<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
SMITH'S FOOD & DRUG CENTERS, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(j)(2) or Item
22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: (i)
Class B Common Stock, par value $.01 per share, of the Registrant
("Class B Common Stock") to be issued in connection with the
transaction.
(2) Aggregate number of securities to which transaction applies: (i)
3,038,888 shares of Class B Common Stock, the maximum number of shares
of Class B Common Stock to be issued by the Registrant in the
transaction on the closing date of the merger described in the
accompanying Proxy Statement (the "Merger").
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): The per unit
price of each share of Class B Common Stock is $24.625 (the average high
and low price of such stock on the New York Stock Exchange, Inc.
Composite Transaction Tape on March 1, 1996). The filing fee of $14,967
is calculated in accordance with Rule 0-11(c)(1) under the Exchange Act
as one-fiftieth of one percent of the product of 3,038,888 shares to be
issued in the transaction and $24.625.
(4) Proposed maximum aggregate value of transaction: $74,832,617.
(5) Total fee paid: $14,967.
[X] Fee paid previously with preliminary materials
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A Cover Page (File No. )
--------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
[LOGO]
SMITH'S FOOD & DRUG CENTERS, INC.
1550 SOUTH REDWOOD ROAD
SALT LAKE CITY, UTAH 84104
April 25, 1996
Dear Fellow Stockholders:
You are invited to attend the Annual Meeting of the Stockholders (the
"Stockholders' Meeting") of Smith's Food & Drug Centers, Inc. (the "Company"),
to vote on, among other things, a proposed recapitalization of the Company and
the merger of Smitty's Supermarkets, Inc. ("Smitty's"), a Phoenix, Arizona-
based supermarket chain, with a subsidiary of the Company (the "Merger"). As
part of the recapitalization, the Company will commence a tender offer (the
"Offer") to purchase 50% of its outstanding shares of common stock for $36 in
cash per share. The Offer and the Merger are anticipated to be consummated at
the same time and will result in Smitty's becoming a wholly owned subsidiary
of the Company. In the Merger, the stockholders of Smitty's will receive
shares of the Company's Class B Common Stock, par value $.01 per share ("Class
B Common Stock"), and affiliates of The Yucaipa Companies ("Yucaipa"), the
controlling stockholders of Smitty's, will become significant new investors in
the Company. In addition, concurrently with the consummation of the Offer and
the Merger, the Company will enter into a management services agreement with
Yucaipa pursuant to which Yucaipa will provide certain management consultation
services to the Company.
We believe Yucaipa will bring significant expertise to the Company and we
look forward to its involvement in the Company. Ronald Burkle, the managing
general partner of Yucaipa and Chairman of Smitty's, will be appointed as
Chief Executive Officer of the Company upon consummation of the Merger. With
the addition of Allen Rowland, our new President and Chief Operating Officer,
we look forward to an even stronger management team.
At the Stockholders' Meeting, the Company's stockholders will be asked to
(i) approve the Recapitalization Agreement and Plan of Merger, dated as of
January 29, 1996 (the "Recapitalization Agreement"), and the transactions
contemplated thereby, including the Offer and the issuance of 3,038,888 shares
of the Company's Class B Common Stock to the stockholders of Smitty's pursuant
to the Merger; (ii) approve and adopt separate amendments to the Company's
Certificate of Incorporation which (A) create a classified Board of Directors,
(B) create a new, non-voting Class C Common Stock, par value $.01 per share,
and (C) amend certain provisions with respect to the Company's Series I
Preferred Stock; (iii) elect a seven person Board of Directors which will be
divided into three classes, with the term of one class expiring each year; and
(iv) ratify the selection of the Company's independent auditors for 1996. A
copy of the Recapitalization Agreement is attached as Annex A to the enclosed
Proxy Statement.
Details of the transactions are discussed in the enclosed Proxy Statement,
the forepart of which includes a summary of the terms and other information
relating to the proposed transactions. The Offer will be made pursuant to an
Offer to Purchase that will be delivered separately to the Company's
stockholders. Stockholders should only tender shares as provided in such Offer
to Purchase and should not send stock certificates with their proxy cards.
The Board of Directors of the Company has received the written opinion of
Goldman, Sachs & Co., financial advisor to the Company, that, as of January
29, 1996, the Exchange Ratio (as defined herein) pursuant to the
Recapitalization Agreement is fair to the Company. The written opinion of
Goldman, Sachs & Co. is included in the accompanying Proxy Statement and
should be read carefully by stockholders of the Company.
AT ITS MEETING ON JANUARY 28, 1996, THE COMPANY'S BOARD OF DIRECTORS
UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR AND IN THE BEST INTEREST OF THE
STOCKHOLDERS OF THE COMPANY, AND THE BOARD RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE RECAPITALIZATION AGREEMENT AND THE
<PAGE>
TRANSACTIONS CONTEMPLATED THEREBY AND FOR THE OTHER PROPOSALS TO BE VOTED ON
AT THE STOCKHOLDERS' MEETING.
The Stockholders' Meeting will be held at the Company's principal executive
offices at 1550 South Redwood Road, Salt Lake City, Utah 84104, on Thursday,
May 23, 1996, beginning at 9:00 a.m., Mountain Time. It is very important that
your shares be represented at the Stockholders' Meeting, whether or not you
plan to attend personally. Therefore, you should complete and sign the
enclosed proxy card and return it as soon as possible in the enclosed postage-
paid envelope. This will ensure that your shares are represented at the
Stockholders' Meeting.
Yours very truly,
/s/ Jeffrey P. Smith
Jeffrey P. Smith
Chairman of the Board and
Chief Executive Officer
<PAGE>
[LOGO]
SMITH'S FOOD & DRUG CENTERS
1550 SOUTH REDWOOD ROAD
SALT LAKE CITY, UTAH 84104
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 23, 1996
TO THE STOCKHOLDERS OF
SMITH'S FOOD & DRUG CENTERS, INC.
The Annual Meeting of the Stockholders of Smith's Food & Drug Centers, Inc.
(the "Company"), will be held at the Company's principal executive offices at
1550 South Redwood Road, Salt Lake City, Utah 84104, on Thursday, May 23, 1996
at 9:00 a.m., Mountain Time (the "Stockholders' Meeting"), for the following
purposes:
1. To approve the Recapitalization Agreement and Plan of Merger, dated as
of January 29, 1996 (the "Recapitalization Agreement"), and the
transactions contemplated thereby, including a tender offer by the
Company to purchase 50% of its outstanding common stock for $36 in cash
per share and the issuance of 3,038,888 shares of the Company's Class B
Common Stock to the stockholders of Smitty's Supermarkets, Inc.
("Smitty's") pursuant to the proposed merger of Smitty's with a
subsidiary of the Company as provided for therein;
2. To approve and adopt separate amendments to the Company's Certificate of
Incorporation which (A) create a classified Board of Directors, (B)
create a new non-voting Class C Common Stock, par value $.01 per share,
and (C) amend certain provisions with respect to the Company's
outstanding Series I Preferred Stock (a form of the Amended and Restated
Certificate of Incorporation reflecting each of these amendments is
attached as Annex C to the enclosed Proxy Statement);
3. To elect a seven person Board of Directors which will be divided into
three classes, with the term of one class expiring each year;
4. To ratify the selection of Ernst & Young LLP as the Company's
independent auditors for 1996; and
5. To transact such other business as may properly come before the
Stockholders' Meeting and any postponements and/or adjournments thereof.
The close of business on April 15, 1996 has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of the
stockholders entitled to notice of, and to vote at, the Stockholders' Meeting.
We hope all stockholders who can do so will attend the Stockholders' Meeting
in person. Whether or not you plan to attend, we urge you to complete and sign
the enclosed proxy card(s) and return it in the enclosed postage-prepaid
envelope. Returning your proxy will not deprive you of your right to attend
the meeting and vote your shares in person.
If you own any shares of Class A Common Stock, Class B Common Stock, or
Series I Preferred Stock, please sign and return all proxy cards provided to
you for each type of stock owned by you as of the Record Date.
By Order of the Board of Directors,
/s/ Michael C. Frei
Michael C. Frei
Secretary
Salt Lake City, Utah
April 25, 1996
<PAGE>
PROXY STATEMENT
-------------------
LOGO
SMITH'S FOOD & DRUG CENTERS, INC.
-------------------
This Proxy Statement is being furnished to the stockholders of Smith's Food
& Drug Centers, Inc., a Delaware corporation (the "Company"), in connection
with the solicitation of proxies by the Board of Directors of the Company for
use at the Annual Meeting of the Stockholders, including any adjournments or
postponements thereof, scheduled to be held on Thursday, May 23, 1996 at 9:00
a.m., Mountain Time, at the Company's principal executive offices at 1550
South Redwood Road, Salt Lake City, Utah 84104 (the "Stockholders' Meeting").
This Proxy Statement relates to among other things the proposed
recapitalization of the Company pursuant to the Recapitalization Agreement and
Plan of Merger, dated as of January 29, 1996 (the "Recapitalization
Agreement"), among the Company, Cactus Acquisition, Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("Acquisition"),
Smitty's Supermarkets, Inc., a Delaware corporation ("Smitty's"), and The
Yucaipa Companies, a California general partnership ("Yucaipa"). In the
Recapitalization Agreement, the Company has agreed, subject to the terms and
conditions described herein to: (i) commence a tender offer (the "Offer") to
purchase 50% of the Company's outstanding Class A Common Stock, par value $.01
per share ("Class A Common Stock"), and Class B Common Stock, par value $.01
per share ("Class B Common Stock"; and, together with the Class A Common
Stock, the "Common Stock") (excluding shares issuable in the Merger referred
to below), for $36.00 in cash per share; and (ii) consummate the merger of
Smitty's with Acquisition, pursuant to which Smitty's will become a wholly
owned subsidiary of the Company and the stockholders of Smitty's will receive
3,038,888 shares of Class B Common Stock of the Company (the "Merger"). It is
anticipated that the Offer and the Merger will close simultaneously, except in
certain limited circumstances described herein.
The consummation of the Offer is subject, among other things, to (i) the
valid tender, without withdrawal prior to the expiration of the Offer, of at
least 50% of the outstanding shares of Common Stock, and (ii) the satisfaction
or waiver of all of the conditions to the Merger (other than the consummation
of the Offer). See "The Recapitalization and Merger--The Offer--Conditions to
the Offer." The closing of the Merger is subject to various conditions,
including among other things the receipt of required regulatory approvals and
the approval by the Company's stockholders of the Recapitalization Agreement
and the other transactions contemplated thereby at the Stockholders' Meeting,
and, except in certain limited circumstances described herein, the
consummation of the Offer. See "The Recapitalization Agreement--Conditions to
the Merger."
Pursuant to the Merger, each share of common stock, par value $.01 per
share, without distinction as to class, of Smitty's (the "Smitty's Common
Stock"), other than any Smitty's dissenting shares, will be converted into
3.011803 shares (the "Exchange Ratio") of Class B Common Stock.
The Recapitalization Agreement, including the issuance by the Company of
3,038,888 shares of Class B Common Stock to the stockholders of Smitty's
pursuant to the Merger, requires the approval at the Stockholders' Meeting of
the holders of a majority of the total votes cast at the meeting, with all
outstanding shares of the Company's Common Stock and Series I Preferred Stock,
par value $.01 per share (the "Series I Preferred Stock") voting together as a
single class and with each share of Class A Common Stock and Series I
Preferred Stock entitled to ten votes and each share of Class B Common Stock
entitled to one vote. The total votes cast at the Stockholders' Meeting is
required to represent over 50% of the number of outstanding shares of capital
stock of the Company entitled to vote at the Stockholders' Meeting.
STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN TRANSACTIONS CONTEMPLATED IN THE
RECAPITALIZATION AGREEMENT WILL INCREASE THE RISK ASSOCIATED WITH, AND MAY
OTHERWISE ADVERSELY AFFECT THE VALUE OF, THEIR INVESTMENT IN THE COMPANY. SEE
"RISK FACTORS" BEGINNING ON PAGE 24 HEREOF.
Pursuant to an agreement (the "Smith's Shareholder Agreement") entered into
by Jeffrey P. Smith, Chairman and Chief Executive Officer of the Company, and
certain other related stockholders (the "Smith Group"), who own approximately
30.4% and 64.5% of the outstanding shares of Common Stock and Series I
Preferred Stock respectively (and approximately 62.1% of the aggregate number
of votes eligible to be cast at the Stockholders' Meeting), such stockholders
have agreed to vote their shares in favor of the Recapitalization Agreement
and the transactions contemplated thereby. In addition, directors and
executive officers of the Company who have not executed the Smith's
Shareholder Agreement, who own approximately 7.6% of the outstanding shares of
Common Stock (and approximately 6.4% of the aggregate number of votes eligible
to be cast at the Stockholders' Meeting), have indicated that they intend to
vote their shares of Common Stock in favor of the Recapitalization Agreement
and the transactions contemplated thereby. THEREFORE, AS OF THE DATE HEREOF,
IF OVER 50% OF THE NUMBER OF OUTSTANDING SHARES OF CAPITAL STOCK OF THE
COMPANY ARE VOTED AT THE STOCKHOLDERS' MEETING, THE REQUISITE NUMBER OF VOTES
FOR THE APPROVAL OF ALL PROPOSALS TO BE CONSIDERED AT THE MEETING BY THE
HOLDERS OF THE COMPANY'S STOCK IS ASSURED.
The Company's stockholders will also be asked at the Stockholders' Meeting
to: (i) approve and adopt separate amendments to the Company's Certificate of
Incorporation which (A) create a classified Board of Directors, (B) create a
new non-voting Class C Common Stock, par value $.01 per share, and (C) amend
certain provisions with respect to the Series I Preferred Stock (a form of the
Amended and Restated Certificate of Incorporation reflecting each of these
amendments is attached as Annex C to this Proxy Statement); (ii) elect a Board
of Directors which will be divided into three classes, with the term of one
class expiring each year; and (iii) ratify the selection of Ernst & Young LLP
as the Company's independent auditors for 1996. See "Proposal No. 2--Amendment
and Restatement of Certificate of Incorporation," "Proposal No. 3--Election of
Board of Directors" and "Proposal No. 4--Ratification of Selection of
Independent Auditors."
This Proxy Statement, and the accompanying form of proxy (the "Proxy"), were
first mailed to the stockholders of the Company on or about April 25, 1996.
-------------------
THE DATE OF THIS PROXY STATEMENT IS APRIL 25, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION BY REFERENCE................................................ 1
SUMMARY................................................................... 2
General................................................................. 2
The Parties............................................................. 3
The Stockholders' Meeting and Votes Required............................ 5
The Recapitalization.................................................... 7
The Merger.............................................................. 9
Financing the Transactions.............................................. 10
Recommendation of the Board of Directors................................ 11
Termination of the Recapitalization Agreement........................... 11
Related Transactions.................................................... 11
Interests of Certain Persons in the Transactions........................ 14
Tax Consequences of the Transactions.................................... 15
Selected Historical Financial Data...................................... 16
Summary Unaudited Pro Forma Combined Financial Data..................... 19
Comparative Per Share Data.............................................. 21
Market Prices of the Company's Class B Common Stock..................... 22
INTRODUCTION.............................................................. 23
RISK FACTORS.............................................................. 24
Leverage and Debt Service............................................... 24
Effect on Trading Market of Common Stock................................ 25
Fraudulent Conveyance Risks; Delaware Law Considerations................ 25
Ability to Achieve Anticipated Cost Savings............................. 26
Anticipated Charges to Earnings Following the Recapitalization and
Merger................................................................. 26
Competition............................................................. 27
Control of the Company; Change of Control Provisions.................... 27
New Senior Management and Board of Directors............................ 28
THE COMPANY, SMITTY'S AND YUCAIPA......................................... 28
The Company and Acquisition............................................. 28
California Divestiture.................................................. 28
Recent Operating Results of The Company................................. 30
Smitty's................................................................ 31
Yucaipa................................................................. 31
Post-Recapitalization and Merger Company................................ 32
THE STOCKHOLDERS' MEETING................................................. 35
Date, Time and Place.................................................... 35
Matters To Be Considered at the Stockholders' Meeting................... 35
Record Date; Stock Entitled to Vote; Quorum............................. 35
Votes Required.......................................................... 35
Voting of Proxies....................................................... 36
Adjournments; Revocability of Proxies................................... 36
Solicitation of Proxies................................................. 37
THE RECAPITALIZATION AND MERGER........................................... 37
Background of the Transactions.......................................... 37
Reasons for the Transactions; Recommendation of Board of Directors...... 43
Opinion of Financial Advisor............................................ 45
Certain Information Provided............................................ 50
Interest of Certain Persons in the Transactions......................... 50
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
The Offer................................................................ 52
Commencement of the Offer.............................................. 52
Conditions to the Offer................................................ 52
Company's Purchase of Shares in the Offer.............................. 52
The Merger............................................................... 53
Effective Time......................................................... 53
Conversion of Shares................................................... 53
Conditions to the Merger............................................... 53
No Fractional Shares................................................... 53
Appraisal Rights....................................................... 53
Accounting Treatment................................................... 54
Resale of Class B Common Stock Following the Merger.................... 54
Repayment of Smitty's Indebtedness....................................... 54
Regulatory Approvals..................................................... 54
Company's Stock Options; Deferred Compensation Plans..................... 55
Financing Arrangements by Yucaipa; Yucaipa Fee........................... 55
Composition of Board of Directors and Officers........................... 55
Discontinuation of Dividend.............................................. 56
Purchase of Series I Preferred Stock..................................... 56
THE RECAPITALIZATION AGREEMENT............................................. 57
The Offer and Merger..................................................... 57
Conditions to the Merger................................................. 57
Termination.............................................................. 59
Termination of Recapitalization.......................................... 59
Amendment and Waiver..................................................... 59
Expenses................................................................. 60
Representations and Warranties........................................... 60
Conduct of Business Pending Merger....................................... 60
Additional Covenants..................................................... 62
CERTAIN RELATED AGREEMENTS................................................. 64
Standstill Agreement..................................................... 64
Management Services Agreement............................................ 65
Warrant Agreement........................................................ 67
Registration Rights Agreement............................................ 67
Smith's Shareholder Agreement............................................ 68
Smitty's Stockholders' Agreement......................................... 69
FINANCING OF THE RECAPITALIZATION AND MERGER............................... 69
General.................................................................. 69
New Credit Facility...................................................... 71
New Senior Notes and New Senior Subordinated Notes....................... 73
New Preferred Stock...................................................... 74
New Exchange Debentures.................................................. 75
PRO FORMA CAPITALIZATION................................................... 76
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.......................... 77
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS....................... 78
UNAUDITED PRO FORMA COMBINED BALANCE SHEET................................. 81
MANAGEMENT AFTER RECAPITALIZATION AND MERGER............................... 85
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 87
Ownership Prior to Recapitalization and Merger........................... 87
Ownership After Recapitalization and Merger.............................. 89
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK.................................. 91
Class A Common Stock and Class B Common Stock............................. 91
Preferred Stock........................................................... 92
Antitakeover Effects of Certain Certificate of Incorporation Provisions... 93
Limitation on Directors' Liability........................................ 94
Delaware Takeover Statute................................................. 94
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 95
The Offer................................................................. 95
The Merger................................................................ 98
BOARD OF DIRECTORS, COMMITTEE MEETINGS AND COMPENSATION OF DIRECTORS........ 98
EXECUTIVE COMPENSATION...................................................... 99
Summary Compensation Table................................................ 99
Fiscal Year-End Option Value.............................................. 99
Pension Plan and Other Retirement, Death and Disability Arrangements...... 100
Compensation/Audit Committee Interlocks and Insider Participation; Certain
Relationships and Related Transactions................................... 101
Certain Transactions...................................................... 101
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION..................... 103
Performance Graph......................................................... 106
Comparison of Five-Year Cumulative Total Return........................... 106
PROPOSAL NO. 1--APPROVAL OF THE RECAPITALIZATION AGREEMENT.................. 107
PROPOSAL NO. 2--AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION... 107
PROPOSAL NO. 3--ELECTION OF BOARD OF DIRECTORS.............................. 108
PROPOSAL NO. 4--RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS........... 110
SECTION 16(a) REPORTING..................................................... 110
STOCKHOLDERS' PROPOSALS FOR NEXT ANNUAL MEETING............................. 110
EXPERTS..................................................................... 110
INDEX TO FINANCIAL STATEMENTS............................................... F-1
ANNEX A Recapitalization Agreement and Plan of Merger....................... A-1
ANNEX B Goldman, Sachs & Co. Opinion........................................ B-1
ANNEX C Amended and Restated Certificate of Incorporation................... C-1
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
The Company 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, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
its offices at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048, 500 West Madison Street,
CitiCorp Center, Suite 1400, Chicago, Illinois 60661 and 5670 Wilshire
Boulevard, Suite 500, Los Angeles, California 90036-3648. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, material filed by the Company may be inspected at the
offices of the New York Stock Exchange, Inc. ("NYSE"), 20 Broad Street, New
York, New York 10005.
The Company has filed this Proxy Statement with the Commission. As permitted
by the rules and regulations of the Commission, this Proxy Statement omits
certain information which is incorporated by reference herein. Statements
contained in this Proxy Statement as to the contents of any contract or other
document filed as an annex to this Proxy Statement are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed herewith as an annex.
All information contained or incorporated by reference in this Proxy
Statement relating to the Company was provided by the management and Board of
Directors of the Company. All information contained in this Proxy Statement
relating to Smitty's was provided by the management and Board of Directors of
Smitty's. All information contained in this Proxy Statement relating to
Yucaipa was provided by Yucaipa.
INCORPORATION BY REFERENCE
The following documents filed with the Commission by the Company under File
No. 001-10252 pursuant to the Exchange Act are incorporated herein by
reference:
(a)The Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995; and
(b)The Company's Current Report on Form 8-K dated February 19, 1996.
All documents filed by the Company 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 date of the Stockholders' Meeting shall hereby be deemed to
be incorporated by reference into this Proxy Statement and to be a part hereof
from the date of filing of such documents. See "Available Information." Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement 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 or replaces
such statement. Any such statement so modified or superseded or replaced shall
not be deemed, except as so modified, superseded or replaced, to constitute a
part of this Proxy Statement.
This Proxy Statement incorporates documents by reference with respect to the
Company which are not presented herein or delivered herewith. Copies of these
documents (excluding exhibits unless such exhibits are specifically
incorporated by reference into the information incorporated herein) will be
provided by first class mail without charge to each person to whom this Proxy
Statement is delivered, upon written or oral request by such person to Smith's
Food & Drug Centers, Inc., 1550 South Redwood Road, Salt Lake City, Utah
84104, Attention: Michael C. Frei, Secretary (telephone: (801) 974-1400). In
order to ensure timely delivery of the documents, any request should be made
by May 17, 1996.
No person has been authorized by the Company to give any information or to
make any representation not contained in this Proxy Statement and, if given or
made, such information or representation should not be relied upon as having
been authorized by the Company. This Proxy Statement does not constitute the
solicitation of a proxy from any person in any jurisdiction where such a
solicitation would be unlawful. The delivery of this Proxy shall not, under
any circumstances, imply or create any implication that there has been no
change in the affairs of the Company or in the information set forth or
incorporated by reference herein subsequent to the date hereof.
1
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. This summary is qualified in its entirety by reference to the
more detailed information contained elsewhere in this Proxy Statement, the
Annexes hereto and the documents referred to herein. Stockholders are urged to
review carefully this Proxy Statement, the Recapitalization Agreement attached
as Annex A and the other annexes attached hereto.
GENERAL.................... Smith's Food and Drug Centers, Inc., a Delaware
corporation (the "Company"), and Cactus
Acquisition, Inc., a Delaware corporation and
wholly owned subsidiary of the Company
("Acquisition"), entered into a Recapitalization
Agreement and Plan of Merger, dated as of January
29, 1996 (the "Recapitalization Agreement"), with
Smitty's Supermarkets, Inc., a Delaware
corporation ("Smitty's"), and The Yucaipa
Companies, a California general partnership
("Yucaipa"). Pursuant to the Recapitalization
Agreement, the Company will commence a tender
offer to purchase 50% of the outstanding shares of
its Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), and its Class B
Common Stock, par value $.01 per share (the "Class
B Common Stock", and together with the Class A
Common Stock, the "Common Stock") (excluding
shares issuable in the Merger), for $36.00 in cash
per share (the "Offer"). Consummation of the Offer
is subject to the tender of at least 50% of the
outstanding shares of Common Stock, the receipt of
financing and certain other conditions.
Pursuant to the Recapitalization Agreement,
Smitty's will be merged with Acquisition (the
"Merger"), as a result of which Smitty's will
become a wholly owned subsidiary of the Company
and the stockholders of Smitty's will receive
3,038,888 shares of Class B Common Stock of the
Company in the Merger.
As part of the Recapitalization (as defined
herein) and Merger, the Company intends to: (i)
purchase 50% of the outstanding Common Stock for
$36.00 in cash per share (or approximately
$451.3 million in the aggregate); (ii) repay
approximately $667.1 million (pro forma at
December 30, 1995) of indebtedness of the Company
and approximately $103.3 million (pro forma at
December 30, 1995) of indebtedness of Smitty's;
(iii) purchase up to half of the outstanding
management stock options of the Company at a price
per share of Common Stock covered by such options
equal to $36.00 per share minus the exercise price
per share (or approximately $13.7 million in the
aggregate); and (iv) purchase approximately three
million shares of its Series I Preferred Stock,
par value $.01 per share (the "Series I Preferred
Stock") for $.33 1/3 per share (or approximately
$1 million in the aggregate). In addition, the
Company will pay related debt refinancing
premiums, accrued interest and fees and expenses
in connection with the Recapitalization and
Merger. The Offer, the Merger and the repayment of
outstanding indebtedness are expected to close
concurrently with the financing transactions
described below.
As part of the Recapitalization, the Company will
enter into a Management Services Agreement (as
defined herein) with Yucaipa
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pursuant to which Yucaipa will provide certain
management consulting services and Ronald W.
Burkle, the managing general partner of Yucaipa,
will become Chief Executive Officer of the
Company. Mr. Burkle, along with another designee
of Yucaipa, will be nominated to become a member
of the Company's Board of Directors. The Company
will also enter into a warrant agreement with
Yucaipa (the "Warrant Agreement") pursuant to
which the Company will issue warrants to Yucaipa
to purchase shares of a new non-voting Class C
Common Stock, par value $.01 per share ("Class C
Common Stock"), of the Company, representing 10%
of the aggregate shares of outstanding Common
Stock on a fully diluted basis upon consummation
of the Recapitalization and Merger, for an initial
exercise price of $50 per share, subject to
certain conditions and exceptions. See "Certain
Related Agreements--Management Services
Agreement," "--Standstill Agreement" and "--
Warrant Agreement."
STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN
TRANSACTIONS CONTEMPLATED IN THE RECAPITALIZATION
AGREEMENT WILL INCREASE THE RISK ASSOCIATED WITH,
AND MAY OTHERWISE ADVERSELY AFFECT THE VALUE OF,
THEIR INVESTMENT IN THE COMPANY. STOCKHOLDERS
SHOULD CONSIDER ALL OF THE INFORMATION CONTAINED
IN THIS PROXY STATEMENT BEFORE VOTING. IN
PARTICULAR, STOCKHOLDERS SHOULD CONSIDER THE
FACTORS SET FORTH HEREIN UNDER "RISK FACTORS."
THE PARTIES
The Company and The Company is a leading supermarket company in
Acquisition................ the Intermountain and Southwestern regions of the
United States, operating 120 stores located in
Utah (35), Arizona (30), Nevada (22), New Mexico
(19) and Idaho, Texas and Wyoming (collectively,
14). Substantially all of the Company's stores
offer one-stop shopping convenience through a food
and drug combination format which features a full-
line supermarket with drug and pharmacy
departments and some or all of the following
specialty departments: delicatessens, hot prepared
food sections, in-store bakeries, video rental
shops, floral shops, one-hour photo processing
labs, full-service banking and frozen yogurt
shops. The Company was founded in 1948 and
reincorporated in Delaware in 1989. The Company's
Class B Common Stock is traded on the NYSE under
the symbol "SFD."
The Company has completed the sale, lease or
closure of its Southern California regional
operations. The Company has entered into
agreements to sell or lease 16 stores and related
equipment, three non-operating properties and its
primary distribution facility in Southern
California to various supermarket companies
(including Ralphs Grocery Company ("Ralphs"), an
affiliate of Yucaipa) and others and has closed
its remaining California stores (the "California
Divestiture"). It is anticipated that such stores
will be sold or leased to other retail companies.
Following the consummation of the Recapitalization
and Merger, the Company intends to accelerate the
disposition of its closed stores and excess land
in California (the
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<PAGE>
"California Asset Disposition", and together with
the California Divestiture, the "California
Disposition"). In connection with the California
Divestiture, the Company recorded pre-tax
restructuring charges of $140 million (the
"California Divestiture Charge") for the year
ended December 30, 1995 and classified the assets
to be leased or sold as "assets held for sale."
The California Divestiture Charge reflected (i) a
provision for anticipated future lease
obligations, (ii) the anticipated cost to the
Company of closing its California stores and
distribution center (primarily termination
payments and inventory), and (iii) asset valuation
adjustments for the equipment in all of the stores
and the distribution center for the land and
buildings associated with the properties being
sold or leased. The California Divestiture,
including the transactions with Ralphs, was
unrelated to the Recapitalization and Merger.
Acquisition is a wholly owned subsidiary of the
Company which was formed for the sole purpose of
enabling the Company to consummate the Merger.
Acquisition has no assets or operations, and as
part of the Merger, Smitty's will be merged with
Acquisition.
See "The Company, Smitty's and Yucaipa--The
Company and Acquisition" and "--California
Divestiture."
Smitty's................... Smitty's is a holding company which, through its
wholly owned subsidiary, Smitty's Super Valu, Inc.
("Smitty's Super Valu"), operates 28 supermarkets
in the Phoenix and Tucson areas. Like the Company,
Smitty's stores include both the combination food
and drug and the conventional supermarket formats.
Smitty's is controlled by Yucaipa. Smitty's
principal executive offices are located at 2231
East Camelback Road, Phoenix, Arizona 85016
(telephone no. (602) 801-1000). See "The Company,
Smitty's and Yucaipa--Smitty's."
Yucaipa.................... Yucaipa is a private investment group specializing
in the supermarket industry, which in addition to
Smitty's also controls Ralphs, the largest
supermarket company in Southern California, and
Dominick's Finer Foods, Inc., a leading Chicago
area supermarket company. Yucaipa is controlled by
Ronald Burkle, the managing general partner.
Post Recapitalization and
Merger Strategy...........
Management, in conjunction with Yucaipa, has
developed a strategic plan for the Company
following the consummation of the Recapitalization
and Merger. Under such plan, the Company expects
to: (i) expand the Company's operations in
existing and adjacent markets, (ii) realize
operating synergies and cost savings resulting
from the Merger, (iii) improve working capital
management, (iv) continue the growth of its
recently introduced price impact warehouse format,
and (v) dispose of remaining California real
estate subject to the completion of the
Recapitalization and Merger.
In connection with its anticipated disposition of
California real estate, the Company would record a
charge to earnings, which is presently
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<PAGE>
estimated to be approximately $125 million (pre-
tax) (the "California Asset Disposition Charge"),
to reflect the difference between the anticipated
cash proceeds from the accelerated dispositions
and the Company's existing book values for such
assets. See "The Company, Smitty's and Yucaipa--
Post Recapitalization and Merger Strategy."
THE STOCKHOLDERS' MEETING
AND VOTES REQUIRED
Time and Place; Record
Date; Quorum..............
The Annual Meeting of Stockholders will be held on
Thursday, May 23, 1996 at 9:00 a.m., Mountain
Time, at the Company's principal executive offices
located at 1550 South Redwood Road, Salt Lake
City, Utah 84104 (the "Stockholders' Meeting").
The record date for the Stockholders' Meeting is
April 15, 1996 (the "Record Date"). As of the
close of business on the Record Date, there were
outstanding 11,366,532 shares of Class A Common
Stock, 13,705,191 shares of Class B Common Stock
and 12,956,747 shares of Series I Preferred Stock.
Only holders of record of Common Stock and Series
I Preferred Stock are entitled to notice of and to
vote at the Stockholders' Meeting.
The presence in person or by proxy at the
Stockholders' Meeting of the holders of at least a
majority of the votes entitled to be cast at the
Stockholders' Meeting is necessary to constitute a
quorum for the transaction of business.
Matters to be Considered
at the Stockholders'
Meeting................... At the Stockholders' Meeting, the Company's
stockholders will be asked to: (i) approve the
Recapitalization Agreement and the transactions
contemplated thereby, including the Offer and the
issuance of 3,038,888 shares of Class B Common
Stock to the stockholders of Smitty's pursuant to
the Merger ("Proposal No. 1"); (ii) approve and
adopt separate amendments to the Company's
Certificate of Incorporation which (A) create a
classified Board of Directors ("Proposal No. 2A"),
(B) create a new non-voting Class C Common Stock
("Proposal No. 2B"), and (C) amend provisions of
the Series I Preferred Stock with respect to the
(x) elimination for a five-year period of annual
mandatory redemptions, (y) restriction for a two-
year period of optional redemptions, and (z)
addition of transfer or sale restrictions which
reduce the number of votes per share of Series I
Preferred Stock from ten to one in certain
circumstances ("Proposal No. 2C") (a form of the
Amended and Restated Certificate of Incorporation
reflecting each of these amendments is attached as
Annex C to this Proxy Statement) (collectively,
"Proposal No. 2"); (iii) elect a Board of
Directors which will be divided into three
classes, with the term of one class expiring each
year ("Proposal No. 3"); (iv) ratify the selection
of Ernst & Young LLP as the Company's independent
auditors for 1996 ("Proposal No. 4"); and (v)
transact such other business as may properly come
before the Stockholders' Meeting.
Required Vote.............. Approval of Proposal No. 1 requires the approval
of the holders of a majority of the total votes
cast at the Stockholders' Meeting. Approval of
Proposal No. 1 also requires that the total votes
cast at
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<PAGE>
the Stockholders' Meeting is required to represent
over 50% of the number of outstanding shares of
capital stock of the Company entitled to vote at
the Stockholders' Meeting.
Approval of Proposals Nos. 2A, 2B and 2C each
requires (i) the approval of the holders of a
majority of the aggregate number of votes eligible
to be cast at the Stockholders' Meeting, and (ii)
by a separate class vote, the approval of the
holders of a majority of the aggregate number of
votes of the outstanding shares of Series I
Preferred Stock eligible to be cast at the
Stockholders' Meeting. THE COMPANY'S STOCKHOLDERS
WILL VOTE SEPARATELY ON EACH OF PROPOSALS NOS. 2A,
2B AND 2C; HOWEVER, CONSUMMATION OF THE
RECAPITALIZATION AS PROVIDED BY THE
RECAPITALIZATION AGREEMENT REQUIRES THAT THE
COMPANY STOCKHOLDERS APPROVE AND ADOPT EACH OF THE
PROPOSALS COMPRISING PROPOSAL NO. 2.
Approval of Proposal No. 3 requires the approval
of the holders of a plurality of the total votes
cast at the Stockholders' Meeting.
Approval of Proposal No. 4 requires the approval
of the holders of a majority of the total votes
cast at the Stockholders' Meeting.
For each of the Proposals, all outstanding shares
of Class A Common Stock, Class B Common Stock and
Series I Preferred Stock will vote together as a
single class, with each share of Class A Common
Stock and Series I Preferred Stock entitled to ten
votes and each share of Class B Common Stock
entitled to one vote, provided that, as described
above for Proposals Nos. 2A, 2B and 2C, the
holders of the Series I Preferred Stock will, in
addition to voting together with the holders of
Common Stock, vote as a separate class.
Pursuant to an agreement dated January 29, 1996
(the "Smith's Shareholder Agreement"), Jeffrey P.
Smith, Chairman and Chief Executive Officer of the
Company, Richard Smith, Fred Smith (all of whom
are brothers), Ida Smith (their mother), and
certain related family trusts and related
stockholders (the "Smith Group"), who own
approximately 30.4% and 64.5% of the outstanding
shares of Common Stock and Series I Preferred
Stock respectively (and approximately 62.1% of the
aggregate number of votes eligible to be cast at
the Stockholders' Meeting), have agreed to vote
their shares in favor of the Merger and to take no
action inconsistent with the Recapitalization
Agreement and the transactions contemplated
thereby. In addition, directors and executive
officers of the Company who have not executed the
Smith's Shareholder Agreement, who own
approximately 7.6% of the outstanding shares of
Common Stock (and approximately 6.4% of the
aggregate number of votes eligible to be cast at
the Stockholders' Meeting), have indicated that
they intend to vote their shares of Common Stock
in favor of the Recapitalization Agreement and the
transactions contemplated thereby. THEREFORE, AS
OF THE DATE HEREOF, IF OVER 50% OF THE NUMBER OF
OUTSTANDING SHARES OF CAPITAL STOCK OF THE COMPANY
ARE VOTED AT THE STOCKHOLDERS' MEETING, THE
REQUISITE VOTE FOR THE APPROVAL OF ALL PROPOSALS
TO BE CONSIDERED AT THE STOCKHOLDERS' MEETING BY
THE
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<PAGE>
HOLDERS OF THE COMPANY'S STOCK IS ASSURED. See
"Security Ownership of Certain Beneficial Owners
and Management."
Voting of Proxies.......... All shares of Common Stock and Series I Preferred
Stock represented by properly executed Proxies
received in time for the Stockholders' Meeting
will be voted in the manner specified in the
Proxy. Proxies that do not contain any instruction
to vote for or against or to abstain from voting
on a particular matter will be voted in favor of
such matter. It is not expected that any matter
other than those referred to herein will be
brought before the stockholders at the
Stockholders' Meeting. However, if other matters
are properly presented, the persons named as
proxies will vote in accordance with their best
judgment with respect to such matters, unless
authority to do so is withheld in the Proxy.
Adjournments; Revocability
of Proxies................
If the Stockholders' Meeting is adjourned for any
reason, the approval of the Recapitalization
Agreement and the transactions contemplated
thereby, including the Offer and the issuance of
3,038,888 shares of Class B Common Stock to the
stockholders of Smitty's in the Merger, as well as
the other proposals to be voted on will be
considered and voted upon by stockholders at the
subsequent reconvened meeting, if any.
A stockholder may revoke a Proxy prior to the time
the shares represented by such Proxy are voted at
the Stockholders' Meeting by: (i) attending and
voting in person at the Stockholders' Meeting;
(ii) giving notice of revocation of a Proxy at the
Stockholders' Meeting; or (iii) delivering to the
Secretary of the Company a written notice of
revocation of a Proxy or a duly executed Proxy
relating to the same shares and matters to be
considered at the Stockholders' Meeting, bearing a
date later than the Proxy previously executed.
Attendance at the Stockholders' Meeting will not
in and of itself constitute revocation of a Proxy.
Solicitation of Proxies.... The Company will bear the cost of the solicitation
of Proxies. In addition to solicitation by mail,
the directors, officers and employees of the
Company and its subsidiaries may solicit Proxies
from stockholders of the Company by telephone,
telegram or in person. Such directors, officers
and employees will not be additionally compensated
for any such solicitation but may be reimbursed
for out-of-pocket expenses in connection
therewith. Arrangements will be made to furnish
copies of proxy materials to fiduciaries,
custodians and brokerage houses for forwarding to
beneficial owners of the Class B Common Stock.
Such persons will be paid reasonable out-of-pocket
expenses.
MacKenzie Partners, Inc. will assist in the
solicitation of Proxies by the Company for a
customary fee, plus reasonable out-of-pocket
expenses.
THE RECAPITALIZATION
Concurrently with the mailing of this Proxy
The Offer.................. Statement, the Company will commence the Offer to
purchase 50% of the outstanding shares of Common
Stock (excluding shares issuable in the Merger)
for
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<PAGE>
$36.00 in cash per share. The Company will make
the Offer pursuant to an offer to purchase (the
"Offer to Purchase") that will be filed as part of
an Issuer Tender Offer Statement on Schedule 13E-4
under the Securities and Exchange Act of 1934, as
amended. The Issuer Offer Statement on Schedule
13E-4 will contain the Offer to Purchase and the
related form of letter of transmittal and summary
advertisement as well as all other information and
exhibits required to be included by law.
HOLDERS OF COMMON STOCK SHOULD NOT SEND STOCK
CERTIFICATES WITH THEIR PROXY CARDS. NEITHER THIS
PROXY STATEMENT NOR THE PROXY INCLUDED HEREWITH
CONSTITUTES AN OFFER TO PURCHASE THE COMMON STOCK.
THE OFFER WILL ONLY BE MADE BY THE COMPANY
PURSUANT TO THE OFFER TO PURCHASE IN THE MANNER
DESCRIBED HEREIN.
The Company will purchase in the Offer 50% of the
outstanding shares of Common Stock. If more than
50% of the shares of outstanding Common Stock are
validly tendered and not withdrawn, the Company
will purchase 50% of the outstanding shares on a
pro rata basis allocated among all of the validly
tendered shares. Upon the Company's acceptance of
shares of Common Stock in the Offer, such shares
will cease to be outstanding for all purposes.
Conditions to the Offer.... The obligation of the Company to consummate the
Offer will be subject to certain conditions,
including that (i) at least 50% of the outstanding
shares of Common Stock have been validly tendered
and not withdrawn before the expiration of the
Offer, (ii) the Company has obtained financing
necessary to purchase 50% of the Common Stock,
repay specified indebtedness of the Company and
Smitty's, and pay certain fees and expenses
incurred in connection with the Offer and the
other transactions contemplated by the
Recapitalization Agreement, and (iii) all of the
conditions to the Merger (other than the
consummation of the Offer) have been satisfied or
waived in accordance with the terms of the
Recapitalization Agreement. See "The
Recapitalization and Merger--The Offer--Conditions
to the Offer."
Termination of the At any time prior to the expiration date of the
Recapitalization........... Offer (the "Offer Closing Date"; and, together
with the Merger Closing Date (as defined herein),
the "Closing Date"), if in the exercise of its
fiduciary duties to the Company's stockholders
under applicable law, the Company's Board of
Directors (i) determines that the termination of
the Recapitalization is required by reason of the
Company's acceptance of an Alternative Transaction
(as defined herein), or (ii) withdraws or
materially modifies or changes its recommendation
of the Recapitalization, the Company may terminate
the Company's obligation to consummate the
Recapitalization. However, in such event, the
Company will be obligated to consummate the Merger
and the Company's stockholders will not be
required to approve the Recapitalization Agreement
and the transactions contemplated thereby. In
addition, under such circumstances, the Company
will not approve and adopt the separate amendments
to the Company's Certificate of Incorporation. See
"The Recapitalization Agreement--Termination of
Recapitalization."
8
<PAGE>
The "Recapitalization" as defined in the
Recapitalization Agreement refers collectively to:
(i) the execution, delivery and receipt of the
proceeds under the Financing Agreements (as
defined herein); (ii) the making and consummation
of the Offer; (iii) the execution and delivery of
the Management Services Agreement; (iv) the
execution and delivery of, and the issuance of the
warrants provided for under, the Warrant
Agreement; (v) the completion of certain
transactions contemplated by the Recapitalization
Agreement regarding the composition of the
Company's Board of Directors, the election of
Ronald Burkle as Chief Executive Officer, the cash
payment for a portion of, and the reduction of the
exercise price for a portion of, the Company's
management stock options and the amendment of the
Company's deferred compensation agreements; and
(vi) the filing of the Amended and Restated
Certificate of Incorporation for the Company.
THE MERGER
Effect of the Merger....... At the effective time of the Merger, Smitty's will
be merged with Acquisition, with Smitty's
continuing its corporate existence under Delaware
law as the surviving corporation (the "Surviving
Corporation") and as a wholly owned subsidiary of
the Company. Subject to certain provisions as
described herein with respect to shares owned by
Smitty's or any of its subsidiaries and with
respect to fractional shares and Smitty's
dissenting shares, each outstanding share of
Smitty's Common Stock, without distinction as to
class, will be converted into 3.011803 shares of
the Company's Class B Common Stock (the "Exchange
Ratio").
Opinion of Financial Goldman, Sachs & Co. ("Goldman Sachs") has
Advisor.................... delivered its written opinion to the Board of
Directors of the Company that, as of January 29,
1996, the Exchange Ratio pursuant to the
Recapitalization Agreement is fair to the Company.
The full text of the written opinion of Goldman
Sachs, which sets forth assumptions made, matters
considered and limitations on the review
undertaken in connection with the opinion, is
attached hereto as Annex B and is incorporated
herein by reference. STOCKHOLDERS OF THE COMPANY
ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS
ENTIRETY. See "The Recapitalization and Merger--
Opinion of Financial Advisor."
Conditions to the Merger... The obligations of the Company and Smitty's to
consummate the Merger are subject to certain
conditions, including the absence of any
injunction or other legal restraint or prohibition
preventing the consummation of the Merger or the
transactions contemplated thereby.
The Company's obligation to effect the Merger is
further subject to the receipt of stockholder
approval at the Stockholders' Meeting of the
Recapitalization Agreement and the transactions
contemplated thereby; provided that this condition
will be automatically deemed to be satisfied
without any further action by the Company if the
Company has terminated the Recapitalization, but
not the Merger.
Smitty's obligation to effect the Merger is
further subject to execution and delivery by the
Company of (i) the registration rights agreement
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<PAGE>
(the "Registration Rights Agreement"), and (ii)
unless the Company has terminated the
Recapitalization, the Management Services
Agreement and the Warrant Agreement, and each of
such agreements being in full force and effect.
See "The Recapitalization Agreement--Conditions to
the Merger" and "Certain Related Agreements."
Regulatory Approvals....... On March 5, 1996, the Federal Trade Commission and
the Antitrust Division granted early termination
of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended,
with respect to the Merger effective immediately.
See "The Recapitalization and Merger--Regulatory
Approvals."
Accounting Treatment....... The Merger will be accounted for under the
"purchase" method of accounting as a purchase of
Smitty's by the Company.
FINANCING THE To consummate the Recapitalization and the Merger,
TRANSACTIONS............... the Company will require approximately $1,393.2
million (net of California Disposition proceeds of
$68.0 million) of financing to repay certain
outstanding indebtedness of the Company and
Smitty's, purchase Common Stock in the Offer,
purchase shares of Series I Preferred Stock,
purchase management stock options, and pay related
fees and expenses. The Company plans to obtain the
necessary funds by (a) borrowings of approximately
$818.2 million aggregate principal amount under
the New Credit Facility (as defined below) to be
provided by a syndicate of banks led by Bankers
Trust Company ("Bankers Trust") and The Chase
Manhattan Bank ("Chase Manhattan"); (b) the
issuance of up to $150 million of new senior notes
(the "New Senior Notes"); (c) the issuance of up
to $350 million of new senior subordinated notes
(the "New Senior Subordinated Notes"); and (d) the
issuance of new cumulative redeemable exchangeable
preferred stock (the "New Preferred Stock") by the
Company for gross proceeds of $75 million. In
addition, the Company will assume approximately
$43.6 million (at December 30, 1995) of existing
indebtedness of Smitty's upon consummation of the
Merger.
The Company has received a commitment letter (as
amended, the "Bank Commitment Letter") from
Bankers Trust and Chase Manhattan, as arrangers,
to provide $995 million of senior bank facilities
(the "New Credit Facility") to finance a portion
of the transactions contemplated by the
Recapitalization Agreement. The Company has also
received a letter from BT Securities Corporation,
CS First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation, Goldman, Sachs &
Co., and Chase Securities Inc. (the "Investment
Banks") stating that, based upon their
understanding of the transactions, the financing,
the then current market conditions and subject to
certain other conditions, the Investment Banks are
highly confident of their ability to sell or place
$150 million of the New Senior Notes, $350 million
of the New Senior Subordinated Notes and $75
million of the New Preferred Stock, in each case
to finance a portion of the transactions
contemplated by the Recapitalization Agreement.
Yucaipa has agreed in the Recapitalization
Agreement to use all reasonable efforts to consult
with the Company concerning and, as appropriate,
assist the Company in arranging for the Company to
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<PAGE>
enter into one or more agreements providing for
financing (collectively the "Financing
Agreements"), with terms and
conditions which are consistent with the related
financing letters and are otherwise reasonably
satisfactory to the Company. See "Financing of the
Recapitalization and Merger" for additional
information with respect to the Company's
Financing Agreements.
RECOMMENDATION OF THE
BOARD OF DIRECTORS........
At its January 28, 1996 meeting, the Board of
Directors unanimously determined that it was in
the best interests of the Company and its
stockholders that the Company enter into the
Recapitalization Agreement and the related
agreements and consummate all of the transactions
contemplated by those agreements, including the
Recapitalization and the Merger. The Board
determined to recommend that the Company's
stockholders approve the Recapitalization
Agreement and the transactions contemplated
thereby, including the issuance of 3,038,888
shares of the Company's Class B Common Stock to
the stockholders of Smitty's in the Merger. See
"The Recapitalization and Merger--Background of
the Transactions" and "--Reasons for the
Transactions; Recommendation of Board of
Directors."
TERMINATION OF THE
RECAPITALIZATION
AGREEMENT................. The Recapitalization Agreement may be terminated
at any time prior to the closing date of the
Merger (the "Merger Closing Date"): (i) by mutual
consent of the Company and Smitty's; (ii) by
either the Company or Smitty's, if the Merger has
not been consummated on or before July 30, 1996
(the "Termination Date"); (iii) by the Company, if
Smitty's or Yucaipa is in material breach of its
obligations under the Recapitalization Agreement;
or (iv) by Smitty's, if the Company or Acquisition
is in material breach of its obligations under the
Recapitalization Agreement; provided that no party
will be entitled to terminate the Recapitalization
Agreement in the manner contemplated by clause
(iii) or (iv) above if it or any of its affiliates
is in material breach of the Recapitalization
Agreement.
RELATED TRANSACTIONS
Company's Stock Options;
Deferred Compensation
Plans..................... In the Recapitalization Agreement, the Company has
agreed to offer employees who hold, immediately
prior to the Offer Closing Date, options to
purchase Common Stock under the Company's 1989
Stock Option Plan (the "Options") the opportunity
to elect either to: (i) receive on the Offer
Closing Date cash payments with respect to half of
the shares subject to the Options in an amount
equal to (A) the number of shares of Common Stock
that would be received by such holder upon
exercise of one-half of such Options multiplied by
$36.00 per share minus (B) the aggregate exercise
price of such Options, and, in consideration of
such payments, to execute amendments to each
existing option agreement such that the remaining
half of the shares subject to the Options will not
be exercisable prior to the exercise date stated
therein (without regard to the transactions
contemplated by the Recapitalization Agreement)
and will have the exercise price reduced
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<PAGE>
from $19.00 to $15.00 per share of Common Stock;
or (ii) have all such employees' Options continue
to vest in accordance with the stated terms of the
Options as in effect as of the date of the
Recapitalization Agreement. Assuming that all of
the Company's employees who hold Options make the
election set forth in clause (i) above, the
estimated aggregate value of the Company's
proposed treatment of the Options will be
approximately $16.9 million (comprised of
approximately $13.7 million representing the cash
payment for half of the Options and $3.2 million
representing the exercise price reduction for the
remaining Options). Of such estimated aggregate
value, approximately $252,000 will be for the
account of members of the Smith Group and
approximately $5.2 million will be for the account
of the Company's other directors and executive
officers who are not members of the Smith Group
but have indicated their intention to vote in
favor of the Recapitalization Agreement. The
Company has also agreed to use all reasonable
efforts to amend its existing deferred
compensation agreements with a number of its
senior managers to provide for the full vesting of
benefits under such manager's deferred
compensation agreement with the Company if such
manager is terminated without cause within two
years of the Merger Closing Date. See "The
Recapitalization and Merger-- Company's Stock
Options; Deferred Compensation Plans."
Standstill Agreement....... The Company, Yucaipa and each of the investment
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"), and Jeffrey Smith
and the other members of the Smith Group entered
into a standstill agreement, dated as of January
29, 1996 (as amended, the "Standstill Agreement").
Under the Standstill Agreement, the Yucaipa Group
is prohibited, subject to certain conditions and
exceptions, from, for a 10-year period,
(i) increasing its aggregate beneficial ownership
of voting stock of the Company above (x) 20% of
the total outstanding votes which may be cast in
an election of directors of the Company or (y) 25%
of the total number of shares of voting stock
outstanding, (ii) submitting any proposal to any
person with respect to a change of control of the
Company or soliciting any proxies with respect to
the voting of any of the Company's capital stock,
and (iii) taking any other actions to seek control
of the Company or that could reasonably be
expected to result in a change of control of the
Company. The Standstill Agreement also provides
that (a) the Company will use its best efforts to
cause its Board of Directors to be comprised of
two designees of the Smith Group, two designees of
the Yucaipa Group, one senior manager of the
Company and two independent directors, and (b)
subject to the provisions of the Certificate of
Incorporation and By-laws of the Company and the
approval of the Company's stockholders, so 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 nominate 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
12
<PAGE>
have the right to designate one director of the
Company. 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 as designees of Yucaipa. See "Certain
Related Agreements--Standstill Agreement."
Management Services On the Closing Date, the Company and Yucaipa will
Agreement.................. enter into a management services agreement (the
"Management Services Agreement"). Yucaipa, through
its partners, employees or other designated
representatives or agents, will agree to provide
the Company and its subsidiaries, subject to the
supervision of the Board of Directors, management
consultation and advice for a term of five years.
In return, the Company will agree to pay Yucaipa
an annual management fee of $1 million and will
reimburse Yucaipa for its reasonable out-of-pocket
costs and expenses incurred in connection with the
performance of its obligations under the
Management Services Agreement. The Company will
also agree that in connection with Yucaipa's
services Ronald Burkle will have the right to
serve as the Chief Executive Officer of the
Company during the term of the Management Services
Agreement. Mr. Burkle will not receive any
compensation for serving in such capacity beyond
the compensation paid to Yucaipa under the
Management Services Agreement. In the event the
Management Services Agreement is terminated under
certain circumstances, Yucaipa will be entitled to
a termination fee equal to the greater of (i) $5
million or (ii) twice the total fees that would
have otherwise been earned by Yucaipa during the
remaining term of the Management Services
Agreement. See "Certain Related Agreements--
Management Services Agreement."
Warrant Agreement.......... On the Closing Date, the Company and Yucaipa will
enter into the Warrant Agreement, and the Company
will issue to Yucaipa warrants (the "Warrants") to
purchase shares of newly designated Class C Common
Stock of the Company representing 10% of the
aggregate shares of outstanding Common Stock on a
fully diluted basis upon consummation of the
Recapitalization and Merger, for an exercise price
of $50 per share, subject to certain conditions
and exceptions. Half of the Warrants will be
exercisable for a term of four years and the
remaining half will be exercisable for a term of
five years, subject in each case to extension for
a five-year period if the market price of the
Class B Common Stock equals or exceeds the
exercise price of $50 per share (subject to
adjustment) for 60 consecutive trading days. The
Class C Common Stock will be non-voting stock, but
any subsequent holder of Warrants other than
Yucaipa or its affiliate may elect to receive
shares of Class B Common Stock upon exercise of
its Warrants or to convert such non-voting Class C
Common Stock into voting Class B Common Stock. See
"Certain Related Agreements-- Warrant Agreement."
Registration Rights On the Closing Date, the Company will enter into
Agreement.................. the Registration Rights Agreement with Jeffrey
Smith, Yucaipa and certain other holders of
Smitty's Common Stock. Under the terms of the
Registration Rights Agreement, each of (i) the
holders of a majority of the Registrable
Securities (as defined in such agreement) held by
Yucaipa, its affiliates and the holders of
Smitty's Common Stock
13
<PAGE>
receiving Class B Common Stock in the Merger, and
transferees of the foregoing, as a group (the
"Yucaipa Holder Group"), and (ii) the holders of a
majority of the Registrable Securities held by
Jeffrey Smith and his affiliates, and transferees
of the foregoing, as a group (the "Smith Holder
Group") will each be entitled to (i) two demand
registration rights, and (ii) certain piggyback
registration rights, in each case in connection
with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of the
Registrable Securities held by such persons. In
addition, the Registration Rights Agreement will
provide that upon the request of the Yucaipa
Holder Group at any time prior to the second
anniversary of the Merger Closing Date, the
Company will file a shelf registration statement
for resales of Registrable Securities held by the
Yucaipa Holder Group, subject to certain
conditions and exceptions. See "Certain Related
Agreements--Registration Rights Agreement."
Yucaipa Fee................ The Recapitalization Agreement provides that if
the Offer is consummated, the Company will pay to
Yucaipa a fee of $15 million on the Closing Date.
Composition of Board of
Directors and Officers....
Effective as of the Closing Date, the Company has
agreed in the Recapitalization Agreement to use
all reasonable efforts, subject to the provisions
of the Certificate of Incorporation and By-laws of
the Company and the approval of the Company's
stockholders at the Stockholders' Meeting, to: (i)
cause the Company's Board of Directors to be
reduced to seven directors and have nominated and
elected as directors two designees of Jeffrey
Smith, two designees of Yucaipa, one senior
manager of the Company and two independent
directors; and (ii) cause the Company's Board of
Directors to elect Ronald Burkle as the Chief
Executive Officer of the Company. For information
concerning the nominees to be elected to the Board
of Directors, see "Proposal No. 3--Election of
Board of Directors."
Purchase of Series I Prior to the Closing Date, the Company will
Preferred Stock............ purchase approximately 3,000,000 shares of Series
I Preferred Stock from certain holders of such
stock for amounts and on terms reasonably
acceptable to the Company and Smitty's. See "The
Recapitalization and Merger-- Purchase of Series I
Preferred Stock."
INTERESTS OF CERTAIN
PERSONS IN THE
TRANSACTIONS.............. Certain directors and officers of the Company and
Yucaipa and certain of its affiliates and certain
nominees have interests described herein that may
present them with potential conflicts of interest
as a result of the transactions contemplated by
the Recapitalization Agreement. The Company's
Board of Directors was aware of such potential
conflicts and considered them in connection with
the approval of the Recapitalization Agreement and
the transactions contemplated therein. See "The
Recapitalization and Merger-- Reasons for the
Transactions; Recommendation of Board of
Directors"; and "--Interest of Certain Persons in
the Transactions."
As described under "The Recapitalization and
Merger--Company's Stock Options; Deferred
Compensation Plans," if the Recapitalization is
consummated, the Company will make certain
14
<PAGE>
provisions for the favorable modification of the
Company's management stock options and deferred
compensation plans. The Company will also
indemnify and maintain directors' and officers'
insurance covering the current directors and
officers of each of the Company and Smitty's. On
the Merger Closing Date, the Company has agreed to
enter into the Registration Rights Agreement
granting certain registration rights to each of
the Smith Holder Group and the Yucaipa Holder
Group for the Registrable Securities (as defined
in such agreement) held by such Groups. See
"Certain Related Agreements--Registrations Rights
Agreement." In addition, if the Recapitalization
is consummated, the Company will: (i) enter into
the Management Services Agreement and the Warrant
Agreement with Yucaipa; (ii) appoint Ronald Burkle
as the Chief Executive Officer of the Company;
(iii) grant Yucaipa certain rights under the
Standstill Agreement including the right to
nominate up to two directors of the Company; and
(iv) pay to Yucaipa a fee in an amount equal
to $15 million, in each case in the manner
described herein. See "The Recapitalization and
Merger--Financing Arrangements by Yucaipa; Yucaipa
Fee" and "Certain Related Agreements--Standstill
Agreement," "--Management Services Agreement," "--
Warrant Agreement." The Company has also recently
entered into an agreement with Ralphs, a
California supermarket operator controlled by
Yucaipa, for the sale or lease of certain of the
Company's properties to Ralphs in connection with
the Company's divestiture of its Southern
California operations. See "The Company, Smitty's
and Yucaipa--California Divestiture." As described
under "Executive Compensation--Certain
Transactions," the Company and Jeffrey Smith have
had tentative discussions regarding an arrangement
to provide Mr. Smith with the use and possible
ownership of the Company airplane after the
consummation of the Recapitalization and Merger.
TAX CONSEQUENCES OF THE
TRANSACTIONS..............
Sales of shares by the Company's stockholders
pursuant to the Offer will be taxable transactions
for federal income tax purposes and may also be
taxable transactions under applicable state,
local, foreign and other tax laws. The federal
income tax consequences to a stockholder may vary
depending upon such stockholders' particular facts
and circumstances. See "Certain Federal Income Tax
Consequences--The Offer."
Consummation of the Merger is conditioned upon
receipt by the Company and Smitty's from their
respective counsel of written opinions, dated the
Merger Closing Date, to the effect that the Merger
will constitute a tax-free reorganization within
the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). See
"Certain Federal Income Tax Consequences-- The
Merger."
15
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
THE COMPANY'S HISTORICAL FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated historical financial and
other data of the Company for the five fiscal years ended December 30, 1995,
which have been derived from the financial statements of the Company audited by
Ernst & Young LLP, independent auditors. The following information should be
read in conjunction with the Unaudited Pro Forma Combined Financial Statements
and the historical consolidated financial statements of the Company and related
notes thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $ 2,217.4 $ 2,649.9 $ 2,807.2 $ 2,981.4 $ 3,083.7
Gross profit........... 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative
expenses.............. 344.4 419.7 430.3 440.8 461.4
Depreciation and
amortization.......... 50.5 67.8 82.2 94.5 105.0
Interest expense....... 30.3 36.1 44.6 53.7 60.5
Restructuring
charges(a)............ -- -- -- -- 140.0
Net income (loss)...... 45.1 53.7 45.8 48.8 (40.5)
Net income (loss) per
common share.......... $ 1.65 $ 1.79 $ 1.52 $ 1.73 $ (1.62)
Weighted average common
shares
outstanding........... 27,397,973 29,962,011 30,238,811 28,176,907 25,030,882
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt(b).......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Total stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(c)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
Ratio of earnings to
fixed charges(d)...... 3.02x 3.06x 2.55x 2.18x --
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of the Company included
elsewhere herein.
(b) Total debt includes long-term debt and current maturities of long-term
debt.
(c) After giving effect to the California Divestiture, the Company will operate
120 stores. See "The Company, Smitty's and Yucaipa--California
Divestiture."
(d) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs and one-third of rental expense (the portion of
annual expenses deemed by the Company to be representative of the interest
factor). For the five-year period ended December 30, 1995, the Company has
not paid any preferred stock dividends. For the 52 weeks ended December 30,
1995, the Company's earnings were inadequate to cover fixed charges by
$69.8 million. However, such earnings included non-cash charges of $105.4
million, primarily consisting of depreciation and amortization, and
restructuring charges of $140.0 million.
16
<PAGE>
SMITTY'S HISTORICAL FINANCIAL AND OTHER DATA
The following table sets forth certain selected consolidated historical
financial and other 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 and the historical consolidated financial
statements of Smitty's and its predecessor and related notes thereto included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
PREDECESSOR SMITTY'S
---------------------------------------- --------------------------------------------
PERIOD FROM PERIOD FROM
52 WEEKS 52 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
</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 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
17
<PAGE>
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.
(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.
("Steinberg"), 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 prior
to the acquisition of Smitty's Super Valu 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, in 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 (as defined herein).
(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 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 in exchange for $1.2 million cash and the cancellation of $65.6
million of indebtedness.
18
<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 (a) the
Recapitalization and Merger 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 the Company's results of operations and balance sheet data as of and
for the 52 weeks ended December 30, 1995 and (ii) combines the operating
results and balance sheet data of the Company, pro forma for the elimination of
the Company's California retail division and the related assets and
liabilities, as of and for the 52 weeks ended December 30, 1995 with the
operating results and balance sheet data of Smitty's 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, an anticipated charge relating to
certain costs expected to be incurred by the Company in connection with the
Merger, a potential severance payment to the Chairman and Chief Executive
Officer of the Company or compensation expense in connection with the
repurchase of certain management stock options as part of the Recapitalization.
See Note (g) to the Unaudited Pro Forma Combined Statement of Operations. The
following pro forma financial data should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements and the historical
consolidated financial statements of the Company and Smitty's, and related
notes thereto, included elsewhere in this Proxy Statement.
<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............................................ 132.3
Net income.......................................... 9.8
Net income (loss) per common share (b).............. $ (0.03)
BALANCE SHEET DATA (END OF PERIOD):
Total assets........................................ $1,709.6
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
Ratio of earnings to fixed charges(d)............... 1.13x
Ratio of earnings to fixed charges and preferred
stock dividends(d)................................. 1.01x
</TABLE>
19
<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) Net income (loss) per common share is calculated based on the weighted
average number of common shares of 15,530,000. Loss per common share has
been computed using the weighted average number of shares of Common Stock
outstanding after giving effect to the issuance of 3,038,888 shares of
Class B Common Stock of the Company to the stockholders of Smitty's as
consideration in the Merger and the purchase of 50% of the outstanding
Common Stock (excluding shares issuable in the Merger) in the Offer. Common
stock equivalents in the form of stock options are excluded from the
weighted average number of common shares due to the net loss.
(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 Recapitalization and Merger of $13.2 million.
(d) 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.
20
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth the Company's and Smitty's selected historical
per share data and unaudited pro forma combined per share data giving effect to
the pro forma adjustments described under "Summary Unaudited Pro Forma Combined
Financial Data." The pro forma combined information may not be indicative of
the results that actually would have occurred if each of such pro forma
adjustments had been consummated or which will be obtained in the future. The
information presented below should be read in conjunction with the Unaudited
Pro Forma Combined Financial Statements and related notes appearing elsewhere
in this Proxy Statement and the separate historical consolidated financial
statements and related notes of each of the Company and Smitty's included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
THE COMPANY SMITTY'S
(HISTORICAL) (HISTORICAL) THE COMPANY'S
(AUDITED) (UNAUDITED) PRO FORMA
DECEMBER 30, 1995 JANUARY 14, 1996 COMBINED
----------------- ---------------- -------------
<S> <C> <C> <C>
Book value per common
share..................... $16.62 $ 9.17 $(7.81)
Income (loss) per common
share..................... (1.62) (2.30) (0.03)
Cash dividends per common
share...................... .60 -- N/A (a)
</TABLE>
- --------
(a) As described under "The Recapitalization and Merger--Discontinuation of
Dividend," following the Closing Date, the Company intends to discontinue
the payment of cash dividends on the Common Stock.
21
<PAGE>
MARKET PRICES OF THE COMPANY'S CLASS B COMMON STOCK
The shares of the Company's Class B Common Stock are quoted on the NYSE under
the symbol "SFD". The following table sets forth the high and low sales prices
per share of Class B Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH AND LOW SALES
PRICE OF CLASS B
COMMON STOCK
------------------
DATE HIGH LOW
---- --------- ---------
<S> <C> <C>
FISCAL 1994
First Quarter........................................... $24 1/8 $ 20 1/8
Second Quarter.......................................... 22 18 1/8
Third Quarter........................................... 24 3/4 18 1/2
Fourth Quarter.......................................... 26 3/4 22 5/8
FISCAL 1995
First Quarter........................................... 27 5/8 23
Second Quarter.......................................... 24 19 1/4
Third Quarter........................................... 20 1/4 18 1/8
Fourth Quarter.......................................... 27 3/4 19 3/8
</TABLE>
On January 5, 1996, the last trading day before public announcement that the
Company was in negotiations regarding a merger with Smitty's and considering a
repurchase of as much as 50% of its Common Stock at a premium to recent trading
levels, the high and low sales price or a share of the Company's Class B Common
Stock was $28 3/4 and $27 3/4, respectively. On January 26, 1996, the last
trading day before public announcement of the execution of the Recapitalization
Agreement, the high and low sales price of a share of the Company's Class B
Common Stock was $31 and $29 7/8, respectively. On April 24, 1996, the most
recent practicable date prior to the printing of this Proxy Statement, the high
and low sales price of a share of the Company's Class B Common Stock was $24
3/4 and $24 3/8, respectively.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR CLASS B COMMON
STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE MARKET PRICE OF CLASS B COMMON STOCK
AT THE CLOSING DATE.
There is no trading market for the Company's Class A Common Stock or Series I
Preferred Stock; however, the Class A Common Stock can typically be converted
into Class B Common Stock upon the request of the holder. See "Description of
the Company's Capital Stock--Class A Common Stock and Class B Common Stock."
Cash dividends of $.15 per share of Common Stock were paid in each of the
four quarters of fiscal 1995, totaling $.60 per share for fiscal 1995. Cash
dividends of $.13 per share of Common Stock were paid in each of the four
quarters of fiscal 1994, totaling $.52 per share for fiscal 1994. The Company
paid a quarterly cash dividend of $.15 per common share for the first quarter
of fiscal 1996. However, as described under "The Recapitalization and Merger--
Discontinuation of Dividend", the Company intends to discontinue the payment of
cash dividends on the Common Stock following the Closing Date and the payment
of future dividends will be severely restricted by the terms of the Financing
Agreements entered into by the Company in connection with the Recapitalization
and Merger.
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<PAGE>
INTRODUCTION
This Proxy Statement is being furnished to the stockholders of Smith's Food
& Drug Centers, Inc., a Delaware corporation (the "Company"), in connection
with the solicitation of proxies (the "Proxies") by the Board of Directors of
the Company for use at the Annual Meeting of the Stockholders, including any
adjournments or postponements thereof, scheduled to be held on Thursday, May
23, 1996 at 9:00 a.m., Mountain Time, at the Company's principal executive
offices at 1550 South Redwood Road, Salt Lake City, Utah 84104 (the
"Stockholders' Meeting").
The Company and Cactus Acquisition, Inc., a Delaware corporation and wholly
owned subsidiary of the Company ("Acquisition"), entered into a
Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996
(the "Recapitalization Agreement"), with Smitty's Supermarkets, Inc., a
Delaware corporation ("Smitty's"), and The Yucaipa Companies, a California
general partnership ("Yucaipa"). Pursuant to the Recapitalization Agreement,
the Company will commence a tender offer to purchase 50% of the outstanding
shares of its Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"), and its Class B Common Stock, par value $.01 per share (the
"Class B Common Stock", and together with the Class A Common Stock, the
"Common Stock"), for $36.00 in cash per share (the "Offer"). Consummation of
the Offer is subject to the tender of at least 50% of the outstanding shares
of Common Stock, the receipt of financing and certain other conditions.
Pursuant to the Recapitalization Agreement, Smitty's will be merged with
Acquisition (the "Merger"), as a result of which Smitty's will become a wholly
owned subsidiary of the Company. Conditions to the consummation of the Merger
include the receipt of regulatory approvals and other necessary consents and
the completion of financing. The consideration payable to the stockholders of
Smitty's in the Merger consists of 3,038,888 shares of Class B Common Stock of
the Company (the "Merger Consideration").
As part of the Recapitalization and Merger, the Company intends to: (i)
purchase 50% of the outstanding Common Stock for $36.00 in cash per share (or
approximately $451.3 million in the aggregate); (ii) repay approximately
$667.1 million (pro forma at December 30, 1995) of indebtedness of the Company
and $103.3 million (pro forma at December 30, 1995) indebtedness of Smitty's;
(iii) purchase up to half of the outstanding management stock options of the
Company at a price per share of Common Stock covered by such options equal to
$36.00 per share minus the exercise price per share (or approximately $13.7
million in the aggregate); and (iv) purchase approximately three million
shares of its outstanding Series I Preferred Stock, par value $.01 per share
(the "Series I Preferred Stock") for $.33 1/3 per share (or approximately $1
million in the aggregate). In addition, the Company will pay related debt
refinancing premiums, accrued interest and fees and expenses in connection
with the Recapitalization and Merger. The Offer, the Merger and the repayment
of outstanding indebtedness are expected to close concurrently with the
financing transactions described below.
To consummate the Recapitalization and the Merger, the Company will require
approximately $1,393.2 million (net of California Disposition proceeds of
$68.0 million) of financing. The Company plans to obtain the necessary funds
by (a) borrowings of approximately $818.2 million aggregate principal amount
under an $995 million senior bank facility (the "New Credit Facility") to be
provided by a syndicate of banks led by Bankers Trust Company ("Bankers
Trust") and The Chase Manhattan Bank ("Chase Manhattan"); (b) the issuance of
up to $150 million of new senior notes (the "New Senior Notes"); (c) the
issuance of up to $350 million of new senior subordinated notes (the "New
Senior Subordinated Notes"); and (d) the issuance of new cumulative redeemable
exchangeable preferred stock (the "New Preferred Stock") by the Company for
gross proceeds of $75 million. In addition, the Company will assume
approximately $43.6 million (at December 30, 1995) of existing indebtedness of
Smitty's upon consummation of the Merger.
This Proxy Statement and the accompanying form of Proxy are being mailed to
stockholders of the Company on or about April 25, 1996.
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<PAGE>
RISK FACTORS
STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO
THE OTHER MATTERS DESCRIBED IN THIS PROXY STATEMENT BEFORE VOTING.
LEVERAGE AND DEBT SERVICE
As a result of the Recapitalization and Merger (including the financing of
such transactions as described herein), the Company will be highly leveraged
and the blended average rates of interest on the Company's outstanding
indebtedness is expected to be higher than the rates of interest on the
Company's indebtedness outstanding immediately prior to such transactions. At
December 30, 1995, pro forma for the Recapitalization and Merger and the
California Disposition, the Company's total debt and stockholders' equity
(deficit) have been $1,356.8 million and $(121.6) million, respectively,
compared to actual debt and stockholders' equity of $746.2 million and $416.7
million, respectively, on such date. The Company would also have had
additional borrowing availability under the New Credit Facility on a pro forma
basis, subject to the borrowing conditions contained therein. In addition, as
of December 30, 1995, pro forma for the Recapitalization and Merger, scheduled
payments under net operating leases of the Company and its subsidiaries for
the twelve months following the Recapitalization and the Merger would have
been approximately $36.9 million. The Company's ability to make scheduled
payments of the principal of, or interest on, or to refinance its indebtedness
(including the New Senior Notes and the New Senior Subordinated Notes) and to
make scheduled payments under its operating leases depends on its future
performance, which is subject to economic, financial, competitive and other
factors beyond its control.
Based upon the current level of operations and anticipated cost savings and
future growth, the Company believes that its cash flow from operations,
together with borrowings under the New Credit Facility and its other sources
of liquidity, will be adequate to meet its anticipated requirements for
working capital, capital expenditures, lease payments, interest payments and
scheduled principal payments. There can be no assurance, however, that the
Company's business will continue to generate cash flow at or above current
levels or that anticipated cost savings or future growth can be achieved. In
addition, no assurances can be given as to the timing of, or the net proceeds
to be realized upon, the California Asset Disposition and, therefore, as to
the timing or amount of receipts thereof as reflected in the unaudited pro
forma combined financial statements. See "--Ability to Achieve Anticipated
Cost Savings." If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt and make necessary capital or
other expenditures, or if its future cash flows are insufficient to amortize
all required principal payments out of internally generated funds, the Company
may be required to refinance all or a portion of its existing debt, sell
assets or obtain additional financing. There can be no assurance that any such
refinancing or asset sales would be possible or that any additional financing
could be obtained, particularly in view of the Company's high level of debt
following the Recapitalization and Merger and the fact that substantially all
of its assets will be pledged to secure borrowings under the New Credit
Facility and other secured obligations.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following:
(a) the Company will have significant cash requirements to service debt,
reducing funds available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (b) the Company's leveraged position will
increase its vulnerability to competitive pressures; (c) the financial
covenants and other restrictions contained in the New Credit Facility, the New
Senior Notes and the New Senior Subordinated Notes will require the Company to
meet certain financial tests and will restrict its ability to borrow
additional funds, to dispose of assets or to pay cash dividends on, or
repurchase, its common stock or preferred stock; and (d) funds available for
working capital, capital expenditures, acquisitions and general corporate
purposes will be limited. The Company's continued growth depends, in part, on
its ability to continue its expansion and store conversion efforts, and
therefore its inability to finance capital expenditures through borrowed funds
or otherwise could have a material adverse effect on the Company's future
operations.
24
<PAGE>
The Company's capital structure immediately after the Recapitalization and
Merger will include a significant amount of floating rate indebtedness,
causing the Company to be significantly more sensitive to prevailing interest
rates than has historically been the case. The Company intends to enter into
interest rate protection agreements which for the duration of such agreements
will effectively provide fixed rates of interest or ceiling rates of interest
on a portion of such floating rate indebtedness. There can be no assurance
that the Company will be able to enter into such agreements on favorable
terms. See "Financing of the Recapitalization and Merger--New Credit
Facility."
In the event of a bankruptcy of the Company, the Common Stock and Series I
Preferred Stock will rank below all claims of the Company's creditors,
including those of the senior lenders under the New Credit Facility and the
holders of the New Senior Notes and the New Senior Subordinated Notes. Because
of the significantly increased leverage of the Company following the
Recapitalization and Merger, such creditors' claims will be substantially
greater than those now entitled to priority over the Common Stock and the
Series I Preferred Stock.
EFFECT ON TRADING MARKET OF COMMON STOCK
Following the consummation of the Recapitalization and Merger, shares of the
Company's Class B Common Stock will trade at a value below their current
level. In addition, the Company intends to discontinue for the foreseeable
future the payment of cash dividends on the Common Stock following the Closing
Date and the payment of future dividends will be severely restricted by the
terms of the Financing Agreements (as defined herein) entered into by the
Company in connection with the Recapitalization and Merger. See "The
Recapitalization and Merger-- Discontinuation of Dividend." The consummation
of the Recapitalization and Merger is expected to cause the Company's credit
ratings to be lowered. It is possible that the more speculative investment
quality of the Common Stock following the consummation of the Recapitalization
and Merger may increase the volatility of, decrease the liquidity of, and
otherwise adversely affect the trading market for the Common Stock.
FRAUDULENT CONVEYANCE RISKS; DELAWARE LAW CONSIDERATIONS
If a court in a lawsuit on behalf of any unpaid creditor of the Company or a
representative of the Company's creditors were to find that, at the time the
Company purchased Common Stock in the Offer or purchased management stock
options and Series I Preferred Stock as contemplated by the Recapitalization,
the Company (x) intended to hinder, delay or defraud any existing or future
creditor or contemplated insolvency with a design to prefer one or more
creditors to the exclusion in whole or in part of others or (y) did not
receive fair consideration in good faith or reasonably equivalent value in
connection with such distributions and the Company (i) was insolvent, (ii) was
rendered insolvent by reason of such stock purchases, (iii) was engaged or
about to engage in a business or transaction for which its remaining assets
constituted unreasonably small capital to carry on its business, or (iv)
intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they matured, such court could void such transactions,
including payments to stockholders in the Offer, and require that such holders
return such cash (or equivalent amounts) to the Company or to a fund for the
benefit of its creditors. The Company may be viewed as insolvent at the time
of or as a result of the Offer, purchase of options and Series I Preferred
Stock if the fair value of its assets does not exceed its probable liabilities
at the time of or following such transactions.
Section 160 of the Delaware General Corporation Law provides that a
corporation may not purchase or redeem any of its own shares for cash or other
property when the capital of the corporation is impaired or when such purchase
or redemption would cause the impairment of the capital of the corporation. In
case of any willful or negligent violation of such section, the Company's
directors will be jointly and severally liable to the Company and its
creditors for the full amount paid for such purchase or redemption.
Based upon financial and other information currently available to it,
management of the Company believes that the Recapitalization is being
undertaken for proper purposes and in good faith. Certain courts have held,
however, that a company's purchase of its own capital stock does not
constitute reasonably equivalent value or fair consideration for incurring
indebtedness. By extension, the purchase of options to purchase capital stock
of
25
<PAGE>
a company may also be viewed as not constituting reasonably equivalent value
or fair consideration to such company. The Company believes that it (i) is
solvent and will continue to be solvent after making the purchases
contemplated by the Recapitalization notwithstanding the fact that the
Company, after completion of the Offer and such purchase of options and
preferred stock, will have a negative net worth under generally accepted
accounting principles, because the Company believes that the fair value of the
Company's assets exceeds and will exceed its probable liabilities, (ii) will
have sufficient capital for carrying on the business it intends to conduct
after such distributions, and (iii) will be able to pay its debts as they
mature. There can be no assurance, however, that a court would concur with
such beliefs and positions.
It is a condition to the consummation of the Offer that the Company shall
have received an opinion from an independent valuation firm (i) as to the
value of the Company's assets and liabilities, after giving effect to the
consummation of the Recapitalization and Merger, and (ii) that the fair value
of the Company's assets would exceed its total stated liabilities and
identified contingent liabilities both before and after giving effect to the
Recapitalization and Merger by at least the aggregate par value of its issued
capital stock. See "The Recapitalization and Merger--The Offer--Conditions to
the Offer." Houlihan, Lokey, Howard & Zukin, Inc. has been retained by the
Company to deliver such an opinion.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Management of the Company has estimated that approximately $25 million of
annualized net cost savings (as compared to such costs for the pro forma
combined fiscal year ended December 30, 1995) can be achieved over a three-
year period as a result of integrating the Arizona operations of the Company
and Smitty's. The estimates of potential cost savings contained in this Proxy
Statement 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
"The Company, Smitty's and Yucaipa--Post-Recapitalization and Merger Company")
or otherwise cause the Company's results of operations to be adversely
affected in future periods: (i) continued or increased competitive pressures
from existing and new competitors and new entrants, including price-cutting
strategies; (ii) unanticipated costs related to the Recapitalization and
Merger and the operations of the Company and Smitty's; (iii) loss or
retirement of key members of management or the termination of the Management
Services Agreement with Yucaipa; (iv) inability to negotiate more favorable
terms with suppliers or to improve working capital management; (v) increases
in interest rates or the Company's cost of borrowing or a default under any
material debt agreements; (vi) inability to develop new stores in advantageous
locations or to successfully convert existing stores; (vii) prolonged labor
disruption; (viii) deterioration in general or regional economic conditions;
(ix) adverse state or federal legislation or regulation that increases the
costs of compliance, or adverse findings by a regulator with respect to
existing operations; (x) loss of customers as a result of the conversion of
store formats; (xi) adverse determinations in connection with pending or
future litigations or other material claims against the Company; (xii)
inability to achieve future sales levels or other operating results that
support the cost savings, and (xiii) the unavailability of funds for capital
expenditures. Many of such factors are beyond the control of the Company. In
addition, there can be no assurance that unforeseen costs and expenses or
other factors will not offset the projected cost savings in whole or in part.
ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE RECAPITALIZATION AND MERGER
Upon consummation of the Recapitalization and Merger, the Company
anticipates that it would record charges to earnings in connection with: (i)
the adoption of a strategy to accelerate the disposition of certain real
estate assets in California pursuant to the California Asset Disposition (See
"The Company, Smitty's and
26
<PAGE>
Yucaipa--California Divestiture"); (ii) the payment of certain refinancing
premiums and the write-off of certain debt issuance costs resulting from the
refinancing of approximately $667.1 million (pro forma at December 30, 1995)
of the Company's indebtedness and approximately $103.3 million (pro forma at
December 30, 1995) of Smitty's indebtedness; (iii) the purchase of certain
management stock options; and (iv) the integration of Arizona operations of
the Company with Smitty's. As a result of the foregoing, the Company
anticipates that it would record a substantial charge to earnings for the
quarter in which the Recapitalization and Merger 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 Proxy Statement and the actual
total charge may differ materially from such estimate if the actual
information available to the Company at the time the charge is recorded varies
from the information currently available.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores and the newer "alternative format" food stores, including warehouse-
style supermarkets, club stores, deep discount drug stores and "supercenters."
The Company's competitors continue to open new stores in the Company's
existing markets. In addition, new competitors have entered the Company's
markets in the past and could do so in the future. Supermarket chains
generally compete on the basis of price, location, quality of products,
service, product variety and store condition. The Company regularly monitors
its competitors' prices and adjusts its prices and marketing strategy as
management deems appropriate in light of existing conditions. Some of the
Company's competitors have greater financial resources than the Company and
could use those resources to take steps which could adversely affect the
Company's competitive position. The Company's ability to respond to
competitive pressures following the consummation of the Recapitalization and
Merger could be adversely affected by its highly leveraged financial
condition.
CONTROL OF THE COMPANY; CHANGE OF CONTROL PROVISIONS
The Company's Class A Common Stock and Series I Preferred Stock are each
entitled to ten votes per share and the Company's Class B Common Stock is
entitled to one vote per share. Upon consummation of the Recapitalization and
Merger, members of the Smith Group are expected to have beneficial ownership,
in the aggregate, of approximately 24.5% of the outstanding Common Stock and
31.6% of the outstanding Series I Preferred Stock, representing approximately
41.8% of the aggregate voting power of the Company's capital stock, and
certain affiliates of the Yucaipa Group will have beneficial ownership of
approximately 13.6% of the outstanding Common Stock of the Company,
representing approximately 1.3% of the aggregate voting power of the Company's
outstanding shares of capital stock. Pursuant to the Standstill Agreement
entered into by the Smith Group, the Yucaipa Group and the Company, upon
consummation of the Recapitalization the Company will use its best efforts to
reconstitute its Board of Directors to consist of seven directors, and each of
the Smith Group and the Yucaipa Group will have the right to nominate two
directors so long as it holds at least 8% of the outstanding Common Stock and
the right to nominate one director of the Company so long as it holds at least
5% of the outstanding Common Stock. As a result of the ownership structure of
the Company and the contractual rights described above, the voting and
management control of the Company is highly concentrated. The Smith Group will
continue to have effective control of the Company and, subject to compliance
with the restrictions contained in the Financing Agreements, will have the
ability to direct the actions of the Company with respect to matters such as
the payment of dividends, material acquisitions and dispositions and other
extraordinary corporate transactions. See "Security Ownership of Certain
Beneficial Owners and Management" and "Description of the Company's Capital
Stock."
Changes contained in the Company's Amended and Restated Certificate of
Incorporation and the control of the Common Stock referred to above may have
the effect of making more difficult or discouraging a proxy contest involving
the Company, certain mergers, a tender offer, an open market purchase program,
or other
27
<PAGE>
purchases of Common Stock in circumstances that may be beneficial to
stockholders. The classification of the Board of Directors provided for in the
Company's Amended and Restated Certificate of Incorporation will make more
difficult a change of control of the Company that is not approved by the Board
of Directors. Such provision may tend to insulate current management against
the possibility of removal in a takeover bid and may also have the effect of
discouraging certain persons from purchasing Common Stock in circumstances
that would give stockholders an opportunity to sell some or all of their
Common Stock at a premium to prevailing market prices. See "Description of the
Company's Capital Stock--Antitakeover Effects of Certain Certificate of
Incorporation Provisions."
NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS
Upon consummation of the Recapitalization and Merger, substantially all of
the existing members of the Company's Board of Directors will resign and be
replaced by the new directors identified in this Proxy Statement. Jeffrey
Smith will remain as Chairman of the Board but will resign as Chief Executive
Officer of the Company. Ronald Burkle, the managing general partner of
Yucaipa, will be appointed Chief Executive Officer of the Company and Allen
Rowland will continue his recent appointment as President and Chief Operating
Officer. As a result, the Company's senior executive officers and a majority
of the members of the Board of Directors will be new appointees. There can be
no assurance that the changes in the Company's Board of Directors or senior
management will not adversely affect the Company's operating performance. Mr.
Burkle will provide his services as Chief Executive Officer pursuant to the
Management Services Agreement between the Company and Yucaipa; however, such
agreement does not require Mr. Burkle to spend any specified amount of time on
Company affairs. Yucaipa will receive an annual fee of $1 million for
providing the services of Mr. Burkle and the other partners and employees of
Yucaipa. The Management Services Agreement may be terminated by the Company's
Board of Directors on 90 days' notice or by either party upon the occurrence
of certain events. If the Company seeks to terminate the Management Services
Agreement, subject to limited exceptions, it is required to pay Yucaipa a
termination fee of between $5 million and $10 million, depending on the time
of termination. Yucaipa will also receive certain fees in connection with the
consummation of the Recapitalization. See "Certain Related Agreements--
Management Services Agreement."
THE COMPANY, SMITTY'S AND YUCAIPA
THE COMPANY AND ACQUISITION
The Company is a leading supermarket company in the Intermountain and
Southwestern regions of the United States, operating 120 stores located in
Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and
Wyoming (collectively, 14). Substantially all of the Company's stores offer
one-stop shopping convenience through a food and drug combination format which
features a full-line supermarket with drug and pharmacy departments and some
or all of the following specialty departments: delicatessens, hot prepared
food sections, in-store bakeries, video rental shops, floral shops, one-hour
photo processing labs, full-service banking and frozen yogurt shops. The
Company's 114 food and drug combination stores averaged approximately 63,000
square feet and $420,000 per week in sales volume in fiscal 1995. The Company
has recently opened four price impact warehouse stores and also operates two
conventional supermarkets. Through its 48 years of operations, the Company
believes it has developed a valuable and strategically located store base,
strong name recognition, customer loyalty and a reputation for quality and
service. At December 30, 1995, the Company had 16,000 employees (excluding
employees in California). Acquisition is a wholly owned subsidiary of the
Company which was formed for the sole purpose of enabling the Company to
consummate the Merger with Smitty's. Acquisition has no independent
operations.
CALIFORNIA DIVESTITURE
The Company has completed the sale, lease or closure of its Southern
California regional operations (the "California Divestiture"). In December
1995, the Company entered into an agreement to sublease its Riverside,
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<PAGE>
California distribution center and dairy plant to Ralphs Grocery Company
("Ralphs"), an affiliate of Yucaipa, for the remaining 23-year term of the
Company's lease. Ralphs also agreed to purchase certain related equipment and
inventory. The Company has completed the sale or lease of 16 stores and
related equipment and inventory and three non-operating properties to various
supermarket companies (including Ralphs) and others. As of March 16, 1996, the
Company had closed its remaining California stores. It is anticipated that
these closed stores will be sold or leased to other retail companies.
Following the consummation of the Recapitalization and Merger, the Company
intends to accelerate the disposition of its closed stores and excess land in
California. Since December 30, 1995, the Company has received net cash
proceeds of approximately $67.2 million from the California divestiture and
expects to receive an additional $10.6 million shortly after the consummation
of the Recapitalization and Merger. In connection with the California
Divestiture, the Company recorded the pre-tax California Divestiture Charge of
$140 million for the year ended December 30, 1995 and classified the assets to
be leased or sold as "assets held for sale." The California Divestiture Charge
reflected (i) a provision for anticipated future lease obligations, (ii) the
anticipated cost to the Company of closing its California stores and
distribution center (primarily termination payments and inventory), and (iii)
asset valuation adjustments for the equipment in all of the stores and the
distribution center and for the land and buildings associated with the
properties being sold or leased. The California Divestiture, including the
transactions with Ralphs, was unrelated to the Recapitalization and Merger.
In connection with the California Divestiture, the Company entered into a
settlement agreement with the California Attorney General (the "CAG") relating
to the stores that were sold, leased or closed. Under the settlement
agreement, the Company agreed that, for a period of five years, it would not
operate any of the closed stores as supermarkets without the permission of the
CAG. In addition, for the same five-year period, the Company agreed not to (i)
transfer the closed stores to third parties for supermarket use without the
CAG's approval, (ii) transfer such stores for non-supermarket use without
prior notice to the CAG, and (iii) sell any of such stores subject to
restrictions as to future supermarket use.
After completion of the California Divestiture, the Company continues to own
real estate assets in California having an aggregate book value at December
30, 1995 of approximately $260 million. These assets include the stores leased
or subleased as part of the California Divestiture (having an aggregate book
value at December 30, 1995 of $42.5 million), the closed stores (aggregate
book value--$115.3 million) and certain non-operating stores and other excess
real estate (aggregate book value--$102.2 million). These properties have
annual carrying costs of approximately $7 million (excluding depreciation and
amortization). Management's present policy is to own and manage its real
estate assets, including those in California, in order to maximize their long-
term values, and, as a result, the Company maintains a fully staffed real
estate, construction and property management capability. The Company believes
that there are several viable strategies for maximizing the value of its
remaining California real estate assets over the next five years and that the
implementation of these policies would not have any material negative impact
on future earnings. Following the consummation of the Recapitalization and
Merger, however, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to accelerate the disposition or its remaining real
estate assets in California including its non-operating stores and excess
land. The Company would use the net cash proceeds from the sales of these
assets to either reinvest in the Company's business or reduce indebtedness
incurred in connection with the Recapitalization and Merger. If this strategy
is adopted, as anticipated, the Company would record a charge to earnings,
presently estimated to be approximately $125 million (pre-tax), 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 "Unaudited Pro Forma
Combined Financial Statements."
In order to finance its Riverside, California distribution center and eight
of its California stores, the Company completed a sale-leaseback financing
(the "Sale-Leaseback Financing") in 1994. Pursuant to such financing, the
Company sold a portion of its interest in the properties to an owner trustee
and entered into an operating lease for each property. In order to provide the
financing for the owner trustee's purchase of the properties, the Company
filed a registration statement with the Commission pertaining to a public
offering of
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$152.4 million of pass through certificates. Each of the pass through trusts
issuing the certificates used the proceeds of the offering to acquire notes
from the owner trustee (which in turn used the proceeds to acquire its
interest in the properties from the Company). Neither the notes nor the pass
through certificates are obligations of, nor are they guaranteed by, the
Company and, accordingly, are not reflected as indebtedness or other
liabilities of the Company under generally accepted accounting principles.
Under the terms of the Sale-Leaseback Financing, the Company may terminate
its lease with respect to the various California properties if it deems such
properties to be obsolete, uneconomic for use or surplus to the Company's
needs. In connection with any such termination, the Company may elect to
satisfy all of the rights and obligations of the owner trustee in respect of
the related notes by exchanging such notes for (a) if the property is sold to
a party other than the Company, unsecured, full recourse securities of the
Company or (b) if such property is sold to the Company, secured, full recourse
securities of the Company. In addition, the Company may substitute other
properties (including properties located outside California) for properties
which it deems to be obsolete, uneconomic for use or surplus to its needs. The
substitute properties must have a fair market value, utility and useful life
equal to or greater than that of the substituted property. The Company would
not be required to assume any indebtedness in connection with such a
substitution. Any such exchange or substitution may be made by the Company
only if certain conditions are satisfied.
In April 1996, the Company received a letter from a holder of pass through
certificates pointing out an inaccurate statement in the 1994 pass through
certificate prospectus. The letter referred to a statement in the prospectus
disclosing that holders of the certificates would not receive any covenant
protection in the event of a highly leveraged transaction involving the
Company, including any transaction resulting in a change of control. The
prospectus went on to state that none of the then-outstanding indebtedness of
the Company contained provisions affording holders of such indebtedness
protection in the event of a change of control, which was characterized in the
letter as a material representation. At the date of such prospectus a
substantial amount of the Company's then-existing indebtedness did contain
such change of control provisions. The Company has pointed out to the holder
that consummation of the Recapitalization and Merger will not result in a
change of control of the Company under the terms of such existing debt
instruments, although the indebtedness under such debt instruments will be
repaid in order to remove certain financial and other covenants contained
therein that would otherwise hinder the Company's ability to consummate the
Recapitalization and Merger. The Company is currently reviewing the relevant
facts and circumstances. The letter suggested that all interested parties be
made aware of the existence of the alleged misrepresentation, but made no
specific claim or demand on the Company. Although no assurances can be given,
the Company does not believe that any claims by the holders of the pass
through certificates, if made, would have a material adverse effect on the
Company or its ability to complete the California Disposition.
RECENT OPERATING RESULTS OF THE COMPANY
Net sales decreased $53.5 million, or 7.2%, from $746.7 million for the
thirteen weeks ended April 1, 1995 to $693.2 million for the thirteen weeks
ended March 30, 1996. The sales decrease in 1996 was attributable to the
closure of 34 stores in California, offset in part by the addition of 14 new
stores outside of California from
the same period a year ago. Same store sales for the thirteen week period
decreased 5.6% in 1996. As adjusted to exclude the Company's California
stores, net sales increased $35.7 million, or 6.1%, from $584.4 million in
1995 to $620.1 million in 1996. As adjusted to exclude the Company's
California stores, same store sales for the thirteen week period decreased
2.7% in 1996, caused primarily by the Company's discontinuance of its "ad
match" program in the Phoenix and Tucson markets.
Earnings from operations decreased on a comparative basis from the first
quarter of 1995 to the first quarter of 1996, primarily as a result of the
winding down of the California retail operations. The California stores, which
were operated during the first quarter and all closed by the end of the
quarter, incurred losses connected with additional inventory clearance sales
and other expenses affected by the disposal process. A California regional
pre-tax loss of approximately $25 million significantly impacted first quarter
earnings. Earnings from continuing operations in the Company's Intermountain
and Southwest regions for the first quarter of 1996 were comparable to those
in the first quarter of 1995.
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SMITTY'S
Smitty's is a leading regional supermarket operator based in Phoenix,
Arizona which through its wholly owned subsidiary, Smitty's Super Valu,
operates 25 stores in the Phoenix area and three stores in the Tucson area.
Smitty's stores provide high quality fresh and prepared foods, groceries,
general merchandise, restaurants and ancillary services in a shopping
environment which emphasizes service, convenience, quality, selection and
customer satisfaction. Smitty's Super Valu's 35-year presence in the Phoenix
community has enabled it to locate its stores in strategic and convenient
sites. These locations, together with Smitty's unique super combination store
format, have provided it with high name recognition and customer loyalty.
On June 29, 1994, Smitty's acquired all of the outstanding shares of
Smitty's Super Valu from Steinberg International, Inc. Smitty's was organized
by Yucaipa prior to the acquisition for the purpose of acquiring Smitty's
Super Valu. Smitty's is a holding company whose only material asset is the
common stock of Smitty's Super Valu.
Store Formats. Smitty's currently operates (i) 21 food and general
merchandise "super combination" stores which average 105,000 square feet in
size, (ii) six food and drug combination stores, which average 52,000 square
feet in size, and (iii) one conventional supermarket. Smitty's "super
combination" stores offer a full line of supermarket items, a broad range of
drug store and pharmaceutical items and an expanded selection of general
merchandise. These stores offer numerous services and specialty departments,
including fresh produce, full-service fresh meat, delicatessen, seafood,
bakery, prepared foods, fresh-cut flowers and video and photo departments,
pharmacies, food courts, restaurants and full-service bank branches, family
style hair salons and airline ticket counters. The food and drug combination
stores offer a full selection of products and services, including full-service
fresh meat, delicatessen, seafood and bakery departments, an expanded line of
health care and beauty aids, a restaurant, snack bar or food court and full-
service banking.
Purchasing and Distribution. Smitty's currently makes approximately 60% of
its annual purchases from Fleming Companies, Inc. ("Fleming") under a supply
agreement which by its original terms expires in June 1997. Smitty's is
negotiating with Fleming to amend the supply agreement, subject to certain
conditions, to make Fleming a secondary supplier to Smitty's and, following
the Merger, to the Company through the end of 1997. Pursuant to its
discussions with Fleming, Smitty's would purchase inventory from Fleming in an
amount not less than approximately $10 million per month through December 31,
1997. Notwithstanding the foregoing, it is anticipated that Smitty's would
have the right to terminate the supply agreement at any time if its aggregate
purchases of inventory from Fleming exceeded $200 million.
Employees and Labor Relations. As of January 14, 1996, Smitty's employed
4,600 people, of whom approximately 36% were full-time and approximately 64%
were part-time. Approximately 4,100 employees working in the stores,
constituting approximately 89% of Smitty's employees, are covered by a
collective bargaining agreement that expires in October 1997. Smitty's has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
Trade Names, Service Marks and Trademarks. Smitty's uses a variety of trade
names, service marks and trademarks. Except for Smitty's(R) and "Shopper's
Passport," Smitty's does not believe any of such tradenames, service marks or
trademarks is material to its business.
YUCAIPA
Yucaipa is a private investment group specializing in the supermarket
industry. In addition to Smitty's, Yucaipa also controls Ralphs, the largest
supermarket company in Southern California, and Dominick's Finer Foods, Inc.,
a leading Chicago area supermarket company. Yucaipa is controlled by Ronald
Burkle, its managing general partner.
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POST-RECAPITALIZATION AND MERGER COMPANY
Company Strengths. Management believes the Company has the following
principal strengths: (i) leading market positions, (ii) attractive markets,
(iii) new and recently remodeled stores, (iv) prime store locations,(v)
advanced backstage operations, and (vi) substantial owned real estate.
Leading Market Positions. Pro forma for the Merger, the Company will
operate 148 stores and will have the largest or second largest market share
in each of its principal markets: Salt Lake City (31%), Phoenix (24%), Las
Vegas (24%), and Albuquerque (23%). The Company believes its reputation for
offering a broad selection of quality products combined with a high level
of customer service has created a valuable franchise with strong name
recognition and customer loyalty.
Attractive Markets. The Company's stores are located predominantly in
Utah, Arizona, Nevada and New Mexico, which are among the fastest growing
states in population and employment. According to the U.S. Bureau of the
Census, the population of those four states has increased at a compound
annual growth rate of 3.0% since 1990, compared to the national average of
1.1% over the same period. According to the U.S. Bureau of Labor
Statistics, employment in the same four states has increased at a compound
annual growth rate of 4.0% since 1990, compared to the national average of
1.3% over the same period. In addition, management believes that operating
in distinct markets in several states provides advantages due to their
differences in economic cycles, demographic and competitive conditions.
New and Recently Remodeled Stores. After giving effect to the Merger and
the California Divestiture, approximately 84% of the Company's stores will
have been opened or remodeled within the last seven years. During the five
fiscal years ended December 30, 1995, the Company spent approximately $414
million in capital expenditures (excluding capital expenditures associated
with California operations), which have been primarily used to build new
stores, and to expand and remodel existing stores. During the five-year
period ended December 30, 1995, Smitty's spent approximately $72 million in
capital expenditures, including approximately $42 million since mid-1994 to
remodel substantially all of its Phoenix-area stores.
Prime Store Locations. The Company's 48 years of operation have allowed
it to choose its store locations selectively as new residential areas have
been developed. The Company believes that many of its stores are in
developed areas where land values and the unavailability of suitable
parcels would make it difficult to replicate the Company's existing store
base.
Advanced Backstage Operations. The Company owns and operates one of the
most modern and efficient backstage operations in the industry. During the
five fiscal years ended December 30, 1995, the Company spent approximately
$163 million (excluding the divested California operations) to build,
expand or remodel its warehousing, distribution and processing facilities.
Management believes that the Company's approximately 3,000,000 square feet
of backstage facilities will be able to accommodate the Smitty's volume
following the Merger and support anticipated future growth.
Substantial Owned Real Estate. The Company will own 108 of the 148 stores
it will operate upon consummation of the Merger. The Company also owns its
primary warehousing, distribution and processing facilities. In addition,
the Company owns land for development, expansion or sale, as well as other
non-operating real estate assets.
Operating Strategy. Management, in conjunction with Yucaipa, has developed a
strategic plan for the Company following the consummation of the
Recapitalization and Merger. Under such plan, the Company expects to: (i)
expand operations in existing and adjacent markets, (ii) realize operating
synergies and cost savings resulting from the Merger, (iii) improve working
capital management, (iv) grow its recently introduced price impact warehouse
stores, and (v) dispose of remaining California real estate subject to the
completion of the Recapitalization and Merger.
Expand Operations in Existing and Adjacent Markets. Management believes
that there are significant opportunities to increase the Company's sales
and gain efficiencies in its existing markets through new store
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openings and store remodels. From 1991 through 1994, management primarily
focused on the Southern California market, opening 32 new stores in
Southern California compared to a net of 10 new stores in its other
markets. In 1995, the Company opened a net of 17 new stores, only two of
which were located in California. In an effort to more fully realize its
market potential in its non-California markets, in 1995 the Company began
opening smaller combination stores (54,000 to 60,000 square feet) in
existing markets as part of a "fill-in" strategy. By pursuing a growth
strategy which emphasizes opening new stores within its existing and
adjacent markets, the Company believes it can increase its market share and
improve its distribution and other efficiencies, while taking advantage of
such markets' favorable growth prospects.
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 Proxy Statement 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. The Company and Smitty's advertising
programs in the Phoenix and Tucson markets substantially overlap and,
as a result of the Merger, management expects that the Company will be
able to eliminate a substantial portion of the combined advertising
expenses. Management estimates that annualized advertising cost savings
of approximately $7 million are achievable by the end of the first full
year of operations following the Merger.
. General and Administrative Cost Savings. Management expects the
Company to achieve savings from the elimination of duplicative
administrative staff and headquarters facilities and the consolidation
of management information systems. Management estimates that annualized
general and administrative cost savings to the Company of approximately
$13 million are achievable by the end of the first full year of
operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently
operates without any of its own distribution facilities. By
incorporating the Smitty's volume into the Company's Tolleson, Arizona
warehousing and distribution facilities, the Company expects to
eliminate the expense associated with Smitty's being supplied primarily
by an independent wholesaler, as well as reduce average unit costs
resulting from improved capacity utilization. Management estimates that
annualized warehousing and transportation cost savings of approximately
$4 million are achievable by the end of the second full year of
operations following the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to utilize the Company's electronic direct
store receiving system in all Smitty's stores, resulting in increased
control over direct store deliveries and corresponding payments. In
addition, by utilizing the Company's front-end systems in Smitty's
stores, improvements in the efficiency of Smitty's stores are expected.
Management estimates that annualized cost savings to the Company of
approximately $2 million related to such direct store delivery and
store systems are achievable by the end of the second full year of
operations following the Merger.
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with an aggregate annual sales (when combined with
the Company) in excess of $11 billion. Management estimates that
annualized cost savings of approximately $6 million are achievable from
such purchasing improvements by the end of the third full year of
operations following the Merger.
The sum of the components of the estimated annual cost savings exceeds
$25 million; however, management expects that a portion of the savings will
be reinvested in the Company's operations. In
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connection with the Recapitalization and Merger, the Company and Smitty's
are evaluating the format mix of the combined Arizona store base and are
assessing the possibility of modifying the formats of certain stores. It is
anticipated that approximately $17 million of capital expenditures and
approximately $15 million of other expenses will be required to integrate
the Arizona operations over the next two years and realize such cost
savings.
Improve Working Capital Management. Management believes that the Company
can improve its working capital management. Under Yucaipa's management,
other supermarket companies have achieved working capital improvements;
however there can be no assurance that similar improvements can be achieved
by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company
recently developed a price impact warehouse store format and during 1995
opened four of these stores in the Las Vegas area operating under the name
"PriceRite Grocery Warehouse." Management believes that a number of the
Company's markets are underserved by price impact warehouse stores and that
there are substantial opportunities for expansion of the Company's
PriceRite format through the conversion of existing stores and the opening
of new stores. Yucaipa, through its management of other supermarket
companies, has extensive experience in expanding and profitably operating
price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation
of the Recapitalization and Merger, management, in conjunction with
Yucaipa, anticipates that it will pursue a strategy to dispose of its
remaining real estate assets in California, which consist of 18 non-
operating stores and excess land. The Company would use the net cash
proceeds from the California Asset Disposition to either reinvest in the
Company's business or reduce indebtedness incurred in connection with the
Recapitalization and Merger. At December 30, 1995, the aggregate book value
of such assets was approximately $260 million. If this strategy is adopted,
as anticipated, the Company would record a pre-tax charge to earnings,
which is presently estimated to be approximately $125 million, to reflect
the difference between the anticipated cash proceeds from the accelerated
dispositions and the Company's existing book values for such assets. See
"Risk Factors--Anticipated Charges to Earnings Following the
Recapitalization and Merger."
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THE STOCKHOLDERS' MEETING
DATE, TIME AND PLACE
The Stockholders' Meeting will be held on Thursday, May 23, 1996, beginning
at 9.00 a.m., Mountain Time at the Company's principal executive offices
located at 1550 South Redwood Road, Salt Lake City, Utah 84104.
MATTERS TO BE CONSIDERED AT THE STOCKHOLDERS' MEETING
At the Stockholders' Meeting, the Company's stockholders will be asked to:
(i) approve the Recapitalization Agreement and the transactions contemplated
thereby, including the Offer and the issuance of 3,038,888 shares of Class B
Common Stock to the stockholders of Smitty's pursuant to the Merger ("Proposal
No. 1"); (ii) approve and adopt separate amendments to the Company's
Certificate of Incorporation which (A) create a classified Board of Directors
("Proposal No. 2A"), (B) create a new non-voting Class C Common Stock, par
value $.01 per share (the "Class C Common Stock") ("Proposal No. 2B"), and (C)
amend provisions of the Series I Preferred Stock with respect to the (x)
elimination for a five-year period of annual mandatory redemptions, (y)
restriction for a two-year period of optional redemptions, and (z) addition of
transfer or sale restrictions which reduce the number of votes per share of
Series I Preferred Stock from ten to one in certain circumstances ("Proposal
No. 2C") (a form of the Amended and Restated Certificate of Incorporation
reflecting each of these amendments is attached as Annex C to this Proxy
Statement) (collectively "Proposal No. 2"); (iii) elect a Board of Directors
which will be divided into three classes, with the term of one class expiring
each year ("Proposal No. 3"); (iv) ratify the selection of Ernst & Young LLP
as the Company's independent auditors for 1996 ("Proposal No. 4"); and (v)
transact such other business as may properly come before the Stockholders'
Meeting. Stockholders may also consider and vote upon such other matters as
may properly be brought before the Stockholders' Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
RECAPITALIZATION AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL OF THE
RECAPITALIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE
BOARD OF DIRECTORS HAS ALSO UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE FOR
APPROVAL OF EACH OF THE OTHER PROPOSALS FOR WHICH PROXIES ARE HEREBY BEING
SOLICITED.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
The record date for the Stockholders' Meeting is April 15, 1996 (the "Record
Date"). As of the close of business on the Record Date, there were outstanding
11,366,532 shares of Class A Common Stock, 13,705,191 shares of Class B Common
Stock and 12,956,747 shares of Series I Preferred Stock. Only holders of
record of Common Stock and Series I Preferred Stock on the Record Date will be
entitled to notice of and to vote at the Stockholders' Meeting.
The presence in person or by proxy at the Stockholders' Meeting of the
holders of at least a majority of the votes entitled to be cast at the
Stockholders' Meeting is necessary to constitute a quorum for the transaction
of business.
VOTES REQUIRED
Approval of Proposal No. 1 requires the approval of the holders of a
majority of the total votes cast at the Stockholders' Meeting. Approval of
Proposal No. 1 also requires that the total votes cast at the Stockholders'
Meeting is required to represent over 50% of the number of outstanding shares
of capital stock of the Company entitled to vote at the Stockholders' Meeting.
Approval of Proposals Nos. 2A, 2B and 2C each requires (i) the approval of
the holders of a majority of the aggregate number of votes eligible to be cast
at the Stockholders' Meeting, and (ii) by a separate class vote, the approval
of the holders of a majority of the aggregate number of votes of the
outstanding shares of Series I Preferred Stock eligible to be cast at the
Stockholders' Meeting. THE COMPANY'S STOCKHOLDERS WILL VOTE SEPARATELY ON EACH
OF PROPOSALS NOS. 2A, 2B AND 2C; HOWEVER, CONSUMMATION OF THE RECAPITALIZATION
AS PROVIDED BY THE RECAPITALIZATION AGREEMENT REQUIRES THAT THE COMPANY
STOCKHOLDERS APPROVE AND ADOPT EACH OF THE PROPOSALS COMPRISING PROPOSAL NO.
2.
Approval of Proposal No. 3 requires the approval of the holders of a
plurality of the total votes cast at the Stockholders' Meeting.
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Approval of Proposal No. 4 requires the approval of the holders of a
majority of the total votes cast at the Stockholders' Meeting. A member of
Ernst & Young LLP is expected to be in attendance at the Stockholders' Meeting
with the opportunity to make a statement and respond to questions.
For each of the Proposals, all outstanding shares of Class A Common Stock,
Class B Common Stock and Series I Preferred Stock will vote together as a
single class, with each share of Class A Common Stock and Series I Preferred
Stock entitled to ten votes and each share of Class B Common Stock entitled to
one vote, provided that, as described above for Proposals Nos. 2A, 2B and 2C,
the holders of the Series I Preferred Stock will, in addition to voting
together with the holders of Common Stock, vote as a separate class.
Pursuant to an agreement dated January 29, 1996 (the "Smith's Shareholder
Agreement"), Jeffrey Smith, Chairman and Chief Executive Officer of the
Company, Richard Smith, Fred Smith (all of whom are brothers), Ida Smith
(their mother), and certain related family trusts and related stockholders
(the "Smith Group"), who own approximately 30.4% and 64.5% of the outstanding
shares of Common Stock and Series I Preferred Stock respectively (and
approximately 62.1% of the aggregate number of votes eligible to be cast at
the Stockholders' Meeting), have agreed to vote their shares in favor of the
Recapitalization Agreement and the transactions contemplated thereby and to
take no action inconsistent therewith. In addition, directors and executive
officers of the Company who have not executed the Smith's Shareholder
Agreement, who own approximately 7.6% of the outstanding shares of Common
Stock (and approximately 6.4% of the aggregate number of votes eligible to be
cast at the Stockholders' Meeting), have indicated that they intend to vote
their shares of Common Stock in favor of the Recapitalization Agreement and
the transactions contemplated thereby. THEREFORE, AS OF THE DATE HEREOF, IF
OVER 50% OF THE NUMBER OF OUTSTANDING SHARES OF CAPITAL STOCK OF THE COMPANY
ARE VOTED AT THE STOCKHOLDERS' MEETING, THE REQUISITE VOTE FOR THE APPROVAL OF
ALL PROPOSALS TO BE CONSIDERED AT THE STOCKHOLDERS' MEETING BY THE HOLDERS OF
THE COMPANY'S STOCK IS ASSURED. See "Security Ownership of Certain Beneficial
Owners and Management."
VOTING OF PROXIES
All shares of Common Stock and Series I Preferred Stock represented by
properly executed Proxies received in time for the Stockholders' Meeting will
be voted in the manner specified in the Proxy. Proxies that do not contain any
instruction to vote for or against or to abstain from voting on a particular
matter will be voted in favor of such matter. It is not expected that any
matter other than those referred to herein will be brought before the
stockholders at the Stockholders' Meeting. However, if other matters are
properly presented, the persons named as proxies will vote in accordance with
their best judgment with respect to such matters, unless authority to do so is
withheld in the Proxy.
An automated system administered by the Company's transfer agent will
tabulate votes cast by proxy at the Stockholders' Meeting, and an employee of
the Company will tabulate votes cast in person at the Stockholders' Meeting.
Brokers who hold shares of Class B Common Stock in street name for customers
who are the beneficial owners of such shares are prohibited from giving a
proxy to vote such customers' shares with respect to any proposal in the
absence of specific instructions from such customers ("broker non-votes").
Abstentions and broker non-votes, tabulated separately, will be included in
the determination of the number of shares present at the Stockholders' Meeting
and whether a quorum is present. Abstentions and broker non-votes are not
counted in determining whether a nominee is elected. In determining whether
any other proposal has been approved, abstentions are counted as votes against
such proposal and broker non-votes are not counted as votes either for or
against such proposal.
ADJOURNMENTS; REVOCABILITY OF PROXIES
If the Stockholders' Meeting is adjourned for any reason, the approval of
the Recapitalization Agreement and the transactions contemplated thereby,
including the Offer and the issuance of 3,038,888 shares of Class B Common
Stock to the stockholders of Smitty's in the Merger, as well as the other
proposals to be voted on will be considered and voted upon by stockholders at
the subsequent reconvened meeting, if any.
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A stockholder may revoke a Proxy prior to the time the shares represented by
such Proxy are voted at the Stockholders' Meeting by: (i) attending and voting
in person at the Stockholders' Meeting; (ii) giving notice of revocation of
the Proxy at the Stockholders' Meeting; or (iii) delivering to the Secretary
of the Company, a written notice of revocation or a duly executed Proxy
relating to the same shares and matters to be considered at the Stockholders'
Meeting, bearing a date later than the Proxy previously executed. Attendance
at the Stockholders' Meeting will not in and of itself constitute a revocation
of a Proxy. Unless revoked in one of the manners set forth above, Proxies in
the form enclosed will be voted at the Stockholders' Meeting in accordance
with such stockholder's instructions. All written notices of revocation and
other communications with respect to revocation of Proxies should be addressed
as follows: 1550 South Redwood Road, Salt Lake City, Utah 84104, Attention:
Secretary, and must be received before the taking of the votes at the
Stockholders' Meeting.
SOLICITATION OF PROXIES
The Company will bear the cost of the solicitation of Proxies and the cost
of printing and mailing this Proxy Statement. In addition to solicitation by
mail, the directors, officers and employees of the Company and its
subsidiaries may solicit Proxies from stockholders of the Company by
telephone, telegram or in person. Such directors, officers and employees will
not be additionally compensated for any such solicitation but may be
reimbursed for out-of-pocket expenses in connection therewith. Arrangements
will be made to furnish copies of proxy materials to fiduciaries, custodians
and brokerage houses for forwarding to beneficial owners of the Class B Common
Stock. Such persons will be paid reasonable out-of-pocket expenses.
MacKenzie Partners, Inc. will assist in the solicitation of proxies by the
Company for a customary fee, plus reasonable out-of-pocket expenses.
THE RECAPITALIZATION AND MERGER
BACKGROUND OF THE TRANSACTIONS
At various times over the past two years various parties have expressed to
management of the Company an interest in submitting a proposal to acquire the
Company. In the spring and summer of 1994 two supermarket companies separately
held preliminary discussions with management of the Company concerning the
possible acquisition of the Company. In the summer of 1995 another supermarket
company and a leveraged buy-out firm separately held preliminary discussions
with management of the Company concerning the possible acquisition of the
Company. The Company provided all of those companies or firms with some
nonpublic information about the Company, and some of them conducted a due
diligence review of the Company. But the price range that each of those
companies or firms indicated to the Company on a preliminary basis for any
acquisition proposal that they might submit was not at a level that management
of the Company found to be sufficient to warrant continuation of the
discussions, and as a result discussions with each company or firm were
terminated.
Jeffrey Smith, Chairman and Chief Executive Officer of the Company and the
owner, along with the other members of the Smith Group, of 30.4% and 64.5% of
the outstanding shares of Common Stock and Series I Preferred Stock
respectively (and approximately 62.1% of the aggregate number of votes
eligible to be cast at the Stockholders' Meeting) did not believe that any of
the price indications expressed by those parties approached levels that would
cause the Smith Group to consider a sale of its shares.
In late September 1995, the Company decided to pursue the closure of its
entire Southern California Region. Pursuant to this determination, the Company
began to explore the possible disposition of its large distribution center and
dairy facility in Riverside, California and the subsequent closure and sale of
its stores in Southern California. At the Board meeting on October 26, 1995,
the Board authorized the Company's pursuit of the California Divestiture.
In connection with the divestiture of its Riverside distribution facility,
the Company conducted discussions with a number of California supermarket
companies and other parties to ascertain their interest in acquiring the
facility and those discussions resulted in an agreement reached in early
November 1995 to sublease the facility to Ralphs, a California supermarket
operator controlled by Yucaipa. The sublease of the Riverside distribution
facility to Ralphs, which was consummated in January 1996, and the California
Divestiture were not related to the transactions comprising the
Recapitalization or the Merger.
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In the course of the discussions that took place in late September and in
October 1995 concerning the Riverside facility between Jeffrey Smith and
Ronald Burkle, managing general partner of Yucaipa (which controls Smitty's)
and Chairman of Smitty's, Mr. Burkle expressed Yucaipa's interest in pursuing
the possible acquisition of the Company by Yucaipa and a group of investors to
be assembled by Yucaipa. At the same time Mr. Burkle proposed that prior to
such acquisition of the Company by Yucaipa and other investors, the Company
should acquire Smitty's. From October through mid-December 1995, Messrs. Smith
and Burkle and other representatives of the Company, Yucaipa and Smitty's had
numerous discussions about the possible acquisition of the Company by Yucaipa
and other investors, both with and without the prior or simultaneous
acquisition of Smitty's by the Company, as well as the possible acquisition of
the Company by Smitty's. During that period the Company, on the one hand, and
Smitty's and Yucaipa, on the other hand, exchanged nonpublic information and
conducted due diligence reviews of each other. In October 1995, the Company
retained Goldman, Sachs & Co. ("Goldman Sachs") to advise the Company and its
Board of Directors in its discussions with Yucaipa concerning a possible
transaction involving the Company.
The discussions in November and early December 1995 between Messrs. Burkle
and Smith and other representatives of the Company, Yucaipa and Smitty's
resulted in preliminary indications from Yucaipa that, subject to satisfactory
completion of its due diligence and satisfactory discussions with prospective
senior lenders and underwriters of securities as to their willingness to
provide the necessary financing for such a transaction, Yucaipa would be
interested in preparing a proposal under which either Yucaipa or Smitty's
would acquire the Company for consideration consisting of a combination of
cash and equity securities having an aggregate per share value roughly
estimated in the mid $30's (the "Original Yucaipa Acquisition Proposal").
However, in late December 1995, Mr. Burkle advised Mr. Smith that, having
completed its due diligence and its discussions with prospective senior
lenders and underwriters, any proposal that Yucaipa would make to acquire the
Company would involve considerably less cash consideration and more equity
securities than the Original Yucaipa Acquisition Proposal. After consulting
with the Company's financial advisors, Mr. Smith advised Mr. Burkle that the
Company would not be interested in the revised acquisition proposal because
the value of the revised proposal was below the level at which the Company and
the Smith Group would entertain the sale of the Company. Mr. Burkle then
proposed as an alternative that the Company engage in a series of transactions
comparable to the transactions contemplated by the Recapitalization and
Merger--namely that (a) the Company acquire Smitty's in exchange for the
issuance of 3,038,888 shares of Class B Common Stock, (b) the Company make a
tender offer pursuant to which it would purchase 50% of its outstanding shares
of Common Stock (excluding the shares to be issued to the stockholders of
Smitty's) for $36 in cash per share, (c) the Company enter into a five-year
agreement with Yucaipa calling for Yucaipa's provision of various management
services to the Company, and (d) the Company's Board of Directors be
reconstituted to comprise two representatives of the Smith Group, two
representatives of Yucaipa, one senior manager of the Company and two
independent directors. Mr. Burkle reported to Mr. Smith that the prospective
senior lenders and underwriters with whom Yucaipa had been in contact
concerning the possible acquisition of the Company by Yucaipa or Smitty's had
indicated their willingness to finance the proposed Recapitalization by the
Company.
A few days later in the last week of December 1995, after consulting with
the Company's financial and legal advisors and receiving the benefit of their
analyses of this new transaction proposal, Mr. Smith responded favorably to
the proposal and advised Mr. Burkle that he would submit it to the Company's
Board of Directors. On January 3, 1996, the Board of Directors held a special
meeting. At that meeting Mr. Smith reported on the preliminary discussions
that had taken place in the past two years with the four parties referred to
above concerning the possible acquisition of the Company, and explained that
none of these discussions had resulted in the receipt of any satisfactory
acquisition proposals at price levels that management of the Company believed
to be worth further discussion and that all such proposals had been at price
levels that were significantly below the Original Yucaipa Acquisition
Proposal.
Mr. Smith further reported on the discussions with Yucaipa regarding the
proposed acquisition of Smitty's by the Company, the simultaneous tender offer
by the Company for 50% of its outstanding Common Stock and the other terms of
the series of transactions outlined above that Yucaipa had proposed. Mr. Smith
expressed his
38
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opinion that such transactions presented the best course of action for the
Company among all of the strategic options that were then available to the
Company. He expressed his belief that over time such transactions would
deliver more value to the Company's stockholders than any acquisition proposal
that the Company could reasonably expect to receive at the present time or in
the foreseeable future and that therefore approval of the proposed
transactions by the Board of Directors was in the best interests of all of the
Company's stockholders.
Mr. Smith advised the Board that he was interested in reducing his
management role at the Company and that the Company needed to find an
experienced individual to serve in the position of chief operating officer
with significantly expanded management responsibilities. Mr. Smith expressed
his view that in light of those developments the proposed management services
agreement with Yucaipa would be particularly beneficial to the Company.
Goldman Sachs discussed with the Board the financial aspects of the proposed
transactions and related matters and the Company's legal advisors, Simpson
Thacher & Bartlett, discussed the legal duties of the Company's directors and
various aspects of the proposed transactions, including the fact that no
change of control would result from the transactions under consideration since
the Company's existing stockholders would retain approximately 77.5% of the
Company's outstanding Common Stock following the Recapitalization and Merger,
the Smith Group would continue to be the Company's largest stockholder with
23.2% of the outstanding Common Stock and 41.8% of the vote and Yucaipa would
be entering into a standstill agreement with the Company which would limit
Yucaipa's ability for 10 years to (a) increase its beneficial ownership of
Common Stock beyond 20% of the outstanding votes, (b) sell its shares in large
blocks, (c) submit any proposal regarding a change of control of the Company,
(d) solicit proxies for any meeting of the Company's stockholders, or (e) take
any other actions to seek control of the Company.
The Board discussed the proposed transactions and related matters at length
and set a subsequent meeting for January 12, 1996 to discuss the transactions
further. In addition, the independent directors on the Board engaged separate
legal counsel to assist them in evaluating the proposed transaction.
On January 8, 1996, the Company issued the following press release:
"Smith's Food & Drug Centers, Inc. announced today that it is in
negotiations regarding a merger of Smitty's Super Valu, Inc., a regional
supermarket operator based in Phoenix, Arizona, into Smith's. Smitty's,
which operates 28 stores in the Phoenix and Tucson areas, is controlled by
The Yucaipa Companies. In connection with the merger transaction, Smith's
said it was also considering the repurchase of as much as 50% of its Class
A and Class B common stock at a premium to recent trading levels. It is not
anticipated that a change of control will result from any transaction under
consideration.
"Smith's cautioned that no agreement had been reached regarding the
proposed transaction with Smitty's and that discussions regarding the
transaction and the possible share repurchase are ongoing. No assurances
can be made that any agreement will be reached or that any of the
transactions will be consummated."
Later on January 8, 1996, the Company announced the closure of its
operations in its Southern California Region. It reported that several of its
stores were to be sold or leased to various supermarket companies and that its
remaining California stores would be closed in the near future and that it was
anticipated that they would be sold or leased to other retail companies. The
announcement also reported that restructuring charges of approximately $85
million after taxes would be charged against earnings for the year ended
December 30, 1995 as a result of these actions.
On January 5, 1996, Rodney Brady submitted his resignation as a director of
the Company, citing the press of other business commitments that made it
impossible for him to attend the meetings of the Board that had been or would
be scheduled to consider the various matters then under study by the Board and
to devote sufficient attention to those important matters.
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On January 12, 1996, the Board of Directors met to continue its deliberation
of the proposed series of transactions that had been presented to the Board at
its January 3 meeting. At the commencement of the Board meeting, Jeffrey Smith
received a faxed letter from Supermarket Company A expressing its interest in
pursuing the acquisition of the Company for a consideration consisting of
Supermarket Company A's stock, cash or some combination of Supermarket Company
A's stock and cash having an aggregate value ranging from $28 to $32 per share
of the Company's Common Stock, subject to satisfactory completion of a due
diligence review. (Supermarket Company A was one of the four companies or
firms that had expressed to management of the Company in 1994 or 1995 an
interest in making a proposal to acquire the Company.)
At the Board meeting on January 12, the Board discussed among various other
issues the alternative courses of action then available to the Company,
including effectuating the transactions contemplated by the Recapitalization
and Merger and pursuing the possible sale of the Company. Mr. Smith advised
the Board that the Smith family would not support a transaction involving the
sale of the Company unless it resulted in a higher price than that proposed by
Supermarket Company A or the prices that appeared to be obtainable from the
various other parties with whom the Company previously had discussions. Mr.
Smith expressed his view to the Board that based on those prior discussions
with other parties, he did not believe such price levels were attainable at
that time or in the foreseeable future.
After a lengthy discussion, including discussions with Goldman Sachs and
Simpson Thacher & Bartlett, it was the general consensus of the Board that
management of the Company and its advisors should continue their negotiations
with Yucaipa and Smitty's concerning the proposed transactions contemplated by
the Recapitalization and Merger in an effort to reach agreement on the final
terms of such transactions, but that at the same time management and the
Company's advisors should also contact those parties who might principally be
interested in making a proposal to acquire the Company and should provide
access to nonpublic information about the Company to any potential bidder who
demonstrated a serious interest and ability to make a bona fide proposal to
acquire the Company. It was also the general view of the directors that if
viable preliminary indications of interest for the acquisition of the Company
that met the price objectives of the Smith family and the Board could not be
obtained by the time of the Board's next regularly scheduled meeting on
January 25, 1996, then the Company should pursue the transactions contemplated
by the Recapitalization and Merger.
On January 13, 1996, after being informed of the decisions of the Company's
Board of Directors at its January 12 meeting, Mr. Burkle advised the Company's
advisors that Yucaipa was no longer interested in pursuing either the sale of
Smitty's to the Company or the other transactions contemplated by the
Recapitalization. Mr. Burkle based that decision on the potential adverse
effects to Smitty's operations if its executives, employees, customers and
suppliers had to endure a two-week period (and possibly longer) of uncertainty
as to whether Smitty's was being sold to the Company or would continue to
operate as an independent company.
On January 15, 1996, the Company issued the following press release:
"Smith's Food & Drug Centers, Inc. said that Smith's and Smitty's Super
Valu, Inc. have terminated discussions concerning the possible merger of
Smitty's with Smith's.
"As a result, Smith's said it was terminating its plan to effectuate the
related transaction which contemplates Smith's repurchase of as much as 50%
of its Class A and Class B Common Stock at a significant premium over
recent trading prices.
"Smith's said that it is currently exploring various ways to enhance
shareholder value, including a possible significant repurchase of stock,
the possible sale of the Company or similar transactions. Smith's said
there can be no assurance that any such transaction would be effected.
"Smith's also reported that Rodney Brady has resigned as a director of
Smith's, citing the press of other business commitments."
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During the week of January 15, 1996, Goldman Sachs contacted 10 supermarket
companies and six leveraged buy-out firms (including all four of the companies
or firms referred to earlier in this section which in 1994 or 1995 had
expressed an interest in making a proposal to acquire the Company) to
ascertain if they were interested in making a proposal to acquire the Company.
Five of the parties that were contacted executed confidentiality agreements
and received nonpublic information regarding the Company, and two of those
parties decided to pursue discussions with the Company following their review
of such information.
One of those two companies was Supermarket Company A, which conducted an
extensive due diligence review of the Company during the week of January 15,
1996 and advised Jeffrey Smith at the end of that week that any proposal it
might submit would be at the low end of the value range quoted in its January
12 letter. As a result, discussions between the Company and Supermarket
Company A were terminated.
The other company that pursued discussions with the Company during the week
of January 15, 1996 was Supermarket Company B, which conducted a preliminary
due diligence review of the Company during that week. During the weeks of
January 15 and January 22, representatives of Supermarket Company B met with
Jeffrey Smith regarding a recapitalization transaction they proposed that was
similar in many respects to the transactions contemplated by the
Recapitalization and Merger except that instead of acquiring Smitty's the
Company would acquire Supermarket Company B.
On January 24, 1996, Mr. Smith and the Company's advisors met with
representatives of Supermarket Company B to continue their discussions. At
that meeting the representatives of Supermarket Company B presented a specific
proposal for the recapitalization transaction referred to above. The parties
conducted negotiations as to certain key aspects of the proposal, but those
negotiations did not result in a proposal that Mr. Smith found to be as
advantageous to the Company and its stockholders as the transactions
contemplated by the Recapitalization and Merger. As a result, discussions
between the Company and Supermarket Company B were terminated.
On January 19, 1996, Alan Hoefer submitted his resignation as a director of
the Company, explaining that given the termination of negotiations between the
Company and Smitty's and given the fact that the Company was about to contact
other parties to explore other ways to enhance shareholder value, he believed
it best that he resign from the Board at that particular time.
During the weeks of January 15 and January 22, 1996, discussions between
representatives of the Company and representatives of Yucaipa resumed
concerning the transactions contemplated by the Recapitalization and Merger.
During the week of January 22, representatives of the Company, Yucaipa and
Smitty's returned to negotiating the specific terms of the Recapitalization
and Merger. Those negotiations advanced sufficiently that by January 24 the
Company, Yucaipa and Smitty's had reached agreement on many of the principal
terms of the transactions contemplated by the Recapitalization and Merger.
On January 25, 1996, the Company's Board of Directors held a regularly
scheduled meeting at which Jeffrey Smith reported on the results of the
Company's discussions with interested parties (as noted above) and its resumed
negotiations with Yucaipa and Smitty's concerning the transactions
contemplated by the Recapitalization and Merger. Mr. Smith reported that the
Company, Yucaipa and Smitty's were close to reaching agreement on most of the
principal terms of the transactions contemplated by the Recapitalization and
Merger and he recommended that the Board approve continued negotiations on
such transactions as the best course of action then available to the Company.
Ronald Burkle was then invited into the meeting to make a presentation to the
Board regarding Yucaipa's background, the potential benefits to the Company of
the acquisition of Smitty's and the potential benefits that the Company would
derive by entering into the Management Services Agreement with Yucaipa. After
Mr. Burkle left the meeting and following a discussion by Goldman Sachs of the
financial aspects of the transactions contemplated by the Recapitalization and
Merger, there was a lengthy discussion by the Board of the proposed
transactions and related matters. The general consensus of the Board was
favorable regarding those transactions and the Board set a meeting for January
28, 1996 for action on those transactions to give the Company's management and
advisors the opportunity to finalize negotiations with Yucaipa and Smitty's
concerning the terms of those transactions.
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Later on January 25, the Company's management and financial and legal
advisors met with representatives of Yucaipa and Smitty's and continued their
negotiation of the principal terms of the transactions contemplated by the
Recapitalization and Merger. On January 26, 27 and 28, the parties and their
legal advisors finalized the terms of the Recapitalization Agreement and all
related agreements. The parties and their advisors also negotiated during that
period with senior lenders and securities firms concerning the terms of the
commitment letter from the senior lenders and highly confident letter from the
securities firms with respect to the financing for the Recapitalization. In
addition, subject to the review of the final documentation, Goldman Sachs
believed it would be in a position to deliver an opinion at the January 28
Board meeting to the effect that the Exchange Ratio pursuant to the
Recapitalization Agreement is fair to the Company.
On January 28, 1996, the Company's Board of Directors met. Jeffrey Smith
reported that the final terms of all of the proposed transactions and related
documentation had been agreed to by the Company, Yucaipa and Smitty's. The
Board then unanimously approved the Recapitalization Agreement and all related
agreements and the transactions contemplated by those agreements. Following
the Board meeting, the Recapitalization Agreement and certain related
agreements were executed by the Company, Yucaipa, Smitty's and the other
parties to those agreements. At the same time, the Company, Bankers Trust and
Chase Manhattan executed a commitment letter with respect to the senior bank
financing for the Recapitalization, and five securities firms delivered a
letter to the Company stating that, based upon their understanding of the
transactions, the financing, the then current market conditions and subject to
certain other conditions, they were highly confident of their ability to sell
or place the offering of senior and subordinated debt and preferred stock
required for the Recapitalization and Merger and the Company engaged those
five firms to assist the Company in effecting such offerings.
On January 29, 1996, the Company issued a press release a portion of which
is set forth below:
"Smith's Food & Drug Centers, Inc. made the following announcements
today:
Merger of Smitty's Supermarkets, Inc.
"Smith's has entered into a definitive merger agreement with Smitty's
Supermarkets, Inc. Smitty's, which operates 28 supermarkets in the Phoenix
and Tucson areas, is controlled by The Yucaipa Companies, a private
investment company. Smitty's sales totaled approximately $590 million in
1995. Under the merger agreement, Smith's will issue 3,038,888 shares of
its Class B Common Stock in exchange for all of Smitty's outstanding common
stock and it will assume or refinance approximately $148 million of
Smitty's debt.
Repurchase of Stock
"Smith's also said it will commence a self tender offer to purchase 50%
of its Class A and Class B Common Stock for $36 per share, excluding shares
to be issued in connection with the Smitty's merger. Consummation of the
tender offer will be subject to the tender of at least 50% of Smith's
outstanding common stock, the receipt of financing and various other
conditions. Consummation of the Smitty's merger will be conditioned on
Smith's purchase of shares pursuant to the self tender offer, receipt of
financing, regulatory approvals, approval by Smith's stockholders and
various other conditions. Smith's has received commitment letters and
highly confident letters from several financial institutions with respect
to all of the financing necessary to consummate the Smitty's merger and the
self tender offer.
"The tender offer is expected to commence around April 1, 1996 and be
consummated around May 1, 1996. The Smitty's merger is expected to be
consummated concurrently with the closing of the tender offer.
"Upon consummation of the Smitty's merger and the self tender offer, the
Smith family will continue to be Smith's largest stockholder with
approximately 24% of the outstanding common stock and over 40% of the vote.
The Yucaipa Companies will own approximately 14% of Smith's outstanding
common stock and the other Smitty's stockholders will own approximately 6%.
The Yucaipa Companies will enter into a 10 year standstill agreement with
Smith's.
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Management Changes
"Upon consummation of the Smitty's merger and the self tender offer,
Smith's will enter into a five year management services agreement with The
Yucaipa Companies under which Yucaipa will provide various management
services to Smith's. As part of that arrangement, Ronald W. Burkle,
managing partner of The Yucaipa Companies, will be appointed as Chief
Executive Officer of Smith's upon consummation of the Smitty's merger and
the self tender offer. In addition, at that time Smith's board of directors
will be reconstituted to consist of two representatives of Yucaipa, two
representatives of the Smith family, one other member of management, and
two independent directors.
"The Yucaipa Companies is a private investment company which in addition
to Smitty's also controls Ralphs Grocery Company, the largest supermarket
company in Southern California, operating stores under the Ralphs and Food
4 Less names, which also operates stores in Northern California under the
Cala and Bell names and in the midwest under the Falley's and Food 4 Less
names; and Dominick's Finer Foods, Inc., a leading Chicago area supermarket
company, operating stores under the Dominick's and Omni names.
"In addition, Smith's announced that it has hired Allen R. Rowland as
President and Chief Operating Officer of Smith's. Mr. Rowland spent 25
years at Albertson's Inc., holding various senior executive positions at
that company.
"Jeffrey P. Smith, Chairman and CEO of Smith's, said: "I am very excited
about the transactions we are announcing today. The Smitty's merger will
significantly enhance the combined companies' position in the Arizona
market. The self tender offer will give all of Smith's stockholders the
opportunity to receive substantial cash proceeds while permitting them at
the same time to participate in Smith's future growth. Additionally, our
management arrangements with Yucaipa will permit Smith's to benefit from
Yucaipa's extensive management experience in the supermarket industry. I am
particularly pleased about our good fortune in hiring Al Rowland. He is one
of the most accomplished senior executives in the supermarket industry and
I believe Smith's will benefit greatly from his experience.'
"Ron Burkle said: "We look forward to consummating this exciting
transaction. I have admired Jeff Smith and his company and we are delighted
at the prospect of the combination of Smitty's and Smith's. I am committed
to continuing the expansion of the combined company to benefit its
shareholders, employees and customers.' "
[Portions of the release dealing with financial results for the fourth
quarter of 1995 and the full 1995 fiscal year and other matters have been
omitted.]
REASONS FOR THE TRANSACTIONS; RECOMMENDATION OF BOARD OF DIRECTORS
At a meeting on January 28, 1996, the Board of Directors unanimously
determined that it was in the best interests of the Company and its
stockholders that the Company enter into the Recapitalization Agreement and
related agreements and consummate all of the transactions contemplated by
those agreements, including the Recapitalization and Merger. In reaching this
determination, the Board of Directors considered a number of factors,
including without limitation the following:
1. The Board considered its knowledge of the management, business,
operations, properties, assets, financial condition, operating results and
prospects of the Company. See "--Background of the Transactions."
2. The Board considered the strategic and financial benefits which would
be derived from the combination of Smitty's operations with those of the
Company. In considering such benefits, the Board reviewed the presentations
of management and Ronald Burkle concerning the potential benefits to the
Company of the acquisition of Smitty's and the potential cost savings and
synergies in the Arizona markets. The Board also considered the
uncertainties and risks associated with achieving such potential cost
savings and synergies.
3. The Board considered the reports of management as to the results of
their due diligence investigation on Smitty's and the financial assessments
by management of Smitty's.
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4. The Board considered the various reports from the Company's management
and financial and legal advisors and the legal, tax, accounting and
regulatory implications of the Recapitalization and Merger.
5. The Board considered the oral and written presentations of Goldman
Sachs and the opinion of Goldman Sachs that, as of the date of such
opinion, the Exchange Ratio pursuant to the Recapitalization Agreement is
fair to the Company. See "--Opinion of Financial Advisor."
6. The Board considered the negotiations that had taken place with
Smitty's and Yucaipa, and the results of discussions with other parties
over the past two years concerning possible transactions with the Company.
See "--Background of the Transactions."
7. The Board considered the terms and conditions of the Recapitalization
Agreement, the Standstill Agreement, the Management Services Agreement, the
Warrant Agreement and the other agreements entered into or to be entered
into in connection with the Recapitalization Agreement. The Board
considered in particular the "Alternative Transaction" and termination
provisions of the Recapitalization Agreement, which permitted the Company
to terminate the Recapitalization (subject to completing the Merger upon
satisfaction of the conditions to the Merger) if in the exercise of the
directors' fiduciary duties (i) such termination was required by reason of
its acceptance of an Alternative Transaction, or (ii) the Board withdrew,
modified or changed its recommendation of the Recapitalization. In
considering such provisions the Board considered the impact of the "no-
solicitation" provisions of the Recapitalization Agreement on the Company's
ability to negotiate with third parties that were interested in entering
into an acquisition or other significant transaction with the Company.
While such "no-solicitation" provisions prohibited the Company from
soliciting third party offers, it did not prohibit the Company from
considering such offers if any were made. The Board believed that such
provisions, while responsive to the requirements of Smitty's and Yucaipa
that the Company be committed to the proposed Recapitalization and Merger,
permitted the Board to fulfill its fiduciary duties in the event an
unsolicited offer from a third party were received or the Board were to
withdraw its recommendation of the Recapitalization. The Board considered
the fact that if the Recapitalization were terminated and it was not
obligated to enter into the Management Services Agreement or the Warrant
Agreement, the Company would continue to be obligated to complete the
Merger. While the Board understood that under such circumstances the Merger
could have an adverse impact on the ability of the Company to consummate an
Alternative Transaction, it did not believe that such adverse impact would
preclude such an Alternative Transaction. In that connection, the Board was
aware that if the Recapitalization were terminated and the Company
consummated the Merger as it was obligated to do under the terms of the
Recapitalization Agreement, the shares of the Company's Class B Common
Stock to be issued to the Smitty's stockholders in the Merger could be
expected to trade at considerably higher prices than if the
Recapitalization were consummated, and that such shares could be expected
to trade at even higher prices if an Alternative Transaction were to be
effectuated by the Company in lieu of consummating the Recapitalization.
The Board also considered the fact that in their negotiations Smitty's and
Yucaipa had requested that the Company pay a break-up fee in the event that
the Recapitalization was terminated, which request the Company had
successfully rejected.
8. The Board considered the fact that the Recapitalization and Merger did
not result in a change of control of the Company, that the Smith Group
would continue to be the Company's largest stockholder with 24.5% of the
outstanding Common Stock and 41.8% of the aggregate voting power and that
Yucaipa and its affiliates would be subject to the significant restrictions
set forth in the Standstill Agreement.
9. The Board considered the fact that the Smith Group, the current
holders of 62.1% of the total votes represented by the Company's Common
Stock and Series I Preferred Stock, had expressed its strong support of the
Recapitalization and Merger.
10. The Board considered the commitment letter that was received from
Bankers Trust and Chase Manhattan Bank to provide lending commitments to
finance a portion of the Recapitalization and Merger, and the highly
confident letter received from five securities firms as to such firms'
confidence in their ability to raise the financing for a portion of the
Recapitalization and Merger and the anticipated terms of such financing.
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11. The Board considered Yucaipa's experience with highly leveraged
transactions involving supermarket chains, including its experience and
success in negotiating and obtaining the proceeds of the financing for such
transactions.
12. The Board considered Yucaipa's experience in owning and operating
supermarket chains, and in particular the experience of Mr. Burkle in the
management of Yucaipa and its affiliated companies. The Board believed that
this experience could be extremely valuable to the Company and its
management in the integration of Smitty's operations with the Company's
operations, and in improving the Company's strategic planning.
13. The Board considered the desire of Jeffrey Smith to reduce his
involvement in the management of the Company and the Company's need to
recruit an experienced candidate to serve as chief operating officer with
significantly expanded management responsibilities. The Board also
considered that Allen Rowland, a highly regarded supermarket executive with
25 years of experience at Albertson's, had agreed to become President and
Chief Operating Officer of the Company after he had learned of the proposed
Recapitalization and Merger.
14. The Board considered the fact that all stockholders would be
receiving the opportunity to exchange half of their shares of Common Stock
for a cash amount reflecting a significant premium over the price at which
the Company's Common Stock has traded for some time and yet at the same
time continue to participate in the future performance of the Company.
15. The Board considered the historical market price of the Class B
Common Stock, which had ranged from $18.25 per share to $30.13 per share
during the year ended January 26, 1996, the last trading day prior to
announcement of the signing of the Recapitalization Agreement, and from
$18.25 per share to $37.00 per share during the three years ended January
26, 1996.
16. The Board considered that the Recapitalization gave the Company's
stockholders the potential for capital gains treatment upon the sale of
their shares in the Offer. See "Certain Federal Income Tax Consequences--
The Offer."
The foregoing discussion of the information and factors considered and given
weight by the Board is not intended to be exhaustive. In view of the variety
of factors considered in connection with its evaluation of the
Recapitalization and Merger, the Board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determinations. In addition, individual members of
the Board may have given different weights to different factors.
Based on the foregoing, the Company's Board of Directors unanimously
determined that the Merger is fair and in the best interest of the
stockholders of the Company, and the Board recommends that the Company's
stockholders vote FOR the approval of the Recapitalization Agreement and the
transactions contemplated thereby and FOR the other proposals to be voted on
at the Stockholders' Meeting.
OPINION OF FINANCIAL ADVISOR
Goldman Sachs has delivered its written opinion to the Board of Directors of
the Company that, as of January 29, 1996, the Exchange Ratio pursuant to the
Recapitalization Agreement is fair to the Company.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED JANUARY 29,
1996, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS
ANNEX B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS OF THE COMPANY ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS
ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(i) the Recapitalization Agreement; (ii) the Registration Statement of Form S-
4, as amended, of Smitty's dated July 29, 1994; (iii) the Annual Report on
Form 10-K of Smitty's for the fiscal year ended July 31, 1995 (reflecting
selected five year
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audited financial information); (iv) certain interim reports and Quarterly
Reports on Form 10-Q and certain internal financial analyses and forecasts for
Smitty's prepared by the management of Smitty's; (v) Annual Reports to
Stockholders and Annual Reports on Form 10-K of the Company for the five
fiscal years ended December 31, 1994; (vi) certain interim reports to
stockholders and Quarterly Reports on Form 10-Q of the Company; (vii) certain
other communications from the Company to its stockholders; and (viii) certain
internal financial analyses and forecasts for the Company prepared by the
management of the Company without, and after giving effect to, the Merger and
the Offer. Goldman Sachs also held discussions with members of the senior
management of the Company and Smitty's regarding the strategic rationale for,
and benefits of, the Merger and the past and current business operations,
financial condition, and future prospects of their respective companies on a
standalone basis and as combined in the Merger. In addition, Goldman Sachs
reviewed the reported price and trading activity for the Class B Common Stock,
compared certain financial and stock market information for the Company and
certain financial information for Smitty's with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the supermarket
industry specifically and in other industries generally and performed such
other studies and analyses as it considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by it for
purposes of its opinion. In that regard, Goldman Sachs assumed with the
consent of the Board of Directors of the Company that the financial forecasts
provided to it and discussed with it with respect to the Company and Smitty's
after giving effect to the Merger, including, without limitation, the
projected cost savings and operating synergies resulting from the Merger, have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company and that such
forecasts will be realized in the amounts and at the times contemplated
thereby. In addition, Goldman Sachs was directed by the Board of Directors of
the Company to assume for purposes of its analysis that the Merger and the
Offer will not result in a change of control of the Company. In addition,
Goldman Sachs has not made an independent evaluation or appraisal of the
assets and liabilities of the Company or Smitty's or any of their respective
subsidiaries and Goldman Sachs has not been furnished with any such evaluation
or appraisal.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its written opinion to the Board of
Directors of the Company on January 29, 1996.
(a) Historical Stock Trading Analysis. Goldman Sachs reviewed the
historical trading prices and volumes for the Class B Common Stock. Goldman
Sachs also compared the monthly indexed stock price for the Class B Common
Stock against the S&P 500 Index and a Supermarket Composite Index for the
period beginning December 31, 1990 and ending December 30, 1995. The
Supermarket Composite Index consisted of the following companies:
Albertson's, Inc., American Stores Company, The Great Atlantic & Pacific
Tea Company, Inc., Hannaford Bros. Co., The Kroger Co., The Penn Traffic
Company, Quality Food Centers, Inc., Safeway Inc., The Stop & Shop
Companies, Inc., The Vons Companies, Inc., and Winn-Dixie Stores, Inc. This
comparison indicated that from the period beginning December 31, 1990
through November 30, 1991, the Class B Common Stock traded in line with the
Supermarket Composite Index and outperformed the S&P 500 Index and that
from the period beginning December 1, 1991 through December 30, 1995, the
Class B Common Stock was outperformed by both the S&P 500 Index and the
Supermarket Composite Index.
(b) Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses
of the financial impact of the Merger (without giving effect to the Offer).
Using earnings estimates for the Company and Smitty's prepared by the
management of the Company for the calendar years 1996, 1997 and 1998,
Goldman Sachs compared the earnings per share ("EPS") of the Common Stock,
on a standalone basis, to the EPS of the common stock of the combined
companies on a pro forma basis. Goldman Sachs performed this analysis under
the following five scenarios: $0, $15 million, $25 million, $35 million and
$40 million in synergies would be realized from the Merger. For purposes of
this analysis, Goldman Sachs assumed that (i) 3,038,888 shares of Class B
Common Stock would be issued in the Merger; (ii) 12.655% annual interest
rate on assumed indebtedness; (iii) a tax rate of 40%; and (iv) goodwill is
amortized over 40 years and is
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not tax deductible. Based on such analyses, the proposed transaction (i)
assuming synergies of $0 and $15 million, would be dilutive to the
stockholders of the Company on an estimated earnings per share basis in the
calendar years 1996, 1997 and 1998; (ii) assuming synergies of $25 million,
would be dilutive to the stockholders of the Company on an estimated
earnings per share basis in the calendar year 1996, and would be accretive
to the stockholders of the Company on an estimated earnings per share basis
in the calendar years 1997 and 1998; and (iii) assuming synergies of $35
million and $40 million, would be accretive to the stockholders of the
Company on an estimated earnings per share basis in the calendar years
1996, 1997 and 1998.
(c) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to the Company to corresponding
financial information, ratios and public market multiples for publicly
traded corporations that for purposes of analysis were divided into the
following three categories: (i) highly leveraged; (ii) multi-regional and
(iii) regional. The highly leveraged category consisted of the following
publicly traded corporations: Carr-Gottstein Foods Co., The Kroger Co., The
Penn Traffic Company, Safeway Inc. and The Stop & Shop Companies, Inc. (the
"Highly Leveraged Companies"). The multi-regional category consisted of the
following publicly traded corporations: Albertson's, Inc., American Stores
Company, The Great Atlantic & Pacific Tea Company, Inc. and Winn-Dixie
Stores, Inc. (the "Multi-Regional Companies"). The regional category
consisted of the following publicly traded corporations: Food Lion, Inc.,
Fred Meyer, Inc., Giant Food Inc., Hannaford Bros. Co., Quality Food
Centers, Inc., The Vons Companies, Inc. and Weis Markets, Inc. (the
"Regional Companies", and together with the Highly Leveraged Companies and
the Multi-Regional Companies, the "Selected Companies"). The Selected
Companies were chosen because they are publicly traded companies with
operations that for purposes of analysis may be considered similar to the
Company. Goldman Sachs calculated and compared various financial multiples
and ratios. The multiples of the Company were calculated using a price of
$28.75 per share of Class B Common Stock, the closing price of the Class B
Common Stock on the NYSE on January 22, 1996. For purposes of the following
analysis (except for Carr-Gottstein Foods Co. estimates), the estimates for
earnings before interest, taxes and depreciation ("EBITD") and estimates
for earnings were based on information provided by Goldman Sachs Investment
Research. Earnings per share estimates for Carr-Gottstein Foods Co. were
from Institutional Broker Estimate System ("IBES") and EBITD estimates were
from research reports and shares outstanding were from the most recent
publicly available information. IBES is a data service which monitors and
publishes a compilation of earnings estimates produced by selected research
analysts on companies of interest to investors.
With respect to the Selected Companies, Goldman Sachs considered the
enterprise value (i.e., market value of common equity plus projected debt
less cash) as a multiple of EBITD. Goldman Sachs' analyses of the Highly
Leveraged Companies indicated levered multiples of: (i) estimated 1995
EBITD, which ranged from a low of 6.0x to a high of 7.7x, with a mean of
6.7x and a median of 6.9x, as compared to 6.3x for the Company; (ii)
estimated 1996 EBITD, which ranged from a low of 5.0x to a high of 7.0x,
with a mean of 6.0x and a median of 6.2x, as compared to 5.9x for the
Company; and (iii) estimated 1997 EBITD, which ranged from a low of 4.6x to
a high of 5.9x, with a mean of 5.4x and a median of 5.5x, as compared to
5.5x for the Company. Goldman Sachs' analyses of the Multi-Regional
Companies indicated levered multiples of: (i) estimated 1995 EBITD, which
ranged from a low of 4.3x to a high of 8.8x, with a mean of 6.6x and a
median of 6.7x, as compared to 6.3x for the Company; (ii) estimated 1996
EBITD, which ranged from a low of 3.8x to a high of 8.3x, with a mean of
6.1x and a median of 6.1x, as compared to 5.9x for the Company; and (iii)
estimated 1997 EBITD, which ranged from a low of 4.5x to a high of 6.7x,
with a mean of 5.6x and a median of 5.6x, as compared to 5.5x for the
Company. Goldman Sachs' analyses of the Regional Companies indicated
levered multiples of: (i) estimated 1995 EBITD, which ranged from a low of
5.8x to a high of 7.9x, with a mean of 6.6x and a median of 6.3x, as
compared to 6.3x for the Company; (ii) estimated 1996 EBITD, which ranged
from a low of 4.7x to a high of 6.7x, with a mean of 5.8x and a median of
5.7x, as compared to 5.9x for the Company; and (iii) estimated 1997 EBITD,
which ranged from a low of 4.1x to a high of 6.2x, with a mean of 5.1x and
a median of 5.1x, as compared to 5.5x for the Company.
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Goldman Sachs also considered for the Selected Companies calendarized
price/earnings ratios. With respect to the Highly Leveraged Companies: (i)
estimated 1995 calendarized price/earnings ratios, ranged from a low of
10.0x to a high of 18.3x, with a mean of 14.6x and a median of 14.9x, as
compared to 17.2x for the Company; (ii) estimated 1996 calendarized
price/earnings ratios, ranged from a low of 11.9x to a high of 15.2x, with
a mean of 13.3x and a median of 12.7x, as compared to 15.5x for the
Company; and (iii) estimated 1997 calendarized price/earnings ratios,
ranged from a low of 6.8x to a high of 11.2x, with a mean of 9.6x and a
median of 10.1x, as compared to 13.7x for the Company. With respect to the
Multi-Regional Companies: (i) estimated 1995 calendarized price/earnings
ratios, ranged from a low of 12.0x to a high of 22.3x, with a mean of 17.7x
and a median of 18.3x, as compared to 17.2x for the Company; (ii) estimated
1996 calendarized price/earnings ratios, ranged from a low of 11.3x to a
high of 20.1x, with a mean of 15.2x and a median of 14.7x, as compared to
15.5x for the Company; and (iii) estimated 1997 calendarized price/earnings
ratios, ranged from a low of 10.0x to a high of 14.3x, with a mean of 11.7x
and a median of 10.7x, as compared to 13.7x for the Company. With respect
to the Regional Companies: (i) estimated 1995 calendarized price/earnings
ratios, ranged from a low of 15.2x to a high of 19.2x, with a mean of 16.7x
and a median of 15.5x, as compared to 17.2x for the Company; (ii) estimated
1996 calendarized price/earnings ratios, ranged from a low of 10.8x to a
high of 17.4x, with a mean of 13.9x and a median of 13.9x, as compared to
15.5x for the Company; and (iii) estimated 1997 calendarized price/earnings
ratios, ranged from a low of 8.3x to a high of 15.3x, with a mean of 12.2x
and a median of 12.0x, as compared to 13.7x for the Company.
(d) Discounted Cash Flow Analysis. Goldman Sachs performed a discounted
cash flow analysis of Smitty's based on projections prepared by the
management of the Company. Goldman Sachs calculated a net present value of
free cash flows for the years 1996 through 2005 using discount rates
(discounted back to January 1, 1996) ranging from 16.0% to 10.0%. Goldman
Sachs also calculated the Company's terminal values in the year 2005 based
on multiples of trailing earnings before interest, taxes, depreciation and
amortization ("EBITDA") ranging from 5.0x to 7.0x EBITDA. These terminal
values were then discounted to present value using discount rates from
16.0% to 10.0%. Assuming $15 million of annual synergies would be realized
starting in fiscal year 1997 from the Merger, the analysis indicated that
for discount rates ranging from 16.0% to 10.0% the enterprise value (i.e.,
market value of common equity plus projected debt less cash): (i) ranged
from approximately $167 million to approximately $247 million, assuming a
5.0x multiple of trailing EBITDA; (ii) ranged from approximately $180
million to approximately $268 million, assuming a 6.0x multiple of trailing
EBITDA; and (iii) ranged from approximately $193 million to approximately
$290 million, assuming a 7.0x multiple of trailing EBITDA. Goldman Sachs
calculated (using the same discount rates) that for each additional $5
million increment in synergies realized from the Merger the enterprise
value (i.e., market value of common equity plus projected debt less cash)
would increase in the following ranges: (i) from approximately $23 million
to approximately $31 million, assuming a 5.0x multiple of trailing EBITDA;
(ii) from approximately $24 million to approximately $34 million, assuming
a 6.0x multiple of trailing EBITDA; and (iii) from approximately $26
million to approximately $36 million, assuming a 7.0x multiple of trailing
EBITDA.
(e) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to selected transactions in the supermarket industry
since 1984 (the "Selected Transactions"). Such analysis indicated that for
the Selected Transactions levered aggregate consideration as a multiple of
latest twelve months EBITDA ranged from a low of approximately 3.9x to a
high of approximately 9.7x, as compared to the following multiples of
levered aggregate consideration to be received in the Merger (assuming
3,038,888 shares of Class B Common Stock would be issued in the Merger and
a post-Offer price of the Class B Common Stock of $20.00 per share): (i)
4.0x, (ii) 5.0x and (iii) 7.9x, assuming $25 million, $15 million and $0 in
synergies would be realized from the Merger, respectively. For purposes of
the multiples of levered aggregate consideration to be received in the
Merger, Goldman Sachs calculated such multiples based on EBITDA projections
by the management of the Company that treated the operations of Smitty's as
being merged with the Company.
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(f) Analysis at Various Prices. Goldman Sachs calculated various
financial multiples based upon a range of enterprise values (i.e., market
value of common equity plus projected debt less cash) derived from a range
of potential trading prices of the Class B Common Stock. In preparing such
analysis, Goldman Sachs assumed that 3,038,888 shares of Class B Common
Stock would be issued in the Merger and that, based on projections by the
management of Smitty's, as of March 31, 1996 Smitty's would have net debt
of approximately $146 million (i.e., $147.9 million of total debt less cash
of $2.4 million). This analysis indicated that for a range of potential
trading prices of the Class B Common Stock of $8.23, $16.45, $24.68,
$32.91, and $41.13, the estimated enterprise value would be approximately
$171 million, $196 million, $221 million, $246 million, and $271 million,
respectively. For a price of $8.23 per share of Class B Common Stock, the
multiples of enterprise value were as follows: (i) for sales ranging from
$530 million to $590 million, the corresponding multiples ranged from 0.32x
to 0.29x; (ii) for EBITDA ranging from $25 million to $60 million, the
corresponding multiples ranged from 6.8x to 2.8x and (iii) for EBIT ranging
from $15 million to $50 million, the corresponding multiples ranged from
11.4x to 3.4x. For a price of $16.45 per share of Class B Common Stock, the
multiples of enterprise value were as follows: (i) for sales ranging from
$530 million to $590 million, the corresponding multiples ranged from 0.37x
to 0.33x; (ii) for EBITDA ranging from $25 million to $60 million, the
corresponding multiples ranged from 7.8x to 3.3x and (iii) for EBIT ranging
from $15 million to $50 million, the corresponding multiples ranged from
13.0x to 3.9x. For a price of $24.68 per share of Class B Common Stock, the
multiples of enterprise value were as follows: (i) for sales ranging from
$530 million to $590 million, the corresponding multiples ranged from 0.42x
to 0.37x; (ii) for EBITDA ranging from $25 million to $60 million, the
corresponding multiples ranged from 8.8x to 3.7x and (iii) for EBIT ranging
from $15 million to $50 million, the corresponding multiples ranged from
14.7x to 4.4x. For a price of $32.91 per share of Class B Common Stock, the
multiples of enterprise value were as follows: (i) for sales ranging from
$530 million to $590 million, the corresponding multiples ranged from 0.46x
to 0.42x; (ii) for EBITDA ranging from $25 million to $60 million, the
corresponding multiples ranged from 9.8x to 4.1x and (iii) for EBIT ranging
from $15 million to $50 million, the corresponding multiples ranged from
16.4x to 4.9x. For a price of $41.13 per share of Class B Common Stock, the
multiples of enterprise value were as follows: (i) for sales ranging from
$530 million to $590 million, the corresponding multiples ranged from 0.51x
to 0.46x; (ii) for EBITDA ranging from $25 million to $60 million, the
corresponding multiples ranged from 10.8x to 4.5x and (iii) for EBIT
ranging from $15 million to $50 million, the corresponding multiples ranged
from 18.0x to 5.4x.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Goldman Sachs' opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses. No
company or transaction used in the above analyses as a comparison is identical
to the Company or Smitty's or the contemplated transaction. The analyses were
prepared for purposes of Goldman Sachs' providing its opinion to the Board of
Directors of the Company as to the fairness of the Exchange Ratio pursuant to
the Recapitalization Agreement to the Company and do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by such analyses. Because such analyses
are inherently subject to uncertainty, being based upon numerous factors or
events beyond the control of the parties or their respective advisors, none of
the Company, Smitty's, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those forecast.
As described above, Goldman Sachs' opinion to the Board of Directors of the
Company was one of many factors taken into consideration by the Board of
Directors of the Company in making its determination to approve the
Recapitalization Agreement. The foregoing summary does not purport to be a
complete description of the analysis performed by Goldman Sachs and is
qualified by reference to the written opinion of Goldman Sachs set forth in
Annex B hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings,
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competitive biddings, secondary distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate and other
purposes. The Company selected Goldman Sachs as its financial advisor because
it is a nationally recognized investment banking firm that has substantial
experience in transactions similar to the Merger. Goldman Sachs provides a
full range of financial, advisory and brokerage services and in the course of
its normal trading activities may from time to time effect transactions and
hold positions in the securities of the Company and/or Smitty's for its own
account and for the account of customers. As of January 29, 1996, Goldman
Sachs held for its own account a long position in the Class B Common Stock of
20,800 shares. Goldman Sachs will act as a co-manager in connection with the
public financing relating to the Offer and Goldman Sachs will act as dealer
managers in connection with the Offer.
Pursuant to a letter agreement dated January 10, 1996 (the "January
Engagement Letter"), the Company engaged Goldman Sachs to undertake a study to
enable it to render its opinion with respect to the fairness of the Merger.
Pursuant to the terms of the January Engagement Letter, the Company paid
Goldman Sachs $500,000 for rendering its opinion. In addition, pursuant to a
letter agreement dated December 20, 1995 (the "December Engagement Letter"),
the Company engaged Goldman Sachs to act as its financial advisor in its
discussions with Yucaipa concerning a possible transaction with the Company.
Pursuant to the terms of the December Engagement Letter, the Company has
agreed to pay Goldman Sachs upon consummation of the Merger a transaction fee
of 0.45% multiplied by the product of (i) the average of the last sales prices
of the Common Stock for the ten trading days ending five days prior to the
consummation of the Merger and (ii) the fully diluted shares outstanding of
the Company plus the principal amount of all indebtedness for borrowed money
as set forth on the most recent consolidated balance sheet of the Company
prior to the consummation of the Merger. Pursuant to the January Engagement
Letter and the December Engagement Letter, the Company has agreed to reimburse
Goldman Sachs for its reasonable out-of-pocket expenses, including attorney's
fees, and to indemnify Goldman Sachs against certain liabilities, including
certain liabilities under the federal securities laws.
CERTAIN INFORMATION PROVIDED
In connection with the negotiation of the Recapitalization Agreement, the
Company provided certain financial projections regarding its operations to
Smitty's and Yucaipa, as well as to Goldman Sachs. Smitty's also provided
certain financial projections regarding its operations to the Company and
Goldman Sachs. As a matter of course, the Company does not publicly disclose
projections as to future revenues, earnings or other financial information. In
addition, the referenced projections were not prepared with a view to public
disclosure or compliance with the published guidelines of the Commission
regarding projections, nor were they prepared in accordance with the
guidelines established by the American Institute of Certified Public
Accountants for preparation and presentation of financial projections. The
referenced projections were based upon a variety of estimates and assumptions
which involve judgments with respect to, among other things, future economic
and competitive conditions, financial market conditions and future business
decisions, which, though considered reasonable by the Company, may not be
realized, and are inherently subject to significant economic, competitive and
business uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company. While the Company believes that
the estimates and assumptions relating to the projections prepared by it are
reasonable, there can be no assurance that such projections will be realized,
and actual results may vary materially from those indicated in the
projections. The Company also makes no representation as to the reasonableness
of the estimates and assumptions used by Smitty's in preparing the projections
regarding Smitty's or the likelihood of those projections being realized.
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain directors and officers of the Company, Yucaipa and certain of their
affiliates and certain nominees have interests described herein that may
present them with potential conflicts of interest as a result of the
transactions contemplated by the Recapitalization Agreement. The Company's
Board of Directors was aware of such potential conflicts and considered them
in connection with the approval of the Recapitalization Agreement and the
transactions contemplated therein. See "--Reasons for the Transactions;
Recommendation of Board of Directors."
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Company's Stock Options; Board Membership. As described under "--Company's
Stock Options; Deferred Compensation Plans," if the Recapitalization is
consummated, the Company has agreed to offer employees who hold, immediately
prior to the Offer Closing Date, options to purchase Common Stock under the
Company's 1989 Stock Option Plan (the "Options") the opportunity to elect
either to: (i) receive on the Offer Closing Date cash payments for a portion
of, and the reduction of the exercise price for a portion of, the Company's
management stock options; or (ii) have all such employees' Options continue to
vest in accordance with the stated terms of the Options as in effect as of the
date of the Recapitalization Agreement. The Company has also agreed to use all
reasonable efforts to amend its existing deferred compensation agreements with
a number of its senior managers to provide for the full vesting of benefits
under such manager's deferred compensation agreement with the Company if such
manager is terminated without cause within two years of the Merger Closing
Date.
Effective as of the Closing Date, the Company has agreed in the
Recapitalization Agreement to use all reasonable efforts, subject to the
provisions of the Certificate of Incorporation and By-laws of the Company and
the approval of the Company's stockholders at the Stockholders' Meeting, to:
(i) cause the Company's Board of Directors to be reduced to seven directors
and have nominated and elected as directors two designees of Jeffrey Smith,
two designees of Yucaipa, one senior manager of the Company and two
independent directors; and(ii) cause the Company's Board of Directors to elect
Ronald Burkle as the Chief Executive Officer of the Company. Mr. Smith has
designated himself and Fred Smith as his designees, Yucaipa has designated Mr.
Burkle and Linda McLoughlin Figel as its designees, Allen Rowland, President
and Chief Operating Officer of the Company, has been nominated for election as
a director, and Bruce Karatz and Bertram R. Zweig have been nominated as
independent directors. In addition, pursuant to the Standstill Agreement, each
of the Smith Group and the Yucaipa Group have agreed to vote all shares of
stock of the Company beneficially owned by such Group in favor of the election
to the Company's Board of Directors of the designees designated by such other
Group. See "Certain Related Agreements--Standstill Agreement." For information
concerning the nominees for election to the Board of Directors, see "Proposal
No. 3--Election of Board of Directors" and "--Composition of Board of
Directors and Officers."
CEO's Severance Discussions. As described under "Executive Compensation--
Certain Transactions," the Company and Jeffrey Smith have had tentative
discussions regarding an arrangement to provide Mr. Smith with the use and
possible ownership of the Company airplane after the consummation of the
Recapitalization and Merger.
Directors' and Officers' Indemnification. The Recapitalization Agreement
provides that the Company will indemnify to the fullest extent permitted by
law each current and former director and officer of each of the Company,
Smitty's and their subsidiaries from any claims or other losses arising out of
any matter existing or occurring at or prior to the Closing Date. Subject to
certain conditions and exceptions, the Company will maintain in effect for at
least four years after the Closing Date the current policies of directors' and
officers' liability insurance maintained by the Company or Smitty's, as the
case may be. See "The Recapitalization Agreement--Additional Covenants."
Registration Rights Agreement; Yucaipa Agreements. On the Merger Closing
Date, the Company has agreed to enter into the Registration Rights Agreement
granting certain registration rights to each of the Smith Holder Group and the
Yucaipa Holder Group for the Registrable Securities (as defined in such
agreement) held by such Groups. See "Certain Related Agreements--Registration
Rights Agreement." In addition, if the Recapitalization is consummated, the
Company will: (i) enter into the Management Services Agreement and the Warrant
Agreement with Yucaipa; (ii) appoint Ronald Burkle as the Chief Executive
Officer of the Company; (iii) grant Yucaipa certain rights under the
Standstill Agreement, including the right to nominate up to two directors of
the Company; and (iv) pay to Yucaipa a fee in an amount equal to $15 million,
in each case in the manner described herein. See "Certain Related Agreements--
Standstill Agreement," "--Management Services Agreement," "--Warrant
Agreement" and "--Financing Arrangements by Yucaipa; Yucaipa Fee." The Company
has also recently entered into an agreement with Ralphs, a California
supermarket operator controlled by Yucaipa, for the sale or lease of certain
of the Company's properties to Ralphs in connection with the Company's
divestiture of its Southern California operations. See "The Company, Smitty's
and Yucaipa-- California Divestiture."
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THE OFFER
Commencement of the Offer. Concurrently with the mailing of this Proxy
Statement, the Company will commence the Offer to purchase 50% of the
outstanding shares of Common Stock (excluding shares issuable in the Merger)
at $36.00 in cash per share. The Company will make the Offer pursuant to an
offer to purchase (the "Offer to Purchase") that will be filed with the
Commission as part of an Issuer Tender Offer Statement on Schedule 13E-4 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Issuer Offer Statement on Schedule 13E-4 will contain the Offer to Purchase
and the related form of letter of transmittal and summary advertisement as
well as all other information and exhibits required to be included by law.
HOLDERS OF COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS. NEITHER THIS PROXY STATEMENT NOR THE PROXY INCLUDED HEREWITH
CONSTITUTES AN OFFER TO PURCHASE THE COMMON STOCK. THE OFFER WILL ONLY BE MADE
BY THE COMPANY PURSUANT TO THE OFFER TO PURCHASE IN THE MANNER DESCRIBED
THEREIN.
Conditions to the Offer. The obligation of the Company to consummate the
Offer will be subject to certain conditions, including the following: (a) the
Company's stockholders have validly tendered and not withdrawn prior to the
expiration date of the Offer at least 50% of the outstanding shares of Common
Stock; (b) the Company has obtained all of the financing needed by the
Company, together with other funds available, to purchase 50% of the Common
Stock, repay specified indebtedness of the Company and Smitty's, and pay
certain fees and expenses incurred in connection with the Recapitalization and
the other transactions contemplated by the Recapitalization Agreement; (c) all
of the conditions to the Merger (other than the consummation of the Offer)
have been satisfied or waived; (d) the Company has received from an
independent valuation firm an opinion as to the value of the Company's assets
and liabilities that, after giving effect to the consummation of the
transactions contemplated by the Recapitalization, permits the Company to
reasonably conclude that it will not have violated applicable fraudulent
conveyance laws as a result thereof and that the Company will not violate
provisions of Delaware law governing the purchase of its equity; (e) there are
no injunctions or other proceedings which challenge the making of the Offer or
any of the other transactions comprising part of the Recapitalization or
materially adversely affect the Company and its subsidiaries (including
Smitty's) (collectively, the "Combined Companies") taken as a whole; (f) no
catastrophic events with respect to the United States, the banking or
securities markets in the United States or the Common Stock have occurred; or
(g) no other event has occurred which may result in a material adverse change
to the Combined Companies. The Company has agreed in the Recapitalization
Agreement that so long as it has satisfied the financing condition described
in clause (b) above, if so requested by Yucaipa, the Company will waive the
condition referred to in clause (f) above.
Each member of the Smith Group has agreed in the Smith's Shareholder
Agreement to participate in the Offer and tender a sufficient number of its
shares of Common Stock to enable the Company to repurchase 50% of the
outstanding shares of Common Stock pursuant to the Offer. In addition,
directors and executive officers of the Company who have not executed the
Smith's Shareholder Agreement, who own approximately 7.6% of the outstanding
shares of Common Stock, have indicated that they intend to tender their shares
of Common Stock in the Offer. Because such stockholders own approximately 38%
of the outstanding shares of Common Stock, the minimum tender condition will
be satisfied if other stockholders tender shares of Common Stock representing
at least 12% of the outstanding Common Stock. See "Certain Related Agreements-
- -Smith's Shareholder Agreement."
Company's Purchase of Shares in the Offer. The Company will purchase in the
Offer 50% of the outstanding shares of Common Stock. If more than 50% of the
shares of outstanding Common Stock are validly tendered and not withdrawn, the
Company will purchase 50% of the outstanding shares on a pro rata basis
allocated among all of the validly tendered shares. Upon the Company's
acceptance of shares of Common Stock in the Offer, such shares will cease to
be outstanding for all purposes.
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THE MERGER
Effective Time. The Merger will be effective (the "Effective Time") upon the
filing of a certificate of merger (the "Certificate of Merger") with the
Secretary of State of the State of Delaware in accordance with the Delaware
law or at such later time as is specified in such Certificate of Merger. The
filing of the Certificate of Merger will occur on the Merger Closing Date. At
the Effective Time, the separate existence of Acquisition will cease, and
Smitty's will continue its corporate existence under Delaware law as a wholly
owned subsidiary of the Company (the "Surviving Corporation").
As of the Effective Time, by virtue of the Merger and without any action on
the part of the holders of Smitty's Common Stock or Acquisition's capital
stock, (i) each share of common stock of Acquisition will be converted into
one share of common stock, par value $.01 per share, of the Surviving
Corporation, (ii) each share of Smitty's Common Stock outstanding immediately
prior to the Effective Time (other than Smitty's Dissenting Shares or shares
to be cancelled as described in clause (iii) below), will be converted into
3.011803 shares of Class B Common Stock, and (iii) each share of Smitty's
Common Stock that is owned by Smitty's or by any subsidiary of Smitty's will
automatically be cancelled and retired and will cease to exist, and no
consideration will be delivered in exchange for such shares. The shares of
Class B Common Stock to be issued to Smitty's stockholders will not be
registered by the Company under the Securities Act and will be issued to such
stockholders as a private placement pursuant to available exemptions under the
Securities Act.
Conversion of Shares. As soon as practicable after the Effective Time, each
holder of an outstanding certificate or certificates which prior thereto
represented shares of Smitty's Common Stock will, upon surrender to the
Surviving Corporation duly endorsed as the Surviving Corporation may require,
be entitled to a certificate or certificates representing the number of full
shares of Class B Common Stock into which the number of shares of Smitty's
Common Stock previously represented by such certificate or certificates
surrendered has been converted pursuant to the Recapitalization Agreement.
Conditions to the Merger. The obligations of the Company and Smitty's to
consummate the Merger are subject to certain conditions, including the absence
of any injunction or other legal restraint or prohibition preventing the
consummation of the Merger or the transactions contemplated thereby. See "The
Recapitalization Agreement--Conditions to the Merger."
No Fractional Shares. No certificates or scrip representing fractional
shares of Class B Common Stock will be issued in connection with the Merger.
Each holder of shares of Smitty's Common Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of Class B Common Stock (after taking into account all shares of Smitty's
Common Stock delivered by such holder) will receive in lieu thereof a cash
payment (without interest) representing such holder's proportionate interest
in a share of Class B Common Stock which will be deemed to have a value equal
to the average closing price of the Class B Common Stock on the NYSE for the
five trading days following the Merger Closing Date.
Appraisal Rights. Under Delaware law, Smitty's stockholders are entitled to
appraisal rights in connection with the Merger. Yucaipa and certain Smitty's
stockholders, who in the aggregate own 70% of the outstanding shares of
Smitty's Common Stock, have entered into a Smitty's Stockholders' Agreement
pursuant to which such stockholders have agreed to waive all of their
appraisal rights under Delaware law. In addition, Smitty's and Yucaipa have
agreed in the Recapitalization Agreement to use their respective best efforts
to cause each of the Smitty's stockholders to enter into such an agreement.
Smitty's stockholders who do not deliver a Smitty's Stockholders' Agreement
and properly exercise their appraisal rights in respect of their shares of
Smitty's Common Stock (the "Smitty's Dissenting Shares"), will not have their
shares of Smitty's Common Stock converted into the Merger Consideration in the
manner described herein and will instead receive payments for such shares in
amounts and at the applicable times required by the provisions of Delaware
law.
The Company's stockholders are not entitled to any appraisal rights in
connection with the Recapitalization Agreement, the transactions contemplated
thereby or any of the other proposals to be voted upon at the Stockholders'
Meeting.
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Accounting Treatment. The Merger will be accounted for under the "purchase"
method of accounting as a purchase of Smitty's by the Company.
Resale of Class B Common Stock Following the Merger. The shares of Class B
Common Stock to be issued to the Smitty's stockholders in connection with the
Merger will not be registered under the Securities Act and will be "restricted
securities" for purposes of the Securities Act and the rules and regulations
promulgated thereunder. Holders of such shares will not be able to freely
transfer such shares, except in compliance with the Securities Act and such
rules and regulations. Affiliates of Yucaipa and other Smitty's stockholders
will receive registration rights with respect to their shares of Class B
Common Stock enabling such stockholders to cause the Company, subject to
certain conditions and exceptions, to register their shares of Class B Common
Stock under the Securities Act. See "Certain Related Agreements--Registration
Rights Agreement."
REPAYMENT OF SMITTY'S INDEBTEDNESS
In the Recapitalization Agreement, the Company has agreed that on the Merger
Closing Date it will assume, repay, or cause to be repaid all outstanding
principal and interest, and other amounts payable, under the Specified
Smitty's Indebtedness (as defined below). As a result, (i) Smitty's will (A)
offer to purchase all of the $29.025 million principal amount (accreted value
of approximately $18.4 million at December 30, 1995) of its 13 3/4% Senior
Discount Debentures due 2006 (the "Smitty's Debentures"), and (B) soliciting
consents from the holders of Smitty's Debentures to certain amendments to the
indenture under which the Smitty's Debentures were issued; and (ii) Smitty's
Super Valu will (A) offer to purchase all of the $50.0 million principal
amount of its 12 3/4% Senior Subordinated Notes due 2004 (the "Smitty Notes"),
and (B) soliciting consents from the holders of Smitty's Notes, to certain
amendments to the indenture under which the Smitty's Notes were issued. Such
offers to purchase Smitty's Debentures and Smitty's Notes and the related
consent solicitations are referred to as the "Smitty's Debt Offers."
Consummation of the Smitty's Debt Offers is subject to consummation of the
tender of, and receipt of consents from, a majority of the outstanding
aggregate principal amount of Smitty's Notes and a majority of the aggregate
principal amount at maturity of Smitty's Debentures, and offers to purchase
will be conditioned on the receipt of financing and certain other conditions.
The Offer and the Smitty's Debt Offers are expected to close concurrently with
the closing of the Merger and the financing transactions described below.
As used herein, "Specified Smitty's Indebtedness" means the collective
reference to the Smitty's Notes, the Smitty's Debentures and all indebtedness
under the Credit Agreement dated as of June 29, 1994 among Smitty's Super
Valu, Chase Manhattan and the other lenders party thereto. As of December 30,
1995, there was $103.3 million aggregate principal amount outstanding of
Specified Smitty's Indebtedness.
Although the Company believes that it will be able to successfully repay or
cause the repayment of the Specified Smitty's Indebtedness on terms reasonably
satisfactory to the Company, there can be no assurance that the Company will
in fact be able to do so.
REGULATORY APPROVALS
On March 5, 1996, the Federal Trade Commission and the Antitrust Division
granted early termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect
to the Merger effective immediately.
Except for approvals otherwise described in this Proxy Statement, the
Company is not aware of any other government or regulatory approvals required
for the consummation of the transactions contemplated by the Recapitalization
Agreement.
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COMPANY'S STOCK OPTIONS; DEFERRED COMPENSATION PLANS
In the Recapitalization Agreement, the Company has agreed to offer employees
who hold Options, immediately prior to the Offer Closing Date, the opportunity
to elect either to: (i) receive on the Offer Closing Date cash payments with
respect to half of the shares subject to the Options in an amount equal to (A)
the number of shares of Common Stock that would be received by such holder
upon exercise of one-half of such Options multiplied by $36.00 per share minus
(B) the aggregate exercise price of such Options, and, in consideration of
such payments, to execute amendments to each existing option agreement such
that the remaining half of the shares subject to the Options will not be
exercisable prior to the exercise date stated therein (without regard to the
transactions contemplated by the Recapitalization Agreement) and will have the
exercise price reduced from $19.00 to $15.00 per share of Common Stock; or
(ii) have all such employees' Options continue to vest in accordance with the
stated terms of the Options as in effect as of the date of the
Recapitalization Agreement. Assuming that all of the Company's employees who
hold Options make the election set forth in clause (i) above, the estimated
aggregate value of the Company's proposed treatment of the Options will be
approximately $16.9 million (comprised of approximately $13.7 million
representing the cash payment for half of the Options and $3.2 million
representing the exercise price reduction for the remaining Options). Of such
estimated aggregate value, approximately $252,000 will be for the account of
members of the Smith Group and approximately $5.2 million will be for the
account of the Company's other directors and executive officers who are not
members of the Smith Group but have indicated their intention to vote in favor
of the Recapitalization Agreement.
In addition, the Company has agreed to use all reasonable efforts to amend
its deferred compensation agreements in effect as of the date of the
Recapitalization Agreement with each of Frederick F. Urbanek, James A. Acton,
Richard C. Bylski, Larry R. McNeill, Kenneth A. White, Matthew G. Tezak, Paul
D. Tezak, James W. Hallsey, Michael C. Frei, Harry M. Moskal and Robert C.
Bolinder to provide that if within two years after the Closing Date the
Company terminates such officer's employment without cause (as such term will
be defined in such amendments to the reasonable satisfaction of such officers,
the Company and Yucaipa), all of such officer's unvested benefits under his
deferred compensation agreement will become immediately and fully vested.
FINANCING ARRANGEMENTS BY YUCAIPA; YUCAIPA FEE
Yucaipa has agreed in the Recapitalization Agreement to use all reasonable
efforts to consult with the Company concerning and, as appropriate, assist the
Company in arranging for the Company to enter into one or more Financing
Agreements, with terms and conditions which are consistent with the related
financing letters and are otherwise reasonably satisfactory to the Company.
See "Financing of the Recapitalization and Merger" for additional information
with respect to the Company's Financing Agreements.
The Recapitalization Agreement also provides that if the Offer is
consummated, the Company will pay to Yucaipa a fee of $15 million on the
Closing Date.
COMPOSITION OF BOARD OF DIRECTORS AND OFFICERS
Effective as of the Closing Date, the Company has agreed in the
Recapitalization Agreement to use all reasonable efforts, subject to the
provisions of the Certificate of Incorporation and By-laws of the Company and
the approval of the Company's stockholders at the Stockholders' Meeting, to:
(i) cause the Company's Board of Directors to be reduced to seven directors
and have nominated and elected as directors two designees of Jeffrey Smith,
two designees of Yucaipa, one senior manager of the Company and two
independent directors; and (ii) cause the Company's Board of Directors to
elect Ronald Burkle as the Chief Executive Officer of the Company. Mr. Smith
has designated himself and Fred Smith as his designees, Yucaipa has designated
Mr. Burkle and Linda McLoughlin Figel as its designees, Allen Rowland,
President and Chief Operating Officer of the Company, has been nominated for
election as a director, and Bruce Karatz and Bertram R. Zweig have been
nominated as independent directors. For information concerning the nominees
for election to the Board of Directors, see "Proposal No. 3--Election of Board
of Directors."
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DISCONTINUATION OF DIVIDEND
The Company intends to discontinue the payment of cash dividends on the
Common Stock following the Closing Date and the payment of future dividends
will be severely restricted by the terms of the Financing Agreements entered
into by the Company in connection with the Recapitalization and Merger. See
"Financing of the Recapitalization and Merger."
PURCHASE OF SERIES I PREFERRED STOCK
Prior to the Closing Date, the Company will purchase approximately 3,000,000
shares of Series I Preferred Stock from certain holders of such stock for
amounts and on terms reasonably acceptable to the Company and Smitty's. The
actual number of shares of Series I Preferred Stock which the Company elects
to purchase in connection with the consummation of the Recapitalization and
Merger may be increased or decreased by an amount that is not expected to have
a material adverse effect on the Company.
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THE RECAPITALIZATION AGREEMENT
The following is a brief summary of the material provisions of the
Recapitalization Agreement, which is attached as Annex A to this Proxy
Statement and is incorporated herein by reference. The description set forth
below of the terms of the Recapitalization Agreement is qualified in its
entirety by reference thereto.
THE OFFER AND MERGER
The Recapitalization Agreement provides among other things for: (i) the
Offer to be made by the Company as soon as practicable after the date of this
Proxy Statement for the purchase of 50% of the outstanding shares of Common
Stock (excluding shares issuable in the Merger) at $36.00 in cash per share;
and (ii) the Merger of Smitty's with Acquisition, a wholly owned subsidiary of
the Company, with Smitty's continuing as the Surviving Corporation and a
wholly owned subsidiary of the Company, subject in each case to certain terms
and conditions described herein. The consummation of the Offer and the Merger
will occur simultaneously, except in certain limited circumstances described
herein.
CONDITIONS TO THE MERGER
Company's Obligation to Close. The obligation of the Company and Acquisition
to effect the Merger will be subject to the fulfillment of the following
conditions on or prior to the Effective Time:
(a) The representations and warranties of Smitty's and Yucaipa contained
in the Recapitalization Agreement are true and correct in all material
respects as of the Merger Closing Date with the same effect as though such
representations and warranties had been made as of such date, except for
representations and warranties that speak as of a specific date other than
the Merger Closing Date (which need only be true and correct as of such
date).
(b) The covenants and agreements of Smitty's and Yucaipa to be performed
or complied with prior to the Merger Closing Date have been performed and
complied with in all material respects.
(c) The waiting period and any extension thereof under the HSR Act and
any other applicable federal or state antitrust or fair trade law has
expired. There (i) is not in effect a temporary restraining order or a
preliminary or permanent injunction or other order, decree or ruling by a
court or a governmental, regulatory or administrative agency or commission
which (A) restrains or prohibits the Merger or the consummation of any of
the other transactions contemplated by the Recapitalization Agreement, (B)
(1) prohibits or restricts the ownership or operation by the Company or any
of its subsidiaries of any portion of their or Smitty's business or assets
or (2) compels the Company or any of its subsidiaries to dispose of or hold
separate any portion of their or Smitty's business or assets which in
either case would be reasonably likely to have a material adverse effect on
the Company and its subsidiaries taken as a whole or on Smitty's and its
subsidiaries taken as a whole, (C) imposes any limitations on the ability
of the Company or any of its subsidiaries effectively to control in any
material respect the business and operations of Smitty's, or (D) is
otherwise reasonably likely to have a material adverse effect on the
Company and its subsidiaries taken as a whole, the value of Smitty's and
its subsidiaries taken as a whole, the consummation of the transactions
contemplated by the Recapitalization Agreement or on the Combined Companies
taken as a whole; or (ii) is not pending before any court or administrative
law judge or governmental, regulatory or administrative agency or
commission, any action or proceeding which seeks as a relief a result
described in clause (i) above; or (iii) has not been promulgated or enacted
by a governmental authority a statute, rule, regulation or executive order
which has an effect described in clause (i)(A), (B), (C) or (D) above.
(d) All approvals, consents, authorizations and waivers from governmental
and other regulatory agencies and other third parties disclosed to the
Recapitalization Agreement (including the expiration of any applicable
waiting period under any regulation or statute other than the HSR Act and
any other federal or state antitrust or fair trade law) have been obtained
which, either individually or in the aggregate, if not obtained prior to
the Merger Closing Date would have a material adverse effect on the Company
and its subsidiaries taken as a whole or on Smitty's and its subsidiaries
taken as a whole, or would adversely affect the validity or enforceability
of the Recapitalization Agreement or the transactions contemplated thereby.
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(e) The stockholders of the Company have approved the Recapitalization
Agreement and the other transactions contemplated by the Recapitalization
at the Stockholders' Meeting, provided that, if the Company terminates the
Recapitalization but not the Merger as described below under "--Termination
of Recapitalization," then this condition will automatically be deemed to
have been satisfied without any further action required by the Company.
(f) The Standstill Agreement is in full force and effect.
(g) The Offer has been consummated concurrently in accordance with its
terms, resulting in the purchase of 50% of the outstanding Common Stock by
the Company pursuant to the Offer, provided that, if the Company terminates
the Recapitalization but not the Merger as described below under "--
Termination of Recapitalization," then this condition will automatically be
deemed to have been satisfied without any further action required by the
Company.
Smitty's Obligation to Close. The obligation of Smitty's to effect the
Merger will be subject to the fulfillment of the following conditions on or
prior to the Effective Time:
(a) The representations and warranties of the Company and Acquisition
contained in the Recapitalization Agreement are true and correct in all
material respects as of the Merger Closing Date with the same effect as
though such representations and warranties had been made as of such date,
except for representations and warranties that speak as of a specific date
other than the Merger Closing Date (which need only be true and correct as
of such date).
(b) The covenants and agreements of the Company and Acquisition to be
performed or complied with prior to the Merger Closing Date have been
performed and complied with in all material respects.
(c) The waiting period and any extension thereof under the HSR Act and
any other applicable federal or state antitrust or fair trade law has
expired. There (i) is not in effect a temporary restraining order or a
preliminary or permanent injunction or other order, decree or ruling by a
court or a governmental, regulatory or administrative agency or commission
which (A) restrains or prohibits the Merger or the consummation of any of
the other transactions contemplated by the Recapitalization Agreement, (B)
(1) prohibits or restricts the ownership or operation by the Company or any
of its subsidiaries of any portion of their or Smitty's business or assets
or (2) compels the Company or any of its subsidiaries to dispose of or hold
separate any portion of their or Smitty's business or assets which in
either case would be reasonably likely to have a material adverse effect on
the Company and its subsidiaries taken as a whole or on Smitty's and its
subsidiaries taken as a whole, (C) imposes any limitations on the ability
of the Company or any of its subsidiaries effectively to control in any
material respect the business and operations of Smitty's, or (D) is
otherwise reasonably likely to have a material adverse effect on the
Smitty's stockholders, the value of the Merger Consideration, the
consummation of the transactions contemplated by the Recapitalization
Agreement or on the Combined Companies taken as a whole; or (ii) is not
pending before any court or administrative law judge or governmental,
regulatory or administrative agency or commission, any action or proceeding
which seeks as relief a result described in clause (i) above; or (iii) has
not been promulgated or enacted by a governmental authority a statute,
rule, regulation or executive order which has an effect described in clause
(i)(A) or (B) above.
(d) All approvals, consents, authorizations and waivers from governmental
and other regulatory agencies and other third parties disclosed in the
Recapitalization Agreement (including the expiration of any applicable
waiting period under any regulation or statute other than the HSR Act and
any other federal or state antitrust or fair trade law) have been obtained
which, either individually or in the aggregate, if not obtained prior to
the Merger Closing Date would have a material adverse effect on the
Combined Companies taken as a whole.
(e) The Registration Rights Agreement and, unless the Recapitalization
has been terminated, the Management Services Agreement and the Warrant
Agreement have been duly executed by the Company and are in full force and
effect.
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TERMINATION
The Recapitalization Agreement may be terminated at any time prior to the
Closing Date: (a) by mutual consent of the Company and Smitty's in a written
instrument; (b) by either the Company or Smitty's, if neither the Merger nor
the Offer has been consummated by July 30, 1996 (the "Termination Date"); or
(c) by the Company, if Smitty's or Yucaipa is in material breach of its
obligations under the Recapitalization Agreement, or by Smitty's, if the
Company or Acquisition is in material breach of its obligations under the
Recapitalization Agreement; provided that no party will be entitled to
terminate the Recapitalization Agreement by reason of clause (c) if it or any
of its affiliates is in material breach of its obligations under the
Recapitalization Agreement.
In the event of termination of the Recapitalization Agreement, the
Recapitalization Agreement will become void and no party will have any
liability or further obligation to any other party under the Recapitalization
Agreement or the transactions contemplated thereby, except as otherwise
provided in the Recapitalization Agreement.
TERMINATION OF RECAPITALIZATION
At any time prior to the Offer Closing Date, if in the exercise of its
fiduciary duties to the Company's stockholders under applicable law, the
Company's Board of Directors (i) determines that the termination of the
Recapitalization is required by reason of the Company's acceptance of an
Alternative Transaction, or (ii) withdraws or materially modifies or changes
its recommendation of the Recapitalization, the Company may terminate the
Company's obligation to consummate the Recapitalization. However, in such
event the Company will be obligated to consummate the Merger and the Company's
stockholders will not be required to approve the Recapitalization Agreement
and the transactions contemplated thereby. In addition, under such
circumstances, the Company will not approve and adopt an Amended and Restated
Certificate of Incorporation for the Company, including the classification of
the Board of Directors in the manner contemplated thereby.
The "Recapitalization" as defined in the Recapitalization Agreement refers
to: (i) the execution, delivery and receipt of the proceeds under the
Financing Agreements; (ii) the making and consummation of the Offer; (iii) the
execution and delivery of the Management Services Agreement; (iv) the
execution and delivery of, and the issuance of the warrants provided for
under, the Warrant Agreement; (v) the completion of certain transactions
contemplated by the Recapitalization Agreement regarding the composition of
the Company's Board of Directors, the election of Mr. Burkle as Chief
Executive Officer, the cash payment for a portion of, and the reduction of the
exercise price for a portion of, the Company's management stock options and
the amendment of the Company's deferred compensation agreements; and (vi) the
filing of the Amended and Restated Certificate of Incorporation for the
Company.
An "Alternative Transaction" as defined in the Recapitalization Agreement
means any tender or exchange offer involving the capital stock of the Company
or any subsidiary of the Company, any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the
business or assets of, the Company or any subsidiary of the Company, any
proposal or offer with respect to any recapitalization or restructuring with
respect to the Company or any subsidiary of the Company or any proposal or
offer with respect to any other transaction similar to any of the foregoing
with respect to the Company or any subsidiary of the Company, other than
pursuant to the transactions to be effected pursuant to the Recapitalization
Agreement.
AMENDMENT AND WAIVER
The Recapitalization Agreement may not be amended except by action of each
of the parties thereto set forth in a written instrument signed by each of the
parties thereto.
At any time prior to the Closing Date, any party to the Recapitalization
Agreement may (i) extend the time for the performance of any of the
obligations or other acts of any other party thereto; (ii) waive any
inaccuracies in the representations and warranties of any other party
contained therein or in any document delivered pursuant
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thereto; or (iii) waive compliance with any of the agreements of any other
party or with any conditions to its own obligations. No waiver of any of the
provisions of the Recapitalization Agreement will be deemed to constitute a
waiver of any other provision (whether or not similar), nor will such waiver
constitute a continuing waiver, unless otherwise expressly provided.
EXPENSES
The Recapitalization Agreement provides that if (i) the Recapitalization and
Merger are consummated, or (ii) the Merger is consummated but the
Recapitalization is terminated as described above under "--Termination of
Recapitalization", the fees and expenses of the Company, Yucaipa and Smitty's
in connection with the transactions contemplated thereby (including all
Financing Expenses (as defined below)) will be paid by the Company. In the
event that neither the Recapitalization nor the Merger are consummated, each
of the parties thereto will pay its own fees and expenses; provided, however,
that the Company will bear 65% of the Financing Expenses and Smitty's will
bear 35% of the Financing Expenses. Each of the Company and Smitty's will
indemnify and hold harmless the other party to the extent it pays any portion
of the Financing Expenses in excess of such percentages. "Financing Expenses"
means all fees, costs and expenses incurred by the Company in connection with
the Financing Agreements, including without limitation all fees, costs and
expenses: (i) identified in the related financing letters (including without
limitation the fees and expenses of counsel to the bank lenders), (ii) of
counsel to the Company and Smitty's for the allocable portion of such
counsel's time spent working on matters related to the Financing Agreements
and the Recapitalization, (iii) of the Company's independent certified public
accountants, and (iv) in connection with printing, engraving, messenger and
delivery services customarily incurred in financing transactions similar to
the Financing Agreements.
REPRESENTATIONS AND WARRANTIES
The Recapitalization Agreement contains customary representations and
warranties (subject to certain conditions and exceptions) of the Company
relating among other things to (a) corporate organization and similar
corporate matters; (b) the capital structure of the Company; (c)
authorization, execution, delivery, performance and enforceability of the
Recapitalization Agreement and the other related agreements; (d) absence of
certain material changes or events since the end of the last fiscal year of
the Company; (e) no material conflicts or violations with organizational
documents, applicable laws or material contracts or agreements and no material
consents or approvals; (f) the absence of material litigation; (g) compliance
with applicable laws; (h) the accuracy of documents filed with the Commission;
(i) retirement and other employee plans and matters relating to the Employee
Retirement Income Security Act of 1974, as amended; (j) filing of tax returns
and payment of taxes; (k) brokers' and finders' fees; and (l) the accuracy of
information supplied by the Company in connection with this Proxy Statement
and other documents to be publicly filed by the Company in connection with the
Offer and the Merger.
The Recapitalization Agreement also contains customary representations and
warranties of Smitty's, including representations and warranties that are
similar to those provided by the Company and in addition representations and
warranties relating to: (a) ownership of or valid leasehold interests in
Smitty's properties and stores; (b) material contracts; (c) labor relations;
and (d) insurance.
The Recapitalization Agreement further contains representations and
warranties of Yucaipa relating among other things to (a) due organization and
proper authorization; (b) ownership of Smitty's Common Stock; (c) no material
conflicts or violations and no material consents or approvals; and (d) no
agreements to sell or dispose of Smitty's Common Stock or any material portion
of Smitty's assets.
CONDUCT OF BUSINESS PENDING MERGER
Pursuant to the Recapitalization Agreement, the Company and Smitty's have
each agreed to carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as conducted prior to the
execution of the Recapitalization Agreement.
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The Company. In addition, the Company has agreed that until the Merger
Closing Date, neither the Company nor any of its subsidiaries will, except as
otherwise provided in the Recapitalization Agreement: (a)(i) amend its
Certificate of Incorporation or By-laws (other than amendments to defer the
redemption of the Series I Preferred Stock for up to five years), (ii) split,
combine or reclassify any of its outstanding equity securities or declare, set
aside or pay any dividend payable in cash, stock or property or make any other
distribution with respect to any of its equity securities, except regularly
scheduled dividends on its Common Stock consistent with past practice, or
(iii) redeem, purchase or otherwise acquire, directly or indirectly, any
shares of its equity securities (other than redemptions of Series I Preferred
Stock in accordance with the Company's certificate of incorporation); (b)(i)
issue or sell or agree to issue or sell any additional shares of, or options,
warrants or rights of any kind to acquire any shares of, its capital stock of
any class or series, (ii) enter into any contract or commitment out of the
ordinary course of its business to dispose of or acquire, or relating to the
disposition or acquisition of, a segment of its business, (iii) except in the
ordinary course of business, sell, pledge, dispose of or encumber any material
assets (including without limitation any indebtedness owed to it or any
material claims held by it), (iv) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other business
organization or division thereof or make any material investment, either by
purchase of stock or securities, contribution to capital, property transfer or
purchase of any material amount of property or assets, in any other individual
or entity, or (v) enter into any contract, commitment or arrangement with
respect to any of the foregoing; (c) adopt or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any employee or increase in any
manner the compensation or fringe benefits of any employee or pay any benefit
not required by any existing plan, arrangement or agreement; (d) incur any
material amount of indebtedness for borrowed money, or make any loans or
advances or capital contributions to any other person other than a wholly
owned subsidiary of the Company, or issue or sell any debt securities, other
than borrowings under existing lines of credit in the ordinary course of
business or acquire any debt instruments of others; (e) make or commit to make
any capital expenditures in excess of $1,000,000 in the aggregate, other than
expenditures for (i) routine maintenance and repair or (ii) pursuant to
existing contracts or commitments; (f) enter into or amend any contract for
the purchase of inventory which is not cancelable within 90 days without
penalty, cost or liability or any other contract in excess of $100,000 which
is not cancelable within 30 days without penalty, cost or liability; (g) grant
any severance or termination pay (other than pursuant to policies or
agreements in effect on the date of the Recapitalization Agreement) or
increase the benefits payable under its severance or termination pay policies
or agreements in effect on the date of the Recapitalization Agreement; and (h)
take or permit any action which would prevent the Merger from qualifying as a
reorganization under Section 368 of the Code. Notwithstanding the foregoing
provisions, if the Recapitalization has been terminated, the Company will not
be required to comply with the provisions referred to in clause (b) through
(h) above following the date of such termination.
Smitty's. Smitty's has agreed that, until the Merger Closing Date, Smitty's
will and will cause its subsidiaries to: (i) maintain reasonably comparable
advertising and promotional expenditures; (ii) maintain reasonably comparable
overall levels of inventory subject to seasonal variation and changes in sales
volume;(iii) maintain comparable insurance coverage at commercially reasonable
rates; (iv) pay amounts due to vendors consistent with past practices; and (v)
perform customary maintenance on its properties and provide for the security
of such properties in accordance with past practices.
In addition, Smitty's has agreed that until the Merger Closing Date, neither
Smitty's nor any of its subsidiaries will, except as otherwise provided in the
Recapitalization Agreement or as the Company may specifically consent in
writing, which consent will not be unreasonably withheld: (a) close any
facility, except as required by applicable law or in the event of casualty or
as a result of the expiration of any lease which after reasonable efforts is
not renewed; (b) enter into any new lease, lease termination agreement or
material amendment (excluding any extension or renewal of any lease in
accordance with past practices) of any agreement to lease such real property;
(c) sell, assign or sublease any facility or property; (d) (1) sell, assign or
sublease any fixtures and equipment or other material assets, the aggregate
sales prices and the annual rental payments of which are $100,000 or more in
the aggregate, other than in the ordinary course of business, or (2) enter
into any
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sale-leaseback transaction resulting in annual rental payments in excess of
$100,000, except for sale-leaseback transactions for fixtures and equipment in
the ordinary course of business consistent with past practice; (e) make any
capital expenditures in excess of $250,000 in the aggregate, other than
expenditures for routine maintenance and repair or pursuant to existing
contracts or commitments; (f) incur any material amount of indebtedness for
borrowed money, or make any loans or advances or capital contributions to any
other person other than a wholly owned subsidiary of Smitty's, or issue or
sell any debt securities, other than borrowings under existing lines of credit
in the ordinary course of business or acquire any debt instruments of others;
(g) make any transfer of assets from Smitty's or any of its subsidiaries to
any affiliate; (h) materially reduce any store operating hours except as
consistent with past practices as a result of security concerns, material
changes in sales volume or as required by law; (i) (1) amend its certificate
of incorporation or by-laws or the charter or by-laws of any of its
subsidiaries, (2) split, combine or reclassify the outstanding shares of its
capital stock or declare, set aside or pay any dividend payable in cash, stock
or property or make any other distribution with respect to such shares of
capital stock,(3) redeem, purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock, or (4) sell or pledge any stock
of any of its subsidiaries; (j) (1) issue or sell or agree to issue or sell
any additional shares of, or options, warrants or rights of any kind to
acquire any shares of, its capital stock of any class, (2) enter into any
contract or commitment out of the ordinary course of its business to dispose
of or acquire or relating to the disposition or acquisition of a segment of
its business, (3) except in the ordinary course of business, sell, pledge,
dispose of or encumber any material assets, (4) acquire any corporation,
partnership or other business organization or division thereof or make any
material investment, either by purchase of stock or securities, contribution
to capital, property transfer or purchase of any material amount of property
or assets, in any other person, or (5) enter into any agreement, commitment or
arrangement with respect to any of the foregoing;(k) fail to preserve intact
its business organization, or fail to keep available the services of its
present officers and key employees, and fail to preserve the good will of
customers and other persons having business relationships with it; (l) grant
any severance or termination pay (other than pursuant to policies or
agreements in effect on the date of the Recapitalization Agreement) or
increase the benefits payable under its severance or termination pay policies
or agreements in effect on the date of the Recapitalization Agreement; (m)
adopt or amend any bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
employee or increase in any manner the compensation or fringe benefits of any
employee or pay any benefit not required by any existing plan, arrangement or
agreement; (n) enter into or amend any contract for the purchase of inventory
which is not cancelable within 90 days without penalty, cost or liability or
any other contract in excess of $100,000 which is not cancelable within 30
days without penalty, cost or liability; (o) negotiate, enter into or modify
any agreement or agree to be bound by any agreement with any collective
bargaining agent relating to its business, except for agreements with respect
to routine employee grievance matters in the ordinary course of business; (p)
take or permit any action which would prevent the Merger from qualifying as a
reorganization under Section 368 of the Code; and (q) make any material change
in its tax or accounting policies or any material reclassification of assets
or liabilities.
ADDITIONAL COVENANTS
Further Assurances and Cooperation. Each of the parties to the
Recapitalization Agreement has agreed to use all reasonable efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by the Recapitalization Agreement
and to cooperate with each other in connection therewith (a) to obtain all
necessary waivers, consents and approvals from other parties to material loan
agreements, leases and other contracts (provided that Smitty's will not agree
to any substantial modification to any such agreement, lease or contract or to
any payment of funds in order to obtain such waiver, consent or approval
without the prior written consent of the Company), (b) to effect all necessary
registrations and filings, (c) to negotiate and enter into the Financing
Agreements on terms reasonably satisfactory to the Company and to satisfy all
conditions thereto, and (d) to fulfill all conditions to the Recapitalization
Agreement.
Certain Filings and Consents. Each party to the Recapitalization Agreement
has agreed that it will (a) as promptly as practicable make any required
filings and submissions under the HSR Act with respect to the
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Merger, (b) cooperate with each other in determining whether any other filings
are required to be made or consents, approvals, permits or authorizations are
required to be obtained under any other federal, state, local or foreign law
or regulation or whether any consents, approvals or waivers are required to be
obtained from other parties to loan agreements, leases or other contracts in
connection with the consummation of the transactions contemplated by the
Financing Agreements, the Offer, the Merger and the other transactions
contemplated by the Recapitalization Agreement, and (c) actively assist each
other in obtaining any consents, permits, authorizations, approvals or waivers
which are required. The parties have agreed to cooperate in connection with
reaching any understandings, undertakings or agreements involving the FTC, the
Department of Justice or any other governmental authority in connection with
the transactions contemplated by the Recapitalization Agreement. The Company
has agreed to use all reasonable efforts to resolve such objections, if any,
as may be asserted with respect to the transactions contemplated by the
Recapitalization Agreement under any applicable federal or state antitrust
laws; provided, however, that in no event will the Company be required in that
connection to (i) effect any divestitures of any material assets of the
Company, Smitty's or their respective subsidiaries, (ii) hold separate any
such material assets or (iii) agree to any material restrictions on the
operations
of the Company, Smitty's or their respective subsidiaries of any material
portion of the business or assets of the Company, Smitty's or their respective
subsidiaries.
Access to Information. Each party to the Recapitalization Agreement has
agreed that it will upon reasonable notice, afford the other parties and their
representatives, full access during normal business hours to all of its
officers, agents, properties, books, contracts, commitments and records
(including but not limited to tax returns) and during such period will furnish
promptly to such persons all information concerning its business, properties
and personnel as such persons may reasonably request.
Alternative Proposals. Each of the Company and Smitty's (each, a "Restricted
Party") have agreed not to, and to use their best efforts to ensure that their
respective officers, directors, employees, investment bankers, attorneys,
accountants and other agents do not, directly or indirectly: (i) initiate,
solicit or encourage, or take any action to facilitate the making of, any
offer or proposal which constitutes or is reasonably likely to lead to any
Alternative Transaction or an inquiry with respect thereto, or (ii) in the
event of an unsolicited Alternative Transaction for such Restricted Party or
any subsidiary or affiliate of such Restricted Party, engage in negotiations
or discussions with, or provide any information or data to, any corporation,
partnership, person or other entity or group relating to any Alternative
Transaction, except in the case of clause (ii) above to the extent that (x)
the Alternative Transaction is a bona fide written proposal submitted to the
Restricted Party's Board of Directors and (y) the Restricted Party's Board of
Directors determines, after having received the oral or written opinion of
outside legal counsel, that the failure to engage in such negotiations or
discussions or provide such information would result in a breach of the Board
of Directors' fiduciary duties under applicable law.
Pursuant to the Smith's Shareholder Agreement, the members of the Smith
Group have also agreed to refrain from soliciting anyone other than Smitty's
to purchase interests in the Company or transferring their shares of Company's
capital stock without consent from the Company and Smitty's. See "Certain
Related Agreements--Smith's Shareholder Agreement."
Pursuant to the Smitty's Stockholders' Agreement, each of the parties to
such agreement has agreed to refrain from soliciting anyone other than the
Company or Acquisition to purchase interests in Smitty's or transferring their
shares of Smitty's Common Stock without consent from the Company and Smitty's.
See "Certain Related Agreements--Smitty's Stockholders' Agreement."
Directors and Officers' Insurance and Indemnification. The Company has
agreed that after the Closing Date, with respect to each person who is or has
been a director or officer of the Company, any of its subsidiaries (including
Smitty's), or its successors and assigns, the Company will indemnify each such
person to the fullest extent permitted by law against any claim, liability,
loss, damage, judgment, fine, penalty, amount paid in settlement or
compromise, cost or expense, including reasonable fees and expenses of legal
counsel, arising out of any matter existing or occurring on or prior to the
Closing Date, whether commenced, asserted or claimed before or after the
Closing Date. The Company will maintain in effect for not less than four years
after the Closing Date, the current policies of directors' and officers'
liability insurance maintained by the Company or its
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subsidiaries on the date the Recapitalization Agreement was signed (provided
that the Company may substitute therefor policies having at least the same
coverage and containing terms and conditions which are no less advantageous to
the persons currently covered by such policies as insured) with respect to
matters existing or occurring prior to the Closing Date and the Company will
use its best efforts to prepay premiums with respect to the foregoing
insurance for the four-year period following the Closing Date; provided,
however, that if the aggregate annual premiums for such insurance during such
period exceed 200% of the per annum rate of the aggregate premium currently
paid by the Company or its subsidiaries for such insurance on the date the
Recapitalization Agreement was signed, then the Company will cause the
Surviving Corporation to provide the maximum coverage then available at an
annual premium equal to 200% of such rate.
CERTAIN RELATED AGREEMENTS
STANDSTILL AGREEMENT
On January 29, 1996, the Company, 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.
Standstill Provision; No Solicitation. The Yucaipa Group has agreed that for
a 10-year period ending on January 29, 2006, it will not acquire, offer to
acquire, agree to acquire, become the beneficial owner of, or obtain any
rights in respect of any Company Voting Securities (as defined below), by
purchase or otherwise, or take any action in furtherance thereof, if the
effect of such action would be to increase its aggregate beneficial ownership
of securities that are entitled to vote generally for the election of
directors (the "Company Voting Securities") above (x) 20% of the total number
of votes that could be cast at a stockholders' meeting of the Company (the
"Combined Voting Power") or (y) 25% of the total number of Company Voting
Securities outstanding. In addition, without the approval of a majority of the
Disinterested Directors (defined as directors of the Company who are not
employees or officers of the Company, are not serving as designees of the
Yucaipa Group, and are not associates of Yucaipa or its affiliates) and
subject to certain limited exceptions, no member of the Yucaipa Group will
during such 10-year period (i) submit any proposals to acquire a majority of
the Combined Voting Power of Company Voting Securities (a "Change of Control
Proposal"), (ii) directly or indirectly sell, transfer any beneficial interest
in, pledge, hypothecate or otherwise dispose of any Company Voting Securities
or any shares of Company Common Stock to be acquired from the Company pursuant
to the Warrant Agreement, other than to another member of the Yucaipa Group or
their respective affiliates in any transaction or series of transactions that
would result in a transfer of greater than 3% of the Combined Voting Power or
would result in any person having or having the right to acquire beneficial
ownership greater than 5% of the Combined Voting Power, (iii) solicit any
proxies, or assist any other person in any way in solicitation of proxies, or
submit any proposal for the vote of stockholders of the Company, or induce
another person to take any such actions with respect to the voting of any of
the Company Voting Securities, (iv) directly or indirectly solicit or induce
any person to bid for or acquire Company Voting Securities in excess of 5% of
the Combined Voting Power of Company Voting Securities, (v) engage in certain
affiliate transactions, or (vi) form, join in or in any other way participate
in any partnership, pooling agreement, syndicate, voting trust or other group
(other than the Yucaipa Group) with respect to Company Voting Securities.
Board Composition. In the Standstill Agreement the Company has agreed to use
its best efforts to cause to be elected to the Company's Board of Directors
two designees of the Smith Group, two designees of the Yucaipa Group, one
member of the senior management of the Company and two "independent directors"
(as required by the rules of the NYSE) who are also Disinterested Directors.
Board Nominees. Subject to the provisions of the Certificate of
Incorporation and By-laws of the Company and the approval of the Company's
stockholders, as long as the members of the Smith Group and the Yucaipa Group
and their respective affiliates each beneficially own at least 8% of the
outstanding shares of Common Stock, each such Group will have the right to
designate two directors of the Company, and so long as the
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members of the Smith Group and the Yucaipa Group and their respective
affiliates each beneficially own at least 5% of the outstanding shares of
Common Stock, each such Group will have the right to designate one director of
the Company. However, no individual who is an officer, director, partner, or
principal stockholder of any Significant Competitor (as defined in the
Management Services Agreement) of the Company or any of its subsidiaries will
serve as director. At any time when the Yucaipa Group and its affiliates or
the Smith Group and its affiliates no longer beneficially own at least 5% of
the outstanding shares of Common Stock, such Group will not have the right to
designate any director of the Company, such Group's rights with regard to the
voting of Company securities will terminate and such Group will cause its
designees to the Board of Directors to resign.
Jeffrey Smith and Fred Smith have been nominated to be directors of the
Company as designees of the Smith Group and Ronald Burkle and Linda McLoughlin
Figel have been nominated to be directors of the Company as designees of the
Yucaipa Group.
In addition, each of the Smith Group and the Yucaipa Group has agreed that
they each will, at any annual or special meeting of the stockholders at which
the directors of the Company are to be elected or in connection with a
solicitation of consents through which directors of the Company are to be
selected, to vote (or give a written consent with respect to) all of their
respective Company Voting Securities in favor of the election to the Company's
Board of Directors of the nominees designated by such other Group.
Termination; Amendment. The Standstill Agreement will terminate at any time
that the Yucaipa Group and its affiliates own less than 2% of the outstanding
shares of Common Stock. The Standstill Agreement may be amended or waived if
such amendment or waiver is in writing and executed by all parties thereto;
provided that any amendment or waiver requires the approval of a majority of
the Disinterested Directors of the Company.
MANAGEMENT SERVICES AGREEMENT
On the Closing Date, the Company will enter into the Management Services
Agreement with Yucaipa.
Term, Duties, Fees and Expenses. Yucaipa through its partners, employees or
other designated representatives or agents, will agree to provide, the Company
and its subsidiaries, subject to the supervision of the Board of Directors of
the Company, management consultation and advice regarding strategic planning
and development, budgeting, future financing plans, selection and retention of
management employees, integration strategy, legal and government affairs, and
such other similar management services as may be requested by the Board of
Directors from time to time for a term of five years. In return, the Company
will agree to pay Yucaipa an annual management fee of $1 million and will
reimburse Yucaipa for its reasonable out-of-pocket costs and expenses incurred
in connection with the performance of its obligations under the Management
Services Agreement. In the event that during the term of the Management
Services Agreement, the Board of Directors requests Yucaipa to provide (i)
consulting services in connection with any proposed acquisition or divestiture
transaction or any debt or equity financing, or (ii) any other services not
otherwise covered by such agreement, Yucaipa will be entitled to such
additional compensation for such services as may be agreed upon by Yucaipa and
the Company (and approved by a majority of the Company's disinterested
directors). Under certain circumstances, the Company may prepay a portion of
the management fees payable to Yucaipa under the Management Services Agreement
through the issuance of up to 100,000 shares of the Company's Class B Common
Stock at its then current fair market value.
The Company will also agree that in connection with Yucaipa's services,
Ronald Burkle will have the right to serve as the Chief Executive Officer of
the Company during the term of the Management Services Agreement and will have
all the rights and responsibilities customarily vested in a chief executive
officer. Mr. Burkle will not receive any compensation for serving in such
capacity beyond the compensation paid to Yucaipa under the Management Services
Agreement.
Termination Rights. The Management Services Agreement will be terminable by
the Company (i) at any time following the determination of the Company's Board
of Directors to effect such termination by giving Yucaipa at least 90 days'
notice, (ii) if Yucaipa fails to reasonably perform any material covenant,
agreement,
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term or provision of the Management Services Agreement following 60 days'
notice, (iii) at any time if, in connection with its performance under the
Management Services Agreement, Yucaipa or any of its partners commits any act
of fraud, dishonesty or gross negligence which is materially detrimental to
the business or reputation of the Company, (iv) if certain payment or other
defaults occur under the Company's New Credit Facility or new senior or senior
subordinated debt indentures entered into in connection with the
Recapitalization or any other material debt agreements entered into to
refinance such indebtedness, subject to certain cure periods and conditions,
(v) if Yucaipa or any member of the Yucaipa Group is in material default under
the Standstill Agreement which default will not have been cured or waived
within 90 days' notice, or (vi) if at any time, Yucaipa or any member of the
Yucaipa Group owns less than 50% of the shares of Class B Common Stock of the
Company originally acquired by them in the Merger.
The Management Services Agreement will be terminable by Yucaipa (i) if the
Company fails to reasonably perform any material covenant, agreement, term or
provisions of the Management Services Agreement following 60 days' notice,
(ii) if the Company fails to make any payment due to Yucaipa under the
Management Services Agreement, if such payments are not made in full within 30
days' notice, (iii) if the designees of the Yucaipa Group cease to be members
of the Board of Directors as required by the Standstill Agreement, (iv) if the
Board of Directors fails to approve certain material recommendations by
Yucaipa or if the Board of Directors otherwise takes action which materially
interferes with the ability of Yucaipa to perform its responsibilities under
the Management Services Agreement and such interference will continue for 60
days after notice is given, or (v) if Ronald Burkle ceases to be Chief
Executive Officer of the Company, other than by reason of his death,
disability, termination due to his commission of any act of fraud, dishonesty
or gross negligence which is materially detrimental to the business or
reputation of the Company, or any felony conviction or voluntary resignation.
The Management Services Agreement may be terminated, at the election of
either party if during its term there is a "change of control" of the Company
(defined generally as either (i) the acquisition of beneficial ownership by
any person or group of any securities of the Company such that, as a result
such group or person beneficially owns 40% or more of the Company's then
outstanding voting securities entitled to vote on a regular basis for a
majority of the Board of Directors of the Company, or (ii) the sale of
substantially all of the Company's assets or capital stock in a transaction or
series of related transactions (excluding any transaction with Yucaipa or any
of its partners or affiliates or any member of the Smith Group).
Termination Fee. In the event the Management Services Agreement is
terminated by (i) the Company without cause, (ii) Yucaipa for cause in
accordance with such agreement, or (iii) pursuant to a change of control of
the Company, the Company has agreed to pay or cause to be paid to Yucaipa a
termination payment equal to the greater of (x) $5 million and (y) twice the
total consulting fees that would have been earned by Yucaipa during the
remaining term of the Management Services Agreement as if such agreement had
not been terminated, without regard to sums previously paid by the Company to
Yucaipa as part of its management fee.
Non-Compete. Yucaipa will agree that during the term of the Management
Services Agreement it will not, without the Company's prior written consent,
provide management or consulting services to, or make equity investments over
5% in, any business which operates in excess of five retail supermarket stores
in any market in which the Company operates in excess of five retail
supermarket stores (a "Significant Competitor"), subject to certain exceptions
and conditions.
Indemnification. The Company will agree to indemnify and hold harmless
Yucaipa and each of its affiliates, partners, officers, agents and the
employees from and against all losses, claims, damages, liabilities or
expenses (collectively, "losses") resulting from any claim, lawsuit or other
proceeding by any person to which any of them may become subject which is
related to or arising out of the performance of the services to be provided
under the Management Services Agreement or the Recapitalization Agreement,
including all reasonable out-of-pocket expenses, unless such losses result
from (i) Yucaipa's or such party's gross negligence or willful misconduct or
any intentional, material breach of the Management Services Agreement, or (ii)
any settlement effected without the written consent of the Company, which
consent will not be unreasonably withheld.
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WARRANT AGREEMENT
On the Closing Date, the Company and Yucaipa will enter into the Warrant
Agreement, pursuant to which the Company will issue Yucaipa the Warrants to
purchase shares of the Company's newly designated Class C Common Stock
("Warrant Shares") representing 10% of the aggregate shares of the outstanding
Common Stock on a fully diluted basis upon consummation of the
Recapitalization and Merger. The Warrants will be exercisable at an initial
exercise price of $50 per share, subject to adjustment (the "Exercise Price").
Half of the Warrants will be exercisable for a term of four years and the
remaining half of the Warrants will be exercisable for a term of five years,
subject in each case to extension for a five-year period if the market price
of the Class B Common Stock is at least equal to the Exercise Price for a
period of not less than 60 consecutive trading days.
Each holder of Warrants, upon exercise, may elect to either receive from the
Company, (i) the number of fully paid and nonassessable Warrant Shares which
the holder may be entitled to receive upon exercise of the Warrants and
payment of the Exercise Price then in effect, or (ii) the number of Warrant
Shares, on a net basis, equal to the number of Warrant Shares otherwise
issuable upon exercise of the Warrants less the number of Warrant Shares
having a fair market value equal to the aggregate Exercise Price that would
have been paid by the holder of the Warrants, without the exchange of any
funds.
The Class C Common Stock to be issued to Yucaipa upon exercise of its
Warrants will be identical in all respects to the Class B Common Stock, except
that the Class C Common Stock will be non-voting. Shares of Class C Common
Stock will be convertible into an equal number of shares of Class B Common
Stock following the transfer of such shares by Yucaipa to any person or entity
not affiliated with Yucaipa.
The number of shares issued upon exercise of the Warrants and the Exercise
Price are subject to adjustment under standard anti-dilution provisions.
REGISTRATION RIGHTS AGREEMENT
On the Closing Date, the Company will enter into the Registration Rights
Agreement with Jeffrey Smith, Yucaipa, and certain holders of Smitty's Common
Stock who will receive Class B Common Stock in the Merger. Under the terms of
the Registration Rights Agreement, each of (i) the holders of a majority of
the Registrable Securities (as defined in such agreement) held by Yucaipa, its
affiliates and the holders of Smitty's Common Stock receiving Class B Common
Stock in the Merger, and transferees of the foregoing, as a group (the
"Yucaipa Holder Group"), and (ii) the holders of a majority of the Registrable
Securities held by Jeffrey Smith and his affiliates, and transferees of the
foregoing, as a group (the "Smith Holder Group") will each be entitled to two
written requests (the "Demand Registrations") upon the Company for the
registration under the Securities Act of all or a part (but not less than 20%
of the original number of the Registrable Securities held by the persons
making such demand) of their shares of Registrable Securities. Such Demand
Registration may at the election of the demanding holders be in the form of an
underwritten offering and such demanding holders shall be entitled to select
the underwriters. The Company will only be required to effect one Demand
Registration during any six-month period.
If at any time the Company proposes to file a registration statement under
the Securities Act with respect to an offering by the Company for its own
account or for the account of any holders of any class of common equity
securities (other than (i) a registration statement on Form S-4 or S-8 or (ii)
a registration statement filed in connection with a Demand Registration or a
Shelf Registration (as defined herein) or (iii) a registration statement filed
in connection with an offer of securities solely to existing security holders
of the Company), the Company will give notice of such proposed filing to the
holders of Registrable Securities who are parties to the Registration Rights
Agreement and their transferees and will offer such holders the opportunity to
register their Registrable Securities as part of such registration (the
"Piggyback Registrations").
Upon the request of holders of a majority of the Registrable Securities held
by the Yucaipa Holder Group at any time prior to the second anniversary of the
Closing Date, the Company will cause to be filed with the
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Commission as promptly as practicable after such request, but in no event
later than 60 days thereafter, a shelf registration statement (the "Shelf
Registration") which will provide for resales of Registrable Securities held
by members of the Yucaipa Holder Group who have provided information required
by the Registration Rights Agreement. The Company will agree to use its best
efforts to have such Shelf Registration declared effective and to keep such
Shelf Registration continuously effective, for a period of at least 120 days
following the date on which it becomes effective under the Securities Act,
provided that if the Registrable Securities received by the Yucaipa Holder
Group are "restricted securities" within the meaning of Rule 144 of the
Securities Act, any Shelf Registration Statement shall be kept continuously
effective until such Registrable Securities are no longer subject to the two-
year holding period imposed under Rule 144(c). However, in no event will the
Company be required to keep the Shelf Registration in effect after the second
anniversary of the Closing Date.
In the event the Company is not able to fulfill all requests for the
Registrable Securities to be included in any Demand Registration or Piggyback
Registration, the Company has granted certain priority rights to the Smith
Holder Group which enables the Smith Holder Group to have its Registrable
Securities up to certain designated amounts included in such registrations
before the Yucaipa Holder Group is entitled to include its Registrable
Securities in such registrations.
The Company will be obligated to pay its expenses associated with
registration of the Registrable Securities, regardless of whether any
registration statement required by the Registration Rights Agreement becomes
effective, and the reasonable fees and disbursements of the holders of
Registrable Securities of not more than one counsel chosen by the holders of a
majority in number of such Registrable Securities. In addition, the Company
will provide customary securities law indemnification to any party who
participates in any registration effected under the Registration Rights
Agreement.
The Registration Rights Agreement will terminate upon the earlier to occur
of (i) the mutual agreement by the parties thereto, (ii) with respect to any
holder, such holder ceasing to own any Registrable Securities, (iii) the
fifteenth anniversary of the Closing Date, or (iv) with respect to the Yucaipa
Holder Group or the Smith Holder Group, the date on which the aggregate number
of shares of outstanding Registrable Securities held by the Yucaipa Holder
Group or the Smith Holder Group, as applicable, is less than 20%, of the
Registrable Securities Shares originally held by the Yucaipa Holder Group or
the Smith Holder Group, as applicable, immediately following the consummation
of the Merger and the Recapitalization (except with respect to any holder that
is an "affiliate" of the Company within the meaning of the Securities Act).
SMITH'S SHAREHOLDER AGREEMENT
On January 29, 1996, each member of the Smith Group entered into the Smith's
Shareholder Agreement with Smitty's and Yucaipa. The Smith Group consists of
Jeffrey Smith, Chairman and Chief Executive Officer of the Company, Richard
Smith, Vice Chairman of the Company, Fred Smith, a director of the Company
(all of whom are brothers), and Ida W. Smith (their mother) and certain other
related stockholders, along with certain family trusts controlled by those
persons.
In the Smith's Shareholder Agreement, members of the Smith Group, who are
holders of approximately 30.4% and 64.5% of the outstanding shares of Common
Stock and Series I Preferred Stock respectively (and approximately 62.1% of
the aggregate number of votes eligible to be cast at the Stockholders'
Meeting), have agreed to: (i) take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied; (ii) in the event the Company commences an
Offer, tender a sufficient number of their shares of Common Stock to enable
the Company to repurchase 50% of the outstanding shares of Common Stock
pursuant to the Offer; (iii) refrain from soliciting, from any person other
than Smitty's, offers relating to any acquisition or purchase of all, or any
material portion of the assets of, or any equity interest in the Company; (iv)
refrain from transferring their shares of the Company's capital stock without
consent from the Company or Smitty's, and (v) vote their shares in favor of
the Merger.
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SMITTY'S STOCKHOLDERS' AGREEMENT
On January 29, 1996, the Smitty's Principal Stockholders entered into, and
Smitty's and Yucaipa have agreed to use their best efforts to cause each other
stockholder of Smitty's to enter into, an agreement (the "Smitty's
Stockholders' Agreement") with the Company. As of the date of this Proxy
Statement, holders of 70% of the outstanding shares of Smitty's Common Stock
have entered into the Smitty's Stockholders' Agreement.
Each Smitty's stockholder who is a party to the Smitty's Stockholders'
Agreement has agreed to (i) take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied, (ii) vote its shares in favor of the
Recapitalization Agreement and the transactions contemplated thereby,
including the Merger, at the meeting of the stockholders called for such
purpose (and every adjournment thereof) or by written action without a meeting
or otherwise, (iii) refrain from directly or indirectly soliciting offers from
any person other than the Company or Acquisition relating to any acquisition
or purchase of all or any material portion of the assets of, or any equity
interest in Smitty's or its subsidiaries or transferring their shares of the
Company's capital stock, without the consent of the Company and Smitty's. On
April 10, 1996, holders of a majority of the outstanding shares of Smitty's
Common Stock approved the Recapitalization Agreement and the transactions
contemplated thereby, including the Merger, by delivering to Smitty's a
written consent in accordance with Smitty's bylaws and Delaware law.
FINANCING OF THE RECAPITALIZATION AND MERGER
GENERAL
To consummate the Recapitalization and the Merger, the Company will require
approximately $1,393.2 million (net of California Disposition proceeds of
$68.0 million) of financing to repay certain outstanding indebtedness of the
Company and Smitty's, purchase Common Stock in the Offer, purchase shares of
Series I Preferred Stock, purchase management stock options, and pay related
fees and expenses. The Company plans to obtain the necessary funds by (a)
borrowings of approximately $818.2 million aggregate principal amount under
the New Credit Facility to be provided by a syndicate of banks led by Bankers
Trust and Chase Manhattan; (b) the issuance of up to $150 million of New
Senior Notes; (c) the issuance of up to $350 million of New Senior
Subordinated Notes; and (d) the issuance of New Preferred Stock by the Company
for gross proceeds of $75 million. In addition, the Company will assume
approximately $43.6 million (at December 30, 1995) of existing indebtedness of
Smitty's upon consummation of the Merger.
Yucaipa has caused to be delivered to the Company and the Company has
accepted, a commitment letter dated January 25, 1996 (as amended, the "Bank
Commitment Letter") from Bankers Trust and Chase Manhattan, as arrangers,
providing for borrowings by the Company in an aggregate principal amount of
approximately $995 million under the New Credit Facility. Yucaipa has also
caused to be delivered to the Company and the Company has accepted a letter
dated January 25, 1996 (the "Highly Confident Letter") from BT Securities
Corporation, CS First Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman, Sachs & Co. and Chase Securities Inc. (the
"Investment Banks") relating to the issuance and sale by the Company of the
following new securities (the "New Securities"): (i) $150 million aggregate
principal amount of New Senior Notes, (ii) $350 million aggregate principal
amount of New Senior Subordinated Notes, and (iii) $75 million in gross
proceeds of New Preferred Stock. In the Highly Confident Letter, the
Investment Banks stated that, based upon their understanding of the
transactions and financing summarized in such letter and current market
conditions and subject to the conditions contained in such letter, they are
highly confident of their ability to sell or place the New Securities.
Yucaipa has agreed in the Recapitalization Agreement to use all reasonable
efforts to consult with the Company concerning and, as appropriate, assist the
Company in arranging for the Company to enter into one or more agreements
providing for financing (collectively the "Financing Agreements"), with terms
and conditions which are consistent with the related Commitment Letter and the
Highly Confident Letter and are otherwise reasonably satisfactory to the
Company.
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The following table illustrates the pro forma sources and uses of funds to
consummate the Recapitalization and Merger, assuming such transactions are
consummated as of December 30, 1995. Although management believes the pro
forma amounts estimated below are reasonable under the circumstances, actual
sources and uses may differ from those set forth below:
SOURCES AND USES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SOURCES USES
------- ----
<S> <C> <C> <C>
New Term Loans (a)...... $ 805.0 Purchase Company's Common Stock............... $ 451.3
New Revolving Facility
(a)(b)................. 13.2 Purchase Company's Management Options......... 13.7
New Senior Notes........ 150.0 Purchase Company's Series I Preferred Stock... 1.0
New Senior Subordinated
Notes.................. 350.0 Repay Company's Mortgage Notes................ 257.1
New Preferred Stock..... 75.0 Repay Company's Unsecured Notes............... 410.0
California Disposition Repay Company's Revolving Credit Facility (b).
Proceeds (b)........... 68.0 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 and Chase
Manhattan for the New Credit Facility that will provide up to $805 million
aggregate principal amount of term loans ("New Term Loans") and a $190
million revolving credit facility (the "New Revolving Facility") which
will be available for working capital requirements and general corporate
purposes. A portion of the New Revolving Facility may be used to support
letters of credit, approximately $28 million of which are anticipated to
be issued upon consummation of the Recapitalization and Merger. The New
Credit Facility will be guaranteed by all subsidiaries of the Company,
including Smitty's. See "Financing of the Recapitalization and Merger--New
Credit Facility."
(b) The information presented is derived from the Unaudited Pro Forma
Financial Statements contained elsewhere herein which reflect (i) the
receipt of cash proceeds from the California Divestiture and the assumed
receipt of cash proceeds from the sale of the Company's remaining
California assets, pursuant to the California Asset Disposition, in an
amount equal to the net book value of such assets after giving effect to
the California Asset Disposition Charge; and (ii) the application of a
portion of the cash proceeds therefrom to repay (A) the Company's
historical revolving credit balances at December 30, 1995 ($68.0 million)
and (B) $13.2 million of indebtedness anticipated to be incurred under the
New Revolving Facility in connection with the consummation of the
Recapitalization and Merger. Subsequent to December 30, 1995, the Company
has received net cash proceeds from the California Divestiture of $67.2
million and expects to receive an additional $10.6 million in proceeds
from the California Divestiture shortly after the Closing Date. The
Company intends to use such additional proceeds to reduce revolving loans
under the New Revolving Facility. The Company has not entered into any
contracts relating to the California Asset Disposition and there can be no
assurance as to the timing or the amount of net proceeds, if any, which
the Company will actually receive from such disposition. See "Unaudited
Pro Forma Combined Financial Statements" and "The Company, Smitty's and
Yucaipa--The California Divestiture."
(c) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's Debt
Tenders. If all of the outstanding Smitty's Notes and Smitty's Debentures
are not tendered and accepted for purchase, the Company anticipates that
it would reduce other borrowings.
On or prior to the Offer Closing Date, the Company has agreed in the
Recapitalization Agreement to effect the borrowings and issuances and sales,
as applicable, under the Financing Agreements, the funds of which will be used
upon expiration of the Offer together with other funds available to: (i)
purchase 50% of its outstanding Common Stock for approximately $451.3 million;
(ii) repay approximately $667.1 million (pro forma at December 30, 1995)
million of indebtedness of the Company and $103.3 million (pro forma at
December 30, 1995) indebtedness of Smitty's; (iii) purchase up to half of the
outstanding management stock options of the Company for approximately $13.7
million; and (iv) purchase approximately $1 million of its outstanding Series
I Preferred Stock.
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In connection therewith, the Company has agreed to use all reasonable
efforts to negotiate, prepare and enter into definitive Financing Agreements
to provide for the financing on terms and conditions which are consistent with
those contained in the Commitment Letter and the Highly Confident Letter and
are otherwise reasonably satisfactory to the Company. The Company,
Acquisition, Smitty's and Yucaipa agreed in the Recapitalization Agreement to
use all reasonable efforts to satisfy, on or before the Offer Closing Date,
all requirements of the Financing Agreements which are conditions to closing
the transactions constituting the Financings. The Company has agreed to
prepare registration statements for filling pursuant to the Securities Act in
order to permit the public offering of the New Securities and to take such
other actions in connection therewith as may be appropriate to complete such
public offerings.
NEW CREDIT FACILITY
In connection with the Recapitalization and Merger, the Company will enter
into the New Credit Facility with a syndicate of financial institutions for
whom Bankers Trust will act as administrative agent. The Company has accepted
the Bank Commitment Letter from Bankers Trust and Chase Manhattan pursuant to
which Bankers Trust and Chase Manhattan, as arrangers (the "Arrangers"), have
agreed, subject to certain conditions, to provide the Company $995 million of
financing under the New Credit Facility. The following is a summary of the
anticipated material terms and conditions of the New Credit Facility. This
summary does not purport to be a complete description of the New Credit
Facility and is subject to the detailed provisions of the loan agreement (the
"Loan Agreement") and various related documents to be negotiated and entered
into in connection with the New Credit Facility.
General. The New Credit Facility will provide for (i) the New Term Loans in
the aggregate amount of $805 million, comprised of the $325 million Tranche A
Loans, the $160 million Tranche B Loans, the $160 million Tranche C Loans and
the $160 million Tranche D Loans; and (ii) the $190 million New Revolving
Facility under which working capital loans may be made and commercial or
standby letters of credit in the maximum aggregate amount to be agreed upon
among the Company and the Arrangers, under which approximately $28 million of
letters of credit are expected to be issued upon consummation of the
Recapitalization and Merger.
Proceeds of the New Term Loans and loans under the New Revolving Facility on
the Closing Date, together with proceeds from the New Securities and the
California Divestiture will be used to fund the cash requirements for the
Offer, refinance certain existing indebtedness of the Company and Smitty's,
purchase a portion of the Series I Preferred Stock, purchase certain of the
Company's management options and pay various refinancing premium fees,
expenses and other costs associated with the Recapitalization and Merger. The
New Revolving Facility will be available to provide for the working capital
requirements and general corporate purposes of the Company and to issue
commercial and standby letters of credit.
Interest Rate; Fees. Borrowings under (i) the New Revolving Facility and the
Tranche A Loans will bear interest at a rate equal to the Base Rate (as
defined in the Loan Agreement) plus 1.50% per annum or the reserve adjusted
Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.75% per annum; (ii)
the Tranche B Loans will bear interest at the Base Rate plus 2.00% per annum
or the reserve adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the
Tranche C Loans will bear interest at the Base Rate plus 2.50% per annum or
the reserve adjusted Euro-Dollar Rate plus 3.75% per annum; and (iv) the
Tranche D Loans will bear interest at the Base Rate plus 2.75% per annum or
the 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
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Rate plus an additional 2.00% per annum. The Company will pay the issuing bank
a fee of 0.25% per annum on each standby letter of credit and each commercial
letter of credit and will pay the lenders under the New Credit Facility a fee
equal to the margin on Eurodollar Rate loans under the Revolving Credit
Facility (the "Eurodollar Margin") for standby letters of credit and a fee
equal to the Eurodollar Margin minus 1.00% per annum for commercial letters of
credit. Each of these fees will be calculated based on the amount available to
be drawn under a letter of credit. In addition, the Company will pay a
commitment fee of 0.50% per annum on the unused portions of the New Revolving
Facility and for purposes of calculating this fee, loans under the swingline
facility shall not be deemed to be outstanding. The New Credit Facility will
require the Company to enter into hedging agreements to limit its exposure to
increases in interest rates for a period of not less than two years after the
Closing Date. The New Credit Facility may be prepaid in whole or in part
without premium or penalty.
Amortization; Prepayments. The Tranche A Loans will mature six and one-
quarter years after the Closing and will be subject to amortization,
commencing on the nine month anniversary of the Closing in the amount of $7.5
million, and thereafter commencing on the first anniversary of the Closing on
a quarterly basis in aggregate annual amounts of $45 million in the second
year, $55 million in the third year, $65 million in the fourth year, $65
million in the fifth year, $60 million in the sixth year, and $13.75 million
on the sixth anniversary of the Closing and in the first quarter of the
seventh year. The Tranche B Loan will mature seven and one-half years after
the Closing and will be subject to amortization on a quarterly basis in
aggregate annual amounts of $1.6 million for the first six years and in the
seventh year payable in installments of $4.0 million in the first quarter and
$18 million in each of the last three quarters and in the eighth year payable
in installments of $22.7 million in the first quarter and $69.7 million in the
second quarter. The Tranche C Loans will mature eight and one-half years after
the Closing and will be subject to amortization on a quarterly basis in
aggregate annual amounts of $1.6 million for the first seven years and in the
eighth year payable in installments of $0.4 million in each of the first two
quarters and $25 million in each of the last two quarters and in the ninth
year payable in installments of $25 million in the first quarter and $73
million in the second quarter. The Tranche D Loans will mature nine and one-
quarter years after the Closing and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.6 million for the first
eight years and in the ninth year payable in installments of $0.4 million in
each of the first two quarters, $29 million in the third quarter and $32
million in the last quarter and in the tenth year in an installment of $85.4
million in the first quarter. The New Revolving Facility will mature on the
same date as the Tranche A Loans. The Company will be required to reduce loans
outstanding under the New Revolving Facility to $85 million for a period of
not less than 30 consecutive days during the first 12-month period following
the Closing and to $75 million for a period of not less than 30 consecutive
days during each consecutive 12-month period thereafter. The Company will be
required to make certain prepayments, subject to certain exceptions, on the
New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in
the Loan Agreement) and with the proceeds from certain asset sales, issuances
of debt and equity securities and any pension plan reversion. Such prepayments
will be allocated pro rata between the Tranche A Loans, Tranche B Loans,
Tranche C Loans and the Tranche D Loans and to scheduled amortization payments
of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche
D Loans pro rata, provided that at the election of the Company mandatory
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
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their reasonable economic efforts to provide the lenders with a first priority
lien on all unencumbered leasehold interests of the Company and its
subsidiaries.
Covenants. The obligation of the lenders under the New Credit Facility to
advance funds is subject to the satisfaction of certain conditions customary
in agreements of this type. In addition, the Company will be subject to
certain customary affirmative and negative covenants in the New Credit
Facility, including, without limitation, covenants that restrict, subject to
specified exceptions, (i) the incurrence of additional indebtedness and other
obligations, (ii) mergers and acquisitions, (iii) asset sales, (iv) the
granting of liens, (v) prepayment or repurchase of other indebtedness, (vi)
engaging in transactions with affiliates, (vii) capital expenditures, (vii)
the making of investments, (ix) dividends and other payments with respect to
equity interests, or (x) rental payments. In addition, the New Credit Facility
will require that the Company maintain certain specified financial covenants,
including a minimum fixed charge coverage, a minimum operating cash flow, a
maximum ratio of total debt to operating cash flow and a minimum net worth.
Events of Default. The New Credit Facility also provides for customary
events of default. The occurrence of any of such events of default could
result in acceleration of the Company's obligations under the New Credit
Facility and foreclosure on the collateral securing such obligations, which
could have material adverse results to holders of the New Securities.
NEW SENIOR NOTES AND NEW SENIOR SUBORDINATED NOTES
As part of the financing required to consummate the Recapitalization and the
Merger, it is anticipated that the Company will offer $150 million aggregate
principal amount of its New Senior Notes and $350 million aggregate principal
amount of its New Senior Subordinated Notes (the New Senior Subordinated
Notes, together with the New Senior Notes, the "New Notes"). The New Senior
Notes will mature on the tenth anniversary of the Closing Date and the New
Senior Subordinated Notes will mature on the eleventh anniversary of the
Closing Date. The New Notes will bear interest, payable semiannually, at the
respective rates to be determined by the Company and the Investment Banks
prior to the consummation of the Recapitalization. The following is a summary
of the anticipated material terms and conditions of the New Notes. This
summary does not purport to be a complete description of the New Notes and is
subject to the detailed provisions of the indentures and various related
documents to be negotiated and entered into in connection with the New Notes.
It is anticipated that the New Notes will be redeemable, in whole or in
part, at the option of the Company, at any time on and after the fifth
anniversary of their issue date at the respective redemption prices,
representing a premium that declines ratably to par over an anticipated four-
year period, to be determined by the Company and the Investment Banks. In
addition, it is expected that on or prior to the third anniversary of the
issue date of the New Notes, the Company may, at its option, use the net cash
proceeds of public equity offerings to redeem up to an aggregate of 35% of the
New Senior Notes originally issued and up to 35% of the New Senior
Subordinated Notes originally issued, at the respective redemption prices to
be determined by the Company and the Investment Banks. Upon a change of
control of the Company (as defined in the indentures pursuant to which the New
Notes will be issued), each holder of New Notes will have the right to require
the Company to repurchase such holder's New Notes at a price equal to 101% of
their principal amount plus accrued and unpaid interest to the date of
repurchase.
The New Senior Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with other senior unsecured
indebtedness of the Company. However, the New Senior Notes will be effectively
subordinated to all secured indebtedness of the Company, including
indebtedness under the New Credit Facility. The New Senior Notes will rank
senior in right of payment to all subordinated indebtedness of the Company,
including the New Senior Subordinated Notes. The New Senior Subordinated Notes
will be senior subordinated unsecured obligations of the Company and will be
subordinated in right of payment to all Senior Indebtedness (as defined in the
indentures) of the Company, including the Company's obligations under the New
Credit Facility and the New Senior Notes.
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It is anticipated that the indenture pursuant to which the New Senior Notes
will be issued will contain certain covenants, including, but not limited to,
covenants with respect to the following: (i) limitation on restricted
payments; (ii) limitation on incurrences of additional indebtedness; (iii)
limitation on liens; (iv) limitation on asset sales; (v) limitation on
dividend and other payment restrictions affecting subsidiaries;
(vi) limitation on transactions with affiliates; (vii) limitation on
subsidiary assets and indebtedness; (viii) limitation on mergers and certain
other transactions; and (ix) limitation on preferred stock of subsidiaries. It
is anticipated that the indenture pursuant to which the New Senior
Subordinated Notes will be issued will contain the foregoing covenants, as
well as a prohibition on incurrence of any indebtedness subordinated to any
other indebtedness but senior to the New Senior Subordinated Notes.
NEW PREFERRED STOCK
As part of the financing required to consummate the Recapitalization and the
Merger, it is anticipated that the Company will offer $75 million liquidation
preference of New Preferred Stock. The following is a summary of the
anticipated material terms and conditions of the New Preferred Stock. This
summary does not purport to be a complete description of the New Preferred
Stock and is subject to the detailed provisions of the certificate of
designation and various related documents to be entered into in connection
with the New Preferred Stock.
The New Preferred Stock will be nonvoting, except as otherwise required by
law and except in certain circumstances described herein, including (i)
amending certain rights of the holders of the New Preferred Stock and (ii) the
issuance of any class of equity securities that ranks on parity with or senior
to the New Preferred Stock. In addition, if the Company (i) fails to pay
dividends in respect of more than six quarters in the aggregate (or if after
the fifth anniversary of the issue date such dividends are not paid in cash),
(ii) fails to discharge any redemption obligation, or (iii) fails to make a
required change of control offer, holders of a majority of the outstanding
shares of New Preferred Stock, voting as a class, will be entitled to elect
two additional members to the Company's Board of Directors.
The New Preferred Stock will, with respect to dividend rights, rights on
liquidation and winding-up and dissolution of the Company, rank, subject to
certain conditions, (i) senior to (a) all classes of Common Stock of the
Company and (b) each other class of capital stock or series of preferred stock
issued by the Company after the issuance of the New Preferred Stock the terms
of which specifically provide that such class or series will rank junior to
the New Preferred Stock or junior or on parity with any class of Common Stock
or which do not specify their rank, (ii) on parity with the Series I Preferred
Stock and each other class of capital stock or series of preferred stock
issued by the Company after the issuance of the New Preferred Stock the terms
of which specifically provide that such class or series will rank on parity
with the New Preferred Stock as to dividend distributions and distributions
upon liquidation, winding-up and dissolution of the Company and (iii) junior
to each other class of capital stock or other series of preferred stock issued
by the Company after the issuance of the New Preferred Stock the terms of
which specifically provide that such series will rank senior to the New
Preferred Stock.
Dividends on the New Preferred Stock will accrue from the date of issuance
and will be payable quarterly at a rate per annum to be determined by the
Company and the Investment Banks. The Company, at its option, may pay
dividends on any dividend payment date occurring on or before the fifth
anniversary of the issue date by adding an amount equal to such dividends to
the then effective liquidation preference of the New Preferred Stock. The New
Credit Facility and the indentures governing the Notes will restrict the
payment of cash dividends on the New Preferred Stock.
The New Preferred Stock will be redeemable, subject to certain conditions,
at the option of the Company, in whole at any time or in part from time to
time on or after the fifth anniversary of the issue date at the redemption
prices to be determined by the Company and the Investment Banks, plus, without
duplication, an amount equal to accrued and unpaid dividends to the date of
redemption. In addition, on or prior to the third anniversary of the Closing
Date, the Company may, at its option and subject to certain conditions, use
the net cash proceeds of one or more public equity offerings to redeem up to
an aggregate of 35% of the shares of New
74
<PAGE>
Preferred Stock originally issued at a redemption price to be determined by
the Company and the Investment Banks, plus, without duplication, an amount
equal to accrued and unpaid dividends to the date of redemption. The Company
will be required, subject to certain conditions, to redeem all of the shares
of New Preferred Stock outstanding on the twelfth anniversary of the Closing
Date at a redemption price equal to 100% of the then effective liquidation
preference thereof, plus, without duplication, an amount equal to accrued and
unpaid dividends to the date of redemption.
Upon the occurrence of a change of control (as defined), the Company will,
subject to certain conditions, offer to purchase all outstanding shares of New
Preferred Stock at a price equal to 101% of the then effective liquidation
preference thereof, plus, without duplication, an amount equal to accrued and
unpaid dividends to the date of purchase. The New Credit Facility and the
indentures governing the New Notes will limit the ability of the Company to
make an offer to purchase the New Preferred Stock in the event of a change of
control.
NEW EXCHANGE DEBENTURES
Subject to certain conditions, the New Preferred Stock will be exchangeable
in whole, but not in part, at the option of the Company, on any dividend
payment date, for the Company's Subordinated Exchange Debentures due 2008
(including any such securities paid in lieu of cash interest, as described
herein, the "New Exchange Debentures"). Interest on the New Exchange
Debentures will be payable at a rate to be determined by the Company and the
Investment Banks and will accrue from the date of exchange thereof. Interest
on the New Exchange Debentures will be payable semi-annually in cash or, at
the option of the Company, on or prior to the fifth anniversary of the Closing
Date, in additional New Exchange Debentures, commencing on the first such date
after the exchange of the New Preferred Stock for the New Exchange Debentures.
The New Exchange Debentures will mature on the twelfth anniversary of the
Closing Date and are, subject to certain conditions, redeemable, at the option
of the Company, in whole or in part, on or after the fifth anniversary of the
Closing Date, at the redemption prices to be determined by the Company and the
Investment Banks, plus accrued and unpaid interest to the date of redemption.
In addition, on or prior to the third anniversary of the Closing Date, the
Company may, at its option and subject to certain conditions, use the net cash
proceeds of one or more public equity offerings to redeem up to an aggregate
of 35% of the principal amount of the New Exchange Debentures originally
issued.
The New Exchange Debentures will be subordinated to all existing and future
Senior Indebtedness of the Company, including the New Credit Facility and the
New Notes. In addition, the New Exchange Debentures will be effectively
subordinated to all existing and future liabilities, including indebtedness,
of the subsidiaries of the Company.
In the event of a change of control, the Company will, subject to certain
conditions, offer to purchase all outstanding New Exchange Debentures at a
purchase price of 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. The New Credit Facility and the
indentures governing the New Notes will limit the Company's ability to make an
offer to purchase the New Exchange Debentures in the event of a change of
control.
75
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated pro forma capitalization of
the Company at December 30, 1995, giving effect to the Recapitalization and
Merger and the California Disposition. This table should be read in
conjunction with the Unaudited Pro Forma Combined Financial Statements and the
historical consolidated financial statements of the Company and Smitty's, and
the related notes thereto, included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
PRO FORMA
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Current portion of long-term debt:
New Term Loans...................................... $ 12.3
Other indebtedness.................................. 1.4
--------
Total current portion of long-term debt........... $ 13.7
========
Long-term debt:
New Term Loans (a).................................. $ 792.7
New Revolving Facility (a)(b)....................... --
New Senior Notes.................................... 150.0
New Senior Subordinated Notes....................... 350.0
Other indebtedness.................................. 50.4
--------
Total long-term debt.............................. 1,343.1
========
Redeemable preferred stock, $.01 par value............ 3.3
New Preferred Stock, $.01 par value................... 71.2
Common stockholders' equity:
Common Stock, $.01 par value (c).................... 0.2
Additional paid-in capital.......................... 164.9
Retained earnings (deficit)......................... (286.7)
--------
Total common stockholders' equity (deficit)....... (121.6)
--------
Total capitalization............................ $1,296.0
========
</TABLE>
- --------
(a) The Company has obtained a commitment from Bankers Trust and Chase
Manhattan for the New Credit Facility that will provide up to $805 million
aggregate principal amount of New Term Loans and a $190 million New
Revolving Facility. A portion of the New Revolving facility may be used to
support letters of credit, approximately $28 million of which are
anticipated to be issued at the Closing Date. The New Credit Facility will
be guaranteed by all subsidiaries of the Company, including Smitty's. See
"Financing of the Recapitalization and Merger--New Credit Facility."
(b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's Debt
Offer. If all of the outstanding Smitty's Notes and Smitty's Debentures
are not tendered and accepted for purchase, the Company anticipates that
it would reduce other borrowings. As a result of the assumed application
of a portion of the proceeds of the California Disposition to eliminate
pro forma revolving credit balances, pro forma total debt at December 30,
1995 does not reflect anticipated revolving credit facility borrowings
upon consummation of the 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 Recapitalization and Merger, or (ii) Warrants to
purchase shares of Class C Common Stock of the Company (to be issued at an
initial exercise price of $50.00 per share) to be issued to Yucaipa upon
consummation of the Recapitalization and Merger. See "Certain Related
Agreements."
76
<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
Recapitalization and Merger and the application of the proceeds therefrom and
(b) the California Disposition and the retention of the anticipated proceeds
therefrom as cash (after reducing pro forma revolving credit balances to
zero), in each case as if such transactions occurred on January 1, 1995, with
respect to the pro forma operating and other data, and as of December 30,
1995, with respect to the pro forma balance sheet data. Such pro forma
information: (i) eliminates the results of operations of the Company's
California retail division and the related assets and liabilities as of and
for the 52 weeks ended December 30, 1995 from the Company's results of
operations and balance sheet data as of and for the 52 weeks ended December
30, 1995 and (ii) combines the operating results and balance sheet data of the
Company, pro forma for the elimination of the Company's California retail
division and the related assets and liabilities, as of and for the 52 weeks
ended December 30, 1995 with the operating results and balance sheet data of
Smitty's as of and 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, the Company entered into agreements to sell
or lease 16 stores and related equipment and three non-operating properties.
These transactions are expected to generate net cash proceeds of
$77.8 million, of which $67.2 million has been received to date. The remaining
18 stores in California have been closed. In connection with the California
Divestiture, the Company recorded the $140 million (pre-tax) California
Divestiture Charge for the year ended December 30, 1995 and classified the
assets to be leased or sold as assets held for sale. The California
Divestiture Charge reflected (i) a provision for anticipated future lease
obligations, (ii) the anticipated cost to the Company of closing its
California stores and distribution center (primarily termination payments and
inventory), and (iii) certain asset valuation adjustments. The asset valuation
adjustments included in the California Divestiture Charge reflected the
reduction in net realizable values for the equipment in all of the Company's
California stores and distribution center and for the land and buildings
associated only with those properties being sold or leased. Pursuant to the
California Asset Disposition, following the consummation of the
Recapitalization and Merger 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 Recapitalization and Merger are based upon currently available information
and upon certain assumptions that management believes are reasonable. The
statement of results of operations used to derive the adjustments to eliminate
the California results of operations differs from a complete statement in that
allocations for interest expense and certain services provided by the Company,
including, but not limited to, portions of legal assistance, employee benefits
administration, treasury, accounting, auditing, tax functions and real estate,
have not been made. The Merger will be accounted for by the Company as a
purchase of Smitty's by the Company and Smitty's assets and liabilities will
be recorded at their estimated fair market values at the date of the Merger.
The adjustments included in the Unaudited Pro Forma Combined Financial
Statements represent the Company's preliminary determination of these
adjustments based upon available information. There can be no assurance that
the actual adjustments will not differ significantly from the pro forma
adjustments reflected in the pro forma financial information. The Unaudited
Pro Forma Combined Financial Statements are not necessarily indicative of
either
77
<PAGE>
future results of operations or results that might have been achieved if the
foregoing transactions had been consummated as of the indicated dates. The
Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical consolidated financial statements of the
Company and Smitty's, together with the related notes thereto, included
elsewhere in this Proxy Statement.
The Unaudited Pro Forma Combined Financial Statements do not reflect (i) any
of the net annual cost savings which management believes are achievable by the
end of the third full year of operations following the Merger, or (ii) the
anticipated costs to be incurred in connection with the integration of
operations in Arizona. The Unaudited Pro Forma Combined Statement of
Operations included herein does not reflect the California Divestiture Charge,
the California Asset Disposition Charge, an extraordinary loss on
extinguishment of debt, an anticipated charge relating to certain costs
expected to be incurred by the Company in connection with the Merger, a
potential severance payment to the Chairman and Chief Executive Officer of the
Company or compensation expense in connection with the repurchase of certain
management stock options as part of the Recapitalization. See Note (g) to the
Unaudited Pro Forma Combined Statement of Operations.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------------------------
JANUARY 14,
DECEMBER 30, 1995 1996 PRO FORMA
---------------------------------------- ------------ ADJUSTMENTS FOR COMBINED FOR
PRO FORMA CALIFORNIA CALIFORNIA
THE COMPANY ADJUSTMENTS FOR COMPANY FOR SMITTY'S DISPOSITION AND DISPOSITION
(HISTORICAL) CALIFORNIA CALIFORNIA (HISTORICAL) RECAPITALIZATION AND RECAPITALIZATION
(AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) AND MERGER AND MERGER
------------ --------------- ----------- ------------ ---------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 3,083.7 $(674.6) $ 2,409.1 $ 584.3 $ $ 2,993.4
Cost of goods sold...... 2,386.7 (516.2) 1,870.5 419.6 2,290.1
---------- ------- ---------- --------- ------ ----------
697.0 (158.4) 538.6 164.7 703.3
Expenses:
Operating, selling and
administrative....... 461.4 (145.6) 315.8 136.0 0.4 (b) 452.2
Depreciation and
amortization......... 105.0 (27.0) 78.0 12.3 (1.3)(c)
0.9 (d) 89.9
Restructuring charges. 140.0 (140.0)
Interest.............. 60.0 60.0 18.4 53.9 (e) 132.3
Amortization of debt
issuance costs....... 0.4 0.4 1.0 8.4 (e) 9.8
---------- ------- ---------- --------- ------ ----------
Income (loss) before
income taxes........... (69.8) 154.2 84.4 (3.0) (62.3) 19.1
Income tax expense
(benefit).............. (29.3) 63.2 33.9 (0.7) (23.9)(f) 9.3
---------- ------- ---------- --------- ------ ----------
Net income (loss) (g)... (40.5) 91.0 50.5 (2.3) (38.4) 9.8
Preferred stock
accretion.............. (10.2)(h) (10.2)
---------- ------- ---------- --------- ------ ----------
Income (loss) applicable
to common shares....... $ (40.5) $ 91.0 $ 50.5 $ (2.3) $(48.6) $ (0.4)
========== ======= ========== ========= ====== ==========
Net income (loss) per
common
share (g).............. $ (1.62) $ 2.00 $ (2.30) $ (0.03)(i)
========== ========== ========= ==========
Weighted average common
shares outstanding..... 25,031,000 25,284,000 1,001,000 15,530,000
========== ========== ========= ==========
Ratio of earnings to
fixed charges (j)(k)... -- 2.27x 1.13x
Ratio of earnings to
fixed charges and
preferred stock
dividends (j)(k)....... -- 2.27x 1.01x
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
78
<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 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 Recapitalization and
Merger.
(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 Related
Agreements--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 Company.................................. 60.0
------
78.4
------
Plus: Interest on:
New Term Loans..................................... 71.5
Bank fees.......................................... 0.3
New Senior Notes................................... 15.4
New Senior Subordinated Notes...................... 38.5
Less: Interest on:
Old bank term loans:
Pro forma Company................................. (59.5)
Smitty's.......................................... (3.1)
Bank fees.......................................... (0.4)
Smitty's Notes..................................... (6.5)
Accretion of Smitty's Debentures................... (2.3)
------
Pro forma adjustment................................ 53.9
------
Pro forma interest expense........................... $132.3
======
Historical amortization of debt issuance costs....... $ 1.4
Plus:
Financing fees--New Credit Facility................ 6.8
Financing fees--New Senior Notes and New Senior
Subordinated Notes................................ 3.0
Less:
Historical financing costs:........................ (1.4)
------
Pro forma adjustment................................ 8.4
------
Pro forma amortization of debt issuance costs........ $ 9.8
======
</TABLE>
79
<PAGE>
(f) The pro forma adjustment to income tax benefit is based upon an assumed
blended rate of 39% applied to the pro forma net loss adjusted for
permanent differences between book and tax income. The deferred tax asset
recognized in the unaudited pro forma financial statements is more likely
than not to be realized due to the expected future reversal of taxable
temporary differences and the existence of taxable income in each of the
prior three carryback years available.
(g) The unaudited pro forma results of operations does not reflect the
California Asset Disposition Charge, the California Divestiture Charge or
costs related to (i) expenses to be incurred in connection with the
purchase of certain management stock options as part of the
Recapitalization which are estimated to be $12.5 million, (ii) the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period and (iii) a potential severance payment to
the Chairman and Chief Executive Officer of the Company (definitive
agreements with respect to which have not yet been reached). See "The
Company, Smitty's and Yucaipa--Post Recapitalization and Merger Company"
and "Executive Compensation--Certain Transactions." The unaudited pro
forma results of operations does not include an extraordinary item for the
loss on extinguishment of debt of $42.5 million, net of $27.2 million
income tax benefit.
(h) Reflects the accretion of dividends compounded quarterly for the New
Preferred Stock. See "Description of the Company's Capital Stock--
Preferred Stock."
(i) Loss per common share has been computed using the weighted average number
of shares of Common Stock outstanding after giving effect to the issuance
of 3,038,888 shares of Class B Common Stock of the Company to the
stockholders of Smitty's as consideration in the Merger and the purchase
of 50% of the outstanding Common stock (excluding shares issuable in the
Merger) in the Offer. Common stock equivalents in the form of stock
options are excluded from the weighted average number of common shares due
to the net loss.
(j) For purposes of computing the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred stock dividends,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor). "Preferred stock dividends" reflects the amount
representing the pre-tax earnings that would be required to cover such
dividend requirements.
80
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------------------
JANUARY 14, PRO FORMA
DECEMBER 30, 1995 1996 ADJUSTMENTS FOR COMBINED FOR
---------------------------------------------- ------------ CALIFORNIA CALIFORNIA
THE COMPANY ADJUSTMENTS FOR PRO FORMA COMPANY SMITTY'S DISPOSITION AND DISPOSITION AND
(HISTORICAL)ASSETSCALIFORNIA FOR CALIFORNIA (HISTORICAL) RECAPITALIZATION RECAPITALIZATION
(AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) AND MERGER AND MERGER
------------ --------------- ----------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents........... $ 16.1 $ $ 16.1 $ 11.5 $ 82.7 (b)(c) $ 110.3
Rebates and accounts
receivable............ 23.8 (5.0) 18.8 9.3 28.1
Inventories............ 395.0 (76.0) 319.0 56.7 1.0 (d) 376.7
Prepaid expenses and
deposits.............. 21.3 (2.0) 19.3 3.3 22.6
Refundable income
taxes................. 1.9 1.9
Deferred tax assets.... 23.9 13.1 37.0 18.0 (e) 55.0
Assets held for sale... 125.0 (125.0)
-------- ------- -------- ------ ------- --------
Total current assets. 605.1 (194.9) 410.2 82.7 101.7 594.6
Property and equipment..
Land................... 276.6 276.6 18.6 (128.3)(c) 166.9
Building............... 610.0 610.0 50.6 (107.2)(c)(f) 553.4
Leasehold
improvements.......... 55.8 55.8 9.8 (20.2)(c)(f) 45.4
Furniture and
equipment............. 509.5 509.5 69.9 (27.9)(c)(f) 551.5
-------- ------- -------- ------ ------- --------
Less allowances for
depreciation and
amortization......... (390.9) (390.9) (14.1) 23.3 (c)(f) (381.7)
-------- ------- -------- ------ ------- --------
Net property and
equipment........... 1,061.0 1,061.0 134.8 (260.3) 935.5
Goodwill, net........... 31.5 46.6 (g) 78.1
Other assets............ 20.1 (4.6) 15.5 11.0 74.9 (h)(i) 101.4
-------- ------- -------- ------ ------- --------
$1,686.2 $(199.5) $1,486.7 $260.0 $ (37.1) $1,709.6
======== ======= ======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts
payable............... $ 214.2 $ (42.0) $ 172.2 $ 39.6 $ 0.0 $ 211.8
Accrued sales and
other taxes and other
liabilities........... 50.7 (12.0) 38.7 12.0 (12.6)(j)
10.0 (k) 48.1
Accrued payroll and
related benefits...... 97.5 (32.0) 65.5 19.2 84.7
Current maturities of
long-term debt........ 20.9 20.9 6.2 (13.4)(l) 13.7
Current maturities of
Redeemable Preferred
Stock................. 1.0 1.0 (1.0)(m)
Accrued restructuring
costs................. 58.0 (58.0)
-------- ------- -------- ------ ------- --------
Total current
liabilities......... 442.3 (144.0) 298.3 77.0 (17.0) 358.3
Long-term debt, less
current maturities..... 725.3 (28.6) 696.7 139.8 536.4 (n)
(39.4)(c)
(0.9)(n)
4.6 (i)
13.4 (l)
(7.5)(o) 1,343.1
Accrued restructuring
costs, less current
portion................ 40.0 (40.0)
Deferred income taxes... 58.6 13.1 71.7 13.8 (27.2)(p)
(30.7)(e) 27.6
Other liabilities....... 20.2 7.5 (o) 27.7
Redeemable Preferred
Stock, less current
maturities............. 3.3 3.3 3.3
Cumulative Redeemable
Exchangeable Preferred
Stock.................. 71.2 (m) 71.2
Common Stockholders'
Equity:
Convertible Class A
Common Stock........... 0.1 0.1 0.1
Class B Common Stock.... 0.2 0.2 (0.1)(q) 0.1
Additional paid-in
capital................ 285.2 285.2 11.0 (11.0)(r)
(165.8)(q)
45.5 (s) 164.9
Retained earnings(t).... 238.0 238.0 (1.8) (35.2)(u)
(405.9)(q)
(76.3)(e)
(7.3)(v)
1.8 (r) (286.7)
-------- ------- -------- ------ ------- --------
523.5 523.5 9.2 (654.3) (121.6)
Less cost of common
stock in the treasury.. (106.8) (106.8) (464.9)(q)
571.7 (q)
-------- ------- -------- ------ ------- --------
416.7 416.7 9.2 (547.5) (121.6)
-------- ------- -------- ------ ------- --------
$1,686.2 $(199.5) $1,486.7 $260.0 $ (37.1) $1,709.6
======== ======= ======== ====== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
81
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects the sale of the California stores and other related assets,
excess real estate and distribution center in connection with the
California Divestiture. The Company has received $67.2 million subsequent
to December 30, 1995 and expects to receive an additional $10.6 million
shortly after the consummation of the Recapitalization and Merger. The net
proceeds of such sale is reflected as a reduction of the historical
revolving credit balance ($28.6 million) and payment of certain
liabilities in the Company's pro forma balance sheet at December 30, 1995.
(b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New
Revolving Credit Facility, and(iii) the offerings used to finance the
Recapitalization and Merger and pay related costs and fees as set forth in
the following table:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans...................................... $ 805.0
New Senior Notes.................................... 150.0
New Senior Subordinated Notes....................... 350.0
New Preferred Stock................................. 75.0
Repay Smitty's Notes................................ (50.0)
Discount on Smitty's Notes.......................... 0.4
Repay Smitty's Debentures........................... (18.4)
Discount on Smitty's Debentures..................... 0.5
Repay Smitty's Bank Credit Facility................. (34.9)
Repay Company's Mortgage Notes and Other Indebted-
ness............................................... (667.1)
Purchase existing Series I Preferred Stock.......... (1.0)
Purchase 50% of Common Stock........................ (451.3)
Purchase Management Options......................... (13.7)
Accrued Interest.................................... (12.6)
Fees and Expenses................................... (145.1)
-------
Use of California Proceeds (See Note (c)).......... $ 13.2
=======
(c) Assumes the anticipated sale of the Company's remaining California real
estate pursuant to the California Asset Disposition. Also reflects the
California Asset Disposition Charge of $125 million (pre-tax) in connection
with the adoption of a strategy to dispose of such remaining California
assets following the consummation of the Recapitalization and Merger.
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Disposal of Property and Equipment
Land.............................................. $ 128.3
Buildings......................................... 104.0
Leasehold improvements............................ 19.6
Furniture and equipment........................... 17.6
-------
269.5
Depreciation and amortization..................... (9.2)
-------
Net book value of property and equipment.......... 260.3
Write-down of California assets to net realizable
value............................................ (125.0)
-------
Proceeds from California Asset Disposition........ 135.3
Reduction in historical revolving credit balance . (39.4)
Reduction of anticipated indebtedness under the
New Revolving Facility (See Note (b))............ (13.2)
-------
Cash provided by the California Asset Disposi-
tion........................................... $ 82.7
=======
</TABLE>
82
<PAGE>
(d) Reflects the elimination of Smitty's historical LIFO reserve which adjusts
Smitty's inventory to reflect current estimated selling prices less costs
of disposal and a reasonable profit allowance for the acquiring company.
(e) Represents the $125 million California Asset Disposition Charge, tax
effected at 39% tax rate and the recognition of the related deferred tax
asset. The California Asset Disposition Charge reflects the write-down of
California assets, other than assets held for sale at December 30, 1995,
under the Company's strategy to accelerate the disposition of its 18 non-
operating stores and excess land in California following the consummation
of the Recapitalization and Merger.
(f) Reflects the write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
(g) Reflects the excess of costs over the fair value of net assets of Smitty's
acquired in connection with the Merger ($78.1 million) and the elimination
of Smitty's historical goodwill ($31.5 million). The purchase price for
Smitty's will be determined by reference to the trading price of the
Company's Class B Common Stock following the consummation of the Merger.
The purchase price and preliminary calculation of the excess of costs over
the fair value of net assets acquired is as follows:
<TABLE>
<CAPTION>
Purchase Price:
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Company equity received in exchange for Smitty's
equity with an assumed market value of
$15.00/share...................................... $45.5
Fees and expenses.................................. 1.3
-----
Total purchase price............................... 46.8
Fair value of assets acquired...................... 229.5
Fair value of liabilities assumed.................. 260.8
-----
(31.3)
-----
Goodwill........................................... $78.1
=====
</TABLE>
(h) Reflects the debt issuance costs associated with the New Credit Facility
($50.0 million), the New Senior Notes ($11.3 million), and the New Senior
Subordinated Notes ($21.0 million). These amounts have been capitalized as
deferred financing costs.
(i) Reflects the elimination of deferred financing costs associated with the
Smitty's Bank Credit Facility ($1.8 million), the Smitty's Notes ($3.1
million), the Smitty's Debentures ($0.6 million), the Company's Mortgage
Notes and Other Indebtedness ($1.9 million) and the write-off of an
interest rate swap agreement ($4.6 million), included in historical long-
term debt, to be refinanced in connection with the Merger.
(j) Reflects the payment of accrued interest on Smitty's Bank Credit Facility
($0.1 million), Smitty's Notes ($0.6 million) and the Company's Mortgage
Notes and Other Indebtedness ($11.9 million) to be repaid in connection
with the Merger.
(k) Represents severance payments and other costs associated with the
integration of the Company and Smitty's.
(l) Reflects the repayment and cancellation of the current maturities of the
Smitty's Bank Credit Facility ($4.9 million) and the Company's Mortgage
Notes and Other Indebtedness ($20.8 million) and the recording of the
current maturities of the New Term Loans ($12.3 million).
(m) Reflects the issuance of $75 million of New Preferred Stock, net of
related issuance costs ($3.8 million), and the retirement of 3,000,000
shares of Series I Preferred Stock.
(n) Reflects the repayment and cancellation of the Smitty's Bank Credit
Facility, the Smitty's Notes, the Smitty's Debentures, the Company's
Revolving Credit Facility, the Company's Mortgage Notes and Other
Indebtedness and records borrowings under the New Term Loans and New
Revolving Facility and the issuance of the New Senior Notes and New Senior
Subordinated Notes.
83
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans...................................... $ 805.0
New Senior Notes.................................... 150.0
New Senior Subordinated Notes....................... 350.0
Repay Smitty's Notes................................ (50.0)
Discount on Smitty's Notes.......................... 0.4
Repay Smitty's Debentures........................... (18.4)
Discount on Smitty's Debentures..................... 0.5
Repay Smitty's Bank Credit Facility................. (34.9)
Repay Company's Mortgage Notes and Other Indebted-
ness............................................... (667.1)
-------
$ 535.5
=======
</TABLE>
(o) Represents a reclassification of $7.5 million of the Company's deferred
compensation and other long-term liabilities to conform to the pro forma
combined classification.
(p) Represents the deferred tax asset associated with the write-off of the
deferred debt issuance costs and the premium over book value on the
Company's and Smitty's debt to be refinanced. The deferred tax asset
recognized in the unaudited pro forma financial statements is more likely
than not to be realized due to the expected future reversal of taxable
temporary differences and the existence of taxable income in each of the
prior three carryback years available.
(q) Reflects redemption of 50% of outstanding Common Stock prior to the Merger
at $36.00 in cash per share, the retirement of all treasury shares and the
purchase of certain outstanding management stock options.
(r) Reflects the elimination of Smitty's historical equity.
(s) Represents the issuance of 3,038,888 shares of Common Stock at an assumed
market value of $15.00 per share as consideration in the Merger.
(t) The unaudited pro forma balance sheet does not include (i) certain costs
related to the purchase of certain management stock options as part of the
Recapitalization which are estimated to be $12.5 million, (ii) the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period and (iii) a potential severance payment to
the Chairman and Chief Executive Officer of the Company (definitive
agreements with respect to which have not yet been reached). See
"Executive Compensation--Certain Transactions."
(u) Represents the premium over book value attributable to "make whole"
payments and other premiums payable in connection with the retirement of
the Company's Mortgage Notes and Other Indebtedness and the Smitty's Notes
and Debentures, net of 39% tax rate. The actual amount of such payments
may vary substantially based on the yields of certain U.S. Treasury debt
securities at the time such indebtedness is actually repaid.
(v) Represents the write-off of the historical deferred debt issuance costs of
the Company and Smitty's related to its refinanced debt, net of 39% tax
rate.
84
<PAGE>
MANAGEMENT AFTER RECAPITALIZATION AND MERGER
The following table sets forth certain information with respect to the
persons who are expected to serve as the executive officers and directors of
the Company following the consummation of the Recapitalization and Merger.
Following the Recapitalization, the Board of Directors will be comprised of
seven directors, including two designees of the Smith Group and two designees
of the Yucaipa Group. See "Certain Related Agreements--Standstill Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey P. Smith 46 Chairman of the Board
Ronald W. Burkle 43 Chief Executive Officer, Director
Allen R. Rowland 51 President, Chief Operating Officer, Director
Robert D. Bolinder 65 Executive Vice President--Corporate Planning and Development
Matthew G. Tezak 40 Senior Vice President, Chief Financial Officer
J. Craig Gilbert 48 Senior Vice President, Regional Manager--Intermountain Region
James W. Hallsey 53 Senior Vice President, Regional Manager--Southwest Region
Richard C. Bylski 57 Senior Vice President, Human Resources
Michael C. Frei 50 Senior Vice President, General Counsel and Secretary
Kenneth A. Martindale 36 Senior Vice President, Marketing
Fred F. Urbanek 60 Senior Vice President, Facility Engineering
John T. Standley 32 Senior Vice President, Administration
Fred L. Smith 48 Director
Linda McLoughlin Figel 32 Director
Bruce Karatz 50 Director
Bertram R. Zweig 61 Director
</TABLE>
Biographies for Messrs. Jeffrey Smith, Ronald Burkle, Allen Rowland, Fred
Smith, Bruce Karatz and Bertram Zweig and Ms. Figel are set forth under
"Proposal No. 3--Election of Directors."
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.
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.
85
<PAGE>
Michael C. Frei joined Smith's in 1990 as Senior Vice President, General
Counsel and Secretary. Prior to that time, Mr. Frei served as Vice President
and General Counsel of Price Development Company, a commercial real estate
developer, since 1981.
Kenneth A. Martindale has served as Senior Vice President, Marketing of
Smith's since 1995. He served as Vice President, Merchandising, California
Region from 1991 to 1995. From 1984 to 1991, he served as a district manager
in the Intermountain Region.
Fred F. Urbanek has been Senior Vice President, Facility Engineering of
Smith's since 1992. He served as Vice President, Facility Engineering of
Smith's from 1985 to 1992.
John T. Standley is the Chief Financial Officer, Vice President and
Assistant Secretary of Smitty's and Smitty's Super Valu, and upon consummation
of the Merger, will be the Senior Vice President, Administration of the
Company. Mr. Standley joined Smitty's in December 1994. Prior to that time,
Mr. Standley was Vice President of Finance for Food 4 Less Supermarkets, Inc.
from 1991 to 1994. Prior to 1991, he was a manager at Arthur Andersen &
Company.
86
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
OWNERSHIP PRIOR TO RECAPITALIZATION AND MERGER
The following table provides certain information which has been furnished to
the Company regarding ownership of the Company's voting securities as of April
15, 1996, with respect to (i) each current director of the Company and nominee
for director who beneficially owns shares; (ii) each executive officer of the
Company named in the Summary Compensation Table under "Executive
Compensation--Summary Compensation Table" who beneficially owns shares; (iii)
all current directors and executive officers of the Company as a group; and
(iv) each current beneficial owner of five percent or more of any class of the
Company's voting securities:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF TITLE OF BENEFICIAL PERCENT OF ALL VOTES OF
BENEFICIAL OWNER CLASS(1) OWNERSHIP(2) PERCENT OF CLASS ALL CLASSES OF STOCK
- ------------------- --------- ------------ ---------------- ------------------------
<S> <C> <C> <C> <C>
Jeffrey P. Smith........ Class A 3,341,908(3) 29.4%
c/o Smith's Food & Drug Class B 10,600 * 42.0%
Centers, Inc.
1550 South Redwood Road Preferred 7,455,000(4) 57.5
Salt Lake City, UT 84104
Dee Glen Smith Marital 462,420(5) 4.1
Trust I................ Class A
c/o Ida W. Smith Preferred 7,455,000(5) 57.5 30.8
1066 North East Capital
Blvd.
Salt Lake City, UT 84103
Richard D. Smith........ Class A 2,348,927(6) 20.7 9.1
c/o Smith's Food & Drug
Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Corporation of the
President of the Church
of
Jesus Christ of Latter-
day Saints............. Preferred 2,000,009 15.4 7.8
50 East North Temple
Salt Lake City, UT 84150
Fred L. Smith........... Class A 1,914,996(7) 16.8 7.5
74285 Quail Lake Dr.
Indian Wells, CA 92210
Trust for the Children 1,155,300(5) 10.2 4.5
of Jeffrey P. Smith.... Class A
2551 Brentwood Circle
Salt Lake City, UT 84121
Trust for the Children 1,155,300(8) 10.2 4.5
of Fred L. Smith....... Class A
74285 Quail Lakes Dr.
Indian Wells, CA 92210
Trust for the Children 1,115,300(9) 9.8 4.3
of Richard D. Smith.... Class A
1038 North East Capital
Blvd.
Salt Lake City, UT 84103
University of Utah 1,000,000 7.7 3.9
Medical School......... Preferred
c/o Treasurer
University of Utah
407 Park Building
Salt Lake City, UT 84112
Ida Smith............... Preferred 900,000 6.9 3.5
1066 North East Capital
Blvd.
Salt Lake City, UT 84103
Allen P. Martindale..... Class A 620,000(10) 5.5 2.4
c/o Smith's Food & Drug
Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
</TABLE>
(Table continued on following page)
87
<PAGE>
(Table continued from previous page)
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF TITLE OF BENEFICIAL PERCENT OF ALL VOTES OF
BENEFICIAL OWNER CLASS(1) OWNERSHIP(2) PERCENT OF CLASS ALL CLASSES OF STOCK
- ------------------- --------- ------------ ---------------- ------------------------
<S> <C> <C> <C> <C>
Sean D. Smith........... Class A 488,134(11) 4.3 1.9
DeLonne Anderson........ Class A 271,000(12) 2.4
Class B 141,500(13) 1.0 1.1
Robert D. Bolinder...... Class A 100,000 *
Class B 30,000(14) * *
Ray V. Rose............. Class A 90,000(15) * *
Douglas John Tigert..... Class A 75,000 * *
Kenneth A. White........ Class A 65,900(16) *
Class B 61,540(17) * *
J. Craig Gilbert........ Class A 65,000(18) * *
Matthew G. Tezak........ Class A 60,000 *
Class B 32,097 * *
Duane Peters............ Class A 23,800(19) *
Class B 300(20) * *
All Directors and
Executive Officers
as a Group (20
persons)............... Class A 9,221,958 81.1%
Class B 301,175 2.2% 65.0%
Preferred 7,455,000 57.5%
</TABLE>
- --------
* Less than one-percent.
(1) As used in this table "Preferred" refers to the Series I Preferred Stock.
(2) 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.
(3) Includes 1,542,110 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 462,420 shares held
of record by a trust for benefit of Ida W. Smith and of which Mr. Smith
is trustee.
(4) Such shares are held of record by a trust for the benefit of Ida W. Smith
and of which Jeffrey P. Smith is trustee.
(5) Included in the shares shown for Jeffrey P. Smith.
(6) Includes 1,467,002 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 11,742 shares held of
record by Mr. Smith's wife.
(7) Includes 1,358,778 shares which are held of record by four trusts of
which Fred L. Smith is trustee and of which his children are
beneficiaries, and 35,200 shares held of record by Mr. Smith's wife.
(8) Included in the shares shown for Fred L. Smith.
(9) Included in the shares shown for Richard D. Smith.
(10) 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.
(11) Includes 484,226 shares held of record by trusts for the benefit of Mr.
Sean D. Smith of which Messrs Richard D. Smith and Jeffrey P. Smith are
trustees. Of such shares, 99,126 shares are included in shares shown for
Richard D. Smith and 385,100 shares are included in shares shown for
Jeffrey P. Smith. Also includes 3,227 shares held of record by two trusts
of which Sean D. Smith is trustee and of which his children are
beneficiaries and 681 shares held of record by Mr. Smith's wife.
(12) Includes shares held of record by the following partnerships, of which
Mr. Anderson is a general partner: Cheever Investments, 111 shares; Ricks
Creek Investment, 19,811 shares; and Lupine Investment, 64,851. Also
includes 136,227 shares held of record by Mr. Anderson's wife.
(13) Includes shares held of record by the following partnerships, of which
Mr. Anderson is a general partner: Cheever Investments, 60,500 shares;
and Ricks Creek Investment, 42,000 shares.
(14) Includes 30,000 shares issuable upon exercise of vested options as of
April 15, 1996.
(15) Includes 60,000 shares held of record by a trust of which Mr. Rose is
trustee and of which the members of the family of Mr. Rose are
beneficiaries.
(16) Includes 5,300 shares held of record by four trusts of which Mr. White is
trustee and of which his children are beneficiaries.
(17) Includes 9,250 shares held of record by five trusts of which Mr. White is
trustee and of which his children are beneficiaries.
(18) 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.
(19) Includes 6,450 shares held of record by two trusts of which Mr. Peters is
trustee and of which the members of the family of Mr. Peters are
beneficiaries. Also includes 17,350 shares held in an IRA account of
which Mr. Peters is beneficiary.
(20) Such shares are held of record by Mr. Peters' wife.
88
<PAGE>
OWNERSHIP AFTER RECAPITALIZATION AND MERGER
The following table provides certain information which has been furnished to
the Company regarding ownership of the Company's voting securities as of April
15, 1996 giving effect to the Recapitalization and Merger with respect to (i)
each director of the Company and nominee for director who beneficially owns
shares; (ii) each executive officer of the Company named in the summary
compensation table under "Executive Compensation--Summary Compensation Table"
who beneficially owns shares; (iii) all directors and executive officers of
the Company as a group; and (iv) each beneficial owner of five percent or more
of any class of the Company's voting securities. The table has been prepared
based on the assumptions that (a) 50% of the outstanding Common Stock is
purchased pursuant to the Offer from each stockholder, (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), 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. The actual
number of shares of Series I Preferred Stock which (x) the Company elects to
purchase and/or (y) the Dee Glen Smith Marital Trust I directly or indirectly
conveys to charitable organizations in connection with the consummation of the
Recapitalization and Merger may be increased or decreased by amounts that are
not expected to have a material adverse effect on the Company.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF TITLE OF BENEFICIAL PERCENT OF ALL VOTES OF
BENEFICIAL OWNER CLASS(1) OWNERSHIP(2) PERCENT OF CLASS ALL CLASSES OF STOCK
- ------------------- --------- ------------ ---------------- ------------------------
<S> <C> <C> <C> <C>
Jeffrey P. Smith........ Class A 1,670,954(3) 29.4%
c/o Smith's Food & Drug Class B 5,300 * 29.0%
Centers, Inc.
1550 South Redwood Road Preferred 3,149,000(4) 31.6
Salt Lake City, UT 84104
Dee Glen Smith Marital Class A 231,210(5) 4.1
Trust I.................
c/o Ida W. Smith Preferred 3,149,000(5) 31.6 20.3
1066 North East Capital
Blvd.
Salt Lake City, UT 84103
Corporation of the
President of the Church
of
Jesus Christ of Latter-
day Saints............. Preferred 2,000,009 20.1 12.0
50 East North Temple
Salt Lake City, UT 84150
Richard D. Smith........ Class A 1,174,463(6) 20.7 7.1
c/o Smith's Food & Drug
Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
University of Utah Preferred 1,000,000 10.0 6.0
Medical School..........
c/o Treasurer
University of Utah
407 Park Building
Salt Lake City, UT 84112
Fred L. Smith........... Class A 957,498(7) 16.8 5.8
74285 Quail Lake Dr.
Indian Wells, CA 92210
Trust for the Children Class A 577,650(5) 10.2 3.5
of Jeffrey P. Smith.....
2551 Brentwood Circle
Salt Lake City, UT 84121
Trust for the Children Class A 577,650(8) 10.2 3.5
of Fred L. Smith........
74285 Quail Lakes Dr.
Indian Wells, CA 92210
Trust for the Children Class A 557,650(9) 9.8 3.4
of Richard D. Smith.....
1038 North East Capital
Blvd.
Salt Lake City, UT 84103
City of Hope............ Preferred 500,004 5.0 3.0
1500 East Duarte Road
Duarte, CA 91010
</TABLE>
(Table continued on following page)
89
<PAGE>
(Table continued from previous page)
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF TITLE OF BENEFICIAL PERCENT OF ALL VOTES OF
BENEFICIAL OWNER CLASS(1) OWNERSHIP(2) PERCENT OF CLASS ALL CLASSES OF STOCK
- ------------------- --------- ------------ ---------------- ------------------------
<S> <C> <C> <C> <C>
Allen P. Martindale..... Class A 310,000(10) 5.5 1.9
c/o Smith's Food & Drug
Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Ronald W. Burkle........ Class B 2,125,406(11) 21.5 1.3
c/o The Yucaipa
Companies
10000 Santa Monica
Boulevard
5th Floor
Los Angeles, CA 90067
Robert D. Bolinder...... Class A 50,000 *
Class B 15,000(12) * *
J. Craig Gilbert........ Class A 32,500(13) * *
Matthew G. Tezak........ Class A 30,000 *
Class B 16,048 * *
Allen R. Rowland........ -- -- * *
Kenneth A. Martindale... Class A 53,500(14) *
Class B 9,497(15) * *
James W. Hallsey........ Class A 16,750(16) * *
Michael C. Frei......... Class B 1,584 * *
Richard C. Bylski....... Class A 28,009(17) *
Class B 938 * *
Fred F. Urbanck......... Class A 22.500 *
Class B 505 * *
Linda McLoughlin Figel.. -- --(11) * *
John T. Standley........ -- --(11) * *
All Directors and Class A 2,861,711 50.4%
Executive Officers
as a Group (16 Class B 2,174,323 22.0% 37.5%
persons)................
Preferred 3,149,000 31.6%
</TABLE>
- --------
* Less than one-percent.
(1) As used in this table "Preferred" refers to the Series I Preferred Stock.
(2) 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.
(3) 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.
(4) Such shares are held of record by a trust for the benefit of Ida W. Smith
and of which Jeffrey P. Smith is trustee.
(5) Included in the shares shown for Jeffrey P. Smith.
(6) 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.
(7) 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.
(8) Included in the shares shown for Fred L. Smith.
(9) Included in the shares shown for Richard D. Smith.
(10) 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.
(11) 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. Mr. Standley, who will be the Senior Vice
President, Administration of the Company following the Merger, is a
limited partner in Yucaipa Smitty's Partners, L.P., and Yucaipa Smitty's
Partners II, L.P. Under certain circumstances, the Company may prepay a
portion of the management fees payable to Yucaipa under the Management
Services Agreement through the issuance of up to 100,000 shares of the
Company's Class B Common Stock at its then current fair market value.
(12) Includes 15,000 shares issuable upon exercise of vested options as of
April 15, 1996.
(13) 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.
(14) Includes 3,500 shares held of record by two children of Mr. Martindale
and of which Mr. Martindale is custodian.
(15) Includes 4,800 shares held of record by two children of Mr. Martindale
and of which Mr. Martindale is custodian.
(16) Includes 500 shares held of record by a child of Mr. Hallsey and of which
Mr. Hallsey is custodian.
(17) Includes 5,119 shares held of record by a partnership of Mr. Bylski is a
general partner and 600 shares held of record by children of Mr. Bylski
and of which Mr. Bylski is custodian.
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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 20,000,000
shares of Class A Common Stock, par value $.01 per share, (ii) 100,000,000
shares of Class B Common Stock, par value $.01 per share, and (iii) 85,000,000
shares of Preferred Stock, par value $.01 per share, of which 34,524,579
shares of Preferred Stock are designated as Series I Preferred Stock.
At the Stockholders' Meeting, the Company will ask its stockholders to
approve and adopt separate amendments to the Company's Certificate of
Incorporation which will provide for (i) the creation of the Company's Class C
Common Stock, (ii) the classification of the Board of Directors into three
classes having staggered three-year terms, and (iii) the amendment of certain
provisions with respect to the Series I Preferred Stock. The following
description of the Company's capital stock does not reflect the changes to be
effected by such amendments to the Company's Certificate of Incorporation, but
does describe the capital stock authorized by, and other provisions included
in, the Company's Certificate of Incorporation as in effect as of the date
hereof. For a description of the changes to be adopted, see "Proposal No. 2--
Amendment and Restatement of Certificate of Incorporation."
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
As of April 15, 1996, there were 11,366,532 shares of Class A Common Stock
outstanding and 13,705,191 shares of Class B Common Stock outstanding.
Voting Rights. 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. Except as described
below, holders of Class A Common Stock, Class B Common Stock and Series I
Preferred Stock vote together on all matters presented to the stockholders for
their vote or approval, including the election of directors. The stockholders
are not entitled to vote cumulatively for the election of directors, 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 after consummation of the
Recapitalization and Merger, will have effective control of the Company
through holding approximately 94.1% of the combined voting power of the
outstanding Common Stock and Series I Preferred Stock and will have the
ability to elect all of 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.
Currently under the Company's By-Laws, directors may be removed with or
without cause by the holders of a majority of the shares then entitled to vote
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 General Corporation Law of Delaware (the "Delaware Law"), the
holders of Class A Common Stock and Class B Common Stock are entitled to vote
as separate classes on any amendment to the Company's 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, preference or special
rights of the shares of such class so as to affect them adversely.
Dividends. Each share of Class A Common Stock and Class B Common Stock is
entitled to receive dividends if, as and when declared by the Board of
Directors of the Company. Under the Delaware Law, the Company may declare and
pay dividends only out of its surplus, or if there is no surplus, out of its
net profits for the fiscal year in which the dividend is declared or the
preceding year. However, no dividends may be declared if the capital of the
Company has been diminished by depreciation, losses or otherwise to any amount
less than the aggregate amount of capital represented by any issued and
outstanding stock having a preference on distribution.
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Under certain of the Company's current credit agreements (the "Current
Credit Agreements"), the Company's ability to pay dividends is restricted
based on various measures, including the Company's net income for designated
periods. The Current Credit Agreements also contain provisions which among
other things require the Company to maintain specified levels of working
capital and consolidated net worth. In connection with the Recapitalization,
the Company intends to repay substantially all of its outstanding long-term
indebtedness, including its indebtedness under the Current Credit Agreements.
As described under "Financing of the Recapitalization and Merger," the New
Credit Facility and the New Senior Notes and New Senior Subordinated Notes
will prohibit or otherwise restrict the payment of dividends for the
foreseeable future.
Conversion Rights. 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 is not convertible.
Other Provisions, Holders of Class A Common Stock and Class B Common Stock
have no preemptive rights to subscribe to any additional securities which the
Company may issue and there are no redemption provisions or sinking fund
provisions applicable to either class, nor is the Class A Common Stock or the
Class B Common Stock subject to calls or assessments by the Company. All
outstanding shares are, legally issued, fully paid and nonassessable. Under
the Delaware Law, in the event of the liquidation, dissolution or winding up
the Company, holders of the shares of Class A Common Stock and Class B Common
Stock are entitled to share ratably, share-for-share, in the assets available
for distribution.
The Class A Common Stock is subject to certain limitations on
transferability that do not apply to Class B Common Stock. Shares of Class A
Common Stock may not be sold, gifted, or transferred except to 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 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.
Listing of Class B Common Stock on NYSE. The Company's shares of Class B
Common Stock are listed on the NYSE. Application will be made to list the
shares of Class B Common Stock to be issued to Smitty's stockholders in the
Merger on the NYSE. The transferability of such shares will be subject to
certain restrictions. See "The Recapitalization and Merger--The Merger--Resale
of Class B Common Stock Following the Merger."
PREFERRED STOCK
The Company currently has one series of Preferred Stock outstanding, which
is designated as Series I Preferred Stock. As of April 15, 1996, 12,956,747
shares of Series I Preferred Stock were outstanding.
Each share of Series I Preferred Stock is entitled to ten votes per share.
Except as described below, holders of Series I Preferred Stock vote together
with the holders of Class A Common Stock and Class B Common Stock on all
matters presented to the stockholders for their vote or approval, including
the election of directors. The affirmative vote of the holders of the majority
of the Series I Preferred Stock, voting as a class, is required upon any
amendment to the Company's Certificate of Incorporation affecting adversely
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 other series of Preferred
Stock, before any distribution to the holders of Common Stock.
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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"). Also, on December 1 of each year one-eleventh of the
total number of shares of Series I Preferred Stock authorized is subject to
mandatory redemption at the Redemption Price. Prior to the Closing Date, the
Company will be amending the foregoing redemption provisions with respect to
the Series I Preferred Stock. For a description of the amendments to be
effected, see "The Recapitalization and Merger--Purchase of Series I 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 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 may be entitled to
more than one vote upon any matter presented to the stockholders for vote or
approval, including the election of directors. The purpose of authorizing the
Board of Directors to determine such rights and preferences is to eliminate
delays associated with a stockholder vote on specific issuances. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could among other things adversely
affect the voting power of the holders of Common Stock and under certain
circumstances make it more difficult for a third party to gain control of the
Company. In connection with the financing for the Recapitalization and Merger,
the Company intends to issue the New Preferred Stock. See "Financing the
Recapitalization and Merger--New Preferred Stock."
ANTITAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION PROVISIONS
General. Certain provisions of the Company's Certificate of Incorporation
and the By-laws could have an antitakeover effect. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions described below which may involve an actual or threatened change
of control of the Company. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover of the
Company that does not contemplate the acquisition of all of its outstanding
shares or an unsolicited proposal for the restructuring or sale of all or part
of the Company. The provisions are also intended to discourage certain tactics
that may be used in proxy fights. The Board of Directors believes that as a
general rule such takeover proposals would not be in the best interests of the
Company and its stockholders.
Classified Board. The Amended and Restated Certificate of Incorporation will
provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-
third of the Board of Directors will be elected each year. The overall effect
of the provisions in the Amended and Restated Certificate of Incorporation
with respect to the staggered Board may be to render more difficult a change
in control of the Company or the removal of incumbent management. In addition,
under Delaware law, stockholders in a company with a staggered board may only
remove directors for cause. See "Proposal No. 2--Amendment and Restatement of
Certificate of Incorporation."
Ownership of Shares by Smith Group and Yucaipa Group. Upon consummation of
the Recapitalization and the Merger, (i) 23.2% of the outstanding shares of
Common Stock and 31.6% of the outstanding shares of Series I Preferred Stock
(and 41.8% of the aggregate number of votes eligible to be cast at any meeting
of the Company's stockholders) will be beneficially owned by the Smith Group
and its affiliates and (ii) approximately 13.6% of the outstanding shares of
Class B Common Stock (and approximately 1.3% of the aggregate number of votes
eligible to be cast at any meeting of the Company's stockholders) will be
beneficially owned by the Yucaipa Group and its affiliates. Pursuant to the
Standstill Agreement, each of the Smith Group and the Yucaipa Group have
agreed among other things to vote their shares in favor of director nominees
designated by the other Group. As a result of the ownership structure of the
Company and the contractual rights described above, the
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voting and management control of the Company will be highly concentrated. The
Smith Group is expected to continue to have effective control of the Company
and, subject to compliance with the restrictions contained in the Financing
Agreements, is expected to continue to have the ability to direct the actions
of the Company with respect to such matters as the payment of dividends,
material acquisitions and dispositions and other extraordinary corporate
transactions.
LIMITATION ON DIRECTORS' LIABILITY
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware Law a director of the Company will not be liable
to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under current Delaware Law, liability of a
director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of this provision of
the Company's Certificate of Incorporation is to limit or eliminate the rights
of the Company and its stockholders (through stockholders' derivative suits on
behalf of the Company) to recover monetary damages against a director for
breach of fiduciary duty except in those circumstances described in clauses
(i) through (iv) above. This provision does not limit or eliminate the rights
of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's fiduciary
duties. In addition, the Company's Certificate of Incorporation and By-laws
provide that the Company will indemnify its directors, officers, employees and
agents to the fullest extent permitted by Delaware law.
DELAWARE TAKEOVER STATUTE
Section 203 of the Delaware Law, as amended ("Section 203"), provides that,
subject to certain exceptions specified therein, a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation with an "interested
Stockholder" for a three-year period following the time at which such
stockholder becomes an "interested stockholder" unless (i) prior to such time,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
"interested stockholder," (ii) upon consummation of the transaction which
resulted in the stockholder becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares), or (iii) on or subsequent to such time, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." Except as otherwise specified in Section 203, an
"interested stockholder" is defined to include (x) any person which is the
owner of 15% or more of the outstanding voting stock of the corporation, or is
an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within three
years immediately prior to the relevant date and (y) the affiliates and
associates of any such person.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to its Certificate of Incorporation or By-laws, may elect not to be
governed by Section 203, effective twelve months after adoption. Neither the
Certificate nor the By-laws presently exclude the Company from the
restrictions imposed by Section 203.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE OFFER
The following discussion describes the principal United States ("U.S.")
federal income tax consequences that may be relevant to a Company stockholder
who tenders shares of Class A or Class B Common Stock to the Company pursuant
to the Offer (a "Tendering Stockholder"). The discussion assumes that the
Common Stock tendered to the Company by a Tendering Stockholder pursuant to
the Offer is held as a capital asset by such Tendering Stockholder and does
not take into account any rules or Code provisions that may apply to Tendering
Stockholders who are subject to special treatment under the Code (including,
without limitation, insurance companies, dealers in securities, certain
retirement plans, financial institutions, tax exempt organizations, Tendering
Stockholders who acquired shares of Common Stock pursuant to the exercise of
an employee stock option or otherwise as compensation or foreign persons).
This discussion is based upon the Code, Treasury regulations promulgated
thereunder and Internal Revenue Service ("IRS") rulings and pronouncements and
judicial decisions thereunder, all as in effect on the date hereof and all of
which are subject to change at any time, possibly with retroactive effect.
The following discussion is intended to be only a general summary of the
U.S. federal income tax consequences that may be relevant to a Tendering
Stockholder who tenders shares of Common Stock to the Company pursuant to the
Offer. The actual U.S. federal income tax consequences to a Tendering
Stockholder of a disposition of such shares pursuant to the Offer will be
determined on a stockholder-by-stockholder basis and, thus, will depend upon
each Tendering Stockholder's particular facts and circumstances. Consequently,
this discussion cannot possibly describe the U.S. federal income tax
consequences of a disposition of shares pursuant to the Offer to a particular
Tendering Stockholder, nor does it address every U.S. federal income tax
concern which may be applicable to a particular Tendering Stockholder. In
addition, the discussion does not address the state, local or foreign tax
consequences of the Offer to a Tendering Stockholder.
ACCORDINGLY, EACH TENDERING STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR TO DETERMINE THE ACTUAL U.S. FEDERAL INCOME TAX CONSEQUENCES, AND
THE STATE, LOCAL OR FOREIGN TAX CONSEQUENCES, TO SUCH TENDERING STOCKHOLDER OF
A DISPOSITION OF COMMON STOCK PURSUANT TO THE OFFER.
If the Company's repurchase of Common Stock from a Tendering Stockholder
pursuant to the Offer is treated as a sale or exchange under section 302(b) of
the Code, that particular Tendering Stockholder will recognize either capital
gain or loss equal to the difference between the cash proceeds received from
the Company by such stockholder in exchange for the Common Stock repurchased
by the Company from such stockholder and the Tendering Stockholder's adjusted
tax basis in such Common Stock. Such gain or loss generally will be long-term
capital gain or loss if the Common Stock has been held as a capital asset by
the Tendering Stockholder for more than one year. Under section 302(b) of the
Code, the Company's repurchase of Common Stock pursuant to the Offer generally
will be treated as a sale or exchange if such repurchase (a) is "substantially
disproportionate" with respect to the Tendering Stockholder, (b) results in a
"complete termination" of the Tendering Stockholder's stock ownership interest
in the Company or (c) is "not essentially equivalent to a dividend" with
respect to the Tendering Stockholder.
These Code section 302(b) tests are applied on a stockholder-by-stockholder
basis and thus the application of these tests to each Tendering Stockholder
depends upon that stockholder's particular facts and circumstances. To a large
degree however, the application of these Code section 302(b) tests to a
particular Tendering Stockholder depends upon such stockholder's stock
ownership in the Company immediately before and immediately after the
Company's repurchase of Common Stock pursuant to the Offer. Moreover, in
determining whether any of these Section 302(b) tests are satisfied, a
Tendering Stockholder must take into account not only the stock of the Company
that the stockholder actually owns, but also any stock of the Company that
such stockholder is deemed to own under the constructive ownership rules set
forth in section 318 of the Code. Pursuant to these constructive ownership
rules, a Tendering Stockholder is deemed to constructively own any
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stock of the Company that is owned by certain related individuals or entities
(each a "Related Party") and any stock of the Company that the stockholder has
a right to acquire by exercise of an option or by conversion or exchange of a
security.
In addition, a stockholder should be able to qualify a repurchase of his or
her stock for capital gain treatment under Code section 302(b) by selling or
otherwise disposing of (by gift or otherwise) some or all of the remaining
shares of stock that the stockholder owns in the redeeming corporation
concurrent with or immediately before or after such repurchase, provided that
such repurchase and such sale or other disposition is part of a single,
integrated plan. Moreover, an issuance or exchange of shares pursuant to a
corporate reorganization also should be taken into account in determining a
redeeming stockholder's stock ownership if the reorganization and the
redemption are each part of an "integrated" transaction. An issuance of new
shares of stock by the redeeming corporation also should be taken into account
in determining a stockholder's stock ownership in the redeeming corporation
after a redemption of such stockholder's stock if the redemption and issuance
are integral parts of a single plan. The Recapitalization Agreement indicates
that the Company's issuance of new shares of Class B Common Stock to the
stockholders of Smitty's pursuant to the Merger and its issuance of shares of
New Preferred Stock as part of the financing for the Recapitalization are all
integral parts of a single plan, no part of which will be completed unless the
other parts also are consummated (unless the Company's repurchase of Common
Stock is abandoned by the Company in order to effect an Alternative
Transaction). Accordingly, although the matter is not free from doubt, a
Tendering Stockholder's actual and constructive stock ownership in the Company
after the Offer should be determined by reference to the total amount of
Company stock that is outstanding after the Offer, the Merger and any other
related issuances or repurchases of stock by the Company have been
consummated. In addition, such determination also should take into account any
sales or other dispositions of Company stock made by a Tendering Stockholder
(or a Related Party) in connection with the transactions described herein.
The Company's repurchase of a Tendering Stockholder's Common Stock will be
"substantially disproportionate" with respect to such stockholder if (i) the
Tendering Stockholder's actual and constructive voting power immediately after
the repurchase is less than 80% of his or her actual and constructive voting
power immediately before the repurchase; (ii) the Common Stock actually and
constructively owned by the Tendering Stockholder (based upon the aggregate
fair market value of such Common Stock) immediately after the repurchase is
less than 80% of his or her actual and constructive percentage ownership of
such Common Stock immediately before the repurchase; and (iii) immediately
after the repurchase, the Tendering Stockholder actually and constructively
owns less than 50% of the total combined voting power of all classes of the
Company stock that is entitled to vote. Tendering Stockholders should consult
their own tax advisors with respect to the application of the Code section
302(b) "substantially disproportionate" test to their particular facts and
circumstances.
The Company's repurchase of a Tendering Stockholder's Common Stock will
result in a "complete termination" of such Tendering Stockholder's interest in
the Company if either (a) all the Company stock actually and constructively
owned by the stockholder is repurchased by the Company pursuant to the Offer
(or is sold or otherwise disposed of in connection with the Offer) or (b) all
the Company stock actually owned by the Tendering Stockholder is repurchased
by the Company pursuant to the Offer (or is sold or otherwise disposed of in
connection with the Offer) and the stockholder is eligible to waive, and does
effectively waive in accordance with section 302(c) of the Code, attribution
of the ownership of any stock of the Company that otherwise would be
considered to be constructively owned by such Tendering Stockholder. Tendering
Stockholders should consult their own tax advisors with respect to the
application of the Code section 302(b) "complete termination" test to their
particular facts and circumstances.
Even if the Company's repurchase of a Tendering Stockholder's Common Stock
fails to satisfy the "substantially disproportionate" test or the "complete
termination" test described above, the Company's repurchase of a Tendering
Stockholder's Common Stock may nevertheless satisfy the "not essentially
equivalent to a dividend" test if the stockholder's disposition of Common
Stock pursuant to the Offer results in a "meaningful reduction" of such
stockholder's proportionate stock ownership interest in the Company. Whether
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the receipt of cash by a Tendering Stockholder will be considered "not
essentially equivalent to a dividend" will depend upon such stockholder's
facts and circumstances. In certain circumstances, even a small reduction in a
stockholder's proportionate stock interest may satisfy this test. For example,
the IRS has indicated in a published ruling that a 3.3% reduction in the
proportionate stock interest of a small (substantially less than 1%)
stockholder in a publicly held corporation who exercises no control over
corporate affairs constitutes such a "meaningful reduction." Tendering
Stockholders should consult with their own tax advisors as to the application
of this test in their particular situation.
A Tendering Stockholder may not be able to satisfy one of the above three
tests because of contemporaneous acquisitions of Common Stock or other Company
stock by such stockholder or a Related Party. Tendering Stockholders should
consult their own tax advisors regarding the tax consequences of such
acquisitions in their particular circumstances.
In addition, a Tendering Stockholder may not be able to satisfy either the
"substantially disproportionate" test or the "not essentially equivalent to a
dividend" test if all of the Class A stockholders were to convert the
remaining shares of their outstanding Class A Common Stock into shares of
Class B Common Stock contemporaneously with or in close proximity to the Offer
or the other transactions described herein. However, a Tendering Stockholder
should be able to qualify the Company's repurchase of his or her Common Stock
pursuant to the Offer for sale or exchange treatment under the "not
essentially equivalent to a dividend" test if such Tendering Stockholder (x)
owns (actually and constructively) less than 1% of the voting power of the
Company's outstanding capital stock immediately prior to the Offer and
exercises no control over the Company or its affairs, (y) the Smith family
members and Smith family trusts that own shares of Class A Common Stock do not
convert any of their remaining outstanding shares of such stock into shares of
Class B Common Stock and (z) such Tendering Stockholder or a Related Party
does not make any contemporaneous acquisitions of any capital stock of the
Company. Smith family members and the trustees of the Smith family trusts that
own shares of Class A Common Stock have represented to the Company that they
have no present plan or intention to convert any shares of their Class A
Common Stock into shares of Class B Common Stock.
If a particular Tendering Stockholder cannot satisfy any of the three tests
described above and to the extent the Company has sufficient current and/or
accumulated earnings and profits, such stockholder will be treated as having
received a dividend which will be includible in gross income (and treated as
ordinary income) in an amount equal to the aggregate cash proceeds paid by the
Company to such stockholder in exchange for such stockholder's Common Stock
(without regard to gain or loss, if any).
In the case of a Tendering Stockholder that is a corporation (a "corporate
stockholder"), if the cash paid by the Company to such corporate stockholder
in exchange for such stockholder's Common Stock is treated as a dividend, such
dividend income may be eligible for the 70% dividends-received deduction. The
dividends-received deduction is subject to certain limitations, and may not be
available if the corporate stockholder does not satisfy certain holding period
requirements with respect to its Common Stock or if its Common Stock is
treated as "debt financed portfolio stock" within the meaning of Code Section
246A(c). It should be noted that recent legislative proposals, if enacted,
would reduce the dividends-received deduction from 70% to 50%. In addition,
such proposals would provide that a corporate stockholder would not be
entitled to a dividends-received deduction on distributions on the Common
Stock if such stockholder protects itself from risk of loss immediately before
or immediately after the stockholder becomes entitled to the dividend. It is
unclear whether, or in what form, such proposals will be enacted.
Additionally, if a dividends-received deduction is available, the dividend may
be treated as an "extraordinary dividend" under section 1059(a) of the Code,
in which case a corporate stockholder's adjusted tax basis in the Common Stock
retained by such stockholder would be reduced, but not below zero, by the
amount of the nontaxed portion of such dividend. Any amount of the nontaxed
portion of the dividend in excess of the corporate stockholder's adjusted tax
basis generally will be subject to tax upon a sale or other taxable
disposition of such Common Stock. However, recently introduced legislation
would require gain on the nontaxed portion of an extraordinary dividend to be
recognized at the time when the extraordinary dividend is paid rather than at
the time of the sale or other taxable disposition of the Common Stock. It is
unclear whether, or in what form, such legislation will be enacted. Corporate
stockholders are urged to consult their own tax advisors as to the effect of
section 1059 of the Code on the adjusted tax basis of their Common Stock.
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THE MERGER
The following describes the principal U.S. federal income tax consequences
of the Merger to the Company, the Company's stockholders and Smitty's,
assuming that the Merger is consummated as contemplated herein. This
discussion is based upon the Code, the Treasury regulations promulgated
thereunder, and IRS rulings and pronouncements and judicial decisions
thereunder, all as in effect on the date hereof and all of which are subject
to change at any time. The following discussion does not address the state,
local or foreign tax consequences of the Merger.
Consummation of the Merger is conditioned upon receipt by the Company and
Smitty's from their respective counsel of written opinions dated the Merger
Closing Date to the effect that the Merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Code. Neither the
Company nor Smitty's has requested or will request an advance ruling from the
IRS as to the tax consequences of the Merger.
As of the date of this Proxy Statement, Simpson Thacher & Bartlett, counsel
to the Company, has advised the Company that in its opinion, based on certain
customary representations and assumptions referred to in such opinions, (i)
the Merger will be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the Code, and (ii)
the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code. Accordingly, no income, gain or loss will be
recognized by Smitty's, the Company or the Company's stockholders as a result
of the consummation of the Merger.
BOARD OF DIRECTORS, COMMITTEE MEETINGS
AND COMPENSATION OF DIRECTORS
The Board of Directors held four meetings during the 1995 fiscal year. All
of the directors attended over 90% of the meetings of the Board of Directors
and Board Committees of which they were members. Directors who are not also
employees of the Company receive an annual retainer of $7,200 for their
services as directors. Additionally, directors who are not also employees of
the Company receive $2,500 for each Board of Directors meeting attended.
Directors who are members of committees of the Board of Directors receive
$1,000 for each committee meeting attended.
As described under "The Recapitalization and Merger--Background of the
Transactions," two directors, Alan R. Hoefer and Rodney H. Brady, recently
resigned their directorships.
Jeffrey P. Smith, Robert D. Bolinder, Richard D. Smith and Kenneth A. White
are members of the Executive Committee of the Board of Directors. Such
Committee exercises the powers of the Board in the management of the business
and affairs of the Company between regularly scheduled meetings of the Board
of Directors, when necessary. The Executive Committee did not meet during the
1995 fiscal year. The Executive Committee serves as the nominating committee
for the Board of Directors and, although there are no formal procedures for
stockholders to recommend nominations, the Committee will consider any
recommendations from stockholders. Recommendations should be sent to Michael
C. Frei, Secretary, Smith's Food & Drug Centers, Inc., 1550 South Redwood
Road, Salt Lake City, Utah 84104.
DeLonne Anderson, Allen Martindale and Duane Peters are members of the Audit
Committee of the Board of Directors. Such Committee reports to the Board of
Directors with respect to various auditing and accounting matters, the scope
of audit procedures, and the performance of the Company's independent
auditors. During fiscal year 1995, the Audit Committee, which was then
comprised of Alan R. Hoefer, Rodney H. Brady and Allen Martindale, met three
times.
Duane Peters, Ray Rose, and Doug Tigert are currently members of the
Compensation Committee of the Board of Directors. Such Committee administers
the stock option and stock purchase plans of the Company on behalf of the
Board of Directors. During fiscal year 1995, the Compensation Committee met
three times. The Compensation Committee also determines compensation for
executive officers of the Company.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following tables set forth certain information concerning compensation
of the Company's Chief Executive Officer and its four other most highly
compensated executive officers (the "named executive officers"), as well as
compensation information with respect to Richard D. Smith, the Company's Vice
Chairman, and Stuart Rosenthal, the Company's former President and Chief
Operating Officer.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------ ---------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) OPTIONS/SARS(#)
- --------------------------- ------ --------- -------- ---------------
<S> <C> <C> <C> <C>
Jeffrey P. Smith................... 1995 $704,206 $502,670 --
Chairman of the Board of Directors 1994 684,112 516,000 --
and Chief Executive Officer 1993 683,606 539,000 --
Richard D. Smith................... 1995 563,365 292,315 --
Vice Chairman of the Board of
Directors 1994 547,300 300,000 --
1993 546,895 300,000 --
Stuart Rosenthal................... 1995 490,000 249,600
President and Chief Operating
Officer (1/25/95-11/17/95)
Robert D. Bolinder................. 1995 339,111 194,875 --
Executive Vice President, Corporate 1994 333,310 200,000 --
Planning and Development 1993 529,072 -- 25,000
Kenneth A. White................... 1995 182,002 332,895 --
Senior Vice President and Regional
Manager, 1994 175,850 323,200 --
California Region 1993 127,817 440,000 --
J. Craig Gilbert................... 1995 182,002 301,270 --
Senior Vice President and Regional
Manager, 1994 176,156 323,200 --
Intermountain Region 1993 143,716 255,700 20,000
Matthew G. Tezak................... 1995 294,415 111,080 --
Senior Vice President, Chief
Financial Officer 1994 286,000 114,000 --
1993 263,447 99,000 46,000
</TABLE>
- --------
(1) All years presented include 52 weeks.
FISCAL YEAR-END OPTION VALUE
The following table sets forth the number of shares covered by stock options
held by the named executive officers as of the end of fiscal 1995, and the
value of "in-the-money" stock options, which represents the positive spread
between the exercise price of a stock option and the market price of the
shares subject to such options, as of the end of fiscal 1995. None of the
named executive officers exercised any stock options during fiscal 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
FISCAL YEAR END(#) AT FISCAL YEAR END($)
NAME(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
------- ------------------------- ----------------------------
<S> <C> <C>
Robert D. Bolinder... 30,000/25,000 $187,500/$156,250
Kenneth A. White..... 0/70,000 0/$437,500
J. Craig Gilbert..... 0/70,000 0/$437,500
Matthew G. Tezak..... 0/70,000 0/$437,500
</TABLE>
- --------
(1) Except as set forth in the table, no named executive officer held any
stock options as of the end of fiscal 1995.
(2) Calculated on the basis of the closing price per share for the Class B
Common Stock on the NYSE of $25 1/4 on December 29, 1995, the last trading
day in fiscal 1995.
99
<PAGE>
PENSION PLAN AND OTHER RETIREMENT, DEATH AND DISABILITY ARRANGEMENTS
Pension Plan. The Company sponsors a retirement plan (the "Pension Plan")
for its nonunion employees, including executive officers, which is funded
entirely by the Company's contributions. An employee's monthly benefit under
the Pension Plan is determined by multiplying a fixed dollar amount by the
number of years of the employee's employment. The fixed dollar amount, which
has varied from year to year, is currently $30 per month and is not subject to
reduction for social security benefits. The fixed dollar amount is adjusted
from time to time on the basis of a number of factors, including the other
compensation and benefits offered to the Company's employees generally, the
Company's overall budget and earnings and pension benefits offered by
comparable employers. As of the end of fiscal 1995, the estimated annual
amounts payable following retirement to Messrs. Jeffrey P. Smith, Richard D.
Smith, White, Bolinder, Gilbert and Tezak under the Pension Plan were $11,604,
$12,768, $8,668, $2,160, $10,662 and $13,032, respectively.
Additional Retirement Benefits. As of the end of fiscal 1995, the Company
has entered into agreements with ten of its executive officers, including each
of the named executive officers, which provide that if the officer serves in
his present position or a higher position with the Company through age 65,
such officer or his beneficiary will receive following such officer's
retirement or death fixed equal monthly payments over a ten-year period
totaling $100,000.
Supplemental Compensation Agreements. The Company has entered into
agreements with Mr. White, Mr. Tezak and four other current executive officers
which provide for monthly cash payments following the officer's disability or
death, or upon reaching a date specified in the agreement (the "Payment
Date"). The agreements provide that if the employee becomes disabled while
employed by the Company and before the Payment Date, the employee is entitled
to receive fixed monthly payments for the duration of the disability or for a
period of twenty years, whichever period is shorter. The agreements also
provide that if the employee dies while employed by the Company and before the
Payment Date, his beneficiary is entitled to receive fixed monthly payments
for a period of twenty years. Unless the employee dies prior to the Payment
Date, he is entitled to receive monthly payments for a period of twenty years
beginning on the Payment Date. The number of years for which these monthly
payments will be received is based on the employee's number of years of
employment from the date of the agreement through the Payment Date. If the
employee dies after the Payment Date, the employee's beneficiary is entitled
to receive any remaining payments. The payment of benefits under the
agreements is subject to forfeiture if the employee accepts employment prior
to the Payment Date with a company in the food or drug business (either
wholesale or retail) without the prior written consent of the Company. In the
event of a change in control of the Company, defined as either a sale of
substantially all of the assets of the Company or the sale of 51% of the
Company's outstanding capital stock to an entity other than one owned and
controlled by the Smith family, the Company must purchase a fully paid
insurance annuity for the benefit of the employees that will fully vest the
employees in their benefits under the agreements. Mr. White, Mr. Tezak and all
executive officers as a group are entitled to receive maximum monthly payments
of $12,500, $6,250 and $46,875, respectively, under the supplemental
compensation agreements, subject to pro rata reduction in the event that
employment ceases prior to the Payment Date other than as a result of death or
disability. Mr. White's agreement provides for a Payment Date in 2000, and
those of the other executive officers provide for Payment Dates ranging from
2000 to 2010. One such agreement extends for a period of ten years only. The
Company has purchased cost-recovery life insurance to cover its obligations
under these agreements.
Stock Option Plan. The Company's 1989 Stock Option Plan, as amended (the
"1989 Plan"), authorizes the Compensation Committee of the Board of Directors
to grant options to key employees for the purchase of shares of Class B Common
Stock. The options may be either incentive stock options ("ISOs") within the
meaning of Section 422A of the Code, or nonqualified stock options. Pursuant
to the 1989 Plan, while the aggregate number of such shares available for
grant shall not exceed 10% of the number of shares of Class B Common Stock
which are authorized, the number of outstanding and unexercised options shall
not exceed 10% of the total number of Class A Common Stock and Class B Common
Stock outstanding as of the close of trading on the last trading day of the
Company's immediately preceding fiscal year. The 1989 Plan is administered by
the Compensation Committee, the members of which cannot receive options under
the 1989 Plan. Subject to the
100
<PAGE>
terms of the 1989 Plan, the Compensation Committee has sole discretion,
without reference to any specific criteria, to determine the employees of the
Company to whom, and the time or times at which, options will be granted; the
designation of each option as either an incentive stock option or a
nonqualified stock option; the per share exercise price and the duration of
each option; the number of shares subject to each option; the rate and manner
of exercise of each option; and any other restrictions placed on each option.
ISOs may not be granted to any employee who, at the time the option is
granted, beneficially owns stock of the Company representing more than 10% of
the voting power of the Company.
The 1989 Plan provides that the per share exercise price for an ISO may not
be less than 100% of the fair market value of the Company's Class B Common
Stock on the date the option is granted and that the duration of an incentive
stock option may not be more than ten years from the date of grant. The per
share exercise price for nonqualified options may be above or below the fair
market value of the Company's Class B Common Stock at the time of grant and
the duration of a nonqualified stock option may be shorter than or exceed ten
years, each in the discretion of the Compensation Committee. During the
lifetime of the optionee, his or her option is exercisable only by him or her
and is not transferable except by will or by the laws of descent and
distribution, and then only if presently exercisable.
In the event of a change in control of the Company, all options outstanding
under the 1989 Plan will become fully exercisable. For purposes of the 1989
Plan, a change of control of the Company occurs if (i) a person acquires or is
reasonably believed by the Board of Directors to have acquired 51% or more of
the combined voting power of the Company's outstanding securities in a
transaction not approved by the Board of Directors serving immediately prior
to such transaction, (ii) a majority of the members of the Board of Directors
is replaced during any period of two consecutive years, or (iii) the Company's
stockholders approve a plan of liquidation in connection with a transaction
not approved by the Board of Directors serving immediately prior to the date
of the stockholders' meeting at which such approval was given. In 1995, the
1989 Plan was amended to limit the number of shares which may be granted under
options to any employee in any fiscal year to 500,000 to comply with section
162(m) of the Code. As of December 30, 1995, there were 1,616,500 shares of
Class B Common Stock subject to outstanding options and 890,671 shares
available for future grants under the 1989 Plan. These options were held by 88
persons and had expiration dates ranging from June 22, 1997 to June 1, 2006.
Each of such options had an exercise price of $19.00 per share.
COMPENSATION/AUDIT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION; CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995, the following individuals served as members of the Audit
Committee of the Board of Directors: Rodney H. Brady, Alan R. Hoefer and Allan
P. Martindale (Chair). Certain transactions between members of the Audit
Committee and the Company are described below under "--Certain Transactions."
CERTAIN TRANSACTIONS
During the 1995 fiscal year, the Company 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 the Company, serves as President and Chief Executive Officer of
Bonneville, but has no role in the Company's advertising decisions. Also
during the 1995 fiscal year, the Company paid $15,385 to an automobile
dealership owned by Fred Smith, one of the Company's directors, in connection
with the purchase of an automobile for use by the Company.
In January 1996, Alan R. Hoefer, another former director of the Company,
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.
The Company believes that the terms of the foregoing transactions were no
less favorable to the Company than those which could have been obtained from
unaffiliated third parties.
101
<PAGE>
In addition, 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 Recapitalization and
Merger and may provide consulting services to the Company. In addition, Mr.
Smith and the Company have had tentative discussions regarding an arrangement
to provide Mr. Smith with the use and possible ownership of the Company
airplane after the consummation of the Recapitalization and Merger. It is
anticipated that a definitive agreement regarding such matters will be reached
prior to the consummation of the Recapitalization and Merger.
102
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act or the Exchange Act that
might incorporate this Proxy Statement or future filings with the Commission,
in whole or in part, the following report and the Performance Graph which
follows shall not be deemed to be incorporated by reference into any such
filings.
The Compensation Committee is responsible for developing and making
recommendations to the Board with respect to the Company's executive
compensation policies. In addition, the Compensation Committee, pursuant to
authority delegated by the Board, reviews and approves on an annual basis the
compensation policies applicable to the Chief Executive Officer and the other
executive officers of the Company.
The objectives of the Company's executive compensation program are to:
. Support the achievement of desired performance by the Company.
. Provide compensation that will attract and retain superior talent and
reward performance.
. Align the executive officers' personal interests and financial
remuneration with the success of the Company by basing a significant
portion of their compensation upon Company performance.
The executive compensation program provides an overall level of compensation
opportunity that is competitive within the retail food and drug industry,
including those companies which compete directly with the Company in its
regions, as well as companies outside the industry with which the Company may
compete for executive talent. Companies are selected for the purpose of
comparing compensation practices on the basis of a number of factors relative
to the Company, such as their size and complexity, the nature of their
businesses, the regions in which they operate, the structure of their
compensation programs (including the extent to which they rely on bonuses and
other contingent forms of compensation), and the availability of compensation
information. In reviewing the compensation practices of other companies, the
Compensation Committee considers the fact that the compensation structures of
most peer companies tend to be significantly different than those of the
Company in a number of respects, particularly in such areas as the amount of
bonus relative to salary paid by such companies, their use of stock
appreciation rights and stock options, the time period over which stock
options vest and the nature and amount of pension benefits made available to
executive officers. For these reasons, although the Compensation Committee has
considered the compensation policies of certain companies which are among the
Company's peer group in the Performance Graph below, the Compensation
Committee does not believe that all of such companies are comparable to the
Company for the purpose of setting the compensation for the Company's
executive officers. The Compensation Committee uses its discretion to set
executive compensation at levels warranted by external, internal and
individual circumstances. Actual compensation levels may be greater or less
than average compensation levels in other companies based upon annual and
long-term performance of the Company and each individual executive officer's
performance. Based upon a survey of compensation levels at such peer companies
in recent periods, the Compensation Committee believes that the Company's cash
compensation level corresponds to the top one-third of compensation paid to
executive officers of companies in the peer group.
The Company's executive officer compensation program is comprised of base
salary, cash bonus compensation, long-term incentive compensation in the form
of stock options, and other benefits such as those available through the
Company's medical and pension plans.
Base Salary. Base salary levels for the Company's executive officers,
including the Chief Executive Officer, are set such that the overall cash
compensation package for executive officers, including bonus opportunity,
compares favorably to companies with which the Company competes for executive
talent. In determining salaries, the Compensation Committee also takes into
account a number of factors, which primarily include individual experience and
performance, the officer's level of responsibility, the cost of living and
historical salary
103
<PAGE>
levels. The measures of individual performance considered include, to the
extent applicable to an individual executive officer, a number of quantitative
and qualitative factors such as the Company's historical and recent financial
performance (including such measures as gross margin, net income, same-store
sales, customer count, cost savings and market share), the individual's
achievement within his or her responsibility of particular financial (such as
sales, gross margin, and pre-tax income) and non-financial (such as store
openings, site acquisitions or other specific tasks) goals, and other
contributions made by the officer to the Company's success. The Compensation
Committee has not found it practicable to, and has not attempted to, assign
relative weights to the specific factors considered in determining base salary
levels, and the specific factors used may vary among officers. As is typical
for most companies, payment of base salary amounts generally is not
conditioned upon the achievement of any specific, pre-determined performance
targets.
Cash Bonus. The Company's cash bonus program includes all executive
officers. Its purpose is to provide a direct financial incentive in the form
of an annual cash bonus to executive officers to achieve or exceed budgeted
pre-tax income for the year of the individual's area of responsibility. Under
the terms of the Bonus Program, the cash bonus paid for fiscal 1995 to each
officer was equal to the maximum bonus amount determined to be available for
such officer less any reductions (calculated on a sliding scale) based upon a
comparison of actual pre-tax income for the officer's operating area to
budgeted pre-tax income. Accordingly, officers may receive cash bonuses
ranging from 100% to 0%. The annual amount budgeted for pre-tax income was
approved by the Board of Directors for the 1995 fiscal year of the Company
during its January 1995 meeting. Any adjustments to the amount of budgeted
pre-tax income was reviewed by the Compensation Committee and the Board. At
the beginning of the 1995 fiscal year, the Compensation Committee established
the maximum amount of bonus payable for such year for each executive officer.
In reviewing the amount, the Compensation Committee considered a number of
factors including each officer's overall compensation package, bonus and other
compensation opportunities at competing companies and the officer's level of
responsibility. The Compensation Committee also established a formula for
payment of bonuses based on the extent of achievement of the Board-approved
budgets. The Company believes that as compared to other companies in its
industry, the Company pays a relatively higher proportion of total executive
compensation in the form of bonus rather than salary and equity-based
compensation.
Stock Option Plan. The Company's Amended and Restated 1989 Stock Option Plan
authorizes the Compensation Committee to grant stock options to executives and
key managers. Grants of options are made in amounts commensurate with the
individual's responsibility and at a level calculated to be competitive within
the retail food and drug industries as well as a broader group of companies of
comparable size and complexity. Option grants are made from time to time and,
depending upon the circumstances, typically are not made to each executive
officer during each year. Options granted to executive officers typically do
not vest until ten years after the grant date, and do not include any
specific, pre-determined performance targets as a condition to vesting or
granting. The Company believes that such long-term grants serve the primary
objective of retaining executives and key managers, while also aligning
executive and shareholder interests by creating a strong and direct link
between compensation and stockholder return and by enabling executives and key
managers to develop and maintain a significant, long-term ownership interest
in the Company's Common Stock. Stock options for 125,000 shares were granted
during 1995 to Stuart Rosenthal when he joined the Company as President and
Chief Operating Officer. However, such options were forfeited when he resigned
at the end of 1995. No additional stock options were granted to the other
named executive officers during 1995 because the Compensation Committee
determined that, in general, stock and options held by such officers
(including the stock holdings of the Chief Executive Officer) currently
provide such officers with a strong identity of interest with the Company's
stockholders and are adequate to achieve the goals discussed above. Grants of
additional stock options to the named executive officers may be considered in
future periods by the Compensation Committee. Since the Company's initial
public offering in 1989, the Company has granted all stock options at an
exercise price of $19.00 per share, which was the initial public offering
price for the Company's Class B Common Stock. The Compensation Committee
believes that despite the nominal compensation expense incurred by the Company
in granting stock options below the then-current market value of the Company's
stock, this policy promotes morale among executive officers while providing
adequate incentives to maximize shareholder value, given that typically no
portion of the Company's stock options become exercisable until ten years from
the date of grant.
104
<PAGE>
Benefits. The Company provides medical and pension benefits to the executive
officers, including the Chief Executive Officer, that are generally available
to the Company's employees. The Company also provides certain executive
officers with supplemental retirement, death and disability benefits, as more
fully described under the caption, "Pension Plan and Other Retirement, Death
and Disability Arrangements." The benefits available under such arrangements
generally are the same for each of the Company's executive officers, including
the Chief Executive Officer, except to the extent benefits are payable based
upon the length of an officer's employment with the Company.
Chief Executive Officer Compensation. The Chief Executive Officer's
compensation is reviewed and approved independently by the Compensation
Committee. The Compensation Committee members determine the Chief Executive
Officer's compensation based upon the factors applicable to the Company's
other executive officers, which are described in detail above, as well as a
number of additional qualitative and quantitative factors appropriate to his
position as the Company's principal executive. For 1995, these factors
included providing the strategic leadership necessary when faced with the
current challenges of the Company and the supermarket industry. In particular,
the Compensation Committee noted that in fiscal 1995 the Chief Executive
Officer directed the Company's expansion program in opening 19 new stores
which were "fill-in" stores strengthening current market share and increasing
total sales by 6.8%. The expansion program also included four retail warehouse
stores in Las Vegas, Nevada to serve the more price conscious shoppers.
The Compensation Committee also noted that during fiscal 1995, the Chief
Executive Officer negotiated the California Divestiture. Southern California
was a very difficult competitive environment and in conjunction with the
continuing recession in that market prevented the Company from earning an
adequate return on its investment. The Company's large distribution center in
Riverside, California was subleased to Ralphs and 16 of the 34 operating
stores were sold or leased to various supermarket companies. The remaining 18
stores have been or will be closed in the near future. The Chief Executive
Officer also negotiated a merger agreement with Smitty's Supermarkets, Inc.
which operates 25 stores in the Phoenix area and three stores in the Tucson
area. This merger will increase the Company's presence in those areas and
provide certain economy of scale efficiencies. The Compensation Committee has
not found it practicable to, and has not attempted to, assign relative weights
to the specific factors considered in determining the Chief Executive
Officer's compensation.
In accordance with the Company's compensation policies for all executive
officers, a large component of the Chief Executive Officer's compensation is
paid in the form of bonus, which, in order to provide an appropriate incentive
to maximize the Company's financial performance, is determined based upon
preset bonus maximums and the amount of the Company's pre-tax income compared
to budgeted pre-tax income. For fiscal 1995, the Company did not achieve the
budgeted level of pre-tax income. Accordingly, the maximum pre-determined
Chief Executive Officer bonus for 1995 was not paid. Rather, the Chief
Executive Officer received a bonus of $502,670 (which represented a 2.6%
decrease from the bonus paid for the previous year). The Chief Executive
Officer's total cash compensation for 1995 represented a .6% increase from the
previous year.
The Compensation Committee believes that the Chief Executive Officer's total
cash compensation is appropriate in light of the Company's reduced earnings in
fiscal 1995 and the other factors described above. Based upon its survey of
compensation levels at the peer companies included in the Performance Graph
below, the Compensation Committee noted that the Chief Executive Officer's
cash compensation during fiscal 1995 was in the top one-third relative to the
fiscal 1994 cash compensation of the Chief Executive Officers of such
companies. The Compensation Committee noted, however, that, while the Chief
Executive Officer's compensation for fiscal 1995 consisted solely of cash
compensation, a substantial majority of the peer companies also provided
substantial equity or stock appreciation compensation to their Chief Executive
Officers during fiscal 1994. The Chief Executive Officer has not received any
stock option grants to date. For this reason, the Chief Executive Officer's
overall compensation would most likely rank lower relative to Chief Executive
Officer compensation at the peer companies when the value of such non-cash
compensation is included. In determining the compensation of the Chief
Executive Officer, the Compensation Committee considers compensation levels at
105
<PAGE>
these peer companies. However, the Compensation Committee has not deemed it
practicable or appropriate to target the Chief Executive Officer's
compensation at any particular percentile relative to the peer group.
Duane Peters
Ray V. Rose
Douglas J. Tigert
Members of the Compensation
Committee
of the Board of Directors
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on the
Class B Common Stock of the Company with the cumulative total return on the
Standard & Poor's 500 Index and a peer group of eleven companies in the
Company's industry over the period. In accordance with guidelines of the
Commission, the stockholder return for each entity in the peer group index has
been weighted on the basis of market capitalization as of the beginning of
each fiscal year set forth on the graph. The stock price performance shown on
the graph below is not necessarily indicative of future price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Smiths Food
Measurement period & Drug S & P 500 Peer Group
(Fiscal year Covered) Centers, Inc. Index Index
- --------------------- ------------- --------- ----------
<S> <C> <C> <C>
Measurement PT -
1990 $ 100.00 $ 100.00 $ 100.00
FYE 1991 $ 119.09 $ 130.47 $ 107.92
19.09% 30.47% 7.92%
FYE 1992 $ 122.35 $ 140.41 $ 101.10
2.73% 7.62% -6.32%
FYE 1993 $ 74.41 $ 154.56 $ 114.54
-39.18% 10.08% 13.29%
FYE 1994 $ 91.65 $ 156.60 $ 126.67
23.17% 1.32% 10.59%
FYE 1995 $ 94.67 $ 214.86 $ 170.16
3.29% 37.20% 34.33%
</TABLE>
NOTE: Data complete through last fiscal year.
NOTE: Corporate Performance Graph with peer group uses peer group only
performance (excludes your company).
NOTE: Peer group indices use beginning of period market capitalization
weighting.
(1) The selected peer group consists of the following companies: Fred Meyer,
Inc.; Giant Food, Inc.; Great Atlantic & Pacific Tea Co.; Hannaford
Brothers Co.; Kroger Co.; Quality Food Centers, Inc.; Safeway, Inc.; Stop
& Shop Cos. Inc.; Vons Companies, Inc.; and Weis Markets, Inc. Such
companies have been selected for the peer group on the basis of, among
other factors, the similarity of their business to that of the Company and
their market capitalization relative to that of the Company.
106
<PAGE>
PROPOSAL NO. 1--APPROVAL OF THE RECAPITALIZATION AGREEMENT
At the Stockholders' Meeting, the Company's stockholders will be asked to
approve the Recapitalization Agreement and the transactions contemplated
thereby, including the Offer and the issuance of 3,038,888 shares of Class B
Common Stock to the stockholders of Smitty's pursuant to the Merger. See "The
Recapitalization and Merger."
Approval of Proposal No. 1 requires the approval of the holders of a
majority of the total votes cast at the Stockholders' Meeting. In addition,
the total votes cast at the Stockholders' Meeting is required to represent
over 50% of the number of outstanding shares of capital stock of the Company
entitled to vote at the Stockholders' Meeting.
All outstanding shares of Common Stock and Series I Preferred Stock will
vote together as a single class, with each share of Class A Common Stock and
Series I Preferred Stock entitled to ten votes and each share of Class B
Common Stock entitled to one vote.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
RECAPITALIZATION AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL OF THE
RECAPITALIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
PROPOSAL NO. 2--AMENDMENT AND RESTATEMENT OF
CERTIFICATE OF INCORPORATION
In connection with the consummation of the Recapitalization, the Company's
Board of Directors proposes to adopt the following separate amendments to the
Company's Certificate of Incorporation (a form of the Amended and Restated
Certificate of Incorporation reflecting each of these amendments is attached
as Annex C to this Proxy Statement):
(a) Proposal No. 2A provides for the reduction in the number of directors
to seven and the classification of the Board of Directors into three
classes of directors serving staggered three-year terms;
(b) Proposal No. 2B provides for the authorization of 20,000,000 shares
of Class C Common Stock, par value $.01 per share, of the Company; and
(c) Proposal No. 2C provides for the amendment of certain redemption and
voting provisions with respect to the Series I Preferred Stock.
Classified Board of Directors. The Amended and Restated Certificate of
Incorporation will provide that upon the adoption thereof the full Board of
Directors will be comprised of seven directors and without the unanimous
approval of the directors then in office the number of directors may not be
altered. The Board of Directors will be divided into three classes as nearly
equal in number as possible, with the term of office of one class expiring
each year and each director serving for a term ending at the third annual
meeting of stockholders of the Company following the annual meeting at which
such director was elected, except for the directors to be elected at the
Stockholders' Meeting, who shall have the term for which such directors are
elected at such meeting. See "Proposal No. 3--Election of Board of Directors."
Any increase in the number of directors or vacancy on the Board of Directors
may be filled, subject to the rights of any holders of any series of Preferred
Stock to elect additional directors, only by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board. Any director elected in accordance with the preceding
sentence will hold office for the remainder of the full term of the class of
directors in which the new directorship was created or such vacancy occurred.
Class C Common Stock. The Class C Common Stock will be issuable upon
exercise of the Warrants which are to be issued to Yucaipa pursuant to the
Warrant Agreement. See "Certain Related Agreements--Warrant Agreement." The
Class C Common Stock will have all the same rights and preferences as the
other classes of
107
<PAGE>
Common Stock, except that the Class C Common Stock will not have any voting
rights while such stock is owned by an "Original Class C Stockholder" (as such
term is defined in the Amended and Restated Certificate of Incorporation).
Upon any transfer of shares of Class C Common Stock by an Original Class C
Stockholder to a third party other than another Original Class C Stockholder,
the transferee of such Class C Stockholder may convert such shares of Class C
Common Stock into an equal number of shares of Class B Common Stock. No
conversion of Class C Common Stock into Class B Common Stock will be permitted
for shares of Class C Common Stock held by an Original Class C Stockholder or
any party bound by the terms of the Standstill Agreement as a member of the
Yucaipa Group.
Series I Preferred Stock Amendments. The Amended and Restated Certificate of
Incorporation will include certain provisions with respect to the Series I
Preferred Stock providing for: (i) the elimination for a five-year period of
the annual mandatory redemption of original outstanding shares of Series I
Preferred Stock, (ii) the restriction for a two-year period of the optional
redemption of shares of Series I Preferred Stock, and (iii) the addition of
transfer or sale restrictions which reduce the number of allocated votes per
share of Series I Preferred Stock from ten votes to one vote per share in the
event of transfers or sales not made to a Permitted Series I Transferee (as
defined below). A "Permitted Series I Transferee" is defined generally as
either (x) a family member or an affiliate of the holder of Series I Preferred
Stock, (y) any person to whom shares of Series I Preferred Stock were
originally issued, or (z) any person which is an original party to the
Standstill Agreement. Because the foregoing amendments to the Amended and
Restated Certificate of Incorporation adversely affect the rights of the
shares of Series I Preferred Stock, the holders of shares of Series I
Preferred Stock will be entitled to a separate class vote for the approval of
such amendments.
ALL STOCKHOLDERS OF THE COMPANY ARE URGED TO READ THE PROPOSED COMPANY'S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION IN ITS ENTIRETY.
Approval and adoption of Proposals Nos. 2A, 2B and 2C each requires (i) the
approval of the holders of a majority of the aggregate number of votes
eligible to be cast at the Stockholders' Meeting, and (ii) by a separate class
vote, the approval of the holders of a majority of the aggregate number of
votes of the outstanding shares of Series I Preferred Stock eligible to be
cast at the Stockholders' Meeting. THE COMPANY'S STOCKHOLDERS WILL VOTE
SEPARATELY ON EACH OF PROPOSALS NOS. 2A, 2B AND 2C; HOWEVER, CONSUMMATION OF
THE RECAPITALIZATION AS PROVIDED BY THE RECAPITALIZATION AGREEMENT REQUIRES
THAT THE COMPANY STOCKHOLDERS' APPROVE AND ADOPT EACH OF THE PROPOSALS
COMPRISING PROPOSAL NO. 2.
All outstanding shares of Common Stock and Series I Preferred Stock will
vote together as a single class, with each share of Class A Common Stock and
Series I Preferred Stock entitled to ten votes and each share of Class B
Common Stock entitled to one vote, provided that, as described above, the
holders of the Series I Preferred Stock will, in addition to voting together
with the holders of Common Stock, vote as a separate class.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION OF
EACH OF PROPOSALS NOS. 2A, 2B AND 2C.
PROPOSAL NO. 3--ELECTION OF BOARD OF DIRECTORS
Seven persons have been nominated by the Board of Directors for election as
directors at the Stockholders' Meeting to serve for the term indicated below
and until their respective successors are elected or appointed. The seven
nominees receiving the highest number of votes at the Stockholders' Meeting
will be elected as directors, with three of such nominees serving for a one-
year term which expires at the Company's 1997 Annual Meeting of Stockholders,
two of such nominees serving for a two-year term which expires at the
Company's 1998 Annual Meeting of Stockholders, and two of such nominees
serving for a three-year term which expires at the Company's 1999 Annual
Meeting of Stockholders.
It is the intention of the proxy holders to vote FOR the election of ALL of
the nominees listed below in the absence of contrary instructions on the
Proxy. If the candidacy of any one or more of such nominees should for any
reason be withdrawn, the proxy holders will vote in favor of the remainder of
those nominated and for such substituted nominees (if any) as shall be
designated by the proxy holders, or the number of directors to be elected at
this time may be reduced by the Board of Directors. The Board of Directors has
no reason to believe that any of the nominees will be unable or unwilling to
serve as a director if elected.
108
<PAGE>
The following information is furnished regarding the nominees:
NOMINEES FOR ONE-YEAR TERM EXPIRING AT THE 1997 ANNUAL MEETING
Jeffrey P. Smith, age 45, has been a director of the Company since 1971. He
has been Chairman and Chief Executive Officer of the Company since 1988. He
served as Chief Operating Officer and President of the Company from 1984 to
1988.
Ronald W. Burkle, age 43, has been the Chairman of the Board of Smitty's and
a director of Smitty's Super Valu since 1994 and Chairman of the Board of
Smitty's Super Valu since October 1995. It is intended that Mr. Burkle will be
appointed as the Company's Chief Executive Officer in connection with the
Recapitalization and Merger. Mr. Burkle co-founded Yucaipa in 1986 and has
served as a director of Ralphs Grocery Company since 1995. Mr. Burkle served
as Chairman of the Board of Ralphs Grocery Company from 1995 to January 1996
and as Chief Executive Officer and a director of its predecessor, Food 4 Less
Supermarkets, Inc. since 1987. Mr. Burkle served as Chief Executive Officer
and a director of Dominick's Supermarkets, Inc. from 1995 to 1996 and
currently serves as its Chairman of the Board. From 1986 to 1988, Mr. Burkle
was Chairman and Chief Executive Officer of Jurgensen's, a Southern California
gourmet food retailer. Mr. Burkle has served as a director of Kaufman and
Broad Home Corporation since March 1995.
Allen R. Rowland, age 51, has been President and Chief Operating Officer
since joining the Company in January 1996. Prior to that time, from 1989 to
1996 he served as a Senior Vice President/Regional Manager of Albertson's Inc.
From 1982 to 1989, he was a Vice President/Division Manager with the Florida
and Texas Divisions of Albertson's, Inc.
NOMINEES FOR TWO-YEAR TERM EXPIRING AT THE 1998 ANNUAL MEETING
Fred L. Smith, age 48, has been a director of the Company since 1968. Since
1988, he has been President of Fred Smith's Honda Automobiles of Palm Springs,
an auto dealership, prior to which time he was a private investor. Since 1989,
he has also been President of Fred Smith's Jaguar/Rolls Royce of Rancho
Mirage, an auto dealership.
Linda McLoughlin Figel, age 32, 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.
NOMINEES FOR THREE-YEAR TERM EXPIRING AT THE 1999 ANNUAL MEETING
Bruce Karatz, age 50, 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, age 61, is a partner in the Los Angeles office of Jones,
Day, Reavis & Pogue. Mr. Zweig was with Jones, Day from 1962 to 1978, and
rejoined the firm in 1995. Between August 1992 and June 1995, Mr. Zweig was a
partner with the law firm of Graham and James, and from January 1988 to July
1992 he was a partner with the law firm of Stroock & Stroock & Lavan. He is a
member of the Board of Directors of Wedbush Corporation, the parent of Wedbush
Morgan Securities, Inc., a regional investment banking firm in Los Angeles.
Mr. Zweig is a member of the Board of Directors of Aquatic Water Systems
Incorporated.
Jeffrey P. Smith and Fred L. Smith are brothers.
Election of nominees to the Board of Directors requires the approval of the
holders of a plurality of the total votes cast at the Stockholders' Meeting,
with all outstanding shares of Common Stock and Series I Preferred Stock
voting together as a single class and with each share of Class A Common Stock
and Series I Preferred Stock entitled to ten votes and each share of Class B
Common Stock entitled to one vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE SLATE OF NOMINEES SET FORTH
ABOVE.
109
<PAGE>
PROPOSAL NO. 4--RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP as the independent
auditors to examine the accounts of the Company for the 1996 fiscal year.
Ernst & Young LLP has served as the Company's independent auditors since prior
to 1970. In the event that ratification of this selection of auditors is not
approved by the affirmative vote of a majority of the shares of Class A Common
Stock, Class B Common Stock and Series I Preferred Stock, voting on the
proposal, with all such shares voting together and with each share of Class A
Common Stock and Series I Preferred Stock entitled to ten votes and each share
of Class B Common Stock entitled to one vote, management will review its
future selection of auditors.
A member of Ernst & Young LLP is expected to be in attendance at the Annual
Meeting with the opportunity to make a statement and respond to questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE SELECTION
OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE 1996 FISCAL
YEAR.
SECTION 16(A) REPORTING
Section 16(a) of the Exchange Act requires the Company's directors, officers
and beneficial owners of more than ten percent of the Company's Class B Common
Stock (collectively, "Reporting Persons") to file reports of ownership and
changes in ownership with the Commission and the NYSE. Reporting Persons are
required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms which they file. Based solely on its review of the copies
of such forms received or written representations from certain Reporting
Persons, the Company believes that during fiscal 1995 all the Reporting
Persons complied with all applicable filing requirements.
STOCKHOLDERS' PROPOSALS FOR NEXT ANNUAL MEETING
Stockholders' proposals to be presented at the 1997 Annual Meeting of
Stockholders of the Company must be received by the Company no later than
August 25, 1996 for inclusion in the Company's Proxy Statement and proxy card
related to the 1997 Annual Meeting.
EXPERTS
The consolidated financial statements of the Company at December 30, 1995
and December 31, 1994 and for each of three years in the period ended December
30, 1995 included in this Proxy Statement have been audited by Ernst & Young
LLP, independent auditors as set forth in their report 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 as of July 30, 1995 and July 30,
1994 and the related consolidated statement of operations, stockholders'
equity, and cash flows for year ended July 30, 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 Proxy Statement, 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.
Salt Lake City, Utah
April 25, 1996
110
<PAGE>
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 December 30, 1995,
December 31, 1994 and January 1, 1994................................... F-4
Consolidated statements of common stockholders' equity for the years
ended December 30, 1995, December 31, 1994 and January 1, 1994.......... F-5
Consolidated statements of cash flows for the years ended December 30,
1995, December 31, 1994 and January 1, 1994............................. F-6
Notes to consolidated financial statements............................... F-7
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.
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.
F-7
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
======== ======= =======
</TABLE>
Income tax expense included a charge of $1.95 million in 1993 resulting from
applying the increased federal tax rate to deferred tax items. Cash
disbursements for income taxes were $19.2 million in 1995, $21.7 million in
1994 and $17.3 million in 1993.
The difference between income tax expense (benefit) and the tax computed by
applying the statutory income tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Statutory federal income tax rate......... (35.0)% 35.0 % 35.0%
State income tax rate, net of federal
income tax effect........................ (4.3) 4.7 5.2
Effect of income tax rate changes on 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
======= ======= =======
</TABLE>
At December 30, 1995, future minimum rental payments and sublease rentals
for all noncancellable leases with initial or remaining terms of one year or
more consisted of the following (dollar amounts in thousands):
<TABLE>
<CAPTION>
MINIMUM LESS
RENTAL SUBLEASE
PAYMENTS RENTALS TOTAL
-------- -------- --------
<S> <C> <C> <C>
1996........................................... $ 48,781 $ 16,419 $ 32,362
1997........................................... 40,223 16,932 23,291
1998........................................... 43,759 16,934 26,825
1999........................................... 46,205 16,600 29,605
2000........................................... 45,998 16,433 29,565
Thereafter..................................... 697,832 201,864 495,968
-------- -------- --------
$922,798 $285,182 $637,616
======== ======== ========
</TABLE>
At December 30, 1995 the Company had contract commitments of approximately
$3.6 million for future construction and a contract for information technology
services requiring payments of approximately $19.6 million in 1996, $21.3
million in 1997, $24.1 million in 1998, $26.7 million in 1999 and $35.0
million in 2000.
NOTE I--EMPLOYEE STOCK PLANS
In 1993 the Company established a stock profit sharing plan under which year
end employees who are compensated for more than 1,000 hours during the year
are participants. Eligible employees are allocated shares of the Company's
Class B Common Stock based on hours of service up to 2,080 hours.
Contributions are made at the sole discretion of the Company based on its
profitability. The contribution expense was $1.4 million in 1995, $1.6 million
in 1994 and $3.0 million in 1993.
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 ben-
efits earned during the period.... $ 2,119 $ 2,326 $ 1,869
Interest cost on projected benefit
obligation........................ 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, 1994 to
July 31, 1994...................................... $(4,695) $270
PREDECESSOR
June 28, 1994 and the period from August 2, 1993 to
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 $500 million of
new senior and senior subordinated notes and approximately $75 million of new
preferred stock; borrow approximately $805 million under a new $995 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>
ANNEX A
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER
A-1
<PAGE>
================================================================================
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER
by and among
SMITH'S FOOD & DRUG CENTERS, INC.
CACTUS ACQUISITION, INC.
SMITTY'S SUPERMARKETS, INC.
and
THE YUCAIPA COMPANIES
Dated as of January 29, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. THE MERGER AND EFFECT OF THE MERGER ON THE
CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS................................ 2
1.1 The Merger.................................. 2
1.2 Effective Time of the Merger................ 2
1.3 Effects of the Merger....................... 2
1.4 Certificate of Incorporation and Bylaws..... 2
1.5 Directors and Officers...................... 3
1.6 Tax Consequences............................ 3
1.7 Stockholders' Agreements.................... 3
1.8 Tax Matters Certificates and Opinions....... 3
1.9 Specified Smitty's Indebtedness............. 3
1.10 Effect on Capital Stock..................... 4
1.11 Dissenting Shares........................... 4
1.12 Exchange of Certificates.................... 5
ARTICLE 2.RECAPITALIZATION OF THE COMPANY............. 6
2.1 Offer by the Company........................ 6
2.2 Financing Arrangements by Yucaipa........... 7
2.3 Definitive Financing Agreements............. 8
2.4 Execution of Related Agreements............. 8
2.5 Redemption of the Company's Preferred Stock. 8
2.6 Board of Directors; Officers................ 8
2.7 Company's Options and Deferred
Compensation Plans......................... 9
2.8 Recapitalization............................ 9
ARTICLE 3.THE CLOSINGS................................ 10
3.1 Merger Closing.............................. 10
3.2 Offer Closing............................... 11
ARTICLE 4.REPRESENTATIONS OF THE COMPANY AND
ACQUISITION.......................................... 11
4.1 Organization................................ 11
4.2 Capitalization.............................. 11
4.3 Authorization............................... 12
4.4 Absence of Certain Changes or Events........ 12
4.5 No Conflict or Violation.................... 13
4.6 Consents and Approvals...................... 13
4.7 Litigation.................................. 13
i
<PAGE>
Page
4.8 Compliance with Law......................... 14
4.9 Company SEC Reports......................... 14
4.10 ERISA....................................... 14
4.11 Taxes....................................... 15
4.12 Absence of Breaches or Defaults............. 16
4.13 Environmental Matters....................... 16
4.14 No Brokers.................................. 17
4.15 Opinion of Financial Advisor................ 17
4.16 No Other Agreements to Sell the Company or
its Assets................................. 17
4.17 Transactions with Affiliates................ 17
4.18 Vote Required............................... 17
4.19 Registration Rights......................... 17
4.20 Information in Proxy Statement.............. 17
4.21 Information in the Financing Registration
Statements................................. 18
ARTICLE 5.REPRESENTATIONS OF SMITTY'S................. 18
5.1 Organization of Smitty's.................... 18
5.2 Subsidiaries................................ 18
5.3 Capitalization.............................. 19
5.4 Authorization............................... 19
5.5 Absence of Certain Changes or Events........ 19
5.6 Assets...................................... 20
5.7 Contracts and Commitments................... 21
5.8 Absence of Breaches or Defaults............. 22
5.9 No Conflict or Violation.................... 22
5.10 Consents and Approvals...................... 23
5.11 Litigation.................................. 23
5.12 Compliance with Law......................... 23
5.13 Labor Matters............................... 23
5.14 Smitty's SEC Reports........................ 24
5.15 No Brokers.................................. 25
5.16 No Other Agreements to Sell Smitty's
or its Assets.............................. 25
5.17 Proprietary Rights.......................... 25
5.18 Employee Benefit Plans...................... 25
5.19 Insurance................................... 26
5.20 Affiliate Transactions...................... 26
5.21 Environmental Matters....................... 27
5.22 Taxes....................................... 27
5.23 Bank Accounts............................... 28
5.24 Information in Proxy Statement and
Financing Registration Statements.......... 28
ii
<PAGE>
Page
ARTICLE 6.REPRESENTATIONS OF YUCAIPA.................. 29
6.1 Organization; Authorization; etc............ 29
6.2 Ownership of Shares......................... 29
6.3 Consents and Approvals; No Violations....... 29
6.4 Agreement to Sell Smitty's and Other
Matters.................................... 30
ARTICLE 7.CONDUCT OF BUSINESS PENDING THE MERGER
CLOSING.................................... 30
7.1 The Company................................. 30
7.2 Smitty's.................................... 31
ARTICLE 8.ADDITIONAL COVENANTS........................ 34
8.1 Further Assurances and Cooperation.......... 34
8.2 Certain Filings and Consents................ 34
8.3 Access to Information; Confidentiality...... 35
8.4 Notification of Certain Matters............. 35
8.5 Alternative Proposals....................... 36
8.6 Public Statements and Press Releases........ 37
8.7 Directors' and Officers' Insurance and
Indemnification............................ 37
8.8 Financial Information....................... 39
8.9 Smitty's Stockholders' Approval............. 39
8.10 Proxy Statement; Company Stockholders'
Meeting.................................... 39
8.11 Stockholders' Representative................ 40
8.12 Termination of Consulting Agreement......... 40
ARTICLE 9.CONDITIONS PRECEDENT TO THE MERGER.......... 40
9.1 Conditions Precedent to the Company's and
Acquisition's Obligations.................. 40
9.2 Conditions Precedent to Smitty's'
Obligations................................ 42
ARTICLE 10. TERMINATION, AMENDMENT AND WAIVER......... 43
10.1 Termination of the Agreement................ 43
10.2 Termination of Recapitalization............. 44
10.3 Procedure and Effect of Termination......... 44
10.4 Fees and Expenses........................... 45
10.5 Amendments.................................. 45
10.6 Waivers..................................... 45
iii
<PAGE>
Page
ARTICLE 11. DEFINITIONS............................... 45
11.1 Defined Terms............................... 45
11.2 Other Defined Terms......................... 50
ARTICLE 12. MISCELLANEOUS............................. 52
12.1 Non-survival of Representations and
Warranties................................. 52
12.2 Assignment.................................. 52
12.3 Notices..................................... 52
12.4 Payment to Yucaipa.......................... 53
12.5 Choice of Law............................... 53
12.6 Counterparts................................ 53
12.7 No Third Party Beneficiaries................ 53
12.8 Invalidity.................................. 53
12.9 Headings.................................... 53
12.10Gender...................................... 54
12.11Delivery of Company Disclosure Schedule..... 54
SCHEDULE I - Specified Company Indebtedness
ANNEXES
Annex A - Certificate of Incorporation of the Surviving Corporation
Annex B - Legal Opinion to be Delivered by Counsel to the Company
Annex C - Legal Opinion to be Delivered by Counsel to Smitty's
Annex D - Form of Amended and Restated Certificate of Incorporation of
the Company
Annex E - Form of Registration Rights Agreement
Annex F - Form of Smitty's Stockholders' Agreement
Annex G - Form of Continuity-of-Interest Letter
Annex H - Form of Investment Letter
Annex I - Form of Company Tax Matters Certificate
Annex J - Form of Smitty's Tax Matters Certificate
Annex K - Form of Standstill Agreement
Annex L - Form of Management Agreement
Annex M - Form of Warrant Agreement
Annex N - Conditions to Offer
Annex O - Smith's Shareholder Agreement
iv
<PAGE>
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER (this "Agreement"),
---------
dated as of January 29, 1996, by and among Smith's Food & Drug Centers, Inc., a
Delaware corporation (the "Company"), Cactus Acquisition, Inc., a Delaware
-------
corporation and a 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"). Acquisition
-------
and Smitty's are hereinafter collectively referred to as the "Constituent
-----------
Corporations". Definitions of capitalized terms used herein are contained or
- ------------
referenced in Article 11 hereof.
WHEREAS, the parties hereto desire to effect a series of transactions
as described herein which, collectively, will constitute the Recapitalization of
the Company;
WHEREAS, the respective Boards of Directors of the Company,
Acquisition and Smitty's have determined that the merger of Acquisition with and
into Smitty's (the "Merger") in accordance with the Delaware General Corporation
------
Law (the "Delaware Law") and upon the terms and subject to the conditions set
------------
forth in this Agreement, would be fair and in the best interests of their
respective stockholders, and such Boards of Directors have approved such Merger
upon the terms and conditions contained in this Agreement;
WHEREAS, it is intended that the Merger qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended;
WHEREAS, as part of the Recapitalization, the Company will make an
offer to repurchase for $36.00 per share (the "Offer Price") 50% of its
-----------
outstanding Class A Common Stock, par value $.01 per share (the "Class A Common
--------------
Stock") and its outstanding Class B Common Stock, par value $.01 per share (the
- -----
"Class B Common Stock; together with the Class A Common Stock, the "Common
-------------------- ------
Stock"), pursuant to a tender offer as further described herein (the "Offer");
-----
WHEREAS, as part of the Recapitalization, the Company will enter into
a Management Services Agreement, in the form of Annex L hereto (the "Management
----------
Agreement"), with Yucaipa pursuant to which Yucaipa will undertake and perform
- ---------
various managerial obligations in respect of the Company's operations, subject
to the terms and conditions contained in such agreement; and
WHEREAS, as part of the Recapitalization, the Company will redeem a
portion of its outstanding Series I Preferred Stock, par value $.01 per share
(the "Series I Preferred Stock"), from certain holders thereof in accordance
------------------------
with the redemption provisions contained in the Company's certificate of
incorporation;
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:
<PAGE>
ARTICLE 1.
THE MERGER AND EFFECT OF THE MERGER ON THE
CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
---------------------------------------------
1.1 The Merger. Subject to the terms and conditions hereof, at the
----------
Effective Time, Acquisition shall be merged with and into Smitty's in accordance
with the applicable provisions of the Delaware Law. Upon the consummation of
the Merger, the separate existence of Acquisition shall cease and Smitty's, as
the surviving corporation in the Merger (the "Surviving Corporation"), shall
---------------------
continue its corporate existence under the laws of the State of Delaware as a
wholly owned subsidiary of the Company.
1.2 Effective Time of the Merger. On the Merger Closing Date, the
----------------------------
parties hereto shall cause the Merger to be consummated by duly filing an
appropriate certificate of merger (the "Certificate of Merger") in such form as
---------------------
is required by, and executed in accordance with, the relevant provisions of the
Delaware Law. The Merger shall be effective at such time as the Certificate of
Merger is filed with the Secretary of State of Delaware in accordance with the
Delaware Law or at such later time as is specified in the Certificate of Merger
(the "Effective Time").
--------------
1.3 Effects of the Merger. The Merger shall have all of the effects
---------------------
provided for under the Delaware Law, including, without limitation, that upon
the effectiveness of the Merger, the Surviving Corporation shall thereupon and
thereafter possess all the rights, privileges, powers and franchises, of a
public as well as of a private nature, of the Constituent Corporations, and
shall become subject to all the restrictions, disabilities and duties of each of
the Constituent Corporations; and, all and singular, the rights, privileges,
powers and franchises of each of the Constituent Corporations, and all property,
real, personal and mixed, and all debts due to any of such Constituent
Corporations, on whatever account, as well for stock subscriptions as all other
choses in action belonging to each of such corporations, shall become vested in
the Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall become thereafter as
effectually the property of the Surviving Corporation as they were of the
Constituent Corporations; and the title to any real estate vested by deed or
otherwise or any other interest in real estate vested by any instrument or
otherwise in either of such Constituent Corporations shall not revert or become
in any way impaired by reason of the Merger; but all liens upon any property of
either of the Constituent Corporations shall thenceforth attach to the Surviving
Corporation, and shall be enforceable against it to the same extent as if such
debts, liabilities and duties had been incurred or contracted by it; all of the
foregoing in accordance with the applicable provisions of the Delaware Law.
1.4 Certificate of Incorporation and Bylaws.
---------------------------------------
(a) The certificate of incorporation of Smitty's, as in effect
immediately prior to the Effective Time, shall be amended so as to read in its
entirety in the form set forth as Annex A hereto, and, as so amended, until
thereafter further amended as provided therein and under the Delaware Law, it
shall be the certificate of incorporation of the Surviving Corporation following
the Merger.
2
<PAGE>
(b) The bylaws of Smitty's as in effect at the Effective Time shall be
the bylaws of the Surviving Corporation following the Merger until thereafter
changed or amended as provided therein or under the Delaware Law.
1.5 Directors and Officers. The directors and officers of the
----------------------
Surviving Corporation following the Merger shall be the directors and officers,
respectively, of Acquisition at the Merger Closing Date, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be. Smitty's shall cause to be delivered
to the Company on the Merger Closing Date the resignations of such officers and
directors as the Company shall designate, in such capacities, of itself and its
subsidiaries.
1.6 Tax Consequences. For federal income tax purposes, the Merger is
----------------
intended to constitute a reorganization within the meaning of Section 368(a) of
the Code. Neither the Company, Acquisition, Smitty's nor the Surviving
Corporation shall take a position inconsistent with this Section 1.6 on any tax
return or otherwise.
1.7 Stockholders' Agreements. As of the date hereof, each of the
------------------------
Smitty's Principal Stockholders shall have entered into, and Smitty's and
Yucaipa shall use their respective best efforts to cause each other Smitty's
Stockholder, to enter into a stockholders' agreement (each a "Smitty's
--------
Stockholders' Agreement") with the Company in substantially the form attached
- -----------------------
hereto as Annex F and to execute a Continuity-of-Interest Letter and an
Investment Letter in the forms attached hereto as Annexes G and H, respectively.
1.8 Tax Matters Certificates and Opinions. At the Merger Closing,
-------------------------------------
the Company and Smitty's shall deliver Tax Matters Certificates to their
respective counsel, which certificates shall be in substantially the form of
Annexes I and J attached hereto, respectively. At the Merger Closing, each of
the Company and Smitty's shall have requested and received written opinions from
their respective counsel, dated the Merger Closing Date, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code, which opinions will be substantially identical in form and substance.
Such counsel shall, in rendering such opinions, be entitled to rely on (and to
the extent reasonably required, the parties and the Smitty's Principal
Stockholders shall make) reasonable representations related thereto.
1.9 Specified Smitty's Indebtedness. On the Merger Closing Date, the
-------------------------------
Company shall repay, or cause to be repaid, all outstanding principal and
interest, and other amounts payable, under the Specified Smitty's Indebtedness.
In furtherance of the foregoing, substantially concurrently with the
commencement of the Offer (or in the event that the Recapitalization is
terminated prior to the commencement of the Offer in accordance with the
provisions of Section 10.2 hereof, as soon as practicable following such
termination), Smitty's shall commence offers (the "Debt Offers") to purchase for
-----------
cash all of the issued and outstanding 12 3/4% Senior Subordinated Notes due
2004 of Smitty's Super Valu, Inc. (the "Smitty's Notes") and the 13 3/4% Senior
--------------
Discount Debentures due 2006 of Smitty's (the "Smitty's Debentures" and,
-------------------
together with the Smitty's Notes, the "Smitty's Securities"), at such prices as
-------------------
may be recommended by the Company's financial advisors, net to the sellers in
cash (such prices, or such higher prices as may be paid in the Debt Offers,
being referred to herein as the "Debt Offer Prices"). The Debt Offers shall be
-----------------
subject to there being validly tendered and not withdrawn prior to the
expiration of the Debt Offers, at least 50.1% of the outstanding Smitty's Notes
and Smitty's Debentures as of the expiration of the Debt Offers (the
3
<PAGE>
"Minimum Debt Condition") and to such other conditions as are reasonably
----------------------
determined by Smitty's. Smitty's shall, on the terms and subject to the prior
satisfaction or waiver of the conditions of the Debt Offers, accept for payment
and pay for Smitty's Securities tendered as soon as practicable after the later
of the satisfaction of the conditions to the Debt Offers and the expiration of
the Debt Offers. The Debt Offers shall be made by means of an offer to purchase
(the "Debt Offer to Purchase") containing the terms contemplated by this
----------------------
Agreement. Without the written consent of the Company, Smitty's shall not amend
or waive the Minimum Debt Condition, change the Debt Offer Prices, change the
number of Smitty's Securities sought to an amount less than all of the
outstanding Smitty's Securities, change the form of consideration to be paid
pursuant to the Debt Offers or amend any other term or condition of the Debt
Offers in any manner which is adverse to the holders of the Smitty's Securities;
provided, however, that if on the initial scheduled expiration date of the Debt
Offers (as they may be extended in accordance with the terms thereof), all
conditions to the Debt Offers shall not have been satisfied or waived, the Debt
Offers may be extended from time to time without the consent of the Company for
such period of time as is reasonably expected to be necessary to satisfy such
unsatisfied conditions. In addition, the Debt Offer Prices may be increased
with the consent of the Company as specified above, in which case the Debt
Offers may be extended to the extent required by law in connection with such
increase without any further consent of the Company.
1.10 Effect on Capital Stock. As of the Effective Time, by virtue of
-----------------------
the Merger and without any action on the part of the holder of any shares of
common stock, par value $.01 per share, without distinction as to class, of
Smitty's (the "Smitty's Common Stock") or any shares of capital stock of
---------------------
Acquisition or the Company:
(a) Common Stock of Acquisition. Each share of common stock of
---------------------------
Acquisition issued and outstanding immediately prior to the Effective Time
shall be converted into one share of common stock, par value $.01 per
share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock of Acquisition. Each share of
---------------------------------------------
capital stock of Acquisition that is owned by Acquisition or by any
subsidiary of the Company or Acquisition shall automatically be cancelled
and retired and shall cease to exist, and no consideration shall be
delivered or deliverable in exchange therefor.
(c) Smitty's Common Stock. Each share of Smitty's Common Stock,
---------------------
without distinction as to class, outstanding immediately prior to the
Effective Time (other than shares of Smitty's Common Stock to be cancelled
pursuant to Section 1.10(d) below), shall be converted into 3.011803 shares
of the Company's Class B Common Stock (the "Merger Consideration").
--------------------
(d) Cancellation of Treasury Stock of Smitty's. Each share of capital
------------------------------------------
stock of Smitty's that is owned by Smitty's or by any subsidiary of
Smitty's shall automatically be cancelled and retired and shall cease to
exist, and no consideration shall be delivered or deliverable in exchange
therefor.
1.11 Dissenting Shares. Each Smitty's Stockholder delivering a
-----------------
Smitty's Stockholders' Agreement will agree, pursuant to its respective Smitty's
Stockholders' Agreement, to waive any appraisal rights granted pursuant to
Section 262 of the Delaware Law (or any successor
4
<PAGE>
provision) to which it may otherwise be entitled as a result of the transactions
resulting from the Merger. Notwithstanding anything in this Agreement to the
contrary, shares of Smitty's Common Stock outstanding immediately prior to the
Effective Time held by a holder (other than any Smitty's Stockholder who has
delivered a Smitty's Stockholders' Agreement) who has the right to demand
payment for and an appraisal of such shares in accordance with Section 262 of
the Delaware Law (or any successor provision) ("Dissenting Shares") shall not be
-----------------
converted into the Merger Consideration or any cash in lieu of fractional shares
of Smitty's Common Stock unless such holder fails to perfect or otherwise loses
such holder's right to such payment or appraisal, if any. If, after the
Effective Time, such holder fails to perfect or loses any such right to
appraisal, each such share of Smitty's Common Stock of such holder shall be
treated as a share that had been converted as of the Effective Time into the
Merger Consideration in accordance with Section 1.10. Smitty's shall give
prompt notice to the Company of any demands received by Smitty's for appraisal
of shares of Smitty's Common Stock, and the Company (or its designee) shall have
the right to participate in and direct all negotiations and proceedings with
respect to such demands. Smitty's shall not, except with the prior written
consent of the Company (or its designee), make any payment with respect to, or
settle or offer to settle, any such demands.
1.12 Exchange of Certificates.
------------------------
(a) Exchange Procedures. As soon as practicable after the Effective
-------------------
Time, each holder of an outstanding certificate or certificates which prior
thereto represented shares of Smitty's Common Stock shall, upon surrender to the
Surviving Corporation, duly endorsed, as the Surviving Corporation may require,
be entitled to a certificate or certificates representing the number of full
shares of Class B Common Stock into which the number of shares of Smitty's
Common Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to this Agreement. Certificates
for the newly issued Class B Common Stock shall bear the legend contemplated by
the Investment Letters. After the Effective Time, there shall be no further
transfer on the records of Smitty's or its transfer agent of certificates
representing shares of Smitty's Common Stock which have been converted pursuant
to this Agreement into the Merger Consideration, and if such certificates are
presented to Smitty's for transfer, they shall be cancelled against delivery of
the certificates representing the Merger Consideration, as well as any cash in
lieu of fractional shares thereof. If any certificate for Class B Common Stock
is to be issued in, or if cash in lieu of fractional shares is to be remitted
to, a name other than that in which the certificate for Smitty's Common Stock
surrendered for exchange is registered, it shall be a condition of such exchange
that the certificate so surrendered shall be properly endorsed, with signature
guaranteed, or otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Company or its transfer agent any
transfer or other taxes required by reason of the issuance of certificates for
such Class B Common Stock in a name other than that of the registered holder of
the Smitty's Common Stock certificate surrendered, or establish to the
satisfaction of Smitty's or its transfer agent that such tax has been paid or is
not applicable. Until surrendered as contemplated by this Section, each
certificate for shares of Smitty's Common Stock shall be deemed at any time
after the Effective Time to represent the Merger Consideration as contemplated
by Section 1.10. No interest will be paid or will accrue on any cash payable as
Merger Consideration or in lieu of any fractional shares of Class B Common Stock
issued hereby.
(b) Distributions. No dividends or other distributions with respect
-------------
to Class B Common Stock issued hereby with a record date after the Effective
Time shall be paid to the holder
5
<PAGE>
of any unsurrendered certificate for shares of Smitty's Common Stock with
respect to the shares of Class B Common Stock represented thereby and no cash
payment in lieu of fractional shares shall be paid to any such holder until the
surrender of such certificate in accordance with this Article 1. Subject to the
effect of applicable laws, following surrender of any such certificate, there
shall be paid to the holder of the certificates representing whole shares of
Class B Common Stock issued in connection therewith, without interest, (i) at
the time of such surrender the amount of any cash payable in lieu of a
fractional share of Class B Common Stock to which such holder is entitled
pursuant to Section 1.11(c), and (ii) at the appropriate payment date, the
proportionate amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender with respect to such whole
shares of Class B Common Stock.
(c) No Fractional Shares.
--------------------
(i) No certificates or scrip representing fractional shares of
Class B Common Stock shall be issued in connection with the Merger.
(ii) Notwithstanding any other provision of this Agreement, each
holder of shares of Smitty's Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of
Class B Common Stock (after taking into account all shares of Smitty's
Common Stock delivered by such holder) shall receive, in lieu thereof, a
cash payment (without interest) representing such holder's proportionate
interest in a share of Class B Common Stock which shall be deemed to have a
value equal to the average closing price of the Class B Common Stock on the
New York Stock Exchange for the five trading days following the Merger
Closing Date.
ARTICLE 2.
RECAPITALIZATION OF THE COMPANY
-------------------------------
2.1 Offer by the Company.
--------------------
(a) The Company shall commence the Offer as soon as practicable
following the mailing of the Proxy Statement by the Company to its stockholders.
The Company agrees that the terms of the Offer will provide that the Company
will purchase, subject to the satisfaction or waiver of the conditions to the
Offer set forth in Annex N hereto, 50% of its outstanding shares of Common
Stock, which shares have been validly tendered and not withdrawn in the Offer,
at a price per share equal to the Offer Price. Notwithstanding the foregoing,
however, the parties agree that in the event the financing described in
paragraph (b) of Annex N has been obtained, the Company agrees that it will, if
so requested in writing by Yucaipa, waive the condition set forth in paragraph
(f) of Annex N. Upon the Company's acceptance of, and payment for, shares of
Common Stock, such shares shall cease to be outstanding for all purposes. The
Offer shall provide that if there are validly tendered and not withdrawn more
than 50% of the shares of outstanding Common Stock, then the number of shares
that the Company is obligated to purchase shall be reduced pro rata on the basis
of the total number of shares tendered.
6
<PAGE>
(b) On the date the Offer is commenced, the Company shall file with
the SEC an Offer Statement on Schedule 13E-4 with respect to the Offer. The
Offer Statement shall contain the offer to purchase and forms of the related
letter of transmittal and summary advertisement, as well as all other
information and exhibits required by law. The Company agrees promptly to
correct any information in the Offer Statement that shall be or shall have
become false or misleading in any material respect and the Company further
agrees to take all steps necessary to cause the Offer Statement as so corrected
to be filed with the SEC and disseminated to the stockholders of the Company as
and to the extent required by applicable federal securities laws. Smitty's and
its counsel shall be given an opportunity to participate in the preparation of
the Offer Statement prior to its being filed with the SEC. The Company agrees
to provide Smitty's and its counsel with any written comments the Company or its
counsel may receive from the SEC with respect to the Offer Statement promptly
after the receipt of such comments. The form and substance of the Offer
Statement and any amendments, modifications or supplements to the Offer
Statement shall be determined by the Company in its reasonable discretion;
provided, however, that the Company will provide Smitty's a reasonable
opportunity to review and comment on any such amendment, modification or
supplement prior to filing or distribution.
2.2 Financing Arrangements by Yucaipa.
---------------------------------
(a) On or prior to the date hereof, Yucaipa has caused to be delivered
to the Company, and the Company has accepted, one or more bank commitment
letters and one or more highly confident letters (collectively, the "Commitment
----------
Letters") containing indicative terms and conditions which are reasonably
- -------
satisfactory to the Company providing for (i) borrowings by the Company in an
aggregate principal amount of approximately $850 million under one or more
senior bank facilities, (ii) the issuance and sale by the Company of senior
notes and senior subordinated notes in an aggregate principal amount of
approximately $650 million (the "New Debt Securities"), (iii) the issuance and
-------------------
sale of shares of a newly designated series of the Company's pay-in-kind
preferred stock with aggregate gross proceeds of approximately $75 million (the
"PIK Preferred Stock") and shares of the Company's Class B Common Stock (the
-------------------
financings referred to in clauses (i), (ii) and (iii) are collectively referred
to as the "Financings").
----------
(b) At all times prior to the Offer Closing Date, Yucaipa agrees to
use all reasonable efforts to consult with the Company concerning and, as
appropriate, assist the Company in arranging for the Company to enter into one
or more agreements providing for financing (collectively, the "Financing
---------
Agreements"), with terms and conditions which are consistent with the related
- ----------
Commitment Letters for such Financing Agreements and are otherwise reasonably
satisfactory to the Company.
(c) On or prior to the Offer Closing Date, the Company agrees to
effect borrowings and issuances and sales, as applicable, under the Financing
Agreements, the funds of which shall be used upon expiration of the Offer,
together with other funds available to the Company, to (x) purchase 50% of its
outstanding Common Stock, (y) repay all outstanding principal and interest, and
other amounts payable, under the Specified Company Indebtedness and the
Specified Smitty's Indebtedness and (z) pay certain fees and expenses incurred
in connection with the Recapitalization and the other transactions contemplated
hereby.
7
<PAGE>
2.3 Definitive Financing Agreements. The Company shall use all
-------------------------------
reasonable efforts to negotiate, prepare and enter into definitive Financing
Agreements to provide for the Financings on terms and conditions which are
consistent with those contained in the related Commitment Letters and are
otherwise reasonably satisfactory to the Company. Each of the parties hereto
shall use all reasonable efforts to satisfy, on or before the Offer Closing
Date, all requirements of the Financing Agreements which are conditions to
closing the transactions constituting the Financings. Without limitation of the
foregoing, the Company will prepare registration statements (the "Financing
---------
Registration Statements") for filing pursuant to the Securities Act on such
- -----------------------
forms as may be appropriate in order to permit the public offering of the New
Debt Securities and the PIK Preferred Stock and to take such other actions in
connection therewith as may be appropriate to complete such public offerings.
Smitty's and its counsel shall be given an opportunity to participate in the
preparation of each Financing Registration Statement prior to its being filed
with the SEC. The Company agrees to provide Smitty's and its counsel with any
written comments the Company or its counsel may receive from the SEC with
respect to any Financing Registration Statement promptly after the receipt of
such comments. The form and substance of the Financing Registration Statements
and any amendments, modifications or supplements to the Financing Registration
Statements shall be determined by the Company in its reasonable discretion;
provided, however, that the Company will provide Smitty's and its counsel a
reasonable opportunity to review and comment on any such amendment, modification
or supplement prior to filing or distribution.
2.4 Execution of Related Agreements.
-------------------------------
(a) Simultaneously with the execution of this Agreement, the Company,
Yucaipa, the Smitty's Principal Stockholders and the Company stockholders named
therein shall enter into a Standstill Agreement (the "Standstill Agreement"), in
--------------------
the form of Annex K hereto.
(b) On the Offer Closing Date, the Company and Yucaipa shall enter
into the Management Agreement, in the form of Annex L hereto.
(c) On the Offer Closing Date, the Company and Yucaipa shall enter
into a Warrant Agreement (the "Warrant Agreement"), in the form of Annex M
-----------------
hereto.
(d) Simultaneously with the execution of this Agreement, Smitty's,
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
shall each enter into a stockholders' agreement (the "Smith's Shareholder
-------------------
Agreement"), in the form of Annex O hereto.
- ---------
2.5 Redemption of the Company's Preferred Stock. On or prior to the
-------------------------------------------
Offer Closing Date, the Company agrees, subject to the provisions of the
Company's certificate of incorporation, to redeem outstanding shares of Series I
Preferred Stock from certain holders in an amount and on terms reasonably
acceptable to the Company and Smitty's.
2.6 Board of Directors; Officers. Effective on the Offer Closing
----------------------------
Date, the Company agrees to use all reasonable efforts, subject to the
provisions of the certificate of
8
<PAGE>
incorporation and bylaws of the Company and the approval of the Company's
stockholders at the Company Stockholders' Meeting, to:
(a) cause the Company's Board of Directors to be reduced to seven
directors and have nominated and elected as directors two designees of
Yucaipa, two independent directors, the individual selected by the Company
to become the Chief Operating Officer of the Company and two nominees
designated by the Chairman of the Company; and
(b) cause the Company's Board of Directors to elect Ronald W. Burkle
as the Chief Executive Officer of the Company.
2.7 Company's Options and Deferred Compensation Plans.
-------------------------------------------------
(a) The Company shall, consistent with applicable law, offer those
employees who hold, immediately prior to the Offer Closing Date, options to
purchase Common Stock under the Company's 1989 Stock Option Plan (the
"Options"), the opportunity to elect either: (A) to receive (on the Offer
-------
Closing Date) cash payments with respect to one-half of the shares subject to
the Options in an amount equal to (1) the number of shares of Company Common
Stock that would be received by such holder upon exercise of such Options
multiplied by the Offer Price minus (2) the aggregate exercise price of such
Options, and, in consideration of such payments, to execute amendments to each
existing option agreement such that the remaining one-half of the shares subject
to the Options shall not be exercisable prior to the exercise date stated
therein (without regard to the transactions contemplated hereby) and shall have
a reduced exercise price of $15.00 per share of Company Common Stock; or (B)
have the vesting of all of such holder's Options accelerate in accordance with
the stated terms of the options as in effect as of the date of this Agreement.
(b) The Company shall use all reasonable efforts to amend its deferred
compensation agreements in effect as of the date of this Agreement with each of
Frederick F. Urbanek, James A. Acton, Richard C. Bylski, Larry R. McNeill,
Kenneth A. White, Matthew G. Tezak, Paul D. Tezak, James W. Hallsey, Michael C.
Frei, Harry M. Moskal, Robert C. Bolinder and Thomas K. Welch, to provide that
if within two years after the Closing Date the Company terminates such officer's
employment without cause (as such term will be defined in such amendments to the
reasonable satisfaction of such officers, the Company and Yucaipa), all of such
officer's unvested benefits under such deferred compensation agreement shall
become immediately and fully vested.
2.8 Recapitalization. As used herein, the "Recapitalization" refers
---------------- ----------------
collectively to the execution, delivery and performance of this Agreement with
respect to the following: (i) the execution and delivery of, and receipt of the
proceeds under, the Financing Agreements, (ii) the making and consummation of
the Offer, (iii) the execution and delivery of the Management Agreement; (iv)
the execution and delivery of, and the issuance of the warrants provided for
under, the Warrant Agreement, (v) the completion of the transactions
contemplated by Sections 2.6 and 2.7 hereof, and (vi) the filing of the restated
certificate of incorporation of the Company in the form attached hereto as Annex
D.
9
<PAGE>
ARTICLE 3.
THE CLOSINGS
------------
3.1 Merger Closing.
--------------
(a) The closing of the Merger (the "Merger Closing") shall take place
--------------
at 10:00 a.m. local time on the fifth Business Day following the day on which
the last to be fulfilled or waived of the conditions set forth in Article 9
hereof shall be fulfilled or waived in accordance with this Agreement, at the
offices of Latham & Watkins, 633 West Fifth Street, Sixth Floor, Los Angeles,
California 90071, or at such other time and place and on such other date as the
parties hereto shall agree (the "Merger Closing Date").
-------------------
(b) In connection with the Merger Closing, the filing required under
Section 1.2 shall be made and all actions, payments and deliveries then required
hereunder shall be completed. The Merger Closing shall be deemed to have
occurred only when (i) the matters provided for in Section 1.2 shall have
occurred and (ii) all of the opinions, certificates and other documents required
to be delivered at the Merger Closing, as specified in the following sentence,
have been delivered (or the requirement therefor waived).
(c) At the Merger Closing, (i) the Company shall deliver to the
Smitty's Stockholders, in the case of clause (A), and to Yucaipa (with copies to
Smitty's) as representative of the Smitty's Stockholders, in the case of clauses
(B) through (G), (A) the Merger Consideration as specified in Section 1.10, (B)
a certificate of the Company (signed on behalf of the Company by its President
or a Vice President) that the conditions set forth in Section 9.1 have been
satisfied (except as waived by Smitty's), (C) the certificate of incorporation
of each of the Company and Acquisition, certified by the Secretary of State of
Delaware and certificates of good standing of the Company and Acquisition in
Delaware and Arizona, (D) an incumbency certificate with respect to the officers
of the Company and Acquisition, (E) the Registration Rights Agreement, in the
form of Annex E hereto, duly executed by the Company, (F) a favorable opinion of
counsel to the Company (which counsel may include in-house counsel to the
Company and shall be reasonably satisfactory to Smitty's) as to the matters set
forth in the Annex B hereto and such other matters as are customary in
acquisition transactions and as may be reasonably requested by Smitty's and
Yucaipa, and (G) such other certificates, instruments or other documents as
Smitty's may reasonably request, in each case in form and substance reasonably
satisfactory to Smitty's; and (ii) Smitty's and Yucaipa, as applicable, shall
deliver, or cause to be delivered, to the Company (A) the corporate minute
books, stock transfer books and bylaws of Smitty's, (B) a certificate of
Smitty's and Yucaipa (signed, in the case of Smitty's, by its President or a
Vice President) that the conditions set forth in Section 9.2 have been satisfied
(except as waived by the Company), (C) the certificate of incorporation of
Smitty's certified by the Secretary of State of Delaware and certificates of
good standing of Smitty's in Delaware and Arizona, (D) incumbency certificates
with respect to the officers of Smitty's and, as appropriate, its subsidiaries,
and Yucaipa, (E) a favorable opinion of counsel to Smitty's (which counsel may
include in-house counsel to Smitty's and shall be reasonably satisfactory to the
Company) as to the matters set forth in Annex C hereto and such other matters as
are customary in acquisition transactions and as may be reasonably requested by
the Company, and (F) such other certificates, instruments or other documents as
the Company may reasonably request, in each case in form and substance
reasonably satisfactory to the Company.
10
<PAGE>
3.2 Offer Closing. Unless the Recapitalization has been terminated
-------------
in accordance with Section 10.2 hereof, the closing of the Offer (the "Offer
-----
Closing"; and together with the Merger Closing, the "Closing") shall take place
- ------- -------
on the Merger Closing Date (the "Offer Closing Date"; and together with the
------------------
Merger Closing Date, the "Closing Date"). At the Offer Closing, each of the
------------
parties hereto shall have executed and delivered, to the extent they are parties
thereto, each of the Management Agreement and the Warrant Agreement.
ARTICLE 4.
REPRESENTATIONS OF THE COMPANY AND ACQUISITION
----------------------------------------------
The Company and Acquisition hereby represent and warrant to Smitty's
as follows:
4.1 Organization. Each of the Company, Acquisition and the Company's
------------
other subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, with the
corporate power and authority to own and operate its businesses as presently
conducted. Each of the Company, Acquisition and the Company's other
subsidiaries is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure of the Company or any of its
subsidiaries to be so qualified would not have a Material Adverse Effect on the
Company and its subsidiaries taken as a whole. The Company has previously
provided Smitty's with true and correct copies of the certificate of
incorporation and bylaws, as currently in effect, of the Company and each of the
Company's subsidiaries. Except as disclosed in Section 4.1 of the Disclosure
Schedule, all of the outstanding shares of capital stock of each of the
Company's subsidiaries are beneficially owned by the Company, directly or
indirectly, free and clear of all liens, charges, security interests, options,
claims or encumbrances of any nature whatsoever, and all such shares have been
validly issued and are fully paid and non-assessable.
4.2 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of 20,000,000
shares of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
85,000,000 shares of preferred stock, 34,524,579 shares of which have been
designated as Series I Preferred Stock. As of January 25, 1996, 11,598,086
shares of Class A Common Stock, 18,363,925 shares of Class B Common Stock
(4,890,288 of which are held in the Company's treasury) and 12,956,747 shares of
Series I Preferred Stock are issued and outstanding. All of the issued and
outstanding shares of Common Stock are validly issued, fully paid and non-
assessable. As of the date hereof, except as otherwise disclosed in Section 4.2
of the Disclosure Schedule, there are no existing options, warrants, calls,
subscriptions, convertible securities or other securities, agreements,
commitments, or obligations which would require the Company to issue or sell
shares of Common Stock or any other equity securities, or securities convertible
into or exchangeable or exercisable for shares of Common Stock or any other
equity securities of the Company or any of its subsidiaries. The Company has no
commitments or obligations to purchase or redeem any shares of its Common Stock
or, except as specified in the Company's certificate of incorporation, its
Series I Preferred Stock.
11
<PAGE>
(b) The authorized capital stock of Acquisition consists of (i) 1,000
shares of common stock, 100 shares of which are issued and outstanding as of the
date hereof. All of the issued and outstanding shares of Acquisition's common
stock are validly issued, fully paid and non-assessable and owned by the
Company. There are no existing options, warrants, calls, subscriptions,
convertible securities or other securities, agreements, commitments, or
obligations which would require Acquisition to issue or sell shares of its
common stock or any other equity securities, or securities convertible into or
exchangeable or exercisable for shares of its common stock or any other equity
securities. Acquisition has no commitments or obligations to purchase or redeem
any shares of its common stock.
(c) Upon issuance in connection with the Merger, the shares of Class B
Common Stock to be delivered to the Smitty's Stockholders as Merger
Consideration will be validly issued, fully paid and non-assessable.
4.3 Authorization. Each of the Company and Acquisition has the
-------------
requisite corporate power and authority to execute, deliver and perform this
Agreement and the other Transaction Documents to which it is a party and the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement by each of the Company and Acquisition, the performance by each
of the Company and Acquisition of their respective obligations hereunder and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company and Acquisition, as
applicable, except for the authorization and performance of the Financing
Agreements and the requisite approval of the Company's stockholders, all of
which action will be taken prior to the Closing Date. The execution, delivery
and performance of the other Transaction Documents and the consummation of the
transactions contemplated thereby will have been duly authorized by all
necessary corporate action on the part of the Company or Acquisition, as
applicable, prior to the Closing Date. Each of this Agreement and the
Standstill Agreement has been duly and validly executed and delivered by each of
the Company and Acquisition, as applicable, and constitutes a legally valid and
binding obligation of each of the Company and Acquisition, as the case may be,
enforceable against them in accordance with its terms except to the extent that
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general principles of equity. The other Transaction
Documents will have been, as of the Closing Date, duly and validly executed and
delivered by the Company and will constitute, as of such time, legally valid and
binding obligations of the Company, enforceable against them in accordance with
their respective terms, except to the extent that such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally or by
general principles of equity. The Certificate of Merger will have been, as of
the Effective Time, duly and validly executed and delivered by Acquisition and
will constitute as of such time legally valid and binding obligation of
Acquisition, enforceable against it in accordance with its terms except to the
extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting the enforcement
of creditors' rights generally or by general principles of equity.
4.4 Absence of Certain Changes or Events. Except as set forth in
------------------------------------
Section 4.4 of the Disclosure Schedule or in the Company SEC Reports and except
for the transactions contemplated hereby, since December 31, 1994, (i) the
Company and its subsidiaries have conducted their respective businesses only in
the ordinary and usual course consistent with past practices, and
12
<PAGE>
(ii) there has not been any materially adverse change in the business,
operations, condition (financial or otherwise), results of operations,
prospects, assets, liabilities, working capital or reserves of the Company and
its subsidiaries taken as a whole. Except as set forth in Section 4.4 of the
Disclosure Schedule or the Company SEC Reports, from December 31, 1994 through
the date of this Agreement, neither the Company nor any of its subsidiaries has
taken any of the actions prohibited by Section 7.1 hereof.
4.5 No Conflict or Violation. Except as set forth in Section 4.5 of
------------------------
the Disclosure Schedule, neither the execution and delivery of this Agreement or
the other Transaction Documents, nor the performance by each of the Company and
Acquisition of their respective obligations hereunder and thereunder, nor the
consummation of the transactions contemplated hereby or thereby, will (i)
conflict with the Company's or Acquisition's certificate of incorporation or
bylaws; (ii) assuming satisfaction of the requirements set forth in Section 4.6
below, violate any statute, law, ordinance, rule or regulation applicable to the
Company or Acquisition or any of their respective properties or assets; or (iii)
violate, breach, be in conflict with or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under, or
permit the termination of any provision of, or result in the termination of, the
acceleration of the maturity of, or the acceleration of the performance of any
obligation of the Company or any of its subsidiaries, or result in the creation
or imposition of any lien upon any properties, assets or business of the Company
or any of its subsidiaries under, any note, bond, indenture, mortgage, deed of
trust, lease, franchise, permit, authorization, license, contract, instrument or
other agreement or commitment, or any order, judgment or decree to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of their respective assets or properties is bound or
encumbered, except, in each case, for such violations, conflicts, defaults or
other occurrences which, in the aggregate, would not have a Material Adverse
Effect on the Company and its subsidiaries taken as a whole and would not
prevent or delay the Merger or the Recapitalization or otherwise prevent the
Company from performing its obligations under this Agreement and the other
Transaction Documents.
4.6 Consents and Approvals. Except (i) pursuant to applicable
----------------------
requirements of the HSR Act, (ii) for filing of the Certificate of Merger in
accordance with the Delaware Law, (iii) with respect to matters set forth in
Section 4.6 of the Disclosure Schedule, no consent, approval or authorization
of, permit from, or declaration, filing or registration with, any governmental
or regulatory authority, or any other person or entity, is required to be made
or obtained by the Company or Acquisition in connection with the execution,
delivery and performance of this Agreement or the other Transaction Documents
and the consummation of the transactions contemplated hereby and thereby.
4.7 Litigation. Except as set forth in Section 4.7 of the Disclosure
----------
Schedule or in the Company SEC Reports, there are no Actions instituted, pending
or, to the best knowledge of the Company or Acquisition, threatened, which can
reasonably be expected, individually or in the aggregate, directly or
indirectly, to have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole, or to prevent or delay the Merger or the
Recapitalization or otherwise prevent the Company or Acquisition from performing
their respective obligations under this Agreement and the other Transaction
Documents, nor is there any outstanding judgment, decree, or injunction or any
statute, rule or order of any domestic or foreign court, governmental
department,
13
<PAGE>
commission or agency which has or will have, individually or in the aggregate,
any such Material Adverse Effect.
4.8 Compliance with Law. Except as set forth in Section 4.8 of the
-------------------
Disclosure Schedule, the Company and each of its subsidiaries is in compliance
with all foreign, federal, state and local laws and regulations applicable to
its operations or with respect to which compliance is a condition of engaging in
the business thereof (including, without limitation, all Environmental Laws),
except to the extent that failure to comply would not have a Material Adverse
Effect on the Company and its subsidiaries taken as a whole. Except as set
forth in Section 4.8 of the Disclosure Schedule, to the best knowledge of the
Company, neither the Company nor any of its subsidiaries has received any notice
asserting a failure, or possible failure, to comply with any such law or
regulation, the subject of which notice has not been resolved as required
thereby or otherwise to the satisfaction of the party sending the notice, except
for such failure as would not have a Material Adverse Effect on the Company and
its subsidiaries taken as a whole or the transactions contemplated hereby.
4.9 Company SEC Reports. The Company has delivered to Smitty's true
-------------------
and complete copies of each registration statement, report and proxy or
information statement, including without limitation, its annual reports to
stockholders incorporated in material part by reference in certain of such
reports, in the form (including exhibits (including all material contracts) and
any amendments thereto) required to be filed with the SEC since December 31,
1993 (collectively, the "Company SEC Reports"). As of the respective dates such
-------------------
Company SEC Reports were filed, or if any Company SEC Reports were amended, as
of the date such amendment was filed, each of the Company SEC Reports (i)
complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act and the rules and regulations promulgated
thereunder, and (ii) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Each of the audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company (including any related notes and schedules) included or incorporated by
reference in its Annual Reports on Form 10-K for each of the three fiscal years
ended on the Saturday nearest to December 31 in 1992, 1993 and 1994 and
Quarterly Reports on Form 10-Q for all interim periods subsequent thereto fairly
present, in conformity with GAAP applied on a consistent basis (except as may be
indicated in the notes thereto), the consolidated financial position of the
Company and its subsidiaries as of its date and the consolidated results of
operations and changes in financial position for the period then ended (subject
to normal year-end adjustments in the case of any unaudited interim financial
statements).
4.10 ERISA.
-----
(a) Section 4.10 of the Disclosure Schedule contains a complete list
of the Company's Employee Plans. Copies or descriptions of the Company's
Employee Plans have been or will be furnished or made available to Smitty's and
Yucaipa and their counsel within 10 Business Days of the date of this Agreement.
(b) Except as described in Section 4.10 of the Disclosure Schedule,
each of the Company's Employee Plans (other than any Multiemployer Plan) has
been administered and is in compliance with the terms of such Plan and all
applicable laws, rules and regulations where the
14
<PAGE>
failure thereof would have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole.
(c) No "reportable event" (as such term is used in section 4043 of
ERISA), "prohibited transaction" (as such term is used in section 406 of ERISA
or section 4975 of the Code) or "accumulated funding deficiency" (as such term
is used in section 412 or 4971 of the Code) has heretofore occurred with respect
to any of the Company's Employee Plans (other than any Multiemployer Plan) which
would have a Material Adverse Effect on the Company and its subsidiaries taken
as a whole.
(d) No litigation or administrative or other proceeding involving any
of the Company's Employee Plans (other than any Multiemployer Plan) has occurred
or are threatened where an adverse determination would have a Material Adverse
Effect on the Company and its subsidiaries taken as a whole.
(e) Except as set forth in Section 4.10 of the Disclosure Schedule,
neither the Company nor any ERISA Affiliate of the Company has incurred any
withdrawal liability with respect to any Multiemployer Plan under Title IV of
ERISA which remains unsatisfied in an amount which would have a Material Adverse
Effect on the Company and its subsidiaries taken as a whole.
(f) Any termination of, or withdrawal from, any of the Company's
Employee Plans or Multiemployer Plans, on or prior to the Closing Date, would
not subject the Company to any material liability under Title IV of ERISA.
4.11 Taxes. As of the date of this Agreement, except as set forth
-----
in Section 4.12 of the Disclosure Schedule:
(i) the Company and its subsidiaries have (A) duly filed (or
there have been filed on their behalf) with the appropriate governmental
authorities all Tax Returns required to be filed by them and such Tax
Returns are true, correct and complete in all material respects, and (B)
duly paid in full or made provision in accordance with GAAP (or there has
been paid or provision has been made on their behalf) for the payment of
all Taxes for all periods (or portions thereof) ending on or prior to the
Merger Closing Date;
(ii) the Company and its subsidiaries have complied in all
material respects with all applicable laws, rules and regulations relating
to the payment and withholding of Taxes and have, within the time and the
manner prescribed by law, withheld and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under
applicable laws;
(iii) no federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Tax Returns of the Company or its subsidiaries and
neither the Company nor its subsidiaries has received a written notice of
any pending audits or proceedings;
15
<PAGE>
(iv) neither the Service nor any other taxing authority (whether
domestic or foreign) has asserted, or to the best knowledge of the Company,
is threatening to assert, against the Company or any of its subsidiaries
any deficiency or claim for Taxes; and
(v) there are no material liens for Taxes upon any property or
assets of the Company or any subsidiary thereof, except for liens for Taxes
not yet due and payable and liens for Taxes that are being contested in
good faith by appropriate proceedings.
4.12 Absence of Breaches or Defaults. Except as set forth in Section
-------------------------------
4.12 of the Disclosure Schedule, to the best of the Company's knowledge, neither
the Company nor any of its subsidiaries is in default under, or in breach or
violation of, any material Contract. No event has occurred which either
entitles, or would, on notice or lapse of time or both, entitle the holder of
any indebtedness affecting the Company or any of its subsidiaries (except for
the execution of this Agreement) to accelerate, or which does accelerate, the
maturity of any indebtedness affecting the Company or any of its subsidiaries,
except as set forth in Section 4.12 of the Disclosure Schedule.
4.13 Environmental Matters. Except as set forth in Section 4.13 of
---------------------
the Disclosure Schedule, each of the Properties of the Company or any of its
subsidiaries is maintained in compliance with all Environmental Laws, except
where the failure to so comply, or any aggregation of such failures, would not
have a Material Adverse Effect on the Company and its subsidiaries taken as a
whole. Except as set forth in Section 4.13 of the Disclosure Schedule, no
conditions exist with respect to the soil, surface waters, groundwaters, land,
stream sediments, surface or subsurface strata, ambient air, and any other
environmental medium on or off the Company's Properties, which, individually or
in the aggregate, could result in any damage, claim, or liability to or against
the Company or any of its subsidiaries by any third party (including, without
limitation, any government entity), including, without limitation, any condition
resulting from the operation of the Company's business and/or operator in the
vicinity of any of the Company's Properties and/or any activity or operation
formerly conducted by any Person on the Company's Properties, except in any such
case which would not be reasonably expected to have a Material Adverse Effect on
the Company and its subsidiaries taken as a whole. With the exception of retail
consumer products sold in the ordinary course of business and supplies used in
the ordinary course of business, and except as set forth in Section 4.13 of the
Disclosure Schedule, the Company and any other Person for whose conduct the
Company is or may be held responsible, has not generated, manufactured, refined,
transported, treated, stored, handled, disposed, transferred, produced, or
processed any Hazardous Materials. Except as set forth in Section 4.13 of the
Disclosure Schedule, (i) there are no existing uncured notices of violation,
administrative actions, or lawsuits against the Company or any of its
subsidiaries arising under Environmental Laws or relating to the use, handling,
storage, treatment, recycling, generation, or release of Hazardous Materials at
any of the Company's Properties, nor has the Company received any uncured
notification of any allegation of any responsibility for any disposal, release,
or threatened release at any location of any Hazardous Materials; (ii) there
have been no spills or releases of Hazardous Materials at any of the Company's
Properties in excess of quantities reportable under Environmental Laws, except
in any such case which would not be reasonably expected to have a Material
Adverse Effect on the Company and its subsidiaries taken as a whole; and (iii)
there are no consent decrees, consent orders, judgments, judicial or
administrative orders, or liens by any governmental authority relating to any
Environmental Law which regulate, obligate, or bind the Company or any of its
subsidiaries.
16
<PAGE>
4.14 No Brokers. Except for fees to be paid to Goldman, Sachs & Co.
----------
by the Company, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the Recapitalization or in connection with any proposed sale of the Company or
any of its assets, or a restructuring of or merger or similar transaction
involving the Company based upon arrangements made by or on behalf of Company
and its subsidiaries.
4.15 Opinion of Financial Advisor. The Company has received an
----------------------------
opinion from Goldman, Sachs & Co. dated as of a date which is on or prior to the
date of this Agreement to the effect that, as of such date, the Merger
Consideration to be paid by the Company in the Merger is fair to the Company
(the "Fairness Opinion"). The Company has delivered to each of Smitty's and
----------------
Yucaipa a true, complete and correct copy of the Fairness Opinion.
4.16 No Other Agreements to Sell the Company or its Assets. Except as
-----------------------------------------------------
set forth in Section 4.16 of the Disclosure Schedule, the Company has no legal
obligation, absolute or contingent, to any other person or firm to sell any
material portion of the Assets of the Company, to sell the capital stock of the
Company or any of its subsidiaries, or to effect any merger, consolidation or
other reorganization of the Company or any of its subsidiaries or to enter into
any agreement with respect thereto.
4.17 Transactions with Affiliates. Except to the extent disclosed in
----------------------------
the Company SEC Reports filed prior the date of this Agreement, from December
31, 1994 through the date of this Agreement, there have been no transactions,
agreements, arrangements or understandings between the Company or its
subsidiaries, on the one hand, and the Company's affiliates (other than wholly
owned subsidiaries of the Company) or other Persons, on the other hand, that
would be required to be disclosed under Item 404 of Regulation S-K under the
Securities Act.
4.18 Vote Required. The approval by a majority of the votes cast by
-------------
the holders of the outstanding shares of Company Common Stock and Series I
Preferred Stock (taking into account the special voting rights attributable to
the Class A Common Stock and the Series I Preferred Stock) is the only vote of
the holders of any class or series of the Company's capital stock necessary to
approve the Merger and the Recapitalization; provided that the total vote cast
represents over 50% in interest of all securities of the Company entitled to
vote on such matters.
4.19 Registration Rights. Except as set forth in Section 4.19 of the
-------------------
Disclosure Schedule, neither the Company nor any of its subsidiaries has
previously entered into any agreement granting any registration rights to any
Person, whether consistent or inconsistent with the rights to be granted to the
Smitty's Stockholders in the Registration Rights Agreement.
4.20 Information in Proxy Statement. The Proxy Statement (or any
------------------------------
amendment thereof or supplement thereto), at the date mailed to the Company's
stockholders and at the time of the Company Stockholders' Meeting, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading; provided, however, that no representation is made by the Company
with respect to statements made therein based on information supplied by
Smitty's, Yucaipa or any of their respective affiliates for inclusion in the
Proxy Statement. Subject to the proviso set forth in the preceding sentence,
the Proxy Statement will
17
<PAGE>
comply in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
4.21 Information in the Financing Registration Statements. The
----------------------------------------------------
Financing Registration Statements (or any amendments thereof or supplements
thereto), on the date declared effective by the SEC, will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading; provided, however,
that no representation is made by the Company with respect to statements made
therein based on information supplied by Smitty's, Yucaipa or any of their
respective affiliates for inclusion in the Financing Registration Statements.
Subject to the proviso set forth in the preceding sentence, the Financing
Registration Statements will comply in all material respects with the provisions
of the Securities Act and the rules and regulations thereunder.
ARTICLE 5.
REPRESENTATIONS OF SMITTY'S
---------------------------
Smitty's hereby represents and warrants to the Company and Acquisition
as follows:
5.1 Organization of Smitty's. Smitty's and each of its subsidiaries
------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, with the corporate power and
authority to own and operate its businesses as presently conducted. Smitty's
and each of its subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure of Smitty's or any of its
subsidiaries to be so qualified would not have a Material Adverse Effect on
Smitty's and its subsidiaries taken as a whole. The jurisdictions in which
Smitty's and each of its subsidiaries are qualified to do business are set forth
in Section 5.1 of the Disclosure Schedule. Smitty's has previously provided the
Company with true and correct copies of its certificate of incorporation and
bylaws and the charter documents and bylaws of each of its subsidiaries, as
currently in effect.
5.2 Subsidiaries. The only subsidiaries of Smitty's are those set
------------
forth in Section 5.2 of the Disclosure Schedule. All of the outstanding shares
of capital stock of each of Smitty's' subsidiaries are validly issued, fully
paid, non-assessable and free of preemptive rights or rights of first refusal.
Except as set forth in Section 5.2 of the Disclosure Schedule, Smitty's owns,
directly or indirectly, all of the issued and outstanding capital stock of each
of its subsidiaries, free and clear of all Encumbrances, and there are no
existing options, warrants, calls, subscriptions, convertible securities or
other securities, agreements, commitments or obligations of any character
relating to the outstanding capital stock or other securities of any subsidiary
of Smitty's or which would require any subsidiary of Smitty's to issue or sell
any shares of its capital stock or securities convertible into or exchangeable
for shares of its capital stock. Except as set forth in Section 5.2 of the
Disclosure Schedule, neither Smitty's nor any of its subsidiaries owns less than
100% of the outstanding voting securities or other capital stock of any
corporation or other entity (other than investments in marketable securities).
18
<PAGE>
5.3 Capitalization. The authorized capital stock of Smitty's
--------------
consists of (i) 1,500,000 shares of Smitty's Common Stock, 1,000,000 shares of
which have been designated as "Class A Common Stock" and 500,000 shares of which
have been designated "Class B Common Stock," and (ii) 10,000 shares of preferred
stock, par value $.01 per share. As of the date hereof, 705,692.803 shares of
Smitty's' Class A Common Stock, 303,300 shares of Smitty's' Class B Stock and no
shares of Smitty's' preferred stock are issued and outstanding; none of such
shares are held in Smitty's' treasury as of the date hereof. All of the issued
and outstanding shares of Smitty's Common Stock are validly issued, fully paid
and non-assessable. There are no existing options, warrants, calls,
subscriptions, convertible securities or other securities, agreements other than
this Agreement, commitments, or obligations which would require Smitty's to
issue or sell shares of Smitty's Common Stock or any other equity securities, or
securities convertible into or exchangeable or exercisable for shares of
Smitty's Common Stock or any other equity securities of Smitty's. Neither
Smitty's nor any of its subsidiaries has any commitments or obligations to
purchase or redeem any shares of capital stock of any class of, or other equity
interests in, Smitty's or any of its subsidiaries.
5.4 Authorization. Smitty's has the requisite corporate power and
-------------
authority to execute, deliver and perform this Agreement and the transactions
contemplated hereby. The execution and delivery of this Agreement by Smitty's
and the performance by Smitty's of its obligations hereunder and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Smitty's, other than the
adoption and approval of this Agreement by the stockholders of Smitty's, and no
other corporate proceedings on the part of Smitty's are necessary to authorize
this Agreement and the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by Smitty's and constitutes a
legally valid and binding obligation of Smitty's, enforceable against it in
accordance with its terms, except to the extent that such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally or by
general principles of equity. The Certificate of Merger will have been, as of
the Effective Time, duly and validly authorized, executed and delivered by
Smitty's, and will constitute as of such time a legally valid and binding
obligation of Smitty's, enforceable against it in accordance with its terms,
except to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
5.5 Absence of Certain Changes or Events. Except as set forth in
------------------------------------
Section 5.5 of the Disclosure Schedule and the transactions contemplated hereby,
since July 30, 1995, Smitty's and its subsidiaries have conducted their
respective businesses only in the ordinary and usual course consistent with past
practices and there has not been any change in Smitty's' business, operations,
condition (financial or otherwise), results of operations, prospects, assets,
liabilities, working capital or reserves, except for changes contemplated hereby
or changes which have not, individually or in the aggregate, been materially
adverse to Smitty's and its subsidiaries taken as a whole. Except as set forth
in Section 5.5 of the Disclosure Schedule or the Smitty's SEC Reports, from July
30, 1995 through the date of this Agreement, neither Smitty's nor any of its
subsidiaries has taken any of the actions prohibited by Section 7.2 hereof.
19
<PAGE>
5.6 Assets.
------
(a) Except as set forth in Section 5.6(a) of the Disclosure Schedule,
Smitty's and its subsidiaries have good and marketable fee simple title to, or a
valid leasehold interest in, all material Assets reflected on Smitty's' balance
sheet at October 22, 1995, free and clear of all Encumbrances (other than
Permitted Encumbrances).
(b) Section 5.6(b) of the Disclosure Schedule sets forth a complete
and accurate list of (i) each Property and/or Facility owned in fee by Smitty's
or any of its subsidiaries, (ii) each Property and/or Facility held for
development by Smitty's or any of its subsidiaries and (iii) each Property
and/or Facility being leased, subleased or otherwise occupied by Smitty's or any
of its subsidiaries pursuant to any Lease, in each case describing the location
(property address), the identity of the tenant (if other than Smitty's) and the
current use of such Property or Facility.
(c) Smitty's and its subsidiaries, in person or by subtenant, as the
case may be, enjoy peaceful and undisturbed possession of all of their
respective Properties and Facilities, except for those Properties designated as
unimproved land on Section 5.6(b) of the Disclosure Schedule and, with respect
to which, such Properties are subject to no Encumbrances (other than Permitted
Encumbrances) that would materially interfere with the development of or the
market value of the same as Facilities.
(d) There are no pending or, to the best knowledge of Smitty's,
threatened condemnation or similar proceedings relating to any of the Properties
or Facilities of Smitty's and its subsidiaries.
(e) To the best knowledge of Smitty's, (i) the real property
improvements (including leasehold improvements), which constitute a portion of
the Facilities are structurally sound with no known material defects, and (ii)
the building systems which constitute a portion of the Facilities and the
equipment and other tangible Assets owned, leased or used by Smitty's and its
subsidiaries in the conduct of their respective businesses are in good operating
condition and repair, subject to ordinary wear and tear, and are adequate for
the present uses thereof; none of such Facilities (except for Facilities
scheduled for renovation in the ordinary course of business as set forth in
Section 5.6(e) of the Disclosure Schedule), are in need of maintenance or
repairs except for ordinary, routine maintenance and repairs.
(f) Section 5.6(f) of the Disclosure Schedule sets forth a complete
and accurate list of all leases (including subleases and licenses) of personal
property entered into by Smitty's or any of its subsidiaries and involving any
annual expense to Smitty's or any such subsidiary in excess of $50,000 and not
cancelable (without material liability) within 30 days.
(g) Section 5.6(g) of the Disclosure Schedule sets forth a complete
and accurate list of all agreements pursuant to which Smitty's or any of its
subsidiaries lease, sublease, or otherwise permit any third party to occupy all
or any portion of its Properties or the Facilities (collectively, the "Third
-----
Party Leases").
- ------------
(h) Section 5.6(h) of the Disclosure Schedule indicates with respect
to each Lease entered into by Smitty's or any of its subsidiaries, as a tenant
or subtenant: (i) the term, (ii) current
20
<PAGE>
rent and (iii) a brief summary of any terms which would be outside of the
ordinary course of business which would have, or could reasonably be expected to
have, a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole.
(i) Smitty's or its subsidiaries, as the case may be, has in all
material respects performed all obligations on its part to be performed with
respect to (i) all Assets leased by it or to it (whether as lessor or lessee)
except where the failure to perform would not, individually or in the aggregate,
have a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole, and (ii) all Leases of its Facilities, and there exists no material
default or event which, with the giving of notice or lapse of time or both,
would become a default on the part of Smitty's or any of its subsidiaries under
any Lease.
(j) To the best knowledge of Smitty's, (i) no default (nor any event
which, with the giving of notice or passage of time or both would constitute a
default) has occurred on the part of any other party to any Lease of which it is
a party and (ii) each of the Leases is valid, binding and enforceable in
accordance with its terms and is in full force and effect, and assuming all
consents required by the terms thereof or applicable law have been obtained, the
Leases will continue to be valid, binding and enforceable in accordance with
their respective terms and in full force and effect immediately following the
consummation of the transactions contemplated hereby.
(k) Smitty's has delivered to the Company, or otherwise made
available, originals or true copies of all Leases and Third Party Leases (as the
same may have been amended or modified from time to time).
5.7 Contracts and Commitments. Section 5.7 of the Disclosure
-------------------------
Schedule contains a complete and accurate list of all Contracts of the following
categories to which Smitty's or any of its subsidiaries is a party or by which
any of them is bound as of the date of this Agreement:
(i) Contracts not made in the ordinary course of business
involving annual expenditures or liabilities in excess of $100,000 or total
expenditures in excess of $300,000;
(ii) employment contracts, including, without limitation,
contracts to employ executive officers and other contracts with officers,
directors or stockholders of Smitty's, and any other Contracts with or for
the benefit of any Smitty's Stockholder or its affiliates, and all
severance or similar arrangements with any Personnel that will result in
any obligation (absolute or contingent) of Smitty's or any of its
subsidiaries to make any payment to any Personnel following termination of
employment;
(iii) labor contracts;
(iv) material distribution, franchise, license, sales, agency or
advertising contracts;
(v) options, rights of first refusal, purchase rights or other
contractual rights to lease, purchase, acquire, sell or dispose of all, or
any portion of, any real property or material personal property, whether as
grantor or grantee, other than as set forth in the Leases;
21
<PAGE>
(vi) Contracts for the purchase of inventory which are not cancelable
(without material penalty, cost or other liability) within 90 days (other
than Contracts for the purchase of holiday goods in accordance with
customary industry practices) and other Contracts made in the ordinary
course of business involving expenditures or liabilities in excess of
$100,000 which are not cancelable (without material penalty, cost or other
liability) within 30 days;
(vii) promissory notes, loans, agreements, indentures, evidences
of indebtedness or other instruments relating to the lending of money,
whether as borrower, lender or guarantor, in excess of $50,000;
(viii) Contracts containing covenants limiting the freedom of
Smitty's or any of its subsidiaries to engage in any line of business or
compete with any person or operate at any location;
(ix) powers of attorney;
(x) joint venture or partnership agreements or joint development
or similar agreements pursuant to which any third party is entitled to
develop any Property and/or Facility on behalf of Smitty's or its
subsidiaries; and
(xi) any other Contract, whether similar or dissimilar to the
foregoing, which would be material to Smitty's and its subsidiaries taken
as a whole.
True copies of the written Contracts identified in Section 5.7 of the Disclosure
Schedule have been delivered or made available to the Company.
5.8 Absence of Breaches or Defaults. Except as set forth in Section
-------------------------------
5.8 of the Disclosure Schedule, to best knowledge of Smitty's, neither Smitty's
nor any of its subsidiaries is in default under, or in breach or violation of,
any material Contract. No event has occurred which either entitles, or would,
on notice or lapse of time or both, entitle the holder of any indebtedness
affecting Smitty's or any of its subsidiaries (except for the execution of this
Agreement) to accelerate, or which does accelerate, the maturity of any
indebtedness affecting Smitty's or any of its subsidiaries, except as set forth
in Section 5.8 of the Disclosure Schedule.
5.9 No Conflict or Violation. Except as set forth in Section 5.9 of
------------------------
the Disclosure Schedule, neither the execution and delivery of this Agreement,
nor the performance by Smitty's of its obligations hereunder nor the
consummation of the transactions contemplated hereby, will (i) conflict with
Smitty's' certificate of incorporation or bylaws; (ii) assuming satisfaction of
the requirements set forth in Section 5.10 below, violate any statute, law,
ordinance, rule or regulation, applicable to Smitty's or any of its subsidiaries
or any of their properties or assets; or (iii) violate, breach, be in conflict
with or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or permit the termination of any
provision of, or result in the termination of, the acceleration of the maturity
of, or the acceleration of the performance of any obligation of Smitty's or any
of its subsidiaries, or result in the creation or imposition of any lien upon
any properties, assets or business of Smitty's or any of its subsidiaries under,
any note, bond, indenture, mortgage, deed of trust, lease, franchise, permit,
authorization, license, contract,
22
<PAGE>
instrument or other agreement or commitment or any order, judgment or decree to
which Smitty's or any of its subsidiaries is a party or by which Smitty's or any
of its subsidiaries or any of their respective assets or properties is bound or
encumbered, except for such violations, conflicts, defaults or other occurrences
which, in the aggregate, would not have, and would not reasonably be expected to
have, a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole, and would not prevent or delay the Merger or the Recapitalization or
otherwise prevent the Smitty's from performing its obligations under this
Agreement.
5.10 Consents and Approvals. Except (i) pursuant to applicable
----------------------
requirements of the HSR Act, (ii) for the filing of the Certificate of Merger in
accordance with the Delaware Law, or (iii) with respect to matters set forth in
Section 5.10 of the Disclosure Schedule, no consent, approval or authorization
of, permit from, or declaration, filing or registration with, any governmental
or regulatory authority, or any other person or entity (including, without
limitation, any landlord under any lease), is required to be made or obtained by
Smitty's or its subsidiaries in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby.
5.11 Litigation. Except as set forth in Section 5.11 of the
----------
Disclosure Schedule, there are no Actions instituted, pending or, to the best
knowledge of Smitty's, threatened, which, if adversely decided, would,
individually or in the aggregate, directly or indirectly, have a Material
Adverse Effect on Smitty's and its subsidiaries taken as a whole, or would
prevent or delay the Merger or the Recapitalization or otherwise prevent
Smitty's from performing its obligations under this Agreement, nor is there any
outstanding judgment, decree, or injunction or any statute, rule or order of any
domestic or foreign court, governmental department, commission or agency which
has or will have, individually or in the aggregate, any such Material Adverse
Effect.
5.12 Compliance with Law. Except as set forth in Section 5.12 of the
-------------------
Disclosure Schedule, Smitty's and each of its subsidiaries is in compliance with
all foreign, federal, state and local laws and regulations applicable to its
operations or with respect to which compliance is a condition of engaging in the
business thereof (including, without limitation, all Environmental Laws), except
to the extent that failure to comply would not have a Material Adverse Effect on
Smitty's and its subsidiaries taken as a whole. Except as set forth in Section
5.12 of the Disclosure Schedule, to the best knowledge of Smitty's, neither
Smitty's nor any of its subsidiaries has received any notice asserting a
failure, or possible failure, to comply with any such law or regulation, the
subject of which notice has not been resolved as required thereby or otherwise
to the satisfaction of the party sending the notice, except for such failure as
would have a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole or the transactions contemplated hereby. Smitty's and its subsidiaries
have all material permits, licenses and franchises from governmental agencies
required to conduct their respective businesses as they are now being conducted
and all such permits, licenses and franchises will remain in effect after the
Effective Time.
5.13 Labor Matters.
-------------
(a) Section 5.13(a) of the Disclosure Schedule contains a complete
list of all organizations representing the employees of Smitty's or any of its
subsidiaries. There is no strike, work stoppage or labor disturbance pending
or, to the best knowledge of Smitty's, threatened, which involves any employees
of Smitty's or any of its subsidiaries.
23
<PAGE>
(b) Section 5.13(b) of the Disclosure Schedule contains a list of all
unfair employment or labor practice charges which are presently pending, as well
as a description and the status of each, which to the best knowledge of Smitty's
have been filed with any governmental authority by or on behalf of any employee
of Smitty's or any of its subsidiaries and a list of all employment-related
litigation or administrative proceedings which are presently pending (together
with a description and the status of each such litigation or proceeding), filed
by or on behalf of any employee of Smitty's or any of is subsidiaries.
(c) Except as described in Sections 5.11, 5.13(a) and (b) of the
Disclosure Schedule, there are not presently pending or, to the best knowledge
of Smitty's, threatened, against Smitty's or any of its subsidiaries any
material claims by any governmental authority, labor organization, or employee
alleging that Smitty's or any such employer has violated any applicable laws
respecting employment practices. Smitty's and each of its subsidiaries is in
compliance in all material respects with its obligations under all statutes,
executive orders and other governmental regulations or judicial decrees
governing its employment practices, including without limitation, provisions
relating to wages, hours, equal opportunity and payment of social security and
other taxes.
(d) Except as described in Section 5.13(d) of the Disclosure Schedule,
(i) Smitty's has paid, or caused to be paid, in full to all employees of
Smitty's and its subsidiaries all wages, salaries, commissions, bonuses,
benefits and other compensation due to such employees or otherwise arising under
any policy, practice, agreement, plan, program, statute or other law, (ii)
neither Smitty's nor any of its subsidiaries is liable for any severance pay or
other payments to any employee or former employee arising from the termination
of employment, nor will Smitty's or its subsidiaries have any liability under
any benefit or severance policy, practice, agreement, plan, or program which
exists or arises, or may be deemed to exist or arise, as a result of or in
connection with the transactions contemplated hereunder or as a result of the
termination by Smitty's or such subsidiaries of any persons employed on or prior
to the Merger Closing Date, (iii) Smitty's and its subsidiaries have not closed
any plant or facility, effectuated any layoffs of employees or implemented any
early retirement, separation or window program within the past year, nor has
Smitty's or its subsidiaries planned or announced any such future action or
program for the future, and (iv) Smitty's is in compliance with its obligations,
if any, pursuant to the Worker Adjustment and Retraining Notification Act of
1988, and all other notification and bargaining obligations arising under any
collective bargaining agreement, statute or otherwise.
5.14 Smitty's SEC Reports. Smitty's has delivered or made available
--------------------
to the Company true and complete copies of each registration statement, report
and proxy or information statement filed with the SEC, including, without
limitation, all exchange offer registration statements on Form S-4 (the
"Smitty's Exchange Registration Statements"), in the form (including exhibits
- ------------------------------------------
and any amendments thereto) required to be filed with the SEC since July 31,
1994 (collectively, the "Smitty's SEC Reports"). As of the respective dates
--------------------
such Smitty's SEC Reports were filed or, if any such Smitty's SEC Reports were
amended, as of the date such amendment was filed, each of the Smitty's SEC
Reports (i) complied in all material respects with all applicable requirements
of the Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder, and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Each of the audited consolidated
financial statements and unaudited consolidated interim financial statements of
Smitty's (including any related notes and
24
<PAGE>
schedules) included or incorporated by reference in its Annual Reports on Form
10-K for the three fiscal years ended July 30, 1995 and Quarterly Reports on
Form 10-Q for all interim periods subsequent thereto fairly present, in
conformity with GAAP applied on a consistent basis (except as may be indicated
in the notes thereto), the consolidated financial position of Smitty's and its
subsidiaries as of its date and the consolidated results of operations and
changes in financial position for the period then ended (subject to normal year-
end adjustments in the case of any unaudited interim financial statements).
5.15 No Brokers. Except as specified in Schedule 5.15 hereto, no
----------
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the Recapitalization or
in connection with any proposed sale of Smitty's or any of its assets, or a
restructuring of or merger or similar transaction involving Smitty's based upon
arrangements made by or on behalf of Smitty's and its subsidiaries.
5.16 No Other Agreements to Sell Smitty's or its Assets. Except as
--------------------------------------------------
set forth in Section 5.16 of the Disclosure Schedule, Smitty's has no legal
obligation, absolute or contingent, to any other Person to sell any material
portion of the Assets of Smitty's, to sell the capital stock of Smitty's or any
of its subsidiaries, or to effect any merger, consolidation or other
reorganization of Smitty's or any of its subsidiaries or to enter into any
agreement with respect thereto.
5.17 Proprietary Rights. Section 5.17 of the Disclosure Schedule
------------------
contains a list of all Proprietary Rights which are owned by Smitty's or any of
its subsidiaries, or in which Smitty's or any of its subsidiaries has any
interest, or which, to the best knowledge of Smitty's, have been used in
connection with, or which relate to the business of Smitty's or any of its
subsidiaries (whether or not presently used in connection therewith). Except as
set forth in Section 5.17 of the Disclosure Schedule, Smitty's or a subsidiary
of Smitty's owns and has the sole and exclusive right to use all such
Proprietary Rights and such items are not subject to any licenses, Encumbrances
or charges of any kind. Neither Smitty's nor any of its subsidiaries has been
charged, or to the best knowledge of Smitty's is any of them threatened to be
charged, with infringement of, nor to the best knowledge of Smitty's has any of
them infringed, any unexpired patent, trademark, trademark registration, trade
name, service mark, copyright, copyright registration or other proprietary right
of any party. Smitty's and each of its subsidiaries owns, or is licensed or
otherwise has the right to use, all patents, trademarks, trade names, service
marks, copyrights, technology, know-how, processes, methods and designs used in
or necessary for the conduct of its business as presently being conducted. The
consummation of the Merger and the other transactions contemplated hereby will
not alter or impair any of such rights.
5.18 Employee Benefit Plans.
----------------------
(a) Section 5.18 of the Disclosure Schedule contains a complete list
of the Employee Plans of Smitty's. Copies or descriptions of the Employee Plans
of Smitty's have been or will be furnished or made available to the Company and
their counsel within 10 Business Days of the date of this Agreement.
(b) Except as described in Section 5.18 of the Disclosure Schedule,
each of Smitty's Employee Plans (other than any Multiemployer Plan) has been
administered and is in compliance
25
<PAGE>
with the terms of such Plan and all applicable laws, rules and regulations where
the failure thereof would have a Material Adverse Effect on Smitty's and its
subsidiaries taken as a whole.
(c) No "reportable event" (as such term is used in section 4043 of
ERISA), "prohibited transaction" (as such term is used in section 406 of ERISA
or section 4975 of the Code) or "accumulated funding deficiency" (as such term
is used in section 412 or 4971 of the Code) has heretofore occurred with respect
to any Smitty's Employee Plan (other than any Multiemployer Plan) which would
have a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole.
(d) No litigation or administrative or other proceeding involving any
Smitty's Employee Plans (other than any Multiemployer Plan) has occurred or are
threatened where an adverse determination would have a Material Adverse Effect
on Smitty's and its subsidiaries taken as a whole.
(e) Except as set forth in Section 5.18 of the Disclosure Schedule,
neither Smitty's nor any ERISA Affiliate of Smitty's has incurred any withdrawal
liability with respect to any Multiemployer Plan under Title IV of ERISA which
remains unsatisfied in an amount which would have a Material Adverse Effect on
Smitty's and its subsidiaries taken as a whole.
(f) Any termination of, or withdrawal from, any Smitty's Employee
Plans or Multiemployer Plans, on or prior to the Closing Date, would not subject
Smitty's to any material liability under Title IV of ERISA.
5.19 Insurance. Section 5.19 of the Disclosure Schedule contains a
---------
complete and accurate list of all policies or binders of fire, liability,
property, title, workers' compensation, business interruption, errors or
omissions and other forms of insurance (showing as to each policy or binder the
carrier, policy number, coverage limits, including without limitation,
retentions and deductibles, expiration dates, annual premiums and a general
description of the type of coverage provided) maintained by Smitty's or any of
its subsidiaries on its business, property or Personnel within the last five
years. All of such policies are sufficient for compliance with all requirements
of law and of all contracts to which Smitty's or any of its subsidiaries is a
party.
5.20 Affiliate Transactions. Except as set forth in Section 5.20 of
----------------------
the Disclosure Schedule or in the Smitty's SEC Reports, from July 30, 1995
through the date of this Agreement there have been no transactions, agreements,
arrangements or understandings between Smitty's or any of its subsidiaries, on
the one hand, and Smitty's' affiliates (other than wholly owned subsidiaries of
Smitty's) or other Persons, on the other hand, that would be required to be
disclosed under Item 404 of Regulation S-K under the Securities Act.
5.21 Environmental Matters. Except as set forth in Section 5.21 of
---------------------
the Disclosure Schedule, each of the Properties of Smitty's or any of its
subsidiaries is maintained in compliance with all Environmental Laws, except
where the failure to so comply, or any aggregation of such failures, would not
have a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole. Except as set forth in Section 5.21 of the Disclosure Schedule, no
conditions exist with respect to the soil, surface waters, groundwaters, land,
stream sediments, surface or subsurface strata, ambient air, and any other
environmental medium on or off the Properties, which, individually or in the
aggregate, could result in any damage, claim, or liability to or against
Smitty's or any of its
26
<PAGE>
subsidiaries by any third party (including without limitation, any government
entity), including, without limitation, any condition resulting from the
operation of Smitty's' business and/or operator in the vicinity of any of the
Properties and/or any activity or operation formerly conducted by any Person on
the Properties, except in any such case which would not be reasonably expected
to have a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole. With the exception of retail consumer products sold in the ordinary
course and supplies used in the ordinary course of business and except as set
forth in Section 5.21 of the Disclosure Schedule, Smitty's and any other Person
for whose conduct Smitty's is or may be held responsible, has not generated,
manufactured, refined, transported, treated, stored, handled, disposed,
transferred, produced, or processed any Hazardous Materials. Except as set
forth in Section 5.21 of the Disclosure Schedule, (i) there are no existing
uncured notices of violation, administrative actions, or lawsuits against
Smitty's or any of its subsidiaries arising under Environmental Laws or relating
to the use, handling, storage, treatment, recycling, generation, or release of
Hazardous Materials at any of the Properties, nor has Smitty's received any
uncured notification of any allegation of any responsibility for any disposal,
release, or threatened release at any location of any Hazardous Materials; (ii)
there have been no spills or releases of Hazardous Materials at any of the
Properties in excess of quantities reportable under Environmental Laws, except
in any such case which would not be reasonably expected to have a Material
Adverse Effect on Smitty's and its subsidiaries taken as a whole; and (iii)
there are no consent decrees, consent orders, judgments, judicial or
administrative orders, or liens by any governmental authority relating to any
Environmental Law which regulate, obligate, or bind Smitty's or any of its
subsidiaries.
5.22 Taxes. As of the date of this Agreement, except as set forth in
-----
Section 5.22 of the Disclosure Schedule:
(i) Smitty's and its subsidiaries have (A) duly filed (or there
have been filed on their behalf) with the appropriate governmental
authorities all Tax Returns required to be filed by them and such Tax
Returns are true, correct and complete in all material respects, and (B)
duly paid in full or made provision in accordance with GAAP (or there has
been paid or provision has been made on their behalf) for the payment of
all Taxes for all periods (or portions thereof) ending on or prior to the
Merger Closing Date;
(ii) Smitty's and its subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the
payment and withholding of Taxes and have, within the time and the manner
prescribed by law, withheld and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under
applicable laws;
(iii) no federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Tax Returns of Smitty's or its subsidiaries and
neither Smitty's nor its subsidiaries has received a written notice of any
pending audits or proceedings;
(iv) neither the Service nor any other taxing authority (whether
domestic or foreign) has asserted, or to the best knowledge of Smitty's, is
threatening to assert, against Smitty's or any of its subsidiaries any
deficiency or claim for Taxes;
27
<PAGE>
(v) there are no material liens for Taxes upon any property or
assets of Smitty's or any subsidiary thereof, except for liens for Taxes
not yet due and payable and liens for Taxes that are being contested in
good faith by appropriate proceedings;
(vi) neither Smitty's nor any of its subsidiaries has agreed to
or is required to make any adjustment under Section 481(a) of the Code;
(vii) the applicable statutes of limitation for the assessment
of federal income Taxes upon Smitty's and its subsidiaries for all periods
have expired, except as set forth on Section 5.22 of the Disclosure
Schedule;
(viii) neither Smitty's nor any of its subsidiaries is a party
to any material agreement providing for the allocation or sharing of Taxes;
and
(ix) neither Smitty's nor any of its subsidiaries has, with
regard to any assets or property held or acquired by any of them, filed a
consent to the application of Section 341(f) of the Code, or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f)
asset (as such term is defined in Section 341(f)(4) of the Code) owned by
Smitty's or any of its subsidiaries.
5.23 Bank Accounts. Section 5.23 of the Disclosure Schedule contains
-------------
a true and complete listing of all bank accounts or other depositary accounts
maintained by Smitty's or any of its subsidiaries and the authorized signatories
thereto.
5.24 Information in Proxy Statement and Financing Registration
---------------------------------------------------------
Statements. Information supplied by Smitty's, Yucaipa or any of their respective
- ----------
affiliates for inclusion in (i) the Proxy Statement (or any amendment thereof or
supplement thereto), at the date mailed to the Company's stockholders and at the
time of the Company Stockholders' Meeting, and (ii) the Financing Registration
Statements (or any amendments thereof or supplements thereto), on the date
declared effective by the SEC, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
ARTICLE 6.
REPRESENTATIONS OF YUCAIPA
--------------------------
Yucaipa, on behalf of itself and on behalf of the Smitty's Principal
Stockholders that are affiliates of the Yucaipa, hereby represents and warrants
to the Company and Acquisition as follows:
6.1 Organization; Authorization; etc. Yucaipa and each Smitty's
--------------------------------
Principal Stockholder is duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization. The execution and delivery
of this Agreement and the consummation of the Merger and the other transactions
contemplated hereby have been duly authorized by all necessary partnership
action on the part of Yucaipa. This Agreement has been duly executed and
delivered
28
<PAGE>
by Yucaipa, and, assuming the due execution hereof by each other party hereto,
this Agreement constitutes the legally valid and binding obligation of Yucaipa,
enforceable against Yucaipa in accordance with its terms, except to the extent
that such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally and to general equitable principles.
6.2 Ownership of Shares. At the time of the Merger Closing, each of
-------------------
the Smitty's Principal Stockholders will own, beneficially and of record, all of
the shares of Smitty's Common Stock issued in its name and set forth opposite
its name on Section 6.2 of the Disclosure Schedule, free of any Encumbrance and
subject to no restriction with respect to the voting thereof (except as
contemplated by this Agreement or the Smitty's Stockholders' Agreements), other
than restrictions generally applicable under federal or state securities laws.
6.3 Consents and Approvals; No Violations. Except for the filing of
-------------------------------------
the Certificate of Merger with the Secretary of State of Delaware as set forth
in Section 1.2, filings pursuant to the HSR Act and the matters set forth in
Section 6.3 of the Disclosure Schedule, and assuming compliance with any
applicable antitrust laws, there is no requirement applicable to Yucaipa or any
Smitty's Principal Stockholder to make any filing or registration with, or to
obtain any permit, authorization, consent or approval of, any government or
regulatory authority or any non-governmental person or entity in connection with
the execution and delivery by Yucaipa of this Agreement, the consummation of the
Merger, and the performance of the other transactions contemplated hereby,
except where the failure to make such filings or registrations or to obtain such
permits, authorizations, consents or approvals would not, individually or in the
aggregate, have a Material Adverse Effect on Smitty's and its subsidiaries taken
as a whole or the consummation of the transactions contemplated hereby. Except
as set forth in Section 6.3 of the Disclosure Schedule, neither the execution or
delivery of this Agreement by Yucaipa nor the performance by Yucaipa of its
obligations under this Agreement will (i) violate any provision of the
partnership agreement or bylaws (or other comparable governing instrument) of
Yucaipa or any Smitty's Principal Stockholder, (ii) violate any provision of, or
constitute (with or without notice, the passage of time or both) a default
under, or result in the acceleration of or entitle any party to accelerate
(whether after the giving of notice or lapse of time or both) or terminate any
obligation under, any mortgage, lien, lease, agreement or other instrument or
obligation to which Yucaipa or any Smitty's Principal Stockholder is a party or
by which it or the shares of Smitty's Common Stock owned by it are bound, except
where such event would not, individually or in the aggregate, have a Material
Adverse Effect on Smitty's and its subsidiaries taken as a whole or the
consummation of the transactions contemplated hereby, or (iii) assuming
compliance with any applicable antitrust laws, violate any order, writ,
injunction, decree, statute, rule or regulation to which Yucaipa or any Smitty's
Principal Stockholder is subject.
6.4 Agreement to Sell Smitty's and Other Matters. Neither Yucaipa
--------------------------------------------
nor any Smitty's Principal Stockholder has any legal obligation, absolute or
contingent, to any other Person to sell or dispose of its interest in the
capital stock of Smitty's, by way of a sale of capital stock, merger,
consolidation or other reorganization, or otherwise, or to enter into any
agreement with respect thereto. Except as set forth on Section 6.4 of the
Disclosure Schedule, neither Yucaipa nor any Smitty's Principal Stockholder has
directly or through any Affiliate or agent created, or caused to be created, (i)
any legal obligation, absolute or contingent, of any other Person to sell any
material portion of the Assets of Smitty's or its subsidiaries, to sell the
capital stock of Smitty's or its
29
<PAGE>
subsidiaries, to effect any merger, consolidation or other reorganization of
Smitty's or its subsidiaries, or to enter into any agreement with respect
thereto, or (ii) any liability (contingent or otherwise) for payment of a
brokerage, finder's, investment banking or other fee or commission in connection
with any sale or restructuring of Smitty's and its subsidiaries, or (iii) any
obligation with respect to the issuance or sale of capital stock by Smitty's or
any of its subsidiaries.
ARTICLE 7.
CONDUCT OF BUSINESS PENDING THE MERGER CLOSING
----------------------------------------------
7.1 The Company. From the date hereof through the Merger Closing
-----------
Date, except as otherwise provided for in this Agreement, the Company shall
conduct the business of the Company and its subsidiaries only in the ordinary
and usual course as such business has been conducted, and shall use all
reasonable efforts to keep intact the business organization in all material
respects. The Company shall use all reasonable efforts to avoid, and to cause
its subsidiaries to avoid, the occurrence of a breach of any representation or
warranty hereunder as of the Merger Closing, or a violation of any covenant to
be performed by it pursuant hereto, or the failure to satisfy any condition to
the obligations of any party hereto. In addition, from the date hereof through
the Merger Closing Date, neither the Company nor any of its subsidiaries shall,
except as otherwise provided in this Agreement:
(a) (i) amend its certificate of incorporation or bylaws (other than
amendments to defer the redemption of the Series I Preferred Stock for up
to five years); (ii) split, combine or reclassify any of its outstanding
equity securities or declare, set aside or pay any dividend payable in
cash, stock or property or make any other distribution with respect to any
of its equity securities, except regularly scheduled dividends on its
Common Stock, consistent with past practice; or (iii) redeem, purchase or
otherwise acquire, directly or indirectly, any shares of its equity
securities (other than redemptions of Series I Preferred Stock in
accordance with the Company's certificate of incorporation);
(b) except as set forth in Section 4.4 of the Disclosure Schedule,
issue or sell or agree to issue or sell any additional shares of, or
options, warrants or rights of any kind to acquire any shares of, its
capital stock of any class or series; (ii) enter into any agreement,
contract or commitment out of the ordinary course of its business to
dispose of or acquire, or relating to the disposition or acquisition of, a
segment of its business; (iii) except in the ordinary course of business,
sell, pledge, dispose of or encumber any material Assets (including,
without limitation, any indebtedness owed to it or any material claims held
by it); (iv) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or make any material investment, either by purchase of
stock or securities, contribution to capital, property transfer or
purchase, in any case, of any material amount of property or assets, in any
other individual or entity; or (v) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(c) adopt or amend any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, employment or other
employee benefit plan,
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agreement, trust, fund or other arrangement for the benefit or welfare of
any employee or increase in any manner the compensation or fringe benefits
of any employee or pay any benefit not required by any existing plan,
arrangement or agreement;
(d) incur any material amount of indebtedness for borrowed money, or
make any loans or advances or capital contributions to any other person
other than a wholly owned subsidiary of the Company, or issue or sell any
debt securities, other than borrowings under existing lines of credit in
the ordinary course of business or acquire any debt instruments of others;
(e) make or commit to make any capital expenditures in excess of
$1,000,000 in the aggregate, other than expenditures for (i) routine
maintenance and repair or (ii) pursuant to existing contracts or
commitments;
(f) enter into or amend any Contract for the purchase of inventory
which is not cancelable within 90 days (other than Contracts for the
purchase of holiday goods in accordance with customary industry practices)
without penalty, cost or liability or any other Contract in excess of
$100,000 which is not cancelable within 30 days without penalty, cost or
liability;
(g) grant any severance or termination pay (other than pursuant to
policies or agreements in effect on the date hereof) or increase the
benefits payable under its severance or termination pay policies or
agreements in effect on the date hereof; and
(h) take or permit any action which would prevent the Merger from
qualifying as a reorganization under Section 368 of the Code.
Notwithstanding the foregoing provisions, in no event shall the Company be
required to comply with the provisions contained in Sections 7.1(b) through (h)
following the date, if any, that the Company shall have terminated the
Recapitalization.
7.2 Smitty's. From the date hereof through the Merger Closing Date,
--------
except as otherwise provided for in this Agreement, Smitty's shall conduct its
business and the business of its subsidiaries only in the ordinary and usual
course as such business has been conducted, and shall use reasonable efforts to
keep intact the business organization in all material respects. Without
limiting the foregoing, Smitty's shall, and shall cause its subsidiaries to; (i)
maintain reasonably comparable advertising and promotional expenditures; (ii)
maintain reasonably comparable overall levels of inventory subject to seasonal
variation and changes in sales volume; (iii) maintain comparable insurance
coverage at commercially reasonable rates; (iv) pay amounts due to vendors
consistent with past practices; and (v) perform customary maintenance on its
Properties, Facilities and Fixtures and Equipment and provide for the security
of such Properties, Facilities and Fixtures and Equipment in accordance with
past practices. Smitty's shall use all reasonable efforts to avoid, and to
cause each of its subsidiaries to avoid, the occurrence of a breach of any
representation or warranty hereunder as of the Merger Closing, or a violation of
any covenant to be performed by it pursuant hereto, or the failure to satisfy
any condition to the obligations of any party hereto. In addition, from the
date hereof through the Merger Closing, except as set forth in Section 7.2 of
the Disclosure Schedule or as otherwise specifically provided for in this
Agreement or as the Company may
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<PAGE>
specifically consent in writing, which consent shall not be unreasonably
withheld, neither Smitty's or any of its subsidiaries shall:
(a) close any Facility, except as required by applicable law or in the
event of casualty or as a result of the expiration of any Lease which,
after reasonable efforts, is not renewed;
(b) enter into, with respect to any Facility or Property or any other
real property or any material assets, any new lease, lease termination
agreement or material amendment (excluding any extension or renewal of any
lease in accordance with past practices) of any agreement to lease such
real property;
(c) sell, assign or sublease any Facility or Property;
(d) (i) sell, assign or sublease any Fixtures and Equipment or other
material Assets (other than as specified in clause (ii)), the aggregate
sales prices and the annual rental payments of which are $100,000 or more
in the aggregate, other than in the ordinary course of business, or (ii)
enter into any sale-leaseback transaction resulting in annual rental
payments in excess of $100,000, except for sale-leaseback transactions for
Fixtures and Equipment in the ordinary course of business consistent with
past practice;
(e) make or commit to make any capital expenditures in excess of
$250,000 in the aggregate, other than expenditures for (i) routine
maintenance and repair or (ii) pursuant to existing contracts or
commitments;
(f) incur any material amount of indebtedness for borrowed money, or
make any loans or advances or capital contributions to any other person
other than a wholly owned subsidiary of the Company, or issue or sell any
debt securities, other than borrowings under existing lines of credit in
the ordinary course of business or acquire any debt instruments of others;
(g) make any transfer of Assets from Smitty's or any of its
subsidiaries to any Affiliate (other than a wholly owned subsidiary);
(h) materially reduce any store operating hours except as consistent
with past practices, as a result of security concerns, material changes in
sales volume, or as required by law;
(i) (i) amend its certificate of incorporation or bylaws or the
charter or bylaws of any of its subsidiaries; (ii) split, combine or
reclassify the outstanding shares of its capital stock or declare, set
aside or pay any dividend payable in cash, stock or property or make any
other distribution with respect to such shares of capital stock; (iii)
redeem, purchase or otherwise acquire, directly or indirectly, any shares
of its capital stock; or (iv) sell or pledge any stock of any of its
subsidiaries;
(j) (i) issue or sell or agree to issue or sell any additional shares
of, or options, warrants or rights of any kind to acquire any shares of,
its capital stock of any class; (ii)
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<PAGE>
enter into any agreement, contract or commitment out of the ordinary course
of its business, to dispose of or acquire, or relating to the disposition
or acquisition of, a segment of its business; (iii) except in the ordinary
course of business, sell, pledge, dispose of or encumber any material
Assets (including without limitation, any indebtedness owed to them or any
material claims held by them); (iv) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other
business organization or division thereof or make any material investment,
either by purchase of stock or securities, contribution to capital,
property transfer or purchase, in any case, of any material amount of
property or assets, in any other Person; or (v) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
(k) fail to preserve intact its business organization, or fail to keep
available the services of its present officers and key employees, and fail
to preserve the good will of customers of, and other persons having
business relationships with it;
(l) grant any severance or termination pay (other than pursuant to
policies or agreements in effect on the date hereof) or increase the
benefits payable under its severance or termination pay policies or
agreements in effect on the date hereof;
(m) adopt or amend any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, fund or other arrangement for the
benefit or welfare of any employee or increase in any manner the
compensation or fringe benefits of any employee or pay any benefit not
required by any existing plan, arrangement or agreement;
(n) enter into or amend any Contract for the purchase of inventory
which is not cancelable within 90 days (other than Contracts for the
purchase of holiday goods in accordance with customary industry practices)
without penalty, cost or liability or any other Contract in excess of
$100,000 which is not cancelable within 30 days without penalty, cost or
liability;
(o) negotiate, enter into, or modify any agreement or agree to be
bound by any agreement with any collective bargaining agent relating to its
business, except for agreements with respect to routine employee grievance
matters in the ordinary course of business;
(p) take or permit any action which would prevent the Merger from
qualifying as a reorganization under Section 368 of the Code; and
(q) make any material change in its tax or accounting policies or any
material reclassification of assets or liabilities.
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<PAGE>
ARTICLE 8.
ADDITIONAL COVENANTS
--------------------
8.1 Further Assurances and Cooperation. Subject to the terms and
----------------------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by this
Agreement and to cooperate with each other in connection therewith, (a) to
obtain all necessary waivers, consents and approvals from other parties to
material loan agreements, leases and other contracts (provided that Smitty's
shall not agree to any substantial modification to any such agreement, lease or
contract or to any payment of funds in order to obtain such waiver, consent or
approval without the prior written consent of the Company), (b) to defend any
lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby, (c) to lift or rescind any
injunction or restraining order or other order adversely affecting the ability
of the parties to consummate the transactions contemplated hereby, (d) to effect
all necessary registrations and filings (including any registrations and filings
which may be required to be made by the Company pursuant to any federal or state
securities laws), (e) to negotiate and enter into, on terms reasonably
satisfactory to the Company, the Financing Agreements and to satisfy all
conditions thereto, and (f) to fulfill all conditions to this Agreement.
Without limitation of the foregoing, Smitty's shall use all reasonable efforts
to (i) cause each of the Smitty's Stockholders to execute a Smitty's
Stockholders' Agreement, Continuity-of-Interest Letter and Investment Letter as
referred to in Section 1.7 hereof, and (ii) take such actions as the Company may
reasonably request to facilitate the repayment by the Company of the Specified
Smitty's Indebtedness on the Merger Closing Date.
8.2 Certain Filings and Consents. Each party hereto shall (a) as
----------------------------
promptly as practicable make any required filings and submissions under the HSR
Act with respect to the Merger, (b) cooperate with each other in determining
whether any other filings are required to be made or consents, approvals,
permits or authorizations are required to be obtained under any other federal,
state, local or foreign law or regulation or whether any consents, approvals or
waivers are required to be obtained from other parties to loan agreements,
leases or other contracts in connection with the consummation of the Financings,
the Merger, the Offer and the other transactions contemplated by this Agreement,
and (c) actively assist each other in obtaining any consents, permits,
authorizations, approvals or waivers which are required. Each party hereto
shall promptly inform the other of any material communication between such party
and the Federal Trade Commission, the Department of Justice or any other
government or governmental authority regarding the Merger or the other
transactions contemplated by this Agreement. If any party receives a request
for additional information or documentary material from any such government or
governmental authority, then such party shall endeavor in good faith to make, or
cause to be made, as soon as reasonably practicable and after consultation with
the other party, an appropriate response to such request. Notwithstanding the
foregoing, in connection with proceedings under or relating to the HSR Act or
any other federal or state antitrust law, all analyses, appearances,
presentations, memoranda, briefs, arguments, and opinions made or submitted by
or on behalf of any party hereto shall be subject to the joint approval or
disapproval and the joint control of the Company and Smitty's, acting with the
advice of their respective counsel, provided that nothing herein shall prevent
any party hereto or their authorized representatives from making or submitting
any such analysis, appearance, presentation,
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<PAGE>
memorandum, brief, argument, or opinion in response to a subpoena or as
otherwise required by law. The parties hereto shall cooperate in connection
with reaching any understandings, undertakings or agreements (oral or written)
involving the Federal Trade Commission, the Department of Justice or any other
governmental authority in connection with the transactions contemplated hereby.
The Company shall use all reasonable efforts to resolve such objections, if any,
as may be asserted with respect to the transactions contemplated hereby under
any applicable federal or state antitrust laws; provided, however, that in no
event shall the Company or any of its subsidiaries or the Surviving Corporation
or any of its subsidiaries be required in that connection to (i) effect any
divestitures of any material assets of the Company, Smitty's or their respective
subsidiaries, (ii) hold separate any such material assets or (iii) agree to any
material restrictions on the operations of the Company, Smitty's or their
respective subsidiaries of any material portion of the business or assets of the
Company, Smitty's or their respective subsidiaries.
8.3 Access to Information; Confidentiality.
--------------------------------------
(a) Upon reasonable notice, each party shall, and shall cause each of
its subsidiaries to, afford the other parties and their representatives, full
access during normal business hours to all of its officers, agents, properties,
books, contracts, commitments and records (including but not limited to tax
returns) and, during such period, shall furnish promptly to such other party and
such other persons all information concerning its business, properties and
personnel as such other party or such other persons may reasonably request. No
investigation pursuant to this Section 8.3 or otherwise shall affect the
representations and warranties or indemnities of the parties hereto or the
conditions to the parties' respective obligations to consummate the Financings,
the Merger, the Offer or the other transactions contemplated by the
Recapitalization.
(b) Each party hereto shall (and shall use all reasonable efforts to
cause its representatives to) hold all such non-public documents, work papers
and other materials in confidence in accordance with the provisions of the
Confidentiality Agreements. In the event of termination of this Agreement, each
party hereto shall return promptly every confidential document furnished to it
by the other parties hereto in connection with the transactions contemplated
hereby, and shall use all reasonable efforts to cause its representatives to
return the same, in each case subject to the continued application of the
Confidentiality Agreements.
8.4 Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to Smitty's, and Smitty's shall give prompt notice to the Company, of (a)
the occurrence, or failure to occur, of any event which occurrence or failure
would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate in any material respect at any time from
the date hereof to the Merger Closing Date, (b) any material failure of the
Company or Smitty's or any of their respective affiliates, as the case may be,
or of any of their respective officers, directors, employees or agents, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement, and (c) the status or fulfillment of
any of the conditions set forth in Article 9 hereof, upon reasonable request of
the other party; provided, however, that no such notification shall affect the
representations or warranties of the parties or the conditions to the
obligations of the parties hereunder.
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<PAGE>
8.5 Alternative Proposals.
---------------------
(a) Smitty's (and its subsidiaries, and affiliates over which it
exercises control) will not, and Smitty's (and each of its subsidiaries and
affiliates over which it exercises control) will use its best efforts to ensure
that its respective officers, directors, employees, investment bankers,
attorneys, accountants and other agents do not, directly or indirectly: (i)
initiate, solicit or encourage, or take any action to facilitate the making of,
any offer or proposal which constitutes or is reasonably likely to lead to any
Alternative Transaction (as defined below) or an inquiry with respect thereto,
or, (ii) in the event of an unsolicited Alternative Transaction for Smitty's or
any subsidiary or affiliate of Smitty's, engage in negotiations or discussions
with, or provide any information or data to, any corporation, partnership,
person or other entity or group (other than the Company or any of its affiliates
or representatives) relating to any Alternative Transaction, except in the case
of clause (ii) above to the extent that (x) the Alternative Transaction is a
bona fide written proposal submitted to Smitty's Board of Directors and (y)
Smitty's Board of Directors determines, after having received the oral or
written opinion of outside legal counsel to Smitty's, that the failure to engage
in such negotiations or discussions or provide such information would result in
a breach of the Board of Directors' fiduciary duties under applicable law.
Smitty's shall, and shall cause its subsidiaries and affiliates over which it
exercises control, and will use its best efforts to ensure their respective
officers, directors, employees, investment bankers, attorneys, accountants and
other agents to, immediately cease and cause to be terminated all discussions
and negotiations that have taken place prior to the date hereof, if any, with
any parties conducted heretofore with respect to any Alternative Transaction
relating to Smitty's. Smitty's represents that it is not now engaged in
discussions or negotiations with any party with respect to an Alternative
Transaction.
(b) The Company (and its subsidiaries, and affiliates over which it
exercises control) will not, and the Company (and its subsidiaries, and
affiliates over which it exercises control) will use their best efforts to
ensure that their respective officers, directors, employees, investment bankers,
attorneys, accountants and other agents do not, directly or indirectly: (i)
initiate, solicit or encourage, or take any action to facilitate the making of,
any offer or proposal which constitutes or is reasonably likely to lead to any
Alternative Transaction (as defined below) or an inquiry with respect thereto,
or, (ii) in the event of an unsolicited Alternative Transaction for the Company
or any subsidiary or affiliate of the Company, engage in negotiations or
discussions with, or provide any information or data to, any corporation,
partnership, person or other entity or group (other than Yucaipa or any of its
affiliates or representatives) relating to any Alternative Transaction, except
in the case of clause (ii) above to the extent that (x) the Alternative
Transaction is a bona fide written proposal submitted to the Company's Board of
Directors and (y) 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 the Board of Directors' fiduciary duties
under applicable law. The Company shall, and shall cause its subsidiaries and
affiliates over which it exercises control, and will use its best efforts to
ensure their respective officers, directors, employees, investment bankers,
attorneys, accountants and other agents to, immediately cease and cause to be
terminated all discussions and negotiations that have taken place prior to the
date hereof, if any, with any parties conducted heretofore with respect to any
Alternative Transaction relating to the Company. The Company represents that it
is not now engaged in discussions or negotiations with any party with respect to
an Alternative Transaction. Nothing contained in this Section 8.5 shall
prohibit the Company or its Board of Directors from taking and disclosing to its
stockholders a position with
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<PAGE>
respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or making such disclosure as may be required
by applicable law.
(c) As used in this Agreement, "Alternative Transaction" when used in
-----------------------
connection with any Person shall mean any tender or exchange offer involving the
capital stock of such Person, any proposal for a merger, consolidation or other
business combination involving such Person or any subsidiary of such Person, any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the business or assets of, such Person or any
subsidiary of such Person, any proposal or offer with respect to any
recapitalization or restructuring with respect to such Person or any subsidiary
of such Person or any proposal or offer with respect to any other transaction
similar to any of the foregoing with respect to such Person or any subsidiary of
such Person other than pursuant to the transactions to be effected pursuant to
this Agreement.
(d) In case of any capital reorganization, sale, merger or
consolidation of the Company in connection with an Alternative Transaction
(other than a merger or consolidation in which the Company is the continuing
corporation and which does not result in any reclassification of the outstanding
shares of Common Stock into shares of other stock or other securities or assets)
(collectively such actions being hereinafter referred to as "Reorganizations")
---------------
is consummated, the Smitty's Stockholders shall, to the extent they do not
receive the Merger Consideration prior to the consummation of such Alternative
Transaction, be entitled upon consummation of the Merger to receive the same
number of shares of stock or other securities or assets to which a holder of the
number of shares of the Company's Common Stock included in the Merger
Consideration would have been entitled to receive upon the consummation of such
Reorganization.
8.6 Public Statements and Press Releases. The Company, Smitty's and
------------------------------------
each of their respective affiliates shall not from and after the date hereof
make, issue or release any public announcement, press release, statement or
acknowledgment of the existence of, or reveal publicly the terms, conditions and
status of, the transactions provided for herein, without the prior consent of
the other parties as to the content and time of release of and the media in
which such statement or announcement is to be made, except as may be required by
applicable law, court process or by obligations pursuant to any requirements of
the New York Stock Exchange, Inc.; provided, in the case of any such exception,
the Company shall use all reasonable efforts to provide Smitty's and Yucaipa
with prior notice of such disclosure or release. Each party hereto agrees that
it will not unreasonably withhold any such consent.
8.7 Directors' and Officers' Insurance and Indemnification.
------------------------------------------------------
(a) The Company agrees that after the Merger Closing Date it shall,
and shall cause its subsidiaries to, indemnify each person who is now, or has
been at any time prior to the date hereof, a director or officer of Smitty's or
any of Smitty's subsidiaries, successors and assigns (individually a "Smitty's
--------
Indemnified Party" and collectively the "Smitty's Indemnified Parties"), to the
- ----------------- ----------------------------
fullest extent permitted by law, with respect to any claim, liability, loss,
damage, judgment, fine, penalty, amount paid in settlement or compromise, cost
or expense, including reasonable fees and expenses of legal counsel (whenever
asserted or claimed) ("Smitty's Indemnified Liability"), based in whole or in
------------------------------
part on, or arising in whole or in part out of, any matter existing or occurring
at or prior to the Merger Closing Date whether commenced, asserted or claimed
before or after the Merger Closing Date, including liability arising under the
Securities Act, the Exchange Act or state
37
<PAGE>
law. The Company shall, and shall cause the Surviving Corporation to, maintain
in effect for not less than four years after the Merger Closing Date the current
policies of directors' and officers' liability insurance maintained by Smitty's
and its subsidiaries on the date hereof (provided that the Company may
substitute therefor policies having at least the same coverage and containing
terms and conditions which are no less advantageous to the persons currently
covered by such policies as insured) with respect to matters existing or
occurring at or prior to the Merger Closing Date, and the Company shall use its
best efforts to prepay premiums with respect to the foregoing insurance for the
four-year period following the Merger Closing Date; provided, however, that if
the aggregate annual premiums for such insurance during such period shall exceed
200% of the per annum rate of the aggregate premium currently paid by Smitty's
and its subsidiaries for such insurance on the date of this Agreement, then the
Company shall cause the Surviving Corporation to, and the Surviving Corporation
shall, provide the maximum coverage that shall then be available at an annual
premium equal to 200% of such rate. The Company agrees to pay all reasonable
expenses (including reasonable fees and expenses of counsel) that may be
incurred by any Smitty's Indemnified Party in successfully enforcing the
indemnity or other obligations under this Section 8.7(a).
(b) The Company agrees that after the Offer Closing Date it shall, and
shall cause its subsidiaries to, indemnify each person who is now, or has been
at any time prior to the date hereof, a director or officer of the Company or
any of the Company's subsidiaries, successors and assigns (individually a
"Company Indemnified Party" and collectively the "Company Indemnified Parties"),
- -------------------------- ---------------------------
to the fullest extent permitted by law, with respect to any claim, liability,
loss, damage, judgment, fine, penalty, amount paid in settlement or compromise,
cost or expense, including reasonable fees and expenses of legal counsel
(whenever asserted or claimed) ("Company Indemnified Liability"), based in whole
-----------------------------
or in part on, or arising in whole or in part out of, any matter existing or
occurring at or prior to the Offer Closing Date whether commenced, asserted or
claimed before or after the Offer Closing Date, including liability arising
under the Securities Act, the Exchange Act or state law. The Company shall
maintain in effect for not less than four years after the Offer Closing Date the
current policies of directors' and officers' liability insurance maintained by
the Company and its subsidiaries on the date hereof (provided that the Company
may substitute therefor policies having at least the same coverage and
containing terms and conditions which are no less advantageous to the persons
currently covered by such policies as insured) with respect to matters existing
or occurring at or prior to the Offer Closing Date and the Company shall use its
best efforts to prepay premiums with respect to the foregoing insurance for the
four-year period following the Merger Closing Date; provided, however, that if
the aggregate annual premiums for such insurance during such period shall exceed
200% of the per annum rate of the aggregate premium currently paid by the
Company and its subsidiaries for such insurance on the date of this Agreement,
then the Company shall provide the maximum coverage that shall then be available
at an annual premium equal to 200% of such rate. The Company agrees to pay all
reasonable expenses (including reasonable fees and expenses of counsel) that may
be incurred by any Company Indemnified Parties in successfully enforcing the
indemnity or other obligations under this Section 8.7(b).
(c) Indemnity Procedures. The rights under this Section 8.7 are in
--------------------
addition to rights that a Smitty's Indemnified Party or a Company Indemnified
Party may have under the certificate of incorporation, bylaws, other similar
organizational documents of the Company, Smitty's or any of their subsidiaries
or applicable law. The rights under this Section 8.7 shall survive consummation
of the Merger and the Recapitalization and are expressly intended to benefit
each
38
<PAGE>
Indemnified Party. The Company shall keep, and shall cause the Surviving
Corporation and any of its other subsidiaries (or their successors) to keep, in
effect the provisions of its certificate of incorporation or bylaws or similar
organizational documents providing for indemnification to the fullest extent
provided by law.
8.8 Financial Information. Smitty's shall deliver to the Company as
---------------------
soon as available all interim and other financial statements and other
management reports generated in the ordinary course of business prepared by or
for Smitty's, prior to the Merger Closing. In addition, subject to compliance
with any applicable antitrust laws, Smitty's shall deliver to the Company, on a
weekly and monthly basis, such internal sales reports on a store by store basis
promptly as they are prepared by Smitty's for each such week or month.
8.9 Smitty's Stockholders' Approval. Smitty's agrees to promptly
-------------------------------
hold a meeting of its stockholders, or receive the written consent of its
stockholders in lieu of a meeting (either of such actions, the "Smitty's
--------
Stockholders' Meeting"), in order for such stockholders to approve the Merger as
- ---------------------
required by applicable law.
8.10 Proxy Statement; Company Stockholders' Meeting.
----------------------------------------------
(a) The Company agrees to promptly hold a meeting of its stockholders
(the "Company Stockholders' Meeting") in order for such stockholders to approve
-----------------------------
all of the transactions contemplated by the Recapitalization, including, without
limitation, (i) the issuance of Common Stock by the Company in the Merger and in
connection with the Financings, (ii) the election of directors of the Company,
and (iii) the adoption of an amended and restated certificate of incorporation
for the Company. The Company shall use all reasonable efforts to obtain
stockholder approval thereof. The Company Stockholders' Meeting shall be held
as soon as practicable following the date upon which the Proxy Statement shall
have been approved for release to the Company's stockholders by the SEC.
(b) The Company shall, as promptly as practicable, prepare and file
with the SEC the Proxy Statement, with forms of proxy in connection with the
vote of its stockholders at the Company Stockholders' Meeting. The Company will
use all reasonable efforts to have or cause the Proxy Statement declared
effective as promptly as practicable, and will take any other action required or
necessary to be taken under federal or state securities laws or otherwise in
connection with the SEC approval process. The Company shall use all reasonable
efforts to cause the Proxy Statement to be mailed to its stockholders at the
earliest practicable date and shall use all reasonable efforts to hold the
Company Stockholders' Meeting as soon as practicable after the date thereof.
(c) Smitty's and its counsel shall be given the opportunity to
participate in the preparation of the Proxy Statement prior to its being filed
with the SEC. The Company agrees to provide Smitty's and its counsel with any
written comments the Company or its counsel may receive from the SEC with
respect to the Proxy Statement promptly after the receipt of such comments. The
form and substance of the Proxy Statement and any amendments, modifications or
supplements to the Proxy Statement shall be determined by the Company in its
reasonable discretion; provided, however, that the Company will provide Smitty's
a reasonable opportunity to review and comment on any such amendment,
modification or supplement prior to filing or distribution.
39
<PAGE>
8.11 Stockholders' Representative. Yucaipa is hereby appointed as
----------------------------
the "Stockholders' Representative" on behalf of the Smitty's Stockholders and
irrevocably constituted and appointed as each Smitty's Stockholder's attorney-
in-fact, to act in each Smitty's Stockholder's name, place and stead in any way
in which he/she/it could do any or all of the following: (i) to supervise the
Closings and determine whether the conditions to the Closings have been
satisfied and waive any conditions which, in its sole discretion, it deems
appropriate to facilitate the Closings; (ii) to take any and all actions that
may be necessary or desirable in connection with this Agreement; (iii) to
execute and deliver in its capacity as Stockholders' Representative any and all
notices, documents or certificates to be executed by the Stockholders'
Representative in accordance with this Agreement and the other Transaction
Documents; (iv) deliver at the Merger Closing stock powers and any other
required instruments of transfer to be executed by the Smitty's Stockholders,
including a letter of transmittal, and to accept certificate or certificates in
the name of each Smitty's Stockholder Merger Consideration as set forth in
Section 3.1(c); (v) take all other actions and do other things provided in or
contemplated by this Agreement as to be taken or performed by the Stockholders'
Representative. This power of attorney shall be coupled with an interest and
irrevocable and shall survive, and shall not be affected by, the subsequent
death, disability or incompetence, or liquidation or dissolution, as applicable
of any Smitty's Stockholder.
8.12 Termination of Consulting Agreement. As of the Merger Closing
-----------------------------------
Date, Smitty's and Yucaipa shall mutually terminate the Consulting Agreement
dated as of April 30, 1994 among Smitty's, Smitty's Super Valu, Inc. and Yucaipa
and Smitty's shall pay, or cause to be paid, to Yucaipa all fees and expense
reimbursements accrued through the Merger Closing Date and owing to Yucaipa
thereunder, without regard to any change of control or other payments caused by
the transactions contemplated by this Agreement.
ARTICLE 9.
CONDITIONS PRECEDENT TO THE MERGER
----------------------------------
9.1 Conditions Precedent to the Company's and Acquisition's
-------------------------------------------------------
Obligations. The obligation of the Company and Acquisition to effect the Merger
- -----------
shall be subject to the fulfillment, at or prior to the Effective Time, of the
following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Smitty's and Yucaipa contained in this Agreement which by
their terms require an event or condition having a Material Adverse Effect
in order to be inaccurate shall be true and correct on and as of the Merger
Closing Date with the same effect as though such representations and
warranties had been made on and as of such date, except for representations
and warranties that speak as of a specific date or time other than the
Merger Closing Date (which need only be true and correct as of such date or
time). The representations and warranties of Smitty's and Yucaipa
contained in this Agreement which by their terms do not require an event or
condition having a Material Adverse Effect in order to be inaccurate shall
be true and correct on and as of the Merger Closing Date with the same
effect as though such representations and warranties had been made on and
as of such date (except for representations and warranties that speak as of
a specific date or time other than the Merger Closing Date, which need only
be true and correct as of such date or time), except for such
40
<PAGE>
breaches or inaccuracies that, individually or in the aggregate, would not
have a Material Adverse Effect on Smitty's and its subsidiaries taken as a
whole.
(b) Compliance with Covenants. The covenants and agreements of
-------------------------
Smitty's and Yucaipa to be performed on or complied with prior to the
Effective Time shall have been duly performed and complied with, except for
such breaches that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company and its subsidiaries taken as a
whole, on Smitty's and its subsidiaries taken as a whole or the
consummation of the transactions contemplated hereby.
(c) Absence of Certain Injunctions and Government Actions. The
-----------------------------------------------------
waiting period, and any extension thereof, under the HSR Act and any other
applicable federal or state antitrust or fair trade law shall have expired.
There (i) shall not be in effect a temporary restraining order or a
preliminary or permanent injunction or other order, decree or ruling by a
court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission which (A) restrains or prohibits the
Merger or the consummation of all or any of the other transactions
contemplated hereby, (B) (i) prohibits or restricts the ownership or
operation by the Company or any of its subsidiaries of any portion of their
or Smitty's' business or assets or (ii) compels the Company or any of its
subsidiaries to dispose of or hold separate any portion of their or
Smitty's' business or assets which, in either case, would be reasonably
likely to have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole or on Smitty's and its subsidiaries taken as
a whole, (C) imposes any limitations on the ability of the Company or any
of its subsidiaries effectively to control in any material respect the
business and operations of Smitty's, or (D) is otherwise reasonably likely
to have a Material Adverse Effect on the Company and its subsidiaries taken
as a whole, the value of Smitty's and its subsidiaries taken as a whole,
the consummation of the transactions contemplated hereby or on the Combined
Companies taken as a whole; or (ii) shall not be pending before any court
of competent jurisdiction or before any administrative law judge or court
or before any governmental, regulatory or administrative agency or
commission, any action or proceeding, whether in law or in equity or
otherwise, brought by any governmental, regulatory or administrative
agency, commission or authority, which seeks as relief a result described
in clause (i) above; or (iii) shall not have been promulgated or enacted by
a governmental authority a statute, rule, regulation or executive order
which has an effect described in clause (i)(A), (B), (C) or (D) above.
(d) Approvals and Consents of Third Parties. All approvals, consents,
---------------------------------------
authorizations and waivers from governmental and other regulatory agencies
and other third parties disclosed in Section 5.10 of the Disclosure
Schedule (including the expiration of any applicable waiting period under
any regulation or statute other than the HSR Act and any other federal or
state antitrust or fair trade law) which, either individually or in the
aggregate, if not obtained on or prior to the Effective Time would have a
Material Adverse Effect on the Company and its subsidiaries taken as a
whole or on Smitty's and its subsidiaries taken as a whole, or would
adversely affect the validity or enforceability of this Agreement or the
transactions contemplated hereby, shall have been obtained.
(e) Company Stockholders' Approval. The stockholders of the Company
------------------------------
shall have approved this Agreement and the other transactions contemplated
by the Recapitalization
41
<PAGE>
at the Company Stockholders' Meeting, provided that, if the Company
terminates the Recapitalization in accordance with Section 10.2, then the
condition set forth in this Section 9.1(e) shall automatically be deemed to
have been satisfied without any further action required by the Company.
(f) Standstill Agreement. The Standstill Agreement, in the form
--------------------
attached hereto as Annex K, shall remain in full force and effect.
(g) Consummation of Offer. The Offer shall have been consummated
---------------------
concurrently in accordance with the terms thereof (including the
satisfaction or waiver of the conditions set forth in Annex N hereto) and
shall have resulted in the purchase by the Company pursuant to the Offer of
50% of the Company's outstanding Common Stock, provided that, if the
Company terminates the Recapitalization in accordance with Section 10.2,
then the condition set forth in this Section 9.1(g) shall automatically be
deemed to have been satisfied without any further action required by the
Company.
9.2 Conditions Precedent to Smitty's' Obligations. The obligation of
---------------------------------------------
Smitty's to effect the Merger shall be subject to the fulfillment, at or prior
to the Effective Time, of the following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company and Acquisition contained in this Agreement which
by their terms require an event or condition having a Material Adverse
Effect in order to be inaccurate shall be true and correct on and as of the
Merger Closing Date with the same effect as though such representations and
warranties had been made on and as of such date, except for representations
and warranties that speak as of a specific date or time other than the
Merger Closing Date (which need only be true and correct as of such date or
time). The representations and warranties of the Company and Acquisition
contained in this Agreement which by their terms do not require an event or
condition having a Material Adverse Effect in order to be inaccurate shall
be true and correct on and as of the Merger Closing Date with the same
effect as though such representations and warranties had been made on and
as of such date (except for representations and warranties that speak as of
a specific date or time other than the Merger Closing Date which need only
be true and correct as of such date or time), except for such breaches or
inaccuracies that, individually or in the aggregate, would not have a
Material Adverse Effect on the Smitty's Stockholders, the value of the
Merger Consideration, the consummation of the transactions contemplated
hereby or on the Combined Companies taken as a whole.
(b) Compliance with Covenants. The covenants and agreements of the
-------------------------
Company and Acquisition to be performed on or complied with prior to the
Effective Time shall have been duly performed and complied with, except for
such breaches that, individually or in the aggregate, would not have a
Material Adverse Effect on the Smitty's Stockholders, the value of the
Merger Consideration, the consummation of the transactions contemplated
hereby or on the Combined Companies taken as a whole.
(c) Absence of Certain Injunctions and Government Actions. The
-----------------------------------------------------
waiting period, and any extension thereof, under the HSR Act and any other
applicable federal or state
42
<PAGE>
antitrust or fair trade law shall have expired. There (i) shall not be in
effect a temporary restraining order or a preliminary or permanent
injunction or other order, decree or ruling by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission which (A) restrains or prohibits the Merger or the consummation
of all or any of the other transactions contemplated thereby, (B) (i)
prohibits or restricts the ownership or operation by the Company or any of
its subsidiaries of any portion of their or Smitty's' business or assets or
(ii) compels the Company or any of its subsidiaries to dispose of or hold
separate any portion of their or Smitty's' business or assets which, in
either case, would be reasonably likely to have a Material Adverse Effect
on the Company and its subsidiaries taken as a whole or on Smitty's and its
subsidiaries taken as a whole, (C) imposes any limitations on the ability
of the Company or any of its subsidiaries effectively to control in any
material respect the business and operations of Smitty's, or (D) is
otherwise reasonably likely to have a Material Adverse Effect on the
Smitty's Stockholders, the value of the Merger Consideration, the
consummation of the transactions contemplated hereby or on the Combined
Companies taken as a whole; or (ii) shall not be pending before any court
of competent jurisdiction or before any administrative law judge or court
or before any governmental, regulatory or administrative agency or
commission, any action or proceeding, whether in law or in equity or
otherwise, brought by any governmental, regulatory or administrative
agency, commission or authority, which seeks as relief a result described
in clause (i) above; or (iii) shall not have been promulgated or enacted by
a governmental authority a statute, rule, regulation or executive order
which has an effect described in clause (i)(A) or (B) above.
(d) Approvals and Consents of Third Parties. All approvals, consents,
---------------------------------------
authorizations and waivers from governmental and other regulatory agencies
and other third parties disclosed in Section 5.10 of the Disclosure
Schedule (including the expiration of any applicable waiting period under
any regulation or statute other than the HSR Act and any other federal or
state antitrust or fair trade law) which, either individually or in the
aggregate, if not obtained on or prior to the Effective Time would have a
Material Adverse Effect on the Combined Companies taken as a whole.
(e) Other Agreements. The Registration Rights Agreement, in the form
----------------
attached as Annex F hereto, and, unless the Recapitalization has been
terminated in accordance with Section 10.2, the Management Agreement and
the Warrant Agreement, in the forms attached hereto as Annexes L and M,
respectively, shall have been duly executed by the Company and shall be in
full force and effect.
ARTICLE 10.
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
10.1 Termination of the Agreement. This Agreement may be terminated
----------------------------
at any time prior to the Closing Date by:
(a) the mutual consent of the Company and Smitty's, set forth in a
written instrument executed by both parties;
43
<PAGE>
(b) either the Company or Smitty's, if neither the Merger nor the Offer
shall have been consummated on or before the Termination Date;
(c) the Company, if Smitty's or Yucaipa is in material breach of its
obligations under this Agreement, or by Smitty's, if the Company or
Acquisition is in material breach of its obligations under this Agreement;
provided that no party shall be entitled to terminate this Agreement by
reason of this clause if it or any of its affiliates is in material breach
of its obligations under this Agreement; or
(d) by Smitty's or Yucaipa, if within 13 Business Days after the date
of this Agreement, Yucaipa and Smitty's reasonably determine that the
contents of the portions, if any, of the Disclosure Schedule which are
delivered by the Company after the date of execution of this Agreement, or
updates to any portions of the Disclosure Schedule, are materially adverse
relative to the information disclosed in writing on or prior to the date
hereof to Yucaipa and Smitty's or would otherwise have a Material Adverse
Effect on the consummation of the transactions contemplated hereby.
10.2 Termination of Recapitalization. At any time prior to the
-------------------------------
Closing Date, if, in the exercise of its fiduciary duties to the Company's
stockholders under applicable law, the Company's Board of Directors (i)
determines that the termination of the Recapitalization is required by reason of
its acceptance of any Alternative Transaction (which acceptance and termination
shall be deemed to have occurred upon (A) the execution and delivery by the
Company and the other parties thereto of the definitive merger or other
agreement with respect to any such Alternative Transaction or (B) the Board of
Directors' determination to (1) recommend that the holders of Company Common
Stock tender their shares into any tender offer or exchange offer seeking to
acquire more than 10% of the Company Common Stock or (2) remain neutral with
respect to any such offer) or (ii) withdraws or materially modifies or changes
its recommendation of the Recapitalization, the Company may terminate the terms
and conditions contained herein which relate to the Company's consummation of
the Recapitalization, including the provisions contained in Article 2 and
Sections 3.2, 7.1 and 8.10(b); provided, however, that any such termination of
the Recapitalization shall not otherwise affect the Company's obligation to
consummate the Merger in accordance with the terms and conditions set forth
herein.
10.3 Procedure and Effect of Termination. In the event of termination
-----------------------------------
of this Agreement as provided in Section 10.1, this Agreement shall forthwith
become void and no party hereto shall have any liability or further obligation
to any other party hereto under or by reason of this Agreement or the
transactions contemplated hereby, except that: (i) each party shall redeliver
all documents, work papers and other material of any other party relating to the
transactions contemplated hereby, whether so obtained before or after the
execution hereof, to the party furnishing the same; and (ii) the provisions of
this Section 10.3 and Sections 8.3(b) and 10.4 shall continue in full force and
effect. The foregoing provisions shall not limit or restrict the availability
of specific performance or other injunctive relief to the extent that specific
performance or such other relief would otherwise be available to a party
hereunder. Nothing contained in this Section shall relieve any party of
liability for any breach of the representations, warranties, covenants or
agreements set forth in this Agreement.
44
<PAGE>
10.4 Fees and Expenses. In the event that (i) the Merger and the
-----------------
Recapitalization are consummated, or (ii) the Merger is consummated, but the
Recapitalization is terminated in accordance with Section 10.2 hereof, the fees
and expenses of the Company, Yucaipa and Smitty's in connection with the
transactions contemplated hereby (including all Financing Expenses) shall be
paid by the Company. In the event that neither the Merger nor the
Recapitalization are consummated, each of the parties hereto shall pay its own
fees and expenses; provided, however, that in such an eventuality, the Company
shall bear 65% of the Financing Expenses and Smitty's shall bear 35% of the
Financing Expenses. Each of the Company and Smitty's shall indemnify and hold
harmless the other party to the extent it pays any portion of the Financing
Expenses in excess of the percentages specified in the preceding sentence.
10.5 Amendments. This Agreement may not be amended except by action
----------
of each of the parties hereto set forth in an instrument in writing signed by or
on behalf of each of the parties hereto.
10.6 Waivers. At any time prior to the Closing Date, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party by a duly authorized officer or partner. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
ARTICLE 11.
DEFINITIONS
-----------
11.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings:
"Action" shall mean any action, order, writ, injunction, judgment or
------
decree outstanding or claim, suit, litigation, proceeding, arbitration or
investigation by or before any court, governmental or other regulatory or
administrative agency or commission or any other person.
"Affiliate" shall mean, with respect to any Person, any other Person
---------
that directly, or through one or more intermediaries, controls or is controlled
by or is under common control with such Person.
"Assets" shall mean, with respect to any Person, all land, buildings,
------
improvements, leasehold improvements, Fixtures and Equipment and other assets
(tangible or intangible) owned or leased by such Person or any of its
subsidiaries.
45
<PAGE>
"Benefit Arrangement" shall mean, with respect to any Person, any
-------------------
employment, consulting, severance or other similar contract, arrangement or
policy and each plan, arrangement (written or oral), program, agreement or
commitment providing for insurance coverage (including without limitation any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
life, health, disability or accident benefits (including without limitation any
"voluntary employees' beneficiary association" as defined in Section 501(c)(9)
of the Code providing for the same or other benefits) or for deferred
compensation, profit-sharing bonuses, stock options, stock appreciation rights,
stock purchases or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (A) is not a Welfare Plan, Pension
Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or
required to be contributed to, as the case may be, by such Person or an ERISA
Affiliate or under which such Person or any ERISA Affiliate may incur any
liability, and (C) covers any employee or former employee of such Person or any
ERISA Affiliate (with respect to their relationship with such entities).
"Business Day" shall mean 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.
"Code" shall mean the Internal Revenue Code of 1986, as it may be
----
amended from time to time.
"Combined Companies" shall mean the Company and its subsidiaries after
------------------
the Effective Time.
"Confidentiality Agreements" shall mean those certain confidentiality
--------------------------
agreements between the Company and Yucaipa dated December 13, 1995 and between
the Company and Smitty's dated October 9, 1995.
"Contract" shall mean any contract (written or oral), plan,
--------
undertaking or other commitment or agreement.
"Disclosure Schedule" means the schedules attached to this Agreement
-------------------
which set forth exceptions to the representations and warranties contained in
Articles 4, 5 and 6 hereof and certain other information called for by other
provisions of this Agreement.
"Employee Plans" shall mean all Benefit Arrangements, Multiemployer
--------------
Plans, Pension Plans and Welfare Plans.
"Encumbrances" shall mean any claim, lien, pledge, option, charge,
------------
easement, security interest, deed of trust, mortgage, right-of-way, covenant,
condition, restriction, encumbrance or other rights of third parties.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time.
"ERISA Affiliate" shall mean, with respect to any Person, any entity
---------------
which is (or at any relevant time was) a member of a "controlled group of
corporations" with, under "common
46
<PAGE>
control" with, or a member of an "affiliated service group" with, such Person as
defined in Section 414(b), (c), (m) or (o) of the Code.
"Environmental Laws" shall mean any federal, state or local law,
------------------
statute, ordinance, order, decree, rule or regulation relating to releases,
discharges, emissions or disposals to air, water, land or groundwater, to the
withdrawal or use of groundwater, to the use, handling or disposal of
polychlorinated biphenyls, asbestos or urea formaldehyde, to the treatment,
storage, disposal or management of Hazardous Materials, to exposure to toxic,
hazardous or other controlled, prohibited or regulated substances, and to the
transportation, release or any other use of Hazardous Materials, including the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
(S) 9601, et seq. ("CERCLA"), the Resource Conservation and Recovery Act, 42
U.S.C. (S) 6901, et seq. ("RCRA"), the Toxic Substances Control Act, 15 U.S.C.
(S) 2601, et seq. ("TSCA"), the Occupational, Safety and Health Act, 29 U.S.C.
(S) 651, et seq., the Clean Air Act, 42 U.S.C. (S) 7401, et seq., the Federal
Water Pollution Control Act, 33 U.S.C. (S) 1251, et seq., the Safe Drinking
Water Act, 42 U.S.C. (S) 300f, et seq., the Hazardous Materials Transportation
Act, 49 U.S.C. (S) 1802 et seq. ("HMTA") and the Emergency Planning and
Community Right to Know Act, 42 U.S.C. 11001 et seq. ("EPCRA"), and other
comparable state laws and all rules, regulations and guidance documents
promulgated pursuant thereto or published thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the regulations promulgated thereunder.
"Facility" shall mean each store, office, plant or warehouse.
--------
"Financing Expenses" shall mean all fees, costs and expenses incurred
------------------
by the Company in connection with the Financings, including, without limitation,
all fees, costs and expenses: (i) identified in the Commitment Letters
(including, without limitation, the fees and expenses of counsel to the bank
lenders), (ii) of counsel to Smitty's and the Company for the allocable portion
of such counsel's time spent working on matters related to the Financings and
the Recapitalization, (iii) of the Company's independent certified public
accountants, and (iv) in connection with printing, engraving, messenger and
delivery services customarily incurred in financing transactions similar to the
Financings.
"Fixtures and Equipment" shall mean, with respect to any Person, all
----------------------
of the furniture, fixtures, furnishings, machinery and equipment owned by such
Person and located in, at or upon the Facilities of such Person.
"GAAP" shall mean time generally accepted accounting principles in the
----
United States of America, as in effect from time to time, consistently applied.
"Hazardous Materials" shall mean each and every element, compound,
-------------------
chemical mixture, contaminant, pollutant, material, waste or other substance
which is defined, determined or identified as hazardous or toxic under
Environmental Laws or the release of which is regulated under Environmental
Laws. Without limiting the generality of the foregoing, the term includes:
"hazardous substances" as defined in CERCLA; "extremely hazardous substances" as
defined in EPCRA; "hazardous waste" as defined in RCRA; "hazardous materials" as
defined in HMTA; "chemical substance or mixture" as defined in TSCA; crude oil,
petroleum products or any fraction
47
<PAGE>
thereof; radioactive materials including source, byproduct or special nuclear
materials; asbestos or asbestos-containing materials; and radon.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
-------
of 1976, as amended.
"Leases" shall mean, with respect to any Person, all leases (including
------
subleases and any other occupancy agreement) of real property, in each case to
which such Person or any of its subsidiaries is a party, whether as lessor,
lessee, guarantor or otherwise, or by which any of them or their respective
properties or assets are bound, or which otherwise relate to the operation of
their respective businesses.
"Material Adverse Effect" shall mean, with respect to any person or
-----------------------
entity, a material adverse effect on the business, operations, prospects,
assets, liabilities, results of operations or financial condition of such person
or entity.
"Multiemployer Plan" shall mean, with respect to any Person, any
------------------
"multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A) which such
Person or any ERISA Affiliate maintains, administers, contributes to or is
required to contribute to, or, after September 25, 1980, maintained,
administered, contributed to or was required to contribute to, or under which
such Person or any ERISA Affiliate may incur any liability and (B) which covers
any employee or former employee of such Person or any ERISA Affiliate (with
respect to their relationship with such entities).
"Multiemployer Welfare Plan" shall mean a Welfare Plan that is a
--------------------------
"multiemployer plan," as defined in Section 3(37) of ERISA.
"Offer Statement" shall mean an issuer tender offer statement on
---------------
Schedule 13E-4 (which statement shall contain the Offer to Purchase and forms of
the related letter of transmittal and summary advertisement and the other
information and exhibits required by law to be included therein) to be prepared
with respect to the Offer, together with any amendments thereof or supplements
thereto.
"Pension Plan" shall mean, with respect to any Person, any "employee
------------
pension benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) (A) which such Person or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the six
years prior to the Closing Date, maintained, administered, contributed to or was
required to contribute to, or under which such Person or any ERISA Affiliate may
incur any liability and (B) which covers any employee or former employee of such
Person or any ERISA Affiliate (with respect to their relationship with such
entities).
"Permitted Encumbrances" shall mean any Encumbrances resulting from
----------------------
(i) all statutory or other liens for Taxes or assessments which are not yet due
or delinquent or the validity of which are being contested in good faith by
appropriate proceedings for which adequate reserves are being maintained in
accordance with GAAP; (ii) all cashiers', workers' and repairers' liens, and
other similar liens imposed by law, incurred in the ordinary course of business;
(iii) all laws and governmental rules, regulations, ordinances and restrictions;
(iv) all leases, subleases, licenses,
48
<PAGE>
concessions or service contracts to which Smitty's or any of its subsidiaries is
a party; (v) Encumbrances identified on title policies delivered to the Company
prior to the date hereof; and (vi) all other liens and mortgages (but solely to
the extent such liens or mortgages secure indebtedness described in Section 5.7
of the Disclosure Schedule), covenants, imperfections in title, charges,
easements, restrictions and other Encumbrances which, in the case of any such
Encumbrances pursuant to clauses (i) through (vi), do not materially detract
from or materially interfere with the value or present use of the asset subject
thereto or affected thereby.
"Person" shall mean any individual, corporation, partnership, limited
------
liability company, joint venture, governmental agency or instrumentality, or any
other entity.
"Personnel" shall mean, with respect to any Person, all officers,
---------
employees and agents of such Person.
"Property" shall mean, with respect to any Person, all improved or
--------
unimproved real property owned or leased by such Person or any of its
subsidiaries.
"Proprietary Rights" shall mean all patents, trademarks, trade names,
------------------
service marks and copyrights, and applications therefor.
"Proxy Statement" shall mean a proxy statement and forms of proxy in
---------------
connection with the votes of the stockholders of the Company with respect to the
Merger, the Offer and the other transactions contemplated by the
Recapitalization, together with any amendments thereof or supplements thereto,
in the form or forms mailed to the Company's stockholders.
"SEC" shall mean the Securities and Exchange Commission.
---
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and the regulations promulgated thereunder.
"Service" shall mean the Internal Revenue Service or any successor
-------
thereto.
"Smitty's Principal Stockholders" shall mean, collectively, the
-------------------------------
investment partnerships which own shares in Smitty's for which Yucaipa acts as
the general partner.
"Smitty's Stockholders" shall mean the holders of the Common Stock
---------------------
(Class A and Class B) of Smitty's.
"Specified Smitty's Indebtedness" shall mean the Smitty's Notes, the
-------------------------------
Smitty's Debentures and all indebtedness under the Credit Agreement dated as of
June 29, 1994 among Smitty's Super Valu, Inc., a wholly owned subsidiary of
Smitty's, and The Chase Manhattan Bank, N.A.
"Specified Company Indebtedness" shall mean the indebtedness of the
------------------------------
Company identified on Schedule I hereto.
49
<PAGE>
"subsidiary" shall mean, with respect to any Person, (i) any
----------
corporation in an unbroken chain of corporations beginning with such Person if
each of the corporations other than the last corporation in the unbroken chain
then owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain; (ii) any
partnership in which such Person is a general partner; or (iii) any partnership
in which such Person possesses a 50% or greater interest in the total capital or
total income of such partnership.
"Tax" or "Taxes" shall mean all federal, state, local, foreign and
--- -----
other taxes, levies, imposts, assessments, impositions or other similar
government charges, including, without limitation, income, estimated income,
business, occupation, franchise, real property, payroll, personal property,
sales, transfer, stamp, use, employment, commercial rent or withholding,
occupancy, premium, gross receipts, profits, windfall profits, deemed profits,
license, lease, severance, capital, production, corporation, ad valorem, excise,
duty or other taxes, including interest, penalties and additions (to the extent
applicable) thereto.
"Tax Return" shall mean any report, return, document, declaration or
----------
other information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including, without
limitation, information returns, any documents with respect to or accompanying
payments of estimated Taxes, or with respect to or accompanying requests for the
extension of time in which to file any such report, return, document,
declaration or other information.
"Termination Date" shall mean July 30, 1996.
----------------
"Transaction Documents" shall mean the collective reference to this
---------------------
Agreement, the Certificate of Merger, the Registration Rights Agreement, the
Standstill Agreement, the Management Agreement and the Warrant Agreement;
provided, however, that if the Recapitalization is terminated pursuant to
Section 10.2 hereof, "Transaction Documents" shall be deemed to refer only to
this Agreement, the Certificate of Merger, the Standstill Agreement and the
Registration Rights Agreement.
"Welfare Plan" shall mean, with respect to any Person, any "employee
------------
welfare benefit plan" as defined in Section 3(1) of ERISA, (A) which such Person
or any ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or under which such Person or any ERISA Affiliate may incur any
liability and (B) which covers any employee or former employee of such Person or
any ERISA Affiliate (with respect to their relationship with such entities).
11.2 Other Defined Terms. The following terms shall have the meanings
-------------------
defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Acquisition Preamble
Agreement Preamble
Alternative Transaction 8.5(c)
Certificate of Merger 1.2
Class A Common Stock Recitals
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
Class B Common Stock Recitals
Closing 3.2
Closing Date 3.2
Commitment Letters 2.2
Common Stock Preamble
Company Preamble
Company Indemnified Liability 8.7(b)
Company Indemnified Party 8.7(b)
Company SEC Reports 4.9
Company Stockholders' Agreement 1.7
Company Stockholders' Meeting 8.10(c)
Constituent Corporations Preamble
Debt Offer 1.9
Debt Offer Prices 1.9
Debt Offer to Purchase 1.9
Delaware Law Recitals
Dissenting Shares 1.11
Effective Time 1.2
Fairness Opinion 4.14
Financing Agreements 2.2
Financing Registration Statements 2.3
Financings 2.2
Management Agreement Recitals
Merger Recitals
Merger Closing 3.1(a)
Merger Closing Date 3.1(a)
Merger Consideration 1.10(c)
Minimum Debt Condition 1.9
New Debt Securities 2.2
Notification Date 1.10(e)
Offer Recitals
Offer Closing 3.2(a)
Offer Closing Date 3.2(a)
Offer Price Recitals
PIK Preferred Stock 2.2
Recapitalization 2.7
Series I Preferred Stock Recitals
Smitty's Preamble
Smitty's Common Stock 1.10
Smitty's Debentures 1.9
Smitty's Indemnified Liability 8.7(a)
Smitty's Indemnified Party 8.7(a)
Smitty's Notes 1.9
Smitty's SEC Reports 5.14
Smitty's Securities 1.9
Smitty's Stockholders' Agreement 1.7
Smitty's Stockholders' Meeting 8.9
</TABLE>
51
<PAGE>
<TABLE>
<S> <C>
Standstill Agreement 2.4(a)
Stockholders' Representative 8.11
Surviving Corporation 1.1
Third Party Leases 5.6(g)
Warrant Agreement 2.4(c)
Yucaipa Preamble
</TABLE>
ARTICLE 12.
MISCELLANEOUS
-------------
12.1 Non-survival of Representations and Warranties. None of the
----------------------------------------------
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the Merger
Closing Date or the Offer Closing Date.
12.2 Assignment. Neither this Agreement, nor any of the rights,
----------
duties or obligations hereunder or contemplated hereby, may be assigned by the
parties hereto without the prior written consent of the other parties hereto.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
12.3 Notices. Unless otherwise provided herein, any notice, request,
-------
instruction or other document to be given hereunder by any party to the others
shall be in writing and delivered in person or by courier, telegraphed, telexed
or by facsimile transmission or mailed by certified mail, postage prepaid,
return receipt requested (such mailed notice to be effective on the date of such
receipt is acknowledged), as follows:
(a) if to the Company, to
Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, Utah 84104
Attn: General Counsel
Fax Number: (801) 974-1676
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
52
<PAGE>
(b) if to Smitty's or Yucaipa, to
The Yucaipa Companies
10000 Santa Monica Boulevard, Fifth Floor
Los Angeles, California 90067
Attn: Mark A. Resnik
Fax Number: (310) 789-7201
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
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.
12.4 Payment to Yucaipa. If the Offer is consummated, the Company
------------------
shall pay to Yucaipa, on the Offer Closing Date, a success fee of $15 million by
wire transfer of immediately available funds to an account designated at least
one Business Day prior to the Offer Closing Date by Yucaipa.
12.5 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.
12.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.7 No Third Party Beneficiaries. None of the provisions of this
----------------------------
Agreement shall be for the benefit of or enforceable by any third party, except
for the provisions set forth in Section 8.7 hereof.
12.8 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.
12.9 Headings. The headings of the Articles and Sections herein are
--------
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement. All references to
Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated.
53
<PAGE>
12.10 Gender. Words used in this Agreement, regardless of the number
------
and gender specially 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.
12.11 Delivery of Company Disclosure Schedule. The portions of the
---------------------------------------
Disclosure Schedule which are to be prepared by the Company may be so prepared
and delivered to, or updated and delivered to, Smitty's and Yucaipa not later
than 10 Business Days after the date of this Agreement and, if not reasonably
acceptable to Smitty's and Yucaipa, Smitty's and Yucaipa shall be entitled to
terminate this Agreement as set forth in Section 10.1(d) hereof.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
or have caused this Agreement to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, as of the day and year
first above written.
SMITH'S FOOD & DRUG CENTERS, INC.
By:
---------------------------------------------
Name: Jeffrey P. Smith
Title: Chairman, President and
Chief Executive Officer
CACTUS ACQUISITION, INC.
By:
---------------------------------------------
Name: Jeffrey P. Smith
Title: President and Chief Executive
Officer
SMITTY'S SUPERMARKETS, INC.
By:
---------------------------------------------
Name: Mark A. Resnik
Title: Vice President
THE YUCAIPA COMPANIES
By:
---------------------------------------------
Name: Mark A. Resnik
Title: General Partner
S-1
<PAGE>
SCHEDULE I
SPECIFIED COMPANY INDEBTEDNESS
------------------------------
<TABLE>
<CAPTION>
Amount (in millions)
--------------------
<S> <C>
Mortgage Notes $252.0
Unsecured Notes $410.0
Revolving Credit Facility $119.5
</TABLE>
S-I
<PAGE>
ANNEX A
-------
CERTIFICATE OF INCORPORATION OF
THE SURVIVING CORPORATION
-------------------------
A-1
<PAGE>
ANNEX B
-------
FORM OF LEGAL OPINION TO BE DELIVERED
BY COUNSEL TO THE COMPANY
-------------------------
B-1
<PAGE>
ANNEX C
-------
FORM OF LEGAL OPINION TO BE DELIVERED
BY COUNSEL TO SMITTY'S
----------------------
C-1
<PAGE>
ANNEX D
-------
FORM OF AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF THE COMPANY
----------------------------
D-1
<PAGE>
ANNEX E
-------
FORM OF REGISTRATION RIGHTS AGREEMENT
-------------------------------------
E-1
<PAGE>
ANNEX F
-------
FORM OF SMITTY'S STOCKHOLDERS' AGREEMENT
----------------------------------------
F-1
<PAGE>
ANNEX G
-------
FORM OF CONTINUITY-OF-INTEREST LETTER
-------------------------------------
G-1
<PAGE>
ANNEX H
-------
FORM OF INVESTMENT LETTER
-------------------------
H-1
<PAGE>
ANNEX I
-------
FORM OF SMITTY'S TAX MATTERS CERTIFICATE
----------------------------------------
I-1
<PAGE>
ANNEX J
-------
FORM OF COMPANY TAX MATTERS CERTIFICATE
---------------------------------------
J-1
<PAGE>
ANNEX K
-------
FORM OF STANDSTILL AGREEMENT
----------------------------
K-1
<PAGE>
ANNEX L
-------
FORM OF MANAGEMENT AGREEMENT
----------------------------
L-1
<PAGE>
ANNEX M
-------
FORM OF WARRANT AGREEMENT
-------------------------
M-1
<PAGE>
ANNEX N
-------
CONDITIONS TO OFFER
-------------------
Notwithstanding any other provision of the Offer, the Company will not
be required to accept for payment or pay for any shares of Common Stock
tendered, and may terminate or amend the Offer or may postpone (subject to the
requirements of the Exchange Act for prompt payment for or return of shares of
Common Stock) the acceptance for payment of, the purchase of and payment for,
shares of Common Stock tendered, if at any time at or before the acceptance for
payment of any such shares or the payment therefor, any of the following events
shall have occurred (or shall have been determined by the Company to have
occurred) and which in the Company's sole judgment in any such case makes it
inadvisable to proceed with the Offer or with such acceptance, purchase or
payment:
(a) The Company's stockholders shall not have validly tendered and not
withdrawn prior to the expiration date of the Offer at least 50% of the
outstanding shares of the Company's Common Stock.
(b) The Company shall not have obtained, pursuant to the terms of the
Financing Agreements, all of the financing needed by the Company, together
with other funds available to the Company, to (i) purchase 50% of its
outstanding Common Stock, (ii) repay all outstanding principal and
interest, and other amounts payable, under the Specified Company
Indebtedness and the Specified Smitty's Indebtedness and (iii) pay certain
fees and expenses incurred in connection with the Recapitalization and the
transactions contemplated by the Recapitalization Agreement.
(c) The Company shall not have received from an independent valuation
firm an opinion as to the value of the Company's assets and liabilities,
after giving effect to the consummation of the transactions contemplated by
the Recapitalization, that permits the Company to reasonably conclude that
it will have violated any applicable fraudulent conveyance laws as a result
thereof, nor will the Company have violated any provisions of Delaware Law
governing the purchase of its equity.
(d) All of the conditions to the Merger (other than the satisfaction
of the consummation of the Offer) set forth in Section 9.1 of the
Recapitalization Agreement shall not have been satisfied.
(e) Any action or proceeding, order, decree or injunction shall have
been taken or threatened, instituted or pending, or any statute, rule,
regulation, judgment, order, stay, decree or injunction shall have been
sought, promulgated, enacted, entered, enforced or deemed applicable to the
Offer or the Combined Companies taken as a whole, by or before any court or
governmental, regulatory or administrative authority or agency or tribunal,
which (i) challenges the making of the Offer, the acquisition of shares of
Common Stock pursuant to the Offer or any of the other transactions
comprising part of the Recapitalization, or might directly or indirectly
prohibit, prevent, restrict or delay consummation of the Offer or any of
the other transactions comprising part of the Recapitalization, or (ii)
materially
N-1
<PAGE>
adversely affect the business, operations, condition (financial or
otherwise), results of operations, prospects, assets, liabilities, working
capital or reserves of the Combined Companies taken as a whole, or
otherwise materially impair in any way the contemplated future conduct of
the business of the Combined Companies taken as a whole.
(f) There shall have occurred (i) the declaration of any banking
moratorium or suspension of payments in respect of banks in the United
States, (ii) any general suspension of trading in, or limitation on prices
for, securities on any national securities exchange or in the over-the-
counter market, (iii) the commencement of a war, armed hostilities or any
other national or international crisis directly or indirectly involving the
United States, (iv) any limitation (whether or not mandatory) by any
government or governmental, regulatory or administrative agency or
authority on, or any event which in the Company's sole judgment might
adversely affect, the extension of credit by banks or other lending
institutions in the United States, (v) any significant decline in the
market price of the shares of Common Stock or any change in the general
political, market, economic or financial conditions in the United States or
abroad that has a material adverse effect on the ability to obtain
financing generally or on the trading in the shares of Common Stock or (vi)
in the case of any of the foregoing existing at the time of the
commencement of the Offer, a material acceleration or worsening thereof.
(g) There shall have occurred any event that has resulted, or may in
the sole judgment of the Company result, in an actual or threatened change
in the business, operations, condition (financial or otherwise), results of
operations, prospects, assets, liabilities, working capital or reserves of
the Combined Companies taken as a whole.
N-2
<PAGE>
ANNEX O
-------
SMITH'S SHAREHOLDER AGREEMENT
-----------------------------
O-1
<PAGE>
ANNEX B
GOLDMAN, SACHS & CO. OPINION
B-1
<PAGE>
ANNEX B
Goldman, Sachs & Co. |85 Broad Street| New York, New York 10004
Tel: 212-902-1000
Goldman
Sachs
January 29, 1996
Board of Directors
Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, UT 84104
Gentlemen and Madame:
You have requested our opinion as to the fairness to Smith's Food & Drug
Centers, Inc. (the "Company"), of the exchange of 3.011803 shares of Class B
Common Stock, par value $0.01 per share, of the Company (the "Class B Common
Stock"), for each share of Common Stock, par value $0.01 per share (the
"Smitty's Common Stock"), of Smitty's Supermarkets, Inc. ("Smitty's") pursuant
to the Recapitalization Agreement and Plan of Merger, dated as of January 29,
1996, by and among the Company, Cactus Acquisition, Inc. ("Acquisition"), a
wholly owned subsidiary of the Company, Smitty's, and The Yucaipa Companies (the
"Agreement"). Pursuant to the Agreement, Acquisition will be merged with and
into Smitty's (the "Merger") and each outstanding share of Smitty's Common Stock
will be converted into the right to receive, subject to certain adjustments
contained in the Agreement, 3.011803 shares of Class B Common Stock (the
"Exchange Ratio"). In addition, the Agreement contemplates that the Company will
make an offer to repurchase 50% of its outstanding Class B Common Stock and
Class A Common Stock, par value $.01 per share of the Company, at a price of
$36.00 per share (the "Offer"). The Merger is conditioned except in certain
circumstances set forth in the Agreement, on consummation of the Offer.
Goldman, Sachs & Co., as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We are familiar with
the Company having provided certain investment banking services to the Company
from time to time and have acted as its financial advisor in connection with the
Agreement. Goldman Sachs is a full service securities firm and, in the course of
its normal trading activities may from time to time effect transactions and hold
positions in the securities of the Company for its own account or for the
accounts of customers. As of January 29, 1996, Goldman Sachs had a long position
in the Company's Class B Common Stock of 20,800 shares. It is contemplated that
we will act as a co-manager in connection with the public financinq relating to
the Offer.
<PAGE>
Smith's Food & Drug Centers, Inc.
January 29, 1996
Page Two
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-4, as amended, of Smitty's dated
July 29, 1994; the Annual Report on Form 1 0-K of Smitty's for the fiscal year
ended July 31, 1995 (reflecting selected five year audited financial
information); certain interim reports and Quarterly Reports on Form 10-Q and
certain internal financial analyses and forecasts for Smitty's prepared by its
management. We have also reviewed Annual Reports to Stockholders and Annual
Reports on Form 10-K of the Company for the five fiscal years ended December 31,
1994; certain interim reports to stockholders and Quarterly Reports on Form
10-Q of the Company; certain other communications from the Company to its
stockholders; and certain internal financial analyses and forecasts for the
Company prepared by its management without, and after giving effect to, the
Merger and the Offer. We also have held discussions with members of the senior
management of the Company and Smitty's regarding the strategic rationale for,
and benefits of, the Merger and the past and current business operations,
financial condition and future prospects of their respective companies on a
standalone basis and as combined in the Merger. in addition, we have reviewed
the reported price and trading activity for the Class B Common Stock, compared
certain financial and stock market information for the Company and certain
financial information for Smitty's with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the supermarket industry
specifically and in other industries generally and performed such other studies
and analyses as we considered appropriate.
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. In that regard, we have assumed with your consent that
the financial forecasts provided to us and discussed with us with respect to the
Company and Smitty's after giving effect to the Merger, including, without
limitation, the projected cost savings and operating synergies resulting from
the Merger, have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company and
that such forecasts will be realized in the amounts and at the times
contemplated thereby. You have directed us to assume for purposes of our
analysis that the Merger and the Offer will not result in a change of control of
the Company. In addition, we have not made an independent evaluation or
appraisal of the assets and liabilities of Smitty's or the Company or any of
their respective subsidiaries and we have not been furnished with any such
evaluation or appraisal.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof, the Exchange
Ratio pursuant to the Agreement is fair to the Company.
Very truly yours,
/s/ Goldman, Sachs & Co.
GOLDMAN, SACHS & CO.
<PAGE>
ANNEX C
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
C-1
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
SMITH'S FOOD & DRUG CENTERS, INC.
We, the President and Secretary of Smith's Food & Drug Centers, Inc.,
a Delaware corporation (the "Corporation"), do hereby certify as follows:
First: That the name of the Corporation is Smith's Food & Drug
Centers, Inc.
Second: That its certificate of incorporation was originally filed
with the Secretary of State of the State of Delaware on January 18, 1989.
Third: That the amendment and the restatement of the certificate of
incorporation have been duly adopted in accordance with the provisions of
Sections 242 and 245 of the Delaware General Corporation Law by the Corporation.
Fourth: That the text of the certificate of incorporation of the
Corporation, as amended, is hereby restated as further amended by this
certificate, to read in full, as follows:
ARTICLE I
---------
Name
----
The name of the Corporation is Smith's Food & Drug Centers, Inc.
ARTICLE II
----------
Registered Office
-----------------
The registered office of the Corporation in the State of Delaware is
located at 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent in the State of Delaware at such
address is The Corporation Trust Company.
<PAGE>
2
ARTICLE III
-----------
Purpose
-------
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
----------
Capital Stock
-------------
Section 4.1. Number of Shares Authorized; Par Value. The Corporation
--------------------------------------
shall be authorized to issue two classes of shares of stock to be designated,
respectively, "Common Stock" and "Preferred Stock"; the total number of shares
which the Corporation shall have authority to issue is Two Hundred and Twenty-
Five Million (225,000,000), divided as follows:
(a) Common Stock. The total number of shares of Common Stock shall
------------
be One Hundred and Forty Million (140,000,000), divided into three classes
designated as Class A Common Stock, Class B Common Stock and Class C Common
Stock, as follows: the total number of authorized shares of Class A Common
Stock shall be Twenty Million (20,000,000), and each share of Class A Common
Stock shall have a par value of one cent ($0.01); the total number of authorized
shares of Class B Common Stock shall be One Hundred Million (100,000,000), and
each share of Class B Common Stock shall have a par value of one cent ($0.01)
and the total number of authorized shares of Class C Common Stock shall be
Twenty Million (20,000,000), and each share of Class C Common Stock shall have a
par value of one cent ($0.01).
(b) Preferred Stock. The total number of shares of Preferred Stock
---------------
shall be Eighty-Five Million (85,000,000), and each share of Preferred Stock
shall have a par value of one cent ($0.01).
Section 4.2. Voting Rights.
-------------
(a) Class A Common Stock. Each share of Class A Common Stock shall
--------------------
carry the right to ten (10) votes for the election of directors of the
Corporation and to ten (10) votes upon any matter presented to the stockholders
for their vote or approval, subject to conversion upon transfer as provided for
below.
(b) Class B Common Stock. Each share of Class B Common Stock shall
--------------------
carry the right to one (1) vote for the election of directors of the Corporation
and to one (1) vote upon any matter presented to the stockholders for their vote
or approval.
(c) Class C Common Stock. Each share of Class C Common Stock shall
--------------------
carry the right to no votes for the election of directors of the Corporation and
to no votes upon any
<PAGE>
3
matter presented to the stockholders for their vote or approval, subject to
conversion upon transfer as provided for below.
(d) Preferred Stock. Shares of Preferred Stock shall have such
---------------
voting rights as shall be fixed by the Corporation's Board of Directors from
time to time as provided in Section 4.5(b) below; provided that no share of
Preferred Stock other than shares designated as Series I Preferred Stock under
Section 4.5(c) below shall be entitled to more than one (1) vote for the
election of directors of the Corporation and one (1) vote upon any other matter
presented to the stockholders for their vote or approval.
Section 4.3. Sales or Transfer of Shares of Class A Common Stock;
----------------------------------------------------
Conversion of Shares of Class A Common Stock.
- ---------------------------------------------
(a) "Original Class A Stockholder" Defined. For purposes of this
--------------------------------------
Section 4.3, an "Original Class A Stockholder" shall mean, with respect to any
given share of Class A Common Stock, the person to whom such share was
originally issued; provided that in the event that a share of Class A Common
Stock is issued to a person that is a corporation, partnership, association or
trust (hereafter an "Entity Holder") in a merger from which the Corporation is
the surviving corporation, and if such Entity Holder obtained the securities
which were in such merger converted into Class A Common Stock (for purposes of
this subsection, the "Securities") from a natural person, the Original Class A
Stockholder with respect to such share of Class A Common Stock shall be deemed
to be the natural person from whom such Entity Holder obtained the Securities,
as shown on the records of the merged corporation.
(b) Restrictions Upon Sale or Transfer of Shares of Class A Common
--------------------------------------------------------------
Stock. No share of Class A Common Stock may be sold, assigned, pledged (subject
- -----
to the provisions of Section 4.3(f), below), hypothecated, transferred (by gift,
will, laws of intestacy or otherwise) or exchanged or otherwise disposed of
(herein all these actions are referred to as a "transfer" or to be
"transferred") by the holder thereof except only to the following persons (each
a "Permitted Transferee"):
(1) a spouse, child, grandchild, sibling, parent or other lineal
descendant of such share's Original Class A Stockholder (a "Family
Member"); and
(2) an Entity Holder, all of the equity and/or beneficial interests
in which are owned beneficially and of record by such share's Original
Class A Stockholder and/or such Original Class A Stockholder's Family
Members (a "Family Entity").
(c) Requirement to Convert to Class B Common Stock. Upon the
----------------------------------------------
occurrence of any of the events listed below in this Section 4.3(c) with respect
to any share of Class A Common Stock, the holder and, if applicable, the
transferee of such Class A Common Stock shall promptly present such share(s) to
the Corporation for conversion into an equal number of shares of Class B Common
Stock:
<PAGE>
4
(1) the transfer of Class A Common Stock by the holder thereof to
other than a Permitted Transferee of such shares;
(2) the transfer of any equity or beneficial interest in a Family
Entity which is a holder of Class A Common Stock to other than a Permitted
Transferee of the Original Class A Shareholder of the shares of Class A
Common Stock held by the Family Entity, as determined under Section 4.3(a),
above;
(3) foreclosure upon Class A Common Stock by a bona fide pledgee
thereof; or
(4) the agreement to transfer Class A Common Stock by a trustee in
the bankruptcy of the estate of the holder thereof.
(d) Enforcement of Requirement to Convert. The Corporation shall be
-------------------------------------
entitled to seek specific enforcement of the requirements of Section 4.3(c) upon
the failure of any holder and/or transferee of shares of Class A Common Stock to
comply with the requirements thereof. In such event the Corporation shall be
entitled to recover from the holder and the transferee who failed to comply with
Section 4.3(c), jointly and severally, the court costs, reasonable attorneys'
fees and other costs and expenses incurred by it in connection with the
obtaining of such specific enforcement. The Corporation shall further be
entitled to actual and consequential damages incurred as a result of a willful
violation of the requirements of Section 4.3(c), including without limitation
court costs and reasonable attorneys' fees.
(e) Annual Report to Corporation by Entity Holders. In order to
----------------------------------------------
enable the Corporation to enforce the provisions of Section 4.3(c), each Entity
Holder shall report in writing to the Corporation no later than the last day of
December each year the names and addresses of every person who, during the year
then concluded, owned a beneficial or equity interest in such Entity Holder, as
well as a list of the officers, trustees, general partners, etc. of such Entity
Holder who held office during the year.
(f) Pledge of Shares of Class A Common Stock. Shares of Class A
----------------------------------------
Common Stock may be pledged or otherwise encumbered to secure a bona fide loan
or other obligation without violating the restrictions set forth in Section
4.3(b) or invoking the requirements of Section 4.3(c); provided that a
foreclosure upon any pledged shares by the pledgee for the purpose of selling
such pledged shares other than to a Permitted Transferee of the Original Class A
Stockholder of such pledged or encumbered shares shall invoke upon the pledgee
the requirements of Section 4.3(c) to present such shares to the Corporation for
conversion to shares of Class B Common Stock prior to any transfer by the
pledgee.
(g) Optional Conversion into Shares of Class B Common Stock. Any
-------------------------------------------------------
Class A Stockholder shall have the right at any time to convert any share of
Class A Common Stock into one (1) share of Class B Common Stock, by presenting
the necessary certificates to the Corporation for transfer.
<PAGE>
5
(h) Mandatory Conversion of Class A Common Stock into shares of Class
-----------------------------------------------------------------
B Common Stock. If at any time the total number of shares of Class A Common
- --------------
Stock issued and outstanding shall be less than 2,910,885, as reflected upon the
stock records of the Corporation, then each share of Class A Common Stock issued
and outstanding at such time shall automatically convert into one (1) share of
Class B Common Stock, each outstanding warrant, option or other right to receive
or purchase shares of Class A Common Stock outstanding at such time shall
automatically convert to a right to receive or purchase an equal number of
shares of Class B Common Stock, all without the need for the Corporation or any
stockholder to take any action, and no further shares of Class A Common Stock
may thereafter be issued by the Corporation. After such automatic conversion,
each owner of an outstanding certificate or certificates theretofore
representing shares of Class A Common Stock shall be entitled, upon surrendering
such certificate or certificates to the Corporation, to receive in exchange
therefor a certificate or certificates representing the number of shares of
Class B Common Stock into which the shares of Class A Common Stock theretofore
represented by the surrendered certificate or certificates shall have been
converted as herein provided. Until so surrendered, each outstanding
certificate which, prior to such automatic conversion represented shares of
Class A Common Stock, shall be deemed, for all corporate purposes, to represent
the ownership of the shares of Class B Common Stock into which such shares of
Class A Common Stock were converted on the basis herein provided.
Section 4.4. Sales or Transfer of Shares of Class C Common Stock;
----------------------------------------------------
Conversion of Shares of Class C Common Stock.
- --------------------------------------------
(a) "Original Class C Stockholder" Defined. For purposes of this
--------------------------------------
Section 4.4, an "Original Class C Stockholder" shall mean, with respect to any
given share of Class C Common Stock, any person or entity deemed to be a member
of the "Investor Group" pursuant to that certain Standstill Agreement dated as
of January 29, 1996 (as amended as of April __, 1996, the "Standstill
Agreement"), among the Corporation, 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., and the stockholders of the Corporation named
therein, as it may be amended from time to time.
(b) Permitted Conversion to Class B Common Stock. Upon the transfer
--------------------------------------------
of Class C Common Stock by an Original Class C Stockholder to a third party
other than another Original Class C Stockholder, the transferee of such Class C
Common Stock may present such share(s) to the Corporation for conversion into an
equal number of shares of Class B Common Stock. No conversion of Class C Common
Stock into Class B Common Stock shall be permitted for shares of Class C Common
Stock held by an Original Class C Stockholder or any party bound by the terms of
the Standstill Agreement as a member of the Investor Group, as in effect from
time to time.
Section 4.5. Other Rights and Preferences.
----------------------------
(a) Common Stock. Except as otherwise specifically set forth herein
------------
as to voting powers, all shares of Common Stock shall have the same rights and
preferences.
<PAGE>
6
(b) Preferred Stock. Except as set forth below in Section 4.5(c),
---------------
the rights and privileges of the Preferred Stock shall be fixed by the
Corporation's Board of Directors from time to time by resolution. By such
resolution the Board of Directors may establish a series of such Preferred Stock
and fix and determine the relative voting powers, preferences, rights and
qualifications, limitations and restrictions of the shares of any series so
determined in respect to the Common Stock and in respect to the other series of
Preferred Stock; provided that no series so designated shall have rights or
preferences superior to the rights and preferences of Series I Preferred Stock,
as set forth in Section 4.5(c) below; and provided further that no share of
Preferred Stock other than shares designated as Series I under Section 4.5(c)
shall be entitled to more than one (1) vote for the election of directors of the
Corporation and one (1) vote upon any other matter presented to the stockholders
for their vote or approval.
(c) Series I Preferred Stock. Thirty-Four Million Five Hundred
------------------------
Twenty-Four Thousand Five Hundred Seventy-Nine (34,524,579) shares of Preferred
Stock are hereby designated as Series I Preferred Stock, which shall have the
following rights and preferences:
(1) Preference. If the Corporation shall be dissolved or liquidated;
----------
if it shall sell all or substantially all of its assets, whether voluntary
or involuntary, or whether required or ordered by any federal or state
authority, agency, court, or body; if it shall become insolvent; or
distribute its capital in a winding-up of the Corporation, the holders of
the issued and outstanding shares of Series I Preferred Stock shall be
entitled to receive the amount of Thirty-Three and One-Third Cents ($0.33-
1/3) per share on a pro-rata basis with the holders of other series of
Preferred Stock before any sum shall be paid or any assets distributed to
the holders of shares of Common Stock.
(2) Redemption
----------
(i) Redemption Price. The redemption price for all
----------------
redemptions of Series I Preferred Stock made in accordance with this
Section 4.5(c)(2) shall be Thirty-Three and One-Third Cents ($0.33-
1/3) per share.
(ii) Optional Redemption. All shares of Series I
-------------------
Preferred Stock shall be subject to redemption by the Corporation at
any time after May 1, 1998 by order of the Board of Directors. If
less than the whole amount of the outstanding Series I Preferred Stock
shall be redeemed, each holder of Series I Preferred Stock shall be
entitled to have a portion of his, her or its shares redeemed on a pro
rata basis. In the case of such a redemption, the Corporation shall
send written notice thereof to each of the registered holders of
Series I Preferred Stock at least sixty (60) days prior to the date
designated in such notice for such redemption. Such notice shall set
forth the manner in which the certificates shall be surrendered in
order to receive payments of the redemption price. Upon presentation
of any certificate representing the shares to be redeemed, properly
endorsed, the Corporation shall deliver its check to the holder
thereof in payment of the redemption price for those shares. In the
event all of the Series I Preferred Stock represented by the
surrendered
<PAGE>
7
certificate are not redeemed, the Corporation shall promptly deliver
to the holder of such certificate a new certificate representing the
shares of the Series I Preferred Stock represented by such surrendered
certificate which are not being redeemed.
(iii) Mandatory Redemption. Shares of Series I Preferred
--------------------
Stock shall be redeemed as follows:
(A) On the 1st day of each December, beginning December 1,
1989, the Corporation shall, to the extent permitted by the laws
of the State of Delaware, redeem from the holder or the holder's
successor, one-eleventh (1/11th) of the number of authorized
shares of Series I Preferred Stock; provided that for the five
--------
year period between December 1, 1996 through December 1, 2001 the
Company shall not redeem any portion of its Series I Preferred
Stock.
(B) The redemption price of Thirty-Three and One-Third
Cents ($0.33-1/3) per share of Series I Preferred Stock shall be
paid by check upon presentation by the holders of such shares to
the Secretary of the Corporation of a certificate or certificates
for the appropriate number of shares then to be redeemed,
properly endorsed by such holders. In the event that such
certificate or certificates represent a greater number of shares
than the number of shares to be redeemed pursuant to this Section
4.5(c)(2)(iii), the Corporation shall promptly deliver to the
holders of such certificate or certificates a new certificate
representing the shares of Series I Preferred Stock represented
by such surrendered certificate or certificates which are not
being so redeemed.
(iv) Remedy upon Failure to Redeem. In the event of the
-----------------------------
failure of the Corporation to redeem any of the shares of Series I
Preferred Stock as required by Section 4.5(c)(2)(iii) above, each
holder of Series I Preferred Stock shall be entitled, at his, her or
its option, to require the Corporation to redeem all of the then
outstanding shares of Series I Preferred Stock held by such holder,
provided that the Corporation's default has not been cured within
thirty (30) days after a delivery to the Corporation of written notice
of default by such holder. In the event of the exercise of such
option by any holder of Series I Preferred Stock, the Corporation
shall, to the extent permitted by the laws of the State of Delaware,
pay a redemption price of Thirty-Three and One-Third Cents ($0.33-1/3)
per each share of Series I Preferred Stock by check upon presentation
by such holder of the certificate or certificates representing all
shares of Series I Preferred Stock to be redeemed, properly endorsed
by such holder.
(v) Retirement and Cancellation. All shares of Series I
---------------------------
Preferred Stock which shall have been redeemed as herein provided
shall be cancelled and shall not be reissued as Series I Preferred
Stock, and the Corporation shall
<PAGE>
8
from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of Series I
Preferred Stock accordingly.
(3) Voting Rights.
-------------
(i) General Voting Rights. Except as otherwise set forth
---------------------
in Section 4.5(b)(3)(ii) below, each share of Series I Preferred Stock
shall be entitled to ten (10) votes for the election of directors of
the Corporation and to ten (10) votes upon any matter that comes to a
vote before the stockholders of the Corporation on which the holders
of any series of Common Stock are entitled to vote; provided that the
holders of shares of Series I Preferred Stock shall be entitled to
vote as a class upon any amendment to the Corporation's Certificate of
Incorporation adversely affecting the rights of the holders of Series
I Preferred Stock. The affirmative vote of the holders of a majority
of the issued and outstanding shares of Series I Preferred Stock shall
be required to approve any such amendment.
(ii) Reduction of Voting Rights Following Certain
--------------------------------------------
Transfers.
---------
(A) If, on or after June __, 1996, any share of Series I
Preferred Stock is sold, assigned, pledged, hypothecated,
transferred (by gift, will, laws of intestacy or otherwise) or
exchanged or otherwise disposed of, other than to a Permitted
Series I Transferee (as defined below), then, without any action
required by the Corporation or the transferor or the transferee
of such share, such share of Series I Preferred Stock shall
automatically have the number of votes allocated to such share
reduced from ten (10) votes per share to one (1) vote per share.
(B) For purposes of this Section 4.5(b), a "Permitted
Series I Transferee" shall mean, with respect to any given share
of Series I Preferred Stock, (1) a spouse, child, grandchild,
sibling, parent or other lineal descendant of (or, with respect
to any shares held by a person that is not a natural person, any
affiliate (as defined in Rule 12b-2 under the rules and
regulations of the Securities Exchange Act of 1934, as amended)
of) such share's Original Series I Preferred Stockholder (as
defined below), (2) any other Original Series I Preferred
Stockholder or (3) any person which is a party to the Standstill
Agreement referred to in Section 4.4(a). An "Original Series I
Preferred Stockholder" shall mean, with respect to any given
share of Series I Preferred Stock, the person to whom such share
was originally issued.
<PAGE>
9
ARTICLE V
---------
Bylaws
------
In furtherance and not in limitation of the power conferred upon the
Board of Directors by law, the Board of Directors shall have power to make,
adopt, alter, amend and repeal, from time to time, the Bylaws of the
Corporation, subject to the right of the stockholders entitled to vote with
respect thereto to alter and repeal Bylaws made by the Directors.
ARTICLE VI
----------
Directors
---------
Section 6.1. The number of directors which shall constitute the full
------------
Board of Directors shall be determined by resolution of the Board of Directors
from time to time, provided that such resolution shall not designate a number of
directors other than seven (7) without the unanimous approval of the directors
then in office.
Section 6.2. The board of directors, other than those directors
------------
elected by the holders of any series of Preferred Stock as may be entitled to
the election of directors, shall be divided into three classes, as nearly equal
in number as possible, with the term of office of one class expiring each year
and with each director serving for a term ending at the third annual meeting of
stockholders of the Corporation following the annual meeting at which such
director was elected.
Section 6.3. Except as otherwise provided for or fixed pursuant to
------------
this Restated Certificate of Incorporation relating to the rights of the holders
of any series of Preferred Stock to elect additional directors, and subject to
the provisions hereof, newly created directorships resulting from any increase
in the authorized number of directors, and any vacancies on the Board resulting
from death, resignation, disqualification, removal, or other cause, may be
filled 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 shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or in which the vacancy occurred, and until such
director's successor shall have been duly elected and qualified, subject to his
earlier death, disqualification, resignation or removal. No decrease in the
number of directors constituting the Board shall shorten the term of any
incumbent director.
Section 6.4. Notwithstanding the provisions of Sections 6.2 and 6.3
------------
of this Article VI, each director shall serve until his successor is elected and
qualified or until his or her death, retirement, resignation or removal.
<PAGE>
10
ARTICLE VII
-----------
Written Ballot
--------------
Elections of directors need not be by written ballot unless the bylaws
of the Corporation shall so provide.
ARTICLE VIII
------------
Personal Liability of Directors
-------------------------------
Section 8.1. To the fullest extent that the laws of the State of
------------
Delaware, as the same exist or may hereafter be amended, permit elimination of
the personal liability of directors, no director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director.
Section 8.2. Any amendment or repeal of this Article VIII or adoption
------------
of any Bylaw of the Corporation or other provision of the Certificate of
Incorporation of the Corporation which has the effect of increasing director
liability shall operate prospectively only and shall not affect any action
taken, or any failure to act, by a director of the Corporation prior to such
amendment, repeal, Bylaw or other provision becoming effective.
ARTICLE IX
----------
Indemnification of, and Advancement of
--------------------------------------
Expenses to, Directors, Officers and Other
------------------------------------------
The Corporation shall indemnify its officers, directors, employees and
agents as provided in its Bylaws.
<PAGE>
LOGO
CLASS A PROXY SMITH'S FOOD & DRUG CENTERS, INC. PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 23, 1996
The undersigned hereby appoints Michael C. Frei and Matthew G. Tezak, or any
of them, as Proxies, each with the power to appoint his substitute and hereby
authorizes them to represent and to vote, as designated below, all the shares
of Class A Common Stock held of record by the undersigned on April 15, 1996, at
the Annual Meeting of Stockholders to be held on May 23, 1996, at 9:00 a.m.,
Mountain Time, at the Company's principal executive offices at 1550 South
Redwood Road, Salt Lake City, Utah 84104, or any adjournment or postponement
thereof.
1. APPROVAL of the Recapitalization Agreement and the transactions
contemplated thereby, including the Offer and the issuance of 3,038,888 shares
of Class B Common Stock to the stockholders of Smitty's pursuant to the Merger
FOR [_]AGAINST [_]ABSTAIN [_]
2. APPROVAL and ADOPTION of the following changes reflected in the Company's
Amended and Restated Certificate of Incorporation:
A. Creation of a seven member classified Board of Directors
FOR [_]AGAINST [_]ABSTAIN [_]
B. Creation of a new series of non-voting Class C Common Stock
FOR [_]AGAINST [_]ABSTAIN [_]
C. Amendment of redemption and voting provisions of Series I Preferred
Stock
FOR [_]AGAINST [_]ABSTAIN [_]
3. ELECTION of the following nominees as Directors: Jeffrey P. Smith, Ronald
W. Burkle, Allen R. Rowland, Fred L. Smith, Linda McLoughlin Figel, Bruce
Karatz and Bertram R. Zweig.
[_] FOR all nominees
[_] WITHHOLD AUTHORITY to vote for all Nominees
[_] WITHHOLD AUTHORITY to vote for the following Nominees only: (Write the
name of Nominee(s) below)
-------------------------------------------------------------------------
4. RATIFICATION of the selection of Ernst & Young LLP as the Company's
independent auditors for 1996
FOR [_]AGAINST [_]ABSTAIN [_]
5. In their discretion, the Proxies are authorized to vote upon such other
business as may come before the meeting or any adjournment or postponement
thereof.
If your address differs from that appearing hereon, please advise the
Company's transfer agent and registrar, American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005, Attention: Issac Kagan, of
your correct address.
THIS PROXY, DULY EXECUTED, WILL BE VOTED AS SPECIFIED. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
LOGO
The undersigned hereby acknowledges receipt of a copy of the Company's 1995
Annual Report on Form 10-K and Notice of Annual Meeting and Proxy Statement
relating to the Annual Meeting of Stockholders to be held May 23, 1996.
MARK HERE FOR MARK HERE IF YOU
ADDRESS PLAN
CHANGE AND NOTE TO ATTEND THE
BELOW MEETING
[_] [_]
-------------------------------------
(SIGNATURE)
-------------------------------------
(SIGNATURE IF HELD JOINTLY)
-------------------------------------
(DATE)
(Please sign exactly as your name
appears hereon. If stock is
registered in more than one name,
each holder should sign. When
signing as an attorney,
administrator, executor, guardian or
trustee, please add your title as
such. If executed by a corporation
or other entity, the proxy should be
signed by a duly authorized officer
or other representative.)
PLEASE SIGN, DATE AND PROMPTLY
RETURN THIS PROXY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF
MAILED IN THE UNITED STATES.
<PAGE>
LOGO
CLASS B PROXY SMITH'S FOOD & DRUG CENTERS, INC. PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 23, 1996
The undersigned hereby appoints Michael C. Frei and Matthew G. Tezak, or any
of them, as Proxies, each with the power to appoint his substitute and hereby
authorizes them to represent and to vote, as designated below, all the shares
of Class B Common Stock held of record by the undersigned on April 15, 1996, at
the Annual Meeting of Stockholders to be held on May 23, 1996, at 9:00 a.m.,
Mountain Time, at the Company's principal executive offices at 1550 South
Redwood Road, Salt Lake City, Utah 84104, or any adjournment or postponement
thereof.
1. APPROVAL of the Recapitalization Agreement and the transactions
contemplated thereby, including the Offer and the issuance of 3,038,888
shares of Class B Common Stock to the stockholders of Smitty's pursuant to
the Merger
FOR [_]AGAINST [_]ABSTAIN [_]
2. APPROVAL and ADOPTION of the following changes relected in the Company's
Amended and Restated Certificate of Incorporation.
A. Creation of a seven member classified Board of Directors.
FOR [_]AGAINST [_]ABSTAIN [_]
B. Creation of a new series of non-voting Class C Common Stock
FOR [_]AGAINST [_]ABSTAIN [_]
C. Amendment of redemption and voting provisions of Series I Preferred
Stock
FOR [_]AGAINST [_]ABSTAIN [_]
3. ELECTION of the following nominees as Directors: Jeffrey P. Smith, Ronald
W. Burkle, Allen R. Rowland, Fred L. Smith, Linda McLoughlin Figel, Bruce
Karatz and Bertram R. Zweig.
[_] FOR all nominees
[_] WITHHOLD AUTHORITY to vote for all Nominees
[_] WITHHOLD AUTHORITY to vote for the following Nominees only: (Write the
name of Nominee(s) below)
-------------------------------------------------------------------------
4. RATIFICATION of the selection of Ernst & Young LLP as the Company's
independent auditors for 1996
FOR [_]AGAINST [_]ABSTAIN [_]
5. In their discretion, the Proxies are authorized to vote upon such other
business as may come before the meeting or any adjournment or postponement
thereof.
If your address differs from that appearing hereon, please advise the
Company's transfer agent and registrar, American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005, Attn: Issac Kagan, of your
correct address.
THIS PROXY, DULY EXECUTED, WILL BE VOTED AS SPECIFIED. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
LOGO
The undersigned hereby acknowledges receipt of a copy of the Company's 1995
Annual Report on Form 10-K and Notice of Annual Meeting and Proxy Statement
relating to the Annual Meeting of Stockholders to be held May 23, 1996.
MARK HERE FOR MARK HERE IF YOU
ADDRESS PLAN
CHANGE AND NOTE TO ATTEND THE
BELOW MEETING
[_] [_]
-------------------------------------
(SIGNATURE)
-------------------------------------
(SIGNATURE IF HELD JOINTLY)
-------------------------------------
(DATE)
(Please sign exactly as your name
appears hereon. If stock is
registered in more than one name,
each holder should sign. When
signing as an attorney,
administrator, executor, guardian or
trustee, please add your title as
such. If executed by a corporation
or other entity, the proxy should be
signed by a duly authorized officer
or other representative.)
PLEASE SIGN, DATE AND PROMPTLY
RETURN THIS PROXY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF
MAILED IN THE UNITED STATES.
<PAGE>
LOGO
SERIES I PROXY SMITH'S FOOD & DRUG CENTERS, INC. PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 23, 1996
The undersigned hereby appoints Michael C. Frei and Matthew G. Tezak, or any
of them, as Proxies, each with the power to appoint his substitute and hereby
authorizes them to represent and to vote, as designated below, all the shares
of Series I Preferred Stock held of record by the undersigned on April 15,
1996, at the Annual Meeting of Stockholders to be held on May 23, 1996, at 9:00
a.m., Mountain Time, at the Company's principal executive offices at 1550 South
Redwood Road, Salt Lake City, Utah 84104, or any adjournment or postponement
thereof.
1. APPROVAL of the Recapitalization Agreement and the transactions
contemplated thereby, including the Offer and the issuance of 3,038,888
shares of Class B Common Stock to the stockholders of Smitty's pursuant to
the Merger
FOR [_]AGAINST [_]ABSTAIN [_]
2. APPROVAL and ADOPTION of the following changes reflected in the Company's
Amended and Restated Certificate of Incorporation
A. Creation of a seven member classified Board of Directors
FOR [_]AGAINST [_]ABSTAIN [_]
B. Creation of a new series of non-voting Classs C Common Stock
FOR [_]AGAINST [_]ABSTAIN [_]
C. Amendment of redemption and voting provisions of Series I Preferred
Stock
FOR [_]AGAINST [_]ABSTAIN [_]
3. ELECTION of the following nominees as Directors: Jeffrey P. Smith, Ronald
W. Burkle, Allen R. Rowland, Fred L. Smith, Linda McLoughlin Figel, Bruce
Karatz and Bertram R. Zweig.
[_] FOR all nominees
[_] WITHHOLD AUTHORITY to vote for all Nominees
[_] WITHHOLD AUTHORITY to vote for the following Nominees only: (Write the
name of Nominee(s) below)
-------------------------------------------------------------------------
If your address differs from that appearing hereon, please advise the
Company's transfer agent and registrar, American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005, Attn: Issac Kagan, of your
correct address.
THIS PROXY, DULY EXECUTED, WILL BE VOTED AS SPECIFIED. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
LOGO
4. RATIFICATION of the selection of Ernst & Young LLP as the Company's
independent auditors for 1996
FOR [_]AGAINST [_]ABSTAIN [_]
5. In their discretion, the Proxies are authorized to vote upon such other
business as may come before the meeting or any adjournment or postponement
thereof.
The undersigned hereby acknowledges receipt of a copy of the Company's 1995
Annual Report on Form 10-K and Notice of Annual Meeting and Proxy Statement
relating to the Annual Meeting of Stockholders to be held May 23, 1996.
MARK HERE FOR MARK HERE IF YOU
ADDRESS PLAN
CHANGE AND NOTE TO ATTEND THE
BELOW MEETING
[_] [_]
-------------------------------------
(SIGNATURE)
-------------------------------------
(SIGNATURE IF HELD JOINTLY)
-------------------------------------
(DATE)
(Please sign exactly as your name
appears hereon. If stock is
registered in more than one name,
each holder should sign. When
signing as an attorney,
administrator, executor, guardian or
trustee, please add your title as
such. If executed by a corporation
or other entity, the proxy should be
signed by a duly authorized officer
or other representative.)
PLEASE SIGN, DATE AND PROMPTLY
RETURN THIS PROXY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF
MAILED IN THE UNITED STATES.
