness and terminate all such commitments and repay all such
Indebtedness owed to each lender which has accepted such offer and terminate
all such commitments of each such lender), or (b) obtain the requisite
consents under the Credit Agreement, the terms of which require repayment upon
a change of control, to permit the repurchase of the Exchange Debentures as
provided above. The Company shall first comply with the covenant described in
the immediately preceding sentence before it shall be required to repurchase
Exchange Debentures pursuant to the provisions described above. The Company's
failure to comply with the covenants described in this paragraph shall
constitute an Event of Default under the Exchange Indenture.
Notwithstanding the foregoing, the Company shall not be required to make a
Change of Control Offer, as provided above, if, in connection with any Change
of Control, it has made an offer to purchase (an "Alternate
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Offer") any and all Exchange Debentures validly tendered at a cash price equal
to or higher than the Change of Control Offer Price and has purchased all
Exchange Debentures properly tendered in accordance with the terms of such
Alternate Offer.
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of state and federal securities laws to the extent applicable in
connection with a Change of Control Offer or an Alternate Offer.
Limitation on Mergers and Certain Other Transactions. The Exchange Indenture
will provide that the Company, in a single transaction or through a series of
related transactions, shall not (i) consolidate with or merge with or into any
other Person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to another Person or group of affiliated Persons or (ii) adopt
a Plan of Liquidation, unless, in either case, (1) either the Company shall be
the continuing Person, or the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which all or
substantially all of the properties and assets of the Company as an entirety
or substantially as an entirety are transferred (or, in the case of a Plan of
Liquidation, any Person to which assets are transferred) (the Company or such
other Person being hereinafter referred to as the "Surviving Person") shall be
a corporation organized and validly existing under the laws of the United
States, any state thereof or the District of Columbia, and shall expressly
assume, by supplemental indenture, all the obligations of the Company under
the Exchange Indenture and the Exchange Debentures; (2) immediately after and
giving effect to such transaction and the assumption contemplated by clause
(1) above and the Incurrence or anticipated Incurrence of any Indebtedness to
be Incurred in connection therewith, the Surviving Person shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately preceding the transaction; and (3) immediately before
and immediately after and giving effect to such transaction and the assumption
of the obligations as set forth in clause (1) above and the Incurrence or
anticipated Incurrence of any Indebtedness to be Incurred in connection
therewith, no Default or Event of Default shall have occurred and be
continuing.
The Exchange Indenture will provide that upon any consolidation or merger or
any transfer of all or substantially all of the assets of the Company or any
adoption of a Plan of Liquidation by the Company in accordance with the
foregoing, the surviving Person formed by such consolidation or into which the
Company is merged or to which such transfer is made (or, in the case of a Plan
of Liquidation, to which assets are transferred) shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
such Indenture with the same effect as if such surviving Person had been named
as the Company therein.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Capital Stock of which constitutes all or substantially
all of the properties and assets of the Company shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
EVENTS OF DEFAULT
The following events will constitute "Events of Default" under the Exchange
Indenture: (i) failure to make any interest payment on the Exchange Debentures
when due and the continuance of such default for a period of 30 days, whether
or not prohibited by the provisions described under "--Subordination"; (ii)
failure to pay principal of, or premium, if any, on the Exchange Debentures
when due, whether at maturity, upon acceleration, redemption, required
repurchase or otherwise, whether or not prohibited by the provisions described
under "--Subordination"; (iii) failure to comply with any other agreement
contained in the Exchange Debentures or the Exchange Indenture, if such
failure continues unremedied for 30 days after written notice given by the
applicable New Trustee or the Holders of at least 25% in principal amount of
the Exchange Debentures then outstanding (except in the case of a default with
respect to certain covenants, which shall constitute Events of Default with
notice but without passage of time); (iv) a default under any Indebtedness of
the Company or the Subsidiaries, whether such Indebtedness now exists or shall
hereinafter be created, if both (A) such default either
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(1) results from the failure to pay any such Indebtedness at its stated final
maturity or (2) relates to an obligation other than the obligation to pay such
Indebtedness at its stated final maturity and results in the holder or holders
of such Indebtedness causing such Indebtedness to become due prior to its
stated maturity and (B) the principal amount of such Indebtedness, together
with the principal amount of any other such Indebtedness in default for
failure to pay principal at stated final maturity or the maturity of which has
been so accelerated, aggregate $20 million or more at any one time
outstanding; (v) any final judgment or order for payment of money in excess of
$20 million shall be entered against the Company or any Significant Subsidiary
and shall not be discharged for a period of 60 days after such judgment
becomes final and nonappealable; (vi) either the Company or any Significant
Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (a)
commences a voluntary case or proceeding; (b) consents to the entry of an
order for relief against it in an involuntary case or proceeding; (c) consents
to the appointment of a Custodian of it or for all or substantially all of its
property; or (d) makes a general assignment for the benefit of its creditors;
(vii) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (a) is for relief against the Company or any Significant
Subsidiary, in an involuntary case or proceeding; (b) appoints a Custodian of
the Company or any Significant Subsidiary, or for all or any substantial part
of their respective properties; or (c) orders the liquidation of the Company
or any Significant Subsidiary, and in each case the order or decree remains
unstayed and in effect for 60 days; or (viii) the lenders under the Credit
Agreement shall commence judicial proceedings to foreclose upon any material
portion of the assets of the Company and the Subsidiaries. In the event of a
declaration of acceleration because an Event of Default set forth in clause
(iv) above has occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled if either (i) the holders of the
Indebtedness which is the subject of such Event of Default have waived such
failure to pay at maturity or have rescinded the acceleration in respect of
such Indebtedness within 90 days of such maturity or declaration of
acceleration, as the case may be, and no other Event of Default has occurred
during such 90-day period which has not been cured or waived, or (ii) such
Indebtedness shall have been discharged or the maturity thereof shall have
been extended such that it is not then due and payable, or the underlying
default has been cured (and any acceleration based thereon of such other
Indebtedness has been rescinded), within 90 days of such maturity or
declaration of acceleration, as the case may be.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, receivership or reorganization of the Company or a
Significant Subsidiary) occurs and is continuing under a Exchange Indenture,
the Exchange Debenture Trustee or the Holders of at least 25% in principal
amount of the then outstanding Exchange Debentures may declare due and payable
all unpaid principal and interest accrued and unpaid on the then outstanding
Exchange Debentures by notice in writing to the Company, the administrative
agent under the Credit Agreement and the Exchange Debenture Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there is any Indebtedness outstanding under the Credit
Agreement, shall become due and payable upon the first to occur of an
acceleration under the Credit Agreement, or five business days after receipt
by the Company and the administrative agent under the Credit Agreement of such
Acceleration Notice. If an Event of Default resulting from certain events of
bankruptcy, insolvency, receivership or reorganization of the Company or a
Significant Subsidiary shall occur, all unpaid principal of and accrued
interest on all of the then outstanding Exchange Debentures shall be
immediately due and payable without any declaration or other act on the part
of the Exchange Debenture Trustee or any of the Holders. After a declaration
of acceleration under the Exchange Indenture, subject to certain conditions,
the Holders of a majority in principal amount of the then outstanding Exchange
Debentures, by notice to the Exchange Debenture Trustee, may rescind such
declaration if all existing Events of Default are remedied. In certain cases
the Holders of a majority in principal amount of outstanding Exchange
Debentures may waive a past default and its consequences, except a default in
the payment of or interest on any of the Exchange Debentures.
The Exchange Indenture will provide that if a Default or Event of Default
occurs and is continuing thereunder and if it is known to the Exchange
Debenture Trustee, the Exchange Debenture Trustee shall mail to each Holder
notice of the Default or Event of Default within 90 days after such Default or
Event of Default occurs; provided, however, that, except in the case of a
Default or Event of Default in the payment of the
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principal of or interest on any of the Exchange Debentures, including the
failure to make payment on a Change of Control Payment Date pursuant to a
Change of Control Offer, the Exchange Debenture Trustee may withhold such
notice if it in good faith determines that withholding such notice is in the
interest of the Holders.
The Exchange Indenture will provide that no Holder may pursue any remedy
unless the Exchange Debenture Trustee (i) shall have failed to act for a
period of 60 days after receiving written notice of a continuing Event of
Default by such Holder and a request to act by Holders of at least 25% in
principal amount of the Exchange Debentures and (ii) has received
indemnification satisfactory to it; provided, however, that such provision
does not affect the right of any Holder to sue for enforcement of any overdue
payment of interest or principal on the Exchange Debentures.
The Exchange Indenture will provide that two officers of the Company are
required to certify to the Exchange Debenture Trustee within 120 days after
the end of each fiscal year of the Company whether or not they know of any
Default that occurred during such fiscal year and, if applicable, describe
such Default and the status thereof.
DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Exchange
Debentures ("Legal Defeasance"). Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire Indebtedness represented by
the Exchange Debentures except for (i) the rights of Holders to receive
payments in respect of the principal of, premium, if any, and interest on the
Exchange Debentures when such payments are due solely from the funds held by
the Exchange Debenture Trustee in the trust referred to below; (ii) the
Company's obligations to issue temporary Exchange Debentures, register the
transfer or exchange of Exchange Debentures, replace mutilated, destroyed,
lost or stolen Exchange Debentures and maintain an office or agency for
payments in respect of Exchange Debentures and money for security payments
held in trust in respect of Exchange Debentures; (iii) the rights, powers,
trusts, duties and immunities of the Exchange Debenture Trustee and the
Company's obligations in connection therewith; and (iv) the Legal Defeasance
provisions of the Exchange Indenture. In addition, the Company may, at its
option and at any time elect to have the obligations of the Company released
with respect to the covenants described above under "--Certain Covenants"
("Covenant Defeasance"), and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Exchange Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must have irrevocably deposited with the Exchange Debenture Trustee,
in trust, for the benefit of the Holders, cash in U.S. dollars, U.S.
Government Obligations (as defined in the Exchange Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Exchange
Debentures to redemption or maturity; provided that the Exchange Debenture
Trustee shall have been irrevocably instructed to apply such money or the
proceeds of such U.S. Government Obligations to said payments with respect to
the Exchange Debentures on the maturity date or such redemption date, as the
case may be; (ii) the Company shall have delivered to the Exchange Debenture
Trustee one or more opinions of independent counsel to the effect that (A) the
Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance or Covenant Defeasance, as the
case may be, and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance or Covenant Defeasance, as the case may be, had not occurred
(which opinion, in the case of Legal Defeasance, shall be based upon a change
in the applicable federal income tax law since the Issue Date or a ruling
received from or published by the Internal Revenue Service), (B) after the
91st day following the deposit the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally and will not be subject to any
rights of holders of Senior Indebtedness, and (C) the deposit will not cause
the Exchange Debenture Trustee or the trust so created to be subject to the
Investment Company Act of 1940; (iii) no Default or Event of Default shall
have occurred and be continuing under the
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Exchange Indenture on the date of such deposit or insofar as clauses (vi) and
(vii) under the first paragraph under "--Events of Default" above are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (iv) such Legal Defeasance or Covenant Defeasance shall not cause the
Exchange Debenture Trustee to have a conflicting interest with respect to the
Exchange Debentures; (v) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of, or constitute a default under, the
Exchange Indenture or any other material agreement or instrument to which the
Company is a party or by which it is bound (and in that connection, the
Exchange Debenture Trustee shall have received a certificate from the
administrative agent under the Credit Agreement to that effect with respect to
such Credit Agreement if then in effect); (vi) the Company shall have
delivered to the Exchange Debenture Trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring the
Holders over other creditors of the Company or any Guarantor or with the
intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (vii) the Company shall have delivered to the Exchange
Debenture Trustee an officers' certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or Covenant Defeasance, have been complied with.
SATISFACTION AND DISCHARGE
The Exchange Indenture will be discharged and will cease to be of further
effect as to all outstanding Exchange Debentures, when either (a) all Exchange
Debentures theretofore authenticated and delivered (except lost, stolen or
destroyed Exchange Debentures which have been replaced or paid and Exchange
Debentures for whose payment money has theretofore been deposited in trust and
thereafter repaid to the Company) have been delivered to the Exchange
Debenture Trustee for cancellation; or (b)(i) all Exchange Debentures not
theretofore delivered to such Exchange Debenture Trustee for cancellation have
become due and payable by reason of the making of a notice of redemption or
otherwise and the Company has irrevocably deposited or caused to be deposited
with the Exchange Debenture Trustee as trust funds in trust for the purpose an
amount of money sufficient to pay and discharge the entire indebtedness on
such Exchange Debentures not theretofore delivered to the Exchange Debenture
Trustee for cancellation for principal, premium, if any, and accrued interest
to the date of maturity or redemption; (ii) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or shall
occur as a result of such deposit and such deposit will not result in a breach
or violation of, or constitute a default under, any other instrument to which
the Company is a party or by which it is bound; (iii) the Company has paid all
sums payable by it under the Exchange Indenture; and (iv) the Company has
delivered irrevocable instructions to the Exchange Debenture Trustee to apply
the deposited money toward the payment of Exchange Debentures at maturity or
the redemption date, as the case may be. In addition, the Company must deliver
an officers' certificate and an opinion of counsel to the Exchange Debenture
Trustee stating that all conditions precedent to satisfaction and discharge
have been complied with.
MODIFICATION OF THE EXCHANGE INDENTURE
The Exchange Indenture and the Exchange Debentures may be amended or
supplemented (and compliance with any provision thereof may be waived) by the
Company, the Exchange Debenture Trustee thereunder and the Holders of not less
than a majority in aggregate principal amount of the Exchange Debentures then
outstanding, except that (i) without the consent of each Holder of Exchange
Debentures affected, no such amendment, supplement or waiver may (1) change
the principal amount of the Exchange Debentures the Holders of which must
consent to an amendment, supplement or waiver of any provision of the Exchange
Indenture or the Exchange Debentures, (2) reduce the rate or extend the time
for payment of interest on any Exchange Debentures, (3) reduce the principal
amount of any Exchange Debentures, (4) change the Maturity Date of any
Exchange Debentures or alter the redemption provisions in the Exchange
Indenture or the Exchange Debentures in a manner adverse to any Holder, (5)
make any changes in the provisions concerning waivers of Defaults or Events of
Default by Holders or the rights of Holders to recover the principal of,
interest on or redemption payment with respect to any Exchange Debentures, or
(6) make the principal of, or interest on, any Exchange Debentures payable
with anything or in any manner other than as provided for in the Exchange
Indenture and the Exchange Debentures.
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In addition, the Exchange Indenture and the Exchange Debentures may be
amended by the Company and the Exchange Debenture Trustee (a) to cure any
ambiguity, defect or inconsistency therein; provided that such amendment or
supplement does not adversely affect the rights of any Holder or (b) to make
any other change that does not adversely affect the rights of any Holder in
any material respect.
THE EXCHANGE DEBENTURE TRUSTEE
The Exchange Indenture will provide that the Holders of a majority in
principal amount of the outstanding Exchange Debentures may remove the
Exchange Debenture Trustee and appoint a successor trustee with the Company's
consent, by so notifying the trustee to be so removed and the Company. In
addition, the Holders of a majority in principal amount of the outstanding
Exchange Debentures have the right, subject to certain limitations, to direct
the time, method and place of conducting any proceeding for any remedy
available to the Exchange Debenture Trustee or of exercising any trust or
power conferred on the Exchange Debenture Trustee.
The Exchange Indenture will provide that, in case a Default or an Event of
Default has occurred and is continuing, the Exchange Debenture Trustee shall
exercise such of the rights and powers vested in it by the Exchange Indenture,
and use the same degree of care and skill in the exercise thereof, as a
prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs. Subject to the latter provision, the Exchange
Debenture Trustee is under no obligation to exercise any of its rights or
powers under the Exchange Indenture at the request, order or direction of any
of the Holders, unless they shall have offered to such Exchange Debenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred thereby. If the Company fails to pay such
amounts of principal of, premium, if any, or interest on, the Exchange
Debentures as shall have become due and payable upon demand as specified in
the Exchange Indenture, the Exchange Debenture Trustee, at the request of the
Holders of a majority in aggregate principal amount of the Exchange Debentures
at the time outstanding, and upon being offered such reasonable indemnity as
it may be required against the costs, expenses and liabilities incurred by it,
except as a result of its negligence or bad faith, shall institute any actions
or proceedings at law or in equity for the collection of the sums so due and
unpaid, and collect in the manner provided by law the monies adjudged or
decreed to be payable.
The Exchange Indenture will contain limitations on the rights of the
Exchange Debenture Trustee, should it become a creditor of the Company, to
obtain payment of claims in certain cases or to be realized on certain
property received by it in respect of any such claims, securities or
otherwise. The Exchange Debenture Trustee is permitted to engage in other
transactions; however, if a Exchange Debenture Trustee acquires any
"conflicting interest," it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "affiliated," "controlling" and "controlled" have meanings correlative
to the foregoing.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or
foreign law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or of a subsidiary of such Person or any duly
authorized committee of that Board.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
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"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such Person.
"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or
obligations issued by any agency or instrumentality thereof and backed by the
full faith and credit of the United States of America, (ii) commercial paper
rated the highest grade by Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group and maturing not more than one year from the date of
creation thereof, (iii) time deposits with, and certificates of deposit and
banker's acceptances issued by, any bank having capital surplus and undivided
profits aggregating at least $500 million and maturing not more than one year
from the date of creation thereof, (iv) repurchase agreements that are secured
by a perfected security interest in an obligation described in clause (i) and
are with any bank described in clause (iii), (v) shares of any money market
mutual fund that (a) has at least 95% of its assets invested continuously in
the types of investments referred to in clauses (i) and (ii) above, (b) has
net assets of not less than $500 million, and (c) has the highest rating
obtainable from either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. and (vi) readily marketable direct obligations issued by any
state of the United States of America or any political subdivision thereof
having one of the two highest rating categories obtainable from either Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group.
"Change of Control" means the acquisition after the Issue Date, in one or
more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) by (i) any Person (other than any Permitted Holder) or
(ii) any group (within the meaning of Section 13(d)(3) of the Exchange Act) of
Persons (excluding any Permitted Holders), in either case, of any securities
of the Company such that, as a result of such acquisition, such Person or
group beneficially owns (within the meaning of Rule 13d-3 under the Exchange
Act), directly or indirectly, voting securities representing % or more of
the total voting power of the then outstanding voting securities entitled to
vote on a regular basis for the Board of Directors of the Company (but only to
the extent that such beneficial ownership is not shared with any Permitted
Holder who has the power to direct the vote thereof); provided, however, that
no such Change of Control shall be deemed to have occurred if (A) the
Permitted Holders beneficially own, in the aggregate, at such time, voting
securities representing a greater percentage of such voting power than such
other Person or group or (B) at the time of such acquisition, the Permitted
Holders (or any of them) possess the ability (by contract or otherwise) to
elect, or cause the election, of a majority of the members of the Company's
Board of Directors.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however
designated and whether voting or nonvoting) of, such Person's common stock,
whether outstanding at the Issue Date or issued after the Issue Date, and
includes, without limitation, all series and classes of such common stock.
"Consolidated Net Worth" means, with respect to any Person, the total
stockholders' equity (exclusive of any Disqualified Capital Stock) of such
Person and its Subsidiaries determined on a consolidated basis in accordance
with GAAP.
"Credit Agreement" means the Credit Agreement, dated as of the Issue Date,
by and among Smith's as borrower, its subsidiaries as guarantors, the Lenders
referred to therein, Bankers Trust Company and The Chase Manhattan Bank, N.A.,
as arrangers, and Bankers Trust Company, as administrative agent, as the same
may be amended, extended, renewed, restated, supplemented or otherwise
modified (in each case, in whole or in part, and without limitation as to
amount, terms, conditions, covenants and other provisions) from time to time,
and
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any agreement governing Indebtedness Incurred to refund, replace or refinance
any borrowings and commitments then outstanding or permitted to be outstanding
under such Credit Agreement or any such prior agreement as the same may be
amended, extended, renewed, restated, supplemented or otherwise modified (in
each case, in whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions). The term "Credit Agreement" shall
include all related or ancillary documents, including, without limitation, any
guarantee agreements and security documents. The Company shall promptly notify
the Exchange Debenture Trustee of any such refunding or refinancing of the
Credit Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Designated Senior Indebtedness" means (i) in the event any Indebtedness is
outstanding under the Credit Agreement, all Senior Indebtedness under the
Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit
Agreement, any other issue of Senior Indebtedness which (a) at the time of the
determination is equal to or greater than $[50] million in aggregate principal
amount and (b) is specifically designated in the instrument evidencing such
Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For
purposes of this definition, the term "Credit Agreement" shall not include any
agreement governing Indebtedness Incurred to refund, replace or refinance
borrowings or commitments under the Credit Agreement other than any such
agreements governing Indebtedness Incurred to refund, replace or refinance the
entirety of the borrowings and commitments then outstanding or permitted to be
outstanding thereunder.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person or its subsidiaries that, by its terms, by the terms of
any agreement related thereto or by the terms of any security, into which it
is convertible, puttable or exchangeable is, or upon the happening of any
event or the passage of time would be, required to be redeemed or repurchased
by such Person or its subsidiaries, including at the option of the holder
thereof, in whole or in part, or has, or upon the happening of an event or
passage of time would have, a redemption or similar payment due, on or prior
to the Maturity Date or any other Capital Stock of such Person or its
subsidiaries designated as Disqualified Capital Stock by such Person at the
time of issuance; provided, however, that if such Capital Stock is either (i)
redeemable or repurchasable solely at the option of such Person or (ii) issued
to employees of the Company or the Subsidiaries or to any plan for the benefit
of such employees, such Capital Stock shall not constitute Disqualified
Capital Stock unless so designated; provided, further, however, that the New
Preferred Stock shall not be deemed Disqualified Preferred Stock by reason of
the change of control put thereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Foreign Exchange Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
against fluctuations in currency values.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligations or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing).
"Indebtedness" means with respect to any Person, without duplication, (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures, drafts accepted or similar instruments or letters of credit or
representing the balance deferred and unpaid of the purchase price of any
property (other than any such balance that represents an account payable or
any other monetary obligation to a trade creditor (whether or not an
Affiliate) Incurred by such Person in the ordinary course of business of such
Person in connection with obtaining goods, materials or services and due
within twelve months (or such
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longer period for payment as is customarily extended by such trade creditor)
of the Incurrence thereof, which account is not overdue by more than 90 days,
according to the original terms of sale, unless such account payable is being
contested in good faith), or (c) for the payment of money relating to a
Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all
Disqualified Capital Stock of such Person; (iii) reimbursement obligations of
such Person with respect to letters of credit; (iv) obligations of such Person
with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v)
all liabilities of others of the kind described in the preceding clause (i),
(ii), (iii) or (iv) that such Person has guaranteed or that is otherwise its
legal liability; and (vi) all obligations of others secured by a Lien to which
any of the properties or assets (including, without limitation, leasehold
interests and any other tangible or intangible property rights) of such Person
are subject, whether or not the obligations secured thereby shall have been
assumed by such Person or shall otherwise be such Person's legal liability
(provided that if the obligations so secured have not been assumed by such
Person or are not otherwise such Person's legal liability, such obligations
shall be deemed to be in an amount equal to the fair market value of such
properties or assets, as determined in good faith by the Board of Directors of
such Person, which determination shall be evidenced by a Board Resolution).
For purposes of the preceding sentence, the "maximum fixed repurchase price"
of any Disqualified Capital Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to this
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock (or any equity security for which it
may be exchanged or converted), such fair market value shall be determined in
good faith by the Board of Directors of such Person, which determination shall
be evidenced by a Board Resolution.
"Interest Swap Obligation" means any obligation of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a fixed or floating rate of interest on a stated notional
amount in exchange for periodic payments made by such Person calculated by
applying a fixed or floating rate of interest on the same notional amount;
provided that the term "Interest Swap Obligation" shall also include interest
rate exchange, collar, cap, swap option or similar agreements providing
interest rate protection.
"Issue Date" means the date of original issuance of the New Preferred Stock.
"Lien" means, with respect to any asset or property, any mortgage, pledge,
lien, encumbrance, charge or security interest of any kind in respect of such
asset or property, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest, and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction); provided, however, that in no event shall an operating
lease be deemed to constitute a Lien.
"Maturity Date" means , 2008.
"Obligations" means all obligations of every nature whether for principal,
reimbursements, interest, fees, expenses, indemnities or otherwise, and
whether primary, secondary, direct, indirect, contingent, fixed or otherwise
(including obligations of performance) under the documentation governing any
Indebtedness.
"Permitted Holder" means (i) Yucaipa, or any entity controlled thereby or
any of the partners thereof, (ii) Jeffrey P. Smith, Richard Smith and Fred L.
Smith and their respective family members, (iii) an employee benefit plan of
the Company, or any of its subsidiaries or any participant therein, (iv) a
trustee or other fiduciary holding securities under an employee benefit plan
of the Company or any of the Subsidiaries or (v) any Permitted Transferee of
any of the foregoing Persons.
"Permitted Transferees" means, with respect to any Person, (i) any Affiliate
of such Person, (ii) the heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership, the stockholders or
general or limited partners of which,
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include only such Person or his or her spouse or lineal descendants, in each
case to whom such Person has transferred the beneficial ownership of any
securities of the Company, (iv) any investment account whose investment
managers and investment advisors consist solely of such Person and/or
Permitted Transferees of such Person and (v) any investment fund or investment
entity that is a subsidiary of such Person or a Permitted Transferee of such
Person.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Plan of Liquidation" means, with respect to any Person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety
or substantially as an entirety and (ii) the distribution of all or
substantially all of the proceeds of such sale, lease, conveyance or other
disposition and all or substantially all of the remaining assets of such
Person to holders of Capital Stock of such Person.
"preferred stock" means, with respect to any Person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indentures, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as
interpreted by the Company's chief financial officer or Board of Directors in
consultation with its independent certified public accountants.
"Public Equity Offering" means an underwritten public offering of Common
Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, and all other Obligations with respect to, any Indebtedness of the
Company, whether outstanding on the Issue Date or thereafter Incurred, unless,
in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Exchange Debentures. Without limiting the generality of the foregoing, "Senior
Indebtedness" shall include (x) the principal of, premium, if any, and
interest on all obligations of every nature of the Company from time to time
owed to the lenders under the Credit Agreement, including, without limitation,
the Letter of Credit Obligations and principal of and interest on, all fees
and expenses payable under the Credit Agreement, and (y) interest accruing
thereon subsequent to the occurrence of any Event of Default specified in
clause (vi) or (vii) under "-- Events of Default" relating to the Company,
whether or not the claim for such interest is allowed under any applicable
Bankruptcy Law. Notwithstanding the foregoing, "Senior Indebtedness" shall not
include (a) Indebtedness evidenced by the Exchange Debentures, (b)
Indebtedness which, when Incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is without recourse to the
Company (other than Capitalized Lease Obligations), (c) Indebtedness which is
represented by Disqualified Capital Stock, (d) obligations for goods,
materials or services purchased in the ordinary course of business or
obligations consisting of trade payables, (e) Indebtedness of or amounts owed
by the Company for compensation to employees or for services rendered to the
Company, (f) any liability for federal, state, local or other taxes owed or
owing by the Company, and (g) Indebtedness of the Company to a Subsidiary of
the Company.
"Significant Subsidiary" means each Subsidiary that is either (a) a
"significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under
the Securities Act of 1933, as amended, and the Exchange Act (as such
regulation is in effect on the Issue Date) or (b) material to the financial
condition or results of operations of the Company and the Subsidiaries taken
as a whole.
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"subsidiary" of any Person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such Person, by one or more subsidiaries of such Person or by such Person and
one or more subsidiaries of such Person or (ii) a partnership in which such
Person or a subsidiary of such Person is, at the date of determination, a
general partner of such partnership, but only if such Person or its subsidiary
is entitled to receive more than fifty percent of the assets of such
partnership upon its dissolution, or (iii) any other Person (other than a
corporation or a partnership) in which such Person, a subsidiary of such
Person or such Person and one or more subsidiaries of such Person, directly or
indirectly, at the date of determination, has (x) at least a majority
ownership interest or (y) the power to elect or direct the election of a
majority of the directors or other governing body of such Person.
"Subsidiary" means any subsidiary of the Company.
"Yucaipa" means The Yucaipa Companies, a California general partnership, or
any successor thereto which is an affiliate of Ronald W. Burkle or his
Permitted Transferees.
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DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR NOTES AND SENIOR SUBORDINATED NOTES
As part of the financing required to consummate the Transactions, the
Company will offer $250 million aggregate principal amount of its Senior Notes
and $400 million aggregate principal amount of its Senior Subordinated Notes
(the Senior Subordinated Notes, together with the Senior Notes, the "Notes").
The Senior Notes will mature on the tenth anniversary of their issue date and
the Senior Subordinated Notes will mature on the eleventh anniversary of their
issue date. The Notes will bear interest, payable semiannually, at the
respective rates to be determined by the Company and the Underwriters prior to
the consummation of the Recapitalization. The following is a summary of the
anticipated material terms and conditions of the Notes. This summary does not
purport to be a complete description of the Notes and is subject to the
detailed provisions of the indentures and various related documents to be
entered into in connection with the Notes.
It is anticipated that the 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
and declining ratably to par over an anticipated four-year period, to be
determined by the Company and the Underwriters. In addition, it is expected
that on or prior to the third anniversary of the issue date of the Notes, the
Company may, at its option, use the net cash proceeds of one or more public
equity offerings to redeem up to an aggregate of 35% of the Senior Notes
originally issued and up to 35% of the Senior Subordinated Notes originally
issued, at the respective redemption prices to be determined by the Company
and the Underwriters. Upon a change of control of the Company (as defined in
the indentures pursuant to which the Notes will be issued), each holder of
Notes will have the right to require the Company to repurchase such holder's
Notes at a price equal to 101% of their principal amount plus accrued and
unpaid interest to the date of repurchase.
The 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 Senior Notes will be effectively
subordinated to all secured indebtedness of the Company, including
indebtedness under the New Credit Facility. The Senior Notes will rank senior
in right of payment to all subordinated indebtedness of the Company, including
the Senior Subordinated Notes. The 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 Senior Notes.
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the aggregate outstanding amount
of Senior Indebtedness of the Company would have been approximately $913.2
million. The Notes will be effectively subordinated to all existing and future
liabilities, including indebtedness, of the Company's subsidiaries. At
December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the Company's subsidiaries would have had indebtedness and other
liabilities reflected on the Company's consolidated balance sheet, including
trade payables and accrued expenses (but excluding guarantees of Senior
Indebtedness), of approximately $148.4 million.
The indenture pursuant to which the Senior Notes will be issued will contain
certain covenants that, among other things, limit the ability of the Company
and its Restricted Subsidiaries (as defined) to make restricted payments,
incur additional indebtedness, create liens, sell assets, create dividend or
other payment restrictions affecting Restricted Subsidiaries, enter into
transactions with affiliates or, consummate mergers or certain other
transactions and the ability of the Restricted Subsidiaries to issue preferred
stock. The indenture pursuant to which the Senior Subordinated Notes will be
issued will contain the foregoing covenants, but will also prohibit the
Company from incurring any indebtedness subordinated to any other indebtedness
but senior to the Senior Subordinated Notes.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon filing of the Amended and Restated Certificate of Incorporation, the
Company's authorized capital stock will consist of (i) 20,000,000 shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
(ii) 100,000,000 shares of Class B Common Stock, par value $.01 per share (the
"Class B Common Stock"), (iii) 20,000,000 shares of Class C Common Stock, par
value $.01 (the "Class C Common Stock"), and (iv) 85,000,000 shares of
Preferred Stock, par value $.01 per share, of which 34,524,579 shares are
designated as Series I Preferred Stock and 750,000 shares will be designated
Cumulative Redeemable Exchangeable Preferred Stock. As of April 15, 1996,
there were 11,366,532 shares of Class A Common Stock outstanding, 13,705,191
shares of Class B Common Stock outstanding and 12,956,747 shares of Series I
Preferred Stock outstanding.
COMMON STOCK
All holders of shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Company's Board of Directors in its
discretion from funds legally available therefor, and upon liquidation or
dissolution are entitled to receive all assets available for distribution to
the holders of Common Stock. Under the Delaware Corporation Law, the Company
may declare and pay dividends only out of its surplus, or out of its net
profits for the fiscal year in which the dividend is declared or the preceding
year. Under certain of the Company's credit agreements, the Company's ability
to pay dividends is restricted based on various measures, including the
Company's net income for designated period. All of the outstanding shares of
Common Stock are legally issued, fully paid and nonassessable. Holders of
Common Stock have no preemptive or other rights to subscribe for additional
shares which the Company may issue and there are no redemption provisions or
sinking fund provisions applicable to any class of Common Stock, nor is the
Common Stock subject to calls or assessments by the Company.
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except the holders of
Class A Common Stock are entitled to ten votes per share and the holders of
Class B Common Stock are entitled to one vote per share on all matters
submitted to the vote of stockholders for their vote or approval, including
the election of directors. The holders of Class C Common Stock will not be
entitled to vote on matters submitted to the vote of Company stockholders.
However, if shares of Class C Common Stock are transferred to a holder other
than an Original Class C Holder (as defined in the Amended and Restated
Certificate of Incorporation), such transferred shares of Class C Common Stock
will be convertible, at the option of the holder, into shares of voting Class
B Common Stock. There is no provision made for cumulative voting, and no class
of outstanding Common Stock or Preferred Stock alone is entitled to elect any
directors. The holders of Class A Common Stock and the holders of Series I
Preferred Stock, voting together have, and after consummation of the
Transactions will continue to have, effective control of the Company through
holding approximately 94% of the combined voting power of the outstanding
capital stock and will have the ability to elect all the directors of the
Company and to effect or prevent certain corporate transactions which require
majority approval of the combined classes, including mergers and other
business combinations.
Under the Company's bylaws, directors may be removed with or without cause
by the holders of a majority of the votes entitled to be cast for the election
of directors. A vacancy on the Board created by the removal or resignation of
a director or by expansion of the authorized number of directors may be filled
by the remaining directors then in office or by the stockholders at a special
meeting.
Under the Delaware General Corporation Law, the holders of Class A Common
Stock, Class B Common Stock and Class C Common Stock are entitled to vote as
separate classes on any amendment to the Company's Amended and Restated
Certificate of Incorporation that would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value
of the shares of such class, or alter or change the powers, preferences or
special rights of the shares of such class so as to affect them adversely.
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Each share of Class A Common Stock is convertible at any time at the option
of the holder into Class B Common Stock on a share-for-share basis. 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. The Class B Common Stock
has no conversion rights.
Shares of Class A Common Stock may not be sold, gifted, or transferred
except to and among the Company, a spouse, child, grandchild, sibling or
parent of the person to whom the Class A Common Stock was issued originally (a
"Permitted Transferee"), and certain entities controlled or owned by one or
more Permitted Transferees. The Company's Certificate of Incorporation
provides that any holder of shares of Class A Common Stock desiring to
transfer such shares to a person other than a Permitted Transferee or such
transferee must present such shares to the Company for conversion into an
equal number of shares of Class B Common Stock upon such transfer. Thereafter,
such shares of Class B Common Stock may be freely transferred to persons other
than Permitted Transferees.
SERIES I PREFERRED STOCK
Except as described below, each share of Series I Preferred Stock is
entitled to ten votes per share on all matters submitted to the vote of the
stockholders, including the election of directors, for their vote or approval.
Except as described below, holders of Series I Preferred Stock vote together
with the holders of Common Stock, including the election of directors. The
affirmative vote of the holders of a majority of the Series I Preferred Stock,
voting as a class, is required upon any amendment to the Company's Certificate
of Incorporation adversely affecting in any manner the rights of such holders.
Under the Company's Certificate of Incorporation, 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 ranking on parity with the Series I Preferred Stock, before any
distribution to the holders of any class of Common Stock.
All shares of Series I Preferred Stock are subject to redemption at any time
upon 60 days' notice at the option of the Board of Directors, in such numbers
as the Board may determine, at a redemption price of $.33 1/3 per share (the
"Redemption Price"). In addition, on December 1 of each year commencing in
1989, one-eleventh of the total authorized number of shares of Series I
Preferred Stock is subject to mandatory redemption at the Redemption Price.
The Series I Preferred Stock has no dividend requirement. If approved by a
majority of the outstanding shares of Series I Preferred Stock, the Amended
and Restated Certificate of Incorporation will include certain provisions with
respect to the Series I Preferred Stock which: (i) eliminate for a five-year
period the annual mandatory redemption of original outstanding shares of
Series I Preferred Stock (with mandatory redemptions of one-eleventh of the
outstanding shares of Series I Preferred Stock resuming thereafter), (ii)
restrict for two-year period 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
form ten votes to one vote per share in the event of transfers or sales not
made to certain affiliated or other designated tranferees.
UNDESIGNATED PREFERRED STOCK
Additional Preferred Stock may be issued from time to time in one or more
series and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking funds and any other rights, preferences, privileges and restrictions
applicable to each such series of Preferred Stock. However, under the
Company's Amended and Restated Certificate of Incorporation, no series of
Preferred Stock may have rights or preferences superior to the Series I
Preferred Stock, and no share of Preferred Stock other than shares designated
as Series I Preferred Stock may be entitled to more than one vote upon any
matter presented to the Company's stockholders for vote or approval, including
the election of directors.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Latham & Watkins, counsel to the Company, has advised the Company that the
following discussion expresses their opinion as to the material federal income
tax consequences expected to result to holders from the purchase, ownership,
exchange and disposition of the New Preferred Stock and Exchange Debentures.
Such opinion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury regulations, including
final Treasury regulations addressing debt instruments issued with original
issue discount ("OID") (the "OID Regulations"), judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service (the "Service") will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
The tax treatment of a holder of New Preferred Stock or Exchange Debentures
may vary depending upon such holder's particular situation. Certain holders
(including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. This discussion is limited to holders who will hold New
Preferred Stock or Exchange Debentures as "capital assets" (generally property
held for investment) within the meaning of Section 1221 of the Code. EACH
HOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF PURCHASING, HOLDING, EXCHANGING AND DISPOSING OF THE NEW
PREFERRED STOCK AND EXCHANGE DEBENTURES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
DISTRIBUTIONS ON NEW PREFERRED STOCK
Distributions on the New Preferred Stock, whether paid in cash or by
increasing the liquidation preference and redemption price of the New
Preferred Stock, will be treated as dividends to the holders (and will be
taxable to such holders as ordinary income) to the extent of the current and
accumulated earnings and profits of the Company, as determined for federal
income tax purposes. Although there can be no assurance that distributions on
the New Preferred Stock will be out of current or accumulated earnings and
profits, the Company believes that it has and should continue to have
sufficient current or accumulated earnings and profits to cover any
distributions made on the New Preferred Stock. The amount of any distribution
will be equal to the amount of cash, or, in the case of a distribution paid by
increasing the liquidation preference and redemption price of the New
Preferred Stock, should be equal to the amount of increase in the liquidation
preference and redemption price. To the extent that the amount of a
distribution on the New Preferred Stock exceeds the Company's current and
accumulated earnings and profits (as determined for federal income tax
purposes), such a distribution will be treated as a nontaxable return of
capital and will be applied against and reduce the adjusted tax basis of the
New Preferred Stock in the hands of each holder (but not below zero). The
amount of any such distribution which exceeds the adjusted tax basis of the
New Preferred Stock in the hands of the holder will be treated as capital gain
and will be long-term capital gain if the holder's holding period for the New
Preferred Stock exceeds one year. It is unclear whether a holder's holding
period with respect to that portion of his New Preferred Stock attributable to
any increase in the liquidation preference and redemption price would include
the entire period during which he held the New Preferred Stock, or whether a
new holding period would commence with respect to such portion at the time of
such increase.
Under Section 243 of the Code, corporate stockholders generally will be able
to deduct 70% of the amount of any distribution qualifying as a dividend.
There are, however, many exceptions and restrictions relating to the
availability of such dividends-received deduction and a recent legislative
proposal, if enacted, would reduce the dividends-received deduction from 70%
to 50%. It is unclear whether, and in what form, such proposal will be
enacted.
Section 246A of the Code reduces the dividends-received deduction allowed to
a corporate stockholder that has incurred indebtedness "directly attributable"
to its investment in portfolio stock. Section 246(c) of the Code
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requires that, in order to be eligible for the dividends-received deduction, a
corporate stockholder must generally hold the shares of New Preferred Stock
for a 46-day minimum holding period. A taxpayer's holding period for these
purposes is suspended during any period in which a holder has certain options
or contractual obligations with respect to substantially identical stock or
holds one or more other positions with respect to substantially identical
stock that diminishes the risk of loss from holding the New Preferred Stock. A
recent legislative proposal would provide that a corporate stockholder would
not be entitled to a dividends-received deduction on distributions on the New
Preferred 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, and in what form, such proposal will be
enacted.
Under Section 1059 of the Code, a corporate stockholder is required to
reduce its tax basis (but not below zero) in the New Preferred Stock by the
nontaxed portion of any "extraordinary dividend" if such stock has not been
held for more than two years before the earliest of the date such dividend is
declared, announced, or agreed to. Generally, the nontaxed portion of an
extraordinary dividend is the amount excluded from income by operation of the
dividends-received deduction provisions of Section 243 of the Code. An
extraordinary dividend on the New Preferred Stock generally would be a
dividend that (i) equals or exceeds 5% of the corporate stockholder's adjusted
tax basis in the New Preferred Stock, treating all dividends having ex-
dividend dates within an 85-day period as one dividend or (ii) exceeds 20% of
the corporate stockholder's adjusted tax basis in such stock, treating all
dividends having ex-dividend dates within a 365-day period as one dividend. In
determining whether a dividend paid on the New Preferred Stock is an
extraordinary dividend, a corporate stockholder may elect to substitute the
fair market value of the stock for such holder's tax basis for purposes of
applying these tests, provided such fair market value is established to the
satisfaction of the Secretary of Treasury (the "Secretary") as of the day
before the ex-dividend date. An extraordinary dividend also includes any
amount treated as a dividend in the case of a redemption that is either non-
pro rata as to all stockholders or in partial liquidation of the Company,
regardless of the stockholder's holding period and regardless of the size of
the dividend. If any part of the nontaxed portion of an extraordinary dividend
is not applied to reduce the holder's tax basis as a result of the limitation
on reducing such basis below zero, such part will be treated as gain upon sale
or exchange of the 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 exchange of the New Preferred Stock. It is unclear
whether, and in what form, such legislation will be enacted. Special rules
exist with respect to extraordinary dividends for "qualified preferred
dividends." A qualified preferred dividend is any fixed dividend payable with
respect to any share of stock which (i) provides for fixed preferred dividends
payable not less frequently than annually and (ii) is not in arrears as to
dividends at the time the holder acquired such stock. A qualified preferred
dividend does not include any dividend payable with respect to any share of
stock if the actual rate of return of such stock exceeds 15%. Section 1059 of
the Code does not apply to qualified preferred dividends if the corporate
stockholder holds such stock for more than five years. If the stockholder
disposes of such stock before it has been held for more than five years, the
amount subject to extraordinary dividend treatment with respect to qualified
preferred dividends is limited to the excess of the actual rate of return over
the stated rate of return. Actual or stated rates of return are the actual or
stated dividends expressed as a percentage of the lesser of (i) the
stockholder's tax basis in such stock or (ii) the liquidation preference of
such stock.
A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of the dividends received which such corporate
stockholder deducts in computing taxable income. This results from the fact
that corporate stockholders are required to increase alternative minimum
taxable income by 75% of the excess of adjusted current earnings over
alternative minimum taxable income (determined without regard to this adjusted
current earnings adjustment or the alternative tax net operating loss
deduction).
REDEMPTION PREMIUM ON NEW PREFERRED STOCK
Under Section 305(c) of the Code and the applicable Treasury regulations
thereunder, if the redemption price of New Preferred Stock exceeds its issue
price, the difference ("redemption premium") may be taxable as
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a constructive distribution of additional Preferred Stock to the holder
(treated as a dividend to the extent of the Company's current and accumulated
earnings and profits and otherwise subject to the treatment described above
for distributions) over a certain period. Because the New Preferred Stock
provides for an optional right of redemption by the Company at a price in
excess of the issue price, stockholders could be required to recognize such
redemption premium under a constant interest rate method similar to that
described below for accruing OID (see "Original Issue Discount on Exchange
Debentures") if, based on all of the facts and circumstances, the optional
redemption is more likely than not to occur. If stock may be redeemed at more
than one time, the time and price at which such redemption is most likely to
occur must be determined based on all of the facts and circumstances.
Applicable Treasury regulations provide a "safe harbor" under which a right to
redeem will not be treated as more likely than not to occur if (i) the issuer
and the holder are not related within the meaning of the regulations; (ii)
there are no plans, arrangements, or agreements that effectively require or
are intended to compel the issuer to redeem the stock (disregarding, for this
purpose, a separate mandatory redemption); and (iii) exercise of the right to
redeem would not reduce the yield of the stock, as determined under the
Treasury regulations. Regardless of whether the optional redemption is more
than likely not to occur, constructive dividend treatment will not result if
the redemption premium does not exceed a de minimis amount. The Company
intends to take the position that the existence of the Company's optional
redemption right does not result in a constructive distribution to the
holders.
SALE OR EXCHANGE OF NEW PREFERRED STOCK
A holder will recognize capital gain or loss for federal income tax purposes
upon a sale or exchange of New Preferred Stock in an amount equal to the
difference between such holder's adjusted tax basis in the New Preferred Stock
and the amount realized from such disposition. Any such capital gain or loss
will be long-term capital gain or loss if at the time of the sale or exchange
the holder held such New Preferred Stock for more than one year.
REDEMPTION AND EXCHANGE OF NEW PREFERRED STOCK FOR EXCHANGE DEBENTURES
A redemption of shares of the New Preferred Stock for cash or an exchange of
the New Preferred Stock for Exchange Debentures will be a taxable transaction
on which a holder will generally recognize capital gain or loss, provided that
a holder owns no stock of the Company, actually or constructively within the
meaning of Section 318 of the Code, following a redemption or exchange. The
gain or loss recognized on such exchange will generally be equal to the
difference between the amount realized by the holder of the New Preferred
Stock and such holder's adjusted tax basis in the New Preferred Stock
surrendered in the redemption.
If a holder does own, actually or constructively, such other stock
(including New Preferred Stock not redeemed), a redemption of the New
Preferred Stock may be treated as a dividend to the extent of the Company's
current or accumulated earnings and profits (as determined for federal income
tax purposes). Such dividend treatment would not be applied if the redemption
is "not essentially equivalent to a dividend" with respect to the holder under
Section 302(b)(1) of the Code. A distribution to a holder will be "not
essentially equivalent to a dividend" if it results in a "meaningful
reduction" in the holder's stock interest in the Company. For these purposes,
any redemption of New Preferred Stock should result in a "meaningful
reduction" of such holder's stock interest in the Company unless such holder
owns a significant block of common stock of the Company.
In the case of a redemption for cash, the amount realized will be the cash
received on the redemption. In the case of an exchange of New Preferred Stock
for Exchange Debentures, the amount realized on receipt of the Exchange
Debenture would be equal to the "issue price" of the Exchange Debenture (or
possibly, if different, the fair market value of the Exchange Debenture). The
issue price of Exchange Debentures would be determined in the manner described
below for purposes of computing OID, if any, on the Exchange Debentures (see
"Original Issue Discount on Exchange Debentures").
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ORIGINAL ISSUE DISCOUNT ON EXCHANGE DEBENTURES
General Original Issue Discount Rules
The amount of original issue discount, if any, on a debt instrument is the
excess of its "stated redemption price at maturity" over its "issue price,"
subject to a statutorily defined de minimis exception.
The "issue price" of an Exchange Debenture will be equal to (i) its fair
market value as of the exchange date if the Exchange Debentures are traded on
an established securities market on or at any time during the 60 day period
ending 30 days after the exchange date or (ii) the fair market value at the
exchange date of the New Preferred Stock if such New Preferred Stock is traded
on an established securities market during the 60 day period ending 30 days
after the exchange date but the Exchange Debentures are not. If neither the
New Preferred Stock nor the Exchange Debentures are so traded, the issue price
of the Exchange Debentures is determined under Section 1274 of the Code, in
which case the issue price will be the stated principal amount of the Exchange
Debentures provided that the yield on the Exchange Debentures is equal to or
greater than the "applicable federal rate" in effect at the time the Exchange
Debentures are issued. If the yield on the Exchange Debentures is less than
such applicable federal rate, the issue price of such Exchange Debentures
under Section 1274 of the Code will be equal to the present value as of the
issue date of all payments to be made on the Exchange Debentures, discounted
at the applicable federal rate. It cannot be determined at the present time
whether the New Preferred Stock or the Exchange Debentures will be, at the
relevant time, traded on an established securities market within the meaning
of the OID Regulations.
The "stated redemption price at maturity" of an Exchange Debenture is the
sum of its principal amount plus all other payments required thereunder, other
than payments of "qualified stated interest" (defined generally as stated
interest that is unconditionally payable in cash or in property (other than
debt instruments of the Company) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
In general, the amount of original issue discount that a holder of a debt
instrument with original issue discount must include in gross income for
federal income tax purposes will be the sum of the daily portions of original
issue discount with respect to such debt instrument for each day during the
taxable year or portion of a taxable year on which such holder holds the debt
instrument. The daily portion is determined by allocating to each day of an
accrual period (generally, a six month period or a shorter or longer period
from the date of original issuance) a pro rata portion of an amount equal to
the "adjusted issue price" of the debt instrument at the beginning of the
accrual period multiplied by the yield to maturity of the debt instrument. The
"adjusted issue price" is the issue price of the debt instrument increased by
the accrued original issue discount for all prior accrual periods (and
decreased by the amount of cash payments made in all prior accrual periods,
other than qualified stated interest payments). The tax basis of the debt
instrument in the hands of the holder will be increased by the amount of
original issue discount, if any, on the debt instrument that is included in
the holder's gross income and will be decreased by the amount of any cash
payments (other than qualified stated interest payments) received with respect
to the debt instrument, whether such payments are denominated as principal or
interest.
Exchange Debentures
Because interest on the Exchange Debentures can, at the option of the
Company, be paid in cash or in additional Exchange Debentures, no payments
made on the Exchange Debentures will be treated as qualified stated interest.
In addition, if the issue price of the Exchange Debentures is at least equal
to their stated principal amount, it will be presumed for purposes of
computing OID on the Exchange Debentures that the Company will not exercise
its option to issue additional Exchange Debentures in lieu of paying cash
interest on the Exchange Debentures. In this event, the Exchange Debentures
will initially be treated as having been issued with OID equal to the excess
of their stated redemption price at maturity (which will be equal to the sum
of the principal amount plus all payments of stated interest) over their issue
price. If, in fact, the Company exercises its option to issue
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additional Exchange Debentures in lieu of paying cash interest on the Exchange
Debentures, the additional Exchange Debentures will not be treated as payments
of interest on the Exchange Debentures. In this event, the Exchange Debentures
and the additional Exchange Debentures will be treated as a single OID
obligation which will be deemed to be reissued for an issue price equal to the
original issue price of the Exchange Debentures plus the principal amount of
the additional Exchange Debentures issued with respect thereto, and will have
OID equal to the excess of the stated redemption price at maturity of such
obligation (which will be equal to the sum of the principal amounts of the
Exchange Debentures and the additional Exchange Debentures plus all payments
of stated interest on such debt instruments) over the newly determined issue
price. The Exchange Debentures will similarly be deemed to be reissued with a
new issue price each time the Company exercises its option to issue additional
Exchange Debentures in lieu of paying cash interest on the Exchange
Debentures.
If the issue price of the Exchange Debentures is less than their stated
principal amount, then it will be presumed for purposes of computing OID on
the Exchange Debentures that the Company will exercise its option to issue
additional Exchange Debentures in lieu of paying cash interest on the Exchange
Debentures. In this case, the Exchange Debentures will be treated as having
been issued with OID equal to the excess of their stated redemption price at
maturity (which will be equal to the sum of the principal amounts of the
Exchange Debentures and the additional Exchange Debentures plus all payments
of stated interest) over their issue price. If, in fact, the Company pays cash
interest on the Exchange Debentures instead of issuing additional Exchange
Debentures, such cash payments will be treated as retiring a pro rata portion
of the Exchange Debentures (including any additional Exchange Debentures), and
will result in taxable gain or loss to holders equal to the difference between
the amount of such cash payments and the holders' allocable adjusted tax basis
in the portion of the Exchange Debentures (including any additional Exchange
Debentures) so retired.
A holder of Exchange Debentures, subject to certain limitations, may elect
to include all interest and OID on the Exchange Debentures in gross income
under the constant yield method. For this purpose, interest includes stated
and unstated interest, acquisition discount, OID, de minimis market discount
and market discount, as adjusted by any acquisition premium. Such election, if
made in respect of a market discount bond, will constitute an election to
include market discount in income currently on all market discount bonds
acquired by such holder on or after the first day of the first taxable year to
which the election applies (see "Market Discount on Resale of Exchange
Debentures").
MARKET DISCOUNT ON RESALE OF EXCHANGE DEBENTURES
If a holder purchases an Exchange Debenture for an amount that is less than
its adjusted issue price, the amount of the difference will be treated as
"market discount" for federal income tax purposes, unless such difference is
less than a statutorily-defined de minimis amount. Under the market discount
rules, a holder will be required to treat any principal payment on, or any
gain on the sale, exchange, retirement or other disposition of, an Exchange
Debenture as ordinary income to the extent of the market discount, which has
not previously been included in income and is treated as having accrued on
such Exchange Debenture at the time of such payment or disposition. In
addition, the holder may be required to defer, until the maturity of the
Exchange Debenture or its earlier disposition in a taxable transaction, the
deduction of all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or carry such Exchange Debenture.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Debenture,
unless the holder elects to accrue on a constant interest method. A holder of
an Exchange Debenture may elect to include market discount in income currently
as it accrues (on either a ratable or constant interest method), in which case
the rule described above regarding deferral of interest deductions will not
apply. This election to include market discount in income currently, once
made, applies to all market discount obligations acquired on or after the
first taxable year to which the election applies and may not be revoked
without the consent of the Service.
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<PAGE>
ACQUISITION PREMIUM AND AMORTIZABLE BOND PREMIUM ON EXCHANGE DEBENTURES
A holder that purchases an Exchange Debenture for an amount that is greater
than its adjusted issue price but equal to or less than the sum of all amounts
payable on the Exchange Debenture after the purchase date other than payments
of qualified stated interest will be considered to have purchased such
Exchange Debenture at an "acquisition premium." Under the acquisition premium
rules, the amount of OID which such holder must include in its gross income
with respect to such Exchange Debenture for any taxable year will be reduced
by the portion of such acquisition premium properly allocable to such year.
If at the time the New Preferred Stock is exchanged for Exchange Debentures
or at the time a subsequent holder purchases Exchange Debentures, the holder's
tax basis in any such Exchange Debenture exceeds the sum of all amounts
payable on the Exchange Debenture after the exchange date or purchase date
other than qualified stated interest, such excess may constitute "premium" and
such holder will not be required to include any OID in income. A holder
generally may elect to amortize the premium over the remaining term of the
Exchange Debenture on a constant yield method. The amount amortized in any
year will be treated as a reduction of the holder's interest income from the
Exchange Debenture. Bond premium on an Exchange Debenture held by a holder
that does not make such an election will decrease the gain or increase the
loss otherwise recognized on disposition of the Exchange Debenture. The
election to amortize premium on a constant yield method once made applies to
all debt obligations held or subsequently acquired by the electing holder on
or after the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the Service.
REDEMPTION, SALE OR EXCHANGE OF EXCHANGE DEBENTURES
The adjusted tax basis of a holder who received Exchange Debentures in
exchange for New Preferred Stock will, in general, be equal to the issue price
of such Exchange Debentures, increased by OID and market discount previously
included in income by the holder and reduced by any amortized premium and any
cash payments on the Exchange Debentures other than qualified stated interest.
Upon the redemption, sale, exchange or retirement of an Exchange Debenture, a
holder will recognize gain or loss equal to the difference between the amount
realized upon the redemption, sale, exchange or retirement (less any accrued
qualified stated interest, which will be taxable as such) and the adjusted tax
basis of the Exchange Debenture. Such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if at the time of redemption,
sale, exchange or retirement the holder held such Exchange Debenture for more
than one year.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATION RULES
If the yield-to-maturity on Exchange Debentures equals or exceeds the sum of
(i) the "applicable federal rate" (as determined under Section 1274(d) of the
Code) in effect for the month in which the Exchange Debentures are issued (the
"AFR") and (i) 5%, and the OID on such Exchange Debentures is "significant,"
the Exchange Debentures will be considered "applicable high yield discount
obligations" ("AHYDOs") under Section 163(i) of the Code. Consequently, the
Company will not be allowed to take a deduction for interest (including OID)
accrued on the Exchange Debentures for federal income tax purposes until such
time as the Company actually pays such interest (including OID) in cash or in
other property (other than stock or debt of the Company or a person deemed to
be related to the Company under Section 453(f)(1) of the Code). Because the
amount of OID, if any, attributable to the Exchange Debentures will be
determined at such time such Exchange Debentures are issued and the AFR at the
time such Exchange Debentures are issued in exchange for New Preferred Stock
is not predictable, it is impossible to determine at the present time whether
an Exchange Debenture will be treated as an AHYDO.
Moreover, if the yield-to-maturity on the Exchange Debenture exceeds the sum
of (i) the AFR and (ii) 6% (such excess shall be referred to hereinafter as
the "Disqualified Yield"), the deduction for interest (including OID) accrued
on the Exchange Debentures will be permanently disallowed (regardless of
whether the Company actually pays such interest or OID in cash or in other
property) for federal income tax purposes to the extent such interest or OID
is attributable to the Disqualified Yield on the Exchange Debentures
("Dividend-Equivalent
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Interest"). For purposes of the dividends-received deduction, such Dividend-
Equivalent Interest will be treated as a dividend to the extent it is deemed
to have been paid out of the Company's current or accumulated earnings and
profits. Accordingly, a holder of Exchange Debentures that is a corporation
may be entitled to take a dividends-received deduction with respect to any
Dividend-Equivalent Interest received by such corporate holder on such
Exchange Debentures.
BACKUP WITHHOLDING
A holder of New Preferred Stock or Exchange Debentures may be subject to
backup withholding at the rate of 31% with respect to dividends paid or
accrued on, interest paid on, OID accrued on, and gross proceeds of a sale of,
the New Preferred Stock or Exchange Debentures unless (i) such holder is a
corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss to exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of New Preferred Stock or Exchange Debentures who
does not provide the Company with his or her correct taxpayer identification
number may be subject to penalties imposed by the Service.
The Company will report to the holders of the New Preferred Stock and
Exchange Debentures and to the Service the amount of any "reportable payments"
(including any constructive dividends accrued on the New Preferred Stock and
OID accrued on the Exchange Debentures) and any amount withheld with respect
to the New Preferred Stock or Exchange Debentures during the calendar year.
EACH PURCHASER OF NEW PREFERRED STOCK SHOULD CONSULT HIS OR HER TAX ADVISOR
WITH RESPECT TO THE TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION,
OWNERSHIP, EXCHANGE AND DISPOSITION OF THE NEW PREFERRED STOCK AND EXCHANGE
DEBENTURES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among Smith's and BT Securities Corporation ("BT
Securities"), CS First Boston Corporation ("CS First Boston"), Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), Goldman, Sachs & Co.
("Goldman Sachs") and Chase Securities Inc. ("Chase") (collectively, the
"Underwriters"), the Underwriters have agreed to purchase, and the Company has
agreed to sell to the Underwriters, all of the shares of New Preferred Stock
offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the New Preferred Stock is subject to the
approval of certain legal matters by counsel and to various other conditions.
The nature of each Underwriter's obligation is such that each is severally
committed to purchase the number of shares of New Preferred Stock set forth
opposite its name if it purchases any.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
BT Securities Corporation................................
CS First Boston Corporation..............................
Donaldson, Lufkin & Jenrette Securities Corporation......
Goldman, Sachs & Co......................................
Chase Securities Inc.....................................
-------
Total................................................ 750,000
=======
</TABLE>
The Underwriters propose to offer the shares of New Preferred Stock directly
to the public at the public offering price set forth on the cover page hereof,
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share. After the initial public offering
of the New Preferred Stock, the public offering price and other selling terms
may be changed.
The Company does not intend to apply for listing of the New Preferred Stock
on a national securities exchange, but has been advised by each of the
Underwriters that it presently intends to make a market in the New Preferred
Stock, as permitted by applicable laws and regulations. The Underwriters are
not obligated, however, to make a market in the New Preferred Stock, and any
such market making may be discontinued at any time by one or all of the
Underwriters at the sole discretion of such Underwriters. There can be no
assurance that an active public market for the New Preferred Stock will
develop.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
BT Securities and CS First Boston have been engaged by Smitty's to act as
dealer managers and consent solicitation agents in connection with the
Smitty's Refinancing. BT Securities and CS First Boston will receive customary
fees in connection with such services.
Chase Manhattan, an affiliate of Chase, has been the administrative agent
and a lender under SSV's existing credit facilities. Proceeds of the Offerings
will be used, in part, to repay indebtedness to Chase Manhattan and the other
lenders under such credit facilities. Bankers Trust, an affiliate of BT
Securities, and Chase Manhattan are the Arrangers of the New Credit Facility,
and Bankers Trust will act as administrative agent for the New Credit
Facility. Bankers Trust and Chase Manhattan will receive customary fees in
connection with such services.
An affiliate of Chase is a limited partner in a partnership controlled by
Yucaipa which owns shares of Smitty's Class A Common Stock. The partnership
will receive shares of Smith's Class B Common Stock in the Merger in exchange
for such shares.
Goldman Sachs is serving as financial advisor to the Company in connection
with the Transactions and has delivered a written opinion to the Company's
Board of Directors that, as of January 29, 1996, the exchange ratio
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pursuant to the Recapitalization Agreement is fair to the Company. Goldman
Sachs has been engaged by the Company to act as dealer manager in connection
with the Tender Offer. Goldman Sachs will receive customary fees in connection
with such services.
CS First Boston owns shares of Smitty's Class B Common Stock and will
receive shares of Smith's Common Stock in the Merger in exchange for such
shares of Smitty's Class B Common Stock.
Each of the Underwriters has from time to time provided investment banking
and financial advisory services to one or more of Smith's, Smitty's, Yucaipa
and/or their respective affiliates and may continue to do so in the future.
The Underwriters have received customary fees for such services.
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<PAGE>
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- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW PREFERRED STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NEW
PREFERRED STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... i
Summary................................................................... 1
Risk Factors.............................................................. 13
Pro Forma Capitalization.................................................. 18
Unaudited Pro Forma Combined Financial Statements......................... 19
Selected Historical Financial Data of Smith's............................. 26
Selected Historical Financial Data of Smitty's............................ 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 38
Management................................................................ 48
Principal Stockholders.................................................... 50
Certain Relationships and Related Transactions............................ 52
Description of New Preferred Stock and Exchange Debentures................ 57
Description of Other Indebtedness......................................... 71
Description of Capital Stock.............................................. 72
Description of New Credit Facility........................................ 74
Certain Federal Income Tax Considerations................................. 77
Underwriting.............................................................. 84
Legal Matters............................................................. 86
Experts................................................................... 86
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-----------------
PROSPECTUS
-----------------
[LOGO OF SMITH'S FOOD & DRUG CENTERS, INC.]
SMITH'S FOOD & DRUG
CENTERS, INC.
750,000 SHARES
% CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the Notes.
<TABLE>
<S> <C>
SEC registration fee........................................... $250,000
NASD filing fee................................................ 30,500
Blue Sky fees and expenses.....................................
Accounting fees and expenses...................................
Legal fees and expenses........................................
Printing and engraving expenses................................
Trustee fees...................................................
Miscellaneous..................................................
--------
Total...................................................... $
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Smith's, Smitty's, and SSV are Delaware corporations and their Certificates
of Incorporation and Bylaws provide for indemnification of their officers and
directors to the fullest extent permitted by law. Pursuant to Section
102(b)(7) of the Delaware General Corporation Law (the "DGCL") the
certificates of incorporation of Smith's, Smitty's and SSV eliminate the
personal liability of a corporation's directors to a corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liabilities related to breach of duty of loyalty, actions not in
good faith, and certain other liabilities.
Section 145 of the DGCL permits the indemnification by a Delaware
corporation of its directors, officers, employees and agents in connection
with actions, suits or proceedings brought against them by a third party or in
the right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against liabilities and expenses
incurred in any such action, suit or proceeding.
The Underwriting Agreement provides for indemnification by the Underwriters
of Smith's and its directors, officers and controlling persons for certain
liabilities arising under the Securities Act.
The directors and officers of Smith's, Smitty's and SSV are insured against
certain liabilities under directors' and officers' liability insurance.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
A list of exhibits filed with this Registration Statement on Form S-3 is
set forth in the Index to Exhibits on page E-1, and is incorporated herein
by reference.
(b) Financial Statement Schedules
Not Applicable.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that
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<PAGE>
a claim for indemnification against such liabilities (other than the payment
by the registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants
will, unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Salt Lake City, State of Utah, on
April 16, 1996.
Smith's Food & Drug Centers, Inc.
By /s/ MATTHEW G. TEZAK
--------------------------------
MATTHEW G. TEZAK
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
Chairman of the
* Board and Chief April 16, 1996
- ------------------------------------- Executive Officer
JEFFREY P. SMITH
President and Chief
* Operating Officer April 16, 1996
- -------------------------------------
ALLEN R. ROWLAND
/s/ MATTHEW G. TEZAK
- ------------------------------------- Senior Vice April 16, 1996
MATTHEW G. TEZAK President and Chief
Financial Officer
(Principal
Financial and
Accounting Officer)
* Director April 16, 1996
- -------------------------------------
DELONNE ANDERSON
* Director April 16, 1996
- -------------------------------------
ROBERT D. BOLINDER
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* Director April 16, 1996
- -------------------------------------
ALLEN P. MARTINDALE
* Director April 16, 1996
- -------------------------------------
NICOLE MILLER
* Director April 16, 1996
- -------------------------------------
DUANE PETERS
* Director April 16, 1996
- -------------------------------------
RAY V. ROSE
* Director April 16, 1996
- -------------------------------------
FRED L. SMITH
* Director April 16, 1996
- -------------------------------------
RICHARD D. SMITH
* Director April 16, 1996
- -------------------------------------
SEAN D. SMITH
* Director April 16, 1996
- -------------------------------------
DOUGLAS JOHN TIGERT
* Director April 16, 1996
- -------------------------------------
KENNETH A. WHITE
</TABLE>
*By: /s/ MATTHEW G. TEZAK
----------------------------------
MATTHEW G. TEZAK
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
*1.1 Underwriting Agreement dated as of , 1996 by and
among Smith's Food & Drug Centers, Inc. ("Smith's") and BT
Securities Corporation, CS First Boston Corporation, Donaldson,
Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co.
and Chase Securities Inc. (the "Underwriters") with respect to
the % Senior Notes due 2006 (the "Senior Notes"), the %
Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes") and the % Cumulative Redeemable Exchangeable
Preferred Stock (the "New Preferred Stock").
2.1 Recapitalization Agreement and Plan of Merger dated as of
January 29, 1996 by and among Smith's Food & Drug Centers,
Inc., 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).
*3.1 Form of Amended and Restated Certificate of Incorporation of
Smith's.
*3.2 Form of Amended and Restated Bylaws of Smith's.
*3.3 Certificate of Designation with respect to the New Preferred
Stock.
*4.1 Indenture dated as of , 1996 by and between
Smith's and , as Trustee, with respect to
the Senior Notes.
*4.2 Indenture dated as of , by and between Smith's
and , as Trustee, with respect to the
Senior Subordinated Notes.
*4.3 Indenture dated as of , 1996 by and between Smith's and
, as Trustee, with respect to the % Subordinated Exchange
Debentures due 2008 (the "Exchange Debentures").
*5.1 Opinion of Latham & Watkins regarding the legality of the
Senior Notes, Senior Subordinated Notes and New Preferred
Stock, including consent.
*7.1 Opinion of Latham & Watkins regarding liquidation preference,
including consent.
*8.1 Opinion of Latham & Watkins regarding certain federal income
tax matters, including consent.
*10.1 Credit Agreement dated as of , 1996 by and among
Smith's, Bankers Trust Company and The Chase Manhattan Bank, as
Arrangers, the lenders named therein and Bankers Trust Company,
as Administrative Agent.
10.2 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.
10.3 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.
10.4 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.
10.5 Form of Registration Rights Agreement by and among the Company
and the holders of the Company's Common Stock named therein.
10.6 Form of Management Services Agreement by and between the
Company and The Yucaipa Companies.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.7 Form of Warrant Agreement by and between the Company and The
Yucaipa Companies.
*12.1 Statement regarding computation of ratio of earnings to fixed
charges.
*12.2 Statement regarding computation of ratio of earnings to fixed
charges and preferred stock dividends.
21.1 Subsidiaries of the Company.
*23.1 Consent of Latham & Watkins (included in the opinions filed as
Exhibits 5 and 8 to the Registration Statement).
23.2 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.3 Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of Houlihan, Lokey, Howard & Zukin, Inc.
+24.1 Power of Attorney (included on signature page to the
Registration Statement).
*25.1 Statement of Eligibility and Qualification on Form T-1 of ,
as Trustee with respect to the Senior Notes (No. 22- ).
*25.2 Statement of Eligibility and Qualification on Form T-1 of ,
as Trustee with respect to the Senior Subordinated Notes (No.
22- ).
*25.3 Statement of Eligibility and Qualification on Form T-1 of ,
as Trustee with respect to the Exchange Debentures (No. 22-
).
+27 Financial Data Schedule.
99.1 Consent of Linda McLoughlin Figel to be named as a proposed
Director.
99.2 Consent of Ronald W. Burkle to be named as a proposed Director.
*99.3 Consent of Bruce Karatz to be named as a proposed Director.
99.4 Consent of Bertram R. Zweig to be named as a proposed Director.
</TABLE>
- --------
* To be filed by amendment
+ Previously filed
<PAGE>
EXHIBIT 10.2
STANDSTILL AGREEMENT
THIS STANDSTILL AGREEMENT, dated as of January 29, 1996 (this
"Agreement"), among Smith's Food & Drug Centers, Inc., a Delaware corporation
---------
(the "Company"), The Yucaipa Companies, a California general partnership
-------
("Yucaipa"), Yucaipa SSV Partners, L.P., a California limited partnership,
-------
Yucaipa Smitty's Partners, L.P., a California limited partnership, Yucaipa
Smitty's Partners II, L.P., a California limited partnership, Yucaipa Arizona
Partners, L.P., a California limited partnership, (collectively with Yucaipa and
its affiliates who are required to become parties hereto pursuant to Section
7.2, the "Yucaipa Group"), Jeffrey P. Smith, Richard D. Smith, Fred L. Smith,
-------------
Ida Smith, The Dee Glenn Smith Marital Trust, Trust for the Children of Jeffrey
Paul Smith, Trust for the Children of Richard Dee Smith, and Trust for the
Children of Fred Lorenzo Smith (collectively, with their affiliates who are
required to become parties hereto pursuant to Section 7.2, the "Smith Group").
-----------
WHEREAS, the Company, Cactus Acquisition, Inc. ("Acquisition"),
-----------
Smitty's Supermarkets, Inc. ("Smitty's") and Yucaipa have entered into a
--------
Recapitalization Agreement and Plan of Merger dated as of January 29, 1996 (the
"Recapitalization Agreement");
--------------------------
WHEREAS, the respective Boards of Directors of the Company,
Acquisition and Smitty's have approved the merger of Acquisition with and into
Smitty's (the "Merger") upon the terms and conditions contained in the
------
Recapitalization Agreement;
WHEREAS, as consideration in the Merger, members of the Yucaipa Group
and the other stockholders of Smitty's will receive shares of the Company's
Class B Common Stock, par value $.01 per share (collectively with the Company's
Class A Common Stock, par value $.01 per share, and any new class of common
stock of the Company created and outstanding, "Company Common Stock");
--------------------
WHEREAS, as part of the Recapitalization, the Company and Yucaipa will
enter into a Management Services Agreement, in the form attached to the
Recapitalization Agreement (the "Management Agreement"), pursuant to which
--------------------
Yucaipa will undertake and perform various management services in respect of the
Company's operations, subject to the terms and conditions contained in such
agreement; and
WHEREAS, the parties hereto each believe that it is desirable to
establish certain provisions with respect to the shares of the Company Common
Stock to be issued in connection with the transactions contemplated by the
Recapitalization Agreement and all additional shares of Company Common Stock
which may be acquired by, or which are currently held by, the parties hereto
other than the Company.
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1
<PAGE>
SECTION 1. DEFINITIONS. Capitalized terms used herein without
-----------
definition shall have the meanings given to such terms in the Recapitalization
Agreement. In addition, as used in this Agreement, the following terms shall
have the following meanings:
"affiliate" of any person shall mean any person directly or indirectly
---------
controlling or controlled by such person or under common control with such
person. For purposes of this Agreement, members of the Yucaipa Group or the
Smith Group, on the one hand, and the Company, on the other, shall not be deemed
to be affiliates of each other.
"associate" shall mean any person having a business, financial or
---------
familial relationship that might reasonably be expected to affect the
individual's judgment with respect to matters in which a member of the Yucaipa
Group or its affiliates might be interested. The term "associated" shall have a
----------
correlative meaning.
"beneficial ownership", "person" and "group" shall have the respective
-------------------- ------ -----
meanings ascribed to such terms pursuant to Regulation 13D-G adopted by the SEC
under the Exchange Act, as in effect on the date hereof.
"Combined Voting Power" shall mean, at any measurement date, the total
---------------------
number of votes which could have been cast in an election of directors of the
Company had a meeting of the stockholders of the Company been duly held based
upon a record date as of the measurement date if all Company Voting Securities
then outstanding and entitled to vote at such meeting were present and voted to
the fullest extent possible at such meeting.
"Company Voting Securities" shall mean, collectively, Company Common
-------------------------
Stock, any preferred stock of the Company that is entitled to vote generally for
the election of directors, any other class or series of Company securities that
is entitled to vote generally for the election of directors and any other
securities, warrants or options or rights of any nature (whether or not issued
by the Company) that are convertible into, exchangeable for, or exercisable for
the purchase of, or otherwise give the holder thereof any rights in respect of,
Company Common Stock, or any other class or series of Company securities that is
entitled to vote generally for the election of directors; provided, however,
that "Company Voting Securities" shall not include any shares of Class C Common
Stock of the Company to the extent the holder thereof is not entitled to convert
such shares into Class B Common Stock pursuant to the Company's certificate of
incorporation.
"Disinterested Directors" shall mean directors of the Company who (i)
-----------------------
are not employees or officers of the Company, (ii) are not serving as designees
of the Yucaipa Group pursuant to Section 3.10 hereof, and (iii) are not
associates of Yucaipa or its affiliates.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder.
"13D/G Group" shall mean two or more persons acting together for the
-----------
purpose of acquiring, holding, voting or disposing of Company Voting Securities,
which persons would be required under the Exchange Act to file a statement on
Schedule 13D or 13G with the SEC as a "person" within the meaning of Section
13(d)(3) of the Exchange Act if such persons beneficially owned sufficient
securities to require such a filing under the Exchange Act.
2
<PAGE>
SECTION 2. REPRESENTATIONS AND WARRANTIES.
------------------------------
2.1. The Yucaipa Group represents and warrants to the Company as
follows:
(a) Yucaipa is a validly existing general partnership under
the laws of California and has the full legal right, power and authority to
enter into this Agreement and perform its obligations hereunder.
(b) Each member of the Yucaipa Group (other than Yucaipa) is a
validly existing limited partnership under the laws of California and has the
full legal right, power and authority to enter into this Agreement and perform
its respective obligations hereunder.
(c) This Agreement has been duly authorized, executed and
delivered by each member of the Yucaipa Group and constitutes the legally valid
and binding agreement of each such member, enforceable against it in accordance
with the terms hereof.
(d) Neither the execution and delivery of this Agreement by each
member of the Yucaipa Group nor the performance of its respective obligations
hereunder will conflict with or result in a breach of or constitute a default
under any law, rule, regulation, judgment, order or decree of any court,
arbitrator or governmental agency or instrumentality, or of any agreement or
instrument to which any member of the Yucaipa Group is bound or affected or of
any organization documents of each such member.
(e) Except for not more than 20 shares of Class B Common Stock of
the Company, as of the date hereof, no shares of Company Common Stock are, and
as of the date on which the Offer is consummated, no shares of Company Common
Stock will be, beneficially owned by any member of the Yucaipa Group, except for
those shares of Company Common Stock acquired pursuant to the Recapitalization
Agreement or the other agreements contemplated thereby.
(f) Other than the Recapitalization Agreement and the other
agreements contemplated thereby, neither Yucaipa nor any of its affiliates has
any agreement, arrangement or understanding with any other person or group who
is not a member of the Yucaipa Group or its affiliates with respect to
acquiring, holding, voting or disposing of Company Voting Securities.
2.2. The Company represents and warrants to the Yucaipa Group as
follows:
(a) The Company is a validly existing corporation under the laws
of the jurisdiction of its organization and has the corporate power and
authority to enter into this Agreement and perform its obligations hereunder.
(b) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legally valid and binding agreement
of the Company, enforceable against the Company in accordance with the terms
hereof.
(c) Neither the execution and delivery of this Agreement nor the
performance of its obligations hereunder will conflict with or result in a
breach of or constitute a default under, any law, rule, regulation, judgment,
order or decree of any court, arbitrator or governmental agency
3
<PAGE>
or instrumentality, or of any agreement or instrument to which the Company is
bound or affected or of any charter documents of the Company.
2.3. The Smith Group represents and warrants to the Yucaipa Group
and the Company as follows:
(a) Each member of the Smith Group is a holder of record of shares
of Company Common Stock and entitled to vote such shares for the election of
directors of the Company.
(b) Each member of the Smith Group that is a natural person has
the capacity and legal power, and each member of the Smith Group that is a trust
is validly organized and has the requisite organizational power and authority,
to enter into this Agreement and perform its respective obligations hereunder.
(c) This Agreement has been duly authorized (as applicable),
executed and delivered by each member of the Smith Group and constitutes the
legally valid and binding agreement of each such member, enforceable against it
in accordance with the terms hereof.
(d) Neither the execution and delivery of this Agreement nor the
performance of any obligations hereunder will conflict with or result in a
breach of or constitute a default under, any law, rule, regulation, judgment,
order or decree of any court, arbitrator or governmental agency or
instrumentality, or any agreement or instrument to which any member of the Smith
Group is bound or affected or any organizational documents of any Smith Group
member that is a trust or other organization.
SECTION 3. COVENANTS WITH RESPECT TO THE COMPANY VOTING SECURITIES AND
-----------------------------------------------------------
OTHER MATTERS.
- -------------
3.1. Acquisition of Company Voting Securities.
----------------------------------------
(a) Except as specifically set forth in the Recapitalization
Agreement, until the later of the expiration, termination or withdrawal of the
Offer, the termination of the Recapitalization Agreement or the Merger Closing
Date (as defined in the Recapitalization Agreement), no member of the Yucaipa
Group or any of their respective affiliates shall, directly or indirectly,
acquire, offer to acquire, agree to acquire, become the beneficial owner of or
obtain any rights in respect of any Company Voting Securities, by purchase or
otherwise, or take any action in furtherance thereof.
(b) Subject to Section 3.2, no member of the Yucaipa Group shall,
prior to January 29, 2006, directly or indirectly acquire, offer to acquire,
agree to acquire, become the beneficial owner of or obtain any rights in respect
of any Company Voting Securities, by purchase or otherwise, or take any action
in furtherance thereof, if the effect of such acquisition, agreement or other
action would be (either immediately or upon consummation of any such
acquisition, agreement or other action, or upon the expiration of any period of
time provided in any such acquisition, agreement or other action) to increase
the aggregate beneficial ownership of Company Voting Securities by the Yucaipa
Group and its affiliates to such number of Company Voting
4
<PAGE>
Securities that represents or possesses greater than 20.0% of the Combined
Voting Power of Company Voting Securities, without the approval of a majority of
the Company's Disinterested Directors. Notwithstanding the foregoing maximum
percentage limitation, (A) no member of the Yucaipa Group shall be obligated to
dispose of any Company Voting Securities beneficially owned in violation of such
maximum percentage limitation if, and solely to the extent that, its beneficial
ownership is or will be increased solely as a result of a repurchase, redemption
or other acquisition of any Company Voting Securities by the Company or any of
its subsidiaries, and (B) the foregoing shall not prohibit any purchase of
Company Voting Securities by any member of the Yucaipa Group or its affiliates
directly from the Company (including pursuant to the exercise of rights,
oversubscription rights or standby purchase obligations in connection with
rights offerings by the Company), provided such purchase is approved by a
majority of the Disinterested Directors.
3.2. Takeover Proposals by the Yucaipa Group. No member of the
---------------------------------------
Yucaipa Group shall submit a proposal to acquire a majority of the Combined
Voting Power of Company Voting Securities (a "Change of Control Proposal") to
--------------------------
any person unless such Change of Control Proposal (or the submission thereof to
any such person) is approved by a majority of the Disinterested Directors and
the following conditions are satisfied:
(a) A Change of Control Proposal shall contemplate either (i) a
tender offer for all outstanding Company Common Stock not owned by the Yucaipa
Group and must be conditioned upon a majority of such Common Stock not owned by
the Yucaipa Group being tendered, or (ii) a merger transaction conditioned upon
the holders of a majority of Combined Voting Power of the Company not owned by
the Yucaipa Group present, in person or by proxy, voting in favor of such
transaction. In the case of either (i) or (ii), the same consideration must be
offered to all Company stockholders.
(b) A special committee of the Board of Directors of the Company
shall be created consisting of all of the Independent Directors (the "Special
-------
Committee").
- ---------
(c) The Special Committee shall retain a nationally recognized
investment banking firm to advise the Special Committee with respect to the
fairness of the Change of Control Proposal to the stockholders of the Company.
(d) The Change of Control Proposal must be approved by the Special
Committee, which shall not give its approval unless it has received an opinion
from such investment banking firm that the Change of Control Proposal is fair to
the stockholders of the Company other than the Yucaipa Group.
Unless all of the foregoing conditions have been satisfied, the Change of
Control Proposal shall not be presented to the Company's stockholders (including
by way of a tender offer, merger proposal or other Change of Control Proposal
that is conditioned on satisfaction of this Section 3.2).
3.3. Disposition of the Company Voting Securities and Other
------------------------------------------------------
Related Matters.
- ---------------
(a) Without the prior approval of a majority of the Disinterested
Directors, no member of the Yucaipa Group shall, directly or indirectly, sell,
transfer any beneficial interest in, pledge, hypothecate or otherwise dispose of
any Company Voting Security or any shares of
5
<PAGE>
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 who agree to become bound by the terms of this Agreement:
(i) in a transaction or series of related transactions that
would result in a transfer to any person or group of greater than 3.0%
of the Combined Voting Power, except in response to certain tender or
exchange offers as permitted by Section 3.3(b); and
(ii) in a transaction or series of related transactions that
would result in a transfer to any person or group that, to the
knowledge of the Yucaipa Group at the time of such transaction, upon
consummation of such sale, transfer or disposition, would, directly or
indirectly, have beneficial ownership of or the right to acquire
beneficial ownership of such number of Company Voting Securities that
represent greater than 5.0% of the Combined Voting Power, except in
response to certain tender or exchange offers as permitted by Section
3.3(b).
The Yucaipa Group members shall request all purchasers of Company Common Stock
(or rights, options or warrants to purchase any such shares) from them in
negotiated transactions, and all underwriters, placement agents or brokers
("Agents") for any public offerings or open market transactions involving
------
Company Common Stock (or rights, options or warrants to purchase any such
shares), to represent and warrant that the requirements of this Section 3.3(a)
have been satisfied with respect to such transactions, such representations by
Agents to be qualified to the best of such Agents' knowledge.
(b) Notwithstanding Section 3.3(a), on and after the eleventh
business day after commencement of a tender or exchange offer made by a person
who is not an affiliate of any member of the Yucaipa Group for outstanding
Company Voting Securities, any member of the Yucaipa Group may tender or
exchange any Company Voting Securities beneficially owned by it pursuant to such
offer if such offer shall have been approved by a majority of the Disinterested
Directors.
(c) Proposed transfers of Company Voting Securities by members of
the Yucaipa Group that are not in compliance with this Section shall be of no
force or effect.
3.4. Proxy Solicitations, etc. Except as may be permitted by this
------------------------
Section 3, no member of the Yucaipa Group shall solicit proxies, assist any
other person in any way, directly or indirectly, in the solicitation of proxies,
become a "participant" in a "solicitation," or assist any "participant" in a
"solicitation" (as such terms are defined in Rule 14a-1 of Regulation 14A under
the Exchange Act) in opposition to the recommendation of a majority of the Board
of Directors, or submit any proposal for the vote of stockholders of the
Company, or recommend or request or induce or attempt to induce any other person
to take any such actions, or seek to advise, encourage or influence any other
person with respect to the voting of Company Voting Securities, in each case
without the prior approval of a majority of the Disinterested Directors.
3.5. No Voting Trusts, Pooling Agreements, or Formation of "Groups".
--------------------------------------------------------------
Without the prior approval of a majority of the Disinterested Directors, no
member of the Yucaipa Group
6
<PAGE>
shall form, join in or in any other way participate in any partnership, pooling
agreement, syndicate, voting trust or other "group", including a 13D/G Group,
other than the Yucaipa Group, with respect to Company Voting Securities, or
enter into any agreement (other than this Agreement, the Recapitalization
Agreement or the other agreements contemplated thereby) or arrangement or
otherwise act in concert with any other person or group, for the purpose of
acquiring, holding, voting or disposing of Company Voting Securities.
3.6. Affiliate Transactions. No member of the Yucaipa Group, or any
----------------------
affiliate of any such member, shall engage in any transaction with the Company
without the prior approval of a majority of the Disinterested Directors;
provided that the foregoing provision shall not apply to (i) any transactions as
set forth in the Recapitalization Agreement or the Management Services
Agreement, Registration Rights Agreement or Warrant Agreement (each as defined
in the Recapitalization Agreement), (ii) transactions contemplated by any other
agreement as in effect on the date hereof or any amendment thereto, or (iii)
transactions regarding the purchase or sale of goods or services, in each case,
in the ordinary course of business (including, without limitation, pursuant to
joint venture agreements) which are fair to the Company pursuant to guidelines
set forth by of the Board of Directors of the Company and approved by a majority
of the Disinterested Directors.
3.7. No Solicitation of Bidders. No member of the Yucaipa Group
--------------------------
shall directly or indirectly assist, solicit, encourage or induce any person to
bid for or acquire outstanding Company Voting Securities in excess of 5.0% of
the Combined Voting Power of Company Voting Securities, except in connection
with customary investor relations activities provided pursuant to the Management
Agreement.
3.8. Non-Circumvention. No member of the Yucaipa Group or any
-----------------
affiliate or associate of any such member shall take any action, alone or in
concert with any other person or group, to seek control of the Company or
otherwise seek to circumvent the limitations of the provisions of this Section 3
of this Agreement without the approval of a majority of the Disinterested
Directors. Without limiting the generality of the foregoing, no member of the
Yucaipa Group shall, without the approval of a majority of the Disinterested
Directors, (i) present to the Company or to any third party any proposal that
can reasonably be expected to result in a change of control of the Company or in
any increase beyond the percentage specified in Section 3.1 in the Combined
Voting Power of Company Voting Securities beneficially owned in the aggregate by
the Yucaipa Group, (ii) publicly suggest or announce its willingness or desire
to engage in a transaction or group of transactions or have another person
engage in a transaction or group of transactions that would result in a change
of control of the Company or in any increase beyond the percentage specified in
Section 3.1 in the Combined Voting Power of Company Voting Securities
beneficially owned in the aggregate by the Yucaipa Group, (iii) initiate,
request, induce or attempt to induce or give encouragement to any other person
to initiate any proposal that can reasonably be expected to result in a change
of control of the Company or in any increase beyond the percentage specified in
Section 3.1 in the Combined Voting Power of Company Voting Securities
beneficially owned in the aggregate by the Yucaipa Group, or (iv) publicly
request, suggest or announce its desire to amend or obtain a waiver of any
provision of this Agreement.
7
<PAGE>
3.9. Confidential Material.
---------------------
(a) Definitions. For purposes of this Section:
-----------
(i) The term "Confidential Material" means all
---------------------
information, whether oral, written or otherwise (including any information
furnished prior to the execution of this Agreement), furnished or otherwise
disclosed by the Company to any member of the Yucaipa Group or any of the
Representatives (as defined below), and all notes, reports, analyses,
compilations, studies and other materials prepared by the Yucaipa Group or any
of the Representatives (in whatever form maintained, whether documentary,
computer storage or otherwise) containing or based upon, in whole or in part,
any such information. The term "Confidential Material" does not include
information which is or becomes generally available to the public other than as
a result of a disclosure by any member of the Yucaipa Group or any of the
Representatives (as defined below) or becomes available to any member of the
Yucaipa Group or any of the Representatives on a non-confidential basis from any
source that is not known by such member of the Yucaipa Group or such
Representative to be bound by an obligation of confidentiality to the Company.
(ii) The term "Representatives" shall mean any and all
---------------
partners, directors, officers, employees, agents, prospective financing sources,
affiliates or representatives (including representatives of advisors) of any
member of the Yucaipa Group who needs to know such information for the purpose
of analyzing, structuring, financing, documenting or otherwise facilitating the
transactions contemplated by this Agreement or the carrying out of the duties of
Yucaipa pursuant to the Recapitalization Agreement or the Management Agreement.
(b) Each member of the Yucaipa Group and each of the Representatives
shall preserve the confidentiality of the Confidential Material and shall not
disclose any of the Confidential Material in any manner whatsoever; provided,
however, that (i) any member of the Yucaipa Group may make any disclosure of
such information to which the Company gives its prior written consent, (ii) the
Yucaipa or its Representatives may make disclosures of such information within
the scope of their authority under the Management Agreement, and (iii) any of
such information may be disclosed to the Representatives who need to know, and
who are informed of the confidential nature of the Confidential Material and of
the terms of this Section and who agree to keep such information confidential.
In any event, the Yucaipa Group shall inform each of its Representatives which
have, or will have, access to any or all of the Confidential Material, of the
existence and content of this Agreement and will take all reasonable action
necessary to cause such Representatives to observe the confidentiality
requirements of this Agreement. In any event, each member of the Yucaipa Group
shall be responsible for any breach of this Agreement by any of its
Representatives.
(c) If any member of the Yucaipa Group or any of the Representatives
are requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand, any informal or
formal investigation by any government or governmental agency or authority or
otherwise) to disclose any Confidential Material or such person's opinion,
judgment, view or recommendation concerning the Company as developed from the
Confidential Material, the Yucaipa Group agrees (i) to immediately notify the
Company in writing of the existence, terms and circumstances surrounding such a
request, (ii) to consult with the Company on the advisability of taking legally
available steps to resist or narrow such request and shall exercise its best
efforts to obtain reliable assurance that confidential treatment required hereby
8
<PAGE>
will be accorded such Confidential Material, and (iii) if disclosure of such
information is required, to furnish only that portion of the Confidential
Material which in the opinion of counsel to the Yucaipa Group the Yucaipa Group
is legally compelled to disclose, and to cooperate with any action by the
Company to obtain an appropriate protective order or other reliable assurance
that confidential treatment will be accorded the Confidential Material.
(d) Yucaipa hereby acknowledges on behalf of itself and all members
of the Yucaipa Group (and agrees to advise the Representatives and members of
the Yucaipa Group who are informed in accordance with the terms of this Section
as to the matters which are the subject of this Section), that the United States
securities laws prohibit any person who has received from an issuer material,
non-public information, including certain information that may be part of the
Confidential Material, while such information is non-public, from purchasing or
selling securities of such issuer or from communicating such information to any
other person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell such securities.
3.10. Voting of Company Voting Securities and Other Related Matters.
-------------------------------------------------------------
(a) Each member of the Yucaipa Group and the Smith Group that is a
holder of record of Company Voting Securities shall be present, and each member
of the Yucaipa Group and the Smith Group that is a beneficial owner of Company
Voting Securities shall cause the holder of record to be present, in person or
by proxy, at all meetings of the stockholders of the Company so that all Company
Voting Securities owned of record or beneficially by the Yucaipa Group or the
Smith Group, as the case may be counted for the purpose of determining the
presence of a quorum at such meetings.
(b) Subject to the provisions of the certificate of incorporation and
bylaws of the Company and the approval of the Company's stockholders, as long as
the members of the Yucaipa Group and their respective affiliates beneficially
own at least 8.0% of the outstanding shares of Company Common Stock, the Yucaipa
Group shall have the right to designate two directors of the Company, and as
long as the members of the Yucaipa Group and their respective affiliates
beneficially own, in the aggregate, at least 5.0% of the outstanding shares of
Company Common Stock, the Yucaipa Group shall have the right to designate one
director of the Company; provided that no individual who is an officer,
director, partner or principal stockholder of any Significant Competitor (as
defined in the Management Agreement) of the Company or any of its subsidiaries
shall serve as a director; provided, however, that at any time when the Yucaipa
Group and its affiliates shall no longer beneficially own at least 5.0% of the
outstanding shares of Company Common Stock, the Yucaipa Group shall not have the
right to designate any directors of the Company, the Yucaipa Group's rights
under this Section 3.10 shall terminate, and the Yucaipa Group shall cause its
designees to resign forthwith such that no designee of the Yucaipa Group remains
on the board of directors of the Company.
(c) Subject to the provisions of the certificate of incorporation and
bylaws of the Company and the approval of the Company's stockholders, as long as
the members of the Smith Group and their respective affiliates beneficially own
at least 8.0% of the outstanding shares of Company Common Stock, the Smith Group
shall have the right to designate two directors of the Company, and as long as
the members of the Smith Group and their respective affiliates beneficially own,
in the aggregate, at least 5.0% of the outstanding shares of Company Common
Stock of the
9
<PAGE>
Company, the Smith Group shall have the right to one director of the Company;
provided that no individual who is an officer, director, partner or principal
stockholder of any Significant Competitor of the Company or any of its
subsidiaries (other than members of the Smith Group) shall serve as a director;
provided, however, that at any time when the Smith Group and its affiliates
shall no longer beneficially own at least 5.0% of the Company Common Stock, the
Smith Group shall not have the right to designate any directors of the Company,
the Smith Group's rights under this Section 3.10 shall terminate, and the Smith
Group shall cause its designees to resign forthwith such that no designee of the
Smith Group remains on the board of directors of the Company.
(d) The Company agrees to use its best efforts, to cause to be
elected to the Company's Board of Directors two nominees of Yucaipa (subject to
Section 3.10(b) above), two nominees of the Smith Group (subject to Section
3.10(c) above), one member of the senior management of the Company and two
"independent directors" (as required by the rules of the New York Stock
Exchange, Inc.); provided that once elected by the stockholders of the Company,
such "independent directors" shall be Disinterested Directors for purposes of
this Agreement unless such directors subsequently take some action which would
have prevented them from meeting the definition of Disinterested Director at the
date of their election.
(e) Each member of the Yucaipa Group shall, at any annual or special
meeting of the shareholders at which 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 Company Voting Securities in favor of the election to the Board of
Directors of the Company of the persons designated by the Smith Group pursuant
to this Section 3.10. Each member of the Yucaipa Group shall, and shall use its
best efforts to cause the directors of the Company then in office (other than
the directors designated by the Smith Group) to, not take any action in
furtherance of or seeking to cause an increase or decrease in the number of
directors of the Company from seven directors, the removal of any directors
(other than directors nominated by the Yucaipa Group) or an increase or decrease
in the number of independent directors.
(f) Each member of the Smith Group shall, at any annual or special
meeting of the shareholders at which 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 Company Voting Securities in favor of the election to the board of
directors of the Company of the persons designated by the Yucaipa Group pursuant
to this Section 3.10. Each member of the Smith Group shall, and shall use its
best efforts to cause the directors of the Company then in office (other than
the directors designated by the Yucaipa Group) to, not take any action in
furtherance of or seeking to cause an increase or reduction in the number of
directors of the Company from seven directors, the removal of any directors
(other than directors nominated by the Smith Group) or an increase or decrease
in the number of independent directors.
(g) The Company shall take all necessary or appropriate action to
assist in the nomination and election as directors of those persons designated
by the Yucaipa Group or the Smith Group as are entitled to election to the board
of directors of the Company pursuant to the provisions of this Section 3.10.
Each of the Yucaipa Group and the Smith Group shall cause its respective
designees on the board of directors of the Company to take all necessary or
appropriate
10
<PAGE>
action to assist in the nomination and election as directors of such other
nominees as may be necessary to fill any vacancies on the board of directors.
(h) The provisions of this Section 3.10 shall be terminated in the
event that the Recapitalization is terminated pursuant to Section 10.2 of the
Recapitalization Agreement.
3.11. Waiver of Requirements.
----------------------
(a) Notwithstanding anything in this Section 3 to the contrary, any
of the terms of Sections 3.1 through 3.10 may be waived, in whole or in part and
as to particular transactions or matters or as to one or more members of the
Yucaipa Group, if (a) in the case of a waiver of an obligation of a member of
the Yucaipa Group, a majority of the Disinterested Directors shall have approved
such waiver in accordance with applicable law, or (b) in the case of a waiver of
an obligation of the Company provided for the benefit of a member of the Yucaipa
Group, such member of the Yucaipa Group shall have consented in writing to such
waiver.
(b) Notwithstanding anything in this Section 3 to the contrary, any
of the terms of Sections 3.1 through 3.10 may be waived, in whole or in part and
as to particular transactions or matters or as to one or more members of the
Smith Group, if (a) in the case of a waiver of an obligation of a member of the
Smith Group, a majority of the Disinterested Directors shall have approved such
waiver in accordance with applicable law, or (b) in the case of a waiver of an
obligation of the Company provided for the benefit of a member of the Smith
Group, such member of the Smith Group shall have consented in writing to such
waiver.
3.12. Termination of Restrictions. The restrictions on disposition
---------------------------
contained in Section 3.3 shall terminate upon, and shall not apply to, any of
the following events:
(a) the Company with the approval of a majority of the Disinterested
Directors shall enter into and consummate an agreement with any person or group
providing for an offer to be made to purchase shares of Company Common Stock or
all or substantially all of the assets of the Company, or a majority of the
whole Board of Directors, approves or recommends acceptance of such offer; or
(b) the Company shall enter into and consummate an agreement calling
for the merger or consolidation of the Company with or into any other
corporation in which (i) the Company's outstanding capital stock shall be
converted into cash or other property, (ii) a majority of the outstanding voting
stock of the surviving corporation immediately following such merger or
consolidation will not be owned by persons who were stockholders of the Company
immediately before the merger or consolidation and (iii) notice of a meeting of
shareholders of the Company called to consider such agreement shall be given.
SECTION 4. TERM OF AGREEMENT; CERTAIN PROVISIONS REGARDING
-----------------------------------------------
TERMINATION.
- -----------
Unless this Agreement specifically provides for earlier termination
with respect to any particular right or obligation, this Agreement shall
terminate if the Yucaipa Group and its affiliates shall, at any time (in
compliance with this Agreement), sell or otherwise dispose of or cease to own
11
<PAGE>
any Company Voting Securities so that the Yucaipa Group and its affiliates
beneficially own, in the aggregate, Company Voting Securities representing less
than 2.0% of all shares of Company Common Stock.
SECTION 5. LEGEND AND STOP TRANSFER ORDER.
------------------------------
To assist in effectuating the provisions of this Agreement, each
member of the Yucaipa Group hereby consents (i) to the placement within 10
business days after any Company Voting Securities become subject to the
provisions of this Agreement, of the following legend on all certificates
representing ownership of Company Voting Securities owned of record or
beneficially by any member of the Yucaipa Group, until such shares are sold,
transferred or disposed in a manner permitted hereby to a person who is not then
a member of the Yucaipa Group:
The shares represented by this certificate are subject to the
provisions of a Standstill Agreement by and among the Company and
certain stockholders of the Company, and may not be sold, transferred,
pledged, hypothecated or otherwise disposed of except in accordance
therewith. Copies of said Standstill Agreement are on file at the
office of the Corporate Secretary of the Company.
and (ii) to the entry of stop transfer orders with the transfer agent or agents
of Company Voting Securities against the transfer by such member of Company
Voting Securities except in compliance with the requirements of this Agreement.
The Company agrees to remove promptly all legends and stop transfer orders with
respect to the transfer of Company Voting Securities being made to a person who
is not then a member of the Yucaipa Group in compliance with the provisions of
this Agreement.
SECTION 6. REMEDIES.
--------
Each respective member of the Yucaipa Group, the Smith Group and the
Company acknowledge and agree that (i) the provisions of this Agreement are
reasonable and necessary to protect the proper and legitimate interests of the
parties hereto, and (ii) the parties would be irreparably damaged in the event
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to preliminary and permanent injunctive relief to
prevent breaches of the provisions of this Agreement by the other parties
without the necessity of proving actual damages or of posting any bond, and to
enforce specifically the terms and provisions hereof and thereof in any court of
the United States or any state thereof having jurisdiction, which rights shall
be cumulative and in addition to any other remedy to which the parties may be
entitled hereunder or at law or equity.
SECTION 7. GENERAL PROVISIONS.
------------------
7.1. Choice of Law. This Agreement shall be construed, interpreted
-------------
and the rights of the parties determined in accordance with the laws of the
State of Delaware without reference to the choice of laws provisions thereof.
12
<PAGE>
7.2. Additional Parties; Joint and Several Obligations. All of the
-------------------------------------------------
obligations of the Yucaipa Group and its members hereunder shall be joint and
several, and all of the obligations of the Smith Group and its members hereunder
shall be joint and several. Each affiliate of a member of the Yucaipa Group or
the Smith Group that shall become or have the right to become the beneficial
owner, within the meaning and scope of Section 3 hereof, of Company Voting
Securities shall, promptly upon becoming such owner or holder, execute and
deliver to the Company a joinder agreement, agreeing to be legally bound by this
Agreement as an original signatory as a member of the Yucaipa Group or the Smith
Group, as applicable; provided that failure to execute such agreement shall not
excuse such person's non-compliance with any provision of this Agreement. No
member of the Yucaipa Group shall transfer Company Voting Securities to any of
its affiliates not already a party hereto unless the transferee shall agree to
be bound by this Agreement in the manner specified above in this Section 7.2.
No member of the Smith Group shall transfer shares of Series I Preferred Stock
to any person not already a party hereto unless the transferee shall agree to be
bound by this Agreement in the manner specified above in this Section 7.2.
7.3. Smith Group Representative. The members of the Smith Group
--------------------------
hereby appoint Jeffrey P. Smith as their designated representative to act on
behalf of the Smith Group as a whole for all purposes under the Agreement and
any party hereto may rely on such designation for written notices from the
members of the Smith Group holding a majority of all the shares of common stock
of the Company.
7.4. Notices. All notices, consents, requests, instructions,
-------
approvals and other communications provided for herein and all legal process in
regard hereto shall be in writing and shall be decreed to be validly given, made
or served when delivered personally, transmitted by telex or telecopier, or
deposited in the U.S. mail, postage prepaid, for delivery by express, registered
or certified mail, or delivered to a recognized overnight courier service,
addressed as follows:
If to the Company:
Smith's Food & Drug Centers, Inc.
1550 S. Redwood Road
Salt Lake City, Utah 84107
Attn: General Counsel
Fax Number: (801) 974-1676
If to Yucaipa or any member of the Yucaipa Group:
The Yucaipa Companies
1000 Santa Monica Boulevard, Fifth Floor
Los Angeles, California 90067
Attn: Mark A. Resnik
Fax Number: (310) 789-7201
13
<PAGE>
With a copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
Attn: Thomas C. Sadler, Esq.
Fax Number: (213) 891-8763
If to any member of the Smith Group:
Jeffrey P. Smith
32 Burningtree Court
Las Vegas, Nevada 89117
Fax:
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: Robert L. Friedman, Esq.
Fax Number: (212) 455-2502
or to such other address as may be specified in a notice given pursuant to this
Section. All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back if telexed; when receipt acknowledged, if telecopied; and the next
business day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery. The parties may change the address to
which notices are to be given by giving five days' prior notice of such change
in accordance herewith.
7.5. Severability. If any term, provision, covenant or restriction
------------
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. The parties hereto agree that they will use
their best efforts at all times to support and defend this Agreement.
7.6. Enforcement of Agreement. The approval of a majority of the
------------------------
Board of Directors or a majority of the Disinterested Directors shall be all
that is required for the Company to seek to enforce the terms of this Agreement.
7.7. Amendments; Waivers. Any provision of this Agreement may be
-------------------
amended or waived if, and only if, such amendment or waiver is in writing and
signed by each party hereto; provided that no such amendment or waiver by the
Company shall be effective without the approval of a majority of the
Disinterested Directors. No failure or delay by any party hereto in exercising
any right, power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other
14
<PAGE>
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
7.8. Descriptive Headings. Descriptive headings are for convenience
--------------------
only and shall not control or affect the meaning or construction of any
provision of this Agreement. Reference in this Agreement to Sections are to
Sections of this Agreement. All pronouns and any variations thereof refer to
the masculine, feminine or neuter, singular or plural, as the identity of the
applicable person or persons may require.
7.9. Entire Agreement; Amendment. This Agreement and the other
---------------------------
instruments and agreements referred to herein embody the entire agreement of the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements with respect thereto.
7.10. Counterparts. This Agreement shall become binding when one or
------------
more counterparts hereof, individually or taken together, bears the signatures
of each of the parties hereto. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against the party whose
signature appears thereon, or on whose behalf such counterpart is executed, but
all of which taken together shall be one and the same agreement.
7.11. No Partnership. No partnership, joint venture or joint
--------------
undertaking is intended to be, or is, formed between the parties hereto or any
of them by reason of this Agreement or the transactions contemplated herein.
7.12. Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of and be enforceable by the successors and assigns of
the parties hereto. All of the terms, covenants and agreements contained in
this Agreement are solely for the benefit of the parties hereto, and their
respective successors and assigns, and no other parties (including, without
limitation, any other stockholder or creditor of the Company, or any director,
officer or employee of the Company) are intended to be benefitted by, or
entitled to enforce, this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto intending to be legally bound
have duly executed this Agreement, all as of the day and year first above
written.
SMITH'S FOOD & DRUG CENTERS, INC.
By: /s/ Jeffrey P. Smith
------------------------
Name: Jeffrey P. Smith
Title: Chairman, President and Chief
Executive Officer
THE YUCAIPA COMPANIES
By: /s/ Mark A. Resnik
----------------------
Name: Mark A. Resnik
Title: General Partner
YUCAIPA SSV PARTNERS, L.P.
By: The Yucaipa Companies
Its General Partner
By: /s/ Mark A. Resnik
----------------------
Name: Mark A. Resnik
Title: General Partner
YUCAIPA SMITTY'S PARTNERS, L.P.
By: The Yucaipa Companies
Its General Partner
By: /s/ Mark A. Resnik
----------------------
Name: Mark A. Resnik
Title: General Partner
S-1
<PAGE>
YUCAIPA SMITTY'S PARTNERS II, L.P.
By: The Yucaipa Companies
Its General Partner
By: /s/ Mark A. Resnik
----------------------
Name: Mark A. Resnik
Title: General Partner
YUCAIPA ARIZONA PARTNERS, L.P.
By: The Yucaipa Companies
Its General Partner
By: /s/ Mark A. Resnik
----------------------
Name: Mark A. Resnik
Title: General Partner
/s/ Jeffrey P. Smith
-----------------------
JEFFREY P. SMITH
/s/ Richard D. Smith
------------------------
RICHARD D. SMITH
/s/ Fred L. Smith
---------------------
FRED L. SMITH
/s/ Ida Smith
-----------------
IDA SMITH
S-2
<PAGE>
THE DEE GLENN SMITH MARITAL TRUST
By: /s/ Jeffrey P. Smith
------------------------
Name: Jeffrey P. Smith
Title: Trustee
TRUST FOR THE CHILDREN OF JEFFREY PAUL SMITH
By: /s/ Jeffrey P. Smith
------------------------
Name: Jeffrey P. Smith
Title: Trustee
TRUST FOR THE CHILDREN OF RICHARD DEE SMITH
By: /s/ Richard D. Smith
------------------------
Name: Richard D. Smith
Title: Trustee
TRUST FOR THE CHILDREN OF FRED LORENZO SMITH
By: /s/ Fred L. Smith
---------------------
Name: Fred L. Smith
Title: Trustee
S-3
<PAGE>
EXHIBIT 10.3
SMITH'S SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT (this "Agreement") is entered into as of
---------
January 29, 1996, among Smitty's Supermarkets, Inc., a Delaware corporation
("Smitty's"), The Yucaipa Companies, a California general partnership
- ----------
("Yucaipa"), and the undersigned shareholders (individually, a "Shareholder"
------- -----------
and, collectively, the "Shareholders") of Smith's Food & Drug Centers, Inc., a
------------
Delaware corporation (the "Company").
-------
WHEREAS, Smitty's, Yucaipa, the Company and Cactus Acquisition, Inc.,
a Delaware corporation ("Acquisition"), are parties to a Recapitalization
-----------
Agreement and Plan of Merger dated as of January 29, 1996 (the "Recapitalization
----------------
Agreement"), providing for the merger of Acquisition, a wholly-owned subsidiary
- ---------
of the Company, with and into Smitty's pursuant to the terms and conditions of
the Recapitalization Agreement (the "Merger") and setting forth certain
------
representations, warranties, covenants and agreements which each of the parties
thereto is making thereby in connection with the Merger; and
WHEREAS, the Recapitalization Agreement contemplates that certain
shareholders of the Company will agree to vote their shares of Company capital
stock in favor of the Merger and to take no action inconsistent with the
Recapitalization Agreement; and
WHEREAS, to comply with the Recapitalization Agreement and to induce
the Company and Smitty's to proceed to consummate the Merger, such Shareholders
have agreed to vote all of their shares of Company Common Stock and Company
Preferred Stock (each as hereinafter defined) in favor of the Merger and to take
no action inconsistent with the Merger;
NOW THEREFORE, in consideration of the covenants herein contemplated,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. REPRESENTATIONS OF SHAREHOLDERS. Each undersigned Shareholder
represents that he, she or it (i) is the holder and beneficial owner of that
number of shares of Class A or Class B Common Stock of the Company
(collectively, the "Company Common Stock") and Series I Preferred Stock (the
--------------------
"Company Preferred Stock"), set forth under such Shareholder's signature below,
-----------------------
(ii) has full power and authority to make, enter into and carry out the terms of
this Agreement, and (iii) is not a party to or bound by any contract,
commitment, agreement, understanding arrangement or restriction of any kind with
respect to which the execution of this Agreement, or the consummation by the
Shareholder of the transactions contemplated hereby, will constitute a
violation, or cause a default or a conflict.
2. NO ACTIONS INCONSISTENT WITH RECAPITALIZATION AGREEMENT. Each
undersigned Shareholder agrees to take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to the
Merger from being satisfied at or prior to the Effective Time of the Merger.
3. TENDER OF SHARES. In the event the Company commences an Offer (as
defined in the Recapitalization Agreement), each undersigned Shareholder hereby
agrees to tender a sufficient number of its shares of Company Common Stock to
enable the Company to repurchase 50% of the outstanding shares of Company Common
Stock pursuant to such Offer.
1
<PAGE>
4. AGREEMENT TO VOTE SHARES. Each undersigned Shareholder shall vote
its shares of Company Common Stock and Company Preferred Stock and any New
Shares (as defined in Section 7 below), and shall cause any holder of record of
its shares of Company Common Stock, Company Preferred Stock or New Shares to
vote in favor of approval of the Recapitalization and the other transactions
contemplated by the Recapitalization Agreement at every meeting of the
shareholders of the Company called for such purpose (and every adjournment
thereof) or by written action without a meeting or otherwise.
5. NO-SHOP. Each undersigned Shareholder agrees that it shall not,
directly or indirectly, through any officer, director, partner, agent or
representative or otherwise, (i) solicit, initiate or encourage submission of
proposals or offers from any person other than Smitty's relating to any
acquisition or purchase of all or any material portion of the assets of, or any
equity interest in, or any merger, consolidation or business combination with,
the Company or any of its subsidiaries, or (ii) participate in any discussions
or negotiations regarding, or furnish any person other than Smitty's or its
officers, directors or agents any information with respect to, or otherwise
cooperate with, assist in, or participate in, or facilitate or encourage any
effort by any person other than Smitty's to do any of the foregoing; provided,
however, that the provisions of this Section 5 shall not preclude any
undersigned Shareholder that is a director of the Company from in engaging in
the activities specified in foregoing clause (ii), in such Shareholder's
capacity as a director, in connection with a bona fide written proposal
submitted to the Company's Board of Directors if the Company's Board of
Directors determines, after having received the oral or written opinion of
outside legal counsel to the Company, that the failure to engage in such
negotiations or discussions or provide such information would result in a breach
of such director's fiduciary duties under applicable law.
6. TRANSFER AND ENCUMBRANCE. Each undersigned Shareholder agrees not
to transfer, sell, offer, pledge, or otherwise dispose of or reduce his or her
right relative to or encumber any of its shares of Company Common Stock, Company
Preferred Stock or New Shares without the prior written consent of the Company
and Smitty's.
7. ADDITIONAL PURCHASES. Each undersigned Shareholder agrees that any
New Shares acquired or purchased by it shall be subject to the terms of this
Agreement. For purposes of this Agreement, the term "New Shares" shall mean any
----------
shares of Company Common Stock or Company Preferred Stock that each Shareholder
purchases, otherwise acquires beneficial ownership of or acquires the right to
vote or share in the voting of, after the execution of this Agreement,
including, without limitation, through the exercise of any options, warrants or
other rights to purchase Company Common Stock or Company Preferred Stock.
8. SPECIFIC PERFORMANCE. Each undersigned shareholder hereto
acknowledges that (a) it will be impossible to measure in money the damage to
Smitty's if a Shareholder fails to comply with any of the obligations imposed by
this Agreement, (b) every such obligation is material, and (c) in the event of
any such failure, Smitty's will not have an adequate remedy at law or damages
and, accordingly, each party hereto agrees that injunctive relief or other
equitable remedy, in addition to remedies at law or damages, is an appropriate
remedy for any such failure.
9. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns and shall not be assignable without the written consent of the other
party hereto.
2
<PAGE>
10. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject matter
hereof and, together with the Recapitalization Agreement and any other agreement
to be executed by each undersigned party pursuant to the Recapitalization
Agreement, contains the entire agreement among the parties with respect to the
subject matter hereof. This Agreement may not be amended, supplemented or
modified and no provisions hereof may be modified or waived, except expressly by
an instrument in writing signed by all the parties hereto. No waiver of any
provisions hereof by any party shall be deemed a waiver by any such party, and
no such waiver shall be deemed a continuing waiver of any provision hereof by
such party.
11. MISCELLANEOUS.
A. This Agreement shall be deemed a contract made under, and
for all purposes shall be construed in accordance with, the laws of the State of
Delaware.
B. If any provisions of this Agreement or the application of
such provisions to any person or circumstances shall be held invalid by a court
of competent jurisdiction, the remainder of the provision held invalid and the
application of such provision to persons or circumstances, other than the party
as to which it is held invalid, shall not be affected.
C. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
D. This Agreement shall terminate upon the earlier to occur of
(i) the termination of the Recapitalization pursuant to Section 10.2 of the
Recapitalization Agreement, (ii) the termination of the Recapitalization
Agreement under Section 10.1 of the Recapitalization Agreement or (iii) the
first business day after the Merger Closing.
E. All Section headings herein are for convenience of
reference only and are not part of this Agreement and no construction or
reference shall be derived therefrom.
F. Words used in this Agreement, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
G. Capitalized terms used herein without definition shall have
the meanings ascribed to such terms in the Recapitalization Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first written above.
SMITTY'S SUPERMARKETS, INC.
By: /s/ Mark A. Resnik
--------------------------------
Name: Mark A. Resnik
Title: Vice President
THE YUCAIPA COMPANIES
By:
--------------------------------
Name: Mark A. Resnik
Title: General Partner
SHAREHOLDERS
/s/ Jeffrey P. Smith
-----------------------------------
JEFFREY P. SMITH
Address:
-----------------------------------
-----------------------------------
Shares of Company Common Stock Beneficially
Owned:
Class Number of Shares
----- ----------------
A
----------------------------------------
B
----------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
-------------------------
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
---------------------------------------------
<PAGE>
SHAREHOLDERS
/s/ Richard D. Smith
------------------------
RICHARD D. SMITH
Address:
-----------------------------------
-----------------------------------
Shares of Company Common Stock Beneficially
Owned:
Class Number of Shares
----- ----------------
A
----------------------------------------
B
----------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
---------------------------------------------
<PAGE>
/s/ Fred L. Smith
---------------------------------------------
FRED L. SMITH
Address:
-----------------------------------
-----------------------------------
Shares of Company Common Stock Beneficially
Owned:
-------------------------------------
Class Number of Shares
----- ----------------
A
---------------------------------------
B
---------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
-------------------------
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
---------------------------------------------
<PAGE>
/s/ Ida Smith
-----------------
IDA SMITH
Address:
------------------------------------
------------------------------------
Shares of Company Common Stock Beneficially
Owned:
-------------------------------------
Class Number of Shares
----- ----------------
A
--------------------------------------
B
--------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
-------------------------
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
--------------------------------------------
<PAGE>
THE DEE GLENN SMITH MARITAL TRUST
By: /s/ Jeffrey P. Smith
------------------------
Name: Jeffrey P. Smith
Title: Trustee
Address:
------------------------------------
------------------------------------
Shares of Company Common Stock Beneficially
Owned:
Class Number of Shares
----- ----------------
A
--------------------------------------
B
--------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
-------------------------
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
---------------------------------------------
<PAGE>
TRUST FOR THE CHILDREN OF JEFFREY PAUL SMITH
By: /s/ Jeffrey P. Smith
------------------------
Name: Jeffrey P. Smith
Title: Trustee
Address:
------------------------------------
------------------------------------
Shares of Company Common Stock Beneficially
Owned:
--------------------------------------
Class Number of Shares
----- ----------------
A
--------------------------------------
B
--------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
-------------------------
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
---------------------------------------------
<PAGE>
TRUST FOR THE CHILDREN OF RICHARD DEE SMITH
By: /s/ Richard D. Smith
------------------------
Name: Richard D. Smith
Title: Trustee
Address:
-------------------------------------
-------------------------------------
Shares of Company Common Stock Beneficially
Owned:
---------------------------------------
Class Number of Shares
----- ----------------
A
----------------------------------------
B
----------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
--------------------------
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
--------------------------------------------
<PAGE>
TRUST FOR THE CHILDREN OF FRED LORENZO SMITH
By: /s/ Fred L. Smith
---------------------
Name: Fred L. Smith
Title: Trustee
Address:
------------------------------------
------------------------------------
Shares of Company Common Stock Beneficially
Owned:
---------------------------------------
Class Number of Shares
----- ----------------
A
---------------------------------------
B
---------------------------------------
Shares of Company Preferred Stock
Beneficially Owned:
--------------------------
Options or Warrants to Purchase the Following
Number of Shares of Company Common Stock or
Company Preferred Stock Beneficially Owned:
---------------------------------------------
<PAGE>
EXHIBIT 10.4
SMITTY'S STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (this "Agreement") is entered into as of
---------
January 29, 1996, among SMITH'S FOOD & DRUG CENTERS, INC., a Delaware
corporation (the "Company"), CACTUS ACQUISITION, INC., a Delaware corporation
-------
("Acquisition"), and the undersigned stockholders (individually, a "Stockholder"
- ------------- -----------
and, collectively, the "Stockholders") of Smitty's Supermarkets, Inc., a
------------
Delaware corporation ("Smitty's"), who collectively own [all] of the outstanding
--------
shares of Smitty's capital stock.
WHEREAS, Smitty's, the Company and Acquisition parties to a
Recapitalization Agreement and Plan of Merger dated as of January 29, 1996 (the
"Recapitalization Agreement"), providing for the merger of Acquisition, a
--------------------------
wholly-owned subsidiary of the Company, with and into Smitty's pursuant to the
terms and conditions of the Recapitalization Agreement (the "Merger") and
------
setting forth certain representations, warranties, covenants and agreements
which each of the parties thereto is making thereby in connection with the
Merger; and
WHEREAS, the Recapitalization Agreement contemplates that certain
stockholders of Smitty's will agree to vote their shares of Smitty's Common
Stock (as hereinafter defined) in favor of the Merger and to take no action
inconsistent with the Recapitalization Agreement; and
WHEREAS, to comply with the Recapitalization Agreement and to induce
the Company to proceed to consummate the Merger, such Stockholders have agreed
to commit to vote all shares of Smitty's Common Stock held by each such
Stockholder in favor of the Merger and to take no action inconsistent with the
Merger;
NOW, THEREFORE, in consideration of the covenants herein contemplated,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. REPRESENTATIONS OF STOCKHOLDERS. Each undersigned Stockholder
represents that it (i) is the holder and beneficial owner of that number of
shares of Class A or Class B Common Stock of the Company (collectively, the
"Smitty's Common Stock") set forth under its signature below, (ii) has full
---------------------
power and authority to make, enter into and carry out the terms of this
Agreement, and (iii) is not a party to or bound by any contract, commitment,
agreement, understanding arrangement or restriction of any kind with respect to
which the execution of this Agreement, or the consummation by such Stockholder
of the transactions contemplated hereby will constitute a violation, or cause a
default or a conflict.
2. AGREEMENT TO VOTE SHARES. Each undersigned Stockholder shall vote
its shares of Smitty's Common Stock and any New Shares (as defined in Section 6
below), and shall cause any holder of record of its shares of Smitty's Common
Stock or New Shares to vote, in favor of approval of the Merger and, to the
extent required, the other transactions contemplated by the Recapitalization
Agreement at every meeting of the stockholders of Smitty's called for such
purpose (and every adjournment thereof) or by written action without a meeting
or otherwise.
3. NO-SHOP. Each undersigned Stockholder agrees that it shall not,
directly or indirectly, through any officer, director, partner, agent or
representative or otherwise, (i) solicit, initiate or encourage submission of
proposals or offers from any person other than the Company or Acquisition
1
<PAGE>
relating to any acquisition or purchase of all or any material portion of the
assets of, or any equity interest in, or any merger, consolidation or business
combination with, Smitty's or any of its subsidiaries, or (ii) participate in
any discussions or negotiations regarding, or furnish any person other than the
Company, Acquisition, or their officers, directors or agents any information
with respect to, or otherwise cooperate with, assist in, or participate in, or
facilitate or encourage any effort by any person other than the Company or
Acquisition to do any of the foregoing.
4. NO ACTIONS INCONSISTENT WITH RECAPITALIZATION AGREEMENT. Each
undersigned Stockholder agrees to take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to the
Merger from being satisfied at or prior to the Effective Time of the Merger.
5. TRANSFER AND ENCUMBRANCE. Each undersigned Stockholder agrees not
to transfer, sell, offer, pledge, or otherwise dispose of or reduce his or her
right relative to or encumber any of its shares of Company Common Stock or New
Shares without the prior written consent of the Company and Smitty's.
6. ADDITIONAL PURCHASES. Each undersigned Stockholder agrees that any
New Shares acquired or purchased by it shall be subject to the terms of this
Agreement. For purposes of this Agreement, the term "New Shares" shall mean any
----------
shares of Smitty's Common Stock that each Stockholder purchases, otherwise
acquires beneficial ownership of or acquires the right to vote or share in the
voting of, after the execution of this Agreement, including, without limitation,
through the exercise of any options, warrants or other rights to purchase
Smitty's Common Stock.
7. SPECIFIC PERFORMANCE. Each party hereto acknowledges that (a) it
will be impossible to measure in money the damage to the Company and Acquisition
if a Stockholder fails to comply with any of the obligations imposed by this
Agreement, (b) every such obligation is material, and (c) in the event of any
such failure, the Company and Acquisition will not have an adequate remedy at
law or damages and, accordingly, each party hereto agrees that injunctive relief
or other equitable remedy, in addition to remedies at law or damages, is an
appropriate remedy for any such failure.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns and shall not be assignable without the written consent of the other
parties hereto.
9. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject matter
hereof and, together with the Recapitalization Agreement and any other agreement
to be executed by each undersigned party pursuant to the Recapitalization
Agreement, contains the entire agreement among the parties with respect to the
subject matter hereof. This Agreement may not be amended, supplemented or
modified and no provisions hereof may be modified or waived, except expressly by
an instrument in writing signed by all the parties hereto. No waiver of any
provisions hereof by any party shall be deemed a waiver by any such party, and
no such waiver shall be deemed a continuing waiver of any provision hereof by
such party.
10. MISCELLANEOUS.
A. This Agreement shall be deemed a contract made under, and for
all purposes shall be construed in accordance with, the laws of the State of
Delaware.
2
<PAGE>
B. If any provisions of this Agreement or the application of such
provisions to any person or circumstances shall be held invalid by a court of
competent jurisdiction, the remainder of the provision held invalid and the
application of such provision to persons or circumstances, other than the party
as to which it is held invalid, shall not be affected.
C. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
D. This Agreement shall terminate upon the earlier to occur of
the termination of the Recapitalization Agreement pursuant to Section 10.1
thereof or the consummation of the Merger.
E. All Section headings herein are for convenience of reference
only and are not part of this Agreement and no construction or reference shall
be derived therefrom.
F. Words used in this Agreement, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
G. Capitalized terms used herein without definition shall have
the meanings ascribed to such terms in the Recapitalization Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first written above.
SMITH'S FOOD & DRUG CENTERS, INC.
By: /s/ Jeffrey P. Smith
-----------------------------------------
Name: Jeffrey P. Smith
Title: Chairman, President and
Chief Executive Officer
CACTUS ACQUISITION, INC.
By: /s/ Jeffrey P. Smith
-----------------------------------------
Name: Jeffrey P. Smith
Title: President and Chief Executive
Officer
STOCKHOLDER:
YUCAIPA SSV PARTNERS, L.P.
By: The Yucaipa Companies
Its: General Partner
By: /s/ Mark A. Resnik
-----------------------------------------
Name: Mark A. Resnik
Title: General Partner
Address: 10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Shares of Smitty's Common Stock
Beneficially Owned:
Class Number of Shares
----- ----------------
A 378,872
-------------------------------------
B 0
-------------------------------------
Options or Warrants to Purchase the
Following Number of Shares of Smitty's
Common Stock Beneficially Owned:
0
--------------------------------------------
4
<PAGE>
STOCKHOLDER:
YUCAIPA SMITTY'S PARTNERS, L.P.
By: The Yucaipa Companies
Its: General Partner
By: /s/ Mark A. Resnik
------------------------------------
Name: Mark A. Resnik
Title: General Partner
Address: 10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Shares of Smitty's Common Stock
Beneficially Owned:
Class Number of Shares
----- ----------------
A 99,829.803
--------------------------------
B 0
--------------------------------
Options or Warrants to Purchase the
Following Number of Shares of Smitty's
Common Stock Beneficially Owned:
0
---------------------------------------
5
<PAGE>
STOCKHOLDER:
YUCAIPA SMITTY'S PARTNERS II, L.P.
By: The Yucaipa Companies
Its: General Partner
By: /s/ Mark A. Resnik
----------------------------------------
Name: Mark A. Resnik
Title: General Partner
Address: 10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Shares of Smitty's Common Stock
Beneficially Owned:
Class Number of Shares
----- ----------------
A 45,419
------------------------------------
B 0
------------------------------------
Options or Warrants to Purchase the
Following Number of Shares of Smitty's
Common Stock Beneficially Owned:
0
-------------------------------------------
6
<PAGE>
STOCKHOLDER:
YUCAIPA ARIZONA PARTNERS, L.P.
By: The Yucaipa Companies
Its: General Partner
By: /s/ Mark A. Resnik
-------------------------------------
Name: Mark A. Resnik
Title: General Partner
Address: 10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Shares of Smitty's Common Stock
Beneficially Owned:
Class Number of Shares
----- ----------------
A 181,662
---------------------------------
B 0
---------------------------------
Options or Warrants to Purchase the
Following Number of Shares of Smitty's
Common Stock Beneficially Owned:
0
----------------------------------------
7
<PAGE>
EXHIBIT 10.5
FORM OF
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
---------
entered into as of _____________, 1996 by and among Smith's Food & Drug Centers,
Inc., a Delaware corporation (the "Company"), and each of the holders of the
-------
Company's Common Stock (the "Common Stock") executing this Agreement (each a
------------
"Holder" and collectively, the "Holders").
------ -------
WHEREAS, pursuant to that certain Recapitalization Agreement and Plan
of Merger dated as of January 29, 1996 (the "Recapitalization Agreement"), by
--------------------------
and among the Company, Smitty's 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"), the Company will acquire Smitty's
-------
through the merger of Acquisition with and into Smitty's, and in connection
therewith the existing stockholders of Smitty's will receive shares of Class B
Common Stock, $.01 par value ("Class B Common Stock") of the Company, and
--------------------
Yucaipa will be issued warrants (the "Warrants") to purchase shares of Class C
--------
Common Stock, $.01 par value ("Class C Common Stock") of the Company; and
--------------------
WHEREAS, the Company has agreed to provide the registration rights set
forth in this Agreement and the execution and delivery of this Agreement by the
Company is a condition to the obligations of Smitty's and Yucaipa under the
Recapitalization Agreement.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
-----------
SECTION 1.1 DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein have the meanings ascribed to them in the Recapitalization
Agreement. In addition, the following capitalized terms shall have the meanings
ascribed to them below:
"Affiliate," as applied to any specified Person, shall mean any other
---------
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person and, in the case of a Person
who is an individual, shall include (i) members of such specified Person's
immediate family (as defined in Instruction 2 of Item 404(a) of Regulation S-K
under the Securities Act) and (ii) trusts, the trustee and all beneficiaries of
which are such specified Person or members of such Person's immediate family as
determined in accordance with the foregoing clause (i). For the purposes of
this definition, "control", when used with respect to any Person, means the
-------
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Associated Holder" means any Holder who received Company Common Stock
-----------------
pursuant to the Recapitalization Agreement upon the conversion of such Holder's
shares of Class B Common Stock, $.01 par value, of Smitty's in the Merger.
1
<PAGE>
"Business Day" means any day that is not a Saturday, Sunday or a day
------------
on which banking institutions in New York, New York or Los Angeles, California
are not required to be open.
"Company Common Stock" means the Class B Common Stock and the Class C
--------------------
Common Stock.
"Deferral Period" is defined in Section 2.1.
---------------
"Demand Notice" is defined in Section 2.1.
-------------
"Demand Registration" is defined in Section 2.1.
-------------------
"Demanding Holder" means any Holder initiating a registration request
----------------
in compliance with Section 2.1(a); provided that any action required or
permitted to be taken under this Agreement by any Demanding Holders shall be
taken by action of the holders of a majority of the Registrable Securities held
by such Demanding Holders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"Holders" means the holders of Company Common Stock and of the
-------
Warrants who have executed this Agreement, and the transferees of each of them.
"Person" means an individual, partnership, corporation, limited
------
liability company, trust or unincorporated organization, or a government or
agency or political subdivision thereof.
"Piggyback Registration" is defined in Section 2.2.
----------------------
"Piggyback Holder" is defined in Section 2.2.
----------------
"Prospectus" means the prospectus included in a Registration
----------
Statement, as amended or supplemented by any prospectus supplement and by all
other amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
"Public Distribution" shall mean any bona fide underwritten public
-------------------
distribution of Stock pursuant to an effective registration statement under the
Securities Act or any other applicable law, or any bona fide public sale in an
open market transaction under Rule 144 of the Securities Act (or any successor
rule) if such sale is in compliance with the requirements of paragraphs (c),
(d), (e), (f) and (g) of such Rule (notwithstanding the provisions of paragraph
(k) of such Rule).
"Public Offering" shall mean any bona fide underwritten public
---------------
distribution of Stock pursuant to an effective registration statement under the
Securities Act or any other applicable law.
"Registrable Securities" means each share of Stock held by the
----------------------
Holders, or acquired by the Holders after the date hereof, until (i) it has been
effectively registered under the Securities Act and disposed of by such Holders
pursuant to an effective registration statement, or (ii) it is sold by such
Holders pursuant to Rule 144 (or any similar provisions then in force) under the
Securities Act. "Registrable Securities" shall include all shares of Company
Common Stock issued or issuable upon exercise of the Warrants.
2
<PAGE>
"Registration Statement" means any registration statement of the
----------------------
Company relating to a Demand Registration pursuant to Section 2.1, a Piggyback
Registration pursuant to Section 2.2, or a Shelf Registration pursuant to
Section 2.3, in each case, including the Prospectus included therein, all
amendments and supplements thereto (including post-effective amendments) and all
exhibits and material incorporated by reference therein.
"Restricted Registration" means any public offering of Registrable
-----------------------
Securities pursuant to a Registration Statement in which the aggregate number of
shares proposed to be offered by the Smith Group and the Yucaipa Group is
restricted by the managing underwriter(s) as contemplated by Sections 2.1(e) and
2.2(b) hereof.
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Selling Holder" means a Holder who sells or proposes to sell
--------------
Registrable Securities pursuant to a Registration Statement under the Securities
Act.
"Shelf Registration" or "Shelf Registration Statement" is defined in
------------------ ----------------------------
Section 2.3.
"Smith Group" is defined in Section 2.1(a).
-----------
"Smith Group Priority Amount" means up to an aggregate amount of
---------------------------
850,000 shares of Company Common Stock which may be sold by the Smith Group
pursuant to one or more Registration Statements.
"Stock" means the following securities: (i) the Company Common Stock
-----
or (ii) any security or other instrument (a) received as a dividend on, or other
payment made to the holders of, the Company Common Stock (or any other security
or instrument referred to in this definition) or (b) issued in connection with a
split of the Company Common Stock (or any other security or instrument referred
to in this definition) or as a result of any exchange or reclassification of the
Company Common Stock (or any other security or instrument referred to in this
definition), reorganization, consolidation, merger or recapitalization.
"Underwritten Registration" or "Underwritten Offering" means a
------------------------- ---------------------
registration in which Stock of the Company is sold to an underwriter for re-
offering to the public.
"Yucaipa Group" is defined in Section 2.1(a).
-------------
ARTICLE II
REGISTRATION RIGHTS
-------------------
SECTION 2.1 DEMAND REGISTRATIONS.
(a) Request for Registration. At any time and from time to time on or
------------------------
after the Closing Date (as defined in the Recapitalization Agreement), each of
(i) the holders of a majority of the
3
<PAGE>
Registrable Securities held by Yucaipa and its Affiliates, Associated Holders
and transferees of any of the foregoing, as a group (the "Yucaipa Group"), and
-------------
(ii) the holders of a majority of the Registrable Securities held by Jeffrey P.
Smith and his Affiliates and transferees of any of the foregoing, as a group
(the "Smith Group"), may make two written requests of the Company for
-----------
registration with the SEC, under and in accordance with the provisions of the
Securities Act, of all or part (but not less than 20% of Registrable Securities
originally held by the Holders requesting such Demand Registration) of their
Registrable Securities (a "Demand Registration") by giving written notice to the
-------------------
Company of such demand (a "Demand Notice"), provided that the Company shall be
-------------
required to effect only one Demand Registration during any six-month period.
Each such Demand Notice will specify the number of Registrable Securities
proposed to be sold pursuant to such Demand Registration and will also specify
the intended method of disposition thereof.
Promptly after receipt of any Demand Notice, but in no event later
than 60 days after receipt of such Demand Notice, the Company shall file a
Registration Statement with the SEC with respect to the Registrable Securities
included in the Demand Notice and shall use its best efforts to have such
Registration Statement declared effective as promptly as practicable; provided,
however, that the Company may postpone the filing of such Registration Statement
for a period of up to 90 days (the "Deferral Period") if the Board of Directors
---------------
reasonable determines that (i) such a filing would adversely affect any proposed
financing, acquisition, divestiture or other material transaction by the Company
or (ii) such a filing would otherwise represent an undue hardship for the
Company. The Company shall not be entitled to request more than one such
deferral with respect to any group of Holders requesting a Demand Registration
within any 365-day period. If the Company does elect to defer any such Demand
Registration, the Holders requesting such Demand Registration may, at their
election by written notice to the Company, (i) confirm their request to proceed
with such Demand Registration upon the expiration of the Deferral Period or
(ii) withdraw their request for such Demand Registration in which case no such
request for a Demand Registration shall be deemed to have occurred for purposes
of this Agreement.
The Company shall give written notice of any Demand Notice by any
Holder, which request complies with this Section 2.1(a), within 5 days after the
receipt thereof, to each Holder who did not initially join in such request.
Within 10 days after receipt of such notice, any such Holder may request in
writing that its Registrable Securities be included in such registration, and
the Company shall include in the Demand Registration the Registrable Securities
of each such Holder requested to be so included, subject to the provisions of
Section 2.1(e). Each such request shall specify the number of shares of
Registrable Securities proposed to be sold and the intended method of
disposition thereof.
(b) Effective Registration. Except as provided in subsection (c)
----------------------
below, a registration will not be deemed to have been effected as a Demand
Registration unless it has been declared effective by the SEC; provided that if,
after it has become effective, the offering of Registrable Securities pursuant
to such registration is or becomes the subject of any stop order, injunction or
other order or requirement of the SEC or any other governmental or
administrative agency, or if any court prevents or otherwise limits the sale of
Registrable Securities pursuant to the registration (for any reason other than
the acts or omissions of the Holders), such registration will be deemed not to
have been effected. If (i) a registration requested pursuant to this Section
2.1 is deemed not to have been effected in accordance with the provisions of the
preceding sentence or (ii) the registration requested pursuant to this Section
2.1 does not remain continuously effective for a period of at least 90 days
beyond the effective date thereof or until the consummation of the distribution
by the Holders of the Registrable Securities included in such registration
statement (the "Demand Registration Statement"), then such Demand Registration
-----------------------------
Statement shall not count as a Demand Registration that may be requested by the
Demanding Holder(s) in question and the Company shall continue to be obligated
to effect a registration pursuant to this Section 2.1.
4
<PAGE>
(c) Withdrawal. The Demanding Holders may withdraw all or any part of
----------
the Registrable Securities from a Demand Registration at any time (whether
before or after the filing or effective date of the Demand Registration
Statement), and if all such Registrable Securities are withdrawn, to withdraw
the demand related thereto. If at any time a registration statement is filed
pursuant to a Demand Registration, and subsequently a sufficient number of
Registrable Securities are withdrawn from the Demand Registration so that such
Demand Registration Statement does not cover at least the required amounts
specified by Section 2.1(a), and an additional number of Registrable Securities
is not so included, the Company may (or shall, if requested by the Demanding
Holders) withdraw such Demand Registration Statement; provided that such
withdrawn registration statement will count as a Demand Registration unless the
Demanding Holders elect to bear the expenses associated with such withdrawn
registration statement. If the Demanding Holders elect to bear such expenses,
such expenses shall be borne by the Demanding Holder(s) whose withdrawal of
Registrable Securities resulted in such Demand Registration Statement not
covering the specified required amounts.
(d) Selection of Underwriter. If the Demanding Holders so elect, the
------------------------
offering of Registrable Securities pursuant to a Demand Registration shall be in
the form of an Underwritten Offering. The Demanding Holders shall select one or
more nationally recognized firms of investment bankers to act as the managing
Underwriter or Underwriters in connection with such offering and shall select
any additional investment bankers and managers to be used in connection with
such offering; provided that such investment bankers and managers must be
reasonably satisfactory to the Company. The Company shall (together with all
Holders of Registrable Securities proposing to distribute such Registrable
Securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting in the manner set forth above.
(e) Priority on Demand Registrations. If, in any Demand Registration
--------------------------------
involving an Underwritten Offering the managing underwriter or underwriters
thereof advise the Demanding Holders or the Company in writing that in its or
their reasonable opinion the number of Registrable Securities proposed to be
sold in such Demand Registration exceeds the number that can be sold in such
offering or will adversely affect the success of such offering (including,
without limitation, an impact on the selling price or the number of Registrable
Securities that any participant may sell), the Company shall include in such
registration only the number of Registrable Securities, if any, which in the
opinion of such underwriter or underwriters can be sold without having an
adverse effect on the success of the offering and in accordance with the
following priority: (i) first, Registrable Securities held by Demanding Holders
-----
in the group initially requesting such registration, allocated pro rata among
such group (based upon the number of Registrable Securities requested to be
included in such Demand Registration) and (ii) second, pro rata (based upon the
------
number of Registrable Securities requested to be included in such registration
by such Holders) among the other Holders of Registrable Securities who have
requested to include Registrable Securities in such registration. If all
Registrable Securities requested to be sold in the Underwritten Offering are
included therein, the Company may include other shares of Stock in such offering
in accordance with the following priority, but not to exceed the number
recommended by the managing underwriter or underwriters: (x) first, pro rata
-----
among any other stockholders of the Company having piggyback or other similar
registration rights and (y) second, shares of Stock proposed to be sold by or
------
for the account of the Company. Notwithstanding the foregoing, if prior to the
filing of any Demand Registration Statement, the Company has received Demand
Notices from both the Smith Group and the Yucaipa Group, then the Smith Group
shall have priority until such time as the Smith Group Priority Amount of
Registrable Securities (including all Registrable Securities sold by the Smith
Group under any prior Restricted Registration after the date hereof) has been
included and thereafter the Smith Group and the Yucaipa Group shall be permitted
to include their Registrable Securities in any such Demand Registration on an
equal basis (i.e. each group will be entitled to 50% of the remaining share
5
<PAGE>
allocation, or such greater percentage as may be available if the other group
elects not to fill its entire 50% allocation).
SECTION 2.2 PIGGYBACK REGISTRATIONS.
(a) Right to Participate in Registration. 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 any substitute form that may be adopted by the
SEC) or (ii) a registration statement filed in connection with a Demand
Registration or a Shelf Registration or (iii) a registration statement filed in
connection with an offering of securities solely to the Company's existing
securityholders), then the Company shall give written notice of such proposed
filing to the Holders as soon as practicable (but in no event less than 20 days
before the anticipated filing date), and such notice shall offer such Holder the
opportunity to register such number of shares of Registrable Securities as each
such Holder may request, which request shall specify the Registrable Securities
intended to be disposed of by such Holder and the intended method of
distribution thereof (or, if the offering is a proposed Underwritten Offering,
that such Holder elects to have the number of Registrable Securities so
specified included in such Underwritten Offering) (a "Piggyback Registration").
----------------------
The Company shall use its best efforts to cause the managing
Underwriter or Underwriters of a proposed Underwritten Offering to permit the
Registrable Securities requested by the Holders thereof to be included in a
Piggyback Registration (the "Piggyback Holders") to be included on the same
-----------------
terms and conditions as any similar securities of the Company or any other
securityholder included therein and to permit the sale or other disposition of
such Registrable Securities in accordance with the intended method of
distribution thereof.
No registration effected under this Section 2.2 and no failure to
effect a registration under this Section 2.2(a), shall relieve the Company of
its obligations pursuant to Section 2.1, and no failure to effect a registration
under this Section 2.2(a) and complete the sale of shares in connection
therewith shall relieve the Company of any other obligation under this Agreement
(including, without limitation, the Company's obligations under Sections 3.2 and
4.1).
(b) Priority on Piggyback Registrations. Unless the registration
-----------------------------------
statement is being filed pursuant to a Demand Registration (in which case the
priority of piggyback rights shall be as provided in Section 2.1(e) above), if
the managing underwriter or underwriters advise the Company in writing that in
its or their reasonable opinion the number of equity securities of the Company
proposed to be sold in such registration (including Registrable Securities to be
included pursuant to subsection (a) above) will adversely affect the success of
such offering (including, without limitation, an impact on the selling price or
the number of equity securities of the Company that any participant may sell),
the Company shall include in such registration the number of equity securities
of the Company, if any, which in the opinion of such underwriter or underwriters
can be sold without having an adverse effect on the offering and in accordance
with the following priority: (i) first, the securities the Company proposes to
-----
sell for its own account, (ii) second, any Registrable Securities proposed to be
------
sold by the Smith Group until such time as the Smith Group Priority Amount of
Registrable Securities (including all Registrable Securities sold by the Smith
Group under any prior Restricted Registration after the date hereof) have been
included, (iii) third, any other Registrable Securities of the Smith Group and
-----
any Registrable Securities of the Yucaipa Group, on an equal basis (as specified
in Section 2.1(e) above), and (iv) fourth, pro rata based on the number of
------
Registrable Securities that each Holder or other Person having similar rights
shall have requested to be included therein.
6
<PAGE>
(c) Withdrawal. The Piggyback Holders may withdraw all or any part of
----------
the Registrable Securities from a Piggyback Registration at any time (before but
not after the effective date of such registration statement), by delivering
written notice of such withdrawal request to the Company, unless such Piggyback
Registration is underwritten, in which case Registrable Securities may not be
withdrawn after the effective date of the Registration Statement.
(d) Termination of Registration by the Company. If the Company shall
------------------------------------------
determine for any reason (x) not to register or (y) to delay a registration
which includes Registrable Securities pursuant to this Section 2.2, the Company
may, at its election, give written notice of such determination to the Holders
of the Registrable Securities and, thereupon (i) in the case of a determination
not to register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from its obligation to
pay the Registration Expenses (as defined below) in connection therewith),
without prejudice, however, to the rights, if any, of any Holder or Holders of
Registrable Securities to request that such registration be effected as a Demand
Registration under Section 2.1, and (ii) in the case of a delay in registering,
shall be permitted to delay registering any Registrable Securities for the same
period as the delay in registering such other shares.
SECTION 2.3 SHELF REGISTRATION.
(a) Filing and Effectiveness. Upon the request of the Demanding
------------------------
Holders in the Yucaipa Group at any time prior to the second anniversary of the
Closing Date, the Company shall cause to be filed with the SEC as promptly as
practicable after such request, but in no event later than 60 days thereafter, a
shelf registration statement pursuant to Rule 415 under the Securities Act (a
"Shelf Registration" or a "Shelf Registration Statement"), which Shelf
------------------ ----------------------------
Registration Statement shall provide for resales of all Registrable Securities
held by members of the Yucaipa Group who shall have provided the information
required pursuant to Section 3.1(b). The Company shall use its best efforts to
have such Shelf Registration declared effective and to keep such Shelf
Registration Statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for resales of Registrable
Securities by such Holders, and to ensure that it conforms with the requirements
of this Agreement, the Securities Act and the policies, rules and regulations of
the SEC as announced from time to time, for a period of at least 120 days
following the date on which such Shelf Registration Statement becomes effective
under the Securities Act; provided, however, that if the Registrable Securities
received by the Yucaipa Group are "restricted securities" within the meaning of
Rule 144 under 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) (but in no
event shall such Shelf Registration Statement be required to be kept
continuously effective after the second anniversary of the Closing Date).
(b) Effective Registration. A registration will not be deemed to have
----------------------
been effected as a Shelf Registration unless it has been declared effective by
the SEC and the Company has complied in all material respects with its
obligations under this Agreement with respect thereto; provided that if, after
it has become effective, the offering of Registrable Securities pursuant to such
registration is or becomes the subject of any stop order, injunction or other
order or requirement of the SEC or any other governmental or administrative
agency, or if any court prevents or otherwise limits the sale of Registrable
Securities pursuant to the registration (for any reason other than the acts or
omissions of the Holders), such registration will be deemed not to have been
effected. If (i) the Shelf Registration is deemed not to have been effected in
accordance with the provisions of the preceding sentence or (ii) the Shelf
Registration does not remain continuously effective for the period described in
subsection (a) above, then
7
<PAGE>
such Shelf Registration Statement shall not count as a Shelf Registration and
the Company shall continue to be obligated to effect a registration pursuant to
this Section 2.3.
ARTICLE III
REGISTRATION PROCEDURES
-----------------------
SECTION 3.1 REGISTRATION PROCEDURES.
(a) General Provisions. In connection with any Registration Statement
------------------
and any related Prospectus required by this Agreement to permit the sale or
resale of Registrable Securities, the Company shall:
(1) prepare and file with the SEC a registration statement with
respect to such Registrable Securities within the time periods specified
herein, make all required filings with the NASD and use its best efforts to
cause such registration statement to become effective as promptly as
practicable (subject to the Company's right to withdraw the registration
statement under the circumstances described in Sections 2.1(c) or 2.2(d));
(2) promptly prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be necessary
to keep the Registration Statement effective for the applicable period set
forth in Sections 2.1, 2.2 or 2.3, as applicable, or such shorter period as
will terminate when all Registrable Securities covered by such Registration
Statement have been sold; cause the Prospectus to be supplemented by a
required Prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the Securities Act, and to comply fully with the
applicable provision of Rules 424 and 430A under the Securities Act in a
timely manner; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended
method or methods of distribution by the sellers thereof set forth in such
Registration Statement or supplement to the Prospectus;
(3) use its best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements for
the period specified in Sections 2.1, 2.2 or 2.3, as applicable; upon the
occurrence of any event that would cause any such Registration Statement or
the Prospectus contained therein (A) to contain a material misstatement or
omission or (B) not to be effective and usable for resale of Registrable
Securities during the period required by this Agreement, the Company shall
file promptly an appropriate amendment to such Registration Statement, in
the case of clause (A), correcting any such misstatement or omission, and,
in the case of either clause (A) or (B), use its best efforts to cause such
amendment to declared effective and such Registration Statement and related
Prospectus to become usable for their intended purposes(s) as soon as
practicable thereafter;
(4) provide (A) the Holders of Registrable Securities
participating in the registration, (B) the underwriters (which term, for
purposes of this Agreement, shall include a Person deemed to be an
underwriter within the meaning of Section 2(11) of the Securities Act), if
any, of the Registrable Securities to be registered, (C) the sale or
placement agent therefor, if any, (D) counsel for such underwriters or
agent, and (E) counsel for the Holders thereof, as selected by Holders of a
majority of the Registrable Securities covered by such registration
statement, the opportunity to participate in the preparation of such
registration statement, each
8
<PAGE>
prospectus included therein or filed with the SEC, and each amendment or
supplement thereto, and for a reasonable period prior to the filing of such
registration statement, and throughout the period specified in Section
3.4(b) hereof, make available for inspection by the parties referred to in
(A) through (E) above such financial and other information and books and
records of the Company, provide access to properties of the Company and
cause the officers, directors, employees, counsel and independent certified
public accountants of the Company to respond to such inquiries as shall be
reasonably necessary to conduct a reasonable investigation within the
meaning of Section 11 of the Securities Act;
(5) advise the underwriters, if any, and Selling Holders promptly
and, if requested by such Persons, to confirm such advice in writing, (A)
when the Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to any Registration Statement
or any post-effective amendment thereto, when the same has become
effective, (B) of any request by the SEC for amendments to the Registration
Statement or amendments or supplements to the Prospectus or for additional
information relating thereto, (C) of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement under the
Securities Act or of the suspension by any state securities commission of
the qualification of the Registrable Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for any of the preceding
purposes, (D) of the existence of any fact or the happening of any event
that makes any statement of a material fact made in the registration
Statement, the Prospectus, any amendment or supplement thereto, or any
document incorporated by reference therein untrue, or that requires the
making of any additions to or changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading. If at
any time the SEC shall issue any stop order suspending the effectiveness of
the Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption from qualification of the Registrable Securities under state
securities or Blue Sky laws, the Company shall use its best efforts to
obtain the withdrawal or lifting of such order at the earliest possible
time;
(6) furnish to each Selling Holder named in any Registration
Statement or Prospectus and each of the underwriter(s) in connection with
such sale, if any, such number of copies of any Registration Statement or
Prospectus included therein or any amendments or supplements to any such
Registration Statement or Prospectus (including all documents incorporated
by reference after the initial filing of such Registration Statement and
all exhibits filed therewith), reasonably requested by such Person;
(7) if requested by any selling Holders or the underwriter(s) in
connection with such sale, if any, promptly include in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective
amendment if necessary, such information as such selling Holders and such
underwriter(s), if any, may reasonably request to have included therein,
including, without limitation, information relating to the "Plan of
Distribution" of the Registrable Securities, information with respect to
the principal amount of Registrable Securities being sold to such
underwriter(s), the purchase price being paid therefor and any other terms
of the offering of the Registrable Securities to be sold in such offering,
and make all required filing of such Prospectus supplement or post-
effective amendment as soon as practicable after the Company is notified of
the matters to be included in such Prospectus supplement or post-effective
amendment;
(8) deliver to each Selling Holder and each of the
underwriter(s), if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any
9
<PAGE>
amendment or supplement thereto as such Persons reasonably may request; the
Company hereby consents to the use of the Prospectus and any amendment or
supplement thereto by each of the Selling Holders and each of the
underwriter(s), if any, in connection with the offering and the sale of the
Registrable Securities covered by the Prospectus or any amendment or
supplement thereto;
(9) in connection with any Underwritten Offering pursuant to a
Demand Registration, enter into an underwriting agreement with one or more
underwriters designated in accordance with this Agreement, such agreement
to be of the form, scope and substance as is customary in underwritten
offerings, and take all such other actions as are reasonably requested by
the managing underwriter(s) in order to expedite or facilitate the
disposition of such Registrable Securities and in such connection: (i) make
such representations and warranties to the underwriters in form, scope and
substance as are customarily made by issuers to underwriters in
underwritten offerings with respect to the business of the Company; (ii)
obtain opinions of counsel to the Company and updates thereof (which
counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriter(s)) addressed to the managing
underwriter(s) covering the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be
reasonably requested by the underwriters; (iii) obtain "comfort" letters
and updates thereof from the Company's independent certified public
accountants addressed to the underwriters, such "comfort" letters to be in
customary form and covering matters of the type customarily covered in
"comfort" letters in connection with underwritten offerings; (iv) deliver
such documents and certificates as may be reasonably requested by the
managing underwriter(s) to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement
entered into by the Company. The above shall be done at each closing under
such underwriting or similar agreement.
(10) prior to any public offering of Registrable Securities,
cooperate with the Selling Holders, the underwriter(s), if any, and their
respective counsel in connection with the registration and qualification of
the Registrable Securities under the securities or Blue Sky laws of such
jurisdictions as the Selling Holders or underwriter(s), if any, may request
and do any and all other acts or things necessary or advisable to enable
the disposition in such jurisdictions or the Registrable Securities covered
by the applicable Registration Statement; provided, however, that the
Company shall not be required to register or qualify as a foreign
corporation where it is not now so qualified or to take any action that
would subject it to the service of process in suits or to taxation, except
as is required as a result of the Registration Statement, in any
jurisdiction where it is not now so subject;
(11) in connection with any sale of Registrable Securities that
will result in such securities no longer being Registrable Securities,
cooperate with the Selling Holders and the underwriter(s), if any, to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any restrictive legends;
and to register such Registrable Securities in such denominations and such
names as the Selling Holders or the underwriter(s), if any, may request at
least two Business Days prior to such sale of Registrable Securities;
(12) if requested by the Selling Holders, provide a CUSIP number
for all Registrable Securities not later than the effective date of the
Registration Statement covering such
10
<PAGE>
Registrable Securities and provide the Company's transfer agent(s) and
registrar(s) for the Registrable Securities with printed certificates for
the Registrable Securities;
(13) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of the
NASD, and use their best efforts to cause such Registration Statement to
become effective and approved by such governmental agencies or authorities
as may be necessary to enable the Selling Holders or underwriters, if any,
to consummate the disposition of such Registrable Securities;
(14) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make generally available to its
security holders, as soon as practicable, a consolidated earnings statement
meeting the requirements of Rule 158 under the Securities Act (which need
not be audited) covering a period of at least twelve month periods, but not
more than eighteen months, beginning with the first month of the Company's
first quarter commencing after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act; and
(15) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which securities of
the same class issued by the Company are then listed if requested by the
Selling Holders holding a majority of the Registered Securities or the
managing underwriter(s), if any.
(b) Provision by Holders of Certain Information. No Holder of Registrable
-------------------------------------------
Securities may include any of its Registrable Securities in any Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 20 days after receipt of a request therefor, such
information as the Company may reasonably request specified in item 507 of
Regulation S-K under the Securities Act for use in connection with any
Registration Statement or Prospectus or preliminary Prospectus included therein.
Each Holder as to which any Registration Statement is being effected agrees to
furnish promptly to the Company all information required to be disclosed in
order to make the information previously furnished to the Company by such Holder
not materially misleading.
SECTION 3.2 REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or compliance
with this Section 3.2 will be paid by the Company, regardless of whether any
registration statement required hereunder becomes effective, including, without
limitation:
(1) all registration and filing fees;
(2) fees and expenses of compliance with securities or blue sky laws
(including, without limitation, reasonable fees and disbursements of
counsel for the underwriters or selling Holders in connection with blue sky
qualifications of the Registrable Securities and determination of their
eligibility for investment under the laws of such jurisdictions as the
managing underwriters or Holders of Registrable Securities being sold may
designate);
(3) printing (including, without limitation, expenses of printing or
engraving certificates for the Registrable Securities in a form eligible
for trading on the New York Stock
11
<PAGE>
Exchange or for deposit with the Depository Trust Company and of printing
prospectuses), messenger, telephone and delivery expenses;
(4) reasonable fees and disbursements of counsel for the Company, for
the underwriters and for the Selling Holders (subject to the provisions of
Section 3.2(c) hereof);
(5) reasonable fees and disbursements of all independent certified
public accountants of the Company (including, without limitation, the
expenses of any special audit and "cold comfort" letters required by or
incident to such performance); and
(6) reasonable fees and disbursements of underwriters (excluding
discounts, commissions or fees of underwriters, selling brokers, dealer
managers or similar securities industry professionals relating to the
distribution of the Registrable Securities or legal expenses of any Person
other than the Company, the underwriters or the Selling Holders);
(7) fees and expenses of other Persons retained by the Company; and
(8) fees and expenses associated with any NASD filing required to be
made in connection with the registration of the Registrable Securities,
including, if applicable, the reasonable fees and expenses of any
"qualified independent underwriter" (and its counsel) that is required to
be retained in accordance with the rules and regulations of the NASD
(all such expenses being herein called "Registration Expenses").
---------------------
(b) The Company will, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the Registrable
Securities to be registered on NASDAQ or on each national securities exchange on
which similar securities issued by the Company are then listed, rating agency
fees and the fees and expenses of any Person, including special experts,
retained by the Company.
(c) In connection with each Demand Registration or Piggyback Registration
required hereunder, the Company will reimburse the Holders of Registrable
Securities being registered pursuant to a registration statement required
hereunder for the reasonable fees and disbursements of not more than one counsel
chosen by the holders of a majority in number of such Registrable Securities.
SECTION 3.3 PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder may
participate in any Underwritten Registration hereunder unless such Holder (i)
agrees to sell its Registrable Securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all reasonable questionnaires,
powers of attorney, underwriting agreements, hold-back agreements letters and
other documents customarily required under the terms of such underwriting
arrangements. Notwithstanding the foregoing, (x) no Selling Holder shall be
required to make any representations or warranties except those which relate
solely to such Holder and its intended method of distribution, and (y) the
liability of each such Holder to any underwriter under such underwriting
agreement will be limited to liability arising from misstatements or omissions
regarding such Holder and its intended method of distribution and any such
liability shall not exceed an amount equal to the amount of net proceeds such
Holder derives from such registration; provided, however, that in an offering by
the Company in which any Holder requests to be included in a Piggyback
Registration, the Company shall use its best efforts to arrange the terms of the
offering such that the provisions set
12
<PAGE>
forth in clauses (x) and (y) of this Section 3.3 are true. Nothing in this
Section 3.3 shall be construed to create any additional rights regarding the
registration of Registrable Securities in any Person otherwise than as set forth
herein.
SECTION 3.4 HOLD-BACK AGREEMENTS.
(a) Restrictions on Public Distribution by Holder of Registrable
------------------------------------------------------------
Securities. Upon the written request of the managing underwriter or
- ----------
underwriters of a Public Offering, each Holder of Registrable Securities shall
not effect any Public Distribution of such securities, or any securities
convertible into or exchangeable or exercisable for such securities, including a
sale pursuant to Rule 144 under the Securities Act (except as part of such
Public Offering), during the 14-day period prior to, and during the 90-day
period following, the offering date for each Public Offering made pursuant to
such registration statement (as identified by such underwriter or underwriters
or the Company in good faith). The foregoing provisions shall not apply to any
Holder that is prevented by applicable statute or regulation from entering into
any such agreement; provided, however, that any such Holder shall undertake not
to effect any Public Distribution of the class of securities covered by such
registration statement (except as part of such Underwritten Offering) during
such period unless it has provided 60 days' prior written notice of such Public
Distribution to the managing underwriter.
(b) Restrictions on Public Distribution by the Company and Others.
-------------------------------------------------------------
The Company agrees and it shall use its best efforts to cause its Affiliates
(other than Persons who are Holders hereunder) to agree: (1) not to effect any
Public Distribution of any securities being registered in accordance with
Article II hereof, or any securities convertible into or exchangeable or
exercisable for such securities, during the 14-day period prior to, and during
the 90-day period following, the offering date for each Public Offering made
pursuant to a registration statement filed under Article II hereof, if requested
in writing by the managing underwriters (except as part of such Public Offering
or pursuant to registrations in connection with mergers, acquisitions, exchange
offers, subscription offers, dividend reinvestment plans or stock options or
other employee benefit plans); and (2) to use its best efforts to cause each
Holder of its privately placed Registrable Securities that are issued by the
Company at any time on or after the date of this Agreement to agree not to
effect any Public Distribution, including a sale pursuant to Rule 144 under the
Securities Act, of any Registrable Securities during the period set forth in
clause (1) above (except as part of such Public Offering, if and to the extent
permitted).
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
--------------------------------
SECTION 4.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless each Selling Holder, each person, if any, who
controls such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) (hereinafter referred to as a "controlling
-----------
person"), the respective officers, directors, partners, employees,
- ------
representatives and agents of any Holder or any controlling person (each an
"Indemnified Holder"), to the fullest extent lawful, from and against any and
------------------
all losses, claims, damages, liabilities, judgments, actions and expenses
(including without limitation and as incurred, reimbursement of all reasonable
costs of investigating, preparing, pursuing or defending any claim or action, or
any investigation or proceeding by any governmental agency or body, commenced or
threatened, including the reasonable fees and expenses of counsel to any
Indemnified Holder) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in
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any Registration Statement or Prospectus (or any amendment or supplement
thereto), or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses are caused by an untrue statement or omission or alleged untrue
statement or omission that is made in reliance upon and in conformity with
information relating to any of the Holders furnished in writing to the Company
by any of the Holders expressly for use therein.
SECTION 4.2 INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. Each
Selling Holder agrees, severally and not jointly, to indemnify and hold harmless
the Company and its directors, officers and any person controlling (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
the Company and its respective officers, directors, partners, employees,
representatives and agents of each such person, to the same extent as the
foregoing indemnity from the Company to each of the Indemnified Holders, but
only with respect to losses, claims, damages, liabilities, judgments, actions
and expenses (including without limitation and as incurred, reimbursement of all
reasonable costs of investigating, preparing, pursuing or defending any claim or
action, or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to the Company) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus (or any amendment or supplement thereto), or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement or omission is contained in any
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement or Prospectus. In case any
action or proceeding shall be brought against the Company or its directors or
officers or any such controlling person in respect of which indemnity may be
sought against a Holder of Registrable Securities, such Holder shall have the
rights and duties given the Company, and the Company or its directors or
officers or such controlling person shall have the rights and duties given to
each Holder by the preceding paragraph. Each Selling Holder also agrees to
indemnify and hold harmless each other Selling Holder or underwriters
participating in the distribution on substantially the same basis as that of the
indemnification of the Company provided in this section 4.2. In no event shall
the liability of any selling Holder hereunder be greater in amount than the
dollar amount of the proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company shall be entitled to receive indemnities from underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as provided above with
respect to information so furnished in writing by such Persons specifically for
inclusion in any Registration Statement or Prospectus.
SECTION 4.3 CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled
to indemnification hereunder (an "Indemnified Party") will (i) promptly give
-----------------
notice of any claim, action or proceeding (including any governmental or
regulatory investigation or proceeding) or the commencement of any such action
or proceeding to the Person against whom such indemnity may be sought (an
"Indemnifying Party"); provided that the failure to give such notice shall not
------------------
relieve the Indemnifying Party of its obligations pursuant to this Agreement
except to the extent that such Indemnifying Party has been prejudiced in any
material respect by such failure, and (ii) permit the Indemnifying Party to
assume the defense of such claim with counsel reasonably satisfactory to such
Indemnified Party; provided that the Indemnified Party shall have the right to
employ separate counsel and participate in the defense of such claim, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (a) the Indemnifying Party has agreed to pay for such fees and
expenses, or (b) the Indemnifying Party shall have failed to assume the defense
of such claim and employ counsel reasonably satisfactory to such Indemnified
Party or (c) in the reasonable judgment of such Indemnified Party, based upon
advice
14
<PAGE>
of its counsel, a conflict of interest may exist between such Indemnified Party
and the Indemnifying Party with respect to such claims. If such defense is not
assumed by the Indemnifying Party, the Indemnifying Party will not be subject to
any liability for any settlement of any such claim effected without the
Indemnifying Party's prior written consent, which consent shall not be
unreasonably withheld. The Indemnifying Party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
Indemnifying Party agrees to indemnify and hold harmless any Indemnified Party
from and against any loss, claim damage, liability or expense by reason of any
settlement of any such claim or action. No Indemnifying Party shall, without
the prior written consent of each Indemnified Party, settle or compromise or
consent to the entry of judgment in or otherwise seek to terminate any pending
or threatened action, claim, litigation or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not any
Indemnified Party is a party thereto), unless such settlement, compromise,
consent or termination includes an unconditional release of each Indemnified
Party from all liability arising out of such action, claim, litigation or
proceeding. An Indemnifying Party who is not entitled to, or elects not to,
assume the defense of the claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
Indemnifying Party with respect to such claim, unless in the reasonable
judgement of any Indemnified Party a conflict of interest may exist between such
Indemnified Party and any other such Indemnified Parties with respect to such
Claim, in which event the Indemnifying Party shall be obligated to pay the fees
and expenses of such additional counsel or counsels.
SECTION 4.4 CONTRIBUTION. If the indemnification provided for in this
Article IV is unavailable to an Indemnified Party (other than by reason of
exceptions provided in those Sections) in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then each applicable
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall have a
joint and severable obligation to contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party, on the one hand, and of the Indemnified Party, on the
other, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party, on the
one hand, and of the Indemnified Party, on the other, shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or payable by
a party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in the second paragraph of Section 4.1, any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 4.4 were determined by pro rata allocation
(even if the Holders were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or expenses referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 4.4, none of the Indemnified
Holders shall be required to contribute, in the aggregate, any amount in excess
of the amount by which the net proceeds received by such Holder with respect to
the Registrable Securities exceeds the greater of (A) the amount paid by such
Holder for its Registrable Securities and
15
<PAGE>
(B) the amount of any damages which such Holder has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The Holders'
obligation to contribute pursuant to this Section 4.4 are several in proportion
to the respective number of Registrable Securities held by each of the Holders
hereunder and not joint.
For purposes of this Article IV, each controlling person of a Holder
shall have the same rights to contribution as such Holder, and each officer,
director, and person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have
the same rights to contribution as the Company, subject in each case to the
limitations set forth in the immediately preceding paragraph. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this Article
IV, notify such party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from who contribution may be sought from any obligation it or they may
have under this Article IV or otherwise except to the extent that it has been
prejudiced in any material respect by such failure. No party shall be liable
for contribution with respect to any action or claim settled without its written
consent; provided, however, that such written consent was not unreasonably
withheld.
SECTION 4.5 ADDITIONAL INDEMNITY. The indemnity, contribution and expense
reimbursement obligations under this Article IV shall be in addition to any
liability each Indemnifying Party may otherwise have; provided, however, that
any payment made by the Company which results in an Indemnified Party receiving
from any source(s) indemnification, contribution or reimbursement for an amount
in excess of the actual loss, liability or expense incurred by such Indemnified
Party, shall be refunded to the Company by the Indemnified Party receiving such
excess payment.
ARTICLE V
MISCELLANEOUS
-------------
SECTION 5.1 RULE 144. The Company agrees it will file in a timely manner
all reports required to be filed by it pursuant to the Securities Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder and
will take such further action as any Holder of Registrable Securities may
reasonably request in order that such Holder may affect sales of Registrable
Securities without registration within the limitations of the exemptions
provided by Rule 144, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC. At any reasonable time
and upon the request of a Holder of Registrable Securities, the Company will
furnish such Holder with such information as may be necessary to enable the
Holder to effect sales of Registrable Securities pursuant to Rule 144 under the
Securities Act and will deliver to such Holder a written statement as to whether
it has compiled with such information and requirements.
SECTION 5.2 SPECIFIC PERFORMANCE. Each Holder, in addition to being
entitled to exercise all rights provided herein or granted by law, including
recovery of liquidated or other damages, will be entitled to specific
performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the
16
<PAGE>
provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
SECTION 5.3 NO INCONSISTENT AGREEMENTS. The Company will not on or after
the date of this Agreement enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in this
Agreement or otherwise conflicts with the provisions hereof. The Company has
not previously entered into any agreement granting any registration rights with
respect to its securities to any Person. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to the holders of the Company's securities under any agreement in
effect on the date hereof.
SECTION 5.4 CHARTER AMENDMENTS AFFECTING THE COMPANY'S COMMON STOCK. The
Company will not amend its Certificate of Incorporation in any respect that
would materially and adversely affect the rights of the Holders hereunder.
SECTION 5.5 AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to or departures from the provisions
hereof may not be given unless the Company has obtained the written consent of
Holders of a majority of the outstanding shares of Registrable Securities held
by each of the Smith Group and the Yucaipa Group, respectively.
SECTION 5.6 NOTICES. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any party to the
others shall be made in writing, by hand-delivery, telegraph, telex, telecopier,
registered first-class mail or air courier guaranteeing overnight deliver as
follows:
if to the Company, to:
Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, Utah 84104
Attention: General Counsel
Fax: (801) 974-1676
if to any Holder:
to the address specified below such Holder's name on the
signature pages hereto;
or to such other place and with such other copies as any party hereto may
designate as to itself by written notice to the others. All such notices and
communications shall be deemed to have been duly given: at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied: and on the next Business Day if timely delivered to
an air courier guaranteeing overnight delivery.
SECTION 5.7 SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent holders of Registrable Securities or of the Warrants,
provided that the Company may not assign its rights or obligations under this
Agreement to
17
<PAGE>
any other person or entity without the written consent of a majority of the
outstanding shares of Registrable Securities held by each of the Smith Group and
the Yucaipa Group, respectively.
SECTION 5.8 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
SECTION 5.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit o otherwise affect the meaning
hereof.
SECTION 5.10 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to the choice of law provisions thereof.
SECTION 5.11 SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
SECTION 5.12 ENTIRE AGREEMENT. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Registrable Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
SECTION 5.13 PRONOUNS. Whenever the context may require, any
pronouns used herein shall be deemed also to include the corresponding neuter,
masculine or feminine forms.
SECTION 5.14 ATTORNEY'S FEES. In any action or proceeding brought
to enforce any provision of this Agreement, the successful party shall be
entitled to recover reasonable attorney's fees in addition to its costs and
expenses and any other available remedy.
SECTION 5.15 SECURITIES HELD BY THE COMPANY OR ITS SUBSIDIARIES.
Whenever the consent or approval of Holders of a specified percentage or
Registrable Securities is required hereunder, Registrable Securities held by the
Company or its Subsidiaries shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.
SECTION 5.16 FURTHER ASSURANCES. Each party shall cooperate and
take such action as may be reasonably requested by another party in order to
carry out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
SECTION 5.17 TERMINATION. Unless sooner terminated in accordance
with its terms or as otherwise herein provided, this Agreement shall terminate
upon the earlier to occur of (i) the mutual agreement by the parties hereto,
(ii) with respect to any Holder, such Holder ceasing to own any Registrable
Securities, (iii) the fifteenth anniversary of the Effective Date, or (iv) with
respect to the Yucaipa Group or the Smith Group, the date on which the aggregate
number of shares of outstanding Registrable Securities held by the Yucaipa Group
or the Smith Group, as applicable, is less than 20% of
18
<PAGE>
the Registrable Shares originally held by the Yucaipa Group or the Smith Group,
as applicable, following the consummation of the transactions contemplated by
the Recapitalization Agreement; provided, that the foregoing clause (iv) shall
not apply as to any member of the Yucaipa Group or the Smith Group, as
applicable, if, as of such date, such member of the Yucaipa Group or the Smith
Group, as applicable, is an "affiliate" of the Company within the meaning of the
Securities Act.
(signature page follows)
19
<PAGE>
IN WITNESS HEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
SMITH'S FOOD & DRUG CENTERS, INC.
By:
---------------------------------------------
Name:
Title:
-------------------------------------------------
JEFFREY P. SMITH
Address:
THE YUCAIPA COMPANIES
By:
----------------------------------------------
Name:
Title:
Address: 10000 Santa Monica Boulevard, Fifth Floor
Los Angeles, California 90067
FAX: (310) 798-7201
YUCAIPA SSV PARTNERS, L.P.
By: The Yucaipa Companies
Its: General Partner
By:
----------------------------------------------
Name:
Title:
Address: 10000 Santa Monica Boulevard, Fifth Floor
Los Angeles, California 90067
FAX: (310) 798-7201
1
<PAGE>
YUCAIPA SMITTY'S PARTNERS, L.P.
By: The Yucaipa Companies
Its: General Partner
By:
----------------------------------------------
Name:
Title:
Address: 10000 Santa Monica Boulevard, Fifth Floor
Los Angeles, California 90067
FAX: (310) 798-7201
YUCAIPA SMITTY'S PARTNERS II, L.P.
By: The Yucaipa Companies
Its: General Partner
By:
----------------------------------------------
Name:
Title:
Address: 10000 Santa Monica Boulevard, Fifth Floor
Los Angeles, California 90067
FAX: (310) 798-7201
YUCAIPA ARIZONA PARTNERS, L.P.
By: The Yucaipa Companies
Its: General Partner
By:
----------------------------------------------
Name:
Title:
Address: 10000 Santa Monica Boulevard, Fifth Floor
Los Angeles, California 90067
FAX: (310) 798-7201
2
<PAGE>
OTHER HOLDERS:
------------------------------------------------
[Name of Holder]
If applicable:
By:
----------------------------------------------
Name:
Title:
Address:
----------------------------------------
-------------------------------------------------
-------------------------------------------------
3
<PAGE>
Exhibit 10.6
FORM OF
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (this "Agreement") is made and
---------
entered into as of _____________, 1996 by and between THE YUCAIPA COMPANIES, a
California general partnership ("Yucaipa"), and SMITH'S FOOD & DRUG CENTERS,
-------
INC., a Delaware corporation (the "Company").
-------
RECITALS
A. The Company is in the business of operating supermarkets in
Arizona, Idaho, Nevada, New Mexico, Texas, Utah and Wyoming and has elected to
discontinue its supermarket operations in California;
B. The Company has entered into a Recapitalization Agreement and Plan
of Merger dated as of January 29, 1996 (the "Recapitalization Agreement")
--------------------------
pursuant to which the Company will acquire certain additional supermarket
operations in the State of Arizona through the merger of a wholly-owned
subsidiary of the Company with and into an affiliate of Yucaipa (the "Merger")
------
and consummate certain recapitalization transactions (the "Recapitalization")
----------------
described therein;
C. In connection with the consummation of the Merger and
Recapitalization, the Company wishes to supplement the resources available to
its senior management; and
D. Yucaipa is experienced in the management of supermarket companies
and has the ability to provide certain general business and financial advice and
management services to the Company in connection with the operation of its
business following the consummation of the Merger and the Recapitalization and
the Company wishes to obtain the benefits of such advice and services.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants of the parties hereto and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the undersigned
parties agree as follows:
SECTION 1. MANAGEMENT SERVICES.
-------------------
Subject to the provisions of this Agreement, and subject to the
supervision of the Board of Directors of the Company (the "Board of Directors"),
------------------
Yucaipa, through its partners, employees or other designated representatives or
agents, shall provide the Company with management consultation and advice
regarding strategic planning and development, budgeting, future financing plans,
selection and retention of management employees, general business management and
legal matters, and such other similar management services as may be requested by
the Board of Directors from time to time. As used herein, the Company refers to
the Company and its subsidiaries, as the context requires. Without limitation
of the foregoing, Yucaipa's services pursuant to this Agreement shall include
the following:
(a) Strategic Planning and Development. Yucaipa will review
----------------------------------
management plans and provide advice with respect to (i) the formulation,
implementation and maintenance of the Company's
1
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marketing, operating and competitive strategies in its existing market areas (as
of the date of this Agreement) and (ii) any plans to enter new market areas.
(b) Budgeting and Finance. Yucaipa will review, and provide advice
---------------------
with respect to, (i) management's annual operating and capital budgets and
financial projections and any revisions or supplements thereto; (ii) any
proposals for material capital expenditures; and (iii) the evaluation of any
proposals regarding the sale or purchase of assets or additional debt or equity
financing for the Company and any retirement or redemption of existing debt or
equity of the Company.
(c) Management Personnel. Yucaipa will advise the Board of Directors
--------------------
and management regarding the hiring, promotion, discharge, terms of employment
and compensation of the Company's senior management and other key employees.
(d) Integration Strategy. Yucaipa will assist management with the
--------------------
development, implementation and maintenance of a strategy concerning the
integration of the Company's supermarket operations in the State of Arizona
following the consummation of the Merger.
(e) Legal and Governmental Affairs. Yucaipa will advise the Board of
------------------------------
Directors and management, as requested, on legal and governmental affairs
related to the conduct of the Company's business.
(f) Board Presentations. Yucaipa will work with management to develop
-------------------
and deliver presentations and recommendations for matters to be considered by
the Board of Directors. In the event that any material management
recommendation is made to the Board of Directors which is contrary to Yucaipa's
recommendations, Yucaipa will be provided with an opportunity to present its
views concerning such matter to the Board of Directors.
(g) Chief Executive Officer. Ronald W. Burkle shall, if he so elects,
-----------------------
have the right to serve as Chief Executive Officer of the Company during the
term of this Agreement, and shall have all rights and responsibilities
customarily vested in a Chief Executive Officer, provided that he shall not
receive any compensation for serving in such capacity beyond the compensation
paid to Yucaipa under this Agreement.
SECTION 2. MANAGEMENT FEES.
---------------
Commencing on the date hereof (the "Effective Date"), the Company
--------------
shall pay to Yucaipa an annual management fee, in consideration of the services
rendered by Yucaipa pursuant to Section 1 above, equal to $1,000,000, one-
twelfth (1/12th) of which shall be payable in advance on the first day of each
calendar month; provided that a prorated portion of such fee will be payable in
advance on the Effective Date for the partial month beginning on the Effective
Date and ending on the last day of the then current month.
SECTION 3. REIMBURSEMENT OF EXPENSES.
-------------------------
The Company shall reimburse Yucaipa for all of its reasonable out-of-
pocket costs and expenses incurred in connection with the performance of its
obligations under this Agreement. Yucaipa shall bill the Company for the amount
of all such costs and expenses monthly, and shall provide the Company with a
reasonable itemization of such costs and expenses.
2
<PAGE>
SECTION 4. ADDITIONAL SERVICES.
-------------------
In the event that, during the term of this 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 contemplated by Section 1 above,
Yucaipa shall 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).
SECTION 5. TERM OF AGREEMENT.
-----------------
The term of this Agreement shall commence on the Effective Date and
continue for a period of five (5) years ending on the fifth anniversary of the
Effective Date.
SECTION 6. TERMINATION.
-----------
6.1 Termination by the Company. The Company may elect to terminate
--------------------------
this Agreement:
(a) at any time following a determination of the Board of Directors of
the Company to effect such a termination by giving Yucaipa at least ninety (90)
days' written notice of such termination;
(b) if Yucaipa shall fail to reasonably perform any material covenant,
agreement, term or provision of this Agreement to be kept, observed or performed
by it (other than any failure or alleged failure occasioned by or resulting from
force majeure, directly or indirectly) and such failure shall continue for a
period of sixty (60) days after written notice from the Company, which notice
shall describe the alleged failure with particularity;
(c) at any time if, in connection with the performance of its duties
hereunder, Yucaipa or any of its partners commits (or is grossly negligent in
its supervision or hiring of any employee or agent of Yucaipa who commits) any
act of fraud, dishonesty or gross negligence which is materially detrimental to
the business or reputation of the Company as reasonably determined by the Board
of Directors;
(d) if an event of default shall have occurred under the Company's
bank credit facility or 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 (the "Specified
---------
Indebtedness") and such event of default (i) results from the failure to pay
- ------------
principal or interest on any Specified Indebtedness when due (after the
expiration of any grace periods), (ii) results from a default in any financial
covenant in such bank credit facility or any other material covenant contained
in the instruments governing such Specified Indebtedness (after the expiration
of any grace periods) and, in the case of the foregoing clauses (i) and (ii),
such event of default has not been cured or waived within 90 days after the date
on which the Company is required to notify the applicable lenders of the
occurrence of such event of default in accordance with the terms of the
applicable instrument; provided, however, that in no event shall such 90-day
period commence prior to the time that the Chief Financial Officer of the
Company has actual knowledge of such default or event of default, or (iii) is
not cured or waived within 90 days following the disclosure of the same in any
periodic report filed by the Company with the Securities and Exchange
Commission;
3
<PAGE>
(e) if Yucaipa or any person in the "Yucaipa Group" (as defined in the
Standstill Agreement, dated as of January 29, 1996, by and among the Company,
Yucaipa and the other parties thereto (the "Standstill Agreement")), is in
--------------------
material default under the Standstill Agreement, which default shall not have
been cured or waived within 90 days thereafter; or
(f) if, at any time, the Yucaipa Group shall own less than 50% of the
shares of Class B Common Stock of the Company originally acquired by them on the
closing of the Merger.
6.2 Termination by Yucaipa. Yucaipa may elect to terminate this
----------------------
Agreement:
(a) if the Company shall fail to reasonably perform any material
covenant, agreement, term or provision of this Agreement to be kept, observed or
performed by it (other than any failure or alleged failure occasioned by or
resulting from force majeure, directly or indirectly) and such failure shall
continue for a period of sixty (60) days after written notice from Yucaipa,
which notice shall describe the alleged failure with particularity;
(b) if the Company shall fail to make any payment due to Yucaipa
hereunder, if such payment is not made in full within thirty (30) days after
written notice of such failure; or
(c) if the designees of the Yucaipa Group cease to be members of the
Board of Directors of the Company following the Effective Date, as required by
the Standstill Agreement;
(d) if the Board of Directors fails to approve two or more
recommendations by Yucaipa to the Board of Directors pursuant to Section 1
hereof, which recommendations relate to matters of corporate strategy or
management which have been designated in writing by Yucaipa as material
(provided that Yucaipa may not designate more than four (4) such matters during
any calendar year as "material" for purposes of the foregoing), or if the Board
of Directors otherwise takes action which materially interferes with the ability
of Yucaipa to perform its responsibilities under this Agreement and such
interference shall continue for sixty (60) days after written notice from
Yucaipa; or
(e) if Ronald W. Burkle ceases to be Chief Executive Officer of the
Company, other than by reason of his death, disability, termination for Cause or
voluntary resignation. For purposes of the foregoing, "Cause" shall mean the
commission by Ronald W. Burkle of any act described in Section 6.1(c) or any
felony conviction.
6.3 Termination for Change of Control. This Agreement may be
---------------------------------
terminated, at the election of either Yucaipa or the Company, if during the
term hereof there shall have been a change in control of the Company, which for
purposes of this Agreement shall be deemed to have occurred upon any of the
following events: (a) the acquisition after the Effective Date, in one or more
transactions, of "beneficial ownership" (within the meaning of Rule 13d-3(a)(1)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by
------------
any person (other than Yucaipa or any of its partners or affiliates or any
Qualified Smith Holder) or any group of persons (excluding any group which
includes Yucaipa or any of its partners or affiliates or any Qualified Smith
Holder) who constitute a group (within the meaning of Section 13(d)(3) of the
Exchange Act) of any securities of the Company such that, as a result of such
acquisition, such person or group beneficially owns (within the meaning of Rule
13d-3(a)(1) under the Exchange Act) 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 (b) the sale of all or
substantially all of the assets or capital stock of the Company (including,
without limitation, by way of merger, consolidation, lease or transfer) in a
transaction or series of related transactions (excluding
4
<PAGE>
any sale to Yucaipa or any of its partners or affiliates or any Qualified Smith
Holder). For purposes of this Section, "Qualified Smith Holder" shall mean any
----------------------
member of the Smith Group (as defined in the Standstill Agreement) or any
"Family Member" or "Family Entity" (as such terms are defined in the Company's
Certificate of Incorporation) of any such member of the Smith Group.
6.4 Payments upon Termination.
-------------------------
(a) In the event of any termination pursuant to Section 6.1(a),
Section 6.2 or Section 6.3, the Company shall pay, or cause to be paid, to
Yucaipa a cash termination payment in an amount equal to the greater of (i)
$5,000,000, and (ii) twice the total consulting fees that would have been earned
by Yucaipa under Section 2 hereof during the remaining term of this Agreement as
if the Agreement had not been terminated, without regard to any sums previously
paid by the Company to Yucaipa pursuant to Section 2 above.
(b) Such amount, if any, which shall be due Yucaipa pursuant to this
Section 6.4 in the event of any such termination shall be due and payable to
Yucaipa, in full, as of the date of such termination. The parties intend that
should the foregoing payments be determined to constitute liquidated damages,
such payments shall in all events be deemed reasonable.
6.5 Effect of Termination. Upon any such termination of this
---------------------
agreement the obligations of the parties hereunder shall also terminate, except
(i) the Company shall continue to be obligated to Yucaipa for any payments to be
received pursuant to Section 6.4(a), and for any unpaid fees or expenses
incurred prior to any such termination, (ii) the Company's obligations under
Section 9 hereof shall survive any such termination; and (iii) the provisions of
Sections 8 and 10 shall survive any such termination.
SECTION 7. NON-COMPETITION.
---------------
As an inducement for the Company and Yucaipa to enter into this
Agreement, Yucaipa agrees that during the term of this Agreement, Yucaipa shall
not, without the Company's prior written consent, provide management or
consulting services to, or make investments in, any Significant Competitor.
Notwithstanding the foregoing, Yucaipa may, without the Company's prior written
consent, acquire or hold equity securities of any Significant Competitor, which
class of equity securities is registered under Section 12 of the Exchange Act,
provided that the securities so acquired or held by Yucaipa do not exceed 5% of
the total number of outstanding equity securities of such Significant
Competitor. For purposes of this Section, "Significant Competitor" shall mean
----------------------
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. Nothing in this Section shall be deemed to prevent Yucaipa from
performing services under, or renewing, any management or consulting agreement
to which it is a party on the date hereof (which agreements have been identified
to the Company).
SECTION 8. CONFIDENTIALITY.
---------------
The parties hereto agree to be bound by the confidentiality provisions
of Section 3.9 of the Standstill Agreement during the entire term of this
Agreement, regardless of whether the Standstill Agreement is earlier terminated.
5
<PAGE>
SECTION 9. INDEMNIFICATION.
---------------
(a) The Company (the "Indemnifying Party") agrees to indemnify and
------------------
hold harmless Yucaipa and each of its affiliates, partners, officers, agents and
the employees of each of them (each an "Indemnified Party" and collectively, the
-----------------
"Indemnified Parties"), from and against all losses, claims, damages or
-------------------
liabilities resulting from any claim, lawsuit or other proceeding by any person
to which any Indemnified Party may become subject which is related to or arises
out of the performance of the services to be provided hereunder (or under the
Recapitalization Agreement), and will reimburse any Indemnified Party for all
reasonable out-of-pocket expenses (including reasonable counsel fees and
disbursements) incurred by such Indemnified Party in connection with
investigating or defending any such claim. Each Indemnifying Party further
agrees that the indemnification and reimbursement commitments herein shall apply
whether or not such Indemnified Party is a formal party to any such lawsuit,
claim or other proceedings. The foregoing provision is expressly intended to
cover reimbursement of reasonable legal and other expenses incurred in a
deposition or other discovery proceeding.
Notwithstanding the foregoing, the Indemnifying Party shall not be
liable to any Indemnified Party (a) in respect of any loss, claim, damage,
liability or expense to an Indemnified Party to the extent the same is
determined, in a final judgment by a court having jurisdiction, to have resulted
from the gross negligence or willful misconduct of such Indemnified Party or any
intentional, material breach by such Indemnified Party of its obligations under
this Agreement or (b) for any settlement effected by such Indemnified Party
without the written consent of such Indemnifying Party, which consent shall not
be unreasonably withheld.
In the event of the assertion against any Indemnified Party of any
such claim or the commencement of any such action or proceeding, each
Indemnifying Party shall be entitled to participate in such action or proceeding
and in the investigation of such claim and, after written notice from such
Indemnifying Party to such Indemnified Party, to assume the investigation or
defense of such claim, action or proceeding with counsel of the Indemnifying
Party's choice at the Indemnifying Party's expense; provided, however, that such
counsel shall be reasonably satisfactory to the Indemnified Party.
Notwithstanding anything to the contrary contained herein, the Indemnifying
Party may retain one firm of counsel to represent all Indemnified Parties in
such claim, action or proceeding; provided that the Indemnified Party shall have
the right to employ a single firm of separate counsel (and any necessary local
counsel) and to participate in the defense or investigation of such claim,
action or proceeding, and the Indemnifying Party shall bear the expense of such
separate counsel (and local counsel, if applicable), if (i) in the written
opinion of counsel to the Indemnified Party use of counsel of the Indemnifying
Party's choice could reasonably be expected to give rise to a conflict of
interest, (ii) the Indemnifying Party shall not have employed counsel reasonably
satisfactory to the Indemnified Party to represent the Indemnified Party within
a reasonable time after notice of the assertion of any such claim or institution
of any such action or proceeding or (iii) the Indemnifying Party shall authorize
the Indemnified Party to employ separate counsel at the Indemnifying Party's
expense.
(b) If for any reason (other than the gross negligence or willful
misconduct of an Indemnified Party referred to above) the foregoing
indemnification is unavailable to any Indemnified Party or insufficient to hold
it harmless as and to the extent contemplated by the preceding paragraph (a),
then the Indemnifying Party shall contribute to the amount paid or payable by
the Indemnified Party as a result of such loss, claim, damage or liability in
such proportion as is appropriate to reflect the relative benefits received by
the Indemnifying Party and its affiliates, on the one hand, and the Indemnified
Party, as the case may be, on the other hand, as well as any other relevant
equitable considerations.
6
<PAGE>
SECTION 10. NOTICES.
-------
All notices, demands, requests, consents or approvals required or
permitted to be given hereunder or which are given with respect to this
Agreement shall be in writing and shall be personally served and mailed,
registered or certified, return receipt requested, postage prepaid (or by a
substantially similar method), or delivered by a reputable overnight courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or such other address as such party
shall have specified most recently by written notice. Notice shall be deemed
given or delivered on the date of service or transmission if personally served
or transmitted by telegram, telex or facsimile. Notice otherwise sent as
provided herein shall be deemed given or delivered on the third business day
following the date mailed or on the next business day following the delivery of
such notice to a reputable overnight courier service.
If to Yucaipa: The Yucaipa Companies
10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Attention: Mark A. Resnik
If to the Company: Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, Utah 84104
Attention: Chairman of the Board
with a copy to the General Counsel of the Company at the same
address.
SECTION 11. MISCELLANEOUS.
-------------
11.1 Entire Agreement; Amendments. This Agreement contains a
----------------------------
of the terms and conditions agreed upon by the parties hereto in connection with
the subject matter hereof. This Agreement may not be amended, modified or
changed except by written instrument signed by all of the parties hereto.
11.2 Assignment; Successors. This Agreement shall not be assigned
----------------------
and is not assignable by any party without the prior written consent of each of
the other parties hereto; provided, however, that Yucaipa may assign, without
the prior consent of the Company, its rights and obligations under this
Agreement to any partnership or limited liability company controlled by Ronald
W. Burkle, and provided further, that Yucaipa may assign the right to receive
any payment hereunder (but not its duties and obligations hereunder) to any
other person or entity. Subject to the preceding sentence, this Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective permitted successors and assigns.
11.3 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal domestic laws of the State of
Delaware, without reference to the choice of law principles thereof.
11.4 Attorneys' Fees. If any legal action is brought concerning any
---------------
matter relating to this Agreement, or by reason of any breach of any covenant,
condition or agreement referred to herein,
7
<PAGE>
the prevailing party shall be entitled to have and recover from the other party
to the action all costs and expenses of suit, including attorneys' fees.
11.5 Relationship. Nothing in this Agreement shall constitute or be
------------
construed to be a partnership or joint venture between the Company and Yucaipa.
To the extent appropriate to the duties and obligations hereunder, Yucaipa shall
be an independent contractor and none of its employees shall be deemed employees
of the Company by reason of this Agreement or the performance of its duties
hereunder. This Agreement is for the benefit of the Company and Yucaipa and
shall not create third party beneficiary rights.
11.6 Construction and Interpretation. This Agreement shall not be
-------------------------------
construed for or against either party by reason of the authorship or alleged
authorship of any provision hereof or by reason of the status of the respective
parties. This Agreement shall be construed reasonably to carry out its intent
without presumption against or in favor of either party. The natural persons
executing this Agreement on behalf of each party have the full right, power and
authority to do and affirm the foregoing warranty on behalf of each party and on
their own behalf. The captions on sections are provided for purposes of
convenience and are not intended to limit, define the scope of or aid in
interpretation of any of the provisions hereof. References to a party or
parties shall refer to the Company or Yucaipa, or both, as the context may
require. All pronouns and singular or plural references as used herein shall be
deemed to have interchangeably (where the sense of the sentence requires) a
masculine, feminine or neuter, and/or singular or plural meaning, as the case
may be.
11.7 Severability. If any term, provision or condition of this
------------
Agreement is determined by a court or other judicial or administrative tribunal
to be illegal, void or otherwise ineffective or not in accordance with public
policy, the remainder of this Agreement shall not be affected thereby and shall
remain in full force and effect and shall be construed in such manner so as to
preserve the validity hereof and the substance of the transactions herein
contemplated to the extent possible.
11.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
(signature page follows)
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Management
Services Agreement to be duly executed as of the date first above written.
THE YUCAIPA COMPANIES
By:
------------------------------
Name:
Title:
SMITH'S FOOD & DRUG CENTERS, INC.
By:
------------------------------
Name:
Title:
S-1
<PAGE>
EXHIBIT 10.7
FORM OF
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of ___________ __, 1996 among SMITH'S FOOD
& DRUG CENTERS, INC., a Delaware corporation (the "Company"), and THE YUCAIPA
-------
COMPANIES, a California general partnership, or its registered permitted assigns
(the "Consultant").
----------
WHEREAS, the Company proposes to issue to the Consultant ____________
Warrants, as hereinafter described (the "Warrants"), to purchase an aggregate of
--------
_______________ shares (subject to adjustment) of the Class C Common Stock, $.01
par value per share (the "Class C Common Stock"), of the Company (the Class C
--------------------
Common Stock issuable on exercise of the Warrants being referred to herein as
the "Warrant Shares"), pursuant to that certain Recapitalization Agreement and
--------------
Plan of Merger of even date herewith by and among the Company, Cactus
Acquisition, Inc., the Consultant and Smitty's Supermarkets, Inc. (the
"Recapitalization Agreement"). The Company, the Consultant, certain affiliates
--------------------------
of the Consultant and certain stockholders of the Company are party to a
Standstill Agreement of even date herewith (the "Standstill Agreement") which
--------------------
governs certain transfers of the Warrant Shares. All capitalized terms used but
not defined herein shall have the meanings ascribed to them in the
Recapitalization Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. WARRANT CERTIFICATES. The Company will issue and deliver
--------------------
certificates evidencing the Warrants (the "Warrant Certificates") to the
--------------------
Consultant pursuant to the terms of the Recapitalization Agreement. Fifty
percent (50%) of the aggregate number of Warrants to be issued hereunder will be
issued as "Series A Warrants" in the form of Exhibit A hereto and the remaining
fifty percent (50%) of the aggregate number of Warrants to be issued hereunder
will be issued as "Series B Warrants" in the form of Exhibit B hereto. Such
certificates shall be in registered form only and shall be substantially in the
applicable forms set forth as Exhibits A and B attached hereto. Warrant
Certificates shall be dated the date of issuance by the Company.
SECTION 2. EXECUTION OF WARRANT CERTIFICATES. Warrant Certificates
---------------------------------
shall be signed on behalf of the Company by its Chairman of the Board or its
Chief Executive Officer, President or a Vice President. Each such signature upon
the Warrant Certificates may be in the form of a facsimile signature of the
present or any future Chairman of the Board, Chief Executive Officer, President
or Vice President, and may be imprinted or otherwise reproduced on the Warrant
Certificates and for that purpose the Company may adopt and use the facsimile
signature of any person who shall have been Chairman of the Board, Chief
Executive Officer, President or Vice President, notwithstanding the fact that at
the time the Warrant Certificates shall be delivered or disposed of he shall
have ceased to hold such office. Each Warrant Certificate shall also be manually
signed on behalf of the Company by its Secretary or an Assistant Secretary under
its corporate seal. The seal of the Company may be in the form of a facsimile
thereof and may be impressed, affixed, imprinted or otherwise reproduced on the
Warrant Certificates.
SECTION 3. REGISTRATION. The Company shall number and register the
------------
Warrant Certificates in a register as they are issued. The Company may deem and
treat the registered holder(s) of the Warrant Certificates (the "Holders") as
-------
the absolute owner(s) thereof (notwithstanding any notation of ownership or
other writing thereon made by anyone) for all purposes and shall not be affected
by any notice to the contrary. The Warrants shall be registered initially in
such name or names as the Consultant shall designate.
<PAGE>
SECTION 4. RESTRICTIONS ON TRANSFER; REGISTRATION OF TRANSFERS
---------------------------------------------------
AND EXCHANGES.
- -------------
The Warrants (and any Warrant Shares issued upon the exercise of the
Warrants) shall not be transferable except in accordance with the terms of this
Agreement and the Standstill Agreement.
Prior to any proposed transfer of the Warrants or the Warrant Shares,
unless such transfer is made pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), the
--------------
transferring Holder will deliver to the Company, if so requested by the Company,
an opinion of counsel reasonably satisfactory in form and substance to the
Company, to the effect that the Warrants or Warrant Shares, as applicable, may
be sold or otherwise transferred without registration under the Securities Act.
Upon original issuance thereof, and until such time as the same shall have been
registered under the Securities Act or sold pursuant to Rule 144 promulgated
thereunder (or any similar rule or regulation) each Warrant Certificate and any
certificates evidencing Warrant Shares shall bear any legend required pursuant
to the Recapitalization Agreement or the Standstill Agreement unless in the
opinion of such counsel, such legend required pursuant to the Recapitalization
Agreement is no longer required by the Securities Act or such legend required by
the Standstill Agreement is no longer required thereunder.
The Company shall from time to time register the transfer of any
outstanding Warrant Certificates in a Warrant register to be maintained by the
Company upon surrender thereof accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company, duly executed by
the registered Holder or Holders thereof or by the duly appointed legal
representative thereof or by a duly authorized attorney. Upon any such
registration of transfer, a new Warrant Certificate shall be issued to the
transferee(s) and the surrendered Warrant Certificate shall be canceled and
disposed of by the Company.
Warrant Certificates may be exchanged at the option of the Holder(s)
thereof, when surrendered to the Company at its office for another Warrant
Certificate or other Warrant Certificates of like series and tenor and
representing in the aggregate a like number of Warrants. Warrant Certificates
surrendered for exchange shall be canceled and disposed of by the Company.
SECTION 5. WARRANTS; EXERCISE OF WARRANTS. Subject to the terms of
------------------------------
this Agreement, each Holder shall have the right, which may be exercised at any
time or from time to time during the applicable Exercise Period (as defined
below) to receive from the Company the number of fully paid and nonassessable
Warrant Shares (and such other consideration) which the Holder may at the time
be entitled to receive on exercise of such Warrants and payment of the Exercise
Price then in effect for such Warrant Shares. In the alternative, each Holder
may exercise its right, during the Exercise Period, to receive Warrant Shares on
a net basis, such that, without the exchange of any funds, the Holder receives
that number of Warrant Shares (and such other consideration) otherwise issuable
(or payable) upon exercise of its Warrants less that number of Warrant Shares
having an aggregate Current Market Value (as defined in Section 9) at the time
of exercise equal to the aggregate Exercise Price that would otherwise have been
paid by the Holder for the Warrant Shares. Each Warrant not exercised during the
Exercise Period shall become void and all rights thereunder and all rights in
respect thereof under this agreement shall cease as of such time. No adjustments
as to dividends will be made upon exercise of the Warrants, except as otherwise
expressly provided herein.
Any Holder of Warrants, other than The Yucaipa Companies and its
Affiliates, may elect by written notice to the Company to have the right to
receive shares of Class B Common Stock, par value $.01 per share (the "Class B
-------
Common Stock"), upon exercise of its Warrants and in such case, references
- ------------
2
<PAGE>
herein to "Warrant Shares" (as applied to such Holder's Warrants) shall be
deemed to mean shares of Class B Common Stock. As used herein, "Common Stock"
------------
shall mean either Class B Common Stock or Class C Common Stock, as the context
requires. For purposes of Section 9 hereof, any action taken by the Company
with respect to any of its Class A Common Stock, its Class B Common Stock or its
Class C Common Stock shall be deemed to be action taken with respect to all of
its Common Stock and shall result in an adjustment to the Exercise Price and the
Warrant Number to the extent specified therein.
The periods during which a Warrant shall be exercisable (an "Exercise
--------
Period") shall commence on the date hereof and expire, in the case of the Series
- ------
A Warrants, at 5:00 p.m., Los Angeles time, on _______________, 2000 and, in the
case of the Series B Warrants, at 5:00 p.m., Los Angeles time, on
_______________, 2001; provided, however, that each Exercise Period shall be
extended by five years in the event that, prior to the foregoing expiration
dates, the Market Price of the Company's Class B Common Stock equals or exceeds
the Exercise Price (as adjusted from time to time) for a period of not less than
60 consecutive trading days (excluding from such period any day on which no
Market Price is available).
The price at which each Warrant shall be exercisable (the "Exercise
--------
Price") shall initially be $50.00 per share, subject to adjustment pursuant to
- -----
the terms hereof.
A Warrant may be exercised upon surrender to the Company at its office
address set forth in Section 12 hereof) of the Warrant Certificate or
Certificates to be exercised with the form of election to purchase attached
thereto duly filled in and signed, and upon payment to the Company of the
Exercise Price for the number of Warrant Shares in respect of which such
Warrants are then exercised. Payment of the aggregate Exercise Price shall be
made in cash or by certified or official bank check payable to the order of the
Company or by wire transfer of immediately available funds to an account
designated by the Company or in the manner provided in the first paragraph of
this Section 5.
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Holder and in such name or names as such Holder may designate a certificate or
certificates for the number of full Warrant Shares issuable upon the exercise of
such Warrants (and such other consideration as may be deliverable upon exercise
of such Warrants) together with cash for fractional Warrant Shares as provided
in Section 10. Such certificate or certificates shall be deemed to have been
issued and the person so named therein shall be deemed to have become a holder
of record of such Warrant Shares as of the date of the surrender of such
Warrants and payment of the Exercise Price, irrespective of the date of delivery
of such certificate or certificates for Warrant Shares.
Each Warrant shall be exercisable during the Exercise Period, at the
election of the Holder thereof, either in full or from time to time in part and,
in the event that a Warrant Certificate is exercised in respect of fewer than
all of the Warrant Shares issuable on such exercise at any time prior to the
date of expiration of the Warrants, a new certificate evidencing the remaining
Warrant or Warrants will be issued and delivered pursuant to the provisions of
this Section and of Section 2 hereof.
All Warrant Certificates surrendered upon exercise of Warrants shall
be cancelled and disposed of by the Company. The Company shall keep copies of
this Agreement and any notices given or received hereunder available for
inspection by the Holders during normal business hours at its office.
3
<PAGE>
SECTION 6. PAYMENT OF TAXES. The Company will pay all documentary
----------------
stamp taxes and other governmental charges (excluding all foreign, federal or
state income, franchise, property, estate, inheritance, gift or similar taxes)
in connection with the issuance or delivery of the Warrants hereunder, as well
as all such taxes attributable to the initial issuance or delivery of Warrant
Shares upon the exercise of Warrants and payment of the Exercise Price. The
Company shall not, however, be required to pay any tax that may be payable in
respect of any subsequent transfer of the Warrants or any transfer involved in
the issuance and delivery of Warrant Shares in a name other than that in which
the Warrants to which such issuance relates were registered, and, if any such
tax would otherwise be payable by the Company, no such issuance or delivery
shall be made unless and until the person requesting such issuance has paid to
the Company the amount of any such tax, or it is established to the reasonable
satisfaction of the Company that any such tax has been paid.
SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant
-----------------------------------------
Certificate or certificate evidencing Warrant Shares shall be mutilated, lost,
stolen or destroyed, the Company shall issue, in exchange and substitution
therefor and upon cancellation of the mutilated Warrant Certificate or other
certificate, or in lieu of and substitution for the Warrant Certificate or other
certificate lost, stolen or destroyed, a new Warrant Certificate or other
certificate of like tenor and representing an equivalent number of Warrants or
Warrant Shares.
SECTION 8. RESERVATION OF WARRANT SHARES. The Company shall at all
-----------------------------
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Class C Common Stock or its authorized
and issued Class C Common Stock held in its treasury, for the purpose of
enabling it to satisfy any obligation to issue Warrant Shares upon exercise of
Warrants, the maximum number of shares of Class C Common Stock which may then be
deliverable upon the exercise of all outstanding Warrants. The Company shall
also at all times reserve and keep available sufficient shares of Class B Common
Stock for issuance upon conversion of shares of Class C Common Stock or, if
applicable pursuant to Section 5, for issuance upon exercise of Warrants.
The Company or, if appointed, the transfer agent for the Class C
Common Stock and each transfer agent for any shares of the Company's capital
stock issuable upon the exercise of any of the Warrants (collectively, the
"Transfer Agent") will be irrevocably authorized and directed at all times to
--------------
reserve such number of authorized shares as shall be required for such purpose.
The Company shall keep a copy of this Agreement on file with the Transfer Agent.
The Company will supply the Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available all other
consideration that may be deliverable upon exercise of the Warrants. The
Company will furnish such Transfer Agent a copy of all notices of adjustments
and certificates related thereto, transmitted to each Holder pursuant to Section
11 hereof.
Before taking any action which would cause an adjustment pursuant to
Section 9 hereof to reduce the Exercise Price below the then par value of the
Warrant Shares, the Company shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares at the Exercise Price
as so adjusted.
The Company covenants that all Warrant Shares and other capital stock
issued upon exercise of Warrants will, upon payment of the Exercise Price
therefor and issue, be validly authorized and issued, fully paid, nonassessable,
free of preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issue thereof.
4
<PAGE>
The Company shall from time to time take all action which may be
necessary or appropriate so that the Class B Common Stock issuable upon
conversion of Warrant Shares following an exercise of Warrants, will be listed
on the principal securities exchanges and markets within the United States of
America, if any, on which other shares of the same class of Common Stock of the
Company are then listed.
SECTION 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
---------------------------------------------------------
ISSUABLE. The Exercise Price and the number of shares of Common Stock issuable
- --------
upon the exercise of each Warrant (the "Warrant Number") are subject to
--------------
adjustment from time to time upon the occurrence of the events enumerated in, or
as otherwise provided in, this Section 9. The Warrant Number is initially one.
(a) Adjustment for Change in Capital Stock
--------------------------------------
If the Company:
(1) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(2) subdivides or reclassifies its outstanding shares of Common
Stock into a greater number of shares;
(3) combines or reclassifies its outstanding shares of Common
Stock into a smaller number of shares;
(4) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(5) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which he or it would have owned immediately following such action if
such Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
If after an adjustment a holder of a Warrant upon exercise of it may
receive shares of two or more classes of capital stock of the Company, the
Company shall determine the allocation of the adjusted Exercise Price between
the classes of capital stock. After such allocation, the exercise privilege and
the Exercise Price of each class of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Stock in this
Section.
Such adjustment shall be made successively whenever any event listed
above shall occur. If the occurrence of any event listed above results in an
adjustment under subsections (b) or (c) below, no further adjustment shall be
made under this subsection (a).
5
<PAGE>
(b) Adjustment for Rights Issue
---------------------------
If the Company distributes any rights, options or warrants (whether or
not immediately exercisable) to all holders of its Common Stock entitling them
to purchase shares of Common Stock at a price per share less than the Current
Market Value per share on the record date relating to such distribution, the
Exercise Price shall be adjusted in accordance with the formula:
O + N x P
-------
E' = E x M
-----------
O + N
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of Fully Diluted Shares outstanding on the record
date for any such distribution.
N = the number of additional shares of Common Stock issuable upon
exercise of such rights, options or warrants.
P = the exercise price per share of such rights, options or
warrants.
M = the Current Market Value per share of Common Stock on the record
date for any such distribution.
The adjustment shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
record date for the determination of stockholders entitled to receive the
rights, options or warrants. If at the end of the period during which such
rights, options or warrants are exercisable, not all rights, options or warrants
shall have been exercised, the Exercise Price shall be immediately readjusted to
what it would have been if "N" in the above formula had been the number of
shares actually issued.
(c) Adjustment for Other Distributions
----------------------------------
If the Company distributes to all holders of its Common Stock (i) any
evidences of indebtedness of the Company or any of its subsidiaries, (ii) any
assets of the Company or any of its subsidiaries (other than cash dividends
which are paid out of retained earnings of the Company in the ordinary course of
business), or (iii) any rights, options or warrants to acquire any of the
foregoing or to acquire any other securities of the Company, the Exercise Price
shall be adjusted in accordance with the formula:
6
<PAGE>
E' = E x M - F
-----
M
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
M = the Current Market Value per share of Common Stock on the record
date mentioned below.
F = the fair market value on the record date mentioned below of the
indebtedness, assets, rights, options or warrants distributable
to the holder of one share of Common Stock.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
If an adjustment is made pursuant to this subsection (c) as a result of the
issuance of rights, options or warrants and at the end of the period during
which any such rights, options or warrants are exercisable, not all such rights,
options or warrants shall have been exercised, the Exercise Price shall be
immediately readjusted as if "F" in the above formula was the fair market value
on the record date of the indebtedness or assets actually distributed upon
exercise of such rights, options or warrants divided by the number of shares of
Common Stock outstanding on the record date.
This subsection does not apply to rights, options or warrants referred
to in subsection (b) of this Section 9.
(d) Adjustment for Common Stock Issue
---------------------------------
If the Company issues shares of Common Stock for a consideration per
share less than the Current Market Value per share on the date the Company fixes
the offering price of such additional shares, the Exercise Price shall be
adjusted in accordance with the formula:
O + P
---
E' = E x M
-------
A
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of Fully Diluted Shares outstanding immediately prior
to the issuance of such additional shares of Common Stock.
P = the aggregate consideration received for the issuance of such
additional shares of Common Stock.
7
<PAGE>
M = the Current Market Value per share of Common Stock on the date
of issuance of such additional shares.
A = the number of Fully Diluted Shares outstanding immediately after
the issuance of such additional shares of Common Stock.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance.
This subsection (d) does not apply to:
(1) any of the transactions described in subsection (a) of this
Section 9; or
(2) Common Stock issued to the Company's employees under bona
fide employee benefit plans adopted by the Board of Directors and approved
by the holders of Common Stock when required by law, if such Common Stock
would otherwise be covered by this subsection (d) (but only to the extent
that the aggregate number of shares excluded hereby and issued after the
date of this Warrant shall not exceed 5% of the Common Stock outstanding at
the time of the adoption of each such plan, exclusive of anti-dilution
adjustments thereunder), or
(3) the issuance of Common Stock in connection with (i) the
exercise of Warrants, or (ii) the conversion, exchange or exercise of any
options, warrants, or other securities convertible into or exchangeable or
exercisable for Common Stock.
(e) Adjustment for Convertible Securities Issue
-------------------------------------------
If the Company issues any options, warrants or other securities
convertible into or exchangeable or exercisable for Common Stock (other than
securities issued in transactions described in subsection (b) or (c) of this
Section 9) for a consideration per share of Common Stock initially deliverable
upon conversion, exchange or exercise of such securities less than the Current
Market Value per share on the date of issuance of such securities, the Exercise
Price shall be adjusted in accordance with this formula:
O + P
---
E' = E x M
-----
O + D
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of Fully Diluted Shares outstanding immediately prior
to the issuance of such securities.
P = the aggregate consideration received for the issuance of such
securities.
8
<PAGE>
M = the Current Market Value per share of Common Stock on the date
of issuance of such securities.
D = the maximum number of shares of Common Stock deliverable upon
conversion or in exchange for or upon exercise of such
securities at the initial conversion, exchange or exercise rate.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance.
If all of the Common Stock deliverable upon conversion, exchange or
exercise of such securities has not been issued when such securities are no
longer outstanding, then the Exercise Price shall promptly be readjusted to the
Exercise Price which would then be in effect had the adjustment upon the
issuance of such securities been made on the basis of the actual number of
shares of Common Stock issued upon conversion, exchange or exercise of such
securities.
This subsection (e) does not apply to:
(1) any transaction described in subsection (b) of this Section
9,
(2) the issuance of the Warrants, or
(3) any such options, warrants or other securities issued to the
Company's employees under bona fide employee benefit plans adopted by
the Board of Directors and approved by the holders of such options,
warrants or other securities when required by law, if such Common
Stock would otherwise be covered by this subsection (e) (but only to
the extent that the aggregate number of shares excluded hereby and
issued after the date of this Warrant Agreement shall not exceed 5% of
the Common Stock outstanding at the time of the adoption of each such
plan, exclusive of anti-dilution adjustments thereunder).
(f) Current Market Value
--------------------
"Current Market Value" per share of Common Stock or of any other
--------------------
security (herein collectively referred to as a "Security") at any date shall be:
--------
(1) if the Security is registered under the Exchange Act, the
average of the daily Market Prices for each business day during the period
commencing 30 business days before such date and ending on the date one day
prior to such date or, if the Security has been registered under the
Exchange Act for less than 30 consecutive business days before such date,
then the average of the daily Market Prices for all of the business days
before such date for which daily Market Prices are available. If the
Market Price is not determinable for at least 15 business days in such
period, the Current Market Value of the Security shall be determined as if
the Security was not registered under the Exchange Act; or
(2) if the Security is not registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (i) the value of the
------------
Security determined in good faith by the Board of Directors of the Company
and certified in a board resolution, based on the most recently completed
arm's length transaction between the Company and a person other than an
9
<PAGE>
Affiliate of the Company in which such determination is necessary and the
closing of which occurs on such date or shall have occurred within the six
months preceding such date, (ii) if no such transaction shall have occurred
on such date or within such six-month period, the value of the Security
most recently determined as of a date within the six months preceding such
date by an Independent Financial Expert or (iii) if neither clause (i) nor
(ii) is applicable, the value of the Security determined as of such date by
an Independent Financial Expert;
provided, however, that notwithstanding the foregoing, the "Current Market
Value" per share of Class C Common Stock shall at all times be deemed to be
equal to the Current Market Value per share of the Class B Common Stock.
The "Market Price" for any Security on each business day means: (A)
------------
if such Security is listed or admitted to trading on any securities exchange,
the closing price, regular way, on such day on the principal exchange on which
such Security is traded, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day, (B) if such Security is not then
listed or admitted to trading on any securities exchange, the last reported sale
price on such day, or if there is no such last reported sale price on such day,
the average of the closing bid and the asked prices on such day, as reported by
a reputable quotation source designated by the Company, or (C) if neither clause
(A) nor (B) is applicable, the average of the reported high bid and low asked
prices on such day, as reported by a reputable quotation service, or a newspaper
of general circulation in the Borough of Manhattan, City of New York,
customarily published on each business day, designated by the Company. If there
are no such prices on a business day, then the Market Price shall not be
determinable for such business day.
"Independent Financial Expert" shall mean a nationally recognized
----------------------------
investment banking firm designated by the Company and reasonably acceptable to
the Holders of a majority of the Warrants (i) that does not (and whose
directors, officers, employees and Affiliates do not) have a direct or indirect
material financial interest in the Company, (ii) that has not been, and, at the
time it is called upon to serve as an Independent Financial Expert under this
Agreement is not (and none of whose directors, officers, employees or Affiliates
is) a promoter, director or officer of the Company, (iii) that has not been
retained by the Company or any Holder or Affiliate of a Holder for any purpose,
other than to perform an equity valuation, within the preceding twelve months,
and (iv) that, in the reasonable judgment of the Board of Directors of the
Company, is otherwise qualified to serve as an independent financial advisor.
Any such person may receive customary compensation and indemnification by the
Company for opinions or services it provides as an Independent Financial Expert.
"Affiliate" shall mean, with respect to any person, any other person
---------
directly or indirectly controlling or controlled by or under direct or indirect
common control with such person. For the purposes of this definition,
"control," when used with respect to any person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
(g) Consideration Received
----------------------
For purposes of any computation respecting consideration received
pursuant to subsections (d) and (e) of this Section 9, the following shall
apply:
(1) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that in
no case shall any deduction be
10
<PAGE>
made for any commissions, discounts or other expenses incurred by the
Company for any underwriting of the issue or otherwise in connection
therewith;
(2) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof (irrespective
of the accounting treatment thereof) as determined in good faith by the
Board of Directors; and
(3) in the case of the issuance of options, warrants or other
securities convertible into or exchangeable or exercisable for shares of
Common Stock, the aggregate consideration received therefor shall be deemed
to be the consideration received by the Company for the issuance of such
securities plus the additional minimum consideration, if any, to be
received by the Company upon the conversion, exchange or exercise thereof
(the consideration in each case to be determined in the same manner as
provided in clauses (1) and (2) of this subsection).
(h) When De Minimis Adjustment May Be Deferred
------------------------------------------
No adjustment in the Exercise Price need be made unless the adjustment
would require an increase or decrease of at least 1% in the Exercise Price. No
adjustment in the Warrant Number need be made unless the adjustment would
require an increase or decrease of at least 0.5% in the Warrant Number. Any
adjustments that are not made shall be carried forward and taken into account in
any subsequent adjustment, provided that no such adjustment shall be deferred
beyond the date on which a Warrant is exercised.
All calculations under this Section 9 shall be made to the nearest
1/1000th of a share.
(i) When No Adjustment Required
---------------------------
If an adjustment is made upon the establishment of a record date or
issuance date for a distribution or issuance subject to subsections (a), (b) or
(c) or (d) hereof and such distribution or issuance is subsequently cancelled,
the Warrant Number then in effect shall be readjusted, effective as of the date
when the Board of Directors determines to cancel such distribution, to that
which would have been in effect if such record date had not been fixed.
To the extent the Warrants become convertible into cash, no adjustment
need be made thereafter as to the amount of cash into which such Warrants are
exercisable. Interest will not accrue on the cash.
(j) Notice of Adjustment
--------------------
Whenever the Exercise Price or the Warrant Number is adjusted, the
Company shall provide the notices required by Section 11 hereof.
(k) When Issuance or Payment May Be Deferred
----------------------------------------
In any case in which this Section 9 shall require that an adjustment
in the Exercise Price and Warrant Number be made effective as of a record date
for a specified event, the Company may elect to defer until the occurrence of
such event (i) issuing to the Holder of any Warrant exercised after such
11
<PAGE>
record date the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise over and above the Warrant Shares and other capital
stock of the Company, if any, issuable upon such exercise on the basis of the
Warrant Number prior to such adjustment, and (ii) paying to such Holder any
amount in cash in lieu of a fractional share pursuant to Section 10; provided,
however, that the Company shall deliver to such Holder a due bill or other
appropriate instrument evidencing such Holder's right to receive such additional
Warrant Shares, other capital stock and cash upon the occurrence of the event
requiring such adjustment.
(l) Reorganizations
---------------
In case of any capital reorganization, other than in the cases
referred to in Sections 9(a), (b), (c), (d) or (e) hereof, or the consolidation
or merger of the Company with or into another corporation (other than a merger
or consolidation which does not result in any reclassification of the
outstanding shares of Common Stock into shares of other stock or other
securities or property), or the sale of the property of the Company as an
entirety or substantially as an entirety (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
---------------
deliverable upon exercise of any Warrant (in lieu of the number of shares of
Common Stock theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
that would otherwise have been deliverable upon the exercise of such Warrant
would have been entitled upon such Reorganization if such Warrant had been
exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the Board
of Directors of the Company, whose determination shall be described in a duly
adopted resolution certified by the Company's Secretary or Assistant Secretary,
shall be made in the application of the provisions herein set forth with respect
to the rights and interests of Holders so that the provisions set forth herein
shall thereafter be applicable, as nearly as possible, in relation to any shares
or other property thereafter deliverable upon exercise of Warrants.
The Company shall not effect any such Reorganization unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such Reorganization or the corporation
purchasing or leasing such assets or other appropriate corporation or entity
shall expressly assume, by a supplemental Warrant Agreement or other
acknowledgement executed and delivered to the Holder(s), the obligation to
deliver to each such Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
purchase, and all other obligations and liabilities under this Agreement.
(m) Adjustment in Number of Shares.
------------------------------
Upon each adjustment of the Exercise Price pursuant to this Section 9,
each Warrant outstanding prior to the making of the adjustment in the Exercise
Price shall thereafter evidence the right to receive upon payment of the
adjusted Exercise Price that number of shares of Common Stock (calculated to the
nearest thousandth) obtained from the following formula:
N' = N x E
-
E'
where:
N' = the adjustment number of Warrant Shares issuable upon exercise of
a Warrant by payment of the adjusted Exercise Price.
12
<PAGE>
N = the number of Warrant Shares previously issuable upon exercise
of a Warrant by payment of the Exercise Price prior to
adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
(n) Form of Warrants
----------------
Irrespective of any adjustments in the Exercise Price or the number or
kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.
(o) Adjustments in Other Securities
-------------------------------
If as a result of any event or for any other reason, any adjustment is
made which increases the number of shares of Common Stock issuable upon
conversion, exercise or exchange of, or in the conversion or exercise price or
exchange ratio applicable to, any outstanding securities of the Company that are
convertible into, or exercisable or exchangeable for, Common Stock of the
Company, then a corresponding adjustment shall be made hereunder to increase the
number of shares of Common Stock issuable upon exercise of the Warrants, but
only to the extent that no such adjustment has been made pursuant to Sections
9(a), (b), (c) or (d) hereof with respect to such event or for such other
reason.
(p) Miscellaneous
-------------
For purpose of this Section 9 the term "shares of Common Stock" shall
----------------------
mean (i) shares of any class of stock designated as Common Stock of the Company
at the date of this Agreement, and (ii) shares of any other class of stock
resulting from successive changes or reclassification of such shares consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value. For purposes of this Section 9 the term "Fully Diluted
-------------
Shares" shall mean (i) shares of Common Stock outstanding as of a specified
- ------
date, and (ii) shares of Common Stock into or for which rights, options,
warrants or other securities outstanding as of such date are exercisable or
convertible (other than the Warrants), provided that either: (a) such rights,
options, warrants or other securities are issued and outstanding as of the date
of this Agreement, or (b) the conversion or exercise price of such rights,
options, warrants or other securities is not greater than 120% of the Current
Market Value, as of their issue date, of the Common Stock issuable upon
conversion or exercise thereof. In the event that at any time, as a result of
an adjustment made pursuant to this Section 9, the holders of Warrants shall
become entitled to purchase any securities of the Company other than, or in
addition to, shares of Common Stock, thereafter the number or amount of such
other securities so purchasable upon exercise of each Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares contained in
subsections (a) through (o) of this Section 9, inclusive, and the provisions of
Sections 5, 6, 8 and 10 with respect to the Warrant Shares or the Common Stock
shall apply on like terms to any such other securities.
SECTION 10. FRACTIONAL INTERESTS. The Company shall not be required
--------------------
to issue fractional Warrant Shares on the exercise of Warrants. If more than
one Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant
13
<PAGE>
Shares purchasable on exercise of the Warrants so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 10, be issuable
on the exercise of any Warrants (or specified portion thereof), the Company
shall pay an amount in cash equal to the fair market value of the Warrant Share
so issuable (as determined in good faith by the Board of Directors), multiplied
by such fraction.
SECTION 11. NOTICES TO WARRANT HOLDERS. Upon any adjustment pursuant
--------------------------
to Section 9 hereof, the Company shall promptly thereafter (i) cause to be filed
with the Company a certificate of an officer of the Company setting forth the
Warrant Number and Exercise Price after such adjustment and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculations are based, and (ii) cause to be given to each of the registered
holders of the Warrant Certificates at his or its address appearing on the
Warrant register written notice of such adjustments by first class mail, postage
prepaid. Where appropriate, such notice may be given in advance and included as
a part of the notice required to be mailed under the other provisions of this
Section 11.
In case:
(a) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or
warrants; or
(b) the Company shall authorize the distribution to all holders
of shares of Common Stock of assets, including cash, evidences of its
indebtedness, or other securities; or
(c) of any consolidation or merger to which the Company is a
party and for which approval of any shareholders of the Company is
required, or of the conveyance or transfer of the properties and assets of
the Company substantially as an entirety, or of any reclassification or
change of Common Stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or a
tender offer or exchange offer for shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company proposes to take any action that would require an
adjustment to the Warrant Number or the Exercise Price pursuant to Section
9 hereof;
then the Company shall cause to be given to each of the registered holders of
the Warrant Certificates at his or its address appearing on the Warrant
register, at least 20 days prior to the applicable record date hereinafter
specified, or 20 days prior to the date of the event in the case of events for
which there is no record date, by first-class mail, postage prepaid, a written
notice stating (i) the date as of which the holders of record of shares of
Common Stock to be entitled to receive any such rights, options, warrants or
distribution are to be determined, or (ii) the initial expiration date set forth
in any tender offer or exchange offer for shares of Common Stock, or (iii) the
date on which any such consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up is expected to become effective or consummated, and
the date as of which it is expected that holders of record of shares of Common
Stock shall be entitled to exchange such shares for securities or other
property, if any, deliverable upon such reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up. The failure to
give the notice required by this Section 11 or any defect therein shall not
affect the legality or
14
<PAGE>
validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any action.
Nothing contained in this Agreement or in any Warrant Certificate
shall be construed as conferring upon the Holders of Warrants (prior to the
exercise of such Warrants) the right to vote or to consent or to receive notice
as shareholder in respect of the meetings of shareholders or the election of
Directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company; provided that nothing in the foregoing provision is
intended to detract from any rights explicitly granted to any Holder hereunder.
SECTION 12. NOTICES TO THE COMPANY AND WARRANT HOLDERS. All notices
------------------------------------------
and other communications provided for or permitted hereunder shall be made by
hand delivery, first-class mail, telex, telecopier, or overnight air courier
guaranteeing next day delivery:
(a) if to the Consultant, at 10000 Santa Monica Boulevard, Fifth
Floor, Los Angeles, California 90067, with a copy to Latham & Watkins, 633
W. Fifth Street, Suite 4000, Los Angeles, California 90071, Attention:
Thomas C. Sadler, Esq.; and
(b) if to the Company, at 1550 South Redwood Road, Salt Lake
City, Utah 84104, Attention: Chairman of the Board, with a copy to the
General Counsel.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back if telexed; when receipt acknowledged, if telecopied; and the next
business day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery. The parties may change the addresses to
which notices are to be given by giving five days' prior notice of such change
in accordance herewith.
SECTION 13. ADJUSTMENTS AFFECTING COMMON STOCK. During the term of
----------------------------------
this Agreement, the Company shall not make any adjustment, or permit any
adjustment to occur, with respect to either the Class B Common Stock or the
Class C Common Stock, including, without limitation, any adjustments described
in Section 9, without making a corresponding equivalent adjustment to the other
class of Common Stock.
SECTION 14. SUPPLEMENTS AND AMENDMENTS. The Company may from time to
--------------------------
time supplement or amend this Agreement without the approval of any Holders of
Warrant Certificates in order to cure any ambiguity or to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company may deem necessary or desirable
and which shall not in any way adversely affect the interests of the Holders of
Warrant Certificates.
SECTION 15. SUCCESSORS AND ASSIGNS. All the covenants and provisions
----------------------
of this Agreement by or for the benefit of the Company shall bind and inure to
the benefit of its respective successors and assigns hereunder.
SECTION 16. TERMINATION. This Agreement shall terminate when all
-----------
Warrants have been exercised or have expired pursuant to this Agreement.
15
<PAGE>
SECTION 17. NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing
---------------------------------------
contained herein shall be construed as conferring upon any Holder any rights as
a stockholder of the Company or as imposing any obligation on such holder to
purchase any securities or as imposing any liabilities on such holder as a
stockholder of the Company, whether such obligation or liabilities are asserted
by the Company or by creditors of the Company.
SECTION 18. GOVERNING LAW. This Agreement and each Warrant
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be construed in
accordance with the internal laws of said State.
SECTION 19. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the Company
and the registered Holders of the Warrant Certificates any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company and the registered Holders of the
Warrant Certificates.
SECTION 20. AMENDMENTS AND WAIVERS. No provision of this Agreement
----------------------
may be amended or waived except by an instrument in writing signed by the party
sought to be bound or except as provided pursuant to Section 14 hereof; provided
that any amendment or waiver sought from the Holders of any provision of this
Agreement which affects Holders generally shall be given by Holders of at least
a majority of the Warrants outstanding and any amendment or waiver so given
shall be binding on all Holders. No failure or delay by any party in exercising
any right or remedy hereunder shall operate as a waiver thereof, and a waiver of
a particular right or remedy on one occasion shall not be deemed a waiver of any
other right or remedy or a waiver of the same right or remedy on any subsequent
occasion.
SECTION 21. CONSTRUCTION; INTERPRETATION. This Agreement shall not
----------------------------
be construed for or against any party by reason of the authorship or alleged
authorship of any provision hereof or by reason of the status of the respective
parties. This Agreement shall be construed reasonably to carry out its intent
without presumption against or in favor of any party. The natural persons
executing this Agreement on behalf of each party have the full right, power and
authority to do and affirm the foregoing warranty on behalf of each party and on
their own behalf. The captions on sections are provided for purposes of
convenience and are not intended to limit, define the scope of or aid in
interpretation of any of the provisions hereof. All pronouns and singular or
plural references as used herein shall be deemed to have interchangeably (where
the sense of the sentence requires) a masculine, feminine or neuter, and/or
singular or plural meaning, as the case may be.
SECTION 22. COUNTERPARTS. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
SMITH'S FOOD & DRUG CENTERS, INC.
By:
--------------------------------------------
Name:
Title:
THE YUCAIPA COMPANIES
By:
--------------------------------------------
Name:
Title:
S-1
<PAGE>
EXHIBIT A
[Form of Series A Warrant Certificate]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
[THE SHARES ISSUABLE UPON EXERCISE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON VOTING AND TRANSFER AS SET FORTH IN A
STANDSTILL AGREEMENT BETWEEN THE COMPANY AND CERTAIN OF ITS STOCKHOLDERS. THE
COMPANY WILL FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER OF THIS CERTIFICATE
UPON REQUEST AND WITHOUT CHARGE.]
No. ______ _____ Series A Warrants
Series A Warrant Certificate
SMITH'S FOOD & DRUG CENTERS, INC.
This Warrant Certificate certifies that THE YUCAIPA COMPANIES, or
registered assigns, is the registered holder of the number of Warrants (the
"Warrants") set forth above to purchase Class C Common Stock, $.01 par value
(the "Class C Common Stock"), or, at the election of any holder other than The
Yucaipa Companies and its Affiliates, Class B Common Stock, $.01 par value (the
"Class B Common Stock") of SMITH'S FOOD & DRUG CENTERS, INC., a Delaware
corporation (the "Company"). Each Warrant entitles the holder upon exercise to
receive from the Company one fully paid and nonassessable share of Class C
Common Stock or Class B Common Stock (a "Warrant Share") at the initial exercise
price (the "Exercise Price") of $50.00 payable in lawful money of the United
States of America, upon surrender of this Warrant Certificate and payment of the
Exercise Price at the office of the Company designated for such purpose, but
only subject to the conditions set forth herein and in the Warrant Agreement
referred to hereinafter. The Warrants may be exercised only during the period
commencing on the date hereof and expiring at 5:00 p.m., Los Angeles time, on
_______________, 2000 (the "Exercise Period"); provided, however, that the
Exercise Period shall be extended by five years in the event that, prior to the
foregoing expiration dates, the Market Price of the Company's Class B Common
Stock equals or exceeds the Exercise Price (as adjusted from time to time) for a
period of not less than 60 consecutive trading days (excluding from such period
any day on which no Market Price, as defined in the Warrant Agreement, is
available). Furthermore, Warrants may be exercised during the Exercise Period
without the exchange of funds pursuant to the net exercise provisions of Section
5 of the Warrant Agreement. The Exercise Price and number of Warrant Shares
issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, as set forth in the Warrant Agreement.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants, and are issued or to be issued pursuant to a
Warrant Agreement dated as of _______ __, 1996 (the "Warrant Agreement"), duly
executed and delivered by the Company, which Warrant
A-1
<PAGE>
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
The holder of Warrants evidenced by this Warrant Certificate may
exercise such Warrants during the Exercise Period under and pursuant to the
terms and conditions of the Warrant Agreement by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon (and by this
reference made a part hereof) properly completed and executed, together with
payment of the Exercise Price in cash or by certified or bank check at the
office of the Company designated for such purpose or by wire transfer of
immediately available funds to an account designated by the Company. In the
event that upon any exercise of warrants evidenced hereby the number of Warrants
exercised shall be less than the total number of Warrants evidenced hereby,
there shall be issued by the Company to the holder hereof or his or its
registered assignee a new Warrant Certificate evidencing the number of Warrants
not exercised.
The Warrant Agreement provides that upon the occurrence of certain
events the number of Warrants and the Exercise Price set forth on the face
hereof may, subject to certain conditions, be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the Company
will pay the cash value thereof determined as provided in the Warrant Agreement.
Upon exercise of the Warrants, the holder of Common Stock issued upon
such exercise, if The Yucaipa Companies or any of its Affiliates, will be bound
by and subject to the terms of that certain Standstill Agreement dated as of
_______ __, 1996, by and between the Company, The Yucaipa Companies and the
stockholder parties listed therein (the "Standstill Agreement").
The holders of the Warrants are entitled to certain registration
rights with respect to the Common Stock issuable upon the exercise thereof.
Said registration rights are set forth in a Registration Rights Agreement dated
as of _________ __, 1996, by and among the Company, The Yucaipa Companies, and
certain stockholders of the Company named therein (the "Registration Rights
Agreement"). By acceptance of this Warrant Certificate, the holder hereof
agrees that upon exercise of some or all of the Warrants evidenced hereby, he or
it will be bound by the Registration Rights Agreement as a holder of Registrable
Securities thereunder. A copy of the Registration Rights Agreement may be
obtained by the holder hereof upon written request to the Company.
Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Subject to the terms and conditions of the Warrant Agreement, upon due
presentation for registration of transfer of this Warrant Certificate at the
office of the Company a new Warrant Certificate or Warrant Certificates of like
tenor and evidencing in the aggregate a like number of Warrants shall be issued
to the transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided in the Warrant Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
A-2
<PAGE>
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
IN WITNESS WHEREOF, Smith's Food & Drug Centers, Inc. has caused this
Warrant Certificate to be signed by its Chairman of the Board, Chief Executive
Officer, President or Vice President and by its Secretary or Assistant Secretary
and has caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated: ________ __, 1996 SMITH'S FOOD & DRUG CENTERS, INC.
By:
--------------------------------------------
Name:
Title:
By:
--------------------------------------------
Name:
Title:
A-3
<PAGE>
FORM OF ELECTION TO PURCHASE
(To Be Executed Upon Exercise Of Warrant)
The undersigned holder hereby represents that he or it is the
registered holder of this Warrant Certificate, and hereby irrevocably elects to
exercise the right, represented by this Warrant Certificate, to receive
__________ shares of Class _____ Common Stock, $.01 par value, of SMITH'S FOOD &
DRUG CENTERS, INC. and herewith tenders payment for such shares to the order of
SMITH'S FOOD & DRUG CENTERS, INC. the amount of $_____ in accordance with the
terms hereof (unless the holder is exercising Warrants pursuant to the net
exercise provisions of Section 5 of the Warrant Agreement). The undersigned
requests that a certificate for such shares be registered in the name of the
undersigned or nominee hereinafter set forth, and further that such certificate
be delivered to the undersigned at the address hereinafter set forth or to such
other person or entity as is hereinafter set forth. If said number of shares is
less than all of the shares of Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of such shares be registered in the name of the undersigned or nominee
hereinafter set forth, and further that such certificate be delivered to the
undersigned at the address hereinafter set forth or to such other person or
entity as is hereinafter set forth.
Certificate to be registered as follows:
----------------------------------------
Name:
-----------------------------------------------------------
Address:
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
Social Security or
Taxpayer Identification No.:
---------------------------------------
Certificate to be delivered as follows:
---------------------------------------
Name:
-----------------------------------------------------------
Address:
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
Date: _____________________________ Signature: ____________________________
A-4
<PAGE>
ASSIGNMENT FORM
To assign this Warrant, fill in the form below:
(I) or (we) assign and transfer this Warrant to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. no.)
and irrevocably appoint
- --------------------------------------------------------------------------------
agent to transfer this Warrant on the
- ------------------------------------------
books of the Company. The agent may substitute another to act for him.
Date: Your Signature:
------------ -----------------------------------------------
(Sign exactly as your name appears on the other
side of this Warrant)
Signature Guarantee:
A-5
<PAGE>
EXHIBIT B
[Form of Series B Warrant Certificate]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF REGISTRATION UNDER SAID ACT EXCEPT PURSUANT TO AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
[THE SHARES ISSUABLE UPON EXERCISE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON VOTING AND TRANSFER AS SET FORTH IN A
STANDSTILL AGREEMENT BETWEEN THE COMPANY AND CERTAIN OF ITS STOCKHOLDERS. THE
COMPANY WILL FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER OF THIS CERTIFICATE
UPON REQUEST AND WITHOUT CHARGE.]
No. ______ _____ Series B Warrants
Series B Warrant Certificate
SMITH'S FOOD & DRUG CENTERS, INC.
This Warrant Certificate certifies that THE YUCAIPA COMPANIES, or
registered assigns, is the registered holder of the number of Warrants (the
"Warrants") set forth above to purchase Class C Common Stock, $.01 par value
(the "Class C Common Stock"), or, at the election of any holder other than The
Yucaipa Companies and its Affiliates, Class B Common Stock, $.01 par value (the
"Class B Common Stock") of SMITH'S FOOD & DRUG CENTERS, INC., a Delaware
corporation (the "Company"). Each Warrant entitles the holder upon exercise to
receive from the Company one fully paid and nonassessable share of Class C
Common Stock or Class B Common Stock (a "Warrant Share") at the initial exercise
price (the "Exercise Price") of $50.00 payable in lawful money of the United
States of America, upon surrender of this Warrant Certificate and payment of the
Exercise Price at the office of the Company designated for such purpose, but
only subject to the conditions set forth herein and in the Warrant Agreement
referred to hereinafter. The Warrants may be exercised only during the period.
period commencing on the date hereof and expiring at 5:00 p.m., Los Angeles
time, on _______________, 2001 (the "Exercise Period"); provided, however, that
the Exercise Period shall be extended by five years in the event that, prior to
the foregoing expiration dates, the Market Price of the Company's Class B Common
Stock equals or exceeds the Exercise Price (as adjusted from time to time) for a
period of not less than 60 consecutive trading days (excluding from such period
any day on which no Market Price, as defined in the Warrant Agreement, is
available). Furthermore, Warrants may be exercised during the Exercise Period
without the exchange of funds pursuant to the net exercise provisions of Section
5 of the Warrant Agreement. The Exercise Price and number of Warrant Shares
issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, as set forth in the Warrant Agreement.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants, and are issued or to be issued pursuant to a
Warrant Agreement dated as of _______ __, 1996 (the "Warrant Agreement"), duly
executed and delivered by the Company, which Warrant
B-1
<PAGE>
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
The holder of Warrants evidenced by this Warrant Certificate may
exercise such Warrants during the Exercise Period under and pursuant to the
terms and conditions of the Warrant Agreement by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon (and by this
reference made a part hereof) properly completed and executed, together with
payment of the Exercise Price in cash or by certified or bank check at the
office of the Company designated for such purpose or by wire transfer of
immediately available funds to an account designated by the Company. In the
event that upon any exercise of warrants evidenced hereby the number of Warrants
exercised shall be less than the total number of Warrants evidenced hereby,
there shall be issued by the Company to the holder hereof or his or its
registered assignee a new Warrant Certificate evidencing the number of Warrants
not exercised.
The Warrant Agreement provides that upon the occurrence of certain
events the number of Warrants and the Exercise Price set forth on the face
hereof may, subject to certain conditions, be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the Company
will pay the cash value thereof determined as provided in the Warrant Agreement.
Upon exercise of the Warrants, the holder of Common Stock issued upon
such exercise, if The Yucaipa Companies or any of its Affiliates, will be bound
by and subject to the terms of that certain Standstill Agreement dated as of
_______ __, 1996, by and between the Company, The Yucaipa Companies and the
stockholder parties listed therein (the "Standstill Agreement").
The holders of the Warrants are entitled to certain registration
rights with respect to the Common Stock issuable upon the exercise thereof.
Said registration rights are set forth in a Registration Rights Agreement dated
as of _________ __, 1996, by and among the Company, The Yucaipa Companies and
certain stockholders of the Company named therein (the "Registration Rights
Agreement"). By acceptance of this Warrant Certificate, the holder hereof
agrees that upon exercise of some or all of the Warrants evidenced hereby, he or
it will be bound by the Registration Rights Agreement as a holder of Registrable
Securities thereunder. A copy of the Registration Rights Agreement may be
obtained by the holder hereof upon written request to the Company.
Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Subject to the terms and conditions of the Warrant Agreement, upon due
presentation for registration of transfer of this Warrant Certificate at the
office of the Company a new Warrant Certificate or Warrant Certificates of like
tenor and evidencing in the aggregate a like number of Warrants shall be issued
to the transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided in the Warrant Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
B-2
<PAGE>
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
IN WITNESS WHEREOF, Smith's Food & Drug Centers, Inc. has caused this
Warrant Certificate to be signed by its Chairman of the Board, Chief Executive
Officer, President or Vice President and by its Secretary or Assistant Secretary
and has caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated: ________ __, 1996 SMITH'S FOOD & DRUG CENTERS, INC.
By:
-------------------------------------------
Name:
Title:
By:
-------------------------------------------
Name:
Title:
B-3
<PAGE>
FORM OF ELECTION TO PURCHASE
(To Be Executed Upon Exercise Of Warrant)
The undersigned holder hereby represents that he or it is the
registered holder of this Warrant Certificate, and hereby irrevocably elects to
exercise the right, represented by this Warrant Certificate, to receive
__________ shares of Class _____ Common Stock, $.01 par value, of SMITH'S FOOD &
DRUG CENTERS, INC. and herewith tenders payment for such shares to the order of
SMITH'S FOOD & DRUG CENTERS, INC. the amount of $_____ in accordance with the
terms hereof (unless the holder is exercising Warrants pursuant to the net
exercise provisions of Section 5 of the Warrant Agreement). The undersigned
requests that a certificate for such shares be registered in the name of the
undersigned or nominee hereinafter set forth, and further that such certificate
be delivered to the undersigned at the address hereinafter set forth or to such
other person or entity as is hereinafter set forth. If said number of shares is
less than all of the shares of Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of such shares be registered in the name of the undersigned or nominee
hereinafter set forth, and further that such certificate be delivered to the
undersigned at the address hereinafter set forth or to such other person or
entity as is hereinafter set forth.
Certificate to be registered as follows:
----------------------------------------
Name:
--------------------------------------------------------
Address:
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
Social Security or
Taxpayer Identification No.:
-------------------------------------
Certificate to be delivered as follows:
---------------------------------------
Name:
--------------------------------------------------------
Address:
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
Date: _____________________________ Signature: __________________________
B-4
<PAGE>
ASSIGNMENT FORM
To assign this Warrant, fill in the form below:
(I) or (we) assign and transfer this Warrant to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's WP. sec. or tax I.D. no.)
and irrevocably appoint
---------------------------------------------------------
agent to transfer this Warrant on the
- -------------------------------------------
books of the Company. The agent may substitute another to act for him.
Date: _____________ Your Signature: ________________________________________
(Sign exactly as your name appears on
the other side of this Warrant)
Signature Guarantee:
B-5
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Smith's Beverage of Wyoming, Inc., a Wyoming corporation.
Western Property Investment Group, Inc., a California corporation.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 (File
No. 333-01601) of our report dated October 3, 1995, except for Note 18 for
which the date is January 29, 1996, on our audits of the financial statements
of Smitty's Supermarkets, Inc. and subsidiaries and the Predecessor. We also
consent to the reference to our firm under the captions "Selected Historical
Financial Data of Smitty's" and "Experts."
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
April 16, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and in
headnotes and to the use of our report dated January 29, 1996, in the
Registration Statement (Form S-3, No. 333-01601) and related Prospectuses of
Smith's Food & Drug Centers, Inc. dated April 17, 1996.
ERNST & YOUNG LLP
Salt Lake City, Utah
April 10, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
Pursuant to our retainer agreement with Smith's Food & Drug Centers, Inc.
("Smith's") dated March 28, 1996, we hereby consent to the references to us in
the Registration Statement on Form S-3 (No. 333-01601) of Smith's, including
all amendments thereto (the "Registration Statement"). In giving such consent,
we do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations issued by the Securities and Exchange Commission
thereunder.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
Los Angeles, California
April 16, 1996
<PAGE>
EXHIBIT 99.1
CONSENT TO BE NAMED AS A PROPOSED DIRECTOR
The undersigned, Linda McLoughlin Figel, hereby consents to being named as a
proposed Director of Smith's Food & Drug Centers, Inc., a Delaware corporation
(the "Company"), in the Registration Statement on Form S-3 of the Company
relating to the Company's Senior Notes due 2006, Senior Subordinated Notes due
2007, Cumulative Redeemable Exchangeable Preferred Stock and Subordinated
Exchange Debentures due 2008, and all amendments thereto.
/s/ Linda McLoughlin Figel
-------------------------------------
Linda McLoughlin Figel
Dated: April 16, 1996
<PAGE>
EXHIBIT 99.2
CONSENT TO BE NAMED AS A PROPOSED DIRECTOR
The undersigned, Ronald W. Burkle, hereby consents to being named as a
proposed Director of Smith's Food & Drug Centers, Inc., a Delaware corporation
(the "Company"), in the Registration Statement on Form S-3 (No. 333-01601) of
the Company relating to the Company's Senior Notes due 2006, Senior
Subordinated Notes due 2007, Cumulative Redeemable Exchangeable Preferred
Stock and Subordinated Exchange Debentures due 2008, and all amendments
thereto.
/s/ Ronald W. Burkle
-------------------------------------
Ronald W. Burkle
Dated: April 16, 1996
<PAGE>
EXHIBIT 99.4
CONSENT TO BE NAMED AS A PROPOSED DIRECTOR
The undersigned, Bertram R. Zweig, hereby consents to being named as a
proposed Director of Smith's Food & Drug Centers, Inc., a Delaware corporation
(the "Company"), in the Registration Statement on Form S-3 (No. 333-01601) of
the Company relating to the Company's Senior Notes due 2006, Senior
Subordinated Notes due 2007, Cumulative Redeemable Exchangeable Preferred
Stock and Subordinated Exchange Debentures due 2008, and all amendments
thereto.
/s/ Bertram R. Zweig
-------------------------------------
Bertram R. Zweig
Dated: April 12, 1996
