<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SMITH'S FOOD & DRUG CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1550 SOUTH REDWOOD ROAD 87-0258768
(STATE OR OTHER SALT LAKE CITY, UTAH 84104 (IRS EMPLOYER
JURISDICTION OF (801) 974-1400 IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
MICHAEL C. FREI
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
SMITH'S FOOD & DRUG CENTERS, INC.
1550 SOUTH REDWOOD ROAD
SALT LAKE CITY, UTAH 84104
(801) 974-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
THOMAS C. SADLER, ESQ. MICHAEL A. BECKER, ESQ.
LATHAM & WATKINS CAHILL GORDON & REINDEL
633 WEST FIFTH STREET 80 PINE STREET
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10005
(213) 485-1234 (212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
% Senior Notes due
2006.................. $250,000,000 100% $250,000,000 $86,207
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% Senior Subordinated
Notes due 2007........ $400,000,000 100% $400,000,000 $137,931
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% Cumulative Redeem-
able Exchangeable
Preferred Stock....... 75,000 shares $1,000 $75,000,000 $25,862
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% Subordinated Ex-
change Debentures due
2008.................. (a) -- -- --
</TABLE>
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(a) The Exchange Debentures are being registered to cover the maximum face
amount of Exchange Debentures issuable upon exchange of the Cumulative
Redeemable Exchangeable Preferred Stock. Pursuant to Rule 457(i), no
registration fee is required.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses, one to be
used in connection with the offering of Senior Notes and Senior Subordinated
Notes and one to be used in connection with a concurrent offering of
Cumulative Redeemable Exchangeable Preferred Stock. The two prospectuses will
be identical in all respects except for the outside front cover page, inside
front cover page, summary of the offerings, "Summary Historical Financial Data
of Smith's," the "Risk Factors" section, the "Selected Historical Financial
Data of Smith's" section, the "Description of Notes" section, the "Description
of New Preferred Stock and Exchange Debentures" section, the "Description of
Other Indebtedness" section, the "Description of Capital Stock" section, the
"Certain Federal Income Tax Considerations" section, the "Underwriting"
section and the back cover page. The form of prospectus to be used for the
Senior Notes and Senior Subordinated Notes is included herein and is followed
by alternate pages for the form of prospectus to be used for the Cumulative
Redeemable Exchangeable Preferred Stock.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 8, 1996
PROSPECTUS
[LOGO OF SMITH'S FOOD & DRUG CENTERS(R)]
SMITH'S FOOD & DRUG CENTERS, INC.
$250,000,000 % SENIOR NOTES DUE 2006
$400,000,000 % SENIOR SUBORDINATED NOTES DUE 2007
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The offering by Smith's Food & Drug Centers, Inc. ("Smith's" or the
"Company") of its % Senior Notes due 2006 (the "Senior Notes") and its %
Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes" and,
together with the Senior Notes, the "Notes") is part of the financing required
to consummate the Recapitalization (as defined) of Smith's and the Merger (as
defined) of Smitty's Supermarkets, Inc. ("Smitty's") with a subsidiary of
Smith's. Concurrently with this offering, the Company is offering 75,000 shares
of its Cumulative Redeemable Exchangeable Preferred Stock, par value $.01 per
share (the "New Preferred Stock"), for estimated gross proceeds of $75.0
million (the "Preferred Stock Offering," and together with this offering, the
"Offerings"). Consummation of each of the Offerings is conditioned upon the
closing of the Merger and the Recapitalization.
Interest on the Notes will be payable semiannually on each and ,
commencing on . The Notes will be redeemable, in whole or in part, at
the option of the Company, at any time on and after , 2001, at the
respective redemption prices set forth herein. In addition, on or prior to
, 1999, the Company may, at its option, use the Net Cash Proceeds (as
defined) of one or more Public Equity Offerings (as defined) to redeem up to an
aggregate of 35% of the Senior Notes originally issued and up to 35% of the
Senior Subordinated Notes originally issued, at the respective redemption
prices set forth herein. Upon a Change of Control (as defined), each holder of
Notes will have the right to require the Company to repurchase such holder's
Notes at a price equal to 101% of their principal amount plus accrued and
unpaid interest to the date of repurchase.
The Senior Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with other senior unsecured indebtedness of
the Company. However, the Senior Notes will be effectively subordinated to all
secured indebtedness of the Company, including indebtedness under the New
Credit Facility (as defined). The Senior Notes will rank senior in right of
payment to all subordinated indebtedness of the Company, including the Senior
Subordinated Notes. At December 30, 1995, on a pro forma basis after giving
effect to the Transactions (as defined), the Company would have had outstanding
$784.1 million aggregate principal amount of secured indebtedness. The Senior
Subordinated Notes will be senior subordinated unsecured obligations of the
Company and will be subordinated in right of payment to all Senior Indebtedness
(as defined) of the Company, including the Company's obligations under the New
Credit Facility and the Senior Notes. At December 30, 1995, on a pro forma
basis after giving effect to the Transactions, the aggregate outstanding amount
of Senior Indebtedness of the Company would have been approximately $1,034.2
million. The Notes will be effectively subordinated to all existing and future
liabilities, including indebtedness, of the Company's subsidiaries. At December
30, 1995, on a pro forma basis after giving effect to the Transactions, the
Company's subsidiaries would have had indebtedness and other liabilities
reflected on the Company's consolidated balance sheet, including trade payables
and accrued expenses (but excluding guarantees of Senior Indebtedness), of
approximately $148.4 million.
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
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<S> <C> <C> <C>
Per Senior Note............................ % % %
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Per Senior Subordinated Note............... % % %
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Total...................................... $650,000,000 $ $
</TABLE>
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(1) Plus accrued interest, if any, from date of original issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses of the Offerings payable by the Company,
estimated at $ .
----------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval
of certain legal matters by counsel. It is expected that delivery of the Notes
will be made on or about , 1996, at the offices of BT Securities
Corporation, One Bankers Trust Plaza, New York, New York.
----------
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
----------
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR NOTES,
THE SENIOR SUBORDINATED NOTES OR THE NEW PREFERRED STOCK AT LEVELS ABOVE THOSE
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Notes and the New Preferred Stock. Each of the
Company and Smitty's is subject to the reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder, and in accordance
therewith files reports and other information with the Commission. Such
reports and other information filed by the Company or Smitty's with the
Commission can be inspected without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street. N.W., Room 1024, Washington,
D.C. 20549, and at the regional offices of the Commission located at Seven
World Trade Center, Suite 1300, New York, New York 10048; 500 West Madison
Street, Chicago, Illinois 60601; and 5670 Wilshire Boulevard, Suite 500, Los
Angeles, California 90036. Copies of such materials can also be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.
Washington, D.C. 20549, at prescribed rates. The Class B Common Stock of the
Company is listed on the New York Stock Exchange and reports, proxy statements
and other information concerning the Company can also be inspected at the
office of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
This Prospectus summarizes the contents and terms of documents not included
herewith. These documents are available upon request from Smith's Food & Drug
Centers, Inc. at 1550 South Redwood Road, Salt Lake City, Utah 84104,
telephone number (801) 974-1400, Attn: Michael C. Frei, General Counsel and
Secretary.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Smith's with the Commission under the
Exchange Act are incorporated herein by reference: (i) Smith's Annual Report
on Form 10-K for its fiscal year ended December 30, 1995; (ii) Smith's current
report on Form 8-K dated February 19, 1996, and (iii) the sections of Smith's
1996 Proxy Statement for its Annual Meeting of Stockholders entitled "The
Recapitalization Agreement," and "Executive Compensation." In addition, all
documents filed by Smith's with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior
to the termination of the Offerings shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing
of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document that also is, or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Copies of documents incorporated herein by reference (excluding exhibits
unless such exhibits are specifically incorporated herein by reference) may be
obtained without charge upon request from Smith's Food & Drug Centers, Inc. at
1550 South Redwood Road, Salt Lake City, Utah 84104, telephone number
(801) 974-1400, Attn: Michael C. Frei, General Counsel and Secretary.
i
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the Financial Statements and notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise stated, references in this Prospectus to
numbers of stores prior to the consummation of the Merger are as of March 1,
1996. References to the "pro forma" number of stores to be operated by the
Company following the consummation of the Merger are based on the March 1, 1996
totals for Smith's and Smitty's, but give effect to the California Divestiture,
as described herein. Unless otherwise noted, the market share data contained
herein has been prepared by management of the Company based upon internal
research.
THE COMPANY
Smith's is a leading supermarket company in the Intermountain and
Southwestern regions of the United States, operating 120 stores located in Utah
(35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and Wyoming
(collectively, 14). Substantially all of Smith's stores offer one-stop shopping
convenience through a food and drug combination format which features a full-
line supermarket with drug and pharmacy departments and some or all of the
following specialty departments: delicatessens, hot prepared food sections, in-
store bakeries, video rental shops, floral shops, one-hour photo processing
labs, full-service banking and frozen yogurt shops. The Company's 114 food and
drug combination stores averaged approximately 63,000 square feet and $420,000
per week in sales volume in fiscal 1995. The Company has recently opened four
price impact warehouse stores and also operates two conventional supermarkets.
Through its 48 years of operations, the Company believes it has developed a
valuable and strategically located store base, strong name recognition,
customer loyalty and a reputation for quality and service.
The Company is pursuing a series of transactions designed to enhance
stockholder value and liquidity:
. Arizona Merger and Consolidation. The Company has entered into an
agreement to acquire Smitty's Supermarkets, Inc. ("Smitty's"), a
regional supermarket operator with 28 stores in the Phoenix and Tucson
markets, in a stock-for-stock exchange (the "Merger"). The Merger will
significantly enhance the Company's market position in Arizona. Smitty's
is controlled by affiliates of The Yucaipa Companies ("Yucaipa"), a
private investment group specializing in the supermarket industry.
Affiliates of Yucaipa will own approximately 14% of the Company's
outstanding common stock following the Merger and the Recapitalization
(as defined).
. California Divestiture. The Company has substantially completed the
sale, lease or closure of its store operations and primary distribution
facility in Southern California (the "California Divestiture").
Management determined that because of the attractive growth prospects in
the Company's principal markets and the competitive environment in
Southern California, it would redeploy Company resources from California
into such other markets.
. New Senior Management. The Company will enter into a five-year
management services agreement (the "Management Services Agreement") with
Yucaipa. Ronald W. Burkle, the managing general partner of Yucaipa, will
be appointed as Chief Executive Officer of the Company. In addition,
Allen R. Rowland recently joined Smith's as President and Chief
Operating Officer. Mr. Rowland was employed by Albertson's, Inc. for 25
years and had senior executive responsibilities for all of the principal
regions in which Smith's operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding common stock (excluding shares issuable in the Merger) for
$36.00 in cash per share (the "Tender Offer"). In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
1
<PAGE>
For the fiscal year ended December 30, 1995, after giving pro forma effect to
the Merger, the Company would have had net sales and EBITDA of approximately
$3.7 billion and $268.2 million, respectively. For the same period, after
giving pro forma effect to the Merger and the California Divestiture, the
Company would have had net sales and EBITDA of approximately $3.0 billion and
$255.4 million, respectively. See "Unaudited Pro Forma Combined Financial
Statement." In addition, management believes that the Company will benefit from
significant operating synergies and cost saving opportunities following the
Merger.
COMPANY STRENGTHS
Management believes the Company has the following principal strengths: (i)
leading market positions, (ii) attractive markets, (iii) new and recently
remodeled stores, (iv) prime store locations, (v) advanced backstage operations
and (vi) substantial owned real estate.
Leading Market Positions. Pro forma for the Merger, the Company will operate
148 stores and will have the largest or second largest market share in each of
its principal markets: Salt Lake City (31%), Phoenix (24%), Las Vegas (24%) and
Albuquerque (23%). The Company believes its reputation for offering a broad
selection of quality products combined with a high level of customer service
has created a valuable franchise with strong name recognition and customer
loyalty.
Attractive Markets. The Company's stores are located predominantly in Utah,
Arizona, Nevada and New Mexico, which are among the fastest growing states in
terms of population and employment. According to the U.S. Bureau of the Census,
the population of those four states has increased at a compound annual growth
rate of 3.0% since 1990, compared to the national average of 1.1% over the same
period. According to the U.S. Bureau of Labor Statistics, employment in the
same four states has increased at a compound annual growth rate of 4.0% since
1990, compared to the national average of 1.3% over the same period. In
addition, management believes that operating in distinct markets in several
states provides advantages due to their differences in economic cycles,
demographics and competitive conditions.
New and Recently Remodeled Stores. After giving effect to the Merger and the
California Divestiture, approximately 84% of the Company's stores will have
been opened or remodeled within the last seven years. During the five fiscal
years ended December 30, 1995, Smith's spent approximately $414 million in
capital expenditures (excluding capital expenditures associated with California
operations), which have been primarily used to build new stores and to expand
and remodel existing stores. During the five-year period ended December 30,
1995, Smitty's spent approximately $72.0 million in capital expenditures,
including approximately $43.0 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 $163.0
million (excluding the divested California operations) to build, expand or
remodel its warehousing, distribution and processing facilities. Management
believes that the Company's approximately 3,000,000 square feet of backstage
facilities will be able to accommodate the Smitty's volume following the Merger
and support anticipated future growth.
Substantial Owned Real Estate. The Company will own 108 of the 148 stores it
will operate upon consummation of the Merger. The Company also owns its primary
warehousing, distribution and processing facilities. In addition, the Company
owns land for development, expansion or sale, as well as other non-operating
real estate assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
2
<PAGE>
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing markets, (ii) realize operating
synergies and cost savings resulting from the Merger, (iii) improve working
capital management, (iv) grow its recently introduced price impact warehouse
stores and (v) dispose of remaining California real estate following
consummation of the Transactions.
Expand Operations in Existing Markets. Management believes that there are
significant opportunities to increase the Company's sales and gain efficiencies
in its existing markets through new store openings and store remodels. From
1991 through 1994, management primarily focused on the Southern California
market, opening 32 new stores in Southern California compared to 16 new stores
in its other markets. In 1995, the Company opened 19 new stores, only two of
which were located in California. In an effort to more fully realize its market
potential in its non-California markets, in 1995 the Company began opening
smaller combination stores (54,000 to 60,000 square feet) in existing markets
as part of a "fill-in" strategy. By pursuing a growth strategy which emphasizes
opening new stores within its existing and adjacent markets, the Company
believes it can increase its market share and improve its distribution and
other efficiencies, while taking advantage of such markets' favorable growth
prospects.
Realize Operating Synergies and Cost Savings Resulting from the Merger.
Management believes that approximately $25 million of net annual cost savings
are achievable over a three-year period following the Merger. The majority of
such cost savings opportunities relate to its Arizona operations and are
believed to be achievable (on an annualized basis) by the end of the first full
year of operations following the Merger. The estimates of potential cost
savings resulting from the Merger contained in this Prospectus are forward
looking statements that involve risks and inherent uncertainties that could
cause actual net annual cost savings to differ materially from those projected.
See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's and Smitty's advertising programs in
the Phoenix and Tucson markets substantially overlap and, as a result of
the Merger, management expects that the Company will be able to
eliminate a substantial portion of the combined advertising expenses.
Management estimates that annualized advertising cost savings of
approximately $7 million are achievable by the end of the first full
year of operations following the Merger.
. General and Administrative Cost Savings. Management expects the Company
to achieve savings from the elimination of duplicative administrative
staff and headquarters facilities and the consolidation of management
information systems. Management estimates that annualized general and
administrative cost savings of approximately $13 million are achievable
by the end of the first full year of operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently operates
without any of its own distribution facilities. By incorporating the
Smitty's volume into Smith's Tolleson, Arizona warehousing and
distribution facilities, the Company expects to eliminate the expense
associated with Smitty's being supplied primarily by an independent
wholesaler, as well as reduce average unit costs resulting from improved
capacity utilization. Management estimates that annualized warehousing
and transportation cost savings of approximately $4 million are
achievable by the end of the second full year of operations following
the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to deliver an increased percentage of store
inventory requirements under direct delivery programs, thereby reducing
certain distribution and transportation costs. In addition, by utilizing
Smith's front-end systems in Smitty's stores, improvements in the
efficiency of Smitty's stores is expected. Management estimates that
annualized cost savings of approximately $2 million related to such
direct store delivery and store systems are achievable by the end of the
second full year of operations following the Merger.
3
<PAGE>
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with aggregate annual sales (when combined with the
Company) in excess of $11 billion. Management estimates that annualized
cost savings of approximately $6 million are achievable from such
purchasing improvements by the end of the third full year of operations
following the Merger.
The sum of the components of the estimated annual cost savings exceeds $25
million; however, management expects that a portion of the savings will be
reinvested in the Company's operations. In connection with the Transactions,
the Company and Smitty's are evaluating the format mix of the combined Arizona
store base and are assessing the possibility of converting the formats of
certain stores. It is anticipated that approximately $17 million of capital
expenditures and approximately $10 million of other expenses will be required
to integrate the Arizona operations and realize such cost savings.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
companies have achieved working capital improvements; however, there can be no
assurance that similar improvements can be achieved by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company recently
developed a price impact warehouse store format and during 1995 opened four of
these stores in the Las Vegas area operating under the name "PriceRite Grocery
Warehouse." Management believes that a number of the Company's markets are
underserved by price impact warehouse stores and that there are substantial
opportunities for expansion of the Company's PriceRite format through the
conversion of existing stores and the opening of new stores. Yucaipa, through
its management of other supermarket companies, has extensive experience in
expanding and profitably operating price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation of
the Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of certain real estate assets in California,
including leased stores, closed stores and excess land. The Company would use
the net cash proceeds from the sales of these assets to either reinvest in the
Company's business or reduce indebtedness incurred in connection with the
Transactions. 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 charge to earnings, which could be substantial. See
"Risk Factors--Anticipated Charges to Earnings Following the Transactions."
THE CALIFORNIA DIVESTITURE
Smith's has substantially completed the sale, lease or closure of its
Southern California regional operations. In December 1995, Smith's entered into
an agreement to sublease its Riverside, California distribution center and
dairy plant to Ralphs Grocery Company ("Ralphs"), an affiliate of Yucaipa, for
the remaining 23-year term of Smith's lease. Ralphs also agreed to purchase
certain related equipment and inventory. In January 1996, Smith's entered into
agreements to sell or lease 16 stores and related equipment and three non-
operating properties to various supermarket companies (including Ralphs) and
others. Smith's indicated that it would close the remaining 18 stores as soon
as practicable. It is anticipated that these closed stores will be sold or
leased to other retail companies. Since December 30, 1995, the Company has
received net cash proceeds of approximately $67.2 million from the California
Divestiture and expects to receive an additional $10.6 million shortly after
the consummation of the Transactions. In connection with the California
Divestiture, the Company recorded pre-tax restructuring charges of $140 million
for the year ended December 30, 1995. The California Divestiture, including the
transactions with Ralphs, was unrelated to the Merger or the Recapitalization.
THE TRANSACTIONS
The Merger. On January 29, 1996, Smith's and a wholly owned subsidiary of
Smith's ("Acquisition"), entered into a Recapitalization Agreement and Plan of
Merger (the "Recapitalization Agreement") with Smitty's and Yucaipa. Pursuant
to the terms of the Recapitalization Agreement, Smitty's will merge with
Acquisition, as
4
<PAGE>
a result of which Smitty's will become a wholly owned subsidiary of Smith's.
The consideration payable to the stockholders of Smitty's in the Merger will
consist of 3,038,888 shares of Class B Common Stock of the Company.
Tender Offer. Smith's is offering to purchase 50% of its outstanding Class A
Common Stock and Class B Common Stock (collectively, the "Common Stock") for
$36.00 per share in cash in the Tender Offer. The shares issuable to the
stockholders of Smitty's will not be eligible to participate in the Tender
Offer. Smith's is also offering to purchase for cash certain outstanding
options to purchase Common Stock held by certain officers and employees of
Smith's for an aggregate purchase price estimated to be approximately $13.7
million.
Smith's Debt Refinancing and Preferred Stock Redemption. Smith's will repay
in full approximately $667.9 million principal amount of existing indebtedness
of Smith's, including all outstanding borrowings under its existing revolving
credit facilities, and will purchase approximately $1.0 million of its
outstanding Series I Preferred Stock.
Smitty's Debt Refinancing. At the time the Merger is consummated, the Company
will cause Smitty's and its subsidiary, Smitty's Super Valu, Inc. ("SSV"), to
repay in full approximately $33.7 million principal amount of existing
indebtedness, including all outstanding borrowings under SSV's bank credit
facility. Smitty's will also make an offer to purchase all of the $18.7 million
accreted value of its Senior Discount Debentures due 2006 (the "Smitty's
Debentures"), and SSV will make an offer to purchase all of the $49.5 million
principal amount of its Senior Subordinated Notes due 2004 (the "Smitty's
Notes"). Smitty's and SSV will concurrently solicit consents from the holders
of such securities to certain amendments to the respective indentures under
which such securities were issued. The foregoing debt refinancing transactions
of Smitty's and SSV are referred to herein collectively as the "Smitty's
Refinancing."
The Offerings, the Tender Offer, the purchase of certain management stock
options, the Series I Preferred Stock purchase, the Smith's debt refinancings
described above and the closing under a new senior credit facility (the "New
Credit Facility") to be provided to the Company are collectively referred to
herein as the "Recapitalization." The Recapitalization, the Merger and the
Smitty's Refinancing are collectively referred to herein as the "Transactions."
The following table illustrates the sources and uses of funds to consummate
the Transactions, assuming such Transactions are consummated as of May 1, 1996.
This table assumes that all Smitty's Notes and Smitty's Debentures are tendered
in connection with the Smitty's Refinancing. Although management believes the
amounts estimated below are reasonable under the circumstances, actual sources
and uses may differ from those set forth below.
SOURCES AND USES
(dollars in millions)
<TABLE>
<CAPTION>
SOURCES USES
------- ----
<S> <C> <C> <C>
New Term Loans (a)...... $ 655.0 Purchase Smith's Common Stock............... $ 451.4
New Revolving Facility
(a) (b)................ 52.7 Purchase Smith's Management Options......... 13.7
Senior Notes............ 250.0 Purchase Smith's Series I Preferred Stock... 1.0
Senior Subordinated
Notes.................. 400.0 Repay Smith's Mortgage Notes................ 218.2
New Preferred Stock..... 75.0 Repay Smith's Unsecured Notes............... 410.0
Repay Smith's Revolving Credit Facility (c). 39.7
Repay Smitty's Notes........................ 49.5
Repay Smitty's Debentures................... 18.7
Repay Smitty's Bank Credit Facility......... 33.7
Debt Refinancing Premiums................... 97.2
Accrued Interest............................ 11.8
Fees and Expenses........................... 87.8
-------- --------
Total Sources........... $1,432.7(c) Total Uses.................................. $1,432.7
======== ========
</TABLE>
5
<PAGE>
- --------
(a) The Company has obtained a commitment from Bankers Trust Company ("Bankers
Trust") and The Chase Manhattan Bank ("Chase Manhattan") for a new senior
credit facility that will provide up to $655 million aggregate principal
amount of term loans ("New Term Loans") and a $190 million revolving credit
facility (the "New Revolving Facility") which will be available for working
capital requirements and general corporate purposes. A portion of the New
Revolving Facility may be used to support letters of credit, approximately
$28 million of which are anticipated to be issued at Closing. The New
Credit Facility will be guaranteed by all subsidiaries of the Company,
including Smitty's. See "Description of New Credit Facility."
(b) The Company expects to receive an additional $10.6 million in proceeds from
the California Divestiture shortly after the consummation of the
Transactions (the "Closing"). The Company intends to use such additional
proceeds to reduce revolving loans under the New Revolving Facility. See
"Business--The California Divestiture" and "Description of New Credit
Facility."
(c) The Company anticipates that its total debt at May 1, 1996, giving effect
to the sources and uses of funds set forth in the table above, would be
approximately $1,439.5 million compared to pro forma total debt at December
30, 1995 of $1,477.7 million. See "Pro Forma Capitalization." The
anticipated total debt at May 1, 1996 reflects (i) an anticipated $28.3
million decrease in borrowings under the Smith's revolving credit facility
as a result of the receipt of net cash proceeds from the California
Divestiture as well as other cash receipts and expenditures occurring or
anticipated after December 30, 1995 and prior to May 1, 1996, (ii) an $8.6
million reduction in Smith's Mortgage Notes as a result of the amortization
payments subsequent to December 30, 1995, and (iii) the assumption of
approximately $43.2 million of indebtedness of Smitty's. Approximately
$38.6 million of other indebtedness of Smith's at May 1, 1996 is
anticipated to remain outstanding following the consummation of the
Transactions.
6
<PAGE>
THE OFFERINGS
SENIOR NOTES:
Securities Offered...... $250,000,000 aggregate principal amount of % Senior
Notes due 2006.
Maturity Date........... , 2006.
Interest Rate........... The Senior Notes will bear interest at the rate of %
per annum.
Interest Payment Dates.. and , commencing on .
Optional Redemption..... The Senior Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after , 2001, at the following redemption prices
if redeemed during the 12-month period commencing on
of the year set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001................................................. %
2002................................................. %
2003................................................. %
2004 and thereafter.................................. 100.0%
</TABLE>
in each case plus accrued and unpaid interest to the
date of redemption.
In addition, on or prior to , 1999, the Company
may, at its option, use the net cash proceeds from
one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the
Senior Notes originally issued, at a redemption price
equal to % of the principal amount thereof plus
accrued and unpaid interest to the redemption date.
Ranking................. The Senior Notes will be senior unsecured obligations
of the Company and will rank senior in right of
payment to all subordinated indebtedness of the
Company including the Senior Subordinated Notes. The
Senior Notes will rank pari passu in right of payment
with other senior unsecured indebtedness of the
Company. However, the Senior Notes will be
effectively subordinated to all secured indebtedness
of the Company and its subsidiaries, including
indebtedness under the New Credit Facility. At
December 30, 1995, on a pro forma basis after giving
effect to the Transactions, the Company would have
had outstanding $784.1 million aggregate principal
amount of secured indebtedness, and the Company would
have had $73.0 million available to be borrowed under
the New Revolving Facility. The Senior Notes will be
effectively subordinated to all existing and future
liabilities, including indebtedness of the Company's
subsidiaries. At December 30, 1995, on a pro forma
basis after giving effect to the Transactions, the
Company's subsidiaries would have had indebtedness
and other liabilities reflected on the Company's
consolidated balance sheet, including trade payables
and accrued expenses (but excluding guarantees of
Senior Indebtedness), of approximately $148.4
million.
7
<PAGE>
Change of Control....... Upon the occurrence of a Change of Control (as
defined), each holder will have the right to require
the Company to repurchase such holder's Senior Notes
at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to
the date of repurchase.
Certain Covenants....... The indenture pursuant to which the Senior Notes will
be issued (the "Senior Note Indenture") will contain
certain covenants that, among other things, limit the
ability of the Company and its Restricted
Subsidiaries (as defined) to make restricted
payments, incur additional indebtedness, create
liens, sell assets, create dividend or other payment
restrictions affecting Restricted Subsidiaries, enter
into transactions with affiliates or, consummate
mergers or certain other transactions and the ability
of the Restricted Subsidiaries to issue preferred
stock.
SENIOR SUBORDINATED NOTES:
Securities Offered...... $400,000,000 aggregate principal amount of % Senior
Subordinated Notes due 2007.
Maturity Date........... , 2007.
Interest Rate........... The Senior Subordinated Notes will bear interest at
the rate % per annum.
Interest Payment Dates.. and commencing on .
Optional Redemption..... The Senior Subordinated Notes will be redeemable at
the option of the Company, in whole or in part, at
any time on or after , 2001, at the following
redemption prices if redeemed during the 12-month
period commencing on the year set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001................................................. %
2002................................................. %
2003................................................. %
2004 and thereafter.................................. 100.0%
</TABLE>
in each case plus accrued and unpaid interest to the
date of redemption.
In addition, on or prior to , 1999, the Company
may, at its option, use the net cash proceeds from
one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the
Senior Subordinated Notes originally issued, at a
redemption price equal to % of the principal amount
thereof plus accrued and unpaid interest to the
redemption date.
Ranking................. The Senior Subordinated Notes will be senior
subordinated unsecured obligations of the Company and
will be subordinated in right of payment to all
Senior Indebtedness (as defined) of the Company,
including the Company's obligations under the New
Credit Facility and the Senior Notes. At December 30,
1995, on a pro forma basis after giving effect to the
Transactions, the aggregate outstanding amount of
Senior Indebtedness of the Company would have been
approximately $1,034.2 million and the Company would
have had $73.0 million available to be borrowed under
the New Revolving Facility. The Senior Subordinated
Notes will be
8
<PAGE>
effectively subordinated to all existing and future
liabilities, including indebtedness of the Company's
subsidiaries. At December 30, 1995, on a pro forma
basis after giving effect to the Transactions, the
Company's subsidiaries would have had indebtedness
and other liabilities reflected on the Company's
consolidated balance sheet, including trade payables
and accrued expenses (but excluding guarantees of
Senior Indebtedness), of approximately $148.4
million.
Change of Control....... Upon the occurrence of a Change of Control (as
defined), each holder will have the right to require
the Company to repurchase such holder's Senior
Subordinated Notes at a purchase price equal to 101%
of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase.
Cetain Covenants........ The indenture pursuant to which the Senior
Subordinated Notes will be issued (the "Senior
Subordinated Note Indenture") will contain certain
covenants that, among other things, limit the ability
of the Company and its Restricted Subsidiaries to
make restricted payments, incur additional
indebtedness, create liens, sell assets, create
dividend or other payment restrictions affecting
Restricted Subsidiaries, enter into transactions with
affiliates, consummate mergers or certain other
transactions or incur indebtedness subordinated to
any other indebtedness but senior to the Senior
Subordinated Notes and the ability of the Restricted
Subsidiaries to issue Preferred Stock.
CONCURRENT OFFERING:
New Preferred Stock..... Concurrently with the offering of Notes, the Company
is offering 75,000 shares of its % Convertible
Redeemable Exchangeable Preferred Stock. The
Offerings are conditioned upon each other. In
addition, the consummation of each of the Offerings
is a condition to the Company's simultaneous
obligation to consummate the Merger and the
Recapitalization. See "Summary--The Transactions."
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth summary unaudited pro forma combined financial
data for the 52 weeks ended December 30, 1995, after giving effect to the
Transactions 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 combines the
results of operations and balance sheet data of Smith's as of and for the 52
weeks ended December 30, 1995 with the results of operations and balance sheet
data of Smitty's as of and for the 52 weeks ended January 14, 1996,
respectively. See "Summary--The Transactions." 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) the elimination of 1995 Southern California
operating results for the stores and distribution center which were sold,
leased or closed in connection with the California Divestiture, but does
reflect the restructuring charges recorded in connection therewith, (ii) any
charges resulting from the anticipated change in management's strategy
concerning the disposition of the Company's remaining California real estate
assets following the consummation of the Transactions, (iii) 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 (iv) 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 an extraordinary loss on extinguishment of debt
or compensation expense in connection with the repurchase of certain management
stock options as part of the Recapitalization. See Note (f) to the Unaudited
Pro Forma Combined Statement of Operations. The following pro forma financial
data should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements of Smith's and Smitty's, and related notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS ENDED
DECEMBER 30, 1995
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
OPERATING DATA:
Net sales........................................... $3,668.0
Gross profit........................................ 861.7
Operating, selling and administrative expenses...... 597.8
Depreciation and amortization....................... 116.9
Interest............................................ 140.1
Restructuring charges............................... 140.0
Net income (loss)................................... $ (86.0)
Ratio of earnings to fixed charges(a)............... --
Ratio of earnings of fixed charges to preferred
stock dividends(a)................................. --
BALANCE SHEET DATA (END OF PERIOD):
Working capital..................................... $ 217.6
Total assets........................................ 2,112.0
Total debt(b)(c).................................... 1,477.7
Redeemable preferred stock.......................... 3.3
New Preferred Stock................................. 71.2
Common stockholders' equity (deficit)............... $ (69.2)
OTHER DATA(C):
Capital expenditures................................ $ 184.4
EBITDA(d)(e)........................................ $ 268.2
EBITDA margin(f).................................... 7.31%
Ratio of EBITDA to interest expense................. 1.91x
Ratio of total debt to EBITDA....................... 5.51x
</TABLE>
10
<PAGE>
- --------
(a) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes, restructuring
charges and fixed charges. "Fixed charges" consist of interest on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense (the portion of annual rental expense deemed by the Company
to be representative of the interest factor). For the 52 weeks ended
December 30, 1995, the Company's pro forma ratio of earnings to fixed
charges would have been inadequate to cover fixed charges by $3.0 million.
However, such earnings include non-cash charges of $126.8 million,
primarily consisting of depreciation and amortization. For the same period,
the Company's pro forma ratio of earnings to fixed charges and preferred
stock dividends would have been inadequate to cover fixed charges and
preferred stock dividends by $19.8 million. However, such earnings include
non-cash charges of $143.6 million, primarily consisting of depreciation
and amortization and preferred stock accretion. "Preferred stock dividends"
reflects the amount representing the pre-tax earnings that would be
required to cover such dividend requirements.
(b) Total debt includes long-term debt and current maturities of long-term
debt.
(c) The table below adjusts the pro forma total debt, capital expenditures,
EBITDA, EBITDA margin and the ratio of total debt to EBITDA presented above
to (i) eliminate the 1995 operating results of stores and distribution
center which were sold, leased or closed in connection with the California
Divestiture and (ii) reflect anticipated debt balances at May 1, 1996
(after giving effect to the receipt of net cash proceeds from the
California Divestiture and other anticipated changes in debt balances):
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED (DOLLARS IN MILLIONS)
--------------------- ---------------------
<S> <C>
Total debt.......................................... $1,439.5
Capital expenditures................................ $ 159.7
EBITDA.............................................. $ 255.4
EBITDA margin....................................... 8.53%
Ratio of total debt to EBITDA....................... 5.64x
</TABLE>
See Note (e) below.
(d) EBITDA represents income (loss) before interest expense, income taxes,
depreciation and amortization, LIFO provision and restructuring charges.
EBITDA is a widely accepted financial indicator of a company's ability to
service debt and, with certain variations in definition, is an indicator of
compliance with various covenants in the Company's debt agreements.
However, EBITDA should not be construed as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of the Company's operating performance or as a
measure of liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(e) Pro forma EBITDA does not give effect to the elimination of $12.8 million
of EBITDA as a result of the California Divestiture or to net annual cost
savings (as compared to such costs for the pro forma combined fiscal year
ended December 30, 1995) which management believes are achievable by the
end of the third full year of combined operations following the Merger. As
shown below, the sum of the components of the estimated annual cost savings
exceeds $25 million; however, management's estimate of $25 million in net
annual cost savings gives effect to an offsetting adjustment to reflect its
expectation that a portion of the savings will be reinvested in the
Company's operations. The estimates of potential cost savings resulting
from the Merger contained in this Prospectus are forward looking statements
that involve risks and inherent uncertainties that could cause actual net
annual cost savings to differ materially from those projected. See "Risk
Factors--Ability to Achieve Anticipated Cost Savings." The sum of the
Company's pro forma EBITDA, as adjusted to eliminate the EBITDA as a result
of the California Divestiture, and the full amount of the estimated net
annual cost savings to be realizable by the end of the third full year of
operations following the Merger is set forth below:
<TABLE>
<CAPTION>
52 WEEKS ENDED
DECEMBER 30, 1995
-----------------
(DOLLARS IN
MILLION)
<S> <C>
Pro forma EBITDA...................................... $268.2
Adjustment for elimination of California EBITDA....... (12.8)
------
Pro forma EBITDA, as so adjusted...................... 255.4
Estimated annual cost savings:
Advertising.......................................... 7.0
General and administrative........................... 13.0
Warehousing and transportation....................... 4.0
Direct store delivery and store systems.............. 2.0
Purchasing improvements.............................. 6.0
Less: Annual reinvestment of cost savings............ (7.0)
------
Total estimated net annual cost savings............. 25.0
------
Sum of pro forma EBITDA, as adjusted, and full amount
of estimated net annual cost savings................. $280.4
======
</TABLE>
The Company's California operations contributed $12.8 million of EBITDA
during the 52 weeks ended December 30, 1995. Following the California
Divestiture, the Company's remaining California assets will have annual
carrying costs of approximately $7 million (excluding depreciation and
amortization). The Company believes that these carrying costs will be offset
over time by sublease and other income generated from the ongoing management
of these assets. In addition, if, following the consummation of the
Transactions, the Company adopts a strategy to dispose of these assets, the
associated carrying costs, to the extent not offset by sublease and other
income, would be considered in establishing any necessary charges and would
be reduced or eliminated over time as the asset dispositions were completed.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview."
(f) EBITDA margin represents EBITDA as a percentage of net sales.
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth summary historical financial data of Smith's
for the five fiscal years ended December 30, 1995, which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Smith's and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7
Gross profit........... 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative
expenses.............. 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization.............. 50.5 67.8 82.2 94.5 105.0
Interest expense....... 30.3 36.1 44.6 53.7 60.5
Restructuring
charges(a)............ -- -- -- -- 140.0
Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5)
Ratio of earnings to
fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x 1.92x
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt(c).......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(d)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
EBITDA(e).............. $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included elsewhere
herein.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes, restructuring
charges 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).
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) "EBITDA" represents income (loss) before interest expense, income taxes,
depreciation and amortization expense, LIFO provision and restructuring
charges. EBITDA is a widely accepted financial indicator of a company's
ability to service debt. However, EBITDA should not be construed as an
alternative to operating income or to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles)
and should not be construed as an indication of Smith's operating
performance or as a measure of liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(f) EBITDA margin represents EBITDA as a percentage of net sales.
12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
the securities being sold in the Offerings.
LEVERAGE AND DEBT SERVICE
Following the consummation of the Transactions, the Company will be highly
leveraged. At December 30, 1995, pro forma for the Transactions, the Company's
total debt and stockholders' equity deficit would have been $1,477.7 million
and $69.2 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 an additional $73.0 million available to be
borrowed under the New Revolving Facility on a pro forma basis, subject to the
borrowing conditions contained therein. On the same pro forma basis, for the
52 weeks ended December 30, 1995, the Company's ratio of earnings to fixed
charges would have been inadequate to cover fixed charges by $3.0 million.
However, such earnings include non-cash charges of $126.8 million, primarily
consisting of depreciation and amortization. In addition, as of December 30,
1995, after giving effect to the Transactions, scheduled payments under net
operating leases of the Company and its subsidiaries for the twelve months
following the Merger would have been approximately $36.9 million. The
Company's ability to make scheduled payments of the principal of, or interest
on, or to refinance its indebtedness (including the Notes) and to make
scheduled payments under its operating leases depends on its future
performance, which is subject to economic, financial, competitive and other
factors beyond its control.
Based upon the current level of operations and anticipated cost savings and
future growth, the Company believes that its cash flow from operations,
together with borrowings under the New Revolving Facility and its other
sources of liquidity (including leases), will be adequate to meet its
anticipated requirements for working capital, capital expenditures, lease
payments, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate cash flow at or
above current levels or that anticipated cost savings or future growth can be
achieved. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt and make necessary capital or
other expenditures, or if its future cash flows are insufficient to amortize
all required principal payments out of internally generated funds, the Company
may be required to refinance all or a portion of its existing debt, sell
assets or obtain additional financing. There can be no assurance that any such
refinancing or asset sales would be possible or that any additional financing
could be obtained, particularly in view of the Company's high level of debt
following the Transactions and the fact that substantially all of its assets
will be pledged to secure the borrowings under the New Credit Facility and
other secured obligations.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following:
(a) the Company will have significant cash requirements to service debt,
reducing funds available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (b) the Company's leveraged position will
increase its vulnerability to competitive pressures; (c) the financial
covenants and other restrictions contained in the New Credit Facility and
other agreements relating to the Company's indebtedness and in the Indentures
will require the Company to meet certain financial tests and will restrict its
ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, preferred or common stock; and (d) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes will be limited. The Company's continued growth depends, in
part, on its ability to continue its expansion and store conversion efforts,
and therefore its inability to finance capital expenditures through borrowed
funds or otherwise could have a material adverse effect on the Company's
future operations. Moreover, any default under the documents governing the
indebtedness of the Company could have a significant adverse effect on the
market value of the Notes.
13
<PAGE>
The Company's capital structure immediately after the Transactions will
include a significant amount of floating rate indebtedness, causing the
Company to be significantly more sensitive to prevailing interest rates than
has historically been the case. The Company intends to enter into interest
rate protection agreements which, for the duration of such agreements, will
effectively provide fixed rates of interest or ceiling rates of interest on a
portion of such floating rate indebtedness. There can be no assurance that the
Company will be able to enter into such agreements on favorable terms. See
"Description of New Credit Facility." In addition, following the Transactions,
the Company's blended average rates of interest are anticipated to be higher
than the rates of interest on the Company's indebtedness outstanding
immediately prior to the Transactions.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Management of the Company has estimated that approximately $25 million of
annualized net cost savings (as compared to such costs for the pro forma
combined fiscal year ended December 30, 1995) can be achieved over a three-
year period as a result of integrating the Arizona operations of Smith's and
Smitty's. The estimates of potential cost savings contained in this Prospectus
are forward looking statements that are inherently uncertain. Actual cost
savings, if any, could differ materially from those projected. All of these
forward looking statements are based on estimates and assumptions made by
management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict; therefore, undue reliance
should not be placed upon such estimates. There can be no assurance that the
savings anticipated in these forward looking statements will be achieved. The
following important factors, among others, could cause the Company not to
achieve the cost savings contemplated herein (principally those set forth in
"Summary--Operating Strategy" and "Business-- Operating Strategy") or
otherwise cause the Company's results of operations to be adversely affected
in future periods: (i) continued or increased competitive pressures from
existing competitors and new entrants, including price-cutting strategies;
(ii) unanticipated costs related to the Transactions and the integration
strategy; (iii) loss or retirement of key members of management or the
termination of the Management Services Agreement with Yucaipa; (iv) inability
to negotiate more favorable terms with suppliers or to improve working capital
management; (v) increases in interest rates or the Company's cost of borrowing
or a default under any material debt agreements; (vi) inability to develop new
stores in advantageous locations or to successfully convert existing stores;
(vii) prolonged labor disruption; (viii) deterioration in general or regional
economic conditions; (ix) adverse state or federal legislation or regulation
that increases the costs of compliance, or adverse findings by a regulator
with respect to existing operations; (x) loss of customers as a result of the
conversion of store formats; (xi) adverse determinations in connection with
pending or future litigations or other material claims against the Company;
(xii) inability to achieve future sales levels and other operating results
that support the cost savings, and (xiii) the unavailability of funds for
capital expenditures. Many of such factors are beyond the control of the
Company. In addition, there can be no assurance that unforeseen costs and
expenses or other factors will not offset the projected cost savings in whole
or in part.
ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE TRANSACTIONS
Upon consummation of the Transactions, the Company anticipates that it would
record charges to earnings in connection with (i) the adoption of a strategy
to dispose of certain real estate assets in California, (ii) the payment of
certain refinancing premiums and the write-off of certain debt issuance costs,
(iii) the purchase of certain management stock options, and (iv) the
integration of its Arizona operations with Smitty's. As a result of the
foregoing, the Company anticipates that it would record a substantial charge
to earnings for the quarter in which the Transactions are consummated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores and the newer "alternative format" food stores, including warehouse
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
14
<PAGE>
products, service, product variety and store condition. The Company regularly
monitors its competitors' prices and adjusts its prices and marketing strategy
as management deems appropriate in light of existing conditions. Some of the
Company's competitors have greater financial resources than the Company and
could use those resources to take steps which could adversely affect the
Company's competitive position. The Company's ability to respond to
competitive pressures could be adversely affected by its highly leveraged
financial condition. See "Business--Competition."
CONTROL OF THE COMPANY
The Company's Series A Common Stock and Series I Preferred Stock are each
entitled to ten votes per share and the Company's Series B Common Stock is
entitled to one vote per share. Upon consummation of the Transactions, members
of the Smith Group (as defined) will have beneficial ownership, in the
aggregate, of approximately 24.5% of the outstanding Common Stock and 31.6% of
the outstanding Series I Preferred Stock of the Company, representing
approximately 41.8% of the aggregate voting power of the Company's capital
stock, and certain affiliates of Yucaipa will have beneficial ownership of
approximately 13.6% of the total outstanding Common Stock of the Company,
representing approximately 1.3% of the aggregate voting power of the Company's
outstanding capital stock. Pursuant to a standstill agreement (the "Standstill
Agreement") entered into by such Smith family members (the "Smith Group"),
certain affiliates of Yucaipa (the "Yucaipa Group") and the Company, upon
consummation of the Recapitalization the Company will use its best efforts to
reconstitute its Board of Directors to consist of seven directors, and each of
the Smith Group and the Yucaipa Group will have the right to nominate two
directors so long as it holds at least 8% of the outstanding Common Stock and
the right to nominate one director so long as it holds at least 5% of the
outstanding Common Stock. As a result of the ownership structure of the
Company and the contractual rights described above, the voting and management
control of the Company is highly concentrated. The Smith Group has effective
control of the Company and will effectively be able to direct the actions of
the Company with respect to matters such as the payment of dividends, material
acquisitions and dispositions and other extraordinary corporate transactions.
See "Certain Relationships and Related Transactions," "Principal Stockholders"
and "Description of Capital Stock."
NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS
Upon consummation of the Transactions, substantially all of the existing
members of the Company's Board of Directors will resign and be replaced by the
new directors identified in this Prospectus. Jeffrey P. Smith will remain as
Chairman of the Board but will resign as Chief Executive Officer of the
Company. Ronald W. Burkle, the managing general partner of Yucaipa, will be
appointed Chief Executive Officer of the Company and Allen R. Rowland will
continue his recent appointment as President and Chief Operating Officer. As a
result, the Company's senior executive officers and a majority of the members
of the Board of Directors will be new appointees. There can be no assurance
that the changes in the Company's Board of Directors or senior management will
not adversely affect the Company's operating performance. Mr. Burkle will
provide his services as Chief Executive Officer pursuant to the Management
Services Agreement between the Company and Yucaipa; however, such agreement
does not require Mr. Burkle to spend any specified amount of time on Company
affairs. Yucaipa will receive an annual fee of $1 million for providing the
services of Mr. Burkle and the other partners and employees of Yucaipa. The
Management Services Agreement may be terminated by the Company's Board of
Directors on 90 days' notice or by either party upon the occurrence of certain
events. If the Company seeks to terminate the Management Services Agreement,
subject to limited exceptions, it is required to pay Yucaipa a termination fee
of between $5 million and $10 million, depending on the time of termination.
Yucaipa will also receive certain fees in connection with the consummation of
the Recapitalization. See "Management" and "Certain Relationships and Related
Transactions."
CONTINGENT LIABILITIES RELATING TO CALIFORNIA DIVESTITURE
In connection with closing stores and otherwise redeploying assets, the
Company has assigned leases and subleased stores and other facilities at
various times, including the sublease to Ralphs of the Company's Riverside,
California distribution center and dairy plant and the assignment or sublease
of 10 stores to various
15
<PAGE>
supermarket companies (including 6 to Ralphs) in connection with the
California Divestiture. Since the Company will generally remain either
primarily or secondarily liable for the underlying lease obligations with
respect to these stores and other facilities, the Company has a contingent
liability to the extent the Company's sublessees or assignees default in the
performance of their obligations under their respective sublease or underlying
lease. See "Business--California Divestiture."
FRAUDULENT CONVEYANCE RISKS
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Notes in
favor of other existing or future creditors of the Company.
Proceeds of the Offerings are being used, in part, to purchase shares of
Smith's Common Stock in the Tender Offer, to redeem options to purchase Common
Stock held by Smith's management, and to purchase shares of Smith's Series I
Preferred Stock. If a court in a lawsuit on behalf of any unpaid creditor of
the Company or a representative of the Company's creditors were to find that,
at the time the Company issued the Notes, the Company (x) intended to hinder,
delay or defraud any existing or future creditor or contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (y) did not receive fair consideration in good faith or
reasonably equivalent value for issuing such Notes and the Company (i) was
insolvent, (ii) was rendered insolvent by reason of such stock purchases and
redemptions, (iii) was engaged or about to engage in a business or transaction
for which its remaining assets constituted unreasonably small capital to carry
on its business, or (iv) intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, such court could
void such Notes and void such transactions. Alternatively, in such event,
claims of the holders of such Notes could be subordinated to claims of other
creditors of the Company. The Company may be viewed as insolvent at the time
of or as a result of the Tender Offer, redemption of options and preferred
stock, if the fair value of its assets does not exceed its probable
liabilities at the time of, or following such transactions.
Based upon financial and other information currently available to it,
management of the Company believes that the Notes are being incurred for
proper purposes and in good faith. Certain courts have held, however, that a
company's purchase of its own capital stock does not constitute reasonably
equivalent value or fair consideration for incurring indebtedness. By
extension, the redemption of options to purchase capital stock of a company
may also be viewed as not constituting reasonably equivalent value or fair
consideration to the company. The Company believes that it (i) is solvent and
will continue to be solvent after issuing the Notes notwithstanding the fact
that the Company, after completion of the Tender Offer, redemption of options
and redemption of preferred stock, will have a negative net worth under
generally accepted accounting principles, because the Company believes that
the fair value of the Companys' assets exceeds and will exceed its probable
liabilities, (ii) will have sufficient capital for carrying on the business it
intends to conduct after such issuance, and (iii) will be able to pay its
debts as they mature. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." There
can be no assurance, however, that a court would concur with such beliefs and
positions.
EFFECTIVE SUBORDINATION OF THE NOTES
The Notes will be effectively subordinated to all secured indebtedness of
the Company and its subsidiaries to the extent of the value of the assets
securing such indebtedness. The borrowings and obligations under the New
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiaries. At December 30, 1995, on a pro forma basis after giving
effect to the Transactions, the Company would have had approximately $784.1
million aggregate amount of secured indebtedness and other obligations
outstanding, and the Company would have had $73.0 million available to be
borrowed under the New Revolving Facility.
The Notes will also be effectively subordinated to all existing and future
liabilities, including indebtedness, of the Company's subsidiaries. The
obligations of the Company under the New Credit Facility will be guaranteed,
jointly and severally, by the Company's subsidiaries, including Smitty's. At
December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the Company's subsidiaries would have had
16
<PAGE>
indebtedness and other liabilities reflected on the Company's consolidated
balance sheet, including trade payables and accrued expenses (but excluding
guarantees of Senior Indebtedness), of approximately $148.4 million. Claims of
creditors of the Company's subsidiaries, including trade creditors, will
generally have priority as to the assets of such subsidiaries over the claims
of the Company and the holders of the Company's indebtedness, including the
Notes.
SUBORDINATION OF THE SENIOR SUBORDINATED NOTES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Senior Subordinated Notes will be
subordinated to the prior payment in full of all existing and future Senior
Indebtedness, including indebtedness under the New Credit Facility and the
Senior Notes. As of December 30, 1995, on a pro forma basis after giving
effect to the Transactions, the aggregate outstanding amount of Senior
Indebtedness of the Company would have been approximately $1,034.2 million and
the Company would have had $73.0 million available to be borrowed under the
New Revolving Facility. In the event of the bankruptcy, liquidation,
dissolution, reorganization or other winding up of the Company, the assets of
the Company will be available to pay obligations on the Senior Subordinated
Notes only after all Senior Indebtedness has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
Senior Subordinated Notes. In addition, under certain circumstances, the
Company may not pay principal of, premium, if any, or interest on, or any
other amounts owing in respect of, the Senior Subordinated Notes, or purchase,
redeem or otherwise retire the Senior Subordinated Notes, if a payment default
or a non-payment default exists with respect to certain Senior Indebtedness
and, in the case of a non-payment default, a payment blockage notice has been
received by the Senior Subordinated Note Trustee (as defined). See
"Description of the Notes-- Subordination of the Senior Subordinated Notes."
ABSENCE OF ESTABLISHED MARKET FOR THE NOTES
There is no established market for the Notes and there can be no assurance
as to the liquidity of any markets that may develop for the Notes, the ability
of holders of the Notes to sell their Notes, or the price at which holders
would be able to sell their Notes. Future trading prices of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes. However, the Underwriters are not obligated to do so and
any market-making may be discontinued at any time, by any or all of them,
without notice.
17
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated pro forma capitalization of
the Company at December 30, 1995, giving effect to the Transactions. This
table should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements and the historical consolidated financial statements of
Smith's and Smitty's, and the related notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Current portion of long-term debt:
New Term Loans.................................... $ 20.5
Other indebtedness................................ 4.2
--------
Total current portion of long-term debt......... $ 24.7
========
Long-term debt:
New Term Loans(a)................................. $ 634.5
New Revolving Facility(a)(b)...................... 89.0
Senior Notes...................................... 250.0
Senior Subordinated Notes......................... 400.0
Other indebtedness................................ 79.5
--------
Total long-term debt(c)......................... 1,453.0
--------
Redeemable preferred stock, $.01 par value.......... 3.3
New Preferred Stock, $.01 par value................. 71.2
Common stockholders' equity:
Common Stock, $.01 par value(d)................... 0.2
Additional paid-in capital........................ 164.9
Retained earnings (deficit)....................... (234.3)
--------
Total common stockholders' equity (deficit)..... (69.2)
--------
Total capitalization.......................... $1,458.3
========
</TABLE>
- --------
(a) The Company has obtained a commitment from Bankers Trust and Chase
Manhattan for the New Credit Facility that will provide up to $655 million
aggregate principal amount of New Term Loans and a $190 million New
Revolving Facility which will be available for working capital
requirements and general corporate purposes. A portion of the New
Revolving Facility may be used to support letters of credit, approximately
$28 million of which are anticipated to be issued at Closing. The New
Credit Facility will be guaranteed by all subsidiaries of the Company,
including Smitty's. See "Description of New Credit Facility."
(b) Assumes the tender of all of the outstanding Smitty's Notes and Smitty's
Debentures in connection with the Smitty's Refinancing.
(c) The Company anticipates that total long-term debt at May 1, 1996, after
giving effect to the Transactions, as well as anticipated changes in
revolving credit borrowing levels and scheduled amortization payments,
will be approximately $1,439.5 million. See "Summary--The Transactions."
(d) Does not reflect (i) management options to purchase up to an aggregate of
808,250 shares of Class B Common Stock expected to be outstanding upon
consummation of the Transactions or (ii) Warrants to purchase shares of
Class C Common Stock of the Company (at an initial exercise price of
$50.00 per share) to be issued to Yucaipa upon consummation of the
Transactions. See "Certain Relationships and Related Transactions."
18
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of the
Company for the 52 weeks ended December 30, 1995 give effect to the
Transactions and the application of the proceeds therefrom 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 combines the results of
operations and balance sheet data of Smith's as of and for the 52 weeks ended
December 30, 1995 with the results of operations and balance sheet data of
Smitty's as of and for the 52 weeks ended January 14, 1996. For information
regarding the Transactions, see "Summary--The Transactions."
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management believes are reasonable. The Merger
will be accounted for by the Company as a purchase of Smitty's by Smith's and
Smitty's assets and liabilities will be recorded at their estimated fair
market values at the date of the Merger. The adjustments included in the
unaudited pro forma combined financial statements represent the Company's
preliminary determination of these adjustments based upon available
information. There can be no assurance that the actual adjustments will not
differ significantly from the pro forma adjustments reflected in the pro forma
financial information. The unaudited pro forma combined financial statements
are not necessarily indicative of either future results of operations or
results that might have been achieved if the foregoing transactions had been
consummated as of the indicated dates. The unaudited pro forma combined
financial statements should be read in conjunction with the historical
consolidated financial statements of Smith's and Smitty's, together with the
related notes thereto, included elsewhere in this Prospectus.
The pro forma combined financial statements do not reflect (i) the
elimination of the 1995 Southern California operating results for the stores
and distribution center which were sold, leased or closed in connection with
the California Divestiture, but do reflect the restructuring charges recorded
in connection therewith, (ii) any charges resulting from the anticipated
change in management's strategy concerning the disposition of the Company's
remaining California real estate assets following the consummation of the
Transactions, (iii) 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 (iv) the anticipated costs to be incurred in
connection with the integration of operations in Arizona. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview." The Unaudited Pro Forma Combined Statement of Operations included
herein does not reflect an extraordinary loss on extinguishment of debt, an
anticipated charge relating to certain costs expected to be incurred by
Smith's in connection with the Merger or compensation expense in connection
with the repurchase of certain management stock options as part of the
Recapitalization. See Note (f) to the Unaudited Pro Forma Combined Statement
of Operations.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
----------------------------------
SMITH'S SMITTY'S
(HISTORICAL) (HISTORICAL)
(AUDITED) (UNAUDITED) PRO FORMA PRO FORMA
DECEMBER 30, 1995 JANUARY 14, 1996 ADJUSTMENTS COMBINED
----------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales............... $ 3,083.7 $ 584.3 $ $ 3,668.0
Cost of goods sold...... 2,386.7 419.6 2,806.3
---------- --------- ------ ----------
697.0 164.7 861.7
Expenses:
Operating, selling and
administrative....... 461.4 136.0 0.4 (a) 597.8
Depreciation and
amortization......... 105.0 12.3 (1.3)(b)
0.9 (c) 116.9
Restructuring charges. 140.0 140.0
Interest.............. 60.0 18.4 61.7 (d) 140.1
Amortization of debt
issuance costs....... 0.4 1.0 8.5 (d) 9.9
---------- --------- ------ ----------
Loss before income
taxes.................. (69.8) (3.0) (70.2) (143.0)
Income tax benefit...... (29.3) (0.7) (27.0)(e) (57.0)
---------- --------- ------ ----------
Net income (loss) (f)... (40.5) (2.3) (43.2) (86.0)
Preferred stock
accretion.............. (10.2)(g) (10.2)
---------- --------- ------ ----------
Loss applicable to
common shares.......... $ (40.5) $ (2.3) $(53.4) $ (96.2)
========== ========= ====== ==========
Net income (loss) per
common share (f)....... $ (1.62) $ (2.30) $ $ (6.19)(h)
========== ========= ====== ==========
Weighted average common
shares
outstanding............ 25,031,000 1,001,000 15,530,000
========== ========= ====== ==========
Ratio of earnings to
fixed charges (i)(j)... 1.92x --
Ratio of earnings to
fixed charges and
preferred stock
dividends (i)(j)....... 1.92x --
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(a) Represents fees payable to Yucaipa pursuant to the Management Services
Agreement ($1.0 million) and the elimination of the historical Yucaipa
management fees ($0.6 million) paid by Smitty's. See "Certain
Relationships and Related Transactions--Management Services Agreement."
(b) 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.
(c) 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.
(d) The following table presents a reconciliation of pro forma interest
expense and amortization of debt issuance costs:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Historical interest expense:
Smitty's......................................... $ 18.4
Smith's.......................................... 60.0
------
78.4
------
Plus: Interest on:
New Term Loans................................... 55.3
New Revolving Facility........................... 8.2
Bank fees........................................ 0.3
Senior Notes..................................... 25.0
Senior Subordinated Notes........................ 43.0
Less: Interest on:
Old bank term loans:
Smith's........................................ (57.8)
Smitty's....................................... (3.1)
Bank fees........................................ (0.4)
Smitty's Notes................................... (6.5)
Accretion of Smitty's Debentures................. (2.3)
------
Pro forma adjustment.............................. 61.7
------
Pro forma interest expense......................... $140.1
======
Historical amortization of debt issuance costs..... $ 1.4
Plus:
Financing fees--New Credit Facility.............. 6.5
Financing fees--Senior Notes and Senior
Subordinated Notes.............................. 3.4
Less:
Historical financing costs:...................... (1.4)
------
Pro forma adjustment.............................. 8.5
------
Pro forma amortization of debt issuance costs...... $ 9.9
======
</TABLE>
(e) 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.
(f) The unaudited pro forma results of operations does not include costs
related to (i) expenses to be incurred in connection with the purchase of
certain management stock options as part of the Recapitalization which are
estimated to be $12.5 million and (ii) the integration of the Company's
operations which are estimated to be $10.0 million over a three-year
period. See "Business--Operating Strategy." The unaudited pro forma
results of operations does not give effect to the California Divestiture.
Net sales and net operating loss for the California stores for the 52
weeks ended December 30, 1995 were $674.6 million and $41.1 million,
respectively. The unaudited pro forma results of operations also does not
include an extraordinary item for the loss on extinguishment of debt of
$66.4 million, net of $42.4 million income tax benefit.
(g) Reflects the accretion of dividends compounded quarterly for the New
Preferred Stock. See "Description of Capital Stock--New Preferred Stock."
(h) Loss per common share has been computed using the weighted average number
of shares of Smith's Common Stock outstanding after giving effect to the
issuance of 3,038,888 shares of Class B Common Stock of the Company to the
stockholders of Smitty's as consideration in the Merger and the purchase
of 50% of the outstanding Smith's Common Stock (excluding shares issuable
in the Merger) in the Tender Offer. Common stock equivalents in the form
of stock options are excluded from the weighted average number of common
shares due to the net loss.
(i) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes, restructuring
charges and fixed charges. "Fixed charges" consist of interest on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense (the portion of annual rental expense deemed by the Company
to be representative of the interest factor). For the
21
<PAGE>
52 weeks ended December 30, 1995, the Company's pro forma ratio of earnings
to fixed charges would have been inadequate to cover fixed charges by $3.0
million. However, such earnings include non-cash charges of $126.8 million,
primarily consisting of depreciation and amortization. For the same period,
the Company's pro forma ratio of earnings to fixed charges and preferred
stock dividends would have been inadequate to cover fixed charges and
preferred stock dividends by $19.8 million. However, such earnings include
non-cash charges of $143.6 million, primarily consisting of depreciation and
amortization and preferred stock accretion. "Preferred stock dividends"
reflects the amount representing the pre-tax earnings that would be required
to cover such dividend requirements.
(j) EBITDA represents loss before income taxes, plus interest expense,
depreciation and amortization, LIFO provision and restructuring charges.
EBITDA is a widely accepted financial indicator of a company's ability to
service debt and, with certain variations in definition, is an indicator
of compliance with various covenants in the Company's debt agreements.
However, EBITDA should not be construed as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not
be construed as an indication of the Company's operating performance or as
a measure of liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The following table presents a reconciliation of pro forma EBITDA:
<TABLE>
<CAPTION>
52 WEEKS ENDED
DECEMBER 30, 1995
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Historical EBITDA:
Smith's EBITDA.................................... $239.6
Smitty's EBITDA................................... 29.0
Less: Pro forma adjustments......................... 0.4
------
Pro forma EBITDA.................................... $268.2
======
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SMITH'S SMITTY'S
(HISTORICAL) (HISTORICAL)
(AUDITED) (UNAUDITED) PRO FORMA PRO FORMA
DECEMBER 30, 1995 JANUARY 14, 1996 ADJUSTMENTS COMBINED
----------------- ---------------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents........... $ 16.1 $ 11.5 $ 0.0 (a) $ 27.6
Rebates and accounts
receivable............ 23.8 9.3 33.1
Inventories............ 395.0 56.7 1.0 (b) 452.7
Prepaid expenses and
deposits.............. 21.3 3.3 24.6
Refundable income
taxes................. 1.9 1.9
Deferred tax assets.... 23.9 42.4 (c) 66.3
Assets held for sale... 125.0 125.0
-------- ------ ------- --------
Total current assets. 605.1 82.7 43.4 731.2
Property and equipment:
Land................... 276.6 18.6 295.2
Building............... 610.0 50.6 (3.2)(d) 657.4
Leasehold
improvements.......... 55.8 9.8 (0.6)(d) 65.0
Furniture and
equipment............. 509.5 69.9 (10.3)(d) 569.1
-------- ------ ------- --------
Less allowances for
depreciation and
amortization......... (390.9) (14.1) 14.1 (d) (390.9)
-------- ------ ------- --------
Net property and
equipment........... 1,061.0 134.8 1,195.8
Goodwill, net........... 31.5 46.6 (e) 78.1
Other assets............ 20.1 11.0 75.8 (f)(g) 106.9
-------- ------ ------- --------
$1,686.2 $260.0 $ 165.8 $2,112.0
======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts
payable............... $ 214.2 $ 39.6 $ 0.0 $ 253.8
Accrued sales and
other taxes and other
liabilities........... 50.7 12.0 (12.3)(h)
10.0 (i) 60.4
Accrued payroll and
related benefits...... 97.5 19.2 116.7
Current maturities of
long-term debt........ 20.9 6.2 (2.4)(j) 24.7
Current maturities of
Redeemable Preferred
Stock................. 1.0 (1.0)(k)
Accrued restructuring
costs................. 58.0 58.0
-------- ------ ------- --------
Total current
liabilities......... 442.3 77.0 (5.7) 513.6
Long-term debt, less
current maturities..... 725.3 139.8 588.4 (l)
4.6 (g)
2.4 (j)
(7.5)(m) 1,453.0
Accrued restructuring
costs, less current
portion................ 40.0 40.0
Deferred income taxes... 58.6 13.8 72.4
Other liabilities....... 20.2 7.5 (m) 27.7
Redeemable Preferred
Stock, less current
maturities............. 3.3 3.3
Cumulative Redeemable
Exchangeable Preferred
Stock.................. 71.2 (k) 71.2
Common Stockholders'
Equity:
Convertible Class A
Common Stock........... 0.1 0.1
Class B Common Stock.... 0.2 (0.1)(n) 0.1
Additional paid-in
capital................ 285.2 11.0 (11.0)(o)
(165.8)(n)
45.5 (p) 164.9
Retained earnings....... 238.0 (1.8) (59.3)(q)
(405.9)(n)
(7.1)(r)
1.8 (o) (234.3)
-------- ------ ------- --------
523.5 9.2 (601.9) (69.2)
Less cost of common
stock in the treasury.. (106.8) (464.9)(n)
571.7 (n)
-------- ------ ------- --------
416.7 9.2 (495.1) (69.2)
-------- ------ ------- --------
$1,686.2 $260.0 $ 165.8 $2,112.0
======== ====== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects gross proceeds received from (i) New Term Loans, (ii) the New
Revolving Facility, and (iii) the Offerings used to finance the
Transactions and pay related costs and fees as set forth in the following
table:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans..................................... $ 655.0
New Revolving Facility............................. 89.0
Senior Notes....................................... 250.0
Senior Subordinated Notes.......................... 400.0
New Preferred Stock................................ 75.0
Repay Smitty's Notes............................... (49.6)
Repay Smitty's Debentures.......................... (17.9)
Repay Smitty's Bank Credit Facility................ (34.9)
Repay Smith's Mortgage Notes and Other
Indebtedness...................................... (635.2)
Repay Smith's Revolving Credit Facility............ (68.0)
Purchase existing Smith's Series I Preferred Stock. (1.0)
Purchase 50% of Smith's Common Stock............... (451.4)
Purchase Management Options........................ (13.7)
Accrued Interest................................... (12.3)
Fees and Expenses.................................. (185.0)
-------
$ 0.0
=======
</TABLE>
(b) 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.
(c) Represents the deferred tax asset associated with the write-off of the
deferred debt issuance costs and the premium over book value on Smith's
and Smitty's debt to be refinanced.
(d) Reflects the write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
(e) Reflects the excess of costs over the fair value of net assets of Smitty's
acquired in connection with the Merger ($78.1 million) and the elimination
of Smitty's historical goodwill ($31.5 million). The purchase price for
Smitty's will be determined by reference to the trading price of the
Company's Class B Common Stock following the consummation of the Merger.
The purchase price and preliminary calculation of the excess of costs over
the fair value of net assets acquired is as follows:
Purchase Price:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Smith's equity received in exchange for Smitty's
equity with an assumed market value of
$15.00/share...................................... $ 45.5
Fees and expenses.................................. 1.3
-------
Total purchase price............................... 46.8
Fair value of Assets acquired...................... 229.5
Fair value of Liabilities assumed.................. 260.8
-------
(31.3)
-------
Goodwill........................................... $ 78.1
=======
</TABLE>
(f) Reflects the debt issuance costs associated with the New Credit Facility
($46.5 million), the Senior Notes ($14.0 million), and the Senior
Subordinated Notes ($22.4 million). These amounts have been capitalized as
deferred financing costs.
(g) Reflects the elimination of deferred financing costs associated with the
Smitty's Bank Credit Facility ($1.8 million), the Smitty's Notes ($3.1
million), the Smitty's Debentures ($0.6 million), the Smith's Mortgage
Notes and Other Indebtedness ($1.6 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.
(h) Reflects the payment of accrued interest on Smitty's Bank Credit Facility
($0.1 million), Smitty's Notes ($0.6 million) and Smith's Mortgage Notes
and Other Indebtedness ($11.6 million) to be repaid in connection with the
Merger.
(i) Represents severance payments and other costs associated with the
integration of Smith's and Smitty's.
(j) Reflects the repayment and cancellation of the current maturities of the
Smitty's Bank Credit Facility ($4.9 million) and Smith's Mortgage Notes
and Other Indebtedness ($18.0 million) and the recording of the current
maturities of the New Term Loans ($20.5 million).
(k) 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.
24
<PAGE>
(l) Reflects the repayment and cancellation of the Smitty's Bank Credit
Facility, the Smitty's Notes, the Smitty's Debentures, the Smith's
Revolving Credit Facility, the Smith's Mortgage Notes and Other
Indebtedness and records borrowings under the New Term Loans and New
Revolving Facility and the issuance of the Notes.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans..................................... $ 655.0
New Revolving Facility............................. 89.0
Senior Notes....................................... 250.0
Senior Subordinated Notes.......................... 400.0
Repay Smitty's Notes............................... (49.6)
Repay Smitty's Debentures.......................... (17.9)
Repay Smitty's Bank Credit Facility................ (34.9)
Repay Smith's Revolving Credit Facility............ (68.0)
Repay Smith's Mortgage Notes and Other
Indebtedness...................................... (635.2)
-------
$ 588.4
=======
</TABLE>
(m) Represents a reclassification of $7.5 million of Smith's deferred
compensation and other long-term liabilities to conform to the pro forma
combined classification.
(n) Reflects redemption of 50% of Smith's outstanding Common Stock prior to
the Merger at $36.00 per share, the retirement of all treasury shares and
the purchase of certain outstanding management stock options.
(o) Reflects the elimination of Smitty's historical equity.
(p) Represents the issuance of 3,038,888 shares of Smith's Common Stock at an
assumed market value of $15.00 per share as consideration in the Merger.
(q) Represents the premium over book value attributable to "make whole"
payments and other premiums payable in connection with the retirement of
Smith's Mortgage Notes and Other Indebtedness and the Smitty's Notes and
Debentures, net of 39% tax rate. The actual amount of such payments may
vary substantially based on the yields of certain U.S. Treasury debt
securities at the time such indebtedness is actually repaid.
(r) Represents the write-off of the historical deferred debt issuance costs of
Smith's and Smitty's related to its refinanced debt, net of 39% tax rate.
25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth selected historical financial data of Smith's
for the five fiscal years ended December 30, 1995 which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical consolidated financial statements of Smith's and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7
Gross profit.......... 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative
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)
Ratio of earnings to
fixed charges(b)..... 3.02x 3.06x 2.55x 2.18x 1.92x
BALANCE SHEET DATA (END
OF PERIOD):
Working capital....... $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets.......... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt(c)......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................ 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity............... $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(d)............ 109 119 129 137 154
Capital expenditures.. $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
EBITDA(e)............. $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin(f)...... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included
elsewhere herein.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes, restructuring
charges 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).
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) "EBITDA" represents income (loss) before interest expense, income taxes,
depreciation and amortization expense, LIFO provision and restructuring
charges. EBITDA is a widely accepted financial indicator of a company's
ability to service debt. However, EBITDA should not be construed as an
alternative to operating income or to cash flows from operating activities
(as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of Smith's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(f) EBITDA margin represents EBITDA as a percentage of net sales.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITTY'S
The following table sets forth certain selected consolidated historical
financial and operating data of Smitty's and its Predecessor. The operating
and balance sheet data of Smitty's as of and for the year ended July 30, 1995
and the period from June 29, 1994 to July 31, 1994, and of the Predecessor as
of for the period from August 2, 1993 to June 28, 1994, the 52 weeks ended
August 1, 1993, the 53 weeks ended August 2, 1992 and the 52 weeks ended July
28, 1991 set forth in the table below have been derived from the financial
statements of Smitty's and its Predecessor audited by Coopers & Lybrand,
L.L.P., independent accountants. The operating and balance sheet data of
Smitty's for the 24 weeks ended January 14, 1996 and the 24 weeks ended
January 15, 1995 have been derived from unaudited financial statements of
Smitty's which, in the opinion of management, reflect all material
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of such data. The following information should be read in
conjunction with the Unaudited Pro Forma Combined Financial Statements,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the historical consolidated financial statements of Smitty's
and its predecessor, and related notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR SMITTY'S
---------------------------------------- --------------------------------------------
PERIOD FROM PERIOD FROM
52 WEEKS 53 WEEKS 52 WEEKS AUGUST 2, JUNE 29, 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED 1993 TO 1994 TO ENDED ENDED ENDED
JULY 28, AUGUST 2, AUGUST 1, JUNE 28, JULY 31, JULY 30, JANUARY 15, JANUARY 14,
1991 1992 1993 1994 1994 1995 1995 1996
-------- --------- --------- ----------- ----------- -------- ----------- -----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales(a)............... $625.3 $599.1 $605.1 $551.7 $ 48.4 $594.0 $286.2 $276.5
Gross profit........... 158.9 160.9 150.5 138.0 12.9 162.0 73.7 76.4
Operating, selling,
general
and administrative
expenses(b)(c)(d)..... 143.9 138.8 147.5 117.4 10.8 131.4 59.0 63.6
Depreciation and
amortization.......... 10.2 10.2 9.5 8.0 1.0 10.9 4.6 6.0
Interest expense(e).... 10.1 7.3 6.5 6.4 1.5 18.7 7.9 8.6
Net income (loss)...... $ (3.0) $ 2.3 $ (8.2) $ 3.1 $ (0.4) $ 0.3 $ 0.9 $ (1.8)
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 0.8 $ 5.0 $ 5.3 $ 31.5 $ 27.9 $ 17.3 $ 23.6 $ 5.7
Total assets(f)........ 245.1 242.8 242.8 204.8 235.3 265.7 258.2 260.0
Total debt(g)(h)....... 72.5 59.9 66.6 140.3 143.9 147.9 154.0 146.0
Total stockholders'
equity(h)............. $126.4 $128.7 $120.5 $ 11.2 $ 10.6 $ 10.9 $ 11.4 $ 9.3
OTHER DATA:
Stores open at end of
period................ 24 24 28 27 27 28 29 28
Capital expenditures... $ 3.1 $ 7.2 $ 16.2 $ 3.7 $ 0.3 $ 22.9 $ 6.2 $ 18.7
EBITDA(i).............. $ 13.6 $ 22.9 $ 26.9 $ 26.1 $ 2.4 $ 29.0 $ 13.2 $ 13.2
EBITDA margin.......... 2.2% 3.8% 4.5% 4.7% 5.0% 4.9% 4.6% 4.8%
</TABLE>
- -------
(a) In fiscal 1993, Smitty's leased its food service operations to Morrison,
Incorporated, increasing operating income but decreasing sales and gross
profit. In September 1994, Smitty's resumed its food service operations.
As a result, food service sales and attributable costs are included in the
consolidated results of operation subsequent to such date. Food service
sales were $9.6 million, $6.6 million, $17.8 million, $0, $2.5 million and
$24.9 million for the 24 weeks ended January 14, 1996, the 24 weeks ended
January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993 and fiscal 1992,
respectively. Food service gross profit was $6.0 million, $4.3 million,
$11.4 million, $0, $1.5 million and $16.5 million for the 24 weeks ended
January 14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995, fiscal
1994, fiscal 1993 and fiscal 1992, respectively.
(b) In November 1993, Smitty's agreed to a settlement of a litigation which
required Smitty's to pay $4.75 million in cash and issue a $6.25 million
two-year mortgage note. Fiscal 1993 results of operations include an $11.0
million charge for the settlement, plus a $1.8 million charge for Smitty's
litigation costs. Smitty's used the proceeds from a four-year term loan to
finance the cash payment. Also in November 1993, Smitty's reached a
settlement of a litigation filed by a former supplier providing for a $0.5
million cash payment and a $0.5 million one-year mortgage note. Fiscal
1993 results of operations include a $1.0 million charge for this
settlement. Both mortgage notes were repaid on June 29, 1994.
(c) Included in operating, selling, general and administrative expenses are
parent reorganization costs incurred by Smitty's in connection with
efforts initiated by its former stockholder, Steinberg International,
Inc., to sell its interest in Smitty's. Reorganization costs were $0.7
million and $0.6 million for fiscal 1994 and 1993, respectively. There
were no reorganization costs for the 24 weeks ended January 14, 1996, the
24 weeks ended January 15, 1995, fiscal 1995, fiscal 1992 and fiscal 1991.
In fiscal 1995, Smitty's had a $1.9 million benefit resulting from the
Morrison litigation settlement.
27
<PAGE>
(d) A real estate development partnership in which Smitty's was a partner was
liquidated in July 1993. In connection with this liquidation, Smitty's
obtained ownership of an operating shopping center property and an
undeveloped shopping center property in exchange for the forgiveness of
notes and accrued interest receivable from the partnership and its
managing partner. Fiscal 1993 results of operations include an
$8.9 million charge representing the difference between the current value
of these two properties and the carrying value of the notes and accrued
interest receivable. Such properties were transferred to Steinberg
International, Inc. prior to the acquisition of SSV by Smitty's.
(e) Includes amortization of deferred financing costs of $0.4 million, $0.4
million, $0.9 million, $0.2 million, $0.2 million, $0.2 million, and $0.2
million for the 24 weeks ended January 14, 1996, the 24 weeks ended
January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, and
fiscal 1991, respectively. Interest expense for the 24 weeks ended January
14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995 and fiscal 1994
includes $1.1 million, $1.0 million, $2.1 million and $0.2 million,
respectively, of non-cash interest expense attributable to the Smitty's
Debentures.
(f) Except at January 14, 1996, January 15, 1995, July 30, 1995 and July 31,
1994, total assets includes certain properties which were not purchased by
Smitty's in the acquisition from Steinberg International, Inc. that had a
net book value of $27.5 million at August 1, 1993.
(g) Total debt includes total long-term debt and current maturities of long-
term debt.
(h) During fiscal 1991, Smitty's issued 688 shares of common stock to
Steinberg International, Inc. in exchange for $1.2 million cash and the
cancellation of $65.6 million of indebtedness.
(i) EBITDA represents income (loss) before income taxes, plus interest
expense, depreciation and amortization, severance and employment contract
termination costs, loss on store closing, LIFO provision and Non-Operating
Expenses. Non-Operating Expenses are defined as parent reorganization
costs, gain (loss) on real estate disposals, loss on partnership
liquidation, and litigation settlements, all of which are included in
operating, selling, general and administrative expenses. EBITDA is a
widely accepted financial indicator of a company's ability to service debt
and, with certain variations in definition, is an indicator of compliance
with various covenants in Smitty's debt agreements. However, EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with generally accepted accounting principles) or to cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an
indication of Smitty's operating performance or as a measure of liquidity.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Due to the Transactions and the California Divestiture, the Company believes
that its future operating results may not be directly comparable to its
historical operating results. Certain factors which are expected to affect the
future operating results of the Company (or their comparability to prior
periods) are discussed below.
California Divestiture. Smith's has historically focused on expansion into
high growth markets, which led to its entrance into Southern California in
1991. During the period from 1991 through 1995, Smith's opened 34 stores in
Southern California and a 1,100,000 square foot distribution center and dairy
plant in Riverside, California. Management determined that because of the
attractive growth prospects in the Company's principal markets and the
competitive environment in Southern California, it would redeploy Company
resources from California into such other markets. In December 1995 the
Company executed a sublease with Ralphs Grocery Company ("Ralphs") pursuant to
which Ralphs agreed to sublease the Riverside distribution center and dairy
plant for the remaining 23-year term of Smith's lease. Ralphs also agreed to
purchase certain related equipment and inventory. The sublease term commenced
and the related purchases were consummated on January 29, 1996. In January
1996, the Company entered into agreements to sell or lease 16 of its
California stores and related equipment and three non-operating properties to
various supermarket companies (including Ralphs) and others and indicated that
the remaining 18 stores would be closed as soon as practicable. Of the stores
being sold or leased, four stores owned by Smith's are being sold outright,
two store leases are being assigned, three stores owned by Smith's are being
leased and seven leased stores are being subleased. Since December 30, 1995,
the Company has received net cash proceeds of approximately $67.2 million from
the store, equipment and property sales and expects to receive an additional
approximately $10.6 million shortly after the consummation of the
Transactions. Substantially all of the California stores will be closed by
March 31, 1996. In connection with its decision to cease operations in
California, Smith's recorded pre-tax restructuring charges of $140 million for
the year ended December 30, 1995 to reflect the anticipated cost to Smith's of
the California Divestiture. See Note K of the Notes to Consolidated Financial
Statements of Smith's.
Certain information pertaining to the Company's California operations is
summarized below:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California stores at end
of period.............. 9 18 26 32 34
Net sales............... $ 35.9 $320.4 $472.8 $652.9 $674.6
Capital expenditures:
Stores................ 118.4 160.0 136.1 53.0 23.4
Backstage facilities.. 1.1 33.8 80.6 2.7 1.3
------ ------ ------ ------ ------
Total capital
expenditures....... $119.5 $193.8 $216.7 $ 55.7 $ 24.7
====== ====== ====== ====== ======
</TABLE>
Remaining California Real Estate. After completion of the California
Divestiture, Smith's will continue 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 California
real estate assets over the next five years and that the
29
<PAGE>
implementation of these policies would not have any material negative impact
on future earnings. Following the consummation of the Transactions,
management, in conjunction with Yucaipa, anticipates that it will pursue a
strategy to dispose of certain real estate assets in California on an
accelerated basis, including leased stores, closed stores and excess land. The
Company would use the net cash proceeds from the sales of these assets to
either reinvest in the Company's business or reduce indebtedness incurred in
connection with the Transactions. If this strategy is adopted, as anticipated,
the Company would record a charge to earnings, which could be substantial, to
reflect the difference between the anticipated cash proceeds from the
accelerated dispositions and the Company's existing book values and carrying
costs 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.
Debt Refinancing and Recapitalization Charges. In connection with the
anticipated consummation of the Transactions at May 1, 1996, the Company will
refinance approximately $628.2 million of its existing mortgage notes and
unsecured indebtedness as well as approximately $39.7 million of its revolving
credit borrowings. The Company will also refinance approximately $101.9
million of existing indebtedness of Smitty's (assuming a 100% tender of the
existing Smitty's Notes and Smitty's Debentures). In connection with such debt
refinancings, the Company will pay make-whole and other premiums estimated at
approximately $97.2 million. These refinancing premiums, together with
approximately $11.7 million of debt issuance costs, will be written off upon
the consummation of the Transactions and reflected as an extraordinary charge
for the quarter in which the Transactions are consummated. It is estimated
that this charge, net of taxes, will be approximately $66.4 million. The
Company will also record approximately $12.5 million of pre-tax compensation
expense in connection with the purchase of certain management stock options as
part of the Recapitalization.
Integration of Arizona Operations. Following the Merger, management of the
Company has estimated that approximately $25 million of net annual cost
savings (as compared to costs for the pro forma combined fiscal year ended
December 30, 1995) are achievable by the end of the third year of combined
operations. Management believes that approximately $17 million in Merger-
related capital expenditures and approximately $10.0 million of other expenses
will be required to integrate Arizona operations and realize such cost
savings. Management anticipates that a charge related to such costs will be
recorded in the quarter in which the Transactions are consummated.
Purchase Accounting. The Merger will be accounted for as a purchase of
Smitty's by Smith's. As a result, the assets and liabilities of Smitty's will
be recorded at their estimated fair value as of the date the Merger is
consummated. The purchase price for Smitty's will be determined by reference
to the trading price of the Company's Class B Common Stock following the
consummation of the Merger. The purchase price in excess of the fair value of
Smitty's assets will be recorded as goodwill and amortized over a 40-year
period. The purchase price allocation reflected in the pro forma statements is
based on management's preliminary estimates. The actual purchase accounting
adjustments will be determined following the Merger and may vary from the
amounts reflected in the Unaudited Pro Forma Combined Financial Statements
included elsewhere herein.
30
<PAGE>
RESULTS OF OPERATIONS OF SMITH'S
The Company's fiscal year ends on the Saturday closest to December 31. The
following table sets forth the selected historical operating results of
Smith's for the three fiscal years ended December 30, 1995:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 1, DECEMBER 31, DECEMBER 30,
1994 1994 1995 1994 1994 1995
---------- ------------ ------------ ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $2,807.2 $2,981.4 $3,083.7 100.0% 100.0% 100.0%
Gross profit............ 637.2 669.1 697.0 22.7% 22.4% 22.6%
Operating, selling and
administrative
expenses............... 430.3 440.8 461.4 15.3% 14.8% 15.0%
Depreciation and
amortization........... 82.2 94.5 105.0 2.9% 3.2% 3.4%
Operating income........ 124.7 133.8 130.7 4.4% 4.5% 4.2%
Interest expense........ 44.6 53.7 60.5 1.6% 1.8% 2.0%
Restructuring charges... -- -- 140.0 -- % -- % 4.5%
Income taxes (benefit).. 34.3 31.3 (29.3) 1.2% 1.1% (1.0)%
Net income (loss)....... 45.8 48.8 (40.5) 1.6% 1.6% (1.3)%
</TABLE>
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
30, 1995 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
31, 1994
Net Sales. Net sales increased $102.3 million, or 3.4%, from $2,981.4
million in 1994 to $3,083.7 million in 1995. The sales increase in 1995 was
attributable to a net increase of 17 stores as of the end of 1995, offset in
part by a 3.4% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales increased $80.7 million, or 3.5%, from
$2,328.5 million in 1994 to $2,409.2 million in 1995. As adjusted to exclude
the Company's California stores, same store sales decreased 3.2% in 1995,
caused primarily by the Company's discontinuance of its "ad match" program in
the Phoenix and Tucson markets and new stores opened by competitors in the
Company's markets.
Gross Profit. Gross profit increased $27.9 million, or 4.2%, from $669.1
million in 1994 to $697.0 million in 1995. Gross margins during 1995 and 1994
were 22.6% and 22.4%, respectively. The increase in 1995 is due primarily to
less aggressive promotional activity in the Phoenix and Tucson markets
following the discontinuance of the Company's "ad match" program, reduced
charges for inventory shrinkage and improved competitive conditions in Utah,
which were partially offset by the increase in the LIFO charge and increased
new store openings. The pre-tax LIFO charge was $4.0 million in 1995 compared
to $2.5 million in 1994. Newly opened stores apply pressure on gross margins
until the stores become established in their respective markets. Smith's
opened 19 new stores during 1995 (including two in California) compared to
eight stores in 1994 (including six in California).
Operating, Selling and Administrative Expenses. Operating, selling and
administrative expenses ("OS&A") increased $20.6 million, or 4.7%, from $440.8
million in 1994 to $461.4 million in 1995. As a percent of net sales, OS&A
increased from 14.8% in 1994 to 15.0% in 1995. The increase was caused
principally by the increase in new store opening costs compared to the prior
year. The decrease in same store sales also contributed to the increase of
OS&A as a percentage of net sales.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $10.5 million, or 11.1%, from $94.5 million in 1994 to
$105.0 million in 1995, primarily due to the addition of new combination
stores and equipment replacements in remodeled stores.
Interest Expense. Interest expense increased $6.8 million from $53.7 million
in 1994 to $60.5 million in 1995 primarily as a result of net increases in the
average debt amounts for each period.
Restructuring Charges. As a result of the California Divestiture, the
Company recorded $140 million of pre-tax restructuring charges to reflect the
estimated costs associated with the sale, lease or closure of its
31
<PAGE>
Southern California stores and the Riverside distribution center. See Note K
of the Notes to Consolidated Financial Statements of the Company included
elsewhere herein.
Income Taxes. The Company recorded a tax benefit of $29.3 million in 1995
compared to an expense of $31.3 million in 1994. The benefit recorded in 1995
reflects an adjustment (benefit) of $53.4 million of the Company's deferred
taxes as a result of losses incurred in connection with the California
Divestiture.
Net Income (Loss). Net income before restructuring charges decreased by $5.3
million, or 10.9%, from $48.8 million in 1994 to $43.5 million in 1995. Income
per common share before restructuring charges decreased 0.6% from $1.73 in
1994 to $1.72 in 1995. Primarily as a result of the restructuring charges, the
Company recorded a net loss of $40.5 million for 1995 ($1.62 per share)
compared to net income of $48.8 million in 1994 ($1.73 per share). The
weighted average number of common shares outstanding was 25,030,882 in 1995
and 28,176,907 in 1994.
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
31, 1994 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 1,
1994
Net Sales. Net sales increased $174.2 million, or 6.2%, from $2,807.2
million in 1993 to $2,981.4 million in 1994. The sales increase in 1994 was
attributable to a net increase of eight stores as of the end of 1994, offset
in part by a 2.3% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales decreased $5.9 million, or 0.3%, from
$2,334.4 million in 1993 to $2,328.5 million in 1994. As adjusted to exclude
the Company's California stores, same store sales decreased 1.3% in 1994. The
decrease in same store sales (excluding California) in 1994 was caused
primarily by competitive new store openings in the Company's principal market
areas and increased overall price competition in Utah.
Gross Profit. Gross profit increased $31.9 million, or 5.0%, from $637.2
million in 1993 to $669.1 million in 1994. Gross margins during 1994 and 1993
were 22.4% and 22.7%, respectively. The decrease in gross margin in 1994 was
caused primarily by Smith's aggressive Utah pricing program which commenced in
the second half of 1993 and continued through most of 1994. To reinforce
Smith's everyday low price program, prices in Utah stores were lowered on more
than 10,000 grocery, meat and produce items. Smith's opened eight new stores
during 1994 (including six in California) compared to ten new stores during
1993 (including eight in California).
Operating, Selling and Administrative Expenses. OS&A increased $10.5
million, or 2.4%, from $430.3 million in 1993 to $440.8 million in 1994. As a
percent of net sales, OS&A decreased from 15.3% in 1993 to 14.8% in 1994. The
decrease in 1994, resulting primarily from Smith's program to reduce operating
costs, was somewhat offset by the higher operating and labor costs associated
with the expansion into Southern California.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $12.3 million, or 15.0%, from $82.2 million in 1993 to
$94.5 million in 1994, due to the addition of new food and drug combination
stores and distribution and processing facilities.
Interest Expense. Interest expense increased $9.1 million from $44.6 million
in 1993 to $53.7 million in 1994 as a result of net increases in the average
debt amounts for each period.
Income Taxes. Income taxes as a percent of income before income taxes were
39.1% in 1994 and 42.8% in 1993. The Omnibus Budget Reconciliation Act of 1993
increased Smith's Federal tax rate from 34% to 35%. As a result of the
increased tax rate, net income for 1993 was reduced by $2.75 million, or $0.09
per common share. This reduction consisted of $0.8 million, or $0.03 per
common share, for the rate increase on income earned in 1993 and $1.95
million, or $.06 per common share, for the increase in recorded deferred
taxes.
Net Income. Net income increased 6.6% from $45.8 million in 1993 to $48.8
million in 1994. However, as a result of a reduction in the number of shares
outstanding through Smith's buy-back programs, net income per common share
increased 14% from $1.52 to $1.73. During 1994, Smith's repurchased 4.9
million shares of Common Stock in the open market. The weighted average number
of shares of Common Stock outstanding in 1994 was reduced by approximately 1.9
million shares, which increased net income per common share by $0.11.
32
<PAGE>
RESULTS OF OPERATIONS OF SMITTY'S
Smitty's is a leading regional supermarket operator based in Phoenix,
Arizona with 25 stores in the Phoenix area and three stores in the Tucson
area. Smitty's stores offer high quality fresh and prepared foods, groceries
and general merchandise, restaurants and ancillary services in a shopping
environment which emphasizes service, convenience, quality, selection and
customer satisfaction. On June 29, 1994, Smitty's became the sole stockholder
of SSV when it acquired all of the outstanding shares of common stock of SSV
from Steinberg International, Inc. ("Steinberg"). Smitty's was formed in April
1994 by affiliates of Yucaipa for the purpose of effecting such acquisition.
Smitty's currently operates (i) 21 food and general merchandise "super
combination" stores which average 105,000 square feet in size, (ii) six food
and drug combination stores, which average 52,000 square feet in size, and
(iii) one conventional supermarket. The "super combination" stores offer a
full line of supermarket items, a broad range of drug store and pharmaceutical
items and an expanded selection of general merchandise. These stores offer
numerous services and specialty departments, including video and photo
departments, pharmacies, food courts, restaurants and full-service bank
branches, family style hair salons and America West Airlines ticket counters.
Smitty's food and drug combination stores offer a full selection of products
and services, including full-service fresh meat, delicatessen, seafood and
bakery departments, an expanded line of health care and beauty aids, a
restaurant, snack bar or food court and full-service banking.
At the end of the second quarter of fiscal 1996, Smitty's had completed its
comprehensive remodel program which included 18 stores and resulted in 93% of
its stores being new or remodeled within the last three years. Upon completion
of the remodel program, Smitty's launched an extensive marketing program to
promote its newly remodeled stores which included an increase of 50% in both
broadcast and print media, a billboard campaign estimated to have been seen by
50% of the Phoenix population and a customer service training program that
included substantially all of Smitty's employees. Smitty's management believes
the extensive marketing program and the newly remodeled stores were
significant factors in the reduction of the decline in same store sales from
10.8% in the first quarter to 2.4% in the second quarter of fiscal 1996. The
remodel program includes an increased allocation of floor space to the
supermarket section of each store resulting in at least 60% of the square
footage in each super combination store being devoted to supermarket items
compared to 40% prior to the remodel. The expanded supermarket selling areas
provide increased display and shelf space and enlarged self-service bakeries,
dairy, frozen food and produce departments. Display cases and related
refrigeration in meat, deli, bakery, produce, frozen foods and dairy
departments have generally been replaced and upgraded.
On September 25, 1994, the lease by which Morrison, Incorporated
("Morrison") leased and operated Smitty's food service operations was
rescinded in connection with the litigation between Smitty's and Morrison. In
connection with such rescission, Morrison paid Smitty's $2.6 million and
transferred title to all of the inventories, fixtures and equipment to
Smitty's and Smitty's began operating food service operations. Rental income
from Morrison was $1.4 million in the 24 weeks ended January 15, 1995. Food
service sales and gross profit were $9.6 million and $6.0 million,
respectively, in the 24 weeks ended January 14, 1996.
33
<PAGE>
Smitty's fiscal year ends on the Sunday closest to July 31. The following
table sets forth the selected historical operating results of Smitty's for the
24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, the 52
weeks ended July 30, 1995 ("fiscal 1995"), the 52 weeks ended July 31, 1994
("fiscal 1994") and the 52 weeks ended August 1, 1993 ("fiscal 1993"):
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
---------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14, AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14,
1993 1994(1) 1995 1995 1996 1993 1994 1995 1995 1996
--------- -------- -------- ----------- ----------- --------- -------- -------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales........... $605.1 $600.1 $594.0 $286.2 $276.5 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.... 150.5 150.9 162.0 73.7 76.4 24.9% 25.1% 27.3% 25.7% 27.6%
Operating,
selling,
general and
administrative
expenses....... 147.5 128.2 131.4 59.0 63.6 24.4% 21.4% 22.1% 20.6% 22.9%
Depreciation and
amortization... 9.5 9.0 10.9 4.6 6.0 1.6% 1.5% 1.8% 1.6% 2.2%
Operating income
(loss)......... (6.5) 13.8 19.7 10.2 6.8 (1.1%) 2.3% 3.3% 3.6% 2.5%
</TABLE>
- --------
(1) The operating results for the 52-week period ended July 31, 1994 combines
the results of operations of Smitty's for the period from June 29, 1994 to
July 31, 1994 with the results of operations of its predecessor for the
period from August 2, 1993 to June 28, 1994.
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY
14, 1996 WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY
15, 1995
Sales. Sales decreased $9.7 million, or 3.4%, from $286.2 million in the 24
weeks ended January 15, 1995 to $276.5 million in the 24 weeks ended January
14, 1996. The decrease is primarily the result of a decline in same store
sales and the closure of one store in the third quarter of fiscal 1995,
partially offset by sales from food service operations and sales increases
from the opening of two stores in the second quarter of fiscal 1995. Although
same store sales decreased 6.6% in the 24 weeks ended January 14, 1996, the
decline in same store sales has improved from 10.8% in the 12 weeks ended
October 22, 1995 to 2.4% in the 12 weeks ended January 14, 1996 due in part to
the completion of the remodel program and increased advertising and promotions
associated with the grand re-opening of the remodeled stores.
Gross Profit. Gross profit increased $2.7 million from $73.7 million, or
25.7% of sales, in the 24 weeks ended January 15, 1995 to $76.4 million, or
27.6% of sales, in the 24 weeks ended January 14, 1996. The increase in gross
profit margin in the 24 weeks ended January 14, 1996, is primarily
attributable to increased vendor allowances and rebates arising from improved
procurement practices and the operation of food service for an additional
eight weeks compared to the prior year.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses ("OSG&A") were $59.0 million, or 20.6% of
sales, in the 24 weeks ended January 15, 1995 and $63.6 million, or 22.9% of
sales, in the 24 weeks ended January 14, 1996. This increase was primarily
attributable to the fixed cost component of OSG&A being compared to a lower
sales base, the addition of food service operations, and increased rent
expense associated with new and remodeled stores. In addition, Smitty's
incurred $1.8 million of advertising and promotional expenses for an extensive
marketing program implemented in the second quarter of fiscal 1996. These
additional expenses were offset by advertising allowances received in
connection with the marketing program. In the 24 weeks ended January 15, 1995,
Smitty's had a $1.9 million benefit resulting from the favorable Morrison
litigation settlement.
Depreciation and Amortization. Depreciation and amortization was $4.6
million in the 24 weeks ended January 15, 1995, and $6.0 million in the 24
weeks ended January 14, 1996. The increase relates primarily to the
depreciation of new stores, property and equipment, depreciation on new
fixtures and equipment in newly remodeled stores and additional depreciation
on the equipment Smitty's received in the Morrison settlement.
Operating Income. Operating income decreased $3.4 million from $10.2 million
in the 24 weeks ended January 15, 1995 to $6.8 million in the 24 weeks ended
January 14, 1996. The decrease in operating income is primarily attributable
to the factors described above.
34
<PAGE>
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 30,
1995 (FISCAL 1995) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
JULY 31, 1994 (FISCAL 1994).
Sales. Sales decreased $6.1 million, or 1.0%, from $600.1 million in fiscal
1994 to $594.0 million in fiscal 1995. The decrease was primarily the result
of a 6.7% decline in same store sales and the closure of one store partially
offset by sales from food service operations and sales increases from the
opening of two new stores in Phoenix and the new store that opened in fiscal
1994. The same store sales decline was attributable to sales lost at stores
undergoing remodels and competitive factors, including an increase in new
stores opened by competitors and pricing and promotional activities.
Gross Profit. Gross profit increased $11.1 million from $150.9 million, or
25.1% of sales, in fiscal 1994 to $162.0 million, or 27.3% of sales, in fiscal
1995. Excluding food service, gross profit as a percentage of sales increased
from 25.1% in fiscal 1994 to 26.1% in fiscal 1995. These increases were
primarily attributable to reduced cost of goods sold, reduced inventory
shortages and additional vendor allowances and rebates arising from improved
procurement practices.
Operating, Selling, General and Administrative Expenses. OSG&A was $131.4
million and $128.2 million in fiscal 1995 and 1994, respectively. Excluding
food service expenses and rental income from Morrison, OSG&A decreased $0.2
million from $127.1 million in fiscal 1994 to $126.9 million in fiscal 1995.
On this basis, OSG&A as a percentage of sales increased from 21.4% in fiscal
1994 to 22.1% in fiscal 1995. This increase was primarily attributable to
increased advertising and promotional expenditures, new union pension fund
contributions and increased rent expense associated with new stores.
Additionally, in fiscal 1994, Smitty's incurred severance and employment
termination costs consisting of a $2.0 million payment to the former Chief
Executive Officer of Smitty's in connection with the termination of certain
rights under his employment contract, a $0.5 million loss relating to closing
a store which was subleased, and a $2.9 million expense primarily from real
estate disposals and reorganization costs. In fiscal 1995 Smitty's had a $1.9
million benefit resulting from the favorable Morrison litigation settlement.
Depreciation and Amortization. Depreciation and amortization increased by
$1.9 million from $9.0 million in fiscal 1994 to $10.9 million in fiscal 1995.
These increases related primarily to depreciation of new stores property and
equipment and increased amortization of beneficial leaseholds.
Operating Income. Operating income increased $5.9 million from $13.8 million
in fiscal 1994 to $19.7 million in fiscal 1995. The increase in operating
income was primarily attributable to the factors described above.
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 31,
1994 (FISCAL 1994) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
AUGUST 1, 1993 (FISCAL 1993).
Sales. Sales decreased $5.0 million, or 0.8%, from $605.1 million in fiscal
1993 to $600.1 million in fiscal 1994. The decrease was primarily the result
of a 5.8% decline in same store sales and the closure of two stores in 1994,
partially offset by the opening of one new store in Tucson, and sales
increases from four new stores opened in fiscal 1993. The same store sales
decline was attributable to competitive factors, including an increase in new
stores opened by competitors and pricing and promotional activities.
Gross Profit. Gross profit increased $0.4 million from $150.5 million or
24.9% of sales in fiscal 1993 to $150.9 million or 25.1% of sales in fiscal
1994. These increases were primarily attributable to additional vendor
allowances and rebates earned during fiscal 1994.
Operating, Selling, General and Administrative Expenses. OSG&A was $128.2
million and $147.5 million in fiscal 1994 and 1993, respectively. OSG&A was
affected by severance and employment contract termination costs in fiscal 1994
consisting of a $2.0 million payment to the Chief Executive Officer of
Smitty's in connection with the termination of certain rights under his
employment contract and a charge of $0.5 million relating to the loss on the
closing of a store which was subleased during the period. In addition,
Smitty's incurred other expense of $23.3 million and $2.9 million in fiscal
1993 and fiscal 1994, respectively. The fiscal 1993 expense consisted
primarily of $8.9 million arising from the liquidation of a partnership whose
former properties have been
35
<PAGE>
transferred to Steinberg and $13.8 million related to litigation settlements.
The fiscal 1994 expense consisted primarily of a $2.2 million loss on real
estate disposals. Excluding the items noted above, OSG&A decreased by $1.4
million from $124.2 million in fiscal 1993 to $122.8 million in fiscal 1994.
On this basis, OSG&A, as a percentage of sales, remained constant at 20.5% for
both periods. The decrease in OSG&A primarily reflected reductions in supplies
expenses and liability insurance costs and a lower sales base.
Depreciation and Amortization. Depreciation and amortization decreased by
$0.5 million due to the sale and leaseback in fiscal 1993 of certain fixtures
and equipment related to four stores and the completion of the amortization of
deferred Shoppers Passport card costs in fiscal 1993. Shoppers Passport is
Smitty's "frequent shopper" program.
Operating Income. Operating income increased $20.3 million from an operating
loss of $6.5 million in fiscal 1993 to operating income of $13.8 million in
fiscal 1994. The increase in operating income was primarily attributable to
the factors described above.
COMPANY LIQUIDITY AND CAPITAL RESOURCES
Smith's cash flow from operating activities was $140.6 million for fiscal
1995 and $203.6 million for fiscal 1994. The decrease in cash flow from
operating activities was due primarily to balance fluctuations in operating
assets and liabilities resulting from the execution of cash management
policies based upon cash availability. Trade accounts payable decreased cash
provided by operating activities by $21.7 million in 1995 and increased cash
provided by operating activities by $50.6 million in 1994. One of the
Company's principal uses of cash in its operating activities is inventory
purchases. However, supermarket operators typically require small amounts of
working capital since inventory is generally sold prior to the time that
payments to suppliers are due. This reduces the need for short-term borrowings
and allows cash from operations to be used for non-current purposes such as
financing capital expenditures and other investing activities.
Smith's cash used in investing activities was $146.3 million during fiscal
1995 and $127.4 million during fiscal 1994. Investing activities consisted
primarily of additions to property and equipment for new stores, remodels and
equipment purchases.
Smith's received approximately $7.5 million of cash from financing
activities for fiscal 1995 and used approximately $123.9 million of cash in
financing activities in fiscal 1994. The primary difference in financing
activities from 1994 to 1995 of $131.4 million was the repurchase of Common
Stock in 1994. In 1994, the Company purchased approximately $109.2 million of
its Common Stock under its stock buy-back program.
In order to consummate the Transactions, Smith's expects to utilize total
new financing proceeds in the amount of approximately $1.4 billion. The
Company will enter into the New Credit Facility pursuant to which it will
borrow up to $655 million of New Term Loans and will have available a $190
million New Revolving Facility, of which approximately $52.7 million is
anticipated to be outstanding at the Closing. The Company will also issue $250
million principal amount of Senior Notes, $400 million principal amount of
Senior Subordinated Notes and $75 million liquidation preference of New
Preferred Stock. The proceeds from the New Credit Facility and the Offerings
will provide the sources of financing required to consummate the Transactions
and pay related fees and expenses (including debt refinancing premiums). The
Company will also assume certain existing indebtedness of Smitty's. See
"Summary--The Transactions--Sources and Uses."
The New Revolving Facility will be available, subject to the satisfaction of
customary borrowing conditions, for working capital requirements and general
corporate purposes. A portion of the New Revolving Facility may be used to
support letters of credit, approximately $28 million of which are anticipated
to be outstanding at Closing. The New Revolving Facility will be non-
amortizing and will have a six and one-quarter year term. The Company will be
required to reduce loans outstanding under the New Revolving Facility to $85
million for a period of not less than 30 consecutive days during the first 12
months following the Merger and to $75 million for a period of not less than
30 consecutive days during each consecutive 12-month period thereafter.
Assuming that the Merger closes on May 1, 1996, giving effect to currently
anticipated borrowings and letter of credit
36
<PAGE>
issuances, the Company's remaining borrowing availability under the New
Revolving Facility would have been approximately $109.3 million. Pursuant to
the New Credit Facility, the New Term Loans will be issued in four tranches:
(i) Tranche A, in the amount of $330 million, will have a six and one-quarter
year term; (ii) Tranche B, in the amount of $110 million, will have a seven
and one-half year term; (iii) Tranche C, in the amount of $110 million, will
have an eight and one-half year term; and (iv) Tranche D, in the amount of
$105 million, will have a nine and one-quarter year term. The New Term Loans
will require quarterly amortization payments. The New Credit Facility will be
guaranteed by each of the Company's subsidiaries and secured by liens on
substantially all of the unencumbered assets of the Company and its
subsidiaries and by a pledge of the Company's stock in such subsidiaries. The
New Credit Facility will contain financial covenants which are expected to
require, among other things, the maintenance of specified levels of cash flow
and stockholders' equity. See "Description of New Credit Facility."
The capital expenditures of the Company (excluding expenditures in
California) were $91.0 million for fiscal 1994 and $124.3 million for fiscal
1995. The Company currently anticipates that its aggregate capital
expenditures for fiscal 1996 will be approximately $100.0 million, excluding
the approximately $17 million of capital expenditures which are estimated to
be required in connection with the integration of Arizona operations. The
Company intends to finance these capital expenditures primarily with cash
provided by operations and other sources of liquidity including borrowings and
leases. No assurance can be given that sources of financing for capital
expenditures will be available or sufficient. However, the capital expenditure
program has substantial flexibility and is subject to revision based on
various factors. Management believes that if the Company were to substantially
reduce or postpone these programs, there would be no substantial impact on
short-term operating profitability. In the long term, however, if these
programs were substantially reduced, management believes its operating
businesses, and ultimately its cash flow, would be adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing
markets or to enter other markets. Future acquisitions may require the Company
to seek additional debt or equity financing depending on the size of the
transaction. The Company is not currently engaged in discussions concerning
any material acquisition which it considers probable.
Following the consummation of the Transactions, the Company will be highly
leveraged. Based upon current levels of operations and anticipated cost
savings and future growth, the Company believes that its cash flow from
operations, together with available borrowings under the New Revolving
Facility and its other sources of liquidity (including leases), will be
adequate to meet its anticipated requirements for working capital, capital
expenditures, lease payments, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels or that estimated
cost savings or growth can be achieved. See "Risk Factors--Leverage and Debt
Service."
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed of." The Company will be
required to adopt this standard in the first quarter of 1996. The Company has
not performed the complex analysis required to determine the effect of
implementing this new standard. Management does not currently believe the
adoption of SFAS No. 121 would have a significant impact on the Company's
financial condition.
EFFECTS OF INFLATION
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain gross profit margins by adjusting retail
prices, but competitive conditions may from time to time render the Company
unable to do so while maintaining its market share.
37
<PAGE>
BUSINESS
GENERAL
Smith's is a leading supermarket company in the Intermountain and
Southwestern regions of the United States, operating 120 stores located in
Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and
Wyoming (collectively, 14). Substantially all of Smith's stores offer one-stop
shopping convenience through a food and drug combination format which features
a full-line supermarket with drug and pharmacy departments and some or all of
the following specialty departments: delicatessens, hot prepared food
sections, in-store bakeries, video rental shops, floral shops, one-hour photo
processing labs, full-service banking and frozen yogurt shops. The Company's
114 food and drug combination stores averaged approximately 63,000 square feet
and $420,000 per week in sales volume in fiscal 1995. The Company has recently
opened four price impact warehouse stores and also operates two conventional
supermarkets. Through its 48 years of operations, the Company believes it has
developed a valuable and strategically located store base, strong name
recognition, customer loyalty and a reputation for quality and service.
The Company is pursuing a series of transactions designed to enhance
stockholder value and liquidity:
. Arizona Merger and Consolidation. The Company has entered into an
agreement to acquire Smitty's, a regional supermarket operator with 28
stores in the Phoenix and Tucson markets, in a stock-for-stock exchange.
The Merger will significantly enhance the Company's market position in
Arizona. Smitty's is controlled by affiliates of Yucaipa, a private
investment group specializing in the supermarket industry. Such
affiliates of Yucaipa will own approximately 14% of the Company's
outstanding Common Stock following the Merger. Following the Merger, the
Company will consolidate its Arizona operations with those of Smitty's.
See "--Operating Strategy."
. California Divestiture. The Company has substantially completed the
sale, lease or closure of its Southern California operations. Management
determined that because of the attractive growth prospects in the
Company's principal markets and the competitive environment in Southern
California, it would redeploy Company resources from California into
such other markets. The Company has subleased its Riverside, California,
distribution center and has substantially completed the sale, lease or
closure of all 34 of its Southern California stores, together with
related equipment and inventory, and certain non-operating real estate
assets.
. New Senior Management. The Company will enter into the five-year
Management Services Agreement with Yucaipa. Ronald W. Burkle, the
managing general partner of Yucaipa, will be appointed as Chief
Executive Officer of the Company. In addition, Allen R. Rowland recently
joined Smith's as President and Chief Operating Officer. Mr. Rowland was
employed by Albertson's, Inc. for 25 years and had senior executive
responsibilities for all of the principal regions in which Smith's
operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding Common Stock (excluding shares issuable in the Merger) for
$36.00 per share in cash in the Tender Offer. In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
For the fiscal year ended December 30, 1995, after giving pro forma effect
to the Merger, the Company would have had net sales and EBITDA of
approximately $3.7 billion and $268.2 million, respectively. For the same
period, after giving pro forma effect to the Merger and the California
Divestiture, the Company would have had net sales and EBITDA of approximately
$3.0 billion and $255.4 million, respectively. See "Unaudited Pro Forma
Combined Financial Statements." In addition, management believes that the
Company will benefit from significant operating synergies and cost saving
opportunities following the Merger.
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing markets, (ii) realize operating
synergies and cost savings resulting from the Merger, (iii) improve
38
<PAGE>
working capital management, (iv) grow its recently introduced price impact
warehouse stores and (v) dispose of remaining California real estate following
consummation of the Transactions.
Expand Operations in Existing Markets. Management believes that there are
significant opportunities to increase the Company's sales and gain
efficiencies in its existing markets through new store openings and store
remodels. From 1991 through 1994, management primarily focused on the Southern
California market, opening 32 new stores in Southern California compared to 16
new stores in its other markets. In 1995, the Company opened 19 new stores,
only two of which were located in California. In an effort to more fully
realize its market potential in its non-California markets, in 1995 the
Company began opening smaller combination stores (54,000 to 60,000 square
feet) in existing markets as part of a "fill-in" strategy. By pursuing a
growth strategy which emphasizes opening new stores within its existing and
adjacent markets, the Company believes it can increase its market share and
improve its distribution and other efficiencies, while taking advantage of
such markets' favorable growth prospects.
Realize Operating Synergies and Cost Savings Resulting from the
Merger. Management believes that approximately $25 million of net annual cost
savings are achievable over a three-year period following the Merger. The
majority of such cost savings opportunities relate to its Arizona operations
and are believed to be achievable (on an annualized basis) by the end of the
first full year of operations following the Merger. The estimates of potential
cost savings resulting from the Merger contained in this Prospectus are
forward looking statements that involve risks and inherent uncertainties that
could cause actual net annual cost savings to differ materially from those
projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's and Smitty's advertising programs in
the Phoenix and Tucson markets substantially overlap, and as a result of
the Merger, management expects that the Company will be able to
eliminate a substantial portion of the combined advertising expenses.
Management estimates that annualized advertising cost savings of
approximately $7 million are achievable by the end of the first full
year of operations following the Merger.
. General and Administrative Cost Savings. Management expects the Company
to achieve savings from the elimination of duplicative administrative
staff and headquarters facilities and the consolidation of management
information systems. Management estimates that annualized general and
administrative cost savings of approximately $13 million are achievable
by the end of the first full year of operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently operates
without any of its own distribution facilities. By incorporating the
Smitty's volume into Smith's Tolleson, Arizona warehousing and
distribution facilities, the Company expects to eliminate the expense
associated with Smitty's being supplied primarily by an independent
wholesaler, as well as reduce average unit costs resulting from improved
capacity utilization. Management estimates that annualized warehousing
and transportation cost savings of approximately $4 million are
achievable by the end of the second full year of operations following
the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to deliver an increased percentage of store
inventory requirements under direct delivery programs, thereby reducing
certain distribution and transportation costs. In addition, by utilizing
Smith's front-end systems in Smitty's stores, improvements in the
efficiency of Smitty's stores is expected. Management estimates that
annualized cost savings of approximately $2 million related to such
direct store delivery and store systems are achievable by the end of the
second full year of operations following the Merger.
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with aggregate annual sales (including the Company)
in excess of $11 billion. Management estimates that annualized cost
savings of approximately $6 million are achievable from such purchasing
improvements by the end of the third full year of operations following
the Merger.
39
<PAGE>
The sum of the components of the estimated annual cost savings exceeds $25
million; however, management expects that a portion of the savings will be
reinvested in the Company's operations. In connection with the Transactions,
the Company and Smitty's are evaluating the format mix of the combined Arizona
store base and are assessing the possibility of converting the formats of
certain stores. It is anticipated that approximately $17 million of capital
expenditures and approximately $10 million of other expenses will be required
to integrate the Arizona operations and realize such cost savings.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
companies have achieved working capital improvements; however, there can be no
assurance that similar improvements can be achieved by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company recently
developed a price impact warehouse store format and during 1995 opened four of
these stores in the Las Vegas area operating under the name "PriceRite Grocery
Warehouse." Management believes that a number of the Company's markets are
underserved by price impact warehouse stores and that there are substantial
opportunities for expansion of the Company's PriceRite format through the
conversion of existing stores and the opening of new stores. Yucaipa, through
its management of other supermarket companies, has extensive experience in
expanding and profitably operating price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation of
the Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of certain real estate assets in California,
including leased stores, closed stores and excess land. The Company would use
the net cash proceeds from the sales of these assets to either reinvest in the
Company's business or reduce indebtedness incurred in connection with the
Transactions. 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 charge to earnings, which could be substantial, to
reflect the difference between the anticipated cash proceeds from the
accelerated dispositions and the Company's existing book values and carrying
costs for such assets. See "Risk Factors--Anticipated Charges to Earnings
Following the Transactions."
PRINCIPAL MARKETS
The Company's stores are located predominantly in Utah, Arizona, Nevada and
New Mexico, which are among the fastest growing states in terms of population
and employment. According to the U.S. Bureau of the Census, the population of
those four states has increased at a compound annual growth rate of 3.0% since
1990, compared to the national average of 1.1% over the same period. According
to the U.S. Bureau of Labor Statistics, employment in the same four states has
increased at a compound annual growth rate of 4.0% since 1990, compared to the
national average of 1.3% over the same period. In addition, management
believes that operating in distinct markets in several states provides
advantages due to the differences in economic cycles, demographics and
competitive conditions among such markets.
The Company has achieved strong competitive positions in each of its
principal markets. Smith's currently has leading market shares in Salt Lake
City (31%), Las Vegas (24%) and Albuquerque (23%) and, after giving effect to
the Merger, the Company will also have a leading market share in Phoenix
(24%). The Company believes its reputation for offering a broad product
selection and low pricing combined with quality customer service has created a
valuable franchise with strong name recognition and customer loyalty.
STORE FORMATS
Smith's operates three types of retail stores: (i) 114 food and drug
combination stores; (ii) four warehouse stores; and (iii) two conventional
supermarkets. The food and drug combination stores range in size from 30,000
to 88,000 square feet (with an average size of 63,000 square feet) and offer
an extensive line of supermarket, non-food and drug products. A typical
Smith's food and drug combination store offers approximately 50,000 SKUs, in
comparison to approximately 20,000 SKUs offered at the average conventional
supermarket
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<PAGE>
nationwide. All stores carry a full line of supermarket products, including
groceries, meat, poultry, produce, dairy products, bakery goods, frozen foods
and health and beauty aids. In addition, combination stores carry a wide
variety of general merchandise, including drugs, toys, hardware, giftware and
small appliances. Within each category of merchandise, the stores offer
multiple selections of nationally advertised brand name items. In addition,
the stores carry an extensive selection of private label merchandise, which
provides comparable quality products priced lower than national brands. The
Company also carries a variety of bulk merchandise and generic brand products
which enhance the Company's low price image. These stores feature modern
layouts with wide aisles and well-lighted spaces to facilitate convenient
shopping, a variety of specialty departments along the periphery and
centralized checkout facilities. The Company's four price impact warehouse
stores operating under the PriceRite Grocery Warehouse name, average 55,000
square feet in size, and are targeted to price-conscious consumers rather than
conventional supermarket consumers. The PriceRite stores offer lower prices,
fewer SKUs and fewer service departments than the Company's food and
combination stores and conventional stores. The Company's conventional stores
average 26,000 square feet in size and have the appearance of traditional
supermarkets.
Smitty's, which will become a subsidiary of the Company upon consummation of
the Merger, currently operates (i) 21 food and general merchandise "super
combination" stores which average 105,000 square feet in size, (ii) six food
and drug combination stores, which average 52,000 square feet in size, and
(iii) one conventional supermarket. The "super combination" stores offer a
full line of supermarket items, a broad range of drug store and pharmaceutical
items and an expanded selection of general merchandise. These stores offer
numerous services and specialty departments, including fresh produce, full-
service fresh meat, delicatessen, seafood, bakery, prepared foods, fresh-cut
flowers and video and photo departments, pharmacies, food courts, restaurants
and full-service bank branches, family style hair salons and America West
Airlines ticket counters. Smitty's food and drug combination stores offer a
full selection of products and services, including full-service fresh meat,
delicatessen, seafood and bakery departments, an expanded line of health care
and beauty aids, a restaurant, snack bar or food court and full-service
banking. In connection with the Merger, the Company and Smitty's are
evaluating the format mix of the combined Arizona store base and are assessing
the possibility of converting the format of certain stores.
STORE DEVELOPMENT AND EXPANSION
The following table sets forth information concerning changes in the store
base of the Company and Smitty's over the last five years.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STORES OPENED (NET):
Smith's:
Intermountain and Southwest...................... 5 1 2 2 15
California....................................... 9 9 8 6 2
Smitty's.......................................... 0 2 3 0 (1)
TOTAL NUMBER OF STORES (END OF PERIOD):
Smith's:
Intermountain and Southwest...................... 100 101 103 105 120
California....................................... 9 18 26 32 34
Smitty's.......................................... 24 26 29 29 28
</TABLE>
After giving effect to the Merger, approximately 84% of the Company's stores
will have been opened or remodeled within the last seven years. Over the past
five fiscal years, the Company's capital expenditures for the construction of
new and remodeled stores (not including California operations) totaled
approximately $414.0 million. In addition, during the same period the Company
invested approximately $163.0 million in distribution, processing and other
support facilities (not including California operations). During the five year
period ended December 30, 1995, Smitty's spent approximately $72.0 million in
capital expenditures, including approximately $43.0 million since mid-1994 to
remodel substantially all of its Phoenix-area stores.
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<PAGE>
The Company's real estate department locates, acquires and develops sites
for future stores. The Company's 48 years of operation have allowed it to
choose its store locations selectively as new residential areas have been
developed. The Company believes that many of its stores are in developed areas
where land values and the difficulties in locating suitable parcels would make
it difficult to replicate the Company's existing store base. The Company has
historically sought to purchase the best potential new store locations
available in any target market. If the Company cannot purchase the best
potential locations, however, it will consider leasing a location from its
owner or a local developer. As a result of this strategy, after giving effect
to the Merger, the Company will own 108 of its 148 stores, including the
underlying land with respect to 97 of such owned stores. See "Business--
Properties." In order to maximize its future capital expenditure resources,
the Company intends to place a greater emphasis on leasing new stores
following the consummation of the Transactions.
MERCHANDISING
The Company's merchandising strategy is to offer customers the ability to
fill a significant portion of their daily and weekly shopping needs at one
convenient location and to establish and promote its reputation as a low price
leader in the trade area of each of its stores. The cornerstones of this
strategy include:
Everyday Low Pricing. The Company offers its products on an everyday low
pricing ("EDLP") basis in all markets other than Phoenix and Tucson, where the
Company offers a combination of EDLP and promotional pricing. The Company
offers an EDLP program in most markets because the Company believes that it
generally allows for higher overall profitability than a promotional pricing
program. An EDLP program allows for more consistent prices over time than a
promotional program, which entails variable pricing and higher levels of
demand for sale products. As a result, EDLP simplifies inventory management
and lowers operating costs.
Quality Customer Service. The Company believes a key to its success is its
emphasis on quality customer service. The Company provides courteous and
efficient customer service by placing a high degree of emphasis on employee
training. Most stores have a customer service desk located near the store
entrance to answer questions and to assist customers in locating merchandise.
The Company also provides rapid in-store checkout services, aided by the use
of computerized scanning devices and the bagging of groceries at checkout. In
most locations, stores are open 24 hours each day.
Advertising and Promotion. The Company reinforces its low price image
through extensive television advertising and through print advertising in
newspapers and circulars. The Company divides its advertising budgets in a
similar manner across most markets, with approximately 80% committed to print
advertising and approximately 20% committed to radio and television
advertising. The Company also takes an active interest in the communities in
which its stores are located and maintains programs designed to contribute
funds, products and manpower to local charities and civic groups.
Specialty Departments. Each combination store provides certain specialty
departments designed to provide one-stop shopping convenience to customers and
to increase the frequency with which customers return to the store. The
specialty departments, which vary depending upon store size and location,
include delicatessens with prepared foods, full-service fresh fish and meat
departments, bakeries, dry cleaning drop-off facilities, U.S. Post Office
branches, pharmacies, video rental departments, take-out food counters, camera
and photo departments with on-site film processing, floral departments and in-
store banking provided by a regional or local bank.
Private Label Program. Through its private label program, the Company offers
in excess of one thousand items under the "Smith's," "Mountain Dairy," "Creek
View" and other brand names. These products provide customers with quality
comparable to that of national brands but at lower prices. Management believes
that the Company's private label program is one of the most successful
programs in the industry. The Company's owned manufacturing and processing
facilities, including its dairy plants, cultured dairy products plants, ice
cream processing plant and frozen dough plant, supply the Company's stores
with private label milk, milk products, fruit punches, sour cream, yogurt,
cottage cheese, chip dip products, ice cream and novelty items, baked goods
and other products and allow the Company to generate gross margins on such
private label items that are generally higher than on national brands.
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<PAGE>
Frequent Shopper Program. Smitty's has developed a proprietary information
system that updates and maintains a comprehensive customer database used for
its unique frequent shopper program, Shopper's Passport, in the Smitty's
stores. Customers obtain a Shopper's Passport bar-coded scan readable card
which entitles them to receive a number of benefits, including discounts on
certain purchases, check cashing authorization and participation in special
promotions held throughout the calendar year. Management believes that as a
result of this program, Shopper's Passport has established one of the most
comprehensive supermarket customer data bases in the country. The Company is
evaluating plans to utilize the Shoppers Passport program in Smith's stores
throughout the Phoenix and Tucson markets following the Merger.
OPERATIONS
The Company is divided into two major operating regions, the Intermountain
Region and the Southwest Region, which are segmented into eight geographic
districts. The Intermountain Region consists of stores in Utah, Idaho, Nevada
and Wyoming. The Southwest Region consists of stores in Arizona, New Mexico
and Texas. The districts are staffed with operational managers who are given
as much autonomy as possible while retaining the advantages of central control
over accounting, real estate, legal, data processing and other functions at
the Company's headquarters. This operational autonomy enables management to
react quickly to changes in local markets.
District and store managers are responsible for store operations, local
advertising formats, employee relations and development, customer relations,
community affairs and other functions relating to local operations. The
regional staff includes supervisors responsible for the meat, produce, bakery,
non-food, pharmacy, one-hour photo, deli and prepared foods departments, who
help each regional manager.
PURCHASING, DISTRIBUTION AND PROCESSING
The Company's purchasing activities are centralized, with most food products
and all general merchandise being purchased in volume through regional buyers
supervised by headquarters management. Certain specialized or perishable
products are purchased at regional warehouse levels. Management believes that,
following the Merger, the Company can achieve increased promotional allowances
and discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with aggregate annual sales (when combined with the
Company) in excess of $11 billion.
The Company owns and operates one of the most modern and efficient backstage
operations in the industry. The Company's warehousing, distribution and
processing facilities, which comprise approximately 3,000,000 square feet,
have all been built, expanded or remodeled in the last five years. Central
distribution facilities in Salt Lake City and Layton, Utah supply products to
all stores in the Intermountain Region and distributes the majority of non-
food merchandise, pharmaceutical products and certain bulk products to stores
in the Southwest Region. An integrated distribution and processing center in
Tolleson, Arizona includes complete warehousing operations and a dairy
processing plant. The facility supplies products to all stores in the
Southwest Region and Las Vegas. The Company also operates two produce
warehouses, one in Ontario, California and the other in Albuquerque, New
Mexico. See "--Properties." Approximately 80% of products sold in 1995 were
shipped through the Company's distribution network.
The Company transports food and merchandise from its distribution centers
primarily through a Company-owned fleet of tractors and trailers which
primarily serve nearby stores and through common carriers for stores located
at greater distances. As of December 30, 1995, the Company's owned fleet
included 158 tractors and 406 trailers. The Company seeks to lower costs on
shipments by taking advantage of backhauling opportunities where available.
The Company's processing facilities located in Tolleson, Arizona and Layton,
Utah produce a variety of products under the Company's private label for
distribution to Company stores. The Company's dairy plants process a variety
of milk, milk products and fruit punches. The Company's automated frozen dough
plant produces frozen bakery goods for final baking at in-store bakeries. The
Company's cultured dairy products plant
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<PAGE>
produces sour cream, yogurt, cottage cheese and chip dip products. The
Company's ice cream processing plant supplies all stores with Smith's private
label ice cream and novelty items.
The Company believes that its central distribution facilities provide
several advantages. Management is able to control inventory levels throughout
its system in order to maximize the Company's in-stock position, while at the
same time optimizing the use of store shelf space. Costs of products are
reduced through centralized volume purchases and effective management of per-
item transportation costs. Stores are also served more efficiently through
central control of delivery schedules. By managing overall inventory levels,
the Company maximizes inventory turns and minimizes investments in inventory.
Management believes the Company's backstage operations will be able to
accommodate the increased volume resulting from the integration of the
Smitty's operations in Arizona following the Merger and to support anticipated
future growth.
Smitty's currently makes approximately 60% of its annual purchases from the
Arizona division of Fleming Foods West, Inc. ("Fleming"). Smitty's has reached
an agreement in principal with Fleming to amend the supply agreements to make
Fleming a back-up supplier to Smitty's and, following the Merger, to the
Company through the end of 1997.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company is currently supported by a full range of advanced management
systems. Smith's has implemented store-level inventory and item management
systems developed on UNIX in-store processors using the Informix relational
database. This application includes direct store delivery store receiving,
which allows goods to be scanned electronically upon arrival at each store
receiving dock. This system also includes price verification and order entry
using hand-held personal computers. Store checkout is supported by NCR point-
of-sale scanning. Smith's stores are supported by pharmacy, video rental,
labor scheduling and time and attendance systems which help the Company
facilitate customer service while managing labor costs.
The Company's buying operations are supported by the AS/400-based E3
forecasting and purchasing system which uses statistical models of
seasonality, promotions and buying behavior to optimize inventory levels. The
Company's distribution centers operate utilizing leading software of the
Dallas Systems Company. The key components are the Distribution Center
Management Control System, which is used for all inventory processing, and the
Distribution Center Assignment Monitoring System (DCAMS), which is used for
labor standards management. To increase operating efficiency and decrease
labor costs, the DCAMS system transmits work assignments to lift drivers and
order selectors through a radio-frequency terminal. Smith's is currently
installing the OMI purchasing and forecasting system which will be used for
distribution center replenishment. The installation is expected to be
completed during 1996.
Smith's computer operations and applications development activities were
outsourced to Electronic Data Systems in 1992 under a ten-year outsourcing
agreement.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse
club stores, deep discount drug stores and "supercenters." In addition, new
competitors have entered the Company's markets in the past and could do so in
the future. Supermarket chains generally compete on the basis of price,
location, quality and variety of products, service and store condition. The
Company regularly monitors its competitors' prices and adjusts its prices and
marketing strategy in light of existing conditions. Some of the Company's
competitors have greater financial resources than the Company and could use
those resources to take steps which could adversely affect the Company's
competitive position.
The Company's principal competitors in the Salt Lake City market are
Albertson's, Ream's Food Stores, Harmons, Fred Meyer, and Dan's Foods. In the
Phoenix market, the Company's principal competitors include
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<PAGE>
Fry's, Bashas Markets, Safeway, ABCO, Smitty's, Albertson's and Mega Foods. In
Albuquerque, the Company's principal competitors are Furr's, Jewel Osco and
Albertson's, and in Las Vegas, the Company's main competitors are Lucky, Vons
and Albertson's. The Company also competes with various drug chains and other
non-food operators in each of its markets. See "Risk Factors--Competition."
EMPLOYEES AND LABOR RELATIONS
The Company's policy is to train and develop its employees and promote from
within. The Company generally prefers to promote its own employees to store
manager positions. Management-level employees, including store department
managers, participate in incentive compensation programs tied to
profitability, and such compensation programs can represent a significant
percentage of such managers' total compensation. The Company believes that its
employee retention rate is high within the industry, especially at the store-
manager level and above.
Excluding California operations, as of December 30, 1995, Smith's employed
approximately 16,000 persons, approximately 53% of whom were full-time and 47%
of whom were part-time. Approximately 50% of the Company's employees are
unionized. The Company's unionized employees work under 15 collective
bargaining agreements with local labor unions, primarily in Arizona, Nevada
and New Mexico, which typically have three-year terms. Management of the
Company believes that it will be able to renew existing agreements on terms
satisfactory to the Company. If it is unable to do so, however, there could be
a material adverse effect on the Company's operations. The wages and benefits
provided in the Company's collective bargaining agreements are substantially
similar to those of its supermarket competitors. The Company has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
As of January 14, 1996, Smitty's employed approximately 4,600 people, of
whom approximately 36% were full-time and approximately 64% were part-time.
Approximately 4,100 employees working in the stores, constituting
approximately 89% of Smitty's employees, are covered by a collective
bargaining agreement that expires in October 1997. Smitty's has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
PROPERTIES
As of December 30, 1995, after giving effect to the Merger and the
California Divestiture, the Company would have owned 108 of its 148 operating
stores, including the underlying land with respect to 97 of such owned stores.
The Company's stores are located throughout a seven-state area as follows:
<TABLE>
<CAPTION>
STATE STORES OWNED STORES LEASED TOTAL
----- ------------ ------------- -----
<S> <C> <C> <C>
Arizona.................................. 40 18 58
Utah..................................... 30 5 35
Nevada................................... 12 10 22
New Mexico............................... 15 4 19
Idaho.................................... 4 1 5
Wyoming.................................. 3 2 5
Texas.................................... 4 0 4
--- --- ---
Total.................................. 108 40 148
=== === ===
</TABLE>
The Company leases or subleases 40 of its operating stores from third
parties under leases expiring between 1997 and 2023. Eleven of the Company-
owned stores are located on property which is ground-leased from third parties
under leases expiring between 2007 and 2045. In most cases, such building and
ground leases are subject to customary renewal options.
The Company owns a 1,180,000 square-foot distribution and dairy processing
center in Tolleson, Arizona, 573,000 square feet of grocery warehousing
facilities and 348,000 square feet of processing plants in Layton,
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Utah and a 226,000 square foot non-food warehouse in Salt Lake City, Utah. The
Company also leases a 40,000 square-foot produce and forward-purchasing
warehouse in Albuquerque, New Mexico, a 408,000 square-foot non-foods
warehouse in Salt Lake City, Utah and a 205,000 square-foot produce warehouse
in Ontario, California, under leases expiring in 1997, 1997 and 1999,
respectively.
The Company's corporate offices, data processing and records storage
facilities are located in over 100,000 square feet of office and warehouse
space owned by the Company in Salt Lake City, Utah.
CALIFORNIA DIVESTITURE
In late 1995, management determined that because of the attractive growth
prospects of the Company's principal markets and the competitive environment
in California, it would attempt to sell its California operations and redeploy
the Company's resources into its non-California markets.
In December 1995, Smith's entered into an agreement to sublease its
Riverside, California distribution center to Ralphs. On January 29, 1996,
Ralphs commenced the sublease of the Riverside distribution center and dairy
plant for an initial term of 23 years. Ralphs also purchased certain equipment
and inventory for an aggregate purchase price (net of certain offsetting
payments) of approximately $8.7 million. The sublease provides for a subrental
of approximately $8.8 million per annum, which is substantially the same
amount as is payable by Smith's under the master lease, and requires Ralphs to
fulfill substantially all of the other monetary obligations of Smith's under
the master lease.
In January 1996, the Company entered into agreements to sell or lease 16 of
its California stores and three non-operating properties. The Company has
substantially completed the sale of these stores, including related equipment
and inventory. Of the 16 sold stores, the Company has leased or subleased
eight operating stores and one non-operating store to Ralphs. The non-
operating store, located in Beaumont, California, is partially completed, and
has been subleased by Ralphs in "as is" condition. The subleases to Ralphs are
for terms, and at subrentals, that are substantially equivalent to the terms
of, and the rentals payable under, the master store leases (except that Ralphs
is not responsible for rent escalations in the master store lease of one of
the subleased stores). The remaining eight stores were sold to other
supermarket companies, four pursuant to outright sales, two pursuant to
assignments of underlying leases and two pursuant to subleases. The two
subleases are subject to early termination if the Company has not satisfied
certain conditions within 18 months. See "Risk Factors--Contingent Liabilities
Relating to California Divestiture."
The Company has substantially completed the California Divestiture
transactions described above and, since December 30, 1995, has received net
cash proceeds of approximately $67.2 million (excluding store inventory). The
Company expects to receive approximately $10.6 million of additional cash
proceeds from the sale of certain undeveloped real estate shortly following
the consummation of the Transactions. All of the unsold California stores will
be closed by March 31, 1996. In connection with its decision to cease
operations in California, Smith's recorded pre-tax restructuring charges of
$140 million for the year ended December 30, 1995 to reflect the anticipated
cost to Smith's of the California Divestiture.
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, lease, 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.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental laws, rules,
regulations and investigative or enforcement activities, as are other
companies in the same or similar business. The Company believes it is in
substantial compliance with such laws, rules and regulations. These laws,
rules, regulations and agency activities change from time to time, and such
changes may affect the ongoing business and operations of the Company.
46
<PAGE>
The Company, from time to time, has or may in the future receive requests from
environmental regulatory authorities to provide information or to conduct
investigation or remediation activities. None of these requests is expected by
management to have a material adverse effect on the Company's business.
GOVERNMENTAL REGULATION
The Company is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies which regulate the
distribution and sale of alcoholic beverages, pharmaceuticals, milk and other
agricultural products, as well as various other food and drug items and also
regulate trade practices, advertising, building standards, labor, health,
safety and environmental matters. The Company from time to time receives
inquiries from state and federal regulatory authorities with respect to its
comparative advertising practices, pricing policies, employment practices and
other trade practices. None of these inquiries, individually or in the
aggregate, has resulted, or is expected by management to result, in any order,
judgment, fine or other action that has, or would have, a material adverse
effect on the business or financial position of the Company.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses a variety of trade names, service marks and trademarks in
its business including "Smith's," "Smith's Food & Drug Centers," "Mountain
Dairy," "Creek View," "PriceRite," and numerous others. While the Company
believes its trademarks are important to its business, except for "Smith's,"
"Smith's Food & Drug Centers," "PriceRite" and, following the Merger,
"Smitty's," "Smitty's Super Valu" and "Shoppers Passport," the Company does
not believe any of such trademarks are, or will be, critical to its business.
LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to various
legal actions. Management believes these are routine in nature and incidental
to the operations of the Company. Management believes that the outcome of any
proceedings to which the Company is currently a party will not, individually
or in the aggregate, have a material adverse effect on the operations or
financial condition of the Company.
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
persons who are expected to serve as the executive officers and directors of
the Company following the consummation of the Transactions. Following the
Recapitalization, the Board of Directors will be comprised of seven directors,
including two nominees of the Smith Group (as defined) and two nominees of the
Yucaipa Group (as defined). See "Certain Relationships and Related
Transactions--Standstill Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Jeffrey P. Smith.................... 45 Chairman of the Board
Ronald W. Burkle.................... 43 Chief Executive Officer, Director
Allen R. Rowland.................... 51 President, Chief Operating Officer,
Director
Robert D. Bolinder.................. 64 Executive Vice President--Corporate
Planning and Development
Matthew G. Tezak.................... 40 Senior Vice President, Chief
Financial Officer
J. Craig Gilbert.................... 48 Senior Vice President, Regional
Manager-- Intermountain Region
James W. Hallsey.................... 53 Senior Vice President, Regional
Manager-- Southwest Region
Richard C. Bylski................... 56 Senior Vice President, Human
Resources
Michael C. Frei..................... 49 Senior Vice President, General
Counsel and Secretary
Kenneth A. Martindale............... 36 Senior Vice President, Marketing
Fred F. Urbanek..................... 60 Senior Vice President, Facility
Engineering
Fred L. Smith....................... 48 Director
Linda McLoughlin Figel.............. 32 Director
</TABLE>
Jeffrey P. Smith has been a director of Smith's since 1971. He has served as
Chairman of the Board and Chief Executive Officer since 1988. He served as
Chief Operating Officer of Smith's from 1984 to 1988.
Ronald W. Burkle has been the Chairman of the Board of Smitty's and a
director of SSV since 1994 and Chairman of the Board of SSV since October
1995. Mr. Burkle co-founded Yucaipa in 1986 and has served as a director of
Ralphs Grocery Company since 1995. Mr. Burkle served as Chairman of the Board
of Ralphs Grocery Company from 1995 to January 1996 and as Chief Executive
Officer and a director of its predecessor, Food 4 Less Supermarkets, Inc.
since 1987. Mr. Burkle served as Chief Executive Officer and a director of
Dominick's Supermarkets, Inc. from 1995 to 1996 and currently serves as its
Chairman of the Board. From 1986 to 1988, Mr. Burkle was Chairman and Chief
Executive Officer of Jurgensen's, a Southern California gourmet food retailer.
Mr. Burkle has served as a director of Kaufman and Broad Home Corporation
since March 1995.
Allen R. Rowland has been President and Chief Operating Officer since
joining Smith's in January 1996. From 1989 to 1996 he served as a Senior Vice
President/Regional Manager of Albertson's, Inc. From 1982 to 1989 he was a
Vice President/Division Manager with the Florida and Texas Divisions of
Albertson's, Inc.
Robert D. Bolinder has been a director of Smith's since 1985. He has served
as Executive Vice President, Corporate Planning and Development of Smith's
since 1993. He served as Executive Vice President and Chief Financial Officer
of Smith's from 1988 to 1993, after serving four years as a supermarket
industry management consultant. He is also a director of Hannaford Bros.
Company, Inc., a regional supermarket chain, and Idaho Power Company, a public
utility company. Prior to 1984, Mr. Bolinder was Vice Chairman and a director
of Albertson's, Inc. for many years.
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
48
<PAGE>
Treasurer from 1987 to 1992. Mr. Tezak, a certified public accountant, joined
Smith's in 1979 as Assistant Controller.
J. Craig Gilbert has served as Senior Vice President, Regional Manager,
Intermountain Region of Smith's since 1993. From 1992 to 1993 he served as
Senior Vice President, Regional Manager, Southwest Region. From 1991 to 1992
he was Vice President, Regional Manager, Southwest Region and from 1985 to
1991 he served as Vice President, Sales and Merchandising, Intermountain
Region.
James W. Hallsey has served as Senior Vice President, Regional Manager,
Southwest Region since 1995. He rejoined Smith's in 1994 as Senior Vice
President, Special Projects after serving most of 1994 as Senior Vice
President at McKesson Drug Company, a pharmacy company. In 1993, Mr. Hallsey
retired as a director of Smith's (a capacity in which he served since 1985)
and Senior Vice President, Corporate Nonfoods Director (a capacity in which he
served since 1992). From 1980 to 1992 he served as Vice President, Corporate
Nonfoods Director of the Company.
Richard C. Bylski has been Senior Vice President, Human Resources of Smith's
since 1992. He served as Vice President, Human Resources of Smith's from 1985
to 1992.
Michael C. Frei joined Smith's in 1990 as Senior Vice President, General
Counsel and Secretary. Prior to that time, Mr. Frei served as Vice President
and General Counsel of Price Development Company, a commercial real estate
developer, since 1981.
Kenneth A. Martindale has served as Senior Vice President, Marketing of
Smith's since 1995. He served as Vice President, Merchandising, California
Region from 1991 to 1995. From 1984 to 1991, he served as a district manager
in the Intermountain Region.
Fred F. Urbanek has been Senior Vice President, Facility Engineering of
Smith's since 1992. He served as Vice President, Facility Engineering of
Smith's from 1985 to 1992.
Fred L. Smith has been a director of Smith's since 1968. Since 1988, he has
been President of Fred Smith's Honda Automobiles of Palm Springs, an auto
dealership, prior to which time he was a private investor. Since 1989, he has
also been President of Fred Smith's Jaguar/Rolls Royce of Rancho Mirage, an
auto dealership.
Linda McLoughlin Figel joined Yucaipa in 1989 and became a general partner
in 1991. Prior to that time, she was employed by Bankers Trust Company in its
Structured Finance Group.
CLASSIFIED BOARD OF DIRECTORS
The Amended and Restated Certificate of Incorporation of the Company will
provide that the full Board of Directors will be comprised of seven directors
and, without the unanimous approval of the directors then in office, the
number of directors may not be altered. The Board of Directors will be divided
into three classes as nearly equal in number as possible, with the term of
office of one class expiring each year and each director serving for a term
ending at the third annual meeting of stockholders of the Company following
the annual meeting at which such director was elected, except for the
directors to be elected at the Company's 1996 annual meeting of stockholders,
who shall have the one, two or three-year term for which such directors are
elected at such meeting.
Any increase in the number of directors or any vacancy on the Board of
Directors may be filled, subject to the rights of any holders of any series of
Preferred Stock to elect additional directors, 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.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding ownership of the
Company's voting securities as of February 20, 1996, giving effect to the
Transactions. The table has been prepared based on the assumptions that (a)
50% of the outstanding Common Stock of each holder is purchased pursuant to
the Tender Offer, (b) 3,000,000 shares of Series I Preferred Stock are
purchased by the Company from the Dee Glen Smith Marital Trust I (2,100,000
shares) and Ida Smith (900,000 shares), and (c) 2,206,000 shares of Series I
Preferred Stock are directly or indirectly conveyed by the Dee Glen Smith
Marital Trust I to certain charitable organizations. Based on such assumptions
and giving effect to the foregoing events, the following table sets forth the
ownership of Common Stock and Series I Preferred Stock of the Company by each
person who to the knowledge of Smith's will own 5% or more of any class of the
Company's outstanding voting stock, by each person who will be a director or
executive officer of the Company, and by all executive officers and directors
of the Company as a group. Share amounts and percentage ownership information
set forth below are subject to change pending finalization of the
Recapitalization and may vary depending on the actual number and class of
shares tendered in the Tender Offer.
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES I
COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF
----------------- ------------- ------------------- ALL VOTES OF
NUMBER NUMBER NUMBER ALL CLASSES
OF SHARES % OF SHARES % OF SHARES % OF STOCK
--------- ---- --------- --- ----------- ----- ------------
BENEFICIAL OWNER(A)
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P. Smith
1550 S. Redwood Rd.
Salt Lake City, UT
84104................... 1,670,954(b) 29.4 5,300 * 3,149,000(c) 31.6 29.0
Dee Glen Smith Marital
Trust I
c/o Ida W. Smith
1066 North East Capital
Blvd.
Salt Lake City, UT
84103................... 231,210(d) 4.1 -- -- 3,149,000(d) 31.6 20.3
Richard D. Smith
1550 South Redwood Road
Salt Lake City, UT
84104................... 1,174,463(e) 20.6 -- -- -- -- 7.1
Fred L. Smith
74285 Quail Lake Dr.
Indian Wells, CA 92210.. 957,498(f) 16.8 -- -- -- -- 5.8
Trust for the Children
of
Jeffrey P. Smith
2551 Brentwood Circle
Salt Lake City, UT
84121................... 577,650(d) 10.2 -- -- -- -- 3.5
Trust for the Children
of
Fred L. Smith
74285 Quail Lake Dr.
Indian Wells, CA 92210.. 577,650(g) 10.2 -- -- -- -- 3.5
Trust for the Children
of
Richard D. Smith
1038 North East Capital
Blvd.
Salt Lake City, UT
84103................... 557,650(h) 9.8 -- -- -- -- 3.4
Corporation of the
President of
the Church of Jesus
Christ of
Latter-day Saints
50 East North Temple
Salt Lake City, UT
84150................... -- -- -- -- 2,000,009 20.1 12.0
University of Utah
Medical School
407 Park Building
Salt Lake City, UT
84112................... -- -- -- -- 1,000,000 10.0 6.0
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES I
COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF
----------------- ----------------- --------------- ALL VOTES OF
NUMBER NUMBER NUMBER ALL CLASSES
OF SHARES % OF SHARES % OF SHARES % OF STOCK
--------- ---- --------- ---- --------------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
City of Hope
1500 East Duarte Road
Duarte, CA 91010........ -- -- -- -- 500,004 5.0 3.0
Ronald W. Burkle
c/o The Yucaipa
Companies
10000 Santa Monica Blvd.
Los Angeles, CA 90067... -- -- 2,125,406(i) 21.5 -- -- 1.3
CS First Boston
Merchant Bank, Inc.
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055...... -- -- 476,738 4.8 -- -- *
Allen P. Martindale..... 310,000(j) 5.5 -- -- -- -- 1.9
Allen R. Rowland........ -- -- -- -- -- -- --
Kenneth A. Martindale... 53,500(k) * 9,497(l) * -- -- *
Robert D. Bolinder...... 50,000 * 15,000(m) * -- -- *
J. Craig Gilbert........ 32,500(n) * -- -- -- -- *
Matthew G. Tezak........ 30,000 * 16,048 * -- -- *
James W. Hallsey........ 16,750(o) * -- -- -- -- *
Michael C. Frei......... -- -- 1,584 * -- -- *
Richard C. Bylski....... 28,009(p) * 983 * -- -- *
Fred F. Urbanek......... 22,500 * 505 * -- -- *
Linda McLoughlin Figel.. -- -- -- (i) -- -- -- --
All directors and
officers as a group (15
persons)............... 2,861,711 50.3 2,174,323 22.0 3,149,000 31.6 37.4
</TABLE>
- --------
* Less than one-percent.
(a) Each person has sole investment and voting power with respect to the
shares indicated, except as otherwise set forth in the footnotes to this
table. Each share of Class A Common Stock is convertible at any time at
the option of the holder into one share of Class B Common Stock.
(b) Includes 771,055 shares which are held of record by four trusts of which
Jeffrey P. Smith is the trustee and of which his children and the children
of Richard D. Smith are beneficiaries, and 231,210 shares held of record
by a trust for benefit of Ida W. Smith and of which Mr. Smith is trustee.
(c) Such shares are held of record by a trust for the benefit of Ida W. Smith
and of which Jeffrey P. Smith is trustee.
(d) Included in the shares shown for Jeffrey P. Smith.
(e) Includes 733,501 shares which are held of record by four trusts of which
Richard D. Smith is trustee and of which his children and the children of
Jeffrey P. Smith are beneficiaries and 5,871 shares held of record by Mr.
Smith's wife.
(f) Includes 679,389 shares which are held of record by four trusts of which
Fred L. Smith is trustee and of which his children are beneficiaries, and
17,600 shares held of record by Mr. Smith's wife.
(g) Included in the shares shown for Fred L. Smith.
(h) Included in the shares shown for Richard D. Smith.
(i) Such shares are held of record by the following four limited partnerships
of which Yucaipa is the general partner: Yucaipa SSV Partners, L.P.
(1,140,816); Yucaipa Smitty's Partners, L.P. (300,667); Yucaipa Smitty's
Partners II, L.P. (136,793); and Yucaipa Arizona Partners, L.P. (547,130).
Mr. Burkle is a limited partner in two of those partnerships and is also
the controlling general partner of Yucaipa. Linda McLoughlin Figel, a
nominee for director of the Company, is a limited partner in Yucaipa SSV
Partners, L.P.
(j) Such shares are held of record by a trust for the benefit of Mr.
Martindale and his wife and of which Mr. Martindale is trustee.
(k) Includes 3,500 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(l) Includes 4,800 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(m) Includes 15,000 shares issuable upon exercise of vested options as of
February 20, 1996.
(n) Such shares are held of record by a trust for the benefit of Mr. Gilbert
and his wife and of which Mr. Gilbert is trustee.
(o) Includes 500 shares held of record by a child of Mr. Hallsey and of which
Mr. Hallsey is custodian.
(p) Includes 5,119 shares held of record by a partnership of which Mr. Bylski
is a general partner and 600 shares held of record by children of Mr.
Bylski and of which Mr. Bylski is custodian.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT
Yucaipa will provide certain management services to the Company pursuant to
the Management Services Agreement to be executed upon consummation of the
Transactions. The Management Services Agreement will have a five-year term and
will provide for annual management fees of $1,000,000, plus reimbursement of
all of Yucaipa's reasonable out-of-pocket costs and expenses. Under the
Management Services Agreement, Yucaipa, through its partners, employees or
other designated agents, will provide the Company with management consultation
and advice regarding strategic planning and development, budgeting and future
financing plans, selection and retention of management personnel, integration
strategy, legal and governmental affairs, board presentations and similar
management services as may be requested from time to time. In addition, the
Company may retain Yucaipa in an advisory capacity in connection with certain
acquisitions or sale transactions, debt and equity financings, or any other
services not otherwise covered by the Management Services Agreement, for which
the Company will pay Yucaipa additional compensation in an amount to be agreed
upon by the Company and Yucaipa (and approved by a majority of the Company's
disinterested directors).
During the term of the Management Services Agreement, Ronald W. Burkle, the
managing general partner of Yucaipa, will, if he so elects, have the right to
serve as the Chief Executive Officer of the Company and will have all rights
and responsibilities customarily vested in a Chief Executive Officer. Mr.
Burkle will not receive any compensation for serving in such capacity beyond
the management fees paid to Yucaipa under the Management Services Agreement.
The Management Services Agreement may be terminated by the Company: (a) at
any time by giving Yucaipa at least 90 days' written notice; (b) if Yucaipa
shall fail to reasonably perform any material covenant, agreement, term or
provision under the Management Services Agreement following 60 days' written
notice of such failure; (c) at any time if Yucaipa commits any act of fraud,
dishonesty or gross negligence in connection with its performance under the
Management Services Agreement which is materially detrimental to the Company's
business or reputation; (d) upon the occurrence of certain defaults or events
of default under the Indentures, the New Credit Facility, or any other
material debt agreements entered into to refinance such indebtedness, if such
default is not cured or waived within a specified period; (e) if Yucaipa is in
material default under the Standstill Agreement following 90 days' written
notice of such default; or (f) at any time if Yucaipa and its affiliates own
less than 50% of the shares of Class B Common Stock acquired by them in the
Merger. Yucaipa may terminate the Management Services Agreement: (a) if the
Company fails to reasonably perform any material covenant, agreement, term or
provision under the Management Services Agreement following 60 days' written
notice; (b) if the Company fails to make any payment to Yucaipa under the
Management Services Agreement following 30 days' written notice of such
failure; (c) if the Yucaipa nominees cease to hold Board seats as required by
the Standstill Agreement; (d) if the Board of Directors fails to approve two
or more material recommendations by Yucaipa to the Board (provided that
Yucaipa may not designate more than four such matters during any calendar year
as material) or the Board otherwise takes action which materially interferes
with the ability of Yucaipa to perform its responsibilities under the
Management Services Agreement following 60 days' written notice; or (e) if Mr.
Burkle ceases to be Chief Executive Officer of the Company, other than by
reason of his death, disability, termination for cause or voluntary
resignation. Either Yucaipa or the Company may terminate the Management
Services Agreement upon a change of control of the Company (defined generally,
subject to certain exceptions and conditions, as either (i) the acquisition of
beneficial ownership of 40% or more of the Company's outstanding shares of
voting stock, or (ii) the sale of substantially all of the Company's assets or
capital stock, excluding any transaction with Yucaipa or any of its partners
or affiliates or any member of the Smith Group). If the Management Services
Agreement is terminated (i) by the Company for the reason set forth in clause
(a) of the first sentence of this paragraph, (ii) by Yucaipa in accordance
with the Management Services Agreement, or (iii) pursuant to a change of
control of the Company, Yucaipa will be entitled to the greater of (x) $5
million, or (y) twice the total fees that would have been earned by Yucaipa
under the then remaining term of the Management Services Agreement.
52
<PAGE>
Yucaipa will agree that during the term of the Management Services Agreement
it will not, without the Company's prior written consent, provide management
or consulting services to, or make equity investments in excess of 5% in, any
business which operates in excess of five retail supermarkets in any market in
which the Company operates in excess of five retail supermarket stores,
subject to certain exceptions and conditions.
During the term of the Management Services Agreement, the Company will agree
to indemnify and hold harmless Yucaipa and each of its affiliates, partners,
officers, agents and the employees from and against all losses, claims,
damages, liabilities or expenses (collectively, "losses") resulting from any
claim, lawsuit or other proceeding by any person to which any of them may
become subject which is related to or arising out of the performance of the
services to be provided under the Management Services Agreement or the
Recapitalization Agreement, including all reasonable out-of-pocket expenses,
unless such losses result from (i) Yucaipa's or such party's gross negligence
or willful misconduct or any intentional, material breach of the Management
Services Agreement, or (ii) any settlement effected without the written
consent of the Company, which consent will not be unreasonably withheld.
STOCKHOLDERS' AGREEMENTS
On January 29, 1996, Smith's, Acquisition and certain stockholders of
Smitty's entered into a stockholders agreement (the "Smitty's Stockholders
Agreement") and Smitty's, Yucaipa and certain stockholders of Smith's entered
into a similar shareholders agreement (the "Smith's Shareholders Agreement").
Under the terms of the Smitty's Stockholders Agreement and the Smith's
Shareholders Agreement, each of the parties thereto agreed (i) to vote its
respective shares of Smitty's Common Stock or Smith's Common Stock, as
applicable, in favor of approval of the Recapitalization Agreement; (ii) to
refrain from soliciting any person other than Smitty's or Smith's, as
applicable, to purchase all or any material portion of the assets of, or
equity interests in, the Company; (iii) to refrain from transferring their
shares of the Company's stock without consent from Smith's or Smitty's, as
applicable, and the Company; and (iv) to take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied. Under the terms of the Smith's Shareholders
Agreement, the Smith's stockholders parties thereto have agreed to tender a
sufficient number of their shares of Common Stock in the Tender Offer to
enable Smith's to purchase 50% of the outstanding shares of Common Stock in
the Tender Offer.
STANDSTILL AGREEMENT
On January 29, 1996, the Company, Yucaipa and each of the limited
partnerships which own shares in Smitty's for which Yucaipa acts as the
general partner (the "Smitty's Principal Stockholders"; together with Yucaipa,
the "Yucaipa Group") entered into the Standstill Agreement. Pursuant to the
Standstill Agreement, the Yucaipa Group has agreed that for a 10-year period
ending on January 29, 2006, it will not acquire, offer to acquire, agree to
acquire, become the beneficial owner of, or obtain any rights in respect of
any Company Voting Securities (as defined below), by purchase or otherwise, or
take any action in furtherance thereof, if the effect of such action would be
to increase its aggregate beneficial ownership of securities that are entitled
to vote generally for the election of directors (the "Company Voting
Securities") above 20% of the total number of votes that could be cast at a
stockholders' meeting of the Company (the "Combined Voting Power"), subject to
certain exceptions. In addition, without the approval of a majority of the
Disinterested Directors (defined as directors of the Company who are not
employees or officers of the Company, are not serving as designees of the
Yucaipa Group, and are not associates of Yucaipa or its affiliates) and
subject to certain limited exceptions, no member of the Yucaipa Group will
during such 10-year period (i) submit any proposals to acquire a majority of
the Combined Voting Power of Company Voting Securities (a "Change of Control
Proposal"), (ii) directly or indirectly sell, transfer any beneficial interest
in, pledge, hypothecate or otherwise dispose of any Company Voting Securities
or any shares of Company Common Stock to be acquired from the Company pursuant
to the Warrant Agreement, other than to another member of the Yucaipa Group or
their respective affiliates in any transaction or series of transactions that
would result in a transfer of greater than 3% of the Combined Voting Power or
would result in any person having, or having the right to acquire, beneficial
ownership greater than 5% of the Combined Voting Power, (iii) solicit any
proxies, or assist any other person in any way in solicitation of
53
<PAGE>
proxies, or submit any proposal for the vote of stockholders of the Company,
or induce another person to take any such actions with respect to the voting
of any of the Company Voting Securities, (iv) directly or indirectly solicit
or induce any person to bid for or acquire Company Voting Securities in excess
of 5% of the Combined Voting Power of Company Voting Securities, or (v) engage
in certain affiliate transactions.
Pursuant to the Standstill Agreement, the Company will use its best efforts
to cause to be elected to the Company's Board of Directors two designees of
the Smith Group, two designees of the Yucaipa Group, one member of the senior
management of the Company and two "independent directors" (as required by the
rules of the NYSE) who are also Disinterested Directors. Subject to the
provisions of the Certificate of Incorporation and By-laws of the Company and
the approval of the Company's stockholders, as long as the members of the
Smith Group and the Yucaipa Group and their respective affiliates each
beneficially own at least 8% of the outstanding shares of Common Stock, each
such Group will have the right to designate two directors of the Company, and
so long as the members of the Smith Group and the Yucaipa Group and their
respective affiliates each beneficially own at least 5% of the outstanding
shares of Common Stock, each such Group will have the right to designate one
director of the Company. However, no individual who is an officer, director,
partner, or principal stockholder of any Significant Competitor (as defined in
the Management Services Agreement) of the Company or any of its subsidiaries
will serve as director. At any time when the Yucaipa Group and its affiliates
or the Smith Group and its affiliates no longer beneficially own at least 5%
of the outstanding shares of Common Stock, such Group will not have the right
to designate any director of the Company, such Group's rights with regard to
the voting of Company securities will terminate and such Group will cause its
designees to the Board of Directors to resign.
Jeffrey Smith and Fred Smith have been nominated to be directors of the
Company as designees of the Smith Group and Ronald Burkle and Linda McLoughlin
Figel have been nominated to be directors of the Company as designees of the
Yucaipa Group.
In addition, each of the Smith Group and the Yucaipa Group has agreed that
they each will, at any annual or special meeting of the stockholders at which
the directors of the Company are to be elected or in connection with a
solicitation of consents through which directors of the Company are to be
selected, to vote (or give a written consent with respect to) all of their
respective Company Voting Securities in favor of the election to the Company's
Board of Directors of the nominees designated by such other Group.
The Standstill Agreement will terminate at any time that the Yucaipa Group
and its affiliates own less than 2% of the outstanding shares of Common Stock.
The Standstill Agreement may be amended or waived if such amendment or waiver
is in writing and executed by all parties thereto; provided that any amendment
or waiver requires the approval of a majority of the Disinterested Directors
of the Company.
YUCAIPA WARRANT
Upon closing of the Recapitalization, the Company has agreed to issue
Yucaipa warrants to purchase shares of Class C Common Stock of the Company
(the "Warrants") representing approximately 10% of the outstanding Common
Stock on a fully diluted basis upon consummation of the Recapitalization. The
initial exercise price of the Warrants will be $50.00 per share. One-half of
the Warrants will be designated "Series A Warrants" and will be exercisable at
the election of Yucaipa on or prior to the fourth anniversary of the Closing,
and one-half of the Warrants will be designated "Series B Warrants" and will
be exercisable at the election of Yucaipa on or prior to the fifth anniversary
of the Closing. The foregoing expiration dates will each be extended by five
years in the event that, prior to such respective dates, the market price of
Class B Common Stock equals or exceeds the exercise price (as adjusted from
time to time) for a period of not less than 60 consecutive trading days. The
cashless exercise provisions of the Warrants allow the holder to elect to
exercise the Warrants without the payment of cash consideration, provided that
the Company will withhold from the shares otherwise issuable upon such
exercise a number of shares having a fair market value as of the exercise date
equal to the aggregate exercise price. The Class C Common Stock to be issued
to Yucaipa upon exercise of its Warrants will be identical in all respects to
the Class B Common Stock, except that the Class C Common Stock will be non-
voting. Shares of
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Class C Common Stock will be convertible into an equal number of shares of
Class B Common Stock following the transfer of such shares by Yucaipa to any
person or entity not affiliated with Yucaipa. The number of shares to be
issued upon exercise of the Warrants and the exercise price are each subject
to adjustment under standard anti-dilution provisions.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Recapitalization Agreement, upon consummation of the Merger
the Company will enter into a registration rights agreement (the "Registration
Rights Agreement") with Jeffrey Smith, Yucaipa, and certain holders of
Smitty's Common Stock who will receive Class B Common Stock as consideration
in the Merger (collectively, the "Holders"). Under the terms of the
Registration Rights Agreement, each of (i) Yucaipa and the holders of Smitty's
Common Stock receiving Class B Common Stock in the Merger and their
transferees, as a group (the "Yucaipa Holder Group"), and (ii) Jeffrey Smith
and his affiliates and transferees, as a group (the "Smith Holder Group"),
will be entitled to require the Company to effect a registration under the
Securities Act (a "Demand Registration") of all or a portion (but not less
than 20%) of the Registrable Securities (as defined) held by such Holders,
subject to certain limitations. Upon such demand, the Company will give prompt
notice thereof to each registered holder of Registrable Securities and will
prepare, file and use its best efforts to cause to become effective a
registration statement in respect of all Registrable Securities requested to
be included therein. Each of the Smith Holder Group and the Yucaipa Holder
Group will be entitled to two Demand Registrations. Notwithstanding the
foregoing, the Company will not be required to effect more than one Demand
Registration during any six-month period. Such Demand Registration may, at the
election of the demanding Holders, be in the form of an underwritten offering
and such demanding Holders shall be entitled to select the underwriters.
Members of the Yucaipa Holder Group may at any time prior to the second
anniversary of the Closing Date demand that the Company promptly file a shelf
registration statement pursuant to Rule 415 under the Securities Act which
will provide for resales of Registrable Securities held by the Yucaipa Group.
The Company will keep such Shelf Registration statement continuously effective
for at least 120 days following the effective date (or such longer period as
such Holders' Registrable Securities constitute "restricted securities" under
Rule 144 and are subject to the two-year holding period for affiliates under
Rule 144(c)); provided that in no event will the Company be required to keep
such shelf registration statement effective after the second anniversary of
the Closing Date.
Holders of Registrable Securities will also have the right to include such
Registrable Securities in any registration statement under the Securities Act
filed by the Company for its own account or for the account of any of its
securityholders (other than (i) a registration statement on Form S-4 or S-8,
(ii) a registration statement filed in connection with a Demand Registration
or a Shelf Registration or (iii) a registration statement filed in connection
with an offer of securities solely to existing securityholders) for sale on
the same terms and conditions as the securities of Smitty's or any other
selling securityholder included therein (a "Piggy-Back Registration"). In the
event that, pursuant to any Demand Registration or any Piggy-Back
Registration, the Company is advised by the managing underwriter therefor that
the total number of shares proposed to be included therein is such as to
materially and adversely affect the success of the offering, the Company has
granted certain priority rights to the Smith Group which enables the Smith
Group to have its Registrable Securities (up to certain designated amounts)
included in such registrations before the Yucaipa Group is entitled to include
its Registrable Securities in such registrations.
The Company will be obligated to pay its expenses associated with
registration of the Registrable Securities, regardless of whether any
registration statement required by the Registration Rights Agreement becomes
effective, and the reasonable fees and expenses of any party to the
Registration Rights Agreement who participates in any registration effected
thereunder. In addition, the Company will provide a customary securities law
indemnification to any party who participates in any registration effected
under the Registration Rights Agreement.
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The Registration Rights Agreement will terminate upon the earlier to occur
of (i) the mutual agreement by the parties thereto, (ii) with respect to any
Holder, such Holder ceasing to own any Registrable Securities, (iii) the
fifteenth anniversary of the Closing Date, or (iv) with respect to the Smith
Holder Group or the Yucaipa Holder Group, the date on which the aggregate
number of shares of outstanding Registrable Securities held by the Smith
Holder Group or the Yucaipa Holder Group, as applicable, is less than 20% of
the Registrable Shares originally held by the Smith Holder Group or the
Yucaipa Holder Group, as applicable, immediately following the consummation of
the Transactions (except with respect to any Holder that is an "affiliate" of
the Company within the meaning of the Securities Act).
OTHER TRANSACTIONS WITH YUCAIPA OR ITS AFFILIATES
Pursuant to the Recapitalization Agreement, Yucaipa will receive a success
fee of $15 million upon consummation of the Offerings and the
Recapitalization.
In December 1995, the Company entered into an agreement to sublease its
Riverside, California distribution center and dairy processing plant to
Ralphs, an affiliate of Yucaipa. Pursuant to the sublease, Ralphs will pay the
Company annual rent of approximately $8.8 million for the remaining 23-year
term of the lease. In connection with such transaction, Ralphs purchased
certain inventory, fixtures and equipment from the Company for an aggregate
purchase price (net of certain offsetting payments) of approximately $8.7
million. As part of the California Divestiture, in January 1996 the Company
entered into agreements to lease or sublease certain of its real property
located in California, including eight operating stores and one non-operating
store, to Ralphs, an affiliate of Yucaipa. See "Business--California
Divestiture."
OTHER TRANSACTIONS
During fiscal 1995, Smith's paid $217,524 in advertising fees to radio and
television stations operated by subsidiary companies of Bonneville
International Corporation ("Bonneville"). Rodney H. Brady, a former director
of Smith's, serves as President and Chief Executive Officer of Bonneville, but
has no role in Smith's advertising decisions. Also during fiscal 1995, Smith's
paid $15,385 to an automobile dealership owned by Fred Smith, one of Smith's
directors, in connection with the purchase of an automobile for use by
Smith's.
In January 1996, Alan R. Hoefer, a former director of Smith's, received
consulting fees from the Company in an aggregate amount equal to $250,000 in
connection with certain financial consulting services rendered by him in 1995.
Smith's believes that the terms of the foregoing transactions were no less
favorable to Smith's than those which could have been obtained from
unaffiliated third parties.
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DESCRIPTION OF NOTES
GENERAL
The Senior Notes will be issued under an indenture (the "Senior Note
Indenture"), to be dated as of , 1996, by and among the Company and
, as Trustee (the "Senior Note Trustee").
The Senior Subordinated Notes will be issued under an Indenture (the "Senior
Subordinated Note Indenture," and together with the Senior Note Indenture, the
"Indentures") to be dated as of , 1996, by and among the Company and
, as Trustee (the "Senior Subordinated Note Trustee," and together
with the Senior Note Trustee, the "Trustees").
The following summary of certain provisions of the Notes and the Indentures
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and to all of the provisions of the Notes and the Indentures,
including the definitions of certain terms therein and those terms made a part
of the Indentures by reference to the TIA. The definitions of certain
capitalized terms used in the following summary are set forth below under "--
Certain Definitions." A copy of the forms of the Indentures may be obtained
from the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Senior
Note Trustee will act as Paying Agent and Registrar for the Senior Notes, and
the Senior Subordinated Note Trustee will act as Paying Agent and Registrar
for the Senior Subordinated Notes. The Senior Notes and the Senior
Subordinated Notes may be presented for registration or transfer and exchange
at the offices of their respective Registrar, which for the Senior Notes
initially will be the Senior Note Trustee's corporate trust office and for the
Senior Subordinated Notes initially will be the Senior Subordinated Note
Trustee's corporate trust office. The Company may change any Paying Agent and
Registrar without notice to holders of either the Senior Notes (the "Senior
Noteholders") or of the Senior Subordinated Notes (the "Senior Subordinated
Noteholders," and together with the Senior Noteholders, the "Holders"). The
Company will pay principal (and premium, if any) on the Senior Notes at the
Senior Note Trustee's corporate office, and will pay principal (and premium,
if any) on the Senior Subordinated Notes at the Senior Subordinated Note
Trustee's corporate office, each such office located in New York, New York. At
the Company's option, interest may be paid at the Senior Note Trustee's
corporate trust office (in the case of interest payments on the Senior Notes)
or the Senior Subordinated Note Trustee's corporate trust office (in the case
of interest payments on the Senior Subordinated Notes) or by check mailed to
the registered address of the relevant Holders.
As used below in this "Description of Notes," the "Company" means Smith's
Food & Drug Centers, Inc., but not any of the Subsidiaries.
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NOTES
The Senior Notes are limited in aggregate principal amount to $250,000,000
and will mature on , 2006. The Senior Subordinated Notes are limited in
aggregate principal amount to $400,000,000 and will mature on , 2007.
Interest on the Notes will accrue at the rates per annum set forth on the
cover page of this Prospectus. Interest on the Notes will be payable semi-
annually on each and , commencing on , 199 , to the Holders of
record on the immediately preceding and .
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
issuance. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months.
OPTIONAL REDEMPTION OF THE SENIOR NOTES
The Senior Notes will be redeemable, at the option of the Company, in whole
at any time or in part from time to time, on and after , 2001, at the
following redemption prices (expressed as percentages of
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the principal amount) if redeemed during the twelve-month period commencing on
of the year set forth below, plus, in each case, accrued and unpaid
interest, if any, to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option, use
the Net Cash Proceeds of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the Senior Notes originally
issued, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12 months commencing on of the
year set forth below plus, in each case, accrued and unpaid interest, if any,
to the redemption date (provided that the redemption notice shall have been
sent not later than 60 days after the consummation of such Public Equity
Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
OPTIONAL REDEMPTION OF THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes will be redeemable, at the option of the
Company, in whole at any time or in part from time to time, on and after
, 2001, at the following redemption prices (expressed as percentages of
the principal amount) if redeemed during the twelve-month period commencing on
of the year set forth below, plus, in each case, accrued and unpaid
interest to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option, use
the Net Cash Proceeds of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the Senior Subordinated Notes
originally issued, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12 months
commencing on of the year set forth below, plus, in each case, accrued
and unpaid interest, if any, to the redemption date (provided that the
redemption notice shall have been sent not later than 60 days after the
consummation of such Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
The documents evidencing Senior Indebtedness will restrict the Company's
ability to optionally redeem Senior Subordinated Notes.
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NOTICES AND SELECTION
In the event of a redemption of less than all of the Senior Notes or the
Senior Subordinated Notes, as the case may be, such Notes will be selected for
redemption by the appropriate Trustee pro rata, by lot or by any other method
that such Trustee considers fair and appropriate and, if such Notes are listed
on any securities exchange, by a method that complies with the requirements of
such exchange; provided, however, that any redemption of the Notes pursuant to
the provisions relating to a Public Equity Offering shall be made on a pro
rata basis unless such method is otherwise legally prohibited. Notice of
redemption will be mailed at least 30 days but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at such Holder's
registered address. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption (unless the Company
shall default in the payment of the redemption price or accrued interest).
Notes that are redeemed by the Company or that are purchased by the Company
pursuant to a Net Proceeds Offer (to be defined) or pursuant to a Change of
Control Offer as described under "--Change of Control" below or that are
otherwise acquired by the Company will be surrendered to the appropriate
Trustee for cancellation.
RANKING OF THE SENIOR NOTES
The Senior Notes are senior unsecured obligations of the Company. The Senior
Notes will rank senior in right of payment to all Subordinated Indebtedness of
the Company, including the Senior Subordinated Notes. The Senior Notes will
rank pari passu in right of payment with all unsubordinated Indebtedness and
other liabilities of the Company, but will be effectively subordinated to all
secured Indebtedness of the Company and the Subsidiaries to the extent of the
value of the assets securing such Indebtedness. The borrowings and obligations
under the Credit Agreement (and the related guarantees) are secured by
substantially all of the assets of the Company and the Subsidiaries. At
December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the Company would have had approximately $784.1 million
aggregate amount of secured Indebtedness and other obligations outstanding
(other than guarantees of the New Credit Facility), and the Company would have
had $73.0 million available to be borrowed under the New Revolving Facility.
The Senior Notes will be effectively subordinated to all existing and future
liabilities, including Indebtedness, of the Subsidiaries. At December 30,
1995, after giving pro forma effect to the Transactions, the Subsidiaries
would have had Indebtedness and other liabilities reflected on the Company's
consolidated balance sheet (other than guarantees of the New Credit Facility),
including trade payables and accrued expenses, of approximately $148.4
million.
SUBORDINATION OF THE SENIOR SUBORDINATED NOTES
The payment of the Obligations on the Senior Subordinated Notes will be
subordinated in right of payment, as set forth in the Senior Subordinated Note
Indenture, to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness, whether outstanding on the Issue Date or thereafter
Incurred, including, with respect to Designated Senior Indebtedness, any
interest accruing subsequent to a bankruptcy or other similar proceeding
whether or not such interest is an allowed claim enforceable against the
Company in a bankruptcy case under Title 11 of the United States Code.
Upon any distribution of assets of the Company of any kind or character,
whether in cash, property or securities upon any dissolution, winding up,
total or partial liquidation or reorganization of the Company (including,
without limitation, in bankruptcy, insolvency, or receivership proceedings or
upon any assignment for the benefit of creditors or any other marshalling of
the Company's assets and liabilities), the holders of Senior Indebtedness
shall first be entitled to receive payment in full in cash or Cash Equivalents
of all amounts then due and payable under Senior Indebtedness (including, with
respect to Designated Senior Indebtedness, any interest accruing after the
commencement of any such proceeding at the rate specified in the applicable
Designated Senior Indebtedness whether or not such interest is an allowed
claim enforceable against the Company in any such proceeding) before the
Holders of Senior Subordinated Notes will be entitled to receive
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<PAGE>
any payment with respect to the Senior Subordinated Notes (excluding Permitted
Subordinated Reorganization Securities), and until all Obligations with
respect to Senior Indebtedness then due are paid in full in cash or Cash
Equivalents, any distribution to which the Holders of Senior Subordinated
Notes would be entitled (excluding Permitted Subordinated Reorganization
Securities) shall be made to the holders of Senior Indebtedness.
No direct or indirect payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) by or on behalf of the Company of Obligations on the Senior
Subordinated Notes whether pursuant to the terms of the Senior Subordinated
Notes or upon acceleration or otherwise shall be made if, at the time of such
payment, there exists a default in the payment of all or any portion of
principal of, premium, if any, or interest on any Designated Senior
Indebtedness or any other Senior Indebtedness which, at the time of
determination, is equal to or greater than $50 million in aggregate principal
amount ("Significant Senior Indebtedness") (and the Senior Subordinated Note
Trustee has received written notice thereof), and such default shall not have
been cured or waived by or on behalf of the holders of such Designated Senior
Indebtedness or Significant Senior Indebtedness, as the case may be, or shall
have ceased to exist, until such default shall have been cured or waived or
shall have ceased to exist or such Designated Senior Indebtedness or
Significant Senior Indebtedness, as the case may be, shall have been
discharged or paid in full in cash or Cash Equivalents, after which the
Company shall resume making any and all required payments in respect of the
Senior Subordinated Notes, including any missed payments.
In addition, during the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon the earliest to occur of (a) receipt by the
Senior Subordinated Note Trustee of written notice from the holders of a
majority of the outstanding principal amount of the Designated Senior
Indebtedness or their representative, or (b) if such event of default results
from the acceleration of the Senior Subordinated Notes, the date of such
acceleration, no such payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) may be made by the Company upon or in respect of the Senior
Subordinated Notes for a period ("Payment Blockage Period") commencing on the
earlier of the date of receipt of such notice or the date of such acceleration
and ending 179 days thereafter (unless (x) such Payment Blockage Period shall
be terminated by written notice to the Senior Subordinated Note Trustee from
the holders of a majority of the outstanding principal amount of such
Designated Senior Indebtedness or their representative who delivered such
notice or (y) such default is cured or waived, or ceases to exist or such
Designated Senior Indebtedness is discharged or paid in full in cash or Cash
Equivalents), after which the Company shall resume making any and all required
payments in respect of the Senior Subordinated Notes, including any missed
payments. Notwithstanding anything herein to the contrary, in no event will a
Payment Blockage Period extend beyond 179 days from the date on which such
Payment Blockage Period was commenced. Not more than one Payment Blockage
Period may be commenced with respect to the Senior Subordinated Notes during
any period of 365 consecutive days. No event of default which existed or was
continuing on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period shall be, or be made, the basis for the commencement of a second
Payment Blockage Period by the holders of such Designated Senior Indebtedness
or their representative whether or not within a period of 365 consecutive days
unless such event of default shall have been cured or waived for a period of
not less than 90 consecutive days.
If the Company fails to make any payment on the Senior Subordinated Notes
when due or within any applicable grace period, whether or not on account of
the payment blockage provisions referred to above, such failure would
constitute an Event of Default under the Senior Subordinated Note Indenture
and would enable the Senior Subordinated Noteholders to accelerate the
maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of the insolvency of the
Company, Senior Subordinated Noteholders may recover less, ratably, than
holders of Senior Indebtedness.
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the Company would have had approximately $1,034.2 million
aggregate amount of Senior Indebtedness outstanding, and the Company would
have had $73.0 million available to be borrowed under the New Revolving
Facility.
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In addition, the Senior Subordinated Notes will be effectively subordinated
to all existing and future liabilities, including Indebtedness, of the
Subsidiaries. At December 30, 1995, after giving pro forma effect to the
Transactions, the Subsidiaries would have had Indebtedness and other
liabilities reflected on the Company's consolidated balance sheet (other than
guarantees of the Senior Indebtedness), including trade payables and accrued
expenses, of approximately $148.4 million.
CHANGE OF CONTROL
Each of the Indentures will provide that, upon the occurrence of a Change of
Control, each Holder of Notes issued thereunder will have the right to require
the repurchase of such Holder's Notes pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase.
Each of the Indentures will provide that no later than 30 days following the
date upon which the Change of Control occurred, the Company must send, by
first class mail, a notice to each Holder of Notes issued under such
Indenture, with a copy to the applicable Trustee, which notice shall govern
the terms of the Change of Control Offer. The Indentures shall require that
notice of an event giving rise to a Change of Control shall be given on the
same date and in the same manner to all Holders. Such notice shall state,
among other things, the purchase date, which must be no earlier than 30 days
nor later than 40 days from the date such notice is mailed, other than as may
be required by law (the "Change of Control Payment Date"). Each Indenture
shall provide that the Change of Control Payment Date under the Senior Note
Indenture with respect to any Change of Control shall be one business day
prior to the Change of Control Payment Date under the Senior Subordinated Note
Indenture with respect to such Change of Control. Holders electing to have a
Note purchased pursuant to a Change of Control Offer will be required to
surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the applicable Paying Agent
at the address specified in the notice prior to the close of business on the
Business Day prior to the applicable Change of Control Payment Date. Each
Change of Control Offer is required to remain open for at least 20 Business
Days or such longer period as may be required by law.
The Senior Subordinated Note Indenture will further provide that,
notwithstanding the foregoing, prior to the mailing of the notice of a Change
of Control Offer referred to above, within 30 days following a Change of
Control the Company shall either (a) repay in full all Indebtedness, and
terminate all commitments, under the Credit Agreement to the extent required
upon a change of control pursuant to the terms thereof (or offer to repay in
full all such Indebtedness and terminate all such commitments and repay all
such Indebtedness owed to each lender which has accepted such offer and
terminate all such commitments of each such lender), or (b) obtain the
requisite consents under the Credit Agreement, the terms of which require
repayment upon a change of control, to permit the repurchase of the Senior
Subordinated Notes as provided above. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Senior Subordinated Notes pursuant to the provisions described
above. The Company's failure to comply with the covenants described in this
paragraph shall constitute an Event of Default under the Senior Subordinated
Note Indenture.
In addition, the Senior Subordinated Note Indenture will provide that prior
to purchasing Senior Subordinated Notes tendered in a Change of Control Offer,
the Company shall purchase all Senior Notes (or permitted refinancings
thereof) which it is required to purchase by reason of such Change of Control
pursuant to the provisions of the Senior Note Indenture as in effect on the
Issue Date.
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of state and federal securities laws to the extent applicable in
connection with a Change of Control Offer.
CERTAIN COVENANTS
The Senior Note Indenture will contain certain covenants that, among other
things, limit the ability of the Company and its Restricted Subsidiaries to
make restricted payments, incur additional indebtedness, create liens,
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sell assets, create dividend or other payment restrictions affecting
Restricted Subsidiaries, enter into transactions with affiliates or,
consummate mergers or certain other transactions and the ability of the
Restricted Subsidiaries to issue preferred stock.
The Senior Subordinated Note Indenture will contain certain covenants that,
among other things, limit the ability of the Company and its Restricted
Subsidiaries to make restricted payments, incur additional indebtedness,
create liens, sell assets, create dividend or other payment restrictions
affecting Restricted Subsidiaries, enter into transactions with affiliates,
consummate mergers or certain other transactions or incur indebtedness
subordinated to any other indebtedness but senior to the Senior Subordinated
Notes and the ability of the Restricted Subsidiaries to issue Preferred Stock.
REPORTS TO HOLDERS
Each Indenture will provide that the Company shall deliver to the Trustee
thereunder within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual report and other reports, if any, which the
Company is required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. Each Indenture will further provide that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall
file with the Commission, to the extent permitted, and provide the Trustee
under such Indenture and Holders of the Notes issued thereunder with such
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act. The Company will also comply with
the other provisions of TIA (S) 314(a).
EVENTS OF DEFAULT
The following events constitute "Events of Default" under each of the
Indentures: (i) failure to make any interest payment on the applicable Notes
when due and the continuance of such default for a period of 30 days, in the
case of the Senior Subordinated Note Indentures, whether or not prohibited by
the provisions described under "--Subordination of the Senior Subordinated
Notes"; (ii) failure to pay principal of, or premium, if any, on the
applicable Notes when due, whether at maturity, upon acceleration, redemption,
required repurchase or otherwise, in the case of the Senior Subordinated Note
Indentures, whether or not prohibited by the provisions described under "--
Subordination of the Senior Subordinated Notes"; (iii) failure to comply with
any other agreement contained in the applicable Notes or the applicable
Indenture, if such failure continues unremedied for 30 days after written
notice given by the applicable Trustee or the Holders of at least 25% in
principal amount of the applicable Notes then outstanding (except in the case
of a default with respect to certain covenants, which shall constitute Events
of Default with notice but without passage of time); (iv) a default under any
Indebtedness of the Company or any Restricted Subsidiary, whether such
Indebtedness now exists or shall hereinafter be created, if both (A) such
default either (1) results from the failure to pay any such Indebtedness at
its stated final maturity or (2) relates to an obligation other than the
obligation to pay such Indebtedness at its stated final maturity and results
in the holder or holders of such Indebtedness causing such Indebtedness to
become due prior to its stated maturity and (B) the principal amount of such
Indebtedness, together with the principal amount of any other such
Indebtedness in default for failure to pay principal at stated final maturity
or the maturity of which has been so accelerated, aggregate $ million or
more at any one time outstanding; (v) any final judgment or order for payment
of money in excess of $ million shall be entered against the Company or
any Significant Subsidiary and shall not be discharged for a period of 60 days
after such judgment becomes final and nonappealable; (vi) either the Company
or any Significant Subsidiary pursuant to or within the meaning of any
Bankruptcy Law: (a) commences a voluntary case or proceeding; (b) consents to
the entry of an order for relief against it in an involuntary case or
proceeding; (c) consents to the appointment of a Custodian of it or for all or
substantially all of its property; or (d) makes a general assignment for the
benefit of its creditors; (vii) a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that: (a) is for relief against the
Company or any Significant Subsidiary, in an involuntary case or proceeding;
(b) appoints a Custodian of the Company or any Significant Subsidiary, or for
all or any substantial part of their respective properties; or (c) orders the
liquidation of the Company or any Significant Subsidiary, and in each case the
order or decree remains unstayed and in effect for 60 days; or (viii) the
lenders under the Credit Agreement shall commence judicial proceedings to
foreclose upon any material portion of the assets of the Company and the
Subsidiaries.
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In the event of a declaration of acceleration because an Event of Default
set forth in clause (iv) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
either (x) the holders of the Indebtedness which is the subject of such Event
of Default have waived such failure to pay at maturity or have rescinded the
acceleration in respect of such Indebtedness within 90 days of such maturity
or declaration of acceleration, as the case may be, and no other Event of
Default has occurred during such 90-day period which has not been cured or
waived, or (y) such Indebtedness shall have been discharged or the maturity
thereof shall have been extended such that it is not then due and payable, or
the underlying default has been cured (and any acceleration based thereon of
such other Indebtedness has been rescinded), within 90 days of such maturity
or declaration of acceleration, as the case may be.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, receivership or reorganization of the Company or a
Significant Subsidiary) occurs and is continuing under an Indenture, the
Trustee under such Indenture or the Holders of at least 25% in principal
amount of the then outstanding Notes issued under such Indenture may declare
due and payable all unpaid principal and interest accrued and unpaid on the
then outstanding Notes issued under such Indenture by notice in writing to the
Company, the administrative agent under the Credit Agreement and the
applicable Trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice"), and the same (i) shall
become immediately due and payable or (ii) if there are any amounts
outstanding under the Credit Agreement, shall become due and payable upon the
first to occur of an acceleration under the Credit Agreement, or five business
days after receipt by the Company and the administrative agent under the
Credit Agreement of such Acceleration Notice. If an Event of Default resulting
from certain events of bankruptcy, insolvency, receivership or reorganization
of the Company or a Significant Subsidiary shall occur under an Indenture, all
unpaid principal of and accrued interest on all then outstanding Notes issued
under such Indenture shall be immediately due and payable without any
declaration or other act on the part of the applicable Trustee or any of the
Holders of such Notes. After a declaration of acceleration under an Indenture,
subject to certain conditions, the Holders of a majority in principal amount
of the then outstanding Notes issued thereunder, by notice to the applicable
Trustee, may rescind such declaration if all existing Events of Default under
such Indenture are remedied. In certain cases the Holders of a majority in
principal amount of outstanding Notes issued under such Indenture may waive a
past default under such Indenture and its consequences, except a default in
the payment of or interest on any of the Notes issued thereunder.
Each Indenture provides that if a Default or Event of Default occurs and is
continuing thereunder and if it is known to the applicable Trustee, such
Trustee shall mail to each Holder of Notes issued thereunder notice of the
Default or Event of Default within 90 days after such Default or Event of
Default occurs; provided, however, that, except in the case of a Default or
Event of Default in the payment of the principal of or interest on any such
Notes, including the failure to make payment on a Change of Control Payment
Date pursuant to a Change of Control Offer or payment when due pursuant to a
Net Proceeds Offer the applicable Trustee may withhold such notice if it in
good faith determines that withholding such notice is in the interest of the
Holders of such Notes.
Each Indenture provides that no Holder of Notes issued thereunder may pursue
any remedy thereunder unless the applicable Trustee (i) shall have failed to
act for a period of 60 days after receiving written notice of a continuing
Event of Default under such Indenture by such Holder and a request to act by
Holders of at least 25% in principal amount of Notes issued under such
Indenture and (ii) has received indemnification satisfactory to it; provided,
however, that such provision does not affect the right of any Holder to sue
for enforcement of any overdue payment of Notes issued under such Indenture.
Each Indenture provides that two officers of the Company are required to
certify to the applicable Trustee within 120 days after the end of each fiscal
year of the Company whether or not they know of any Default that occurred
under such Indenture during such fiscal year and, if applicable, describe such
Default and the status thereof.
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DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Senior
Notes or the Senior Subordinated Notes ("Legal Defeasance"). Legal Defeasance
means that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the applicable Notes except for (i) the rights of
Holders of such Notes to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due solely
from the funds held by the applicable Trustee in the trust referred to below;
(ii) the Company's obligations to issue temporary Notes, register the transfer
or exchange of such Notes, replace mutilated, destroyed, lost or stolen Notes
and maintain an office or agency for payments in respect of such Notes and
money for security payments held in trust in respect of such Notes; (iii) the
rights, powers, trusts, duties and immunities of the applicable Trustee and
the Company's obligations in connection therewith; and (iv) the Legal
Defeasance provisions of the Indentures. In addition, the Company may, at its
option and at any time elect to have the obligations of the Company released
with respect to certain covenants described above under "--Certain Covenants"
("Covenant Defeasance"), and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
such Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to either issue of Notes, (i) the Company must have irrevocably
deposited with the applicable Trustee, in trust, for the benefit of the
Holders of such Notes, cash in U.S. dollars, U.S. Government Obligations (as
defined in the Indentures), or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the applicable outstanding Notes to redemption or maturity provided that the
applicable Trustee shall have been irrevocably instructed to apply such money
or the proceeds of such U.S. Government Obligations to said payments with
respect to the Notes on the maturity date or such redemption date, as the case
may be; (ii) the Company shall have delivered to the applicable Trustee one or
more opinions of independent counsel to the effect that (A) the Holders will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance or Covenant Defeasance, as the case may be, and will
be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance or
Covenant Defeasance, as the case may be, had not occurred (which opinion, in
the case of Legal Defeasance, shall be based upon a change in the applicable
federal income tax law since the Issue Date or a ruling received from or
published by the Internal Revenue Service), (B) after the 91st day following
the deposit the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and in the case of the Senior Subordinated Note
Indenture, will not be subject to any rights of holders of Senior
Indebtedness, including, without limitation, those arising under the Senior
Subordinated Note Indenture, and (C) the deposit will not cause the applicable
Trustee or the trust so created to be subject to the Investment Company Act of
1940; (iii) no Default or Event of Default shall have occurred and be
continuing under the applicable Indenture on the date of such deposit or
insofar as clauses (vi) and (vii) under the first paragraph under "--Events of
Default" above are concerned, at any time in the period ending on the 91st day
after the date of deposit; (iv) such Legal Defeasance or Covenant Defeasance
shall not cause the applicable Trustee to have a conflicting interest with
respect to the Notes; (v) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of, or constitute a default under, the
applicable Indenture or any other material agreement or instrument to which
the Company is a party or by which it is bound (and in that connection, the
Trustee shall have received a certificate from the administrative agent under
the Credit Agreement to that effect with respect to such Credit Agreement if
then in effect); (vi) the Company shall have delivered to the applicable
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of the Notes over other
creditors of the Company or with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (vii) the Company shall
have delivered to the applicable Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or Covenant Defeasance, have been complied
with.
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SATISFACTION AND DISCHARGE
Each Indenture will be discharged and will cease to be of further effect as
to all outstanding Notes issued thereunder, when either (a) all such Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Notes which have been replaced or paid and Notes for whose payment money has
theretofore been deposited in trust and thereafter repaid to the Company) have
been delivered to the appropriate Trustee for cancellation; or (b)(i) all such
Notes not theretofore delivered to such Trustee for cancellation have become
due and payable by reason of the making of a notice of redemption or otherwise
and the Company has irrevocably deposited or caused to be deposited with such
Trustee as trust funds in trust for the purpose an amount of money sufficient
to pay and discharge the entire indebtedness on such Notes not theretofore
delivered to such Trustee for cancellation for principal, premium, if any, and
accrued interest to the date of maturity or redemption; (ii) no Default or
Event of Default with respect to the applicable Indenture or the applicable
Notes shall have occurred and be continuing on the date of such deposit or
shall occur as a result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other instrument to
which the Company is a party or by which it is bound; (iii) the Company has
paid all sums payable by it under such Indenture; and (iv) the Company has
delivered irrevocable instructions to the Trustee under such Indenture to
apply the deposited money toward the payment of such Notes at maturity or the
redemption date, as the case may be. In addition, the Company must deliver an
officers' certificate and an opinion of counsel to the appropriate Trustee
stating that all conditions precedent to satisfaction and discharge have been
complied with.
MODIFICATION OF THE INDENTURES
Each of the Indentures and the Notes issued thereunder may be amended or
supplemented (and compliance with any provision thereof may be waived) by the
Company, the Trustee thereunder and the Holders of not less than a majority in
aggregate principal amount of such Notes then outstanding, except that (i)
without the consent of each Holder of such Notes affected, no such amendment,
supplement or waiver may (1) change the principal amount of the applicable
Notes the Holders of which must consent to an amendment, supplement or waiver
of any provision of the applicable Indenture or the applicable Notes, (2)
reduce the rate or extend the time for payment of interest on any applicable
Notes, (3) reduce the principal amount of any applicable Notes, (4) change the
Maturity Date of any applicable Notes or alter the redemption provisions in
the applicable Indenture or the applicable Notes in a manner adverse to any
Holder of such Notes, (5) make any changes in the provisions concerning
waivers of Defaults or Events of Default by Holders or the rights of Holders
to recover the principal of, interest on or redemption payment with respect to
any applicable Notes, (6) make the principal of, or interest on, any
applicable Notes payable with anything or in any manner other than as provided
for in the applicable Indenture and the applicable Notes or (7) in the case of
the Senior Subordinated Note Indenture, modify the subordination provisions of
the Senior Subordinated Note Indenture (including the related definitions) so
as to adversely affect the ranking of any Senior Subordinated Note; provided,
however, that it is understood that any amendment the purpose of which is to
permit the Incurrence of additional Indebtedness under the Senior Subordinated
Note Indenture shall not be construed as adversely affecting the ranking of
any Senior Subordinated Note and (ii) without the consent of Holders of not
less than % in aggregate principal amount of such Notes then outstanding, no
such amendment, supplement or waiver may change the Change of Control Payment
Date or the purchase price in connection with any repurchase of such Notes
pursuant to the covenant described under "--Change of Control" above in a
manner adverse to any Holder or waive a Default or Event of Default resulting
from a failure to comply with the covenant described under "--Change of
Control" above.
In addition, each of the Indentures and the Notes issued thereunder may be
amended by the Company and the applicable Trustee (a) to cure any ambiguity,
defect or inconsistency therein; provided that such amendment or supplement
does not adversely affect the rights of any Holder thereof or (b) to make any
other change that does not adversely affect the rights of any Holder
thereunder in any material respect.
THE TRUSTEES
Each Indenture will provide that the Holders of a majority in principal
amount of the outstanding Notes issued thereunder may remove the Trustee
thereunder and appoint a successor trustee with the Company's
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consent, by so notifying the trustee to be so removed and the Company. In
addition, the Holders of a majority in principal amount of the outstanding
Notes issued under an Indenture have the right, subject to certain
limitations, to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee under such Indenture or of exercising
any trust or power conferred on such Trustee.
Each of the Indentures will provide that, if a Default or an Event of
Default has occurred and is continuing thereunder, the Trustee thereunder
shall exercise such of the rights and powers vested in it by such Indenture,
and use the same degree of care and skill in the exercise thereof, as a
prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs. Subject to the latter provision, the Trustee under
each Indenture is under no obligation to exercise any of its rights or powers
under the applicable Indenture at the request, order or direction of any of
the Holders of the Notes issued thereunder, unless they shall have offered to
such Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred thereby. If the Company fails to pay such
amounts of principal of, premium, if any, or interest on, the Senior Notes or
the Senior Subordinated Notes as shall have become due and payable upon demand
as specified in the applicable Indenture, the Trustee thereunder, at the
request of the Holders of a majority in aggregate principal amount of such
Notes at the time outstanding, and upon being offered such reasonable
indemnity as it may be required against the costs, expenses and liabilities
incurred by it, except as a result of its negligence or bad faith, shall
institute any actions or proceedings at law or in equity for the collection of
the sums so due and unpaid, and collect in the manner provided by law the
monies adjudged or decreed to be payable.
Each Indenture contains limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to be realized on certain property received by it in respect
of any such claims, securities or otherwise. Each Trustee is permitted to
engage in other transactions; however, if a Trustee acquires any "conflicting
interest," it must eliminate such conflict or resign.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon filing of the Amended and Restated Certificate of Incorporation, the
Company's authorized capital stock will consist of (i) 20,000,000 shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
(ii) 100,000,000 shares of Class B Common Stock, par value $.01 per share (the
"Class B Common Stock"), (iii) 20,000,000 shares of Class C Common Stock, par
value $.01 (the "Class C Common Stock"), and (iv) 85,000,000 shares of
Preferred Stock, par value $.01 per share, of which 34,524,579 shares are
designated as Series I Preferred Stock and 75,000 shares will be designated
Cumulative Redeemable Exchangeable Preferred Stock. As of February 20, 1996,
there were 11,375,270 shares of Class A Common Stock outstanding, 13,696,453
shares of Class B Common Stock outstanding and 12,956,747 shares of Series I
Preferred Stock outstanding.
COMMON STOCK
All holders of shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Company's Board of Directors in its
discretion from funds legally available therefor, and upon liquidation or
dissolution are entitled to receive all assets available for distribution to
the holders of Common Stock. Under the Delaware Corporation Law, the Company
may declare and pay dividends only out of its surplus, or out of its net
profits for the fiscal year in which the dividend is declared or the preceding
year. Under certain of the Company's credit agreements, the Company's ability
to pay dividends is restricted based on various measures, including the
Company's net income for designated period. All of the outstanding shares of
Common Stock are legally issued, fully paid and nonassessable. Holders of
Common Stock have no preemptive or other rights to subscribe for additional
shares which the Company may issue and there are no redemption provisions or
sinking fund provisions applicable to any class, nor is the Common Stock
subject to calls or assessments by the Company.
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except the holders of
Class A Common Stock are entitled to ten votes per share and the holders of
Class B Common Stock are entitled to one vote per share on all matters
submitted to the vote of stockholders for their vote or approval, including
the election of directors. The holders of Class C Common Stock will not be
entitled to vote on matters submitted to the vote of Company stockholders.
However, if shares of Class C Common Stock are transferred to a holder other
than an Original Class C Holder (as defined in the Amended and Restated
Certificate of Incorporation), such transferred shares of Class C Common Stock
will be convertible, at the option of the holder, into shares of voting Class
B Common Stock. There is no provision made for cumulative voting, and no class
of outstanding Common Stock or Preferred Stock alone is entitled to elect any
directors. The holders of Class A Common Stock and the holders of Series I
Preferred Stock, voting together have, and after consummation of the
Transactions will continue to have, effective control of the Company through
holding approximately 94% of the combined voting power of the outstanding
capital stock and will have the ability to elect all the directors of the
Company and to effect or prevent certain corporate transactions which require
majority approval of the combined classes, including mergers and other
business combinations.
Under the Company's bylaws, directors may be removed with or without cause
by the holders of a majority of the votes entitled to be cast for the election
of directors. A vacancy on the Board created by the removal or resignation of
a director or by expansion of the authorized number of directors may be filled
by the remaining directors then in office or by the stockholders at a special
meeting.
Under the Delaware General Corporation Law, the holders of Class A Common
Stock, Class B Common Stock and Class C Common Stock are entitled to vote as
separate classes on any amendment to the Company's Amended and Restated
Certificate of Incorporation that would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value
of the shares of such class, or alter or change the powers, preferences or
special rights of the shares of such class so as to affect them adversely.
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Each share of Class A Common Stock is convertible at any time at the option
of the holder into Class B Common Stock on a share-for-share basis. The
Company's Certificate of Incorporation also provides that each share of Class
A Common Stock will be converted automatically into one share of Class B
Common Stock if, at any time, the number of shares of Class A Common Stock
issued and outstanding shall be less than 2,910,885. The Class B Common Stock
has no conversion rights.
Shares of Class A Common Stock may not be sold, gifted, or transferred
except to and among the Company, a spouse, child, grandchild, sibling or
parent of the person to whom the Class A Common Stock was issued originally (a
"Permitted Transferee"), and certain entities controlled or owned by one or
more Permitted Transferees. The Company's Certificate of Incorporation
provides that any holder of shares of Class A Common Stock desiring to
transfer such shares to a person other than a Permitted Transferee or such
transferee must present such shares to the Company for conversion into an
equal number of shares of Class B Common Stock upon such transfer. Thereafter,
such shares of Class B Common Stock may be freely transferred to persons other
than Permitted Transferees.
SERIES I PREFERRED STOCK
Each share of Series I Preferred Stock is entitled to ten votes per share on
all matters submitted to the vote of the stockholders, including the election
of directors, for their vote or approval. Except as described below, holders
of Series I Preferred Stock vote together with the holders of Common Stock,
including the election of directors. The affirmative vote of the holders of a
majority of the Series I Preferred Stock, voting as a class, is required upon
any amendment to the Company's Certificate of Incorporation affecting in any
manner the rights of such holders.
Under the Company's Certificate of Incorporation, upon liquidation of the
Company, each share of Series I Preferred Stock is entitled to a liquidation
preference of $.33 1/3, on a pro-rata basis with any other series of Preferred
Stock ranking on parity with the Series I Preferred Stock, before any
distribution to the holders of any class of Common Stock.
All shares of Series I Preferred Stock are subject to redemption at any time
upon 60 days' notice at the option of the Board of Directors, in such numbers
as the Board may determine, at a redemption price of $.33 1/3 per share (the
"Redemption Price"). In addition, on December 1 of each year commencing in
1989, one-eleventh of the total authorized number of shares of Series I
Preferred Stock is subject to mandatory redemption at the Redemption Price.
The Series I Preferred Stock has no dividend requirement. If approved by a
majority of the outstanding shares of Series I Preferred Stock, the Amended
and Restated Certificate of Incorporation will include certain provisions with
respect to the Series I Preferred Stock which: (i) eliminate for a five-year
period the annual mandatory redemption of original outstanding shares of
Series I Preferred Stock (with mandatory redemptions of one-eleventh of the
outstanding shares of Series I Preferred Stock resuming thereafter), and (ii)
restrict for two-year period the optional redemption of shares of Series I
Preferred Stock.
NEW PREFERRED STOCK
As part of the financing required to consummate the Transactions, it is
anticipated that the Company will offer $75 million liquidation preference of
New Preferred Stock. The following is a summary of the anticipated material
terms and conditions of the New Preferred Stock. This summary does not purport
to be a complete description of the New Preferred Stock and is subject to the
detailed provisions of the certificate of designation to be entered into in
connection with the New Preferred Stock (the "Certificate of Designation") and
various related documents.
The New Preferred Stock will be non-voting, except as otherwise required by
law and except in certain circumstances described herein, including (i)
amending certain rights of the holders of the New Preferred Stock and (ii) the
issuance of any class of equity securities that ranks on parity with or senior
to the New Preferred Stock.
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The New Preferred Stock, will, with respect to dividend rights and rights on
liquidation, winding-up and dissolution of the Company, rank, subject to
certain conditions, (i) senior to (a) all classes of Common Stock of the
Company and (b) each other class of capital stock or series of preferred stock
issued by the Company after the Offerings, the terms of which specifically
provide that such class or series will rank junior to the New Preferred Stock
or junior or on parity with any class of Common Stock or which do not specify
their rank, (ii) on parity with each other class of capital stock or series of
preferred stock issued by the Company after the Offerings, the terms of which
specifically provide that such class or series will rank on parity with the
New Preferred Stock as to dividend distributions and distributions upon
liquidation, winding up and dissolution of the Company and (iii) junior to
each other class of capital stock or other series of preferred stock issued by
the Company after the Offerings, the terms of which specifically provide that
such series will rank senior to the New Preferred Stock.
Dividends on the New Preferred Stock will accrue from the date of issuance
and will be payable quarterly at a rate per annum to be determined by the
Company and the Underwriters. The Company, at its option, may pay dividends on
any dividend payment date occurring on or before the fifth anniversary of the
issue date by adding such dividends to the then effective liquidation
preference of the New Preferred Stock.
The New Preferred Stock will be redeemable, subject to certain conditions,
at the option of the Company, in whole at any time or in part from time to
time on or after the third anniversary of the issue date at the redemption
prices to be determined by the Company and the Underwriters, plus, without
duplication, accrued and unpaid dividends to the date of redemption. In
addition, on or prior to the third anniversary of the issue date, the Company
may, at its option and subject to certain conditions, use the net cash
proceeds of one or more Public Equity Offerings (as defined in the Certificate
of Designation) to redeem up to an aggregate of 35% of the shares of New
Preferred Stock originally issued at a redemption price to be determined by
the Company and the Underwriters, plus, without duplication, accrued and
unpaid dividends to the date of redemption. The Company will be required,
subject to certain conditions, to redeem all of the shares of New Preferred
Stock outstanding on the twelfth anniversary of the issue date at a redemption
price equal to 100% of the then effective liquidation preference thereof,
plus, without duplication, accrued and unpaid dividends to the date of
redemption. Upon the occurrence of a Change of Control (as defined), the
Company will, subject to certain conditions, offer to purchase all outstanding
shares of New Preferred Stock at a price equal to 101% of the then effective
liquidation preference thereof, plus, without duplication, accrued and unpaid
dividends to the date of purchase.
Subject to certain conditions, the New Preferred Stock is exchangeable in
whole, but not in part, at the option of the Company, on any dividend payment
date, for the Company's Subordinated Exchange Debentures due 2008 (including
any such securities paid in lieu of cash interest, as described herein, the
"Exchange Debentures"). Interest on the Exchange Debentures will be payable at
a rate to be determined by the Company and the Underwriters and will accrue
from the date of issuance thereof. Interest on the Exchange Debentures will be
payable semi-annually in cash or, at the option of the Company, on or prior to
the fifth anniversary of the issue date, in additional Exchange Debentures,
commencing on the first such date after the exchange of the Exchange
Debentures for the New Preferred Stock. The Exchange Debentures will mature on
the twelfth anniversary of the issue date and are, subject to certain
conditions, redeemable, at the option of the Company, in whole or in part, on
or after the third anniversary of the issue date, at the redemption prices to
be determined by the Company and the Underwriters, plus accrued and unpaid
interest to the date of redemption. In addition, on or prior to the third
anniversary of the issue date, the Company may, at its option and subject to
certain conditions, use the Net Cash Proceeds of one or more Public Equity
Offerings to redeem up to an aggregate of 35% of the principal amount of the
Exchange Debentures originally issued.
The Exchange Debentures will be subordinated to all existing and future
Senior Indebtedness of the Company, including the New Credit Facility and the
Notes. In addition, the Exchange Debentures will be effectively subordinated
to all existing and future liabilities, including indebtedness, of the
subsidiaries of the Company.
In the event of a Change of Control, the Company will, subject to certain
conditions, offer to purchase all outstanding Exchange Debentures at a
purchase price of 101% of the principal amount thereof, plus accrued and
69
<PAGE>
unpaid interest to the date of purchase. The New Credit Facility and the
indentures governing the Notes will limit the Company's ability to make an
offer to purchase the Exchange Debentures in the event of a Change of Control.
UNDESIGNATED PREFERRED STOCK
Additional Preferred Stock may be issued from time to time in one or more
series and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking funds and any other rights, preferences, privileges and restrictions
applicable to each such series of Preferred Stock. However, under the
Company's Amended and Restated Certificate of Incorporation, no series of
Preferred Stock may have rights or preferences superior to the Series I
Preferred Stock, and no share of Preferred Stock other than shares designated
as Series I Preferred Stock may be entitled to more than one vote upon any
matter presented to the Company's stockholders for vote or approval, including
the election of directors.
70
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
In connection with the Transactions, Smith's will enter into the New Credit
Facility with a syndicate of financial institutions for whom Bankers Trust will
act as administrative agent. Smith's has accepted a commitment letter (the
"Commitment Letter") from Bankers Trust and Chase Manhattan pursuant to which
Bankers Trust and Chase Manhattan, as Arrangers (the "Arrangers"), have agreed,
subject to certain conditions, to provide the Company $845 million of financing
under the New Credit Facility. The following is a summary of the anticipated
material terms and conditions of the New Credit Facility. This summary does not
purport to be a complete description of the New Credit Facility and is subject
to the detailed provisions of the loan agreement (the "Loan Agreement") and
various related documents to be entered into in connection with the New Credit
Facility.
GENERAL
The New Credit Facility will provide for (i) term loans in the aggregate
amount of $655 million, comprised of the $330 million Tranche A Loans, the $110
million Tranche B Loans, the $110 million Tranche C Loans and the $105 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 the closing of the Merger.
Proceeds of the New Term Loans and loans under the Revolving Credit Facility
on the Closing Date, together with proceeds from the Offerings and the
California Divestiture will be used to fund the cash requirements for the
Tender Offer and the Smitty's Refinancing, refinance certain other existing
indebtedness of Smith's and Smitty's, repay a portion of other indebtedness,
redeem Smith's management options and pay various fees, expenses and other
costs associated with the Transactions. The New Revolving Facility will be
available to provide for the working capital requirements and general corporate
purposes of the Company and to issue commercial and standby letters of credit.
INTEREST RATE; FEES
Borrowings under (i) the New Revolving Facility and the Tranche A Loans will
bear interest at a rate equal to the Base Rate (as defined in the Loan
Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as
defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loans
will bear interest at the Base Rate plus 2.00% per annum or the reserve
adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loans will
bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted
Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loans will bear
interest at the Base Rate plus 2.75% per annum or the reserve adjusted Euro-
Dollar Rate plus 4.00% per annum, in each case as selected by the Company.
Applicable interest rates on Tranche A Loans and the New Revolving Facility and
the fees payable under the New Revolving Facility on letters of credit, will be
reduced in increments of 0.25% per annum, up to an aggregate of 0.50% per
annum, after the New Term Loans have been reduced by such amounts and if the
Company meets certain financial tests to be agreed upon among the Company and
the Arrangers. Up to $30 million of the New Revolving Facility will be
available as a swingline facility and loans outstanding under the swingline
facility shall bear interest at the Base Rate plus 1.00% per annum (subject to
adjustment as described in the preceding sentence). After the occurrence of a
default under the New Credit Facility, interest will accrue at the rate equal
to the rate on loans bearing interest at the rate determined by reference to
the Base Rate plus an additional 2.00% per annum. The Company will pay the
issuing bank a fee of 0.25% per annum on each standby letter of credit and each
commercial letter of credit and will pay the lenders under the New Credit
Facility a fee equal to the margin on Eurodollar Rate loans under the Revolving
Credit Facility (the "Eurodollar Margin") for standby letters of credit and a
fee equal to the Eurodollar Margin minus 1.00% per annum for commercial letters
of credit. Each of these fees will be calculated based on the amount available
to be drawn under a letter of credit. In addition, the Company will pay a
commitment fee of 0.50% per annum on the unused portions of the New Revolving
Facility and for purposes of calculating this fee, loans under the swingline
facility shall not be deemed
71
<PAGE>
to be outstanding. The New Credit Facility will require the Company to enter
into hedging agreements to limit its exposure to increases in interest rates
for a period of not less than two years after the Closing. The New Credit
Facility may be prepaid in whole or in part without premium or penalty.
AMORTIZATION; PREPAYMENTS
The Tranche A Loans will mature six and one-quarter years after the Closing
and will be subject to amortization, commencing on the nine month anniversary
of the Closing in the amount of $17.5 million, and thereafter commencing on the
first anniversary of the Closing on a quarterly basis in aggregate annual
amounts of $50 million in the second year, $55 million in the third year, $60
million in the fourth year, $65 million in the fifth year, $55 million in the
sixth year, and $13.75 million on the sixth anniversary of the Closing and in
the first quarter of the seventh year. The Tranche B Loan will mature seven and
one-half years after the Closing and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.1 million for the first six
years and in the seventh year payable in installments of $4.0 million in the
first quarter and $18 million in each of the last three quarters and in the
eighth year payable in installments of $22.7 million in each of the first two
quarters. The Tranche C Loans will mature eight and one-half years after the
Closing and will be subject to amortization on a quarterly basis in aggregate
annual amounts of $1.1 million for the first seven years and in the eighth year
payable in installments of $0.275 million in each of the first two quarters,
and $25 million in each of the last two quarters and in the ninth year payable
in installments of $25.875 million in each of the first two quarters. The
Tranche D Loans will mature nine and one-quarter years after the Closing and
will be subject to amortization on a quarterly basis in aggregate annual
amounts of $1.05 million for the first eight years and in the ninth year
payable in installments of $0.2625 million in each of the first two quarters,
and $29 million in each of the last two quarters and in the tenth year in an
installment of $38.075 million in the first quarter. The New Revolving Facility
will mature on the same date as the Tranche A Loans. The Company will be
required to reduce loans outstanding under the New Revolving Facility to $85
million for a period of not less than 30 consecutive days during the first 12-
month period following the Closing and to $75 million for a period of not less
than 30 consecutive days during each consecutive 12-month period thereafter.
The Company will be required to make certain prepayments, subject to certain
exceptions, on the New Credit Facility with 75% of Consolidated Excess Cash
Flow (as defined in the Loan Agreement) and with the proceeds from certain
asset sales, issuances of debt and equity securities and any pension plan
reversion. Such prepayments will be allocated pro rata between the Tranche A
Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans and to
scheduled amortization payments of the Tranche A Loans, the Tranche B Loans,
Tranche C Loans, and the Tranche D Loans pro rata, provided that at the
election of the Company mandatory prepayments of Tranche A Loans made with
Excess Land Proceeds (as defined in the Loan Agreement) may be applied to the
Tranche A Loans in forward order of maturity up to $50 million. At the option
of the Company, mandatory prepayments on the Tranche B Loans, the Tranche C
Loans and the Tranche D Loans will be used to make an offer to repay such Loans
and to the extent not accepted by the holders of such loans (x) in the event
such mandatory prepayments are to be made from Excess Land Proceeds, such
mandatory prepayments not so accepted will be applied to the prepayment of the
Tranche A Loans and (y) in the event of all other mandatory prepayments, 50% of
such amount will be applied to reduce Tranche A Loans on a pro rata basis and
the remaining 50% may be retained by the Company.
GUARANTEES AND COLLATERAL
All subsidiaries of the Company will guarantee the Company's obligations
under the New Credit Facility. The Company's obligations and the guarantees of
its subsidiaries will be secured by a first priority lien on all existing and
after-acquired personal property of the Company and its subsidiaries, including
a pledge of the stock of all subsidiaries of the Company and by first priority
liens on all unencumbered real property fee interests of the Company and its
subsidiaries and the Company and its subsidiaries will use their reasonable
economic efforts to provide the lenders with a first priority lien on all
unencumbered leasehold interests of the Company and its subsidiaries.
72
<PAGE>
COVENANTS
The obligation of the lenders under the New Credit Facility to advance funds
is subject to the satisfaction of certain conditions customary in agreements of
this type. In addition, the Company will be subject to certain customary
affirmative and negative covenants contained in the New Credit Facility,
including, without limitation, covenants that restrict, subject to specified
exceptions, (i) the incurrence of additional indebtedness and other
obligations, (ii) mergers and acquisitions, (iii) asset sales, (iv) the
granting of liens, (v) prepayment or repurchase of other indebtedness, (vi)
engaging in transactions with affiliates, (vii) capital expenditures, (vii) the
making of investments, (ix) dividends and other payments with respect to equity
interests, or (x) rental payments. Certain of these covenants may be more
restrictive than those in favor of holders of the Notes as described herein and
as set forth in the New Indentures. In addition, the New Credit Facility will
require that the Company maintain certain specified financial covenants,
including a minimum fixed charge coverage, a minimum EBITDA, a maximum ratio of
total debt to EBITDA and a minimum net worth.
EVENTS OF DEFAULT
The New Credit Facility also provides for customary events of default. The
occurrence of any of such events of default could result in acceleration of the
Company's obligations under the New Credit Facility and foreclosure on the
collateral securing such obligations, which could have material adverse results
to holders of the Notes.
73
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among Smith's and BT Securities Corporation ("BT
Securities"), CS First Boston Corporation ("CS First Boston"), Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), Goldman, Sachs & Co.
("Goldman Sachs") and Chase Securities Inc. ("Chase") (collectively, the
"Underwriters"), the Underwriters have agreed to purchase, and the Company has
agreed to sell to the Underwriters, the entire principal amount of the Notes
offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to the approval of
certain legal matters by counsel and to various other conditions. The nature of
each Underwriter's obligation is such that each is severally committed to
purchase the aggregate principal amount of Notes set forth opposite its name if
it purchases any.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
PRINCIPAL AMOUNT OF SENIOR
UNDERWRITERS OF SENIOR NOTES SUBORDINATED NOTES
------------ ---------------- ------------------
<S> <C> <C>
BT Securities Corporation............... $ $
CS First Boston Corporation.............
Donaldson, Lufkin & Jenrette
Securities Corporation.................
Goldman, Sachs & Co. ...................
Chase Securities Inc. ..................
------------ ------------
Total............................... $250,000,000 $400,000,000
</TABLE>
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page hereof, and to certain
dealers at such price less a concession not in excess of $ per $1,000
principal amount of the Notes. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per $1,000 principal amount of the
Notes. After the initial public offering of the Notes, the public offering
prices and other selling terms may be changed.
The Company does not intend to apply for listing of the Notes on a national
securities exchange, but has been advised by each of the Underwriters that it
presently intends to make a market in the Notes, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Notes, and any such market making may be discontinued at any time
by one or all of the Underwriters at the sole discretion of such Underwriters.
There can be no assurance that an active public market for the Notes will
develop.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
BT Securities and CS First Boston have been engaged by Smitty's to act as
dealer managers and consent solicitation agents in connection with the Smitty's
Refinancing. BT Securities and CS First Boston will receive customary fees in
connection with such services.
Chase Manhattan, an affiliate of Chase, has been the administrative agent and
a lender under SSV's existing credit facilities. Proceeds of the Offerings will
be used, in part, to repay indebtedness to Chase Manhattan and the other
lenders under such credit facilities. Bankers Trust, an affiliate of BT
Securities, and Chase Manhattan are the Arrangers of the New Credit Facility,
and Bankers Trust will act as administrative agent for the New Credit Facility.
Bankers Trust and Chase Manhattan will receive customary fees in connection
with such services.
An affiliate of Chase is a limited partner in a partnership controlled by
Yucaipa which owns shares of Smitty's Class A Common Stock. The partnership
will receive shares of Smith's Class B Common Stock in the Merger in exchange
for such shares.
74
<PAGE>
Goldman Sachs is serving as financial advisor to the Company in connection
with the Transactions and has delivered a written opinion to the Company's
Board of Directors that as of January 29, 1996, the exchange ratio in the
Merger is fair to the Company. Goldman Sachs has been engaged by the Company
to act as dealer manager in connection with the Tender Offer. Goldman Sachs
will receive customary fees in connection with such services.
Affiliates of CS First Boston own shares of Smitty's Class B Common Stock
and will receive shares of Smith's Common Stock in the Merger in exchange for
such shares of Smitty's Class B Common Stock.
Each of the Underwriters has from time to time provided investment banking
and financial advisory services to one or more of Smith's, Smitty's, Yucaipa
and/or their respective affiliates and may continue to do so in the future.
The Underwriters have received customary fees for such services.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Latham & Watkins, Los Angeles, California. Certain legal matters in
connection with the Offerings will be passed upon for the Underwriters by
Cahill Gordon and Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The consolidated financial statements of Smith's Food & Drug Centers, Inc.
at December 30, 1995 and December 31, 1994 and for each of three years in the
period ended December 30, 1995 included in this Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated balance sheet of Smitty's Supermarkets, Inc. as of July 30,
1995 and July 31, 1994 and the related consolidated statements of operations,
stockholder's equity, and cash flows for year ended July 31, 1995, and for the
period from June 29, 1994 (date of inception) to July 31, 1994 (Smitty's), and
for the period from August 2, 1993 to June 28, 1994 and the year ended August
1, 1994 (Predecessor), included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
75
<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 January 1, 1994,
December 31, 1994 and December 30, 1995................................. F-4
Consolidated statements of common stockholders' equity for the years
ended January 1, 1994, December 31, 1994 and December 30, 1995.......... F-5
Consolidated statements of cash flows for the years ended January 1,
1994, December 31, 1994 and December 30, 1995........................... F-6
Notes to consolidated financial statements............................... F-7
SMITTY'S SUPERMARKETS, INC.:
Report of Independent Auditors (Coopers & Lybrand L.L.P.)................ F-17
Consolidated balance sheets as of July 31, 1994 and July 30, 1995 and
January 14, 1996 (unaudited)............................................ F-18
Consolidated statements of operations for the 52 weeks ended July 30,
1995 and for the period from June 29, 1994 (date of inception) to July
31, 1994; for the period from August 2, 1993 to June 28, 1994 and the
year ended August 1, 1993 (Predecessor); for the 24 weeks ended January
14, 1996 (unaudited) and the 24 weeks ended January 15, 1995
(unaudited)............................................................. F-19
Consolidated statements of stockholders' equity for the 52 weeks ended
July 30, 1995 and for the period from June 29, 1994 (date of inception)
to July 31, 1994; for the period from August 2, 1992 to June 29, 1994
and the year ended August 1, 1993 (Predecessor); for the 24 weeks ended
January 14, 1996 (unaudited)............................................ F-20
Consolidated statements of cash flows for the 52 weeks ended July 30,
1995 and for the period from June 29, 1994 (date of inception) to July
31, 1994; for the period from August 2, 1993 to June 28, 1994 and the
year ended August 1, 1993 (Predecessor); for the 24 weeks ended January
14, 1996 (unaudited) and the 24 weeks ended January 15, 1995
(unaudited)............................................................. F-21
Notes to consolidated financial statements............................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Smith's Food & Drug Centers, Inc.
We have audited the accompanying consolidated balance sheets of Smith's Food
& Drug Centers, Inc. and subsidiaries as of December 30, 1995 and December 31,
1994, and the related consolidated statements of income, common stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
December 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Smith's Food
& Drug Centers, Inc. and subsidiaries at December 30, 1995 and December 31,
1994, and the consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended December 30, 1995, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
January 29, 1996
F-2
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
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
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
-------------------------------------------
Current Liabilities
Trade accounts payable.................................. $ 214,152 $ 235,843
Accrued sales and other taxes........................... 50,749 44,379
Accrued payroll and related benefits.................... 97,455 84,083
Current maturities of long-term debt.................... 20,932 19,011
Current maturities of Redeemable Preferred Stock........ 1,008 1,017
Accrued restructuring costs............................. 58,000
---------- ----------
Total Current Liabilities............................. 442,296 384,333
Long-term debt, less current maturities................... 725,253 699,882
Accrued restructuring costs, less current portion......... 40,000
Deferred income taxes..................................... 58,600 89,500
Redeemable Preferred Stock, less current 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>
1995 1994 1993
---------- ---------- ----------
<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>
1995 1994 1993
--------- --------- ---------
<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.
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>
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
========== ======== ========== ========
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>
1995 1994
-------- --------
<S> <C> <C>
Mortgage notes, collateralized by property and equip-
ment with a cost of $420.7 million in 1995 and
$413.0 million in 1994, due through 2011 with inter-
est 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 vary-
ing annual installments starting in 2000 which ac-
crue 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>
1995 1994 1993
-------- ------- -------
<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>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate................... (35.0)% 35.0 % 35.0%
State income tax rate, net of federal income tax
effect............................................. (4.3) 4.7 5.2
Effect of income tax rate changes on deferred taxes. (3.6) 2.4
Other............................................... .9 (.6) .2
----- ---- ----
(42.0)% 39.1 % 42.8%
===== ==== ====
</TABLE>
The effect of temporary differences that give rise to deferred tax balances
are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
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>
1995 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>
1995 1994 1993
------- ------- -------
<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>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost--present value of benefits
earned during the period.................... $ 2,119 $ 2,326 $ 1,869
Interest cost on projected benefit obliga-
tion........................................ 1,966 1,725 1,350
Actual return on plan assets................. (9,692) 237 (1,053)
Net amortization and deferral................ 7,598 (1,615) (304)
------- ------- -------
$ 1,991 $ 2,673 $ 1,862
======= ======= =======
</TABLE>
The following table presents the plan's funded status and amounts recognized
in the Company's consolidated balance sheets (dollar amounts in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefits based
on service rendered to date:
Vested.............................................. $29,649 $16,965
Non-vested.......................................... 3,482 3,438
------- -------
33,131 20,403
Fair value of plan assets (primarily in equity and
fixed income funds and real estate).................. 37,934 20,993
------- -------
Fair value of plan assets in excess of projected bene-
fit 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 $41.1 million, $49.5 million and $40.0 million
in 1995, 1994 and 1993, respectively. These losses include corporate
allocations such as benefits of corporate buying, distribution and
manufacturing operations; interest expense and corporate overhead. The
restructuring charges include the following components:
<TABLE>
<CAPTION>
ACCRUED
RESTRUCTURING
TOTAL ADJUSTMENTS COSTS
RESTRUCTURING TO -----------------
CHARGES CARRYING VALUE CURRENT LONG-TERM
------------- -------------- ------- ---------
<S> <C> <C> <C> <C>
Charges for lease obliga-
tions................... $ 65,600 $25,600 $40,000
Asset valuation adjust-
ments:
Closed stores.......... 21,700 $21,700
Assets sold............ 20,300 20,300
Inventory................ 16,000 16,000
Termination payments..... 10,000 10,000
Other.................... 6,400 6,400
-------- ------- ------- -------
$140,000 $42,000 $58,000 $40,000
======== ======= ======= =======
</TABLE>
The lease rental obligations primarily relate to closed stores and consist
of average annual lease expense over a five year period net of any sublease
income discounted at a rate of 9%. Also included is a $15 million charge for
certain fees associated with the sublease of the distribution center which is
expected to be paid by March 1996. The distribution center and nine stores
have been leased or subleased to another supermarket company controlled by the
same group of investors that controls Smitty's Supermarkets, Inc., with whom
the Company has entered into a definitive merger agreement (see Note L).
The charges for store and distribution center inventories represent
incremental losses for shrinkage, damage and liquidation sales expected to be
incurred during the closing process.
The termination payments relate to substantially all of the Company's 3,900
store and distribution center employees in the Southern California Region. The
termination payments are expected to be made by the end of March 1996 and have
been estimated based on existing employment contracts and involuntary
termination statutes.
The other costs represent charges for taxes, fees, contractual obligations,
and other costs associated with closing the region.
The restructuring charges include management's best estimates of the amounts
expected to be realized on the disposal of the remaining stores and closure of
the region. At December 30, 1995, the Company's carrying value of closed
stores, leased stores and excess land in California was approximately $260
million. The Company's current management has not determined the ultimate
disposition or use of these real estate assets and believes that their
disposal in the ordinary course of business would not result in a significant
impact on carrying values. However, should the Company complete the subsequent
event (see Note L), management may decide to pursue the sale of these assets.
The amounts the Company may realize on disposal could differ significantly in
the near term from the carrying values.
F-15
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE L--SUBSEQUENT EVENT
On January 29, 1996, the Company announced it had entered into a definitive
merger agreement with Smitty's Supermarkets, Inc. ("Smitty's") in which
Smitty's will become a wholly owned subsidiary of the Company. The merger will
be completed by issuing 3,038,888 shares of the Company's Class B Common Stock
for all of Smitty's outstanding common stock, subject to adjustment under
certain circumstances. The Company will assume or refinance approximately $148
million of Smitty's debt.
The Company also announced it will commence a self tender offer to purchase
50% of its outstanding Class A and Class B Common Stock for $36 per share,
excluding shares to be issued in connection with the Smitty's merger. Debt of
approximately $1.4 billion is expected to be issued at various interest rates
to finance the stock purchase, repay certain existing indebtedness, and
premiums related to early repayment. In addition, the Company plans to offer
preferred stock to raise approximately $75 million.
Completion of the tender offer will be subject to the tender of at least 50%
of the Company's outstanding Common Stock, the receipt of adequate financing
and various other conditions. Completion of the merger with Smitty's will be
conditioned on the Company's purchase of shares pursuant to the self tender
offer, receipt of adequate financing, regulatory approvals, approval by the
Company's stockholders and various other conditions. The tender offer is
expected to commence in April 1996 and be consummated in May 1996. The merger
with Smitty's is expected to be consummated concurrently with the closing of
the tender offer.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Smitty's Supermarkets, Inc.
We have audited the accompanying consolidated balance sheets of Smitty's
Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and
the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended July 30, 1995 and the period from June 29, 1994
(date of inception) to July 31, 1994. We have also audited the consolidated
statements of operations, stockholders' equity and cash flows of the Company's
predecessor (the "Predecessor") for the period from August 2, 1993 to
June 28, 1994 and the year ended August 1, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Smitty's
Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and
the consolidated results of their operations and their cash flows for the year
ended July 30, 1995 and the period from June 28, 1994 (date of inception) to
July 31, 1994 and the consolidated results of the Predecessor's operations and
cash flows for the period from August 2, 1993 to June 28, 1994 and the year
ended August 1, 1993 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Phoenix, Arizona
October 3, 1995, except for Note 18
as to which the date is January 29, 1996
F-17
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 14, JULY 30, JULY 31,
ASSETS 1996 1995 1994
------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and short-term investments............... $ 11,505 $ 25,653 $ 19,969
Accounts and notes receivable, net of allow-
ances of $440, $506
and $683..................................... 9,290 7,700 7,994
Inventories................................... 56,726 55,475 51,013
Prepaid expenses.............................. 3,279 3,767 2,177
Refundable income taxes....................... 1,895 2,471 546
-------- -------- --------
Total current assets......................... 82,695 95,066 81,699
Property and equipment, net.................... 134,843 128,289 119,218
Goodwill, net of accumulated amortization of
$1,296, $917 and $40.......................... 31,520 31,899 17,500
Property held for sale......................... 3,209 2,360 2,154
Other assets................................... 7,769 8,108 14,741
-------- -------- --------
$260,036 $265,722 $235,312
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................. $ 39,620 $ 35,247 $ 25,396
Accrued compensation.......................... 5,335 6,514 4,876
Taxes, other than income taxes................ 7,372 5,482 4,781
Deferred income taxes......................... 4,642 4,642 3,356
Other accrued expenses........................ 13,851 19,764 12,805
Current portion of long-term debt............. 6,216 6,089 2,560
-------- -------- --------
Total current liabilities.................... 77,036 77,738 53,774
Long-term debt................................. 139,830 141,835 141,356
Deferred income taxes.......................... 13,767 13,767 15,658
Other liabilities.............................. 20,147 21,449 13,937
-------- -------- --------
Total liabilities............................ 250,780 254,789 224,725
Stockholders' Equity
Preferred stock, $.01 par value; 10,000 shares
authorized
Class A common stock, $.01 par value;
1,000,000 shares authorized; 696,700 shares
issued and outstanding at July 30, 1995 and
July 31, 1994; 705,697 shares issued and
outstanding at January 14, 1996.............. 7 7 7
Class B common stock, $.01 par value; 500,000
shares authorized; 303,300 shares issued and
outstanding.................................. 3 3 3
Additional paid-in capital.................... 11,036 10,936 10,936
Retained earnings (deficit)................... (1,790) (13) (359)
-------- -------- --------
Total stockholders' equity................... 9,256 10,933 10,587
-------- -------- --------
$260,036 $265,722 $235,312
======== ======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
--------------------------------------------------- -----------------------------
24 WEEKS 24 WEEKS PERIOD FROM PERIOD FROM
ENDED ENDED JUNE 29, 1994 AUGUST 2, 1993
JANUARY 14, JANUARY 15, YEAR ENDED TO TO YEAR ENDED
1996 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
----------- ----------- ------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Sales................... $ 276,507 $ 286,245 $ 594,019 $ 48,411 $551,681 $605,132
Cost of sales........... 200,100 212,579 432,067 35,476 413,696 454,672
--------- --------- --------- --------- -------- --------
Gross profit............ 76,407 73,666 161,952 12,935 137,985 150,460
Operating, selling,
general, and
administrative
expenses............... 63,596 60,832 133,242 10,828 117,350 147,472
Litigation settlement... (1,866) (1,866)
Depreciation and
amortization........... 6,010 4,566 10,855 959 8,022 9,461
--------- --------- --------- --------- -------- --------
Operating income (loss). 6,801 10,134 19,721 1,148 12,613 (6,473)
Interest expense:
Interest expense,
excluding amortization
of deferred financing
costs................. 8,136 7,508 17,797 1,422 6,219 6,364
Amortization of
deferred financing
costs................. 442 407 923 83 134 182
--------- --------- --------- --------- -------- --------
8,578 7,915 18,720 1,505 6,353 6,546
--------- --------- --------- --------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (1,777) 2,219 1,001 (357) 6,260 (13,019)
Income taxes (benefit).. 1,360 655 2 2,492 (4,822)
--------- --------- --------- --------- -------- --------
Income (loss) before
extraordinary item..... (1,777) 859 346 (359) 3,768 (8,197)
Extraordinary item:
Loss on extinguishment
of debt, net of $413
income tax benefit.... (628)
--------- --------- --------- --------- -------- --------
Net income (loss)....... $ (1,777) $ 859 $ 346 $ (359) $ 3,140 $ (8,197)
========= ========= ========= ========= ======== ========
Income (loss) per share:
Income (loss) before
extraordinary item.... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,716 $ (8,084)
Extraordinary item..... (619)
--------- --------- --------- --------- -------- --------
Income (loss).......... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,097 $ (8,084)
========= ========= ========= ========= ======== ========
Weighted average common
shares outstanding..... 1,002,196 1,000,000 1,000,000 1,000,000 1,014 1,014
========= ========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-19
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------- ------------- ADDITIONAL RETAINED TOTAL
PAR PAR PAID-IN EARNINGS STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) EQUITY
------- ----- ------- ----- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
THE COMPANY
BALANCE AT JUNE 29, 1994
(INCEPTION)
Sale of common stock... 696,700 $7 303,300 $ 3 $10,936 $ 0 $10,946
Net loss............... (359) (359)
------- --- ------- --- ------- ------- -------
BALANCE AT JULY 31,
1994................... 696,700 7 303,300 3 10,936 (359) 10,587
Net income............. 346 346
------- --- ------- --- ------- ------- -------
BALANCE AT JULY 30,
1995................... 696,700 7 303,300 3 10,936 (13) 10,933
Sale of common stock... 8,997 100 100
Net loss (unaudited)... (1,777) (1,777)
------- --- ------- --- ------- ------- -------
BALANCE AT JANUARY 14,
1996................... 705,697 $ 7 303,300 $ 3 $11,036 $(1,790) $ 9,256
======= === ======= === ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
------------- ADDITIONAL RETAINED TOTAL
PAR PAID-IN EARNINGS STOCKHOLDERS'
SHARES VALUE CAPITAL (DEFICIT) EQUITY
------ ----- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
BALANCE AT AUGUST 2, 1992...... 1,014 $ 1 $126,420 $ 2,260 $128,681
Net loss...................... (8,197) (8,197)
----- ---- -------- ------- --------
BALANCE AT AUGUST 1, 1993...... 1,014 1 126,420 (5,937) 120,484
Purchase of common stock...... (284) (27,823) (27,823)
Net income.................... 3,140 3,140
----- ---- -------- ------- --------
BALANCE AT JUNE 29, 1994
(pre-acquisition)............. 730 1 98,597 (2,797) 95,801
Cancellation of Predecessor
equity....................... (730) (1) (98,597) 2,797 (95,801)
----- ---- -------- ------- --------
BALANCE AT JUNE 29, 1994
(post-acquisition)............ -- $-- $ -- $ -- $ --
===== ==== ======== ======= ========
</TABLE>
See accompanying notes.
F-20
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
---------------------------------------------------------------- -------------------------------
PERIOD FROM PERIOD FROM
24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 AUGUST 2, 1993 YEAR ENDED
JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 TO JULY 31, 1994 TO JUNE 28, 1994 AUGUST 1, 1993
---------------- ---------------- ------------- ---------------- ---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash provided (used) by
operating activities:
Net income (loss)....... $(1,777) $ 859 $ 346 $ (359) $3,140 $(8,197)
Adjustments to reconcile
net income (loss) to
net cash provided
by operating
activities:
Depreciation and amor-
tization............. 6,010 4,566 10,855 959 8,286 9,461
Amortization of de-
ferred
financing costs and
discount on long-term
debt................. 489 454 1,025 92 1,236 587
LIFO provision........ 359 359 325 270 228 708
Deferred income taxes. 81 374 26 3,172 (6,825)
Accreted interest on
debentures........... 1,085 973 2,136 195
Loss (gain) on
disposals of assets.. (344) (69) 590 (88)
Loss on partnership
liquidation.......... 8,900
Litigation settle-
ments................ (1,866) (1,866) 13,805
Adjust rentals to
straight-line........ 75 (220) (169) 75 51 (904)
Changes in operating
assets and
liabilities, net of
acquisition
adjustments:
Accounts and notes
receivable......... (1,599) (709) 184 (340) (225) (413)
Inventories, net of
LIFO............... (1,610) (9,385) (4,514) 4,147 (5,953) (504)
Prepaid expenses.... (360) (494) (2,067) 400 (354) (919)
Refundable income
taxes.............. 576 546 (1,925) (24) (157) (410)
Other assets........ 2 54 165
Accounts payable.... 4,373 7,170 9,851 (4,261) (1,340) 2,315
Accrued expenses and
other liabilities.. (6,504) 4,022 3,938 (33) 285 (299)
Income taxes pay-
able............... 733 (775)
------- ------ ------- ------ ------ -------
Net cash provided by
operating
activities............. $ 1,117 $7,089 $18,151 $1,078 $9,013 $16,607
======= ====== ======= ====== ====== =======
</TABLE>
See accompanying notes.
F-21
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
----------------------------------------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
---------------- ---------------- ------------- ----------------- ----------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash provided (used) by
investing activities:
Purchase of property
and equipment....... $(18,714) $(6,192) $(22,855) $ (271) $ (3,729) $(16,233)
Proceeds from sale of
assets.............. 7,656 681 8,464 4 6,074 13,745
Deferred gain on sale
of real estate...... 1,877
Payments for other
assets.............. (1,334) (1,183) (392) (35) (375)
Repayment of notes
receivable.......... 37 1,625 5,811 3,871 538
Advances to
partnerships........ (169) (1,901)
-------- ------- -------- ------- -------- --------
Net cash provided
(used) by investing
activities............ (12,355) (5,069) (8,972) (267) 7,889 (4,226)
-------- ------- -------- ------- -------- --------
Cash provided (used) by
financing activities:
Proceeds from
borrowings.......... 6,500 10,601
Principal payments on
borrowings.......... (3,010) (1,863) (3,178) (108) (19,303) (20,712)
Payments of debt
issuance costs...... (166) (317) (915) (226)
Proceeds from sale of
stock............... 100
Proceeds from
acquisition
financing, net...... 8,401
Payment of
acquisition costs... (2,947)
Purchase of preferred
stock from
affiliate........... (585)
-------- ------- -------- ------- -------- --------
Net cash provided
(used) by financing
activities............ (2,910) (2,029) (3,495) 4,431 (13,388) (10,337)
-------- ------- -------- ------- -------- --------
Increase (decrease) in
cash and short- term
investments........... (14,148) (9) 5,684 5,242 3,514 2,044
Cash and short-term
investments, beginning
of period............. 25,653 19,969 19,969 14,727 11,213 9,169
-------- ------- -------- ------- -------- --------
Cash and short-term
investments, end of
period................ $ 11,505 $19,960 $ 25,653 $19,969 $ 14,727 $ 11,213
======== ======= ======== ======= ======== ========
Supplemental cash flow
disclosures:
Interest paid......... $ 7,518 $ 5,811 $ 14,299 $ 1,025 $ 7,232 $ 5,959
Income taxes paid..... 2,643 573 3,198
Income tax refunds
received............. 576 1,958 1,578 11
Non-cash investing and
financing activities:
Capital lease
obligations entered
into................ $10,889 $ 4,948 $ 10,933 $ 4,929
Notes receivable
obtained through
sales of property
and equipment....... 11,126
Assets transferred to
affiliate in
exchange for
preferred stock..... 27,238
Notes receivable
obtained in exchange
for preferred stock. 27,823
Common stock acquired
from cancellation of
note receivable..... 27,823
</TABLE>
See accompanying notes.
F-22
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Smitty's
Supermarkets, Inc. (the "Company") and its wholly-owned subsidiaries. All
intercompany transactions and accounts are eliminated in consolidation. The
Company is a partner in a real estate development partnership which is being
accounted for under the equity method.
Statement Presentation
On June 29, 1994, the Company acquired Smitty's Super Valu, Inc. (the
"Predecessor"). The financial statements for both the Company and the
Predecessor are included herein.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest the last day of July.
The 1995, 1994 and 1993 fiscal years consisted of 52 weeks each.
Interim Financial Statements
The consolidated balance sheet of the Company as of January 14, 1996 and the
consolidated statements of operations and cash flows for the interim periods
ended January 14, 1996 and January 15, 1995 are unaudited, but include all
adjustments (consisting of only normal recurring accruals) which the Company
considers necessary for a fair presentation of its consolidated financial
position, results of operations and cash flows for these periods. These
interim financial statements do not include all disclosures required by
generally accepted accounting principles, and, therefore, should be read in
conjunction with the Company's financial statements and notes thereto included
herein. Results of operations for interim periods are not necessarily
indicative of the results for a full fiscal year.
Short-Term Investments
Short-term investments consist of highly liquid investments with original
maturities of three months or less. The Company considers such investments to
be cash equivalents for purposes of determining cash flow.
Inventories
Merchandise inventories are valued at LIFO (last-in, first-out) cost, which
is lower than market, for about 95% of the total inventory, and at the lower
of FIFO (first-in, first-out) cost or market for the balance of the inventory.
Property and Equipment
Owned property and equipment are stated at cost and capital lease assets are
stated at the present value of future rentals, less accumulated depreciation
and amortization.
Maintenance and repairs are charged against operations in the year incurred
and major additions to property and equipment are capitalized.
Depreciation and amortization are computed by the straight-line method based
upon the following lives:
<TABLE>
<S> <C>
Buildings and improvements................................. 40 years
Store fixtures and equipment............................... 10 years
Transportation equipment................................... 6 to 12 years
Leasehold improvements, capital leases and beneficial
leaseholds................................................ Term of lease
</TABLE>
F-23
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
acquired assets, less accumulated amortization. Goodwill is amortized on the
straight-line method over forty years. It is the Company's policy to
periodically review and evaluate the recoverability of the acquired
intangibles by assessing current and future profitability and cash flows and
to determine whether the amortization of the balance over its remaining life
can be recovered through expected future results and cash flows.
Deferred Charges
Deferred debt issuance costs are amortized using the interest method.
Property Held for Sale
Property held for sale is comprised of several undeveloped properties and is
valued at the lower of cost or estimated net realizable value.
Self-Insurance
The Company self-insures, with certain stop loss insurance coverage, for
workers' compensation, non-union employee health care and general liability
claims. Claims expense is recorded in the year of occurrence through the
accrual of claim reserves based on estimates of ultimate claims costs and
settlement expenses discounted at a rate of 8%.
Pre-opening and Remodel Costs
All costs associated with store openings and promotional costs associated
with major store remodels are charged to operations ratably over the twelve
months following store openings and remodel completion dates, respectively.
Income Taxes
Effective August 2, 1993, the Predecessor adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
the provisions of SFAS 109, deferred tax assets and liabilities are recognized
for the expected future tax consequences of events that have been included in
the financial statements or income tax returns. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the presentation in the 1995 financial statements.
2. BUSINESS ACQUISITION
On June 29, 1994, the Company acquired the Predecessor for $24,768 net of
transaction costs and the repayment or assumption of certain liabilities (the
"Acquisition").
The Acquisition has been accounted for by the purchase method. Accordingly,
the costs of the Acquisition were allocated to the assets acquired and
liabilities assumed based upon their respective fair values. The
F-24
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
allocation of the purchase price was finalized during 1995. Because of the
effects of the Acquisition, the consolidated financial statements of the
Company are not comparable to the consolidated financial statements of the
Predecessor.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $ 218,046
Fair value of liabilities assumed.............................. (226,094)
Excess costs over acquired net assets.......................... 32,816
---------
Total purchase price........................................... $ 24,768
=========
</TABLE>
In connection with the Acquisition on April 28, 1994, the Predecessor paid
$585 and transferred property and equipment and property held for sale with a
net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly-
owned subsidiary of the Predecessor's former sole shareholder, Steinberg
International, Inc. ("International"), in exchange for Holdings' preferred
stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased
certain shares of its common stock from International in consideration of a
$27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior
to the Acquisition, the Company transferred Holdings' preferred stock to
International in consideration of the repayment of the promissory note.
3. CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of short-term investments and receivables.
The Company's short-term investments are in high quality securities placed
with major banks and financial institutions. The Company's investment policy
limits its exposure to concentrations of credit risk.
The Company's receivables result primarily from vendor rebates and
allowances, and redemption of manufacturer coupons. The vendor rebates and
allowances reflect a broad base, while the coupons are concentrated with one
processor. As a consequence, concentrations of credit risk are limited. The
Company routinely assesses the financial strength of its vendors and coupon
processor.
4. INVENTORIES
If inventories had been valued using the FIFO method, inventories would have
been higher (lower) and gross profit and operating income would have been
greater as follows:
<TABLE>
<CAPTION>
GROSS
PROFIT AND
OPERATING
INVENTORIES INCOME
----------- ----------
<S> <C> <C>
THE COMPANY
July 30, 1995 and the year then ended............... $(4,370) $325
July 31, 1994 and the period from June 29, 1994to
July 31, 1994...................................... $(4,695) $270
PREDECESSOR
June 28, 1994 and the period from August 2, 1993to
June 28, 1994...................................... $ 4,776 $228
August 1, 1993 and the year then ended.............. $ 4,548 $708
</TABLE>
F-25
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
5. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases consist of
the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Land and improvements........................ $ 19,861 $ 24,332
Buildings and improvements................... 76,528 69,748
Store fixtures and equipment................. 32,163 16,697
Beneficial leaseholds........................ 9,233 9,233
-------- --------
137,785 120,010
Less accumulated depreciation and amortiza-
tion........................................ (9,496) (792)
-------- --------
$128,289 $119,218
======== ========
</TABLE>
Included in property and equipment above are assets recorded under capital
leases consisting of the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Land and improvements......................... $ 1,358 $ 1,358
Buildings and improvements.................... 21,211 21,296
Store fixtures and equipment.................. 4,948
Beneficial leaseholds......................... 9,233 9,233
------- -------
36,750 31,887
Less accumulated amortization................. (1,982) (165)
------- -------
$34,768 $31,722
======= =======
</TABLE>
At July 31, 1994, store fixtures and equipment and accumulated depreciation
and amortization includes $1,295 and $28, respectively, relating to subleased
equipment. At July 30, 1995 there were no store fixtures and equipment
subleased.
Depreciation expense relating to property and equipment are as follows:
<TABLE>
<S> <C>
THE COMPANY
Year ended July 30, 1995.......................................... $9,432
Period from June 29, 1994 to July 31, 1994........................ $ 792
PREDECESSOR
Period from August 2, 1993 to June 28, 1994....................... $7,324
Year ended August 1, 1993......................................... $8,261
</TABLE>
F-26
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Term loan payable to banks, interest at LIBOR rate
plus 2%, 8% at July 30, 1995, maturities to 1999. $ 37,382 $ 40,000
Senior subordinated notes, 12 3/4% interest, net
of debt discount of $496 and $552, respectively,
due 2004......................................... 49,504 49,448
Senior discount debentures, 13 3/4% interest, net
of debt discount of $506 and $552, respectively,
due 2006......................................... 16,819 14,637
Sinking fund bonds, 10 1/2% interest, semi-annual
maturities to 2016............................... 12,123 12,198
Mortgage notes payable, repaid in 1995............ 77
Capital lease obligations......................... 32,096 27,556
-------- --------
147,924 143,916
Less current portion.............................. (6,089) (2,560)
-------- --------
$141,835 $141,356
======== ========
</TABLE>
In July, 1994, the Company's subsidiary entered into a Credit Agreement
whereby the lender agreed to provide a $40,000 Term Loan Facility (the "Term
Loan") and a $20,000 Revolving Credit Facility (the "Revolving Loan"). At July
30, 1995, $37,382 was outstanding under the term loan and $1,640 of the
revolving loan was utilized for various outstanding letters of credit. No
compensating balances are required. The interest rate for both facilities is
equal to, at the Company's option, the bank's prime rate plus 0.75% or LIBOR
rate plus 2%.
In connection with the Acquisition described in Note 2, the Company issued
$29,025 Senior Discount Debentures (the "Debentures"). The Debentures are
issued at a discount to their aggregate principal amount and the original
issue discount in the Debenture accretes from the issue date until June 15,
1999. Cash interest will not accrue on the Debentures prior to June 15, 1999.
The Debentures will bear cash interest payable semi-annually in arrears on
June 15 and December 15. The Debentures may be redeemed beginning in 1999 at a
redemption price of 105%. The redemption price declines ratably to 100% in
2004.
The Company's subsidiary issued $50,000 principal amount of Senior
Subordinated Notes (the "Subordinated Notes") in connection with the
Acquisition described in Note 2. The Subordinated Notes bear interest, payable
semi-annually on June 15 and December 15 at an annual rate of 12.75%. The
Subordinated Notes are subordinated to all Senior Indebtedness (as defined) of
the Company's subsidiary, and may be redeemed on or after June 15, 1999 at a
redemption price of 105%. The redemption price declines ratably to 100% in
2000.
Under the most restrictive covenants of the Company's long-term debt
agreements, payments of cash dividends and acquisition of capital stock are
not permitted. Additionally, the agreements require maintenance of specified
ratios.
At July 30, 1995, substantially all of the Company's assets were pledged as
collateral for the Term Loan, the Revolving Loan and the Sinking fund bonds.
F-27
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Maturities of the long-term obligations as of July 30, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 6,089
1997........................................................... 10,194
1998........................................................... 12,169
1999........................................................... 14,282
2000........................................................... 1,755
Thereafter..................................................... 103,435
--------
$147,924
========
</TABLE>
7. LEASES
The Company is a party to a number of non-cancelable lease agreements for
store and warehouse facilities with remaining lease terms ranging from 1 to 25
years and, in certain instances, providing for renewal periods of 5 to 30
years. The Company also subleases store departments, warehouse facilities and
properties with remaining lease terms ranging from 1 to 10 years. At July 30,
1995, future minimum lease payments under capital leases and future minimum
rental payments under operating leases having initial or remaining non-
cancelable terms of more than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUBLEASE
LEASES LEASES RENTALS TOTALS
-------- --------- -------- --------
<S> <C> <C> <C> <C>
1996................................ $ 5,014 $ 10,253 $(1,669) $ 13,598
1997................................ 5,051 9,264 (1,108) 13,207
1998................................ 4,922 7,075 (903) 11,094
1999................................ 4,925 5,442 (861) 9,506
2000................................ 5,024 4,965 (828) 9,161
Thereafter.......................... 64,380 68,570 (2,042) 130,908
-------- -------- ------- --------
89,316 $105,569 $(7,411) $187,474
======== ======= ========
Less amount representing
executory costs.................... (5,658)
Less amount representing interest... (51,562)
--------
$ 32,096
========
</TABLE>
F-28
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Effective September, 1992, the Predecessor entered into an agreement to
lease its restaurant, snack bar/food court and candy departments to Morrison
Incorporated ("Morrison"). The agreement provided for an initial lease term of
ten years and three five-year renewal options. Minimum rentals under the lease
were $2,525 in the first year, $3,500 in the second year, and $4,000 per year
thereafter. In addition, Morrison was obligated to pay electricity and
property taxes for the leased premises. In September, 1994, the Company
resumed its food service operations and sales and costs attributed to such
operations are included in the Company's financial statements for the year
ended July 30, 1995. Results of operations prior to the agreement and
subsequent to September 24, 1994, for these departments are as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------- --------------
YEAR ENDED YEAR ENDED
JULY 30, 1995 AUGUST 1, 1993
------------- --------------
<S> <C> <C>
Sales........................................ $17,753 $2,476
Cost of sales................................ 6,329 933
------- ------
Gross profit................................. 11,424 1,543
Expenses..................................... 10,478 1,351
------- ------
Operating profit............................. $ 946 $ 192
======= ======
</TABLE>
Rental income from Morrison, determined on the basis of the straight-line
amounts of the total rentals during the ten-year lease term, are as follows:
<TABLE>
<S> <C>
THE COMPANY
Year ended July 30, 1995......................................... $2,783
Period from June 29, 1994 to July 31, 1994....................... $ 273
PREDECESSOR
Period from August 2, 1993 to June 28, 1994...................... $3,068
Year ended August 1, 1993........................................ $3,293
</TABLE>
Rent expense for all leases is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Minimum rentals......... $ 7,913 $ 625 $ 6,518 $ 5,169
Contingent rentals:
Capital................ 393 34 318 410
Operating.............. 31 6 34 176
Less sublease.......... (5,229) (471) (5,779) (5,891)
------- ----- ------- -------
$ 3,108 $ 194 $ 1,091 $ (136)
======= ===== ======= =======
</TABLE>
Contingent rental payments are principally determined on the basis of store
sales volume.
F-29
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
8. PENSION AND PROFIT-SHARING PLANS
The Company maintains a profit-sharing/401(k) plan for employees.
Contributions are made to the plan at the discretion of the Company's Board of
Directors. The Company also contributes to a multi-employer defined benefit
union pension plan covering union employees. Contributions to these plans are
as follows:
<TABLE>
<CAPTION>
PROFIT MUTLI-
SHARING EMPLOYER
401(K) PLAN PENSION PLAN
----------- ------------
<S> <C> <C>
THE COMPANY
Year ended July 30, 1995........................ $525 $1,402
Period from June 29, 1994 to July 31, 1994...... $ 38 $ 3
PREDECESSOR
Period from August 2, 1993 to June 28, 1994..... $386 $ 26
Year ended August 1, 1993....................... $360 $ 268
</TABLE>
At September 30, 1993, the date of the most recent actuarial valuation, the
assets of the union pension fund exceeded the liability for vested benefits.
The Company's relative position with the union plan is not determinable.
9. SEVERANCE AND EMPLOYMENT CONTRACT TERMINATION COSTS
During 1993, the Predecessor underwent a reorganization which resulted in
the elimination of various office, store and warehouse positions. The 1993
results of operations include charges of $329 for severance payments and
related benefits for employees whose positions were eliminated.
In February, 1994, the Predecessor and the Predecessor's chairman entered
into an amendment to the chairman's employment contract. Results of operations
for the period from August 2, 1993 to June 28, 1994 include a $2 million
charge for a payment to the chairman under the terms of the amendment.
10. LITIGATION SETTLEMENTS
In November, 1993, the Predecessor agreed to a settlement of a lawsuit in
which an adverse jury verdict had been rendered. Under the terms of the
settlement agreement, the Predecessor agreed to pay $4.75 million cash and
issue a $6.25 million two-year mortgage note. Fiscal 1993 results of
operations include an $11 million charge for the settlement, plus a $1.8
million charge for the Predecessor's litigation costs incurred in fiscal 1993
and expected to be incurred in fiscal 1994. The Predecessor used the proceeds
from a four-year term loan payable to bank to finance the cash payment. Also
in November, 1993, the Predecessor reached a settlement of a lawsuit filed by
a former supplier providing for a $500 cash payment and a $500 one-year
mortgage note. Fiscal 1993 results of operations include a $1 million charge
for this settlement. Both mortgage notes were repaid on June 29, 1994.
In October, 1993, the Predecessor was served with proceedings in Maricopa
County, Arizona Superior Court instituted by Morrison seeking rescission of
the 1992 lease agreement and damages of not less than $3,000. In August, 1994,
the Company settled its litigation with Morrison. The settlement provided for
the cancellation of the lease agreement on September 25, 1994, in
consideration for which Morrison paid the Company $2.6 million and transferred
title to all of its inventories and fixtures and equipment in the restaurant,
snack bar/food court and candy departments.
F-30
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
11. STEINBERG REORGANIZATION
In May, 1992, International's sole shareholder Steinberg, Inc. ("Steinberg")
filed for protection under Section C-36 of the CCAA. During the period from
June 29, 1994 to July 31, 1994, the period from August 2, 1993 to June 28,
1994 and fiscal 1993, the Predecessor incurred $50, $635 and $631,
respectively, of costs arising from the filing by Steinberg for protection
under Section C-36 of the CCAA and the subsequent reorganization of Steinberg.
In connection with the Acquisition, on April 28, 1994, the Predecessor paid
$585 and transferred property and equipment and property held for sale with a
net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly-
owned subsidiary of the Predecessor's former sole shareholder, Steinberg
International, Inc. ("International"), in exchange for Holdings' preferred
stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased
certain shares of its common stock from International in consideration of a
$27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior
to the Acquisition, the Predecessor transferred Holdings preferred stock to
International in consideration of the repayment of the promissory note.
12. LOSS ON PARTNERSHIP LIQUIDATION
A real estate development partnership in which the Predecessor was a partner
was liquidated in July, 1993. In connection with this liquidation, the
Predecessor obtained ownership of an operating shopping center property and an
undeveloped shopping center property in exchange for the forgiveness of notes
and accrued interest receivable from the partnership and its managing partner.
Fiscal 1993 results of operations include a $8,900 charge representing the
difference between the current value of the properties and the carrying value
of the notes and accrued interest receivable. The properties were transferred
to Holdings on April 28, 1994.
13. INCOME TAXES
In February, 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"), which supersedes Statement of Financial Accounting Standards No. 96
with the same title ("SFAS 96"). SFAS 96 was never adopted by the Predecessor.
The Predecessor adopted the provisions of SFAS 109 on August 2, 1993 and
elected not to restate prior year financial statements. The effect from prior
years of adopting SFAS 109 as of August 2, 1993 was not material.
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Current........ $281 $(24) $(1,093) $ 2,003
Deferred....... 374 26 3,172 (6,825)
---- ---- ------- -------
$655 $ 2 $ 2,079 $(4,822)
==== ==== ======= =======
</TABLE>
The provision for income taxes for the period from August 2, 1993 to June
28, 1994 is net of $413 income tax benefit relating to the loss on
extinguishment of debt.
F-31
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
A reconciliation of the provision (benefit) for income taxes and the amount
that would be computed using statutory federal income tax rates on income
before income taxes is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Income taxes computed at
statutory federal
income tax rates....... $ 340 $(121) $1,774 $(4,426)
State income taxes...... 56 (9) 293 (684)
Amortization of
intangible assets...... 298 16 (104) 259
Deduction of tax
goodwill............... (425)
Amortization of discount
on capital lease
obligations............ 77 70
Increase in valuation
allowance.............. 336
Other................... 50 116 39 (41)
----- ----- ------ -------
$ 655 $ 2 $2,079 $(4,822)
===== ===== ====== =======
</TABLE>
At July 30, 1995 the Company had minimum tax credit and general business
credit carryovers for tax purposes of $2,956 and $488, respectively. Upon
recognition, the minimum tax credit carryover will be credited to the
valuation allowance.
The income tax effects of loss carryforwards, tax credit carryforwards and
temporary differences between financial and income tax reporting that give
rise to the deferred income tax assets and liabilities under the provisions of
SFAS 109 are as follows:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................ $ 649 $ 547
Inventories........................................ 298 332
Other assets....................................... 59 59
Accrued liabilities................................ 15,145 9,425
Capital Leases..................................... 2,313
Net operating loss carryovers and credits.......... 11,515 12,587
-------- --------
Gross deferred tax assets......................... 29,979 22,950
Valuation allowance............................... (29,979) (19,998)
-------- --------
Net deferred tax assets........................... 2,952
-------- --------
Deferred tax liabilities:
Inventories........................................ (4,642) (4,686)
Property and equipment............................. (13,767) (16,922)
Other assets....................................... (358)
-------- --------
Gross deferred tax liability...................... (18,409) (21,966)
-------- --------
Net deferred tax liability........................ $(18,409) $(19,014)
======== ========
</TABLE>
The changes in deferred tax assets and liabilities during 1995 primarily
resulted from the Company's finalization of the allocation of the Acquisition
purchase price. See Note 2.
F-32
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
14. FAIR VALUE OF INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short Term Investments
The carrying amount approximates fair value because of the short maturity of
these instruments.
Accounts and Notes Receivable
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on quoted
market prices or if market prices are not available, the present value of the
underlying cash flows discounted at the Company's incremental borrowing rates.
The carrying amounts and fair values of the Company's significant financial
instruments at July 30, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Cash and short-term investments................ $25,653 $25,653
Accounts and Notes receivable.................. 7,700 7,700
Long-term debt................................. 147,924 143,888
</TABLE>
15. CONTINGENCIES
The Company or its subsidiaries are defendants in a number of cases
currently in litigation or potential claims encountered in the ordinary course
of business which are being vigorously defended. The Company believes that the
ultimate resolution of these matters will not have a material adverse effect
on the financial position of the Company.
16. RELATED PARTY TRANSACTIONS
The Company has a five-year consulting agreement with an affiliated company,
effective June 29, 1994 for management services. The agreement is
automatically renewed on January 1 of each year for a five-year term unless
ninety (90) days' notice is given by either party. The contract provides for
annual management fees in an amount equal to one-tenth of one percent of
consolidated sales of the Company and advisory fees for acquisition and
financing transactions.
Fees paid for management services were $600 and $50 for fiscal years ended
July 30, 1995 and the period from June 29, 1994 to July 31, 1994,
respectively. Advisory fees paid or accrued for financing transactions are
capitalized and amortized over the term of the related financing. In
connection with the Acquisition, capitalized fees of $3 million were paid to
this affiliated company in fiscal 1994 for acquisition services.
F-33
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(THOUSANDS OF DOLLARS)
17. OTHER INCOME (EXPENSE)--NET
The components of other income (expense) included in operating, selling,
general and administration expense are as follows:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Gain (loss) on real
estate disposals....... $(2,173) $ 41
Steinberg reorganization
costs.................. $(50) (635) (631)
Loss on partnership
liquidation............ (8,900)
Litigation settlements.. $1,866 (13,805)
Other................... 387
------ ---- ------- --------
$1,866 $(50) $(2,808) $(22,908)
====== ==== ======= ========
</TABLE>
18. SUBSEQUENT EVENT
On January 29, 1996, the Company entered into a definitive Recapitalization
Agreement and Plan of Merger (the "Recapitalization Agreement") by and among
Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's"), Cactus
Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of
Smith's ("Acquisition"), the Company and The Yucaipa Companies, a California
general partnership, pursuant to which Acquisition will be merged with and into
the Company (the "Merger"), subject to the satisfaction or waiver of various
conditions. The Company, as the surviving corporation in the Merger, will
become a wholly owned subsidiary of Smith's. Consummation of the Merger is
subject to various conditions, including the receipt of regulatory approvals
and other necessary consents, receipt of financing and consummation of the
Recapitalization described below.
Upon effectiveness of the Merger, each share of common stock of the Company,
without distinction as to class, will be exchanged for 3.011803 shares of
Smith's Class B Common Stock, par value $.01 per share, subject to adjustment
under certain circumstances. This represents an aggregate of 3,038,888 shares
of Smith's Class B Common Stock issuable as consideration in the Merger.
Pursuant to the Recapitalization Agreement, on the closing date of the
Merger, Smith's shall assume, repay, or cause to be repaid, all outstanding
principal and interest, and other amounts payable, under the 12 3/4% Senior
Subordinated Notes due 2004 of Smitty's Super Valu, Inc., a wholly owned
subsidiary of the Company, the 13 3/4% Senior Discount Debentures due 2006 of
the Company, and the Company's existing credit facility with The Chase
Manhattan Bank, N.A.
Pursuant to the Recapitalization Agreement, Smith's will, subject to various
conditions, commence a tender offer to purchase 50% of its outstanding Class A
and Class B Common Stock; issue an aggregate of approximately $650 million of
new senior and senior subordinated notes and approximately $75 million of new
preferred stock; borrow approximately $700 million under a new $845 million
bank credit facility; repay certain existing indebtedness and engage in certain
other recapitalization transactions (collectively, the "Recapitalization")
concurrently with the Merger. Smith's will also use its reasonable efforts to
cause Ronald W. Burkle, the Chairman of the Board of the Company, to be elected
Chief Executive Officer of Smith's upon the consummation of the Merger and the
Recapitalization.
F-34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... i
Summary................................................................... 1
Risk Factors.............................................................. 13
Pro Forma Capitalization.................................................. 18
Unaudited Pro Forma Combined Financial Statements......................... 19
Selected Historical Financial Data of Smith's............................. 26
Selected Historical Financial Data of
Smitty's................................................................. 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 38
Management................................................................ 48
Principal Stockholders.................................................... 50
Certain Relationships and Related Transactions............................ 52
Description of Notes...................................................... 57
Description of Capital Stock.............................................. 67
Description of New Credit Facility........................................ 71
Underwriting.............................................................. 74
Legal Matters............................................................. 75
Experts................................................................... 75
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-----------------
PROSPECTUS
-----------------
[LOGO OF SMITH'S FOOD & DRUG CENTERS(R)]
SMITH'S FOOD &
DRUG CENTERS, INC.
$250,000,000 % SENIOR NOTES DUE 2006
$400,000,000 % SENIOR SUBORDINATED NOTES DUE 2007
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH , 1996
PROSPECTUS
[LOGO OF SMITH'S FOOD & DRUG CENTERS(R)]
SMITH'S FOOD & DRUG CENTERS, INC.
75,000 SHARES
% CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
-----------
Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's" or the
"Company"), is offering 75,000 shares of Cumulative Redeemable Exchangeable
Preferred Stock, par value $.01 per share (the "New Preferred Stock"), as part
of the financing required to consummate the Recapitalization (as defined) of
Smith's and the Merger (as defined) of Smitty's Supermarkets, Inc., a Delaware
corporation ("Smitty's"), with a subsidiary of Smith's. Concurrently with this
offering, the Company is offering (the "Notes Offering," and together with this
offering, the "Offerings") $250,000,000 aggregate principal amount of its %
Senior Notes due 2006 (the "Senior Notes") and $400,000,000 aggregate principal
amount of its % Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes," and together with the Senior Notes, the "Notes"). Consummation of each
of the Offerings is conditioned upon the closing of the Merger and the
Recapitalization.
Dividends on the New Preferred Stock will accrue from , 1996 and will be
payable quarterly, commencing on , 199 , at the rate per annum of % of
the then effective liquidation preference per share. The Company, at its
option, may pay dividends on any dividend payment date occurring on or before
, 2001 by adding such dividends to the then effective liquidation
preference of the New Preferred Stock. The initial liquidation preference of
the New Preferred Stock will be $ per share. The New Preferred Stock is,
subject to certain conditions, redeemable, at the option of the Company, in
whole at any time or in part from time to time on or after , 1999 at the
redemption prices set forth herein, plus, without duplication, accrued and
unpaid dividends to the date of redemption. In addition, on or prior to ,
1999, the Company may, at its option and subject to certain conditions, use the
Net Cash Proceeds (as defined) of one or more Public Equity Offerings (as
defined) to redeem up to an aggregate of 35% of the shares of New Preferred
Stock originally issued at a redemption price equal to % of the effective
liquidation price thereof, plus, without duplication, accrued and unpaid
dividends to the date of redemption. The Company is required, subject to
certain conditions, to redeem
(continued on next page)
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- ------------------------------------------------------------------------------
Total...................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from date of original issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses of the Offerings payable by the Company,
estimated at $ .
-----------
The shares of New Preferred Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the New Preferred Stock will be made on or about , 1996, at the
offices of BT Securities Corporation, One Bankers Trust Plaza, New York, New
York.
-----------
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
-----------
The date of this Prospectus is , 1996.
<PAGE>
(continued from previous page)
all of the shares of New Preferred Stock outstanding on , 2008 at a
redemption price equal to 100% of the then effective liquidation preference
thereof, plus, without duplication, accrued and unpaid dividends to the date
of redemption. Upon the occurrence of a Change of Control (as defined), the
Company will, subject to certain conditions, offer to purchase all outstanding
shares of New Preferred Stock at a price equal to 101% of the then effective
liquidation preference thereof, plus, without duplication, accrued and unpaid
dividends to the date of purchase.
Subject to certain conditions, the New Preferred Stock is exchangeable in
whole, but not in part, at the option of the Company, on any dividend payment
date, for the Company's % Subordinated Exchange Debentures due 2008
(including any such securities paid in lieu of cash interest, as described
herein, the "Exchange Debentures"). Interest on the Exchange Debentures will
be payable at a rate of % per annum and will accrue from the date of
issuance thereof. Interest on the Exchange Debentures will be payable semi-
annually on and , in cash or, at the option of the Company, on or
prior to , 2001, in additional Exchange Debentures, commencing on the
first such date after the exchange of the Exchange Debentures for the New
Preferred Stock. The Exchange Debentures will mature on , 2008 and are,
subject to certain conditions, redeemable, at the option of the Company, in
whole or in part, on or after , 1999, at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. In
addition, on or prior to , 1999, the Company may, at its option and
subject to certain conditions, use the Net Cash Proceeds of one or more Public
Equity Offerings to redeem up to an aggregate of 35% of the principal amount
of the Exchange Debentures originally issued.
The Exchange Debentures will be subordinated to all existing and future
Senior Indebtedness (as defined) of the Company, including the New Credit
Facility (as defined) and the Notes. At December 30, 1995, on a pro forma
basis after giving effect to the Transactions (as defined), the Company would
have had approximately $1,034.2 million aggregate principal amount of Senior
Indebtedness outstanding. In addition, the Exchange Debentures will be
effectively subordinated to all existing and future liabilities, including
indebtedness, of the subsidiaries of the Company. At December 30, 1995, on a
pro forma basis after giving effect to the Transactions, the Company's
subsidiaries would have had indebtedness and other liabilities reflected on
the Company's consolidated balance sheet, including trade payables and accrued
expenses (but excluding guarantees of Senior Indebtedness), of approximately
$148.4 million.
<PAGE>
THE OFFERINGS
THE NEW PREFERRED STOCK:
Securities Offered.......... 75,000 shares of % Cumulative Redeemable
Exchangeable Preferred Stock, par value $.01 per
share.
Issue Price................. $ per share plus accrued dividends.
Liquidation Preference...... Initially $ per share. See "Dividends" below.
Optional Redemption......... The New Preferred Stock is, subject to
contractual and other restrictions, redeemable,
at the option of the Company, in whole at any
time or in part from time to time, on or after
, 1999 at the redemption prices set forth
herein plus, without duplication, accrued and
unpaid dividends to the date of redemption. In
addition, on or prior to , 1999, the Company
may, at its option and subject to certain
conditions, use the Net Cash Proceeds of one or
more Public Equity Offerings to redeem up to an
aggregate of 35% of the shares of the New
Preferred Stock originally issued at a redemption
price equal to % of the then effective
liquidation preference thereof, plus, without
duplication, accrued and unpaid dividends to the
date of redemption.
Mandatory Redemption........ The Company is required, subject to certain
conditions, to redeem all of the shares of New
Preferred Stock outstanding on , 2008 at a
redemption price equal to 100% of the then
effective liquidation preference thereof, plus,
without duplication, accrued and unpaid dividends
to the date of redemption.
Dividends................... At a rate equal to % per annum of the then
effective Liquidation preference per share,
cumulative and, when declared, payable quarterly
beginning , 1996 and accumulating from the
date of issuance of the New Preferred Stock. The
Company, at its option, may pay dividends on any
dividend payment date occurring on or before
, 2001 by adding such dividends to the then
effective liquidation preference of the New
Preferred Stock. The New Credit Facility and the
indentures governing the Notes will restrict the
payment of cash dividends on the New Preferred
Stock.
Dividend Payment Dates...... , , and , commencing on ,
199 .
Voting...................... The New Preferred Stock will be non-voting,
except as otherwise required by law and except in
certain circumstances described herein, including
(i) amending certain rights of the holders of the
New Preferred Stock and (ii) the issuance of any
class of equity securities that ranks on parity
with or senior to the New Preferred Stock.
Exchange Provisions......... The New Preferred Stock is exchangeable into the
Exchange Debentures, at the Company's option,
subject to certain conditions, in whole, but not
in part, on any scheduled dividend payment date.
P-7
<PAGE>
Ranking..................... The New Preferred Stock, will, with respect to
dividend rights and rights on liquidation,
winding-up and dissolution of the Company, rank,
subject to certain conditions, (i) senior to (a)
all classes of Common Stock of the Company and
(b) each other class of capital stock or series
of preferred stock issued by the Company after
the Offering 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 reach
other class of capital stock or series of
preferred stock issued by the Company after the
Offering, 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 Offering the terms of which
specifically provide that such series will rank
senior to the New Preferred Stock.
Change of Control........... In the event of a Change of Control, the Company
will, subject to certain conditions, offer to
purchase all outstanding New Preferred Stock at a
purchase price of 101% of the then effective
liquidation preference thereof, plus, without
duplication, accrued and unpaid dividends to the
date of repurchase. The New Credit Facility and
the indentures governing the Notes will limit the
ability of the Company to make an offer to
purchase the New Preferred Stock in the event of
a Change of Control.
Use of Proceeds............. The net proceeds of this Offering will be used to
provide a portion of the funds necessary to
consummate the Transactions.
THE EXCHANGE DEBENTURES:
Issue....................... Up to $ of % Subordinated Exchange
Debentures due 2008, issuable in exchange for the
New Preferred Stock in an aggregate principal
amount equal to the then effective liquidation
preference of the New Preferred Stock on the date
fixed for the exchange thereof (including any and
all accrued and unpaid dividends whether or not
added to the liquidation preference since the
issue date). The New Credit Facility and the
indentures governing the Notes will limit the
ability of the Company to issue the Exchange
Debentures.
Maturity.................... , 2008.
Interest Rate and Payment The Exchange Debentures will bear interest at a
Dates....................... rate of % per annum. Interest will accrue from
the date of issuance and will be payable on
and of each year, commencing with the first
such date to occur after issuance in cash or, at
the option of the Company, on or before 2001, in
additional Exchange Debentures.
P-8
<PAGE>
Optional Redemption......... The Exchange Debentures are, subject to
contractual and other restrictions, redeemable,
at the option of the Company, in whole at any
time or in part from time to time on or after
, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest to the
date of redemption. In addition, on or prior to
, 1999, the Company may, at its option and
subject to certain conditions, use the Net Cash
Proceeds of one or more Public Equity Offerings
to redeem up to an aggregate of 35% of the
principal amount of the Exchange Debentures
originally issued, at a redemption price equal to
% of the principal amount thereof plus accrued
and unpaid interest, if any, to the redemption
date.
Ranking..................... The Exchange Debentures will be subordinated to
all existing and future Senior Indebtedness of
the Company, including the New Credit Facility
and the Notes. At December 30, 1995 on a pro
forma basis after giving effect to the
Transactions, the Company would have had
approximately $1,034.2 million aggregate
principal amount of Senior Indebtedness
outstanding.
In addition, the Exchange Debentures will be
effectively subordinated to all existing and
future liabilities, including indebtedness, of
the subsidiaries of the Company. At December 30,
1995 on a pro forma basis after giving effect to
the Transactions, the Company's subsidiaries
would have had indebtedness and other liabilities
reflected on the Company's consolidated balance
sheet, including trade payables and accrued
expenses (excluding guarantees of Senior
Indebtedness), of approximately $148.4 million.
Change of Control........... In the event of a Change of Control, the Company
will, subject to certain conditions, offer to
purchase all outstanding Exchange Debentures at a
purchase price of 101% of the principal amount
thereof, plus accrued and unpaid interest to the
date of purchase. The Credit Agreement and the
indentures governing the New Notes will limit the
Company's ability to make an offer to purchase
the Exchange Debentures in the event of a Change
of Control.
CONCURRENT OFFERINGS:
Senior Notes and Senior
Subordinated Notes.......... Concurrently with the offering of New Preferred
Stock, the Company is offering $250,000,000
aggregate principal amount of % Senior Notes due
2006 and $400,000,000 aggregate principal amount
of % Senior Subordinated Notes due 2007. The
Offerings are conditioned upon each other. In
addition, the consummation of each of the
Offerings is a condition to the Company's
simultaneous obligation to consummate the Merger
and the Recapitalization. See "Summary--The
Transactions."
P-9
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth summary historical financial data of Smith's
for the five fiscal years ended December 30, 1995, which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Smith's and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
OPERATING DATA:
Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7
Gross profit........... 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative ex-
penses................ 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization.............. 50.5 67.8 82.2 94.5 105.0
Interest expense....... 30.3 36.1 44.6 53.7 60.5
Restructuring charges
(a)................... -- -- -- -- 140.0
Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5)
Ratio of earnings to
fixed charges
and preferred stock
dividends (b)......... 3.02x 3.06x 2.55x 2.18x 1.92x
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt (c)......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period (d)............ 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
EBITDA (e)............. $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin (f)...... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with exiting California pursuant to the
California Divestiture. See Note K to Notes to Consolidated Financial
Statements of Smith's included elsewhere herein.
(b) For purposes of computing the ratio of earnings to fixed charges and
preferred stock dividends, "earnings" consist of income (loss) before
income taxes, restructuring charges 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).
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) "EBITDA" represents income (loss) before interest expense, income taxes,
depreciation and amortization expense, LIFO provision and restructuring
charges. EBITDA is a widely accepted financial indicator of a company's
ability to service debt. However, EBITDA should not be construed as an
alternative to operating income or to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles)
and should not be construed as an indication of Smith's operating
performance or as a measure of liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(f) EBITDA margin represents EBITDA as a percentage of net sales.
P-12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
the securities being sold in the Offerings.
LEVERAGE AND DEBT SERVICE
Following the consummation of the Transactions, the Company will be highly
leveraged. At December 30, 1995, pro forma for the Transactions, the Company's
total debt and stockholders' equity deficit would have been $1,477.7 million
and $69.2 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 an additional $73.0 million available to be
borrowed under the New Revolving Facility on a pro forma basis, subject to the
borrowing conditions contained therein. On the same pro forma basis, for the
52 weeks ended December 30, 1995, the Company's ratio of earnings to fixed
charges and preferred stock dividends would have been inadequate to cover
fixed charges and preferred stock dividends by $19.8 million. However, such
earnings include non-cash charges of $143.6 million, primarily consisting of
depreciation and amortization and preferred stock accretion. In addition, as
of December 30, 1995, after giving effect to the Transactions, scheduled
payments under net operating leases of the Company and its subsidiaries for
the twelve months following the Merger would have been approximately $36.9
million. The Company's ability to make scheduled payments of the principal of,
or interest on, or to refinance its indebtedness (including the Notes) and to
make scheduled payments under its operating leases depends on its future
performance, which is subject to economic, financial, competitive and other
factors beyond its control.
Based upon the current level of operations and anticipated cost savings and
future growth, the Company believes that its cash flow from operations,
together with borrowings under the New Revolving Facility and its other
sources of liquidity (including leases), will be adequate to meet its
anticipated requirements for working capital, capital expenditures, lease
payments, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate cash flow at or
above current levels or that anticipated cost savings or future growth can be
achieved. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt and make necessary capital or
other expenditures, or if its future cash flows are insufficient to amortize
all required principal payments out of internally generated funds, the Company
may be required to refinance all or a portion of its existing debt, sell
assets or obtain additional financing. There can be no assurance that any such
refinancing or asset sales would be possible or that any additional financing
could be obtained, particularly in view of the Company's high level of debt
following the Transactions and the fact that substantially all of its assets
will be pledged to secure the borrowings under the New Credit Facility and
other secured obligations.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following:
(a) the Company will have significant cash requirements to service debt,
reducing funds available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (b) the Company's leveraged position will
increase its vulnerability to competitive pressures; (c) the financial
covenants and other restrictions contained in the New Credit Facility and
other agreements relating to the Company's indebtedness and in the Indentures
will require the Company to meet certain financial tests and will restrict its
ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, preferred or common stock; and (d) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes will be limited. The Company's continued growth depends, in
part, on its ability to continue its expansion and store conversion efforts,
and therefore its inability to finance capital expenditures through borrowed
funds or otherwise could have a material adverse effect on the Company's
future operations. Moreover, any default under the documents governing the
indebtedness of the Company could have a significant adverse effect on the
market value of the Notes.
P-13
<PAGE>
The Company's capital structure immediately after the Transactions will
include a significant amount of floating rate indebtedness, causing the
Company to be significantly more sensitive to prevailing interest rates than
has historically been the case. The Company intends to enter into interest
rate protection agreements which, for the duration of such agreements, will
effectively provide fixed rates of interest or ceiling rates of interest on a
portion of such floating rate indebtedness. There can be no assurance that the
Company will be able to enter into such agreements on favorable terms. See
"Description of New Credit Facility." In addition, following the Transactions,
the Company's blended average rates of interest are anticipated to be higher
than the rates of interest on the Company's indebtedness outstanding
immediately prior to the Transactions.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Management of the Company has estimated that approximately $25 million of
annualized net cost savings (as compared to such costs for the pro forma
combined fiscal year ended December 30, 1995) can be achieved over a three-
year period as a result of integrating the Arizona operations of Smith's and
Smitty's. The estimates of potential cost savings contained in this Prospectus
are forward looking statements that are inherently uncertain. Actual cost
savings, if any, could differ materially from those projected. All of these
forward looking statements are based on estimates and assumptions made by
management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict; therefore, undue reliance
should not be placed upon such estimates. There can be no assurance that the
savings anticipated in these forward looking statements will be achieved. The
following important factors, among others, could cause the Company not to
achieve the cost savings contemplated herein (principally those set forth in
"Summary--Operating Strategy" and "Business--Operating Strategy") or otherwise
cause the Company's results of operations to be adversely affected in future
periods: (i) continued or increased competitive pressures from existing
competitors and new entrants, including price-cutting strategies; (ii)
unanticipated costs related to the Transactions and the integration strategy;
(iii) loss or retirement of key members of management or the termination of
the Management Services Agreement with Yucaipa; (iv) inability to negotiate
more favorable terms with suppliers or to improve working capital management;
(v) increases in interest rates or the Company's cost of borrowing or a
default under any material debt agreements; (vi) inability to develop new
stores in advantageous locations or to successfully convert existing stores;
(vii) prolonged labor disruption; (viii) deterioration in general or regional
economic conditions; (ix) adverse state or federal legislation or regulation
that increases the costs of compliance, or adverse findings by a regulator
with respect to existing operations; (x) loss of customers as a result of the
conversion of store formats; (xi) adverse determinations in connection with
pending or future litigations or other material claims against the Company;
(xii) inability to achieve future sales levels and other operating results
that support the cost savings, and (xiii) the unavailability of funds for
capital expenditures. Many of such factors are beyond the control of the
Company. In addition, there can be no assurance that unforeseen costs and
expenses or other factors will not offset the projected cost savings in whole
or in part.
ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE TRANSACTIONS
Upon consummation of the Transactions, the Company anticipates that it would
record charges to earnings in connection with (i) the adoption of a strategy
to dispose of certain real estate assets in California, (ii) the payment of
certain refinancing premiums and the write-off of certain debt issuance costs,
(iii) the purchase of certain management stock options and (iv) the
integration of its Arizona operations with Smitty's. As a result of the
foregoing, the Company anticipates that it would record a substantial charge
to earnings for the quarter in which the Transactions are consummated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores and the newer "alternative format" food stores, including warehouse
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
P-14
<PAGE>
products, service, product variety and store condition. The Company regularly
monitors its competitors' prices and adjusts its prices and marketing strategy
as management deems appropriate in light of existing conditions. Some of the
Company's competitors have greater financial resources than the Company and
could use those resources to take steps which could adversely affect the
Company's competitive position. The Company's ability to respond to
competitive pressures could be adversely affected by its highly leveraged
financial condition. See "Business--Competition."
CONTROL OF THE COMPANY
The Company's Series A Common Stock and Series I Preferred Stock are each
entitled to ten votes per share and the Company's Series B Common Stock is
entitled to one vote per share. Upon consummation of the Transactions, members
of the Smith Group (as defined) will have beneficial ownership, in the
aggregate, of approximately 24.5% of the outstanding Common Stock and 31.6% of
the outstanding Series I Preferred Stock of the Company, representing
approximately 41.8% of the aggregate voting power of the Company's capital
stock, and certain affiliates of Yucaipa will have beneficial ownership of
approximately 13.6% of the total outstanding Common Stock of the Company,
representing approximately 1.3% of the aggregate voting power of the Company's
outstanding capital stock. Pursuant to a standstill agreement (the "Standstill
Agreement") entered into by such Smith family members (the "Smith Group"),
certain affiliates of Yucaipa (the "Yucaipa Group") and the Company, upon
consummation of the Recapitalization the Company will use its best efforts to
reconstitute its Board of Directors to consist of seven directors, and each of
the Smith Group and the Yucaipa Group will have the right to nominate two
directors so long as it holds at least 8% of the outstanding Common Stock and
the right to nominate one director so long as it holds at least 5% of the
outstanding Common Stock. As a result of the ownership structure of the
Company and the contractual rights described above, the voting and management
control of the Company is highly concentrated. The Smith Group has effective
control of the Company and will effectively be able to direct the actions of
the Company with respect to matters such as the payment of dividends, material
acquisitions and dispositions and other extraordinary corporate transactions.
See "Certain Relationships and Related Transactions," "Principal Stockholders"
and "Description of Capital Stock."
NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS
Upon consummation of the Transactions, substantially all of the existing
members of the Company's Board of Directors will resign and be replaced by the
new directors identified in this Prospectus. Jeffrey P. Smith will remain as
Chairman of the Board but will resign as Chief Executive Officer of the
Company. Ronald W. Burkle, the managing general partner of Yucaipa, will be
appointed Chief Executive Officer of the Company and Allen R. Rowland will
continue his recent appointment as President and Chief Operating Officer. As a
result, the Company's senior executive officers and a majority of the members
of the Board of Directors will be new appointees. There can be no assurance
that the changes in the Company's Board of Directors or senior management will
not adversely affect the Company's operating performance. Mr. Burkle will
provide his services as Chief Executive Officer pursuant to the Management
Services Agreement between the Company and Yucaipa; however, such agreement
does not require Mr. Burkle to spend any specified amount of time on Company
affairs. Yucaipa will receive an annual fee of $1 million for providing the
services of Mr. Burkle and the other partners and employees of Yucaipa. The
Management Services Agreement may be terminated by the Company's Board of
Directors on 90 days' notice or by either party upon the occurrence of certain
events. If the Company seeks to terminate the Management Services Agreement,
subject to limited exceptions, it is required to pay Yucaipa a termination fee
of between $5 million and $10 million, depending on the time of termination.
Yucaipa will also receive certain fees in connection with the consummation of
the Recapitalization. See "Management" and "Certain Relationships and Related
Transactions."
CONTINGENT LIABILITIES RELATING TO CALIFORNIA DIVESTITURE
In connection with closing stores and otherwise redeploying assets, the
Company has assigned leases and subleased stores and other facilities at
various times, including the sublease to Ralphs of the Company's Riverside,
California distribution center and dairy plant and the assignment or sublease
of 10 stores to various
P-15
<PAGE>
supermarket companies (including 6 to Ralphs) in connection with the
California Divestiture. Since the Company will generally remain either
primarily or secondarily liable for the underlying lease obligations with
respect to these stores and other facilities, the Company has a contingent
liability to the extent the Company's sublessees or assignees default in the
performance of their obligations under their respective sublease or underlying
lease. See "Business--California Divestiture."
LIMITATIONS ON ABILITY OF THE COMPANY TO PAY DIVIDENDS
The Company's ability to pay dividends on the New Preferred Stock and to
issue the Exchange Debentures will be limited by restrictions in agreements
governing the Company's indebtedness, including the New Credit Facility and
the Notes. See "Description of New Credit Facility--Covenants" and
"Description of Notes-- Covenants--Restricted Payments."
In addition to contractual restrictions, under Delaware law, the Company may
declare and pay dividends or make other distributions on its capital stock,
including the New Preferred Stock, only out of surplus, as defined by the
Delaware General Corporation Law, or, in case there shall be no surplus, out
of its net profits for the fiscal year in which the dividend or distribution
is declared or for the immediately preceding fiscal year. Surplus is defined
as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. In order to
pay dividends in cash, the Company must have surplus or net profits equal to
the full amount of the cash dividend at the time such dividend is declared.
In determining the Company's ability to pay dividends, Delaware law permits
the Board of Directors of the Company to revalue the Company's assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the New
Preferred Stock.
RANKING OF THE NEW PREFERRED STOCK AND THE EXCHANGE DEBENTURES
The New Preferred Stock will rank junior in right of payment to all existing
and future liabilities and obligations of the Company (other than Common Stock
or any other preferred stock of the Company which by its terms is on parity
with or junior to the New Preferred Stock).
The Exchange Debentures, if issued, will be general unsecured obligations of
the Company and will be subordinated to all existing and future Senior
Indebtedness of the Company, including the New Credit Facility and the Notes.
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the Company would have had approximately $1,034.2 million
aggregate principal amount of Senior Indebtedness outstanding. In addition,
the Exchange Debentures will be effectively subordinated to all existing and
future liabilities, including indebtedness, of the subsidiaries of the
Company. At December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the Company's subsidiaries would have had indebtedness and other
liabilities reflected on the Company's consolidated balance sheet (other than
guarantees of the New Credit Facility), including trade payables and accrued
expenses, of approximately $148.4 million. In the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company and/or
its subsidiaries will only be available to pay the obligations of the Exchange
Debentures after the Senior Indebtedness of the Company and the liabilities of
the Company's subsidiaries have been paid in full. The Exchange Indenture will
contain certain covenants that, among other things, limit the ability of the
Company or its subsidiaries to incur additional indebtedness, pay dividends or
make other restricted payments, enter into certain transactions with
affiliates, or merge or consolidate with or transfer all or substantially all
of their assets to any other person. See "Description of the New Preferred
Stock and Exchange Debentures--The Exchange Debentures--Subordination."
P-16
<PAGE>
FEDERAL INCOME TAXATION OF NEW PREFERRED STOCK
Dividends paid on the New Preferred Stock, to the extent paid out of the
Company's current and/or accumulated earnings and profits for tax purposes,
will be ordinary income and, subject to certain limitations and risks
discussed under "Certain Federal Income Tax Considerations," will be eligible
for any dividend received deduction generally allowed to corporations that
meet certain requirements. The Company is not in a position at the present
time to state whether there will be current or accumulated earnings and
profits in 1996 and future years sufficient to result in dividend treatment on
distributions on the New Preferred Stock. Further, the holders of the New
Preferred Stock will bear the risk that the Company will elect to exchange the
New Preferred Stock for the Exchange Debentures; after such exchange, the
interest paid on the Exchange Debentures will not qualify for any dividends-
received deduction. See "Certain Federal Income Tax Considerations."
ABSENCE OF ESTABLISHED MARKET FOR THE NEW PREFERRED STOCK OR EXCHANGE
DEBENTURES
There is no established market for the New Preferred Stock or the Exchange
Debentures and there can be no assurance as to the liquidity of any markets
that may develop for such securities, the ability of holders of the New
Preferred Stock or Exchange Debentures to sell their New Preferred Stock or
Exchange Debentures, or the price at which holders would be able to sell such
securities. Future trading prices of the Preferred Stock and the Exchange
Debentures will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. The Underwriters have advised the Company that they
currently intend to make a market in the New Preferred Stock. However, the
Underwriters are not obligated to do so and any market-making may be
discontinued at any time, by any or all of them, without notice.
P-17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth selected historical financial data of Smith's
for the five fiscal years ended December 30, 1995 which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical consolidated financial statements of Smith's and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
OPERATING DATA:
Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7
Gross profit........... 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative ex-
penses............... 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization............... 50.5 67.8 82.2 94.5 105.0
Interest expense....... 30.3 36.1 44.6 53.7 60.5
Restructuring charges
(a).................... -- -- -- -- 140.0
Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5)
Ratio of earnings to
fixed charges
and preferred stock
dividends (b)........ 3.02x 3.06x 2.55x 2.18x 1.92x
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt (c)......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock.................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................. $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period (d)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
EBITDA (e)............. $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin (f)...... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture.
(b) For purposes of computing the ratio of earnings to fixed charges and
preferred stock dividends, "earnings" consist of income (loss) before
income taxes, restructuring charges 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).
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) "EBITDA" represents income (loss) before interest expense, income taxes,
depreciation and amortization expense, LIFO provision and restructuring
charges. EBITDA is a widely accepted financial indicator of a company's
ability to service debt. However, EBITDA should not be construed as an
alternative to operating income or to cash flows from operating activities
(as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of Smith's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(f) EBITDA margin represents EBITDA as a percentage of net sales.
P-26
<PAGE>
DESCRIPTION OF NEW PREFERRED STOCK
AND EXCHANGE DEBENTURES
THE NEW PREFERRED STOCK
The summary contained herein of certain provisions of the New Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Certificate of Designation relating
thereto, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part, to which exhibit reference is
hereby made. The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions."
GENERAL
The Company is authorized to issue 85,000,000 shares of preferred stock,
$0.01 par value per share. As of the date of this Prospectus, shares
of preferred stock are outstanding on the date of this Prospectus. The
Certificate of Incorporation of the Company authorizes the Board of Directors
of the Company, without stockholder approval, to issue classes of preferred
stock from time to time in one or more series, with such designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions as may be determined by the Board
of Directors; provided, however, that (i) no series so designated shall have
rights or preferences superior to the rights and preferences of the Series I
New Preferred Stock and (ii) no share of preferred stock other than Series I
New Preferred Stock shall be entitled to more than one vote for the election
of directors of the Company or one vote upon any other matter presented to the
stockholders for their vote or approval. The Board of Directors of the Company
has adopted resolutions creating a maximum of shares of New Preferred
Stock and will file a Certificate of Designation with respect thereto with the
Secretary of State of the State of Delaware as required by Delaware law.
Subject to certain conditions, the New Preferred Stock is exchangeable for
Exchange Debentures at the option of the Company on any Dividend Payment Date
(as defined below). The New Preferred Stock, when issued and paid for by the
Underwriters in accordance with the terms of the Underwriting Agreement (as
defined herein), will be fully paid and non-assessable, and the holders
thereof will not have any subscription or preemptive rights related thereto.
will be the transfer agent and registrar for the New Preferred Stock (the
"Registrar").
RANK
With respect to dividend rights and rights on liquidation, winding up and
dissolution of the Company, the New Preferred Stock will rank (i) senior to
(a) all classes of Common Stock of the Company and (b) each other class of
capital stock or series of preferred stock issued by the Company after the
Offering the terms of which specifically provide that such class or series
will rank junior to the New Preferred Stock or junior or on a parity with any
class of Common Stock or which do not specify their rank (collectively
referred to with the Common Stock of the Company as "Junior Securities"), (ii)
on a parity with each other class of capital stock or series of preferred
stock issued by the Company after the Offering the terms of which specifically
provide that such class or series will rank on a parity with the New Preferred
Stock as to dividend distributions and distributions upon liquidation, winding
up and dissolution of the Company (collectively referred to as "Parity
Securities"); provided, however, that any such Parity Securities that were not
approved by a vote of holders of New Preferred Stock as described in the next
following sentence shall be deemed to be Junior Securities and not Parity
Securities and (iii) junior to each other class of capital stock or other
series of preferred stock issued by the Company after the Offering the terms
of which specifically provide that such series will rank senior to the New
Preferred Stock (collectively referred to as "Senior Securities"). The New
Preferred Stock will be subject to the issuance of Junior Securities, Parity
Securities and Senior Securities; provided, however, that the Company may not
issue any Parity Securities or Senior Securities or any obligation or security
convertible into or evidencing the right to purchase Parity Securities or
Senior Securities without the approval of at least a majority of the shares of
New Preferred Stock then outstanding, except that without the approval of the
holders of New Preferred Stock, the Company may issue or have outstanding
shares of Parity Securities issued from time to time in exchange for, or all
of the proceeds of which are used to redeem or repurchase, any or all of the
shares of New Preferred Stock.
P-57
<PAGE>
DIVIDENDS
Holders of New Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, dividends on the New Preferred Stock, at a rate per annum
equal to % of the then effective liquidation preference per share of New
Preferred Stock. Dividends will accrue from the date of issuance and will be
payable quarterly in arrears on , , and of each year (each, a "Dividend
Payment Date"), commencing on . Dividends, whether or not declared, will
cumulate without interest until declared and paid. If any dividend payable on
any Dividend Payment Date on or before is not declared or paid in full in cash
on such Dividend Payment Date the amount payable that is not paid in cash on
such Dividend Payment Date will be added to the liquidation preference of the
New Preferred Stock on such Dividend Payment Date and will be deemed paid in
full. The Company does not expect to pay dividends on the New Preferred Stock
in cash on or prior to . The Loan Agreement will permit the Company to pay
cash dividends on the New Preferred Stock only to the extent the Company could
make a restricted payment thereunder and only if no default or event of
default thereunder shall have occurred and be continuing or would result
therefrom. See "Description of New Credit Facility."
Each dividend on the New Preferred Stock will be payable to the holders of
record of the New Preferred Stock as they appear on the register of the
Registrar on such record date as may be fixed by the Board of Directors of the
Company, which record date will not be less than 10 nor more than 60 days
prior to the applicable Dividend Payment Date. Dividends will cease to accrue
in respect of shares of the New Preferred Stock on the Exchange Date (as
defined below) or on the date of their earlier redemption or repurchase by the
Company, unless the Company fails to issue the appropriate aggregate principal
amount of Exchange Debentures in respect of the New Preferred Stock on the
Exchange Date or fails to pay the relevant redemption or repurchase price on
the date fixed for redemption or repurchase.
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Securities for any period unless full cumulative
dividends have been paid or set apart for such payment on the New Preferred
Stock. If full cumulative dividends have not been so paid, the New Preferred
Stock will share dividends pro rata with the Parity Securities. No dividends
may be declared or paid, nor may funds be set aside for such payment, on
Junior Securities, except dividends on Junior Securities which are paid in
additional Junior Securities (other than Disqualified Stock), and no Parity
Securities or Junior Securities may be repurchased, redeemed or otherwise
retired, nor may funds be set apart for such payment, if full cumulative
dividends have not been paid on the New Preferred Stock.
REDEMPTION OF NEW PREFERRED STOCK
OPTIONAL. The New Preferred Stock will be redeemable (subject to contractual
and other restrictions with respect thereto and to legal availability of funds
therefor), at the option of the Company, in whole at any time or in part from
time to time, at the following redemption prices (expressed as percentages of
the then effective liquidation preference) if redeemed during the 12-month
period commencing on of the year set forth below, plus, in each case,
without duplication, all accrued and unpaid dividends (including an amount
equal to a prorated dividend from the last Dividend Payment Date immediately
prior to the redemption date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option, use the
Net Cash Proceeds of one or more Public Equity Offerings to redeem up to an
aggregate of 35% of the shares of New Preferred Stock originally issued, at
the following redemption prices (expressed as percentages of the then
P-58
<PAGE>
effective liquidation preference) if redeemed during the 12 months commencing
on of the year set forth below plus, in each case, without duplication, all
accrued and unpaid dividends, including an amount equal to a prorated dividend
from the last Dividend Payment Date immediately prior to the redemption date
(provided that the redemption notice shall have been sent not later than 60
days after the consummation of such Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996 %
1997 %
1998 %
</TABLE>
In the event of a partial redemption of the New Preferred Stock, the shares
to be redeemed will be selected on a pro rata basis, except that the Company
may redeem all shares of New Preferred Stock held by any holder of fewer than
100 shares (or all shares of New Preferred Stock owned by any holder who would
hold less than 100 shares as a result of such redemption), as determined by
the Company. No partial redemption of the New Preferred Stock may be
authorized or made unless prior thereto full unpaid cumulative dividends
thereon shall have been paid in cash or declared and a sum set apart for such
payment. The indentures governing the Notes (the "Note Indentures") and the
Loan Agreement will restrict the Company from redeeming the New Preferred
Stock and will prohibit any such redemption if there exists a default or an
event of default thereunder or would result from such redemption, and future
agreements may provide the same.
MANDATORY. On , 2008, the Company will be required to redeem (subject
to contractual and other restrictions with respect thereto and to legal
availability of funds therefor) all outstanding shares of New Preferred Stock
at a price equal to the then effective liquidation preference thereof plus,
without duplication, an amount in cash equal to all accrued and unpaid
dividends (including an amount equal to a prorated dividend from the last
Dividend Payment Date immediately prior to the redemption date). The Note
Indentures and the Loan Agreement will restrict the Company from redeeming the
New Preferred Stock and will prohibit any such redemption if there exists a
default or an event of default thereunder or would result from such
redemption, and future agreements may provide the same.
PROCEDURE FOR REDEMPTION. On and after a redemption date, unless the Company
defaults in the payment of the redemption price, dividends will cease to
accrue with respect to shares of New Preferred Stock called for redemption and
all rights of holders of such shares will terminate except for the right to
receive the redemption price. The Company will send a written notice of
redemption by first class mail, postage prepaid, at least 15 days and not more
than 60 days prior to the date fixed for such redemption to each holder of
record on the record date fixed for such redemption of the New Preferred Stock
at its registered address. If any New Preferred Stock is to be redeemed in
part only, the notice of redemption that relates to such New Preferred Stock
will state the number of shares thereof to be redeemed. Shares of New
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged, will (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized
but unissued shares of preferred stock of the Company undesignated as to
series and may, with any and all other authorized but unissued shares of
preferred stock of the Company, be designated or redesignated and issued or
reissued, as the case may be, as part of any series of preferred stock of the
Company, except that such shares may not be reissued or sold as shares of the
New Preferred Stock.
EXCHANGE
On any Dividend Payment Date, the Company may, at its option but subject to
certain conditions, exchange the New Preferred Stock, in whole but not in
part, for the Exchange Debentures. See "--The Exchange Debentures" below for a
summary of the terms of the Exchange Debentures. Holders of New Preferred
Stock so exchanged will be entitled to receive $1,000 in principal amount of
Exchange Debentures for each $1,000 of the then effective liquidation
preference of New Preferred Stock held by such holder at the time of exchange.
In connection with any such exchange, dividends on shares of New Preferred
Stock exchanged which have accrued on or prior to , 2001 which have not
been paid as of the Exchange Date will be paid, at the Company's option, in
cash or in additional Exchange Debentures in an equivalent principal amount of
such accrued and
P-59
<PAGE>
unpaid dividends. Dividends on any shares of New Preferred Stock accruing
after , 2001 which have not been paid as of the Exchange Date must be paid
in cash on the Exchange Date. Interest will accrue on Exchange Debentures from
the Exchange Date. On the date fixed for exchange, all dividends on the New
Preferred Stock will cease to accrue, the rights of the holders of the New
Preferred Stock as stockholders of the Company with respect to the shares
exchanged will cease and the Person or Persons entitled to receive the
Exchange Debentures issuable upon exchange will be treated as the registered
Holder or Holders (as defined herein) of such Exchange Debentures. Exchange
Debentures issued in exchange for New Preferred Stock will be issued in
principal amounts of $1,000 and integral multiples thereof, and will also be
issued in principal amounts of less than $1,000 so that each holder of New
Preferred Stock will receive certificates representing the entire amount of
Exchange Debentures to which its shares of New Preferred Stock entitle it;
provided, however, that the Company may, at its option, pay cash in lieu of
issuing an Exchange Debenture in a principal amount less than $1,000. The
Company will mail to each holder of record of the shares of New Preferred
Stock written notice of its intention to exchange the New Preferred Stock for
Exchange Debentures at least 30 and not more than 60 days prior to the
Exchange Date. Each notice must state (i) the Exchange Date, (ii) the place or
places where certificates for shares of New Preferred Stock are to be
surrendered for exchange into Exchange Debentures, (iii) that dividends on the
shares of New Preferred Stock to be exchanged will cease to accrue on the
Exchange Date and (iv) that interest on the Exchange Debentures shall accrue
from the Exchange Date whether or not certificates for shares of New Preferred
Stock are surrendered for exchange on such Exchange Date.
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if at the time of the Company's
payment of dividends on, redemption of, or issuance of Exchange Debentures in
exchange for, New Preferred Stock, (i) the Company is insolvent or rendered
insolvent by reason thereof or (ii) the Company is engaged in a business or
transaction for which the Company's remaining assets constitute unreasonably
small capital or (iii) the Company intends to incur or believes that it will
incur debts beyond its ability to pay such debts as they mature, then the
relevant distribution to holders of New Preferred Stock could be avoided in
whole or in part as a fraudulent conveyance and such holders could be required
to return the same or equivalent amounts to or for the benefit of existing or
future creditors of the Company. The measure of insolvency for purposes of the
foregoing will vary depending on the law of the jurisdiction which is being
applied. Generally, the Company would be considered insolvent if the sum of
its debts, including contingent liabilities, was greater than the fair
saleable value of its assets at a fair valuation or if the present fair
saleable value of its assets was less than the amount that would be required
to pay its probably liability on its existing debts, including contingent
liabilities, as they become absolute and matured.
The Loan Agreement will limit the exchange of New Preferred Stock for
Exchange Debentures. See "Description of New Credit Facility". In addition,
the Company will be permitted by the Note Indentures to exchange the New
Preferred Stock for Exchange Debentures only to the extent it could incur
indebtedness pursuant to the terms of the Note Indentures.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of New Preferred Stock will be entitled to be paid, out
of the assets of the Company available for distribution to its stockholders,
an amount in cash equal to the then effective liquidation preference thereof
(which will initially be $ per share), plus an amount in cash equal to
accrued and unpaid dividends, if any, to the date fixed for liquidation,
dissolution or winding up (including an amount equal to a prorated dividend
from the last Dividend Payment Date to the date fixed for liquidation,
dissolution or winding up), before any distribution is made on any Junior
Securities, including without limitation any Common Stock of the Company.
Except as provided in the preceding sentence, holders of New Preferred Stock
shall not be entitled to any distribution in the event of liquidation,
dissolution or winding up of the Company. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the application of all
amounts available for payments with respect to the New Preferred Stock and all
other Parity Securities would not result in payment in full of the New
Preferred Stock and such other Parity Securities, holders of the New Preferred
Stock and the Parity Securities will share
P-60
<PAGE>
equally and ratably in any distribution of assets of the Company in proportion
to the full liquidation preference to which each is entitled. After payment in
full of the liquidation preference to which holders of New Preferred Stock are
entitled, such holders will not be entitled to any further participation in any
distribution of assets of the Company. However, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Company nor the consolidation or merger of the Company with one or more
corporations will be deemed to be a voluntary or involuntary liquidation,
dissolution or winding up of the Company, unless such sale, conveyance,
exchange or transfers in connection with a dissolution or winding up of the
business of the Company.
Neither the stated value nor the liquidation preference of the New Preferred
Stock is necessarily indicative of the price at which shares of the New
Preferred Stock will actually trade after their issuance, and the New Preferred
Stock may trade at prices below its stated value or liquidation price. The
market price of the New Preferred Stock can be expected to fluctuate with
changes in the financial markets and economic conditions, the financial
condition and prospects of the Company and other factors that generally
influence the market prices of securities.
The Certificate of Designation will not contain any provision requiring funds
to be set aside to protect the liquidation preference of the New Preferred
Stock, although such liquidation preference will be substantially in excess of
the par value of such shares of the New Preferred Stock. In addition, the
Company is not aware of any provision of Delaware law or any controlling
decision of the courts of the State of Delaware that requires a restriction
upon the surplus of the Company solely because the liquidation preference of
the New Preferred Stock will exceed the par value. Consequently, there will be
no remedies available to holders of the New Preferred Stock before or after the
payment of any dividend, other than in connection with the liquidation of the
Company, solely by reason of the fact that such dividend would reduce the
surplus of the Company to an amount less than the difference between the
liquidation preference of the New Preferred Stock and its par value.
CHANGE OF CONTROL
The Certificate of Designation will provide that, upon the occurrence of a
Change of Control, each holder of New Preferred Stock will have the right to
require the Company to repurchase such holder's shares of New Preferred Stock
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the then effective liquidation preference of
the New Preferred Stock plus, without duplication, accrued and unpaid
dividends, if any, thereon to the Change of Control Payment Date (as defined
herein).
The Certificate of Designation will provide that not later than 90 days
following the date upon which the Change of Control occurred, the Company must
send, by first class mail, a notice to holders of New Preferred Stock at their
last registered address, with a copy to the Registrar, which notice shall
govern the terms of the Change of Control Offer. Notice of an event giving rise
to a Change of Control shall be given on the same date and in the same manner
to all holders of New Preferred Stock. Such notice shall state, among other
things, the purchase date, which must be no earlier than 30 days nor later than
60 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). The Certificate of Designation
shall provide that the Change of Control Payment Date with respect to any
Change of Control shall be 20 business days after the change of control payment
date under the New Senior Subordinated Note Indenture with respect to such
Change of Control. Each Change of Control Offer is required to remain open for
at least 20 business days or such longer period as may be required by law.
Prior to the mailing of the notice of a Change of Control Offer referred to
above, the Company shall (i) within 60 days following a Change of Control,
either (a) repay in full all Indebtedness, and terminate all commitments, under
the Loan Agreement to the extent required upon a change of control pursuant to
the terms thereof (or offer to repay in full all such Indebtedness and
terminate all such commitments and repay all such Indebtedness owed to each
lender which has accepted such offer and terminate all such commitments of each
such lender), or (b) obtain the requisite consents under the Loan Agreement,
the terms of which require repayment upon a change of control, to permit the
repurchase of the New Preferred Stock as provided above and
P-61
<PAGE>
(ii) within 90 days following a Change of Control, purchase all New Senior
Notes and New Senior Subordinated Notes (or permitted refinancings thereof)
which it is required to purchase by reason of such change of control pursuant
to the provisions of the applicable Note Indenture as in effect on the Issue
Date. The Company shall first comply with the covenant in the immediately
preceding sentence before it shall be required to repurchase New Preferred
Stock pursuant to the provisions described above.
None of the provisions in the Certificate of Designation relating to a
purchase upon a Change of Control are waivable by the Board of Directors of the
Company. The Company could in the future enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change of Control under the New Preferred Stock, but would increase the amount
of Indebtedness outstanding at such time. If a Change of Control were to occur,
there can be no assurance that the Company would have sufficient funds to pay
the purchase price for the New Preferred Stock that the Company is required to
purchase. Moreover, as of December 31, 1995, after giving effect to the
Transactions, the Company would not have sufficient funds available to purchase
all of the outstanding shares of New Preferred Stock pursuant to a Change of
Control Offer. In the event that the Company is required to purchase
outstanding shares of New Preferred Stock pursuant to a Change of Control
Offer, the Company expects that it would need to seek third-party financing to
the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain
such financing. In addition, the Company may be prohibited under the Loan
Agreement, the Note Indentures and other agreements from purchasing the New
Preferred Stock pursuant to a Change of Control Offer. See "Description of New
Credit Facility" and "Description of other Indebtedness."
The Company must comply with Rules 13e-4 and 14e-4 and 14e-1 under the
Exchange Act and other provisions of state and federal securities laws and
regulations thereunder to the extent applicable in connection with a Change of
Control Offer.
VOTING RIGHTS
Holders of the New Preferred Stock will have no general voting rights, except
as otherwise required under Delaware law or as set forth in the Certificate of
Designation.
The Certificate of Designation will provide that, except as stated above
under "--Ranking," the Company shall not, without the affirmative vote or
consent of holders of at least two-thirds of the shares of New Preferred Stock
then outstanding, voting or consenting, as the case may be, separately as one
class, (i) authorize any class of Senior Securities or Parity Securities or
(ii) amend the Certificate of Designation so as to affect adversely the
specified rights, preferences, privileges or voting rights of holders of New
Preferred Stock or authorize the issuance of any additional shares of New
Preferred Stock. The holders of at least two-thirds of the outstanding shares
of New Preferred Stock, voting or consenting, as the case may be, separately as
one class, may waive compliance with any provision of the Certificate of
Designation. Holders of New Preferred Stock will also have the voting rights
described under "--Limitation on Mergers and Certain Other Transactions."
Under Delaware law, holders of the New Preferred Stock are entitled to vote
as a class upon a proposed amendment to the Certificate of Designation, whether
or not entitled to vote thereon by the certificate of incorporation, if the
amendment would increase or decrease the aggregate number of authorized shares
of such class, increase or decrease the par value of the shares of such class,
or alter or change the powers, preferences or special rights of the shares of
such class so as to affect them adversely.
REPORTS TO HOLDERS
The Certificate of Designation will further provide that, so long as any
shares of New Preferred Stock are outstanding, the Company shall file with the
Commission, to the extent permitted, the annual reports, quarterly reports and
the information, documents and other reports specified in Sections 13 and 15(d)
of the Exchange Act, whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, at the time it is or
would be required to file the same with the Commission, and within 15 days
after the Company is or would be required to file such reports, information or
documents with the Commission, shall mail such reports, information and
documents to the holders of the New Preferred Stock at their registered
addresses.
P-62
<PAGE>
THE EXCHANGE DEBENTURES
The summary contained herein of certain provisions of the Exchange Debentures
does not purport to be complete and is qualified in its entirety by reference
to the provisions of the Exchange Indenture relating thereto. A copy of the
form of the Exchange Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The definitions of certain terms
used in the following summary are set forth below under "--Certain
Definitions."
GENERAL
The Exchange Debentures will, if and when issued, be issued under an
indenture (the "Exchange Indenture"), to be dated as of the date of first
issuance (the "Exchange Date") of the Exchange Debentures, between the Company
and , as trustee (the "Exchange Debenture Trustee"). The terms of the
Exchange Debentures include those stated in the Exchange Indenture and those
made part of the Exchange Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act") as in effect on the date of the Exchange
Indenture. The Exchange Debentures are subject to all such terms and holders of
the Exchange Debentures are referred to the Exchange Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Exchange Indenture does not purport to be complete and is
qualified in its entirety by reference to the Exchange Indenture, including the
definitions therein of certain terms used below.
The Exchange Debentures will be issued in registered form, without coupons,
initially in denominations of $1,000 and integral multiples thereof (except as
described under "--Description of New Preferred Stock--Exchange"). The Exchange
Debentures will represent general unsecured obligations of the Company and will
rank junior in right of payment to all Senior Indebtedness.
Each Exchange Debenture will mature on , 2008 and will bear interest from
the Exchange Date at a rate per annum of %, payable quarterly on , ,
, and of each year, commencing with the first such date to occur
after the Exchange Date.
Interest on the Exchange Debentures will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the
original date of issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. The Exchange Debentures will be payable
as to principal, premium, and interest at the office or agency of the Company
maintained for such purpose within or without the City of New York, or, at the
option of the Company, payment of interest may be made by check mailed to the
registered holders of the Exchange Debentures (the "Holders") at their
respective addresses set forth in the register of Holders. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. Interest on the Exchange
Debentures accruing on or prior to , 2001 may, at the option of the
Company, be paid in cash or by issuing additional Exchange Debentures (the
"Additional Debentures") valued at 100% of their principal amount. Interest on
the Exchange Debentures accruing after , 2001 must be paid in cash. See
"Certain Federal Income Tax Considerations." The Company does not expect to pay
interest on the Exchange Debentures in cash on or prior to .
SUBORDINATION
The payment of the Obligations on the Exchange Debentures will be
subordinated in right of payment, as set forth in the Exchange Indenture, to
the prior payment in full in cash or Cash Equivalents of all Senior
Indebtedness, whether outstanding on the Exchange Date or thereafter incurred,
including, with respect to Designated Senior Indebtedness, any interest
accruing subsequent to a bankruptcy or other similar proceeding whether or not
such interest is an allowed claim enforceable against the Company in a
bankruptcy case under Title 11 of the United States Code.
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Upon any distribution of assets of the Company of any kind or character,
whether in cash, property or securities upon any dissolution, winding up, total
or partial liquidation or reorganization of the Company (including, without
limitation, in bankruptcy, insolvency, or receivership proceedings or upon any
assignment for the benefit of creditors or any other marshalling of the
Company's assets and liabilities), the holders of Senior Indebtedness shall
first be entitled to receive payment in full in cash or Cash Equivalents of all
amounts then due and payable under Senior Indebtedness (including, with respect
to Designated Senior Indebtedness, any interest accruing after the commencement
of any such proceeding at the rate specified in the applicable Designated
Senior Indebtedness whether or not such interest is an allowed claim
enforceable against the Company in any such proceeding) before the Holders will
be entitled to receive any payment with respect to the Exchange Debentures
(excluding Permitted Subordinated Reorganization Securities), and until all
Obligations with respect to Senior Indebtedness then due are paid in full in
cash or Cash Equivalents, any distribution to which the Holders would be
entitled (excluding Permitted Subordinated Reorganization Securities) shall be
made to the holders of Senior Indebtedness.
No direct or indirect payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) by or on behalf of the Company of Obligations on the Exchange
Debentures whether pursuant to the terms of the Exchange Debentures or upon
acceleration or otherwise shall be made if, at the time of such payment, there
exists a default in the payment of all or any portion of principal of, premium,
if any, or interest on any Designated Senior Indebtedness or any other Senior
Indebtedness which, at the time of determination, is equal to or greater than
$50 million in aggregate principal amount ("Significant Senior Indebtedness")
(and the Exchange Debenture Trustee has received written notice thereof), and
such default shall not have been cured or waived by or on behalf of the holders
of such Designated Senior Indebtedness or Significant Senior Indebtedness, as
the case may be, or shall have ceased to exist, until such default shall have
been cured or waived or shall have ceased to exist or such Designated Senior
Indebtedness or Significant Senior Indebtedness, as the case may be, shall have
been discharged or paid in full in cash or Cash Equivalents, after which the
Company shall resume making any and all required payments in respect of the
Exchange Debentures, including any missed payments.
In addition, during the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon the earliest to occur of (a) receipt by the
Exchange Debenture Trustee of written notice from the holders of a majority of
the outstanding principal amount of the Designated Senior Indebtedness or their
representative, or (b) if such event of default results from the acceleration
of the Exchange Debentures, the date of such acceleration, no such payment
(other than payments by a trust previously established pursuant to the
provisions described under "--Defeasance of Indenture" below) may be made by
the Company upon or in respect of the Exchange Debentures for a period
("Payment Blockage Period") commencing on the earlier of the date of receipt of
such notice or the date of such acceleration and ending 179 days thereafter
(unless (x) such Payment Blockage Period shall be terminated by written notice
to the Exchange Debenture Trustee from the holders of a majority of the
outstanding principal amount of such Designated Senior Indebtedness or their
representative who delivered such notice or (y) such default is cured or
waived, or ceases to exist or such Designated Senior Indebtedness is discharged
or paid in full in cash or Cash Equivalents), after which the Company shall
resume making any and all required payments in respect of the Exchange
Debentures, including any missed payments. Notwithstanding anything herein to
the contrary, in no event will a Payment Blockage Period extend beyond 179 days
from the date on which such Payment Blockage Period was commenced. Not more
than one Payment Blockage Period may be commenced with respect to the Exchange
Debentures during any period of 365 consecutive days. No event of default which
existed or was continuing on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period shall be, or be made, the basis for the
commencement of a second Payment Blockage Period by the holders of such
Designated Senior Indebtedness or their representative whether or not within a
period of 365 consecutive days unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days.
If the Company fails to make any payment on the Exchange Debentures when due
or within any applicable grace period, whether or not on account of the payment
blockage provisions referred to above, such failure would
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constitute an Event of Default under the Exchange Indenture and would enable
the Holders to accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of the insolvency of the
Company, the Holders may recover less, ratably, than holders of Senior
Indebtedness. See "Risk Factors--Ranking of the New Preferred Stock and the
Exchange Debentures."
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the Company would have had approximately $1,034.2 million
aggregate amount of Senior Indebtedness outstanding, and the Company would have
had $73.0 million available to be borrowed under the New Revolving Facility.
In addition, the Exchange Debentures will be effectively subordinated to all
existing and future liabilities, including Indebtedness, of the Subsidiaries.
At December 30, 1995, after giving pro forma effect to the Transactions, the
Subsidiaries would have had Indebtedness and other liabilities reflected on the
Company's consolidated balance sheet (other than guarantees of Senior
Indebtedness), including trade payables and accrued expenses, of approximately
$148.4 million.
OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable, at the option of the Company, in
whole at any time or in part from time to time, on and after , 2001, at
the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on of the
year set forth below, plus, in each case, accrued and unpaid interest, if any,
to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
In addition, on or prior to , 1999, the Company may, at its option,
use the Net Cash Proceeds of one or more Public Equity Offerings to redeem up
to an aggregate of 35% of the principal amount of the Exchange Debentures
originally issued, at the following redemption prices (expressed as percentages
of the principal amount) if redeemed during the 12 months commencing on
of the year set forth below plus, in each case, accrued and unpaid
interest, if any, to the redemption date (provided that the redemption notice
shall have been sent not later than 60 days after the consummation of such
Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
NOTICES AND SELECTION
In the event of a redemption of less than all of the Exchange Debentures,
such Exchange Debentures will be selected for redemption by the Exchange
Debenture Trustee pro rata, by lot or by any other method that the Exchange
Debenture Trustee considers fair and appropriate and, if the Exchange
Debentures are listed on any securities exchange, by a method that complies
with the requirements of such exchange; provided, however, that
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any redemption of the Exchange Debentures pursuant to the provisions relating
to a Public Equity Offering shall be made on a pro rata basis unless such
method is otherwise legally prohibited. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder of Exchange Debentures to be redeemed at such Holder's registered
address. On and after the redemption date, interest will cease to accrue on
Exchange Debentures or portions thereof called for redemption (unless the
Company shall default in the payment of the redemption price or accrued
interest). Exchange Debentures that are redeemed by the Company or that are
purchased by the Company pursuant to a Change of Control Offer as described
under "--Change of Control" below or that are otherwise acquired by the Company
will be surrendered to the appropriate New Trustee for cancellation. The Loan
Agreement will prohibit subsidiaries of the Company from paying cash dividends
on their capital stock to fund the redemption, repurchase or other prepayment
of the Exchange Debentures.
EVENTS OF DEFAULT
The following events will constitute "Events of Default" under the Exchange
Indenture: (i) failure to make any interest payment on the Exchange Debentures
when due and the continuance of such default for a period of 30 days, whether
or not prohibited by the provisions described under "--Subordination"; (ii)
failure to pay principal of, or premium, if any, on the Exchange Debentures
when due, whether at maturity, upon acceleration, redemption, required
repurchase or otherwise, whether or not prohibited by the provisions described
under "--Subordination"; (iii) failure to comply with any other agreement
contained in the Exchange Debentures or the Exchange Indenture, if such failure
continues unremedied for 30 days after written notice given by the applicable
New Trustee or the Holders of at least 25% in principal amount of the Exchange
Debentures then outstanding (except in the case of a default with respect to
certain covenants, which shall constitute Events of Default with notice but
without passage of time); (iv) a default under any Indebtedness of the Company
or the Subsidiaries, whether such Indebtedness now exists or shall hereinafter
be created, if both (A) such default either (1) results from the failure to pay
any such Indebtedness at its stated final maturity or (2) relates to an
obligation other than the obligation to pay such Indebtedness at its stated
final maturity and results in the holder or holders of such Indebtedness
causing such Indebtedness to become due prior to its stated maturity and (B)
the principal amount of such Indebtedness, together with the principal amount
of any other such Indebtedness in default for failure to pay principal at
stated final maturity or the maturity of which has been so accelerated,
aggregate $ million or more at any one time outstanding; (v) any final
judgment or order for payment of money in excess of $ million shall be
entered against the Company or any Significant Subsidiary and shall not be
discharged for a period of 60 days after such judgment becomes final and
nonappealable; (vi) either the Company or any Significant Subsidiary pursuant
to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case
or proceeding; (b) consents to the entry of an order for relief against it in
an involuntary case or proceeding; (c) consents to the appointment of a
Custodian of it or for all or substantially all of its property; or (d) makes a
general assignment for the benefit of its creditors; (vii) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is
for relief against the Company or any Significant Subsidiary, in an involuntary
case or proceeding; (b) appoints a Custodian of the Company or any Significant
Subsidiary, or for all or any substantial part of their respective properties;
or (c) orders the liquidation of the Company or any Significant Subsidiary, and
in each case the order or decree remains unstayed and in effect for 60 days; or
(viii) the lenders under the Loan Agreement shall commence judicial proceedings
to foreclose upon any material portion of the assets of the Company and the
Subsidiaries. In the event of a declaration of acceleration because an Event of
Default set forth in clause (iv) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
either (i) the holders of the Indebtedness which is the subject of such Event
of Default have waived such failure to pay at maturity or have rescinded the
acceleration in respect of such Indebtedness within 90 days of such maturity or
declaration of acceleration, as the case may be, and no other Event of Default
has occurred during such 90-day period which has not been cured or waived, or
(ii) such Indebtedness shall have been discharged or the maturity thereof shall
have been extended such that it is not then due and payable, or the underlying
default has been cured (and any acceleration based thereon of such other
Indebtedness has been rescinded), within 90 days of such maturity or
declaration of acceleration, as the case may be.
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If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, receivership or reorganization of the Company or a
Significant Subsidiary) occurs and is continuing under a Exchange Indenture,
the Exchange Debenture Trustee or the Holders of at least 25% in principal
amount of the then outstanding Exchange Debentures may declare due and payable
all unpaid principal and interest accrued and unpaid on the then outstanding
Exchange Debentures by notice in writing to the Company, the administrative
agent under the Loan Agreement and the Exchange Debenture Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Loan Agreement,
shall become due and payable upon the first to occur of an acceleration under
the Loan Agreement, or five business days after receipt by the Company and the
administrative agent under the Loan Agreement of such Acceleration Notice. If
an Event of Default resulting from certain events of bankruptcy, insolvency,
receivership or reorganization of the Company or a Significant Subsidiary shall
occur, all unpaid principal of and accrued interest on all of the then
outstanding Exchange Debentures shall be immediately due and payable without
any declaration or other act on the part of the Exchange Debenture Trustee or
any of the Holders. After a declaration of acceleration under the Exchange
Indenture, subject to certain conditions, the Holders of a majority in
principal amount of the then outstanding Exchange Debentures, by notice to the
Exchange Debenture Trustee, may rescind such declaration if all existing Events
of Default are remedied. In certain cases the Holders of a majority in
principal amount of outstanding Exchange Debentures may waive a past default
and its consequences, except a default in the payment of or interest on any of
the Exchange Debentures.
The Exchange Indenture will provide that if a Default or Event of Default
occurs and is continuing thereunder and if it is known to the Exchange
Debenture Trustee, the Exchange Debenture Trustee shall mail to each Holder
notice of the Default or Event of Default within 90 days after such Default or
Event of Default occurs; provided, however, that, except in the case of a
Default or Event of Default in the payment of the principal of or interest on
any of the Exchange Debentures, including the failure to make payment on a
Change of Control Payment Date pursuant to a Change of Control Offer, the
Exchange Debenture Trustee may withhold such notice if it in good faith
determines that withholding such notice is in the interest of the Holders.
The Exchange Indenture will provide that no Holder may pursue any remedy
unless the Exchange Debenture Trustee (i) shall have failed to act for a period
of 60 days after receiving written notice of a continuing Event of Default by
such Holder and a request to act by Holders of at least 25% in principal amount
of the Exchange Debentures and (ii) has received indemnification satisfactory
to it; provided, however, that such provision does not affect the right of any
Holder to sue for enforcement of any overdue payment of interest or principal
on the Exchange Debentures.
The Exchange Indenture will provide that two officers of the Company are
required to certify to the Exchange Debenture Trustee within 120 days after the
end of each fiscal year of the Company whether or not they know of any Default
that occurred during such fiscal year and, if applicable, describe such Default
and the status thereof.
DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the obligations
of the Company discharged with respect to the outstanding Exchange Debentures
("Legal Defeasance"). Legal Defeasance means that the Company shall be deemed
to have paid and discharged the entire Indebtedness represented by the Exchange
Debentures except for (i) the rights of Holders to receive payments in respect
of the principal of, premium, if any, and interest on the Exchange Debentures
when such payments are due solely from the funds held by the Exchange Debenture
Trustee in the trust referred to below; (ii) the Company's obligations to issue
temporary Exchange Debentures, register the transfer or exchange of Exchange
Debentures, replace mutilated, destroyed, lost or stolen Exchange Debentures
and maintain an office or agency for payments in respect of Exchange Debentures
and money for security payments held in trust in respect of Exchange
Debentures; (iii) the rights,
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powers, trusts, duties and immunities of the Exchange Debenture Trustee and the
Company's obligations in connection therewith; and (iv) the Legal Defeasance
provisions of the Exchange Indenture. In addition, the Company may, at its
option and at any time elect to have the obligations of the Company released
with respect to the covenants described above under "--Certain Covenants"
("Covenant Defeasance"), and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must have irrevocably deposited with the Exchange Debenture Trustee, in
trust, for the benefit of the Holders, cash in U.S. dollars, U.S. Government
Obligations (as defined in the Exchange Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on the outstanding Exchange Debentures to
redemption or maturity; provided that the Exchange Debenture Trustee shall have
been irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to said payments with respect to the Exchange Debentures
on the maturity date or such redemption date, as the case may be; (ii) the
Company shall have delivered to the Exchange Debenture Trustee one or more
opinions of independent counsel to the effect that (A) the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance or Covenant Defeasance, as the case may be, and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance or Covenant
Defeasance, as the case may be, had not occurred (which opinion, in the case of
Legal Defeasance, shall be based upon a change in the applicable federal income
tax law since the Issue Date or a ruling received from or published by the
Internal Revenue Service), (B) after the 91st day following the deposit the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and will not be subject to any rights of holders of Senior
Indebtedness, and (C) the deposit will not cause the Exchange Debenture Trustee
or the trust so created to be subject to the Investment Company Act of 1940;
(iii) no Default or Event of Default shall have occurred and be continuing
under the Exchange Indenture on the date of such deposit or insofar as clauses
(vi) and (vii) under the first paragraph under "--Events of Default" above are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (iv) such Legal Defeasance or Covenant Defeasance shall not cause the
Exchange Debenture Trustee to have a conflicting interest with respect to the
Exchange Debentures; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, the Exchange
Indenture or any other material agreement or instrument to which the Company is
a party or by which it is bound (and in that connection, the Exchange Debenture
Trustee shall have received a certificate from the administrative agent under
the Loan Agreement to that effect with respect to such Loan Agreement if then
in effect); (vi) the Company shall have delivered to the Exchange Debenture
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over other creditors of the
Company or any Guarantor or with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (vii) the Company shall
have delivered to the Exchange Debenture Trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or Covenant Defeasance, have been complied
with.
SATISFACTION AND DISCHARGE
The Exchange Indenture will be discharged and will cease to be of further
effect as to all outstanding Exchange Debentures, when either (a) all Exchange
Debentures theretofore authenticated and delivered (except lost, stolen or
destroyed Exchange Debentures which have been replaced or paid and Exchange
Debentures for whose payment money has theretofore been deposited in trust and
thereafter repaid to the Company) have been delivered to the Exchange Debenture
Trustee for cancellation; or (b)(i) all Exchange Debentures not theretofore
delivered to such Exchange Debenture Trustee for cancellation have become due
and payable by reason of the making of a notice of redemption or otherwise and
the Company has irrevocably deposited or caused to be deposited with the
Exchange Debenture Trustee as trust funds in trust for the purpose an amount of
money sufficient to pay and discharge the entire indebtedness on such Exchange
Debentures not theretofore delivered to
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the Exchange Debenture Trustee for cancellation for principal, premium, if any,
and accrued interest to the date of maturity or redemption; (ii) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or shall occur as a result of such deposit and such deposit will not
result in a breach or violation of, or constitute a default under, any other
instrument to which the Company is a party or by which it is bound; (iii) the
Company has paid all sums payable by it under the Exchange Indenture; and (iv)
the Company has delivered irrevocable instructions to the Exchange Debenture
Trustee to apply the deposited money toward the payment of Exchange Debentures
at maturity or the redemption date, as the case may be. In addition, the
Company must deliver an officers' certificate and an opinion of counsel to the
Exchange Debenture Trustee stating that all conditions precedent to
satisfaction and discharge have been complied with.
MODIFICATION OF THE EXCHANGE INDENTURE
The Exchange Indenture and the Exchange Debentures may be amended or
supplemented (and compliance with any provision thereof may be waived) by the
Company, the Exchange Debenture Trustee thereunder and the Holders of not less
than a majority in aggregate principal amount of the Exchange Debentures then
outstanding, except that (i) without the consent of each Holder of Exchange
Debentures affected, no such amendment, supplement or waiver may (1) change the
principal amount of the Exchange Debentures the Holders of which must consent
to an amendment, supplement or waiver of any provision of the Exchange
Indenture or the Exchange Debentures, (2) reduce the rate or extend the time
for payment of interest on any Exchange Debentures, (3) reduce the principal
amount of any Exchange Debentures, (4) change the Maturity Date of any Exchange
Debentures or alter the redemption provisions in the Exchange Indenture or the
Exchange Debentures in a manner adverse to any Holder, (5) make any changes in
the provisions concerning waivers of Defaults or Events of Default by Holders
or the rights of Holders to recover the principal of, interest on or redemption
payment with respect to any Exchange Debentures, (6) make the principal of, or
interest on, any Exchange Debentures payable with anything or in any manner
other than as provided for in the Exchange Indenture and the Exchange
Debentures or (7) modify the subordination provisions of the Exchange Indenture
(including the related definitions) so as to adversely affect the ranking of
any Exchange Debenture; provided, however, that it is understood that any
amendment the purpose of which is to permit the Incurrence of additional
Indebtedness under the Exchange Indenture shall not be construed as adversely
affecting the ranking of any Exchange Debenture, and (ii) without the consent
of Holders of not less than % in aggregate principal amount of the Exchange
Debentures then outstanding, no such amendment, supplement or waiver may change
the Change of Control Payment Date or the purchase price in connection with any
repurchase of such Exchange Debentures pursuant to the covenant described under
"--Change of Control" above in a manner adverse to any Holder or waive a
Default or Event of Default resulting from a failure to comply with the
covenant described under "--Change of Control" above.
In addition, the Exchange Indenture and the Exchange Debentures may be
amended by the Company and the Exchange Debenture Trustee (a) to cure any
ambiguity, defect or inconsistency therein; provided that such amendment or
supplement does not adversely affect the rights of any Holder or (b) to make
any other change that does not adversely affect the rights of any Holder in any
material respect.
THE EXCHANGE DEBENTURE TRUSTEE
The Exchange Indenture will provide that the Holders of a majority in
principal amount of the outstanding Exchange Debentures may remove the Exchange
Debenture Trustee and appoint a successor trustee with the Company's consent,
by so notifying the trustee to be so removed and the Company. In addition, the
Holders of a majority in principal amount of the outstanding Exchange
Debentures have the right, subject to certain limitations, to direct the time,
method and place of conducting any proceeding for any remedy available to the
Exchange Debenture Trustee or of exercising any trust or power conferred on the
Exchange Debenture Trustee.
The Exchange Indenture will provide that, in case a Default or an Event of
Default has occurred and is continuing, the Exchange Debenture Trustee shall
exercise such of the rights and powers vested in it by the Exchange Indenture,
and use the same degree of care and skill in the exercise thereof, as a prudent
Person would
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exercise or use under the circumstances in the conduct of such Person's own
affairs. Subject to the latter provision, the Exchange Debenture Trustee is
under no obligation to exercise any of its rights or powers under the Exchange
Indenture at the request, order or direction of any of the Holders, unless they
shall have offered to such Exchange Debenture Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
thereby. If the Company fails to pay such amounts of principal of, premium, if
any, or interest on, the Exchange Debentures as shall have become due and
payable upon demand as specified in the Exchange Indenture, the Exchange
Debenture Trustee, at the request of the Holders of a majority in aggregate
principal amount of the Exchange Debentures at the time outstanding, and upon
being offered such reasonable indemnity as it may be required against the
costs, expenses and liabilities incurred by it, except as a result of its
negligence or bad faith, shall institute any actions or proceedings at law or
in equity for the collection of the sums so due and unpaid, and collect in the
manner provided by law the monies adjudged or decreed to be payable.
The Exchange Indenture will contain limitations on the rights of the Exchange
Debenture Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to be realized on certain property
received by it in respect of any such claims, securities or otherwise. The
Exchange Debenture Trustee is permitted to engage in other transactions;
however, if a Exchange Debenture Trustee acquires any "conflicting interest,"
it must eliminate such conflict or resign.
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DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR NOTES AND SENIOR SUBORDINATED NOTES
As part of the financing required to consummate the Transactions, the Company
will offer $250 million aggregate principal amount of its Senior Notes and $400
million aggregate principal amount of its Senior Subordinated Notes (the Senior
Subordinated Notes, together with the Senior Notes, the "Notes"). The Senior
Notes will mature on the ninth anniversary of their issue date and the Senior
Subordinated Notes will mature on the tenth anniversary of their issue date.
The Notes will bear interest, payable semiannually, at the respective rates to
be determined by the Company and the Underwriters prior to the consummation of
the Recapitalization. The following is a summary of the anticipated material
terms and conditions of the Notes. This summary does not purport to be a
complete description of the Notes and is subject to the detailed provisions of
the indentures and various related documents to be entered into in connection
with the Notes.
It is anticipated that the Notes will be redeemable, in whole or in part, at
the option of the Company, at any time on and after the fifth anniversary of
their issue date at the respective redemption prices, representing a premium
and declining ratably to par over an anticipated four-year period, to be
determined by the Company and the Underwriters. In addition, it is expected
that on or prior to the third anniversary of the issue date of the Notes, the
Company may, at its option, use the net cash proceeds of one or more public
equity offerings to redeem up to an aggregate of 35% of the Senior Notes
originally issued and up to 35% of the Senior Subordinated Notes originally
issued, at the respective redemption prices to be determined by the Company and
the Underwriters. Upon a change of control of the Company (as defined in the
indentures pursuant to which the Notes will be issued), each holder of Notes
will have the right to require the Company to repurchase such holder's Notes at
a price equal to 101% of their principal amount plus accrued and unpaid
interest to the date of repurchase.
The Senior Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with other senior unsecured indebtedness of
the Company. However, the Senior Notes will be effectively subordinated to all
secured indebtedness of the Company, including indebtedness under the New
Credit Facility. The Senior Notes will rank senior in right of payment to all
subordinated indebtedness of the Company, including the Senior Subordinated
Notes. The Senior Subordinated Notes will be senior subordinated unsecured
obligations of the Company and will be subordinated in right of payment to all
Senior Indebtedness (as defined in the indentures) of the Company, including
the Company's obligations under the New Credit Facility and the Senior Notes.
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions, the aggregate outstanding amount of Senior Indebtedness of the
Company would have been approximately $1,034.2 million. The Notes will be
effectively subordinated to all existing and future liabilities, including
indebtedness, of the Company's subsidiaries. At December 30, 1995, on a pro
forma basis after giving effect to the Transactions, the Company's subsidiaries
would have had indebtedness and other liabilities reflected on the Company's
consolidated balance sheet, including trade payables and accrued expenses (but
excluding guarantees of Senior Indebtedness), of approximately $148.4 million.
The indenture pursuant to which the Senior Notes will be issued will contain
certain covenants that, among other things, limit the ability of the Company
and its Restricted Subsidiaries (as defined) to make restricted payments, incur
additional indebtedness, create liens, sell assets, create dividend or other
payment restrictions affecting Restricted Subsidiaries, enter into transactions
with affiliates or, consummate mergers or certain other transactions and the
ability of the Restricted Subsidiaries to issue preferred stock. The indenture
pursuant to which the Senior Subordinated Notes will be issued will contain the
foregoing covenants, but will also prohibit the Company from incurring any
indebtedness subordinated to any other indebtedness but senior to the Senior
Subordinated Notes.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon filing of the Amended and Restated Certificate of Incorporation, the
Company's authorized capital stock will consist of (i) 20,000,000 shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
(ii) 100,000,000 shares of Class B Common Stock, par value $.01 per share (the
"Class B Common Stock"), (iii) 20,000,000 shares of Class C Common Stock, par
value $.01 (the "Class C Common Stock"), and (iv) 85,000,000 shares of
Preferred Stock, par value $.01 per share, of which 34,524,579 shares are
designated as Series I Preferred Stock and 75,000 shares will be designated
Cumulative Redeemable Exchangeable Preferred Stock. As of February 20, 1996,
there were 11,375,270 shares of Class A Common Stock outstanding, 13,696,453
shares of Class B Common Stock outstanding and 12,956,747 shares of Series I
Preferred Stock outstanding.
COMMON STOCK
All holders of shares of Class A Common Stock, Class B Common Stock and Class
C Common Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Company's Board of Directors in its
discretion from funds legally available therefor, and upon liquidation or
dissolution are entitled to receive all assets available for distribution to
the holders of Common Stock. Under the Delaware Corporation Law, the Company
may declare and pay dividends only out of its surplus, or out of its net
profits for the fiscal year in which the dividend is declared or the preceding
year. Under certain of the Company's credit agreements, the Company's ability
to pay dividends is restricted based on various measures, including the
Company's net income for designated period. All of the outstanding shares of
Common Stock are legally issued, fully paid and nonassessable. Holders of
Common Stock have no preemptive or other rights to subscribe for additional
shares which the Company may issue and there are no redemption provisions or
sinking fund provisions applicable to any class, nor is the Common Stock
subject to calls or assessments by the Company.
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except the holders of
Class A Common Stock are entitled to ten votes per share and the holders of
Class B Common Stock are entitled to one vote per share on all matters
submitted to the vote of stockholders for their vote or approval, including the
election of directors. The holders of Class C Common Stock will not be entitled
to vote on matters submitted to the vote of Company stockholders. However, if
shares of Class C Common Stock are transferred to a holder other than an
Original Class C Holder (as defined in the Amended and Restated Certificate of
Incorporation), such transferred shares of Class C Common Stock will be
convertible, at the option of the holder, into shares of voting Class B Common
Stock. There is no provision made for cumulative voting, and no class of
outstanding Common Stock or Preferred Stock alone is entitled to elect any
directors. The holders of Class A Common Stock and the holders of Series I
Preferred Stock, voting together have, and after consummation of the
Transactions will continue to have, effective control of the Company through
holding approximately 94% of the combined voting power of the outstanding
capital stock and will have the ability to elect all the directors of the
Company and to effect or prevent certain corporate transactions which require
majority approval of the combined classes, including mergers and other business
combinations.
Under the Company's bylaws, directors may be removed with or without cause by
the holders of a majority of the votes entitled to be cast for the election of
directors. A vacancy on the Board created by the removal or resignation of a
director or by expansion of the authorized number of directors may be filled by
the remaining directors then in office or by the stockholders at a special
meeting.
Under the Delaware General Corporation Law, the holders of Class A Common
Stock, Class B Common Stock and Class C Common Stock are entitled to vote as
separate classes on any amendment to the Company's Amended and Restated
Certificate of Incorporation that would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value
of the shares of such class, or alter or change the powers, preferences or
special rights of the shares of such class so as to affect them adversely.
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Each share of Class A Common Stock is convertible at any time at the option
of the holder into Class B Common Stock on a share-for-share basis. The
Company's Certificate of Incorporation also provides that each share of Class A
Common Stock will be converted automatically into one share of Class B Common
Stock if, at any time, the number of shares of Class A Common Stock issued and
outstanding shall be less than 2,910,885. The Class B Common Stock has no
conversion rights.
Shares of Class A Common Stock may not be sold, gifted, or transferred except
to and among the Company, a spouse, child, grandchild, sibling or parent of the
person to whom the Class A Common Stock was issued originally (a "Permitted
Transferee"), and certain entities controlled or owned by one or more Permitted
Transferees. The Company's Certificate of Incorporation provides that any
holder of shares of Class A Common Stock desiring to transfer such shares to a
person other than a Permitted Transferee or such transferee must present such
shares to the Company for conversion into an equal number of shares of Class B
Common Stock upon such transfer. Thereafter, such shares of Class B Common
Stock may be freely transferred to persons other than Permitted Transferees.
SERIES I PREFERRED STOCK
Each share of Series I Preferred Stock is entitled to ten votes per share on
all matters submitted to the vote of the stockholders, including the election
of directors, for their vote or approval. Except as described below, holders of
Series I Preferred Stock vote together with the holders of Common Stock,
including the election of directors. The affirmative vote of the holders of a
majority of the Series I Preferred Stock, voting as a class, is required upon
any amendment to the Company's Certificate of Incorporation affecting in any
manner the rights of such holders.
Under the Company's Certificate of Incorporation, upon liquidation of the
Company, each share of Series I Preferred Stock is entitled to a liquidation
preference of $.33 1/3, on a pro-rata basis with any other series of Preferred
Stock ranking on parity with the Series I Preferred Stock, before any
distribution to the holders of any class of Common Stock.
All shares of Series I Preferred Stock are subject to redemption at any time
upon 60 days' notice at the option of the Board of Directors, in such numbers
as the Board may determine, at a redemption price of $.33 1/3 per share (the
"Redemption Price"). In addition, on December 1 of each year commencing in
1989, one-eleventh of the total authorized number of shares of Series I
Preferred Stock is subject to mandatory redemption at the Redemption Price. The
Series I Preferred Stock has no dividend requirement. If approved by a majority
of the outstanding shares of Series I Preferred Stock, the Amended and Restated
Certificate of Incorporation will include certain provisions with respect to
the Series I Preferred Stock which: (i) eliminate for a five-year period the
annual mandatory redemption of original outstanding shares of Series I
Preferred Stock (with mandatory redemptions of one-eleventh of the outstanding
shares of Series I Preferred Stock resuming thereafter), and (ii) restrict for
two-year period the optional redemption of shares of Series I Preferred Stock.
UNDESIGNATED PREFERRED STOCK
Additional Preferred Stock may be issued from time to time in one or more
series and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking funds and any other rights, preferences, privileges and restrictions
applicable to each such series of Preferred Stock. However, under the Company's
Amended and Restated Certificate of Incorporation, no series of Preferred Stock
may have rights or preferences superior to the Series I Preferred Stock, and no
share of Preferred Stock other than shares designated as Series I Preferred
Stock may be entitled to more than one vote upon any matter presented to the
Company's stockholders for vote or approval, including the election of
directors.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Latham & Watkins, counsel to the Company, has advised the Company that the
following discussion expresses their opinion as to the material federal income
tax consequences expected to result to holders from the purchase, ownership,
exchange and disposition of the New Preferred Stock and Exchange Debentures.
Such opinion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury regulations, including
final Treasury regulations addressing debt instruments issued with original
issue discount ("OID") (the "OID Regulations"), judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service (the "Service") will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
The tax treatment of a holder of New Preferred Stock or Exchange Debentures
may vary depending upon such holder's particular situation. Certain holders
(including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. This discussion is limited to holders who will hold New
Preferred Stock or Exchange Debentures as "capital assets" (generally property
held for investment) within the meaning of Section 1221 of the Code. EACH
HOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF PURCHASING, HOLDING, EXCHANGING AND DISPOSING OF THE NEW
PREFERRED STOCK AND EXCHANGE DEBENTURES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
DISTRIBUTIONS ON NEW PREFERRED STOCK
Distributions on the New Preferred Stock, whether paid in cash or by
increasing the liquidation preference and redemption price of the New
Preferred Stock, will be treated as dividends to the holders (and will be
taxable to such holders as ordinary income) to the extent of the current and
accumulated earnings and profits of the Company, as determined for federal
income tax purposes. The amount of any distribution will be equal to the
amount of cash, or, in the case of a distribution paid by increasing the
liquidation preference and redemption price of the New Preferred Stock, should
be equal to the amount of increase in the liquidation preference and
redemption price. To the extent that the amount of a distribution on the New
Preferred Stock exceeds the Company's current and accumulated earnings and
profits (as determined for federal income tax purposes), such a distribution
will be treated as a nontaxable return of capital and will be applied against
and reduce the adjusted tax basis of the New Preferred Stock in the hands of
each holder (but not below zero). The amount of any such distribution which
exceeds the adjusted tax basis of the New Preferred Stock in the hands of the
holder will be treated as capital gain and will be long-term capital gain if
the holder's holding period for the New Preferred Stock exceeds one year. It
is unclear whether a holder's holding period with respect to that portion of
his New Preferred Stock attributable to any increase in the liquidation
preference and redemption price would include the entire period during which
he held the New Preferred Stock, or whether a new holding period would
commence with respect to such portion at the time of such increase.
Under Section 243 of the Code, corporate stockholders generally will be able
to deduct 70% of the amount of any distribution qualifying as a dividend.
There are, however, many exceptions and restrictions relating to the
availability of such dividends-received deduction and a recent legislative
proposal, if enacted, would reduce the dividends-received deduction from 70%
to 50%. It is unclear whether, and in what form, such proposal will be
enacted.
Section 246A of the Code reduces the dividends-received deduction allowed to
a corporate stockholder that has incurred indebtedness "directly attributable"
to its investment in portfolio stock. Section 246(c) of the Code
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requires that, in order to be eligible for the dividends-received deduction, a
corporate stockholder must generally hold the shares of New Preferred Stock
for a 46-day minimum holding period. A taxpayer's holding period for these
purposes is suspended during any period in which a holder has certain options
or contractual obligations with respect to substantially identical stock or
holds one or more other positions with respect to substantially identical
stock that diminishes the risk of loss from holding the New Preferred Stock. A
recent legislative proposal would provide that a corporate stockholder would
not be entitled to a dividends-received deduction on distributions on the New
Preferred Stock if such stockholder protects itself from risk of loss
immediately before or immediately after the stockholder becomes entitled to
the dividend. It is unclear whether, and in what form, such proposal will be
enacted.
Under Section 1059 of the Code, a corporate stockholder is required to
reduce its tax basis (but not below zero) in the New Preferred Stock by the
nontaxed portion of any "extraordinary dividend" if such stock has not been
held for more than two years before the earliest of the date such dividend is
declared, announced, or agreed to. Generally, the nontaxed portion of an
extraordinary dividend is the amount excluded from income by operation of the
dividends-received deduction provisions of Section 243 of the Code. An
extraordinary dividend on the New Preferred Stock generally would be a
dividend that (i) equals or exceeds 5% of the corporate stockholder's adjusted
tax basis in the New Preferred Stock, treating all dividends having ex-
dividend dates within an 85-day period as one dividend or (ii) exceeds 20% of
the corporate stockholder's adjusted tax basis in such stock, treating all
dividends having ex-dividend dates within a 365-day period as one dividend. In
determining whether a dividend paid on the New Preferred Stock is an
extraordinary dividend, a corporate stockholder may elect to substitute the
fair market value of the stock for such holder's tax basis for purposes of
applying these tests, provided such fair market value is established to the
satisfaction of the Secretary of Treasury (the "Secretary") as of the day
before the ex-dividend date. An extraordinary dividend also includes any
amount treated as a dividend in the case of a redemption that is either non-
pro rata as to all stockholders or in partial liquidation of the Company,
regardless of the stockholder's holding period and regardless of the size of
the dividend. If any part of the nontaxed portion of an extraordinary dividend
is not applied to reduce the holder's tax basis as a result of the limitation
on reducing such basis below zero, such part will be treated as gain upon sale
or exchange of the stock. However, recently introduced legislation would
require gain on the nontaxed portion of an extraordinary dividend to be
recognized at the time when the extraordinary dividend is paid rather than at
the time of the sale or exchange of the New Preferred Stock. It is unclear
whether, and in what form, such legislation will be enacted. Special rules
exist with respect to extraordinary dividends for "qualified preferred
dividends." A qualified preferred dividend is any fixed dividend payable with
respect to any share of stock which (i) provides for fixed preferred dividends
payable not less frequently than annually and (ii) is not in arrears as to
dividends at the time the holder acquired such stock. A qualified preferred
dividend does not include any dividend payable with respect to any share of
stock if the actual rate of return of such stock exceeds 15%. Section 1059 of
the Code does not apply to qualified preferred dividends if the corporate
stockholder holds such stock for more than five years. If the stockholder
disposes of such stock before it has been held for more than five years, the
amount subject to extraordinary dividend treatment with respect to qualified
preferred dividends is limited to the excess of the actual rate of return over
the stated rate of return. Actual or stated rates of return are the actual or
stated dividends expressed as a percentage of the lesser of (i) the
stockholder's tax basis in such stock or (ii) the liquidation preference of
such stock.
A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of the dividends received which such corporate
stockholder deducts in computing taxable income. This results from the fact
that corporate stockholders are required to increase alternative minimum
taxable income by 75% of the excess of adjusted current earnings over
alternative minimum taxable income (determined without regard to this adjusted
current earnings adjustment or the alternative tax net operating loss
deduction).
REDEMPTION PREMIUM ON NEW PREFERRED STOCK
Under Section 305(c) of the Code and the applicable Treasury regulations
thereunder, if the redemption price of New Preferred Stock exceeds its issue
price, the difference ("redemption premium") may be taxable as
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a constructive distribution of additional Preferred Stock to the holder
(treated as a dividend to the extent of the Company's current and accumulated
earnings and profits and otherwise subject to the treatment described above
for distributions) over a certain period. Because the New Preferred Stock
provides for an optional right of redemption by the Company at a price in
excess of the issue price, stockholders could be required to recognize such
redemption premium under a constant interest rate method similar to that
described below for accruing OID (see "Original Issue Discount on Exchange
Debentures") if, based on all of the facts and circumstances, the optional
redemption is more likely than not to occur. If stock may be redeemed at more
than one time, the time and price at which such redemption is most likely to
occur must be determined based on all of the facts and circumstances.
Applicable Treasury regulations provide a "safe harbor" under which a right to
redeem will not be treated as more likely than not to occur if (i) the issuer
and the holder are not related within the meaning of the regulations; (ii)
there are no plans, arrangements, or agreements that effectively require or
are intended to compel the issuer to redeem the stock (disregarding, for this
purpose, a separate mandatory redemption); and (iii) exercise of the right to
redeem would not reduce the yield of the stock, as determined under the
Treasury regulations. Regardless of whether the optional redemption is more
than likely not to occur, constructive dividend treatment will not result if
the redemption premium does not exceed a de minimis amount. The Company
intends to take the position that the existence of the Company's optional
redemption right does not result in a constructive distribution to the
holders.
SALE OR EXCHANGE OF NEW PREFERRED STOCK
A holder will recognize capital gain or loss for federal income tax purposes
upon a sale or exchange of New Preferred Stock in an amount equal to the
difference between such holder's adjusted tax basis in the New Preferred Stock
and the amount realized from such disposition. Any such capital gain or loss
will be long-term capital gain or loss if at the time of the sale or exchange
the holder held such New Preferred Stock for more than one year.
REDEMPTION AND EXCHANGE OF NEW PREFERRED STOCK FOR EXCHANGE DEBENTURES
A redemption of shares of the New Preferred Stock for cash or an exchange of
the New Preferred Stock for Exchange Debentures will be a taxable transaction
on which a holder will generally recognize capital gain or loss, provided that
a holder owns no stock of the Company, actually or constructively within the
meaning of Section 318 of the Code, following a redemption or exchange. The
gain or loss recognized on such exchange will generally be equal to the
difference between the amount realized by the holder of the New Preferred
Stock and such holder's adjusted tax basis in the New Preferred Stock
surrendered in the redemption.
If a holder does own, actually or constructively, such other stock
(including New Preferred Stock not redeemed), a redemption of the New
Preferred Stock may be treated as a dividend to the extent of the Company's
current or accumulated earnings and profits (as determined for federal income
tax purposes). Such dividend treatment would not be applied if the redemption
is "not essentially equivalent to a dividend" with respect to the holder under
Section 302(b)(1) of the Code. A distribution to a holder will be "not
essentially equivalent to a dividend" if it results in a "meaningful
reduction" in the holder's stock interest in the Company. For these purposes,
any redemption of New Preferred Stock should result in a "meaningful
reduction" of such holder's stock interest in the Company unless such holder
owns a significant block of common stock of the Company.
In the case of a redemption for cash, the amount realized will be the cash
received on the redemption. In the case of an exchange of New Preferred Stock
for Exchange Debentures, the amount realized on receipt of the Exchange
Debenture would be equal to the "issue price" of the Exchange Debenture (or
possibly, if different, the fair market value of the Exchange Debenture). The
issue price of Exchange Debentures would be determined in the manner described
below for purposes of computing OID, if any, on the Exchange Debentures (see
"Original Issue Discount on Exchange Debentures").
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ORIGINAL ISSUE DISCOUNT ON EXCHANGE DEBENTURES
General Original Issue Discount Rules
The amount of original issue discount, if any, on a debt instrument is the
excess of its "stated redemption price at maturity" over its "issue price,"
subject to a statutorily defined de minimis exception.
The "issue price" of an Exchange Debenture will be equal to (i) its fair
market value as of the exchange date if the Exchange Debentures are traded on
an established securities market on or at any time during the 60 day period
ending 30 days after the exchange date or (ii) the fair market value at the
exchange date of the New Preferred Stock if such New Preferred Stock is traded
on an established securities market during the 60 day period ending 30 days
after the exchange date but the Exchange Debentures are not. If neither the
New Preferred Stock nor the Exchange Debentures are so traded, the issue price
of the Exchange Debentures is determined under Section 1274 of the Code, in
which case the issue price will be the stated principal amount of the Exchange
Debentures provided that the yield on the Exchange Debentures is equal to or
greater than the "applicable federal rate" in effect at the time the Exchange
Debentures are issued. If the yield on the Exchange Debentures is less than
such applicable federal rate, the issue price of such Exchange Debentures
under Section 1274 of the Code will be equal to the present value as of the
issue date of all payments to be made on the Exchange Debentures, discounted
at the applicable federal rate. It cannot be determined at the present time
whether the New Preferred Stock or the Exchange Debentures will be, at the
relevant time, traded on an established securities market within the meaning
of the OID Regulations.
The "stated redemption price at maturity" of an Exchange Debenture is the
sum of its principal amount plus all other payments required thereunder, other
than payments of "qualified stated interest" (defined generally as stated
interest that is unconditionally payable in cash or in property (other than
debt instruments of the Company) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
In general, the amount of original issue discount that a holder of a debt
instrument with original issue discount must include in gross income for
federal income tax purposes will be the sum of the daily portions of original
issue discount with respect to such debt instrument for each day during the
taxable year or portion of a taxable year on which such holder holds the debt
instrument. The daily portion is determined by allocating to each day of an
accrual period (generally, a six month period or a shorter or longer period
from the date of original issuance) a pro rata portion of an amount equal to
the "adjusted issue price" of the debt instrument at the beginning of the
accrual period multiplied by the yield to maturity of the debt instrument. The
"adjusted issue price" is the issue price of the debt instrument increased by
the accrued original issue discount for all prior accrual periods (and
decreased by the amount of cash payments made in all prior accrual periods,
other than qualified stated interest payments). The tax basis of the debt
instrument in the hands of the holder will be increased by the amount of
original issue discount, if any, on the debt instrument that is included in
the holder's gross income and will be decreased by the amount of any cash
payments (other than qualified stated interest payments) received with respect
to the debt instrument, whether such payments are denominated as principal or
interest.
Exchange Debentures
Because interest on the Exchange Debentures can, at the option of the
Company, be paid in cash or in additional Exchange Debentures, no payments
made on the Exchange Debentures will be treated as qualified stated interest.
In addition, if the issue price of the Exchange Debentures is at least equal
to their stated principal amount, it will be presumed for purposes of
computing OID on the Exchange Debentures that the Company will not exercise
its option to issue additional Exchange Debentures in lieu of paying cash
interest on the Exchange Debentures. In this event, the Exchange Debentures
will initially be treated as having been issued with OID equal to the excess
of their stated redemption price at maturity (which will be equal to the sum
of the principal amount plus all payments of stated interest) over their issue
price. If, in fact, the Company exercises its option to issue
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additional Exchange Debentures in lieu of paying cash interest on the Exchange
Debentures, the additional Exchange Debentures will not be treated as payments
of interest on the Exchange Debentures. In this event, the Exchange Debentures
and the additional Exchange Debentures will be treated as a single OID
obligation which will be deemed to be reissued for an issue price equal to the
original issue price of the Exchange Debentures plus the principal amount of
the additional Exchange Debentures issued with respect thereto, and will have
OID equal to the excess of the stated redemption price at maturity of such
obligation (which will be equal to the sum of the principal amounts of the
Exchange Debentures and the additional Exchange Debentures plus all payments
of stated interest on such debt instruments) over the newly determined issue
price. The Exchange Debentures will similarly be deemed to be reissued with a
new issue price each time the Company exercises its option to issue additional
Exchange Debentures in lieu of paying cash interest on the Exchange
Debentures.
If the issue price of the Exchange Debentures is less than their stated
principal amount, then it will be presumed for purposes of computing OID on
the Exchange Debentures that the Company will exercise its option to issue
additional Exchange Debentures in lieu of paying cash interest on the Exchange
Debentures. In this case, the Exchange Debentures will be treated as having
been issued with OID equal to the excess of their stated redemption price at
maturity (which will be equal to the sum of the principal amounts of the
Exchange Debentures and the additional Exchange Debentures plus all payments
of stated interest) over their issue price. If, in fact, the Company pays cash
interest on the Exchange Debentures instead of issuing additional Exchange
Debentures, such cash payments will be treated as retiring a pro rata portion
of the Exchange Debentures (including any additional Exchange Debentures), and
will result in taxable gain or loss to holders equal to the difference between
the amount of such cash payments and the holders' allocable adjusted tax basis
in the portion of the Exchange Debentures (including any additional Exchange
Debentures) so retired.
A holder of Exchange Debentures, subject to certain limitations, may elect
to include all interest and OID on the Exchange Debentures in gross income
under the constant yield method. For this purpose, interest includes stated
and unstated interest, acquisition discount, OID, de minimis market discount
and market discount, as adjusted by any acquisition premium. Such election, if
made in respect of a market discount bond, will constitute an election to
include market discount in income currently on all market discount bonds
acquired by such holder on or after the first day of the first taxable year to
which the election applies (see "Market Discount on Resale of Exchange
Debentures").
MARKET DISCOUNT ON RESALE OF EXCHANGE DEBENTURES
If a holder purchases an Exchange Debenture for an amount that is less than
its adjusted issue price, the amount of the difference will be treated as
"market discount" for federal income tax purposes, unless such difference is
less than a statutorily-defined de minimis amount. Under the market discount
rules, a holder will be required to treat any principal payment on, or any
gain on the sale, exchange, retirement or other disposition of, an Exchange
Debenture as ordinary income to the extent of the market discount, which has
not previously been included in income and is treated as having accrued on
such Exchange Debenture at the time of such payment or disposition. In
addition, the holder may be required to defer, until the maturity of the
Exchange Debenture or its earlier disposition in a taxable transaction, the
deduction of all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or carry such Exchange Debenture.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Debenture,
unless the holder elects to accrue on a constant interest method. A holder of
an Exchange Debenture may elect to include market discount in income currently
as it accrues (on either a ratable or constant interest method), in which case
the rule described above regarding deferral of interest deductions will not
apply. This election to include market discount in income currently, once
made, applies to all market discount obligations acquired on or after the
first taxable year to which the election applies and may not be revoked
without the consent of the Service.
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ACQUISITION PREMIUM AND AMORTIZABLE BOND PREMIUM ON EXCHANGE DEBENTURES
A holder that purchases an Exchange Debenture for an amount that is greater
than its adjusted issue price but equal to or less than the sum of all amounts
payable on the Exchange Debenture after the purchase date other than payments
of qualified stated interest will be considered to have purchased such
Exchange Debenture at an "acquisition premium." Under the acquisition premium
rules, the amount of OID which such holder must include in its gross income
with respect to such Exchange Debenture for any taxable year will be reduced
by the portion of such acquisition premium properly allocable to such year.
If at the time the New Preferred Stock is exchanged for Exchange Debentures
or at the time a subsequent holder purchases Exchange Debentures, the holder's
tax basis in any such Exchange Debenture exceeds the sum of all amounts
payable on the Exchange Debenture after the exchange date or purchase date
other than qualified stated interest, such excess may constitute "premium" and
such holder will not be required to include any OID in income. A holder
generally may elect to amortize the premium over the remaining term of the
Exchange Debenture on a constant yield method. The amount amortized in any
year will be treated as a reduction of the holder's interest income from the
Exchange Debenture. Bond premium on an Exchange Debenture held by a holder
that does not make such an election will decrease the gain or increase the
loss otherwise recognized on disposition of the Exchange Debenture. The
election to amortize premium on a constant yield method once made applies to
all debt obligations held or subsequently acquired by the electing holder on
or after the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the Service.
REDEMPTION, SALE OR EXCHANGE OF EXCHANGE DEBENTURES
The adjusted tax basis of a holder who received Exchange Debentures in
exchange for New Preferred Stock will, in general, be equal to the issue price
of such Exchange Debentures, increased by OID and market discount previously
included in income by the holder and reduced by any amortized premium and any
cash payments on the Exchange Debentures other than qualified stated interest.
Upon the redemption, sale, exchange or retirement of an Exchange Debenture, a
holder will recognize gain or loss equal to the difference between the amount
realized upon the redemption, sale, exchange or retirement (less any accrued
qualified stated interest, which will be taxable as such) and the adjusted tax
basis of the Exchange Debenture. Such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if at the time of redemption,
sale, exchange or retirement the holder held such Exchange Debenture for more
than one year.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATION RULES
If the yield-to-maturity on Exchange Debentures equals or exceeds the sum of
(i) the "applicable federal rate" (as determined under Section 1274(d) of the
Code) in effect for the month in which the Exchange Debentures are issued (the
"AFR") and (i) 5%, and the OID on such Exchange Debentures is "significant,"
the Exchange Debentures will be considered "applicable high yield discount
obligations" ("AHYDOs") under Section 163(i) of the Code. Consequently, the
Company will not be allowed to take a deduction for interest (including OID)
accrued on the Exchange Debentures for federal income tax purposes until such
time as the Company actually pays such interest (including OID) in cash or in
other property (other than stock or debt of the Company or a person deemed to
be related to the Company under Section 453(f)(1) of the Code). Because the
amount of OID, if any, attributable to the Exchange Debentures will be
determined at such time such Exchange Debentures are issued and the AFR at the
time such Exchange Debentures are issued in exchange for New Preferred Stock
is not predictable, it is impossible to determine at the present time whether
an Exchange Debenture will be treated as an AHYDO.
Moreover, if the yield-to-maturity on the Exchange Debenture exceeds the sum
of (i) the AFR and (ii) 6% (such excess shall be referred to hereinafter as
the "Disqualified Yield"), the deduction for interest (including OID) accrued
on the Exchange Debentures will be permanently disallowed (regardless of
whether the Company actually pays such interest or OID in cash or in other
property) for federal income tax purposes to the extent such interest or OID
is attributable to the Disqualified Yield on the Exchange Debentures
("Dividend-Equivalent
P-82
<PAGE>
Interest"). For purposes of the dividends-received deduction, such Dividend-
Equivalent Interest will be treated as a dividend to the extent it is deemed
to have been paid out of the Company's current or accumulated earnings and
profits. Accordingly, a holder of Exchange Debentures that is a corporation
may be entitled to take a dividends-received deduction with respect to any
Dividend-Equivalent Interest received by such corporate holder on such
Exchange Debentures.
BACKUP WITHHOLDING
A holder of New Preferred Stock or Exchange Debentures may be subject to
backup withholding at the rate of 31% with respect to dividends paid or
accrued on, interest paid on, OID accrued on, and gross proceeds of a sale of,
the New Preferred Stock or Exchange Debentures unless (i) such holder is a
corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss to exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of New Preferred Stock or Exchange Debentures who
does not provide the Company with his or her correct taxpayer identification
number may be subject to penalties imposed by the Service.
The Company will report to the holders of the New Preferred Stock and
Exchange Debentures and to the Service the amount of any "reportable payments"
(including any constructive dividends accrued on the New Preferred Stock and
OID accrued on the Exchange Debentures) and any amount withheld with respect
to the New Preferred Stock or Exchange Debentures during the calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PURCHASER OF
NEW PREFERRED STOCK SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE
TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP, EXCHANGE AND
DISPOSITION OF THE NEW PREFERRED STOCK AND EXCHANGE DEBENTURES, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
P-83
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among Smith's and BT Securities Corporation ("BT
Securities"), CS First Boston Corporation ("CS First Boston"), Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), Goldman, Sachs & Co.
("Goldman Sachs") and Chase Securities Inc. ("Chase") (collectively, the
"Underwriters"), the Underwriters have agreed to purchase, and the Company has
agreed to sell to the Underwriters, all of the shares of New Preferred Stock
offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the New Preferred Stock is subject to the
approval of certain legal matters by counsel and to various other conditions.
The nature of each Underwriter's obligation is such that each is severally
committed to purchase the number of shares of New Preferred Stock set forth
opposite its name if it purchases any.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
BT Securities Corporation................................
CS First Boston Corporation..............................
Donaldson, Lufkin & Jenrette Securities Corporation......
Goldman, Sachs & Co......................................
Chase Securities Inc.....................................
------
Total................................................ 75,000
======
</TABLE>
The Underwriters propose to offer the shares of New Preferred Stock directly
to the public at the public offering price set forth on the cover page hereof,
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share. After the initial public offering
of the New Preferred Stock, the public offering price and other selling terms
may be changed.
The Company does not intend to apply for listing of the New Preferred Stock
on a national securities exchange, but has been advised by each of the
Underwriters that it presently intends to make a market in the New Preferred
Stock, as permitted by applicable laws and regulations. The Underwriters are
not obligated, however, to make a market in the New Preferred Stock, and any
such market making may be discontinued at any time by one or all of the
Underwriters at the sole discretion of such Underwriters. There can be no
assurance that an active public market for the New Preferred Stock will
develop.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
BT Securities and CS First Boston have been engaged by Smitty's to act as
dealer managers and consent solicitation agents in connection with the
Smitty's Refinancing. BT Securities and CS First Boston will receive customary
fees in connection with such services.
Chase Manhattan, an affiliate of Chase, has been the administrative agent
and a lender under SSV's existing credit facilities. Proceeds of the Offerings
will be used, in part, to repay indebtedness to Chase Manhattan and the other
lenders under such credit facilities. Bankers Trust, an affiliate of BT
Securities, and Chase Manhattan are the Arrangers of the New Credit Facility,
and Bankers Trust will act as administrative agent for the New Credit
Facility. Bankers Trust and Chase Manhattan will receive customary fees in
connection with such services.
An affiliate of Chase is a limited partner in a partnership controlled by
Yucaipa which owns shares of Smitty's Class A Common Stock. The partnership
will receive shares of Smith's Class B Common Stock in the Merger in exchange
for such shares.
Goldman Sachs is serving as financial advisor to the Company in connection
with the Transactions and has delivered a written opinion to the Company's
Board of Directors that as of January 29, 1996, the exchange ratio
P-84
<PAGE>
in the Merger is fair to the Company. Goldman Sachs has been engaged by the
Company to act as dealer manager in connection with the Tender Offer. Goldman
Sachs will receive customary fees in connection with such services.
CS First Boston owns shares of Smitty's Class B Common Stock and will
receive shares of Smith's Common Stock in the Merger in exchange for such
shares of Smitty's Class B Common Stock.
Each of the Underwriters has from time to time provided investment banking
and financial advisory services to one or more of Smith's, Smitty's, Yucaipa
and/or their respective affiliates and may continue to do so in the future.
The Underwriters have received customary fees for such services.
P-85
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
---------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... i
Summary................................................................... 1
Risk Factors.............................................................. 13
Pro Forma Capitalization.................................................. 18
Unaudited Pro Forma Combined Financial Statements......................... 19
Selected Historical Financial Data of Smith's............................. 26
Selected Historical Financial Data of Smitty's............................ 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 38
Management................................................................ 48
Principal Stockholders.................................................... 50
Certain Relationships and Related Transactions............................ 52
Description of New Preferred Stock and Exchange Debentures................ 57
Description of Other Indebtedness......................................... 71
Description of Capital Stock.............................................. 72
Description of New Credit Facility........................................ 74
Certain Federal Income Tax Considerations................................. 77
Underwriting.............................................................. 84
Legal Matters............................................................. 86
Experts................................................................... 86
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-----------------
PROSPECTUS
-----------------
[LOGO OF SMITH'S FOOD & DRUG CENTERS(R)]
SMITH'S FOOD &
DRUG CENTERS, INC.
75,000 SHARES
% CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the Notes.
<TABLE>
<S> <C>
SEC registration fee.............................................. $
NASD filing fee...................................................
Blue Sky fees and expenses........................................
Accounting fees and expenses......................................
Legal fees and expenses...........................................
Printing and engraving expenses...................................
Trustee fees......................................................
Miscellaneous.....................................................
-----
Total......................................................... $
=====
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Smith's, Smitty's, and SSV are Delaware corporations and their Certificates
of Incorporation and Bylaws provide for indemnification of their officers and
directors to the fullest extent permitted by law. Section 102(b)(7) of the
Delaware General Corporation Law (the "DGCL") eliminates the liability of a
corporation's directors to a corporation or its stockholders, except for
liabilities related to breach of duty of loyalty, actions not in good faith,
and certain other liabilities.
Section 145 of the DGCL provides for the indemnification by a Delaware
corporation of its directors, officers, employees and agents in connection
with actions, suits or proceedings brought against them by a third party or in
the right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against liabilities and expenses
incurred in any such action, suit or proceeding.
The Underwriting Agreement provides for indemnification by the Underwriters
of Smith's and its directors, officers and controlling persons for certain
liabilities arising under the Securities Act.
The directors and officers of Smith's, Smitty's and SSV are insured against
certain liabilities under directors' and officers' liability insurance.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
A list of exhibits filed with this Registration Statement on Form S-3 is
set forth in the Index to Exhibits on page E-1, and is incorporated herein
by reference.
(b) Financial Statement Schedules
Not Applicable.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that
II-1
<PAGE>
a claim for indemnification against such liabilities (other than the payment
by the registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants
will, unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Salt Lake City, State of Utah, on
March 8, 1996.
Smith's Food & Drug Centers, Inc.
By /s/ ALLEN R. ROWLAND
--------------------------------
ALLEN R. ROWLAND
PRESIDENT AND CHIEF OPERATING
OFFICER
We, the undersigned officers and directors of Smith's Food & Drug Centers,
Inc. and each of us, do hereby constitute and appoint each and any of Allen R.
Rowland and Matthew G. Tezak, our true and lawful attorney and agent, with
full power of substitution and resubstitution, to do any all acts and things
in our name and behalf in any and all capacities and to execute any and all
instruments for us in our names in any and all the Securities Act of 1933, as
amended, and any rules, regulations, and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement, including
specifically, but without limitation, power and authority to sign for us or
any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto; and we hereby ratify
and confirm all that said attorney and agent, or his substitute, shall do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ JEFFREY P. SMITH Chairman of the March 8, 1996
- ------------------------------------- Board and Chief
JEFFREY P. SMITH Executive Officer
/s/ ALLEN R. ROWLAND President and Chief March 8, 1996
- ------------------------------------- Operating Officer
ALLEN R. ROWLAND
/s/ MATTHEW G. TEZAK Senior Vice March 8, 1996
- ------------------------------------- President and Chief
MATTHEW G. TEZAK Financial Officer
(Principal
Financial Officer)
/s/ DELONNE ANDERSON Director March 8, 1996
- -------------------------------------
DELONNE ANDERSON
/s/ ROBERT D. BOLINDER Director March 8, 1996
- -------------------------------------
ROBERT D. BOLINDER
II-3
<PAGE>
SIGNATURES TITLE DATE
/s/ ALLEN P. MARTINDALE Director March 8, 1996
- -------------------------------------
ALLEN P. MARTINDALE
/s/ NICOLE MILLER Director March 8, 1996
- -------------------------------------
NICOLE MILLER
/s/ DUANE PETERS Director March 8, 1996
- -------------------------------------
DUANE PETERS
/s/ RAY V. ROSE Director March 8, 1996
- -------------------------------------
RAY V. ROSE
/s/ FRED L. SMITH Director March 8, 1996
- -------------------------------------
FRED L. SMITH
/s/ RICHARD D. SMITH Director March 8, 1996
- -------------------------------------
RICHARD D. SMITH
/s/ SEAN D. SMITH Director March 8, 1996
- -------------------------------------
SEAN D. SMITH
/s/ DOUGLAS JOHN TIGERT Director March 8, 1996
- -------------------------------------
DOUGLAS JOHN TIGERT
/s/ KENNETH A. WHITE Director March 8, 1996
- -------------------------------------
KENNETH A. WHITE
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
*1.1 Underwriting Agreement dated as of , 1996 by and
among Smith's Food & Drug Centers, Inc. ("Smith's") and BT
Securities Corporation, CS First Boston Corporation, Donaldson,
Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co.
and Chase Securities Inc. (the "Underwriters") with respect to
the % Senior Notes due 2006 (the "Senior Notes"), the %
Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes") and the % Cumulative Redeemable Exchangeable
Preferred Stock (the "New Preferred Stock").
*2.1 Recapitalization Agreement and Plan of Merger dated as of
January 29, 1996 by and among Smith's Food & Drug Centers,
Inc., Cactus Acquisition, Inc., Smitty's Supermarkets, Inc. and
The Yucaipa Companies.
*3.1 Amended and Restated Certificate of Incorporation of Smith's.
*3.2 Amended and Restated Bylaws of Smith's.
*3.3 Certificate of Designation with respect to the New Preferred
Stock.
*4.1 Indenture dated as of , 1996 by and between
Smith's and , as Trustee, with respect to
the Senior Notes.
*4.2 Indenture dated as of , by and between Smith's
and , as Trustee, with respect to the
Senior Subordinated Notes.
*4.3 Indenture dated as of , 1996 by and between Smith's and
, as Trustee, with respect to the % Subordinated Exchange
Debentures due 2008 (the "Exchange Debentures").
*5.1 Opinion of Latham & Watkins regarding the legality of the
Senior Notes, Senior Subordinated Notes and New Preferred
Stock, including consent.
*7.1 Opinion of Latham & Watkins regarding liquidation preference,
including consent.
*8.1 Opinion of Latham & Watkins regarding certain federal income
tax matters, including consent.
*10.1 Credit Agreement dated as of , 1996 by and among
Smith's, Bankers Trust Company and The Chase Manhattan Bank, as
Arrangers, the lenders named therein and Bankers Trust Company,
as Administrative Agent.
*12.1 Statement regarding computation of ratio of earnings to fixed
charges.
*12.2 Statement regarding computation of ratio of earnings to fixed
charges and preferred stock dividends.
*23.1 Subsidiaries of the Company.
23.2 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.3 Consent of Ernst & Young LLP, independent auditors.
*23.4 Consent of Latham & Watkins (included in the opinions filed as
Exhibits 5 and 8 to the Registration Statement).
24.1 Power of Attorney (included on signature page to the
Registration Statement).
*25.1 Statement of Eligibility and Qualification on Form T-1 of ,
as Trustee with respect to the Senior Notes (No. 22- ).
*25.2 Statement of Eligibility and Qualification on Form T-1 of ,
as Trustee with respect to the Senior Subordinated Notes (No.
22- ).
*25.3 Statement of Eligibility and Qualification on Form T-1 of ,
as Trustee with respect to the Exchange Debentures (No. 22-
).
27 Financial Data Schedule.
*99.1 Consent of Linda McLoughlin Figel to be named as a proposed
Director.
</TABLE>
- --------
* To be filed by amendment
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 (File
No. 333- ) of our report dated October 3, 1995, except for Note 18 for which
the date is January 29, 1996, on our audits of the financial statements of
Smitty's Supermarkets, Inc. and subsidiaries and the Predecessor. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
March 5, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and in
headnotes and to the use of our report dated January 29, 1996, in the
Registration Statement (Form S-3, No. 333-00000) and related Prospectuses of
Smith's Food & Drug Centers, Inc. dated March 8, 1996.
ERNST & YOUNG LLP
Salt Lake City, Utah
March 5, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-30-1995
<CASH> 16,079
<SECURITIES> 0
<RECEIVABLES> 23,802
<ALLOWANCES> 0
<INVENTORY> 394,982
<CURRENT-ASSETS> 605,018
<PP&E> 1,452,029
<DEPRECIATION> 390,933
<TOTAL-ASSETS> 1,686,180
<CURRENT-LIABILITIES> 442,296
<BONDS> 725,253
3,311
0
<COMMON> 299
<OTHER-SE> 416,421
<TOTAL-LIABILITY-AND-EQUITY> 1,686,180
<SALES> 3,083,737
<TOTAL-REVENUES> 3,083,737
<CGS> 2,386,707
<TOTAL-COSTS> 2,386,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,478
<INCOME-PRETAX> (69,812)
<INCOME-TAX> (29,300)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,512)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
