<PAGE>
FILED PURSUANT TO RULE 424(B)(1)
REGISTRATION NO. 333-01601
PROSPECTUS
LOGO
[LOGO OF SMITH'S FOOD & DRUG CENTERS]
$575,000,000
SMITH'S FOOD & DRUG CENTERS, INC.
11 1/4% SENIOR SUBORDINATED NOTES DUE 2007
---------------
The offering (the "Offering") by Smith's Food & Drug Centers, Inc.
("Smith's" or the "Company") of its 11 1/4% Senior Subordinated Notes due 2007
(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.
Consummation of the Offering is conditioned upon the closing of the Merger and
the Recapitalization.
Interest on the Notes will be payable semiannually on each May 15 and
November 15, commencing on November 15, 1996. The Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on and after May
15, 2001, at the respective redemption prices set forth herein. In addition, on
or prior to May 15, 1999, the Company may, at its option, use the Net Cash
Proceeds (as defined) of one or more Public Equity Offerings (as defined) to
redeem up to an aggregate of 35% of the 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 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 New Credit Facility (as defined). At
March 30, 1996, on a pro forma basis after giving effect to the Transactions
(as defined) and the California Disposition (as defined), the aggregate
outstanding amount of Senior Indebtedness of the Company would have been
approximately $813.2 million, which amount excludes any borrowings or amounts
available to be borrowed under the New Revolving Facility (as defined). The
Notes will be effectively subordinated to all existing and future liabilities,
including indebtedness, of the Company's subsidiaries. At March 30, 1996, on a
pro forma basis after giving effect to the Transactions and the California
Disposition, the Company's subsidiaries would have had indebtedness and other
liabilities reflected on the Company's consolidated balance sheet, including
trade payables and accrued expenses (but excluding guarantees of Senior
Indebtedness), of approximately $143.0 million.
The Company does not intend to apply for listing of the Notes on any national
securities exchange. See "Underwriting."
-------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 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 Note................................... 100.00% 3.00% 97.00%
- -----------------------------------------------------------------------------------
Total...................................... $575,000,000 $17,250,000 $557,750,000
===================================================================================
</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 Offering payable by the Company, estimated
at $1,494,500.
-------------
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 May 23, 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 May 16, 1996.
<PAGE>
FOR CALIFORNIA RESIDENTS:
WITH RESPECT TO SALES OF THE NOTES OF SMITH'S FOOD & DRUG CENTERS, INC.
BEING OFFERED HEREBY TO CALIFORNIA RESIDENTS, AS OF THE DATE OF THIS
PROSPECTUS, SUCH NOTES MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS" WITHIN
THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS,
SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES,
INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940,
PENSION AND PROFIT-SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH,
TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH
ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED
FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY
AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES
OF THE FOREGOING, (3) ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE
PURPOSE OF PURCHASING THE NOTES BEING OFFERED HEREBY) WHO PURCHASES AT LEAST
$1,000,000 AGGREGATE AMOUNT OF THE NOTES BEING OFFERED HEREBY, OR (4) ANY
PERSON WHO (A) HAS AN INCOME OF $65,000 AND A NET WORTH OF $250,000, OR (B)
HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME, HOME FURNISHINGS
AND PERSONAL AUTOMOBILES).
---------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES 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. 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
reports on Form 8-K dated February 20, 1996 and May 7, 1996, (iii) Smith's
Quarterly Report on Form 10-Q for its fiscal quarter ended March 30, 1996, and
(iv) 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 Offering 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 May 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 May 1, 1996
totals for Smith's and Smitty's and give effect to the anticipated sale of two
Smitty's stores. 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 14.7% of the Company's
outstanding common stock following the Merger and the Recapitalization
(as defined).
. California Disposition. The Company has completed the sale or lease of
16 stores, three non-operating properties and its primary distribution
facility in Southern California and has closed its remaining 18 stores
there (the "California Divestiture"). Management determined that because
of the attractive growth prospects in the Company's principal markets
and the competitive environment in Southern California, it would
redeploy Company resources from California into such other markets.
Following the consummation of the Transactions, the Company intends to
accelerate the disposition of its closed stores and excess land in
California (the "California Asset Disposition", and together with the
California Divestiture, the "California Disposition").
. New Senior Management. The Company will enter into a five-year
management services agreement (the "Management Services Agreement") with
Yucaipa. Ronald W. Burkle, the managing general partner of Yucaipa, will
be appointed as Chief Executive Officer of the Company. In addition,
Allen R. Rowland recently joined Smith's as President and Chief
Operating Officer. Mr. Rowland was employed by Albertson's, Inc. for 25
years and had senior executive responsibilities for all of the principal
regions in which Smith's operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding common stock (excluding shares issuable in the Merger) for
$36.00 in cash per share (the "Tender Offer"). In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
1
<PAGE>
For the fiscal year ended December 30, 1995, after giving pro forma effect to
the Transactions and the California Disposition, the Company would have had net
sales and EBITDA (as defined) of approximately $3.0 billion and $255.4 million,
respectively. See "Unaudited Pro Forma Combined Financial Statements." In
addition, management believes that the Company will benefit from significant
operating synergies and cost saving opportunities following the Merger.
COMPANY STRENGTHS
Management believes the Company has the following principal strengths: (i)
leading market positions, (ii) attractive markets, (iii) new and recently
remodeled stores, (iv) prime store locations, (v) advanced backstage operations
and (vi) substantial owned real estate.
Leading Market Positions. Pro forma for the Merger, the Company will operate
146 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 and low pricing combined with a high level of
customer service has created a valuable franchise with strong name recognition
and customer loyalty.
Attractive Markets. The Company's stores are located predominantly in Utah,
Arizona, Nevada and New Mexico, which are among the fastest growing states in
terms of population and employment. According to the U.S. Bureau of the Census,
the population of those four states has increased at a compound annual growth
rate of 3.0% since 1990, compared to the national average of 1.1% over the same
period. According to the U.S. Bureau of Labor Statistics, employment in the
same four states has increased at a compound annual growth rate of 4.0% since
1990, compared to the national average of 1.3% over the same period. In
addition, management believes that operating in distinct markets in several
states provides advantages due to their differences in economic cycles,
demographics and competitive conditions.
New and Recently Remodeled Stores. After giving effect to the Merger and the
California Divestiture, approximately 84% of the Company's stores will have
been opened or remodeled within the last seven years. During the five fiscal
years ended December 30, 1995, Smith's spent approximately $414 million in
capital expenditures (excluding capital expenditures associated with California
operations), which have been primarily used to build new stores and to expand
and remodel existing stores. During the five-year period ended December 30,
1995, Smitty's spent approximately $72 million in capital expenditures,
including approximately $42 million since mid-1994 to remodel substantially all
of its Phoenix-area stores.
Prime Store Locations. The Company's 48 years of operation have allowed it to
choose its store locations selectively as new residential areas have been
developed. The Company believes that many of its stores are in developed areas
where land values and the unavailability of suitable parcels would make it
difficult to replicate the Company's existing store base.
Advanced Backstage Operations. The Company owns and operates one of the most
modern and efficient backstage operations in the industry. During the five
fiscal years ended December 30, 1995, the Company spent approximately $163
million (excluding the divested California operations) to build, expand or
remodel its warehousing, distribution and processing facilities. Management
believes that the Company's approximately 3,000,000 square feet of backstage
facilities will be able to accommodate the Smitty's volume following the Merger
and support anticipated future growth.
Substantial Owned Real Estate. The Company will own 107 of the 146 stores it
will operate upon consummation of the Merger. The Company also owns its primary
warehousing, distribution and processing facilities. In addition, the Company
owns land for development, expansion or sale, as well as other non-operating
real estate assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
2
<PAGE>
THE CALIFORNIA DIVESTITURE
Smith's has completed the sale, lease or closure of its Southern California
regional operations. In December 1995, Smith's entered into an agreement to
sublease its Riverside, California distribution center and dairy plant to
Ralphs Grocery Company ("Ralphs"), an affiliate of Yucaipa, for the remaining
23-year term of Smith's lease. Ralphs also agreed to purchase certain related
equipment and inventory. In January 1996, Smith's entered into agreements to
sell or lease 16 stores and related equipment and three non-operating
properties to various supermarket companies (including Ralphs) and others.
Smith's has closed the remaining 18 stores and it is anticipated that these
closed stores will be sold or leased to other retail companies. The Company has
received net cash proceeds of approximately $67.2 million from the California
Divestiture and expects to receive an additional $10.6 million shortly after
the consummation of the Transactions. In connection with the California
Divestiture, the Company recorded pre-tax restructuring charges of $140 million
(the "California Divestiture Charge") for the year ended December 30, 1995 and
classified the assets to be leased or sold as "assets held for sale." The
California Divestiture Charge reflected (i) a provision for anticipated future
lease obligations, (ii) the anticipated cost to the Company of closing its
California stores and distribution center (primarily termination payments and
inventory), and (iii) asset valuation adjustments for the equipment in all of
the California stores and the distribution center and for the land and
buildings associated with the properties being sold or leased. The California
Divestiture, including the transactions with Ralphs, was unrelated to the
Merger or the Recapitalization.
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing and adjacent markets, (ii)
realize operating synergies and cost savings resulting from the Merger, (iii)
improve working capital management, (iv) grow its recently introduced price
impact warehouse stores and (v) dispose of remaining California real estate
following the consummation of the Transactions.
Expand Operations in Existing and Adjacent Markets. Management believes that
there are significant opportunities to increase the Company's sales and gain
efficiencies in its existing markets through new store openings and store
remodels. From 1991 through 1994, management primarily focused on the Southern
California market, opening 32 new stores in Southern California compared to a
net of 10 new stores in its other markets. In 1995, the Company opened a net of
17 new stores, only two of which were located in California. In an effort to
more fully realize its market potential in its non-California markets, in 1995
the Company began opening smaller combination stores (54,000 to 60,000 square
feet) in existing markets as part of a "fill-in" strategy. By pursuing a growth
strategy which emphasizes opening new stores within its existing and adjacent
markets, the Company believes it can increase its market share and improve its
distribution and other efficiencies, while taking advantage of such markets'
favorable growth prospects.
Realize Operating Synergies and Cost Savings Resulting from the Merger.
Management believes that approximately $25 million of net annual cost savings
are achievable over a three-year period following the Merger. The majority of
such cost savings opportunities relate to its Arizona operations and are
believed to be achievable (on an annualized basis) by the end of the first full
year of operations following the Merger. The estimates of potential cost
savings resulting from the Merger contained in this Prospectus are forward
looking statements that involve risks and inherent uncertainties that could
cause actual net annual cost savings to differ materially from those projected.
See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's and Smitty's advertising programs in
the Phoenix and Tucson markets substantially overlap and, as a result of
the Merger, management expects that the Company will be able to
eliminate a substantial portion of the combined advertising expenses.
Management estimates that annualized advertising cost savings of
approximately $7 million are achievable by the end of the first full
year of operations following the Merger.
3
<PAGE>
. General and Administrative Cost Savings. Management expects the Company
to achieve savings from the elimination of duplicative administrative
staff and headquarters facilities and the consolidation of management
information systems. Management estimates that annualized general and
administrative cost savings of approximately $13 million are achievable
by the end of the first full year of operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently operates
without any of its own distribution facilities. By incorporating the
Smitty's volume into Smith's Tolleson, Arizona warehousing and
distribution facilities, the Company expects to eliminate the expense
associated with Smitty's being supplied primarily by an independent
wholesaler, as well as reduce average unit costs resulting from improved
capacity utilization. Management estimates that annualized warehousing
and transportation cost savings of approximately $4 million are
achievable by the end of the second full year of operations following
the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to utilize Smith's electronic direct store
receiving system in all Smitty's stores, resulting in increased control
over direct store deliveries and corresponding payments. In addition, by
utilizing Smith's front-end systems in Smitty's stores, improvements in
the efficiency of Smitty's stores are expected. Management estimates
that annualized cost savings of approximately $2 million related to such
direct store delivery and store systems are achievable by the end of the
second full year of operations following the Merger.
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with aggregate annual sales (when combined with the
Company) in excess of $11 billion. Management estimates that annualized
cost savings of approximately $6 million are achievable from such
purchasing improvements by the end of the third full year of operations
following the Merger.
The sum of the components of the estimated annual cost savings exceeds $25
million; however, management expects that a portion of the savings will be
reinvested in the Company's operations. In connection with the Transactions,
the Company and Smitty's are evaluating the format mix of the combined Arizona
store base and are assessing the possibility of modifying the formats of
certain stores. It is anticipated that approximately $17 million of capital
expenditures and approximately $15 million of other expenses will be required
to integrate the Arizona operations over the next two years and realize such
cost savings.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
companies have achieved working capital improvements; however, there can be no
assurance that similar improvements can be achieved by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company recently
developed a price impact warehouse store format and during 1995 opened four of
these stores in the Las Vegas area operating under the name "PriceRite Grocery
Warehouse." Management believes that a number of the Company's markets are
underserved by price impact warehouse stores and that there are substantial
opportunities for expansion of the Company's PriceRite format through the
conversion of existing stores and the opening of new stores. Yucaipa, through
its management of other supermarket companies, has extensive experience in
expanding and profitably operating price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation of
the Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of its remaining real estate assets in
California which consist of 18 non-operating stores and excess land. The
Company would use the net cash proceeds from the California Asset Disposition
to either reinvest in the Company's business or
4
<PAGE>
reduce indebtedness incurred in connection with the Transactions. At December
30, 1995, the aggregate book value of such assets was approximately $260
million. If this strategy is adopted, as anticipated, the Company would record
a pre-tax charge to earnings, which is presently estimated to be approximately
$125 million (the "California Asset Disposition Charge") to reflect the
difference between the anticipated cash proceeds from the accelerated
dispositions and the Company's existing book values for such assets. See "Risk
Factors--Anticipated Charges to Earnings Following the Transactions."
THE TRANSACTIONS
The Merger. On January 29, 1996, Smith's and a wholly owned subsidiary of
Smith's ("Acquisition"), entered into a Recapitalization Agreement and Plan of
Merger (the "Recapitalization Agreement") with Smitty's and Yucaipa. Pursuant
to the terms of the Recapitalization Agreement, Smitty's will merge with
Acquisition, as a result of which Smitty's will become a wholly owned
subsidiary of Smith's. The consideration payable to the stockholders of
Smitty's in the Merger will consist of 3,038,888 shares of Class B Common Stock
of the Company.
Tender Offer. Smith's is offering to purchase 50% of its outstanding Class A
Common Stock and Class B Common Stock (collectively, the "Common Stock") for
$36.00 per share in cash in the Tender Offer. The shares issuable to the
stockholders of Smitty's will not be eligible to participate in the Tender
Offer. Smith's is also offering to purchase for cash certain outstanding
options to purchase Common Stock held by certain officers and employees of
Smith's for an aggregate purchase price estimated to be approximately $13.7
million.
Smith's Debt Refinancing and Preferred Stock Redemption. Smith's will repay
in full substantially all of its existing indebtedness ($661.6 million at March
30, 1996), including all outstanding borrowings under its existing revolving
credit facilities, and will purchase approximately $1.0 million of its
outstanding Series I Preferred Stock.
Smitty's Debt Refinancing. At the time the Merger is consummated, the Company
will cause Smitty's and its subsidiary, Smitty's Super Valu, Inc. ("SSV"), to
repay in full certain existing indebtedness (approximately $33.7 million
principal amount at March 30, 1996), including all outstanding borrowings under
SSV's bank credit facility. In addition, Smitty's is offering to purchase all
of the $29.025 million principal amount at maturity (accreted value of $19.0
million at March 30, 1996) of its Senior Discount Debentures due 2006 (the
"Smitty's Debentures"), and SSV is offering to purchase all of the $50.0
million principal amount of its Senior Subordinated Notes due 2004 (the
"Smitty's Notes"). Smitty's and SSV will concurrently solicit consents from the
holders of such securities to certain amendments to the respective indentures
under which such securities were issued. The foregoing debt refinancing
transactions of Smitty's and SSV are referred to herein collectively as the
"Smitty's Refinancing."
The Offering, the Tender Offer, the purchase of certain management stock
options, the Series I Preferred Stock purchase, the Smith's debt refinancings
described above and the closing under a new senior credit facility (the "New
Credit Facility") to be provided to the Company are collectively referred to
herein as the "Recapitalization." The Recapitalization, the Merger and the
Smitty's Refinancing are collectively referred to herein as the "Transactions."
5
<PAGE>
The following table illustrates the pro forma sources and uses of funds to
consummate the Transactions, assuming the Transactions and the California
Disposition had been consummated as of March 30, 1996. Although management
believes the pro forma amounts estimated below are reasonable under the
circumstances, actual sources and uses may differ from those set forth below.
SOURCES AND USES
(dollars in millions)
<TABLE>
<CAPTION>
SOURCES USES
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<S> <C> <C> <C>
New Term Loans (a)...... $ 805.0 Purchase Smith's Common Stock............. $ 451.3
New Revolving Facility
(a)(b)................. 7.9 Purchase Smith's Management Options....... 13.7
Notes................... 575.0 Purchase Smith's Series I Preferred Stock. 1.0
Repay Smith's Mortgage Notes.............. 251.6
Repay Smith's Unsecured Notes............. 410.0
Repay Smitty's Notes (c).................. 50.0
Repay Smitty's Debentures (c)............. 19.0
Repay Smitty's Bank Credit Facility....... 33.7
Debt Refinancing Premiums................. 56.8
Accrued Interest.......................... 13.5
Fees and Expenses......................... 87.3
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Total Sources........... $1,387.9 Total Uses................................ $1,387.9
======== ========
</TABLE>
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(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 $805 million aggregate principal
amount of term loans ("New Term Loans") and a $190 million revolving credit
facility (the "New Revolving Facility") which will be available for working
capital requirements and general corporate purposes. A portion of the New
Revolving Facility may be used to support letters of credit, approximately
$28 million of which are anticipated to be issued upon consummation of the
Transactions (the "Closing"). The New Credit Facility will be guaranteed by
all subsidiaries of the Company, including Smitty's. See "Description of
New Credit Facility."
(b) The information presented is derived from the Unaudited Pro Forma Combined
Financial Statements contained elsewhere herein which reflect (i) the
receipt of cash proceeds from the California Divestiture and the assumed
receipt of cash proceeds from the sale of the Company's remaining
California assets pursuant to the California Asset Disposition, in an
amount equal to the net book value of such assets after giving effect to
the California Asset Disposition Charge; and (ii) the application of a
portion of the cash proceeds therefrom to repay $7.9 million of
indebtedness anticipated to be incurred under the New Revolving Facility in
connection with the consummation of the Transactions. The Company has
received net cash proceeds from the California Divestiture of $67.2 million
and expects to receive an additional $10.6 million in proceeds from the
California Divestiture shortly after the Closing. The Company intends to
use such additional proceeds to reduce revolving loans under the New
Revolving Facility. On May 13, 1996, the Company entered into an agreement
to dispose of an additional seven California stores, subject to certain
conditions, for approximately $16.5 million and the assumption of certain
lease liabilities, but has not entered into any other contracts to sell
assets in connection with the California Asset Disposition and there can be
no assurance as to the timing or the amount of net proceeds, if any, which
the Company will actually receive from such dispositions. See "Unaudited
Pro Forma Combined Financial Statements" and "Business--The California
Divestiture."
(c) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's
Refinancing. If all of the outstanding Smitty's Notes and Smitty's
Debentures are not tendered and accepted for purchase, the Company
anticipates that it would reduce other borrowings.
6
<PAGE>
THE OFFERING
Securities Offered...... $575,000,000 aggregate principal amount of 11 1/4%
Senior Subordinated Notes due 2007.
Maturity Date........... May 15, 2007.
Interest Rate........... The Notes will bear interest at the rate 11 1/4% per
annum.
Interest Payment Dates.. May 15 and November 15 commencing on November 15,
1996.
Optional Redemption..... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
May 15, 2001, at the following redemption prices if
redeemed during the 12-month period commencing on May
15 of the year set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001................................................. 104.219%
2002................................................. 102.813%
2003................................................. 101.406%
2004 and thereafter.................................. 100.000%
</TABLE>
in each case plus accrued and unpaid interest to the
date of redemption.
In addition, on or prior to May 15, 1999, the Company
may, at its option, use the Net Cash Proceeds from
one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the
Notes originally issued, at a redemption price equal
to 111.250% of the principal amount thereof if
redeemed during the 12 months commencing on May 15,
1996, 109.844% of the principal amount thereof if
redeemed during the 12 months commencing on May 15,
1997 and 108.438% of the principal amount thereof if
redeemed during the 12 months commencing on May 15,
1998, in each case plus accrued and unpaid interest
to the date of redemption.
Ranking................. The 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. At March
30, 1996, on a pro forma basis after giving effect to
the Transactions and the California Disposition, the
aggregate outstanding amount of Senior Indebtedness
of the Company would have been approximately $813.2
million, which amount excludes any borrowings or
amounts available to be borrowed under the New
Revolving Facility. The Notes will be effectively
subordinated to all existing and future liabilities,
including indebtedness of the Company's subsidiaries.
At March 30, 1996, on a pro forma basis after giving
effect to the Transactions and the California
Disposition, the Company's subsidiaries would have
had indebtedness and other liabilities reflected on
the Company's consolidated balance sheet, including
trade payables and accrued expenses (but excluding
guarantees of Senior Indebtedness), of approximately
$143.0 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 Notes at a
purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date
of repurchase.
7
<PAGE>
Certain Covenants....... The indenture pursuant to which the Notes will be
issued (the "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, consummate mergers or
certain other transactions or incur indebtedness
subordinated to any other indebtedness but senior to
the Notes and the ability of the Restricted
Subsidiaries to issue preferred stock.
The Company does not intend to apply for listing of the Notes on any national
securities exchange. See "Underwriting."
8
<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 and the 13 weeks ended March 30,
1996, after giving effect to the (a) Transactions and the application of the
proceeds therefrom and (b) the California Disposition and the retention of the
anticipated proceeds therefrom as cash (after reducing pro forma revolving
credit balances to zero), in each case as if they had occurred on January 1,
1995 with respect to the pro forma operating and other data for the 52 weeks
ended December 30, 1995, as of December 31, 1995 with respect to the pro forma
operating and other data for the 13 weeks ended March 30, 1996, and as of
March 30, 1996 with respect to the pro forma balance sheet data. Such pro forma
information: (i) eliminates the results of operations of the Company's
California retail division for the 52 weeks ended December 30, 1995 and for the
13 weeks ended March 30, 1996 from Smith's results of operations for such
periods and eliminates the related assets and liabilities from Smith's balance
sheet data as of March 30, 1996, and (ii) combines the operating results of
Smith's for the 52 weeks ended December 30, 1995 and the operating results and
balance sheet data of Smith's as of March 30, 1996, in each case pro forma for
the elimination of the Company's California retail division and the related
assets and liabilities, with the operating results of Smitty's for the 52 weeks
ended January 14, 1996 and the operating results and balance sheet data of
Smitty's as of and for the 12 weeks ended April 7, 1996, respectively. The pro
forma financial data set forth below is not necessarily indicative of the
results that actually would have been achieved had such transactions been
consummated as of the dates indicated, or that may be achieved in the future.
The pro forma combined financial data does not reflect (i) any of the net
annual cost savings which management believes are achievable by the end of the
third full year of operations following the Merger, (ii) the anticipated costs
expected to be incurred in connection with the integration of operations in
Arizona following the Merger or (iii) a $2 million severance payment to the
Chairman and Chief Executive Officer of the Company. In addition, the summary
pro forma combined operating data does not reflect the California Divestiture
Charge, the California Asset Disposition Charge, an extraordinary loss on
extinguishment of debt, an anticipated charge relating to certain costs
expected to be incurred by Smith's in connection with the Merger, or
compensation expense in connection with the repurchase of certain management
stock options as part of the Recapitalization. See Note (g) to the Unaudited
Pro Forma Combined Statements 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 13 WEEKS ENDED
DECEMBER 30, 1995(a) MARCH 30, 1996(a)
-------------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
OPERATING DATA:
Net sales.......................... $2,993.4 $ 755.4
Gross profit....................... 703.3 176.5
Operating, selling and administra-
tive expenses..................... 452.2 111.2
Depreciation and amortization...... 89.9 23.3
Interest expense................... 143.1 35.6
Net income......................... $ 3.0 $ 2.4
Ratio of earnings to fixed
charges(b)........................ 1.05x 1.10x
BALANCE SHEET DATA (END OF PERIOD):
Total assets............................................ $1,691.2
Total debt(c)........................................... 1,431.4
Redeemable preferred stock.............................. 3.3
Common stockholders' equity (deficit)................... (126.4)
OTHER DATA:
Capital expenditures............... $ 159.7 $ 19.6
EBITDA (as defined)(d)(e).......... $ 255.4 $ 67.3
EBITDA margin(f)................... 8.53% 8.91%
Ratio of EBITDA (as defined) to in-
terest expense.................... 1.79x 1.89x
Ratio of total debt to 1995 EBITDA
(as defined)...................... 5.60x
</TABLE>
9
<PAGE>
- -------
(a) For purposes of the Summary Unaudited Pro Forma Combined Financial Data,
the Company has given effect to the California Asset Disposition as if
each of the relevant properties had been sold for a cash amount equal to
its net book value after giving effect to the California Asset Disposition
Charge. The proceeds of such assumed sales, together with the proceeds of
the California Divestiture, are reflected in the Company's pro forma cash
balances (net of pro forma revolving credit balances, which have been
eliminated) at March 30, 1996. INVESTORS ARE CAUTIONED THAT ALTHOUGH THE
COMPANY HAS ENTERED INTO AN AGREEMENT TO DISPOSE OF AN ADDITIONAL SEVEN
CALIFORNIA STORES, SUBJECT TO CERTAIN CONDITIONS, FOR APPROXIMATELY $16.5
MILLION AND THE ASSUMPTION OF CERTAIN LEASE LIABILITIES, IT HAS NOT ENTERED
INTO ANY OTHER CONTRACTS TO SELL ASSETS IN CONNECTION WITH THE CALIFORNIA
ASSET DISPOSITION AND THAT THERE CAN BE NO ASSURANCE AS TO THE TIMING OR
THE AMOUNT OF NET PROCEEDS, IF ANY, WHICH THE COMPANY WILL ACTUALLY RECEIVE
FROM SUCH DISPOSITIONS.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor).
(c) Total debt includes long-term debt and current maturities of long-term
debt. As a result of the assumed application of a portion of the proceeds
of the California Disposition (see note (a) above) to eliminate pro forma
revolving credit balances, pro forma total debt at March 30, 1996 does not
reflect anticipated revolving credit facility borrowings upon consummation
of the Transactions of $7.9 million.
(d) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of
a company's ability to service debt and, with certain variations in
definition, is an indicator of compliance with various covenants in the
Company's debt agreements. However, EBITDA should not be construed as an
alternative to operating income (as determined in accordance with
generally accepted accounting principles) or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of the Company's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
For additional information concerning the Company's historical cash flows,
see "Selected Historical Financial Data of Smith's" and the Consolidated
Statements of Cash Flows included elsewhere herein.
(e) Pro forma EBITDA (as defined) does not give effect to net annual cost
savings (as compared to such costs for the pro forma combined fiscal year
ended December 30, 1995) which management believes are achievable by the
end of the third full year of combined operations following the Merger.
The sum of the components of the estimated annual cost savings exceeds $25
million; however, management's estimate of $25 million in net annual cost
savings gives effect to an offsetting adjustment to reflect its
expectation that a portion of the savings will be reinvested in the
Company's operations. The estimates of potential cost savings resulting
from the Merger contained in this Prospectus are forward looking
statements that involve risks and inherent uncertainties that could cause
actual net annual cost savings to differ materially from those projected.
See "Risk Factors--Ability to Achieve Anticipated Cost Savings." The sum
of the Company's pro forma EBITDA (as defined) ($255.4 million) and the
full amount of the estimated net annual cost savings to be realizable by
the end of the third full year of operations following the Merger ($25.0
million) is $280.4 million. See "--Operating Strategy--Realize Operating
Synergies and Cost Savings Resulting from the Merger."
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
10
<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 summary historical financial data of Smith's for the 13 weeks
ended April 1, 1995 and March 30, 1996 have been derived from unaudited interim
financial statements of Smith's which, in the opinion of management, reflect
all adjustments, consisting only of 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 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 13 WEEKS 13 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30,
1991 1993 1994 1994 1995 1995 1996
------------ ---------- ---------- ------------ ------------ -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7 $ 746.7 $ 693.2
Gross profit........... 498.6 611.6 637.2 669.1 697.0 168.3 146.6
Operating, selling and
administrative
expenses.............. 344.4 419.7 430.3 440.8 461.4 112.8 111.4
Depreciation and
amortization.......... 50.5 67.8 82.2 94.5 105.0 24.7 22.6
Interest expense....... 30.3 36.1 44.6 53.7 60.5 15.1 14.5
Restructuring
charges(a)............ -- -- -- -- 140.0 -- --
Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5) $ 9.5 $ (1.2)
Ratio of earnings to
fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x -- 1.83x --
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7 $ 112.6 $ 87.8
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2 1,661.8 1,486.0
Total debt(c).......... 395.4 612.7 725.5 718.9 746.2 765.0 672.8
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3 5.1 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7 $ 477.6 $ 411.7
OTHER DATA:
Stores open at end of
period(d)............. 109 119 129 137 154 142 120
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0 $ 25.2 $ 18.3
EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6 $ 56.6 $ 36.9
EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8% 7.6% 5.3%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included elsewhere
herein.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor). For the 52 weeks ended December 30, 1995, the Company's
earnings were inadequate to cover fixed charges by $69.8 million. However,
such earnings include non-cash charges of $105.4 million, primarily
consisting of depreciation and amortization, and restructuring charges of
$140.0 million. For the 13 weeks ended March 30, 1996, the Company's
earnings were inadequate to cover fixed charges by $2.0 million. However,
such earnings include non-cash charges of $22.7 million, primarily
consisting of depreciation and amortization.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of a
company's ability to service debt. However, EBITDA should not be construed
as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of Smith's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
For additional information concerning the Company's historical cash flows,
see "Selected Historical Financial Data of Smith's" and the Consolidated
Statements of Cash Flows included elsewhere herein.
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
11
<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 March 30, 1996, pro forma for the Transactions and the
California Disposition, the Company's total debt and stockholders' equity
(deficit) would have been $1,431.4 million and $(126.4) million, respectively,
compared to actual debt and stockholders' equity of $672.8 million and $411.7
million, respectively, on such date. The Company would also have had
additional borrowing availability under the New Revolving Facility on a pro
forma basis, subject to the borrowing conditions contained therein. In
addition, after giving effect to the Transactions and the California
Disposition, scheduled payments under net operating leases of the Company and
its subsidiaries for the twelve months following the Merger would have been
approximately $38.7 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, will be adequate to meet its anticipated requirements
for working capital, capital expenditures, lease payments, interest payments
and scheduled principal payments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." There can be no assurance, however, that the Company's business
will continue to generate cash flow at or above current levels or that
anticipated cost savings or future growth can be achieved. In addition, no
assurances can be given as to the timing of, or the net proceeds to be
realized upon, the California Asset Disposition and, therefore, as to the
timing or amount of receipts thereof as reflected in the Unaudited Pro Forma
Combined Financial Statements. If the Company is unable to generate sufficient
cash flow from operations in the future to service its debt and make necessary
capital or other expenditures, or if its future cash flows are insufficient to
amortize all required principal payments out of internally generated funds,
the Company may be required to refinance all or a portion of its existing
debt, sell assets or obtain additional financing. There can be no assurance
that any such refinancing or asset sales would be possible or that any
additional financing could be obtained, particularly in view of the Company's
high level of debt following the Transactions and the fact that substantially
all of its assets will be pledged to secure 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 Indenture
will require the Company to meet certain financial tests and will restrict its
ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, preferred or common stock; and (d) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes will be limited. The Company's continued growth depends, in
part, on its ability to continue its expansion and store conversion efforts,
and therefore its inability to finance capital expenditures through borrowed
funds or otherwise could have a material adverse effect on the Company's
future operations. Moreover, any default under the documents governing the
indebtedness of the Company could have a significant adverse effect on the
market value of the Notes.
The Company's capital structure immediately after the Transactions will
include a significant amount of floating rate indebtedness, causing the
Company to be significantly more sensitive to prevailing interest rates than
has historically been the case. The Company intends to enter into interest
rate protection agreements which, for the duration of such agreements, will
effectively provide fixed rates of interest or ceiling rates of interest on
12
<PAGE>
a portion of such floating rate indebtedness. There can be no assurance that
the Company will be able to enter into such agreements on favorable terms. See
"Description of New Credit Facility." In addition, following the Transactions,
the Company's blended average rates of interest are anticipated to be higher
than the rates of interest on the Company's indebtedness outstanding
immediately prior to the Transactions.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Management of the Company has estimated that approximately $25 million of
annualized net cost savings (as compared to such costs for the pro forma
combined fiscal year ended December 30, 1995) can be achieved over a three-
year period as a result of integrating the Arizona operations of Smith's and
Smitty's. The estimates of potential cost savings contained in this Prospectus
are forward looking statements that are inherently uncertain. Actual cost
savings, if any, could differ materially from those projected. All of these
forward looking statements are based on estimates and assumptions made by
management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict; therefore, undue reliance
should not be placed upon such estimates. There can be no assurance that the
savings anticipated in these forward looking statements will be achieved. The
following important factors, among others, could cause the Company not to
achieve the cost savings contemplated herein (principally those set forth in
"Summary--Operating Strategy" and "Business-- Operating Strategy") or
otherwise cause the Company's results of operations to be adversely affected
in future periods: (i) continued or increased competitive pressures from
existing competitors and new entrants, including price-cutting strategies;
(ii) unanticipated costs related to the Transactions and the integration
strategy; (iii) loss or retirement of key members of management or the
termination of the Management Services Agreement with Yucaipa; (iv) inability
to negotiate more favorable terms with suppliers, including Fleming Companies,
Inc., or to improve working capital management; (v) increases in interest
rates or the Company's cost of borrowing or a default under any material debt
agreements; (vi) inability to develop new stores in advantageous locations or
to successfully convert existing stores; (vii) prolonged labor disruption;
(viii) deterioration in general or regional economic conditions; (ix) adverse
state or federal legislation or regulation that increases the costs of
compliance, or adverse findings by a regulator with respect to existing
operations; (x) loss of customers as a result of the conversion of store
formats; (xi) adverse determinations in connection with pending or future
litigations or other material claims against the Company; (xii) inability to
achieve future sales levels or other operating results that support the cost
savings, and (xiii) the unavailability of funds for capital expenditures. Many
of such factors are beyond the control of the Company. In addition, there can
be no assurance that unforeseen costs and expenses or other factors will not
offset the projected cost savings in whole or in part.
ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE TRANSACTIONS
Upon consummation of the Transactions, the Company anticipates that it would
record charges to earnings in connection with (i) the adoption of a strategy
to accelerate the disposition of certain real estate assets in California
pursuant to the California Asset Disposition, (ii) the payment of certain
refinancing premiums and the write-off of certain debt issuance costs, (iii)
the purchase of certain management stock options, and (iv) the integration of
its Arizona operations with Smitty's. As a result of the foregoing, the
Company anticipates that it would record a substantial charge to earnings for
the quarter in which the Transactions are consummated. The Company currently
estimates that the total charge for all such items would be approximately $220
million (pre-tax). However, such estimate is based on information available as
of the date of this Prospectus and the actual total charge may differ
materially from such estimate if the actual information available to the
Company at the time the charge is recorded varies from the information
currently available. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores and the newer "alternative format" food stores, including warehouse-
style supermarkets, club stores, deep discount drug stores and "supercenters."
The Company's competitors continue to open new stores in the Company's
existing markets. In addition, new competitors have entered the Company's
markets in
13
<PAGE>
the past and could do so in the future. Supermarket chains generally compete
on the basis of price, location, quality of products, service, product variety
and store condition. The Company regularly monitors its competitors' prices
and adjusts its prices and marketing strategy as management deems appropriate
in light of existing conditions. Some of the Company's competitors have
greater financial resources than the Company and could use those resources to
take steps which could adversely affect the Company's competitive position.
The Company's ability to respond to competitive pressures could be adversely
affected by its highly leveraged financial condition. See "Business--
Competition."
CONTROL OF THE COMPANY
The Company's Class A Common Stock and Series I Preferred Stock are each
entitled to ten votes per share and the Company's Class B Common Stock is
entitled to one vote per share. Upon consummation of the Transactions, members
of the Smith Group (as defined) are expected to have beneficial ownership, in
the aggregate, of approximately 24.5% of the outstanding Common Stock and
31.6% of the outstanding Series I Preferred Stock of the Company, representing
approximately 41.8% of the aggregate voting power of the Company's capital
stock, and certain affiliates of Yucaipa will have beneficial ownership of
approximately 14.7% of the total outstanding Common Stock of the Company,
representing approximately 1.4% 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."
For a discussion of certain other matters relating to the Company's deferred
compensation, severance and certain other employee arrangements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Deferred Compensation Agreements," "Business--Employees and Labor
Relations," and "Certain Relationships and Related Transactions-- CEO's
Severance Agreement" and "--Company's Stock Options; Deferred Compensation
Plans."
14
<PAGE>
CONTINGENT LIABILITIES RELATING TO CALIFORNIA DIVESTITURE
In connection with closing stores and otherwise redeploying assets, the
Company has assigned leases and subleased stores and other facilities at
various times, including the sublease to Ralphs of the Company's Riverside,
California distribution center and dairy plant and the assignment or sublease
of 10 stores to various supermarket companies (including nine 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. For additional information concerning the
California Divestiture, the Company's sale-leaseback financing and certain
related claims and other matters, see "Business--California Divestiture" and
"--California Sale-Leaseback Financing."
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 Offering 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 the 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 the Notes and void such transactions. Alternatively, in such event,
claims of the holders of Notes could be subordinated to claims of other
creditors of the Company. The Company may be viewed as insolvent at the time
of or as a result of the Tender Offer, redemption of options and preferred
stock, if the fair value of its assets does not exceed its probable
liabilities at the time of, or following such transactions.
Based upon financial and other information currently available to it,
management of the Company believes that the Notes are being incurred for
proper purposes and in good faith. Certain courts have held, however, that a
company's purchase of its own capital stock does not constitute reasonably
equivalent value or fair consideration for incurring indebtedness. By
extension, the redemption of options to purchase capital stock of a company
may also be viewed as not constituting reasonably equivalent value or fair
consideration to the company. The Company believes that it (i) is solvent and
will continue to be solvent after issuing the Notes notwithstanding the fact
that the Company, after completion of the Tender Offer, redemption of options
and redemption of preferred stock, will have a negative net worth under
generally accepted accounting principles, because the Company believes that
the fair value of the Companys' assets exceeds and will exceed its probable
liabilities, (ii) will have sufficient capital for carrying on the business it
intends to conduct after such issuance, and (iii) will be able to pay its
debts as they mature. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." There
can be no assurance, however, that a court would concur with such beliefs and
positions.
It is a condition to the consummation of the Tender Offer that the Company
shall have received an opinion from an independent valuation firm (i) as to
the value of the Company's assets and liabilities, after giving effect to the
consummation of the Transactions, and (ii) that the fair value of the
Company's assets would exceed its total stated liabilities and identified
contingent liabilities both before and after giving effect to the Transactions
by at least the aggregate par value of its issued capital stock. Houlihan,
Lokey, Howard & Zukin, Inc. has been retained by the Company to deliver such
an opinion.
15
<PAGE>
SUBORDINATION OF THE NOTES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Notes will be subordinated to the prior
payment in full of all existing and future Senior Indebtedness, including
indebtedness under the New Credit Facility. As of March 30, 1996, on a pro
forma basis after giving effect to the Transactions and the California
Disposition, the aggregate outstanding amount of Senior Indebtedness of the
Company would have been approximately $813.2 million, which amount excludes
any borrowings or amounts available to be borrowed under the New Revolving
Facility. In the event of the bankruptcy, liquidation, dissolution,
reorganization or other winding up of the Company, the assets of the Company
will be available to pay obligations on the 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 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 Notes, or
purchase, redeem or otherwise retire the 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 Trustee (as defined). See "Description of the Notes--Subordination."
The New Credit Facility permits the Company to pay interest on the Notes,
subject to the subordination provisions of the Indenture, so long as no event
of default or potential event of default has occurred under the New Credit
Facility.
The Notes will be effectively subordinated to all secured indebtedness of
the Company and its subsidiaries. The borrowings and obligations under the New
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiaries. At March 30, 1996, on a pro forma basis after giving
effect to the Transactions and the California Disposition, the Company would
have had approximately $813.2 million aggregate amount of secured indebtedness
and other obligations outstanding, which amount excludes any borrowings or
amounts available to be borrowed under the New Revolving Facility.
The Notes will also be effectively subordinated to all existing and future
liabilities, including indebtedness, of the Company's subsidiaries. The
obligations of the Company under the New Credit Facility will be guaranteed,
jointly and severally, by the Company's subsidiaries, including Smitty's. At
March 30, 1996, on a pro forma basis after giving effect to the Transactions
and the California Disposition, the Company's subsidiaries would have had
indebtedness and other liabilities reflected on the Company's consolidated
balance sheet, including trade payables and accrued expenses (but excluding
guarantees of Senior Indebtedness), of approximately $143.0 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.
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.
16
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated pro forma capitalization of
the Company at March 30, 1996, giving effect to the Transactions and the
California Disposition. This table should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements and the historical
consolidated financial statements of Smith's and Smitty's, and the related
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Current portion of long-term debt:
New Term Loans.................................... $ 12.3
Other indebtedness................................ 4.2
--------
Total current portion of long-term debt......... $ 16.5
========
Long-term debt:
New Term Loans(a)................................. $ 792.7
New Revolving Facility(a)(b)...................... --
Senior Subordinated Notes......................... 575.0
Other indebtedness................................ 47.2
--------
Total long-term debt............................ 1,414.9
--------
Redeemable preferred stock, $.01 par value.......... 3.3
Common stockholders' equity:
Common Stock, $.01 par value(c)................... 0.2
Additional paid-in capital........................ 164.8
Retained earnings (deficit)....................... (291.4)
--------
Total common stockholders' equity (deficit)..... (126.4)
--------
Total capitalization.......................... $1,291.8
========
</TABLE>
- --------
(a) The Company has obtained a commitment from Bankers Trust and Chase
Manhattan for the New Credit Facility that will provide up to $805 million
aggregate principal amount of New Term Loans and a $190 million New
Revolving Facility which will be available for working capital
requirements and general corporate purposes. A portion of the New
Revolving Facility may be used to support letters of credit, approximately
$28 million of which are anticipated to be issued at Closing. The New
Credit Facility will be guaranteed by all subsidiaries of the Company,
including Smitty's. See "Description of New Credit Facility."
(b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's
Refinancing. If all of the outstanding Smitty's Notes and Smitty's
Debentures are not tendered and accepted for purchase, the Company
anticipates that it would reduce other borrowings. As a result of the
assumed application of a portion of the proceeds of the California
Disposition to eliminate pro forma revolving credit balances, pro forma
total debt at March 30, 1996 does not reflect anticipated revolving credit
facility borrowings upon consummation of the Transactions of $7.9 million.
(c) Does not reflect (i) management options to purchase up to an aggregate of
808,250 shares of Class B Common Stock expected to be outstanding upon
consummation of the Transactions or (ii) Warrants to purchase shares of
Class C Common Stock of the Company (at an initial exercise price of
$50.00 per share) to be issued to Yucaipa upon consummation of the
Transactions. See "Certain Relationships and Related Transactions."
17
<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 and the 13 weeks ended March
30, 1996 give effect to (a) the Transactions and the application of the
proceeds therefrom and (b) the California Disposition and the retention of the
anticipated proceeds therefrom as cash (after reducing pro forma revolving
credit balances to zero), in each case as if such transactions occurred on
January 1, 1995 with respect to the pro forma operating and other data for the
52 weeks ended December 30, 1995, as of December 31, 1995 with respect to the
pro forma operating and other data for the 13 weeks ended March 30, 1996, and
as of March 30, 1996 with respect to the pro forma balance sheet data. Such
pro forma information: (i) eliminates the results of operations of the
Company's California retail division for the 52 weeks ended December 30, 1995
and for the 13 weeks ended March 30, 1996 from Smith's results of operations
for such periods and eliminates the related assets and liabilities from
Smith's balance sheet data as of March 30, 1996 and (ii) combines the
operating results of Smith's for the 52 weeks ended December 30, 1995 and the
operating results and balance sheet data of Smith's as of and for the 13 weeks
ended March 30, 1996, in each case pro forma for the elimination of the
Company's California retail division and the related assets and liabilities,
with the operating results of Smitty's for the 52 weeks ended January 14, 1996
and the operating results and balance sheet data of Smitty's as of and for the
12 weeks ended April 7, 1996, respectively.
As indicated above, the Unaudited Pro Forma Combined Financial Statements
give effect to the California Divestiture and the California Asset Disposition
and the retention of the anticipated proceeds therefrom as cash. In connection
with the California Divestiture, Smith's entered into agreements to sell or
lease 16 stores and related equipment and three non-operating properties.
These transactions are expected to generate net cash proceeds of
$77.8 million, of which $67.2 million has been received to date. The remaining
18 stores in California have been closed. In connection with the California
Divestiture, the Company recorded the $140 million (pre-tax) California
Divestiture Charge for the year ended December 30, 1995 and classified the
assets to be leased or sold as "assets held for sale." The California
Divestiture Charge reflected (i) a provision for anticipated future lease
obligations, (ii) the anticipated cost to the Company of closing its
California stores and distribution center (primarily termination payments and
inventory), and (iii) certain asset valuation adjustments. The asset valuation
adjustments included in the California Divestiture Charge reflected the
reduction in net realizable values for the equipment in all of the Company's
California stores and distribution center and for the land and buildings
associated with those properties being sold or leased. Pursuant to the
California Asset Disposition, following the consummation of the Transactions
the Company intends to accelerate the disposition of its 18 non-operating
stores and its excess land in California. As a result of the adoption of this
strategy, the Company intends to record a pre-tax charge to earnings of
approximately $125 million (the California Asset Disposition Charge) to
reflect the difference between the anticipated cash proceeds from the
accelerated dispositions and the Company's existing book values for such
assets. For purposes of the Unaudited Pro Forma Combined Balance Sheet, the
Company has given effect to the California Asset Disposition as if each of the
relevant properties had been sold for a cash amount equal to its net book
value after giving effect to the California Asset Disposition Charge. The
proceeds of such assumed sales, together with the proceeds of the California
Divestiture, are reflected in the Company's pro forma cash balances (net of
pro forma revolving credit borrowings, which have been eliminated) at March
30, 1996. INVESTORS ARE CAUTIONED THAT ALTHOUGH THE COMPANY HAS ENTERED INTO
AN AGREEMENT TO DISPOSE OF AN ADDITIONAL SEVEN CALIFORNIA STORES, SUBJECT TO
CERTAIN CONDITIONS, FOR APPROXIMATELY $16.5 MILLION AND THE ASSUMPTION OF
CERTAIN LEASE LIABILITIES, IT HAS NOT ENTERED INTO ANY OTHER CONTRACTS TO SELL
ASSETS IN CONNECTION WITH THE CALIFORNIA ASSET DISPOSITION AND THAT THERE CAN
BE NO ASSURANCE AS TO THE TIMING OR THE AMOUNT OF NET PROCEEDS, IF ANY, WHICH
THE COMPANY WILL ACTUALLY RECEIVE FROM SUCH DISPOSITIONS.
The pro forma adjustments to give effect to the California Disposition and
the Transactions are based upon currently available information and upon
certain assumptions that management believes are reasonable. The statement of
results of operations used to derive the adjustments to eliminate the
California results of operations differs from a complete statement in that
allocations for interest expense and certain services provided by the Company,
including, but not limited to, portions of legal assistance, employee benefits
administration, treasury, accounting, auditing, tax functions and real estate,
have not been made. The Merger will be accounted for by the
18
<PAGE>
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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical consolidated financial
statements of Smith's and Smitty's, together with the related notes thereto,
included elsewhere in this Prospectus.
The Unaudited Pro Forma Combined Financial Statements do not reflect (i) any
of the net annual cost savings which management believes are achievable by the
end of the third full year of operations following the Merger, (ii) the
anticipated costs to be incurred in connection with the integration of
operations in Arizona following the Merger, or (iii) a $2 million severance
payment to the Company's Chairman and Chief Executive Officer. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Certain Relationships and Related Transactions--
CEO's Severance Agreement." The Unaudited Pro Forma Combined Statements of
Operations included herein do not reflect the California Divestiture Charge,
the California Asset Disposition Charge, an extraordinary loss on
extinguishment of debt, an anticipated charge relating to certain costs
expected to be incurred by Smith's in connection with the Merger or
compensation expense in connection with the repurchase of certain management
stock options as part of the Recapitalization. See Note (g) to the Unaudited
Pro Forma Combined Statements of Operations.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------------------
JANUARY 14, ADJUSTMENTS
DECEMBER 30, 1995 1996 FOR PRO FORMA
---------------------------------------------- ------------ CALIFORNIA COMBINED FOR
SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA
(HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION
(AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
------------ --------------- ----------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 3,083.7 $(674.6) $ 2,409.1 $ 584.3 $ $ 2,993.4
Cost of goods sold...... 2,386.7 (516.2) 1,870.5 419.6 2,290.1
---------- ------- ---------- --------- ------ ----------
697.0 (158.4) 538.6 164.7 703.3
Expenses:
Operating, selling and
administrative....... 461.4 (145.6) 315.8 136.0 0.4 (b) 452.2
Depreciation and
amortization......... 105.0 (27.0) 78.0 12.3 (1.3)(c)
0.9 (d) 89.9
Restructuring charges. 140.0 (140.0)
Interest.............. 60.0 60.0 18.4 64.7(e) 143.1
Amortization of debt
issuance costs....... 0.4 0.4 1.0 8.8 (e) 10.2
---------- ------- ---------- --------- ------ ----------
Income (loss) before
income taxes........... (69.8) 154.2 84.4 (3.0) (73.5) 7.9
Income tax expense
(benefit).............. (29.3) 63.2 33.9 (0.7) (28.3)(f) 4.9
---------- ------- ---------- --------- ------ ----------
Net income (loss) (g)... $ (40.5) $ 91.0 $ 50.5 $ (2.3) $(45.2) $ 3.0
========== ======= ========== ========= ====== ==========
Net income (loss) per
common share (g)....... $ (1.62) $ 2.00 $ (2.30) $ 0.19 (h)
========== ========== ========= ==========
Weighted average common
shares outstanding..... 25,031,000 25,284,000 1,001,000 15,530,000
========== ========== ========= ==========
Ratio of earnings to
fixed charges (i)(j)... -- 2.27x 1.05x
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
12 WEEKS
ENDED
13 WEEKS ENDED APRIL 7, ADJUSTMENTS
MARCH 30, 1996 1996 FOR PRO FORMA
---------------------------------------------- ------------ CALIFORNIA COMBINED FOR
SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA
(HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION
(UNAUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
------------ --------------- ----------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 693.2 $(73.1) $ 620.1 $ 135.3 $ $ 755.4
Cost of goods sold...... 546.6 (62.9) 483.7 95.2 578.9
---------- ------ ---------- --------- ------ ----------
146.6 (10.2) 136.4 40.1 176.5
Expenses:
Operating, selling and
administrative....... 111.4 (32.3) 79.1 32.0 0.1 (b) 111.2
Depreciation and
amortization......... 22.6 (2.3) 20.3 3.1 (0.3)(c)
0.2 (d) 23.3
Interest.............. 14.5 14.5 3.9 17.2 (e) 35.6
Amortization of debt
issuance costs....... 0.1 0.1 0.2 2.2 (e) 2.5
---------- ------ ---------- --------- ------ ----------
Income (loss) before
income taxes........... (2.0) 24.4 22.4 0.9 (19.4) 3.9
Income tax expense
(benefit).............. (0.8) 9.5 8.7 (7.2)(f) 1.5
---------- ------ ---------- --------- ------ ----------
Net income (loss) (g)... $ (1.2) $ 14.9 $ 13.7 $ 0.9 $(12.2) $ 2.4
========== ====== ========== ========= ====== ==========
Net income (loss) per
common share (g)....... $ (0.05) $ 0.54 $ 0.89 $ 0.15 (h)
========== ========== ========= ==========
Weighted average common
shares outstanding..... 25,072,000 25,500,000 1,009,000 15,575,000
========== ========== ========= ==========
Ratio of earnings to
fixed charges (i)(j)... -- 2.40x 1.10x
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(a) Reflects the elimination of the 1995 operating results for the California
stores, excess real estate and distribution center which were sold, leased
or closed, and the reversal of the restructuring charge recorded, in
connection with the California Divestiture and the anticipated sale of the
Company's remaining California real estate pursuant to the California
Asset Disposition, but does not reflect the California Asset Disposition
Charge of $125 million (pre-tax) which is anticipated to be recorded in
connection with the adoption of a strategy to dispose of such remaining
California assets following the consummation of the Transactions.
(b) Represents fees payable to Yucaipa pursuant to the Management Services
Agreement ($1.0 million for the 52 weeks ended December 30, 1995 and $0.3
million for the 13 weeks ended March 30, 1996) and the elimination of the
historical Yucaipa management fees ($0.6 million for the 52 weeks ended
December 30, 1995 and $0.2 million for the 13 weeks ended March 30, 1996)
paid by Smitty's. See "Certain Relationships and Related Transactions--
Management Services Agreement."
(c) Represents a reduction in depreciation expense associated with the $16.1
million write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
(d) Reflects the amortization of excess costs over net assets acquired in the
Merger ($2.0 million for the 52 weeks ended December 30, 1995 and $0.5
million for the 13 weeks ended March 30, 1996) and the elimination of
Smitty's historical amortization ($1.1 million for the 52 weeks ended
December 30, 1995 and $0.3 million for the 13 weeks ended March 30, 1996).
Amortization has been allocated on the straight line basis over a period
of 40 years.
(e) The following table presents a reconciliation of pro forma interest
expense and amortization of debt issuance costs:
<TABLE>
<CAPTION>
52 WEEKS 13 WEEKS
ENDED ENDED
DECEMBER 30, 1995 MARCH 30, 1996
----------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest expense:
Smitty's.............................. $ 18.4 $ 3.9
Pro forma Smith's..................... 60.0 14.5
------ ------
78.4 18.4
------ ------
Plus: Interest on:
New Term Loans........................ 71.5 18.0
Bank fees............................. 0.3 0.1
Notes................................. 64.7 16.2
Less: Interest on:
Old bank term loans:
Pro forma Smith's................... (59.5) (14.3)
Smitty's............................ (3.1) (0.6)
Bank fees............................. (0.4) (0.1)
Smitty's Notes........................ (6.5) (1.5)
Accretion of Smitty's Debentures...... (2.3) (0.6)
------ ------
Pro forma adjustment................... 64.7 17.2
------ ------
Pro forma interest expense.............. $143.1 $ 35.6
====== ======
Historical amortization of debt issuance
costs.................................. $ 1.4 $ 0.3
Plus:
Financing fees--New Credit Facility... 7.2 1.8
Financing fees--Notes................. 3.0 0.7
Less:
Historical financing costs:........... (1.4) (0.3)
------ ------
Pro forma adjustment................... 8.8 2.2
------ ------
Pro forma amortization of debt issuance
costs.................................. $ 10.2 $ 2.5
====== ======
</TABLE>
(f) The pro forma adjustment to income tax benefit is based upon an assumed
blended rate of 39% applied to the pro forma net loss adjusted for
permanent differences between book and tax income. The deferred tax asset
recognized in the Unaudited Pro Forma Combined Financial Statements is
more likely than not to be realized due to the expected future reversal of
taxable temporary differences and the existence of taxable income in each
of the prior three carryback years available.
(g) The Unaudited Pro Forma Statements of Operations do not reflect the
California Asset Disposition Charge, the California Divestiture Charge or
costs related to (i) expenses to be incurred in connection with the
purchase of certain management stock options as part of the
Recapitalization which are estimated to be $12.5 million, (ii) the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period, and (iii) a $2 million severance payment
to the Company's Chairman and Chief Executive Officer. See "Business--
Operating Strategy" and "Certain Relationships and Related Transactions--
CEO's Severance Agreement." The Unaudited Pro Forma Statements of
Operations also do not include an extraordinary item for the loss on
extinguishment of debt of $42.5 million, net of $27.2 million income tax
benefit.
22
<PAGE>
(h) Net income (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 do not have an impact on the
weighted average number of common shares.
(i) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor). For the 52 weeks ended December 30, 1995 (historical),
the Company's earnings were inadequate to cover fixed charges by $69.8
million. For the 13 weeks ended March 30, 1996 (historical), the Company's
earnings were inadequate to cover fixed charges by $2.0 million. See
"Selected Historical Financial Data of Smith's" and the notes thereto.
(j) EBITDA (as defined) represents loss before income taxes, plus interest
expense, depreciation and amortization, LIFO provision and restructuring
charges. EBITDA is a widely accepted financial indicator of a company's
ability to service debt and, with certain variations in definition, is an
indicator of compliance with various covenants in the Company's debt
agreements. However, EBITDA should not be construed as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles) or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles)
and should not be construed as an indication of the Company's operating
performance or as a measure of liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The following table presents a reconciliation of pro forma EBITDA (as
defined):
<TABLE>
<CAPTION>
52 WEEKS ENDED 13 WEEKS ENDED
DECEMBER 30, 1995 MARCH 30, 1996
----------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
EBITDA (as defined):
Pro forma Smith's EBITDA (as defined). $226.8 $59.1
Historical Smitty's EBITDA (as
defined)............................. 29.0 8.3
Less: Pro forma adjustments............. (0.4) (0.1)
------ -----
Pro forma EBITDA (as defined)........... $255.4 $67.3
====== =====
</TABLE>
23
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
APRIL 7, ADJUSTMENTS
MARCH 30, 1996 1996 FOR PRO FORMA
---------------------------------------------- ------------ CALIFORNIA COMBINED FOR
SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA
(HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION
(UNAUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
------------ASSETS--------------- ----------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents........... $ 11.0 $ $ 11.0 $ 9.0 $ 98.4 (b)(c) $ 118.4
Rebates and accounts
receivable............ 18.6 (0.6) 18.0 10.3 28.3
Inventories............ 298.0 298.0 54.6 1.1 (d) 353.7
Prepaid expenses and
deposits.............. 17.0 (0.6) 16.4 3.2 19.6
Refundable income
taxes................. 9.4 9.4 0.5 9.9
Deferred tax assets.... 14.5 13.1 27.6 18.0 (e) 45.6
Assets held for sale... 42.8 (42.8)
-------- ------ -------- ------ ------- --------
Total current assets. 411.3 (30.9) 380.4 77.6 117.5 575.5
Property and equipment:
Land................... 279.6 279.6 18.6 (128.3)(c) 169.9
Building............... 614.7 614.7 51.2 (107.6)(c)(f) 558.3
Leasehold improvements. 54.8 54.8 9.8 (20.4)(c)(f) 44.2
Furniture and
equipment............. 498.4 498.4 71.6 (31.1)(c)(f) 538.9
-------- ------ -------- ------ ------- --------
Less allowances for
depreciation and
amortization......... (392.3) (392.3) (16.1) 27.5 (c)(f) (380.9)
-------- ------ -------- ------ ------- --------
Net property and
equipment........... 1,055.2 1,055.2 135.1 (259.9) 930.4
Goodwill, net........... 31.4 45.6 (g) 77.0
Other assets............ 19.5 (0.9) 18.6 10.8 78.9 (h)(i) 108.3
-------- ------ -------- ------ ------- --------
$1,486.0 $(31.8) $1,454.2 $254.9 $ (17.9) $1,691.2
======== ====== ======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts
payable............... $ 164.0 $ (0.2) $ 163.8 $ 36.2 $ 0.0 $ 200.0
Accrued sales and
other taxes and other
liabilities........... 41.4 (4.0) 37.4 11.3 (13.5)(j)
10.0 (k) 45.2
Accrued payroll and
related benefits...... 77.9 (14.2) 63.7 18.5 82.2
Current maturities of
long-term debt........ 24.1 24.1 9.2 (16.8)(l) 16.5
Current maturities of
Redeemable Preferred
Stock................. 1.0 1.0 (1.0)(m)
Accrued restructuring
costs................. 15.1 (15.1)
-------- ------ -------- ------ ------- --------
Total current
liabilities......... 323.5 (33.5) 290.0 75.2 (21.3) 343.9
Long-term debt, less
current maturities..... 648.7 28.6 677.3 135.8 617.5 (n)
(28.6)(c)
(0.9)(n)
4.5 (i)
16.8 (l)
(7.5)(o) 1,414.9
Accrued restructuring
costs, less current
portion................ 40.0 (40.0)
Deferred income taxes... 58.8 13.1 71.9 13.8 (27.0)(p)
(30.7)(e) 28.0
Other liabilities....... 20.0 7.5 (o) 27.5
Redeemable Preferred
Stock, less current
maturities............. 3.3 3.3 3.3
Common Stockholders'
Equity:
Convertible Class A
Common Stock........... 0.1 0.1 0.1
Class B Common Stock.... 0.2 0.2 (0.1)(q) 0.1
Additional paid-in
capital................ 285.1 285.1 11.0 (11.0)(r)
(165.8)(q)
45.5 (s) 164.8
Retained earnings(t).... 233.1 233.1 (0.9) (35.2)(u)
(405.9)(q)
(76.3)(e)
(7.1)(v)
0.9 (r) (291.4)
-------- ------ -------- ------ ------- --------
518.5 518.5 10.1 (655.0) (126.4)
Less cost of common
stock in the treasury.. (106.8) (106.8) (464.9)(q)
571.7 (q)
-------- ------ -------- ------ ------- --------
411.7 411.7 10.1 (548.2) (126.4)
-------- ------ -------- ------ ------- --------
$1,486.0 $(31.8) $1,454.2 $254.9 $ (17.9) $1,691.2
======== ====== ======== ====== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects the sale of the California stores and other related assets,
excess real estate and distribution center in connection with the
California Divestiture. The Company has received $67.2 million in proceeds
from the California Divestiture and expects to receive an additional $10.6
million shortly after the consummation of the Transactions. The net
proceeds of such sale is reflected as a payment of certain liabilities in
the Company's Unaudited Pro Forma Combined Balance Sheet at March 30,
1996.
(b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New
Revolving Facility, and (iii) the Offering 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...................................... $ 805.0
Notes............................................... 575.0
Repay Smitty's Notes................................ (50.0)
Discount on Smitty's Notes.......................... 0.4
Repay Smitty's Debentures........................... (19.0)
Discount on Smitty's Debentures..................... 0.5
Repay Smitty's Bank Credit Facility................. (33.7)
Repay Smith's Mortgage Notes and Other Indebtedness. (661.6)
Purchase existing Smith's Series I Preferred Stock.. (1.0)
Purchase 50% of Smith's Common Stock................ (451.3)
Purchase Management Options......................... (13.7)
Accrued Interest.................................... (13.5)
Fees and Expenses................................... (145.0)
-------
Use of California Proceeds (See Note (c)).......... $ 7.9
=======
</TABLE>
(c) Assumes the anticipated sale of the Company's remaining California real
estate pursuant to the California Asset Disposition. Also reflects the
California Asset Disposition Charge of $125 million (pre-tax) in
connection with the adoption of a strategy to dispose of such remaining
California assets following the consummation of the Transactions.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Disposal of Property and Equipment
Land............................................. $ 128.3
Buildings........................................ 104.0
Leasehold improvements........................... 19.6
Furniture and equipment.......................... 19.4
-------
271.3
Depreciation and amortization.................... (11.4)
-------
Net book value of property and equipment......... 259.9
Write-down of California assets to net realiz-
able value...................................... (125.0)
-------
Proceeds from California Asset Disposition....... 134.9
Reduction in Smith's pro forma revolving credit
balance......................................... (28.6)
Reduction of anticipated indebtedness under the
New Revolving Facility (See Note (b))........... (7.9)
-------
Cash provided by the California Asset Disposi-
tion.......................................... $ 98.4
=======
</TABLE>
(d) Reflects the elimination of Smitty's historical LIFO reserve which adjusts
Smitty's inventory to reflect current estimated selling prices less costs
of disposal and a reasonable profit allowance for the acquiring company.
(e) Represents the $125 million California Asset Disposition Charge, tax
effected at 39% tax rate and the recognition of the related deferred tax
asset. The California Asset Disposition Charge reflects the write-down of
California assets, other than assets held for sale at March 30, 1995,
under the Company's strategy to accelerate the disposition of its 18 non-
operating stores and excess land in California following the consummation
of the Transactions.
(f) Reflects the write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
25
<PAGE>
(g) Reflects the excess of costs over the fair value of net assets of Smitty's
acquired in connection with the Merger ($77.0 million) and the elimination
of Smitty's historical goodwill ($31.4 million). The purchase price for
Smitty's will be determined by reference to the trading price of the
Company's Class B Common Stock following the consummation of the Merger.
The purchase price and preliminary calculation of the excess of costs over
the fair value of net assets acquired is as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase Price:
Smith's equity received in exchange for Smitty's
equity with an assumed market value of
$15.00/share...................................... $ 45.5
Fees and expenses.................................. 1.5
------
Total purchase price............................... 47.0
Fair value of assets acquired...................... 224.7
Fair value of liabilities assumed.................. 254.7
------
(30.0)
------
Goodwill........................................... $ 77.0
======
</TABLE>
(h) Reflects the debt issuance costs associated with the New Credit Facility
($52.5 million) and the Notes ($33.5 million). These amounts have been
capitalized as deferred financing costs.
(i) Reflects the elimination of deferred financing costs associated with the
Smitty's Bank Credit Facility ($1.7 million), the Smitty's Notes ($3.0
million), the Smitty's Debentures ($0.6 million), the Smith's Mortgage
Notes and Other Indebtedness ($1.8 million) and the write-off of an
interest rate swap agreement ($4.5 million), included in historical long-
term debt, to be refinanced in connection with the Merger.
(j) Reflects the payment of accrued interest on Smitty's Bank Credit Facility
($0.3 million), Smitty's Notes ($2.0 million) and Smith's Mortgage Notes
and Other Indebtedness ($11.2 million) to be repaid in connection with the
Merger.
(k) Represents severance payments and other costs associated with the
integration of Smith's and Smitty's.
(l) Reflects the repayment and cancellation of the current maturities of the
Smitty's Bank Credit Facility ($7.9 million) and Smith's Mortgage Notes
and Other Indebtedness ($21.2 million) and the recording of the current
maturities of the New Term Loans ($12.3 million).
(m) Reflects the retirement of 3,000,000 shares of Series I Preferred Stock.
(n) Reflects the repayment and cancellation of the Smitty's Bank Credit
Facility, the Smitty's Notes, the Smitty's Debentures, the 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..................................... $ 805.0
Notes.............................................. 575.0
Repay Smitty's Notes............................... (50.0)
Discount on Smitty's Notes ........................ 0.4
Repay Smitty's Debentures.......................... (19.0)
Discount on Smitty's Debentures ................... 0.5
Repay Smitty's Bank Credit Facility................ (33.7)
Repay Smith's Mortgage Notes and Other
Indebtedness...................................... (661.6)
-------
$ 616.6
=======
</TABLE>
(o) 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.
(p) Represents the deferred tax asset associated with the write-off of the
deferred debt issuance costs and the premium over book value on Smith's
and Smitty's debt to be refinanced. The deferred tax asset recognized in
the Unaudited Pro Forma Combined Financial Statements is more likely than
not to be realized due to the expected future reversal of taxable
temporary differences and the existence of taxable income in each of the
prior three carryback years available.
(q) Reflects redemption of 50% of 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.
(r) Reflects the elimination of Smitty's historical equity.
(s) 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.
(t) The Unaudited Pro Forma Combined Balance Sheet does not include (i)
certain costs related to the purchase of certain management stock options
as part of the Recapitalization which are estimated to be $12.5 million,
(ii) the integration of the Company's operations which are estimated to be
$15.0 million over a two-year period, and (iii) a $2 million severance
payment to the Company's Chairman and Chief Executive Officer. See
"Certain Relationships and Related Transactions--CEO's Severance
Agreement."
(u) 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.
(v) Represents the write-off of the historical deferred debt issuance costs of
Smith's and Smitty's related to its refinanced debt, net of 39% tax rate.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth selected historical financial data of Smith's
for the five fiscal years ended December 30, 1995 which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The selected historical financial data of Smith's for the 13 weeks
ended April 1, 1995 and March 30, 1996 have been derived from unaudited
interim financial statements of Smith's which, in the opinion of management,
reflect all adjustments, consisting only of 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 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 13 WEEKS 13 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30,
1991 1993 1994 1994 1995 1995 1996
------------ ---------- ---------- ------------ ------------ -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7 $ 746.7 $ 693.2
Gross profit........... 498.6 611.6 637.2 669.1 697.0 168.3 146.6
Operating, selling and
administrative
expenses.............. 344.4 419.7 430.3 440.8 461.4 112.8 111.4
Depreciation and
amortization.......... 50.5 67.8 82.2 94.5 105.0 24.7 22.6
Interest expense....... 30.3 36.1 44.6 53.7 60.5 15.1 14.5
Restructuring
charges(a)............ -- -- -- -- 140.0 -- --
Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5) 9.5 (1.2)
Ratio of earnings to
fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x -- 1.83x --
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7 $ 112.6 $ 87.8
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2 1,661.8 1,486.0
Total debt(c).......... 395.4 612.7 725.5 718.9 746.2 765.0 672.8
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3 5.1 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7 $ 477.6 $ 411.7
OTHER DATA:
Stores open at end of
period(d)............. 109 119 129 137 154 142 120
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0 $ 25.2 $ 18.3
Cash provided by (used
in) operating
activities............ 61.9 84.6 118.6 203.6 140.6 (15.9) 6.3
Cash provided by (used
in) investing
activities............ (277.4) (286.6) (164.4) (127.4) (146.3) (23.9) 66.1
Cash provided by (used
in) financing
activities............ 212.8 203.1 92.3 (123.9) 7.5 38.3 (77.5)
EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6 $ 56.6 $ 36.9
EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8% 7.6% 5.3%
</TABLE>
- -------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included
elsewhere herein.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor). For the 52 weeks ended December 30, 1995, the Company's
earnings were inadequate to cover fixed charges by $69.8 million. However,
such earnings include non-cash charges of $105.4 million, primarily
consisting of depreciation and amortization, and restructuring charges of
$140.0 million. For the 13 weeks ended March 30, 1996, the Company's
earnings were inadequate to cover fixed charges by $2.0 million. However,
such earnings include non-cash charges of $22.7 million, primarily
consisting of depreciation and amortization.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of
a company's ability to service debt. However, EBITDA should not be
construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
Smith's operating performance or as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITTY'S
The following table sets forth certain selected consolidated historical
financial and operating data of Smitty's and its Predecessor. The operating
and balance sheet data of Smitty's as of and for the year ended July 30, 1995
and the period from June 29, 1994 to July 31, 1994, and of the Predecessor as
of for the period from August 2, 1993 to June 28, 1994, the 52 weeks ended
August 1, 1993, the 53 weeks ended August 2, 1992 and the 52 weeks ended July
28, 1991 set forth in the table below have been derived from the financial
statements of Smitty's and its Predecessor audited by Coopers & Lybrand
L.L.P., independent accountants. The operating and balance sheet data of
Smitty's as of and for the 36 weeks ended April 7, 1996 and the 36 weeks ended
April 9, 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 36 WEEKS 36 WEEKS
ENDED ENDED ENDED 1993 TO 1994 TO ENDED ENDED ENDED
JULY 28, AUGUST 2, AUGUST 1, JUNE 28, JULY 31, JULY 30, APRIL 9, APRIL 7,
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 $423.8 $411.9
Gross profit........... 158.9 160.9 150.5 138.0 12.9 162.0 113.8 116.5
Operating, selling,
general
and administrative
expenses(b)(c)(d)..... 143.9 138.8 147.5 117.4 10.8 131.4 91.5 95.6
Depreciation and
amortization.......... 10.2 10.2 9.5 8.0 1.0 10.9 7.1 9.1
Interest expense(e).... 10.1 7.3 6.5 6.4 1.5 18.7 12.4 12.7
Net income (loss)...... $ (3.0) $ 2.3 $ (8.2) $ 3.1 $ (0.4) $ 0.3 $ 0.9 $ (0.9)
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 0.8 $ 5.0 $ 5.3 $ 31.5 $ 27.9 $ 17.3 $ 23.1 $ 2.5
Total assets(f)........ 245.1 242.8 242.8 204.8 235.3 265.7 260.6 254.9
Total debt(g)(h)....... 72.5 59.9 66.6 140.3 143.9 147.9 153.8 145.1
Total stockholders'
equity(h)............. $126.4 $128.7 $120.5 $ 11.2 $ 10.6 $ 10.9 $ 11.5 $ 10.1
OTHER DATA:
Stores open at end of
period................ 24 24 28 27 27 28 28 28
Capital expenditures... $ 3.1 $ 7.2 $ 16.2 $ 3.7 $ 0.3 $ 22.9 $ 11.0 $ 21.8
Cash provided by
operating activities.. 10.7 18.9 16.6 9.0 1.1 18.2 13.7 3.5
Cash provided by (used
in) investing
activities............ (2.0) (7.2) (4.2) 7.9 (0.3) (9.0) (7.4) (15.6)
Cash provided by (used
in) financing
activities............ (7.3) (13.2) (10.3) (13.4) 4.4 (3.5) (2.8) (4.5)
EBITDA (as defined)
(i)................... $ 13.6 $ 22.9 $ 26.9 $ 26.1 $ 2.4 $ 29.0 $ 20.9 $ 21.4
EBITDA margin (j)...... 2.2% 3.8% 4.5% 4.7% 5.0% 4.9% 4.9% 5.2%
</TABLE>
- -------
(a) In fiscal 1993, Smitty's leased its food service operations to Morrison,
Incorporated, thereby increasing operating income but decreasing sales and
gross profit. In September 1994, Smitty's resumed its food service
operations. As a result, food service sales and attributable costs are
included in the consolidated results of operation subsequent to such date.
Food service sales were $14.5 million, $11.8 million, $17.8 million, $0,
$2.5 million and $24.9 million for the 36 weeks ended April 7, 1996, the
36 weeks ended April 9, 1995, fiscal 1995, fiscal 1994, fiscal 1993 and
fiscal 1992, respectively. Food service gross profit was $9.1 million,
$7.6 million, $11.4 million, $0, $1.5 million and $16.5 million for the 36
weeks ended April 7, 1996, the 36 weeks ended April 9, 1995, fiscal 1995,
fiscal 1994, fiscal 1993 and fiscal 1992, respectively.
(b) In November 1993, Smitty's agreed to a settlement of a litigation which
required Smitty's to pay $4.75 million in cash and issue a $6.25 million
two-year mortgage note. Fiscal 1993 results of operations include an $11.0
million charge for the settlement, plus a $1.8 million charge for Smitty's
litigation costs. Smitty's used the proceeds from a four-year term loan to
finance the cash payment. Also in November 1993, Smitty's reached a
settlement of a litigation filed by a former supplier providing for a $0.5
million cash payment and a $0.5 million one-year mortgage note. Fiscal
1993 results of operations include a $1.0 million charge for this
settlement. Both mortgage notes were repaid on June 29, 1994.
28
<PAGE>
(c) Included in operating, selling, general and administrative expenses are
parent reorganization costs incurred by Smitty's in connection with
efforts initiated by its former stockholder, Steinberg International,
Inc., to sell its interest in Smitty's. Reorganization costs were $0.7
million and $0.6 million for fiscal 1994 and 1993, respectively. There
were no reorganization costs for the 36 weeks ended April 7, 1996, the
36 weeks ended April 9, 1995, fiscal 1995, fiscal 1992 and fiscal 1991. In
fiscal 1995, Smitty's had a $1.9 million benefit resulting from the
Morrison litigation settlement.
(d) A real estate development partnership in which Smitty's was a partner was
liquidated in July 1993. In connection with this liquidation, Smitty's
obtained ownership of an operating shopping center property and an
undeveloped shopping center property in exchange for the forgiveness of
notes and accrued interest receivable from the partnership and its
managing partner. Fiscal 1993 results of operations include an
$8.9 million charge representing the difference between the current value
of these two properties and the carrying value of the notes and accrued
interest receivable. Such properties were transferred to Steinberg
International, Inc. prior to the acquisition of SSV by Smitty's.
(e) Includes amortization of deferred financing costs of $0.7 million, $0.6
million, $0.9 million, $0.2 million, $0.2 million, $0.2 million, and $0.2
million for the 36 weeks ended April 7, 1996, the 36 weeks ended April 9,
1995, fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, and fiscal 1991,
respectively. Interest expense for the 36 weeks ended April 7, 1996, the
36 weeks ended April 9, 1995, fiscal 1995 and fiscal 1994 includes $1.7
million, $1.5 million, $2.1 million and $0.2 million, respectively, of
non-cash interest expense attributable to the Smitty's Debentures.
(f) Except at April 7, 1996, April 9, 1995, July 30, 1995 and July 31, 1994,
total assets includes certain properties which were not purchased by
Smitty's in the acquisition from Steinberg International, Inc. that had a
net book value of $27.5 million at August 1, 1993.
(g) Total debt includes total long-term debt and current maturities of long-
term debt.
(h) During fiscal 1991, Smitty's issued 688 shares of common stock to
Steinberg International, Inc. in exchange for $1.2 million cash and the
cancellation of $65.6 million of indebtedness.
(i) EBITDA (as defined) represents income (loss) before income taxes, plus
interest expense, depreciation and amortization, severance and employment
contract termination costs, loss on store closing, LIFO provision and Non-
Operating Expenses. Non-Operating Expenses are defined as parent
reorganization costs, gain (loss) on real estate disposals, loss on
partnership liquidation, and litigation settlements, all of which are
included in operating, selling, general and administrative expenses.
EBITDA is a widely accepted financial indicator of a company's ability to
service debt and, with certain variations in definition, is an indicator
of compliance with various covenants in Smitty's debt agreements. However,
EBITDA should not be construed as an alternative to operating income (as
determined in accordance with generally accepted accounting principles) or
to cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as
an indication of Smitty's operating performance or as a measure of
liquidity.
(j) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Due to the Transactions and the California Divestiture, the Company believes
that its future operating results may not be directly comparable to its
historical operating results. Certain factors which are expected to affect the
future operating results of the Company (or their comparability to prior
periods) are discussed below.
California Divestiture. Smith's has historically focused on expansion into
high growth markets, which led to its entrance into Southern California in
1991. During the period from 1991 through 1995, Smith's opened 34 stores in
Southern California and a 1,100,000 square foot distribution center and dairy
plant in Riverside, California. Management determined that because of the
attractive growth prospects in the Company's principal markets and the
competitive environment in Southern California, it would redeploy Company
resources from California into such other markets. In December 1995, the
Company executed a sublease with Ralphs pursuant to which Ralphs agreed to
sublease the Riverside distribution center and dairy plant for the remaining
23-year term of Smith's lease. Ralphs also agreed to purchase certain related
equipment and inventory. The sublease term commenced and the related purchases
were consummated on January 29, 1996. In January 1996, the Company entered
into agreements to sell or lease 16 of its California stores and related
equipment and three non-operating properties to various supermarket companies
(including Ralphs) and others. Smith's has closed the remaining 18 stores and
it is anticipated that these stores will be sold or leased to other retail
companies. Of the stores being sold or leased, four stores owned by Smith's
are being sold outright, two store leases are being assigned, three stores
owned by Smith's are being leased and seven leased stores are being subleased.
Since December 30, 1995, the Company has received net cash proceeds of
approximately $67.2 million from the California Divestiture and expects to
receive an additional approximately $10.6 million shortly after the
consummation of the Transactions. All of the remaining California stores were
closed by March 16, 1996. In connection with its decision to cease operations
in California, Smith's recorded the California Divestiture Charge of $140
million (pre-tax) for the year ended December 30, 1995 and classified the
assets to be leased or sold pursuant to the California Divestiture as "assets
held for sale" on its balance sheet at such date. The California Divestiture
Charge reflected (i) a provision for anticipated future lease obligations,
(ii) the anticipated cost to the Company of closing its California stores and
distribution center (primarily termination payments and inventory), and (iii)
certain asset valuation adjustments. The asset valuation adjustments included
in the California Divestiture Charge reflected the reduction in net realizable
values for the equipment in all of the Company's California stores and
distribution center and for the land and buildings associated with those
properties being sold or leased. See Note K of the Notes to Consolidated
Financial Statements of Smith's.
Certain information pertaining to the Company's California operations is
summarized below:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California stores at end
of period.............. 9 18 26 32 34
Net sales............... $ 35.9 $320.4 $472.8 $652.9 $674.6
Capital expenditures:
Stores................ 118.4 160.0 136.1 53.0 23.4
Backstage facilities.. 1.1 33.8 80.6 2.7 1.3
------ ------ ------ ------ ------
Total capital
expenditures....... $119.5 $193.8 $216.7 $ 55.7 $ 24.7
====== ====== ====== ====== ======
</TABLE>
Remaining California Real Estate. After completion of the California
Divestiture, Smith's continues to own real estate assets in California having
an aggregate book value at December 30, 1995 of approximately $260 million.
These assets include the stores leased or subleased as part of the California
Divestiture (having an aggregate book value at December 30, 1995 of $42.5
million), the closed stores (aggregate book value--$115.3
30
<PAGE>
million) and certain non-operating stores and other excess real estate
(aggregate book value--$102.2 million). These properties have annual carrying
costs of approximately $7 million (excluding depreciation and amortization).
Management's present policy is to own and manage its real estate assets,
including those in California, in order to maximize their long-term values,
and, as a result, the Company maintains a fully staffed real estate,
construction and property management capability. The Company believes that
there are several viable strategies for maximizing the value of its remaining
California real estate assets over the next five years and that the
implementation of these policies would not have any material negative impact
on future earnings. Following the consummation of the Transactions, however,
management, in conjunction with Yucaipa, anticipates that it will pursue a
strategy to accelerate the disposition of its remaining real estate assets in
California including its non-operating stores and excess land. On May 13,
1996, the Company entered into an agreement to dispose of an additional seven
of the non-operating California stores, subject to certain conditions
(including consummation of the Transactions), for approximately $16.5 million
and the assumption of certain lease liabilities. The Company intends to use
the net cash proceeds from the sales of these assets to either reinvest in the
Company's business or reduce indebtedness incurred in connection with the
Transactions. If this strategy is adopted, as anticipated, the Company would
record a charge to earnings, presently estimated to be approximately
$125 million (pre-tax), to reflect the difference between the anticipated cash
proceeds from the accelerated dispositions and the Company's existing book
values for such assets. This charge will cause a substantial decrease in the
Company's earnings for such period and net worth, but is not otherwise
anticipated to adversely affect the Company's liquidity or ongoing results of
operations. See the "Unaudited Pro Forma Combined Financial Statements"
included elsewhere herein.
Debt Refinancing and Recapitalization Charges. In connection with the
anticipated consummation of the Transactions, the Company will refinance
substantially all of its existing mortgage notes and unsecured indebtedness
(approximately $661.6 million at March 30, 1996), including all outstanding
borrowings under its existing revolving credit facilities. The Company will
also refinance approximately $102.7 million of existing indebtedness of
Smitty's (pro forma at March 30, 1996 and assuming a 100% tender of the
existing Smitty's Notes and Smitty's Debentures). In connection with such debt
refinancings, the Company will pay make-whole and other premiums estimated at
approximately $56.8 million. These refinancing premiums, together with
approximately $12.0 million of debt issuance costs, will be written off upon
the consummation of the Transactions and reflected as an extraordinary charge
for the quarter in which the Transactions are consummated. It is estimated
that this charge, net of taxes, will be approximately $42.5 million. The
Company will also record approximately $12.5 million of pre-tax compensation
expense in connection with the purchase of certain management stock options as
part of the Recapitalization.
Integration of Arizona Operations. Following the Merger, management of the
Company has estimated that approximately $25 million of net annual cost
savings (as compared to costs for the pro forma combined fiscal year ended
December 30, 1995) are achievable by the end of the third year of combined
operations. See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
Management believes that approximately $17 million in Merger-related capital
expenditures and approximately $15 million of other expenses will be required
to integrate Arizona operations over the next two years and realize such cost
savings. Management anticipates that a charge related to such costs will be
recorded in the quarter in which the Transactions are consummated.
Purchase Accounting. The Merger will be accounted for as a purchase of
Smitty's by Smith's. As a result, the assets and liabilities of Smitty's will
be recorded at their estimated fair value as of the date the Merger is
consummated. The purchase price for Smitty's will be determined by reference
to the trading price of the Company's Class B Common Stock following the
consummation of the Merger. The purchase price in excess of the fair value of
Smitty's assets will be recorded as goodwill and amortized over a 40-year
period. The purchase price allocation reflected in the pro forma statements is
based on management's preliminary estimates. The actual purchase accounting
adjustments will be determined following the Merger and may vary from the
amounts reflected in the Unaudited Pro Forma Combined Financial Statements
included elsewhere herein.
31
<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 and the 13 weeks
ended April 1, 1995 and March 30, 1996:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
-------------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30, JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30,
1994 1994 1995 1995 1996 1994 1994 1995 1996 1996
---------- ------------ ------------ -------- --------- ---------- ------------ ------------ -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $2,807.2 $2,981.4 $3,083.7 $746.7 $693.2 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.... 637.2 669.1 697.0 168.3 146.6 22.7 22.4 22.6 22.5 21.1
Operating, sell-
ing and admin-
istrative ex-
penses......... 430.3 440.8 461.4 112.8 111.4 15.3 14.8 15.0 15.1 16.1
Depreciation and
amortization... 82.2 94.5 105.0 24.7 22.6 2.9 3.2 3.4 3.3 3.3
Operating
income......... 124.7 133.8 130.7 30.8 12.6 4.4 4.5 4.2 4.1 1.8
Interest
expense........ 44.6 53.7 60.5 15.1 14.5 1.6 1.8 2.0 2.0 2.1
Restructuring
charges........ -- -- 140.0 -- -- -- -- 4.5 -- --
Income taxes
(benefit)...... 34.3 31.3 (29.3) 6.3 (0.8) 1.2 1.1 (1.0) 0.8 (0.1)
Net income
(loss)......... 45.8 48.8 (40.5) 9.5 (1.2) 1.6 1.6 (1.3) 1.3 (0.2)
</TABLE>
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 13 WEEKS ENDED MARCH 30,
1996 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 13 WEEKS ENDED APRIL, 1 1995
Net Sales. Net sales decreased $53.5 million, or 7.2%, from $746.7 million
in the 13 weeks ended April 1, 1995 to $693.2 million in the 13 weeks ended
March 30, 1996. The sales decrease in 1996 was primarily attributable to the
closure of 34 stores in California, offset in part by the addition of 11 net
new stores outside of California since the end of the first quarter of 1995.
As adjusted to exclude Smith's California stores, net sales increased $35.7
million, or 6.1%, from $584.4 million in the 13 weeks ended April 1, 1995 to
$620.1 million in the 13 weeks ended March 30, 1996. As adjusted to exclude
Smith's California stores, same store sales for the first quarter of 1996
decreased 2.7%, caused primarily by Smith's discontinuance of its "ad match"
program in the Phoenix and Tucson markets.
Gross Profit. Gross profit decreased $21.8 million, or 12.9%, from $168.3
million in the 13 weeks ended April 1, 1995 to $146.6 million in the 13 weeks
ended March 30, 1996. Gross margins during the 13 weeks ended April 1, 1995
and the 13 weeks ended March 30, 1996 were 22.5% and 21.1%, respectively.
Excluding the Company's California operations, gross profit increased $28.0
million, or 6.2%, in the first quarter of 1996 compared to the first quarter
of 1995 and the gross margins were relatively flat. The pre-tax LIFO charge
was $1.8 million in the 13 weeks ended March 30, 1996 compared to $1.0 million
for the same period in 1995. Newly opened stores apply pressure on gross
margins until the stores become established in their respective markets.
Operating, Selling and Administrative Expenses. Operating, selling and
administrative expenses ("OS&A") decreased $1.4 million, or 1.2%, from $112.8
million in the 13 weeks ended April 1, 1995 to $111.4 million in the 13 weeks
ended March 30, 1996. As a percent of net sales, OS&A increased from 15.1% in
the 13 weeks ended April 1, 1995 to 16.1% in the 13 weeks ended March 30,
1996. The increase in OS&A as a percent of net sales was primarily
attributable to the closure of the Company's 34 California stores offset
somewhat by the opening of 11 net additional stores over the prior year. As
adjusted to exclude Smith's California stores, OS&A as a percent of net sales
was flat.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased by $2.1 million, or 8.5%, from $24.7 million in the 13
weeks ended April 1, 1995 to $22.6 million in the 13 weeks ended March 30,
1996, primarily due to the closure of the Company's California stores in 1996,
offset slightly by the addition of new food and drug combination stores
elsewhere.
32
<PAGE>
Interest Expense. Interest expense decreased $0.6 million from $15.1 million
in the 13 weeks ended April 1, 1995 to $14.5 million in the 13 weeks ended
March 30, 1996, primarily as a result of net decreases in the average debt
amounts for each period.
Income Taxes. Smith's recorded a tax benefit of $0.8 million in the 13 weeks
ended March 30, 1996 compared to an expense of $6.3 million in the 13 weeks
ended April 1, 1995.
Net Income (Loss). Smith's incurred a net loss of $1.2 million, or $0.05 per
common share, in the 13 weeks ended March 30, 1996, compared to net income of
$9.5 million, or $0.37 per common share, in the 13 weeks ended April 1, 1995,
due to the costs related to the closure of the Company's California
operations. Excluding the California loss of approximately $14.9 million, net
income for the first quarter of 1996 was approximately $13.7 million.
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. OS&A increased $20.6
million, or 4.7%, from $440.8 million in 1994 to $461.4 million in 1995. As a
percent of net sales, OS&A increased from 14.8% in 1994 to 15.0% in 1995. The
increase was caused principally by the increase in new store opening costs
compared to the prior year. The decrease in same store sales also contributed
to the increase of OS&A as a percentage of net sales.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $10.5 million, or 11.1%, from $94.5 million in 1994 to
$105.0 million in 1995, primarily due to the addition of new combination
stores and equipment replacements in remodeled stores.
Interest Expense. Interest expense increased $6.8 million from $53.7 million
in 1994 to $60.5 million in 1995 primarily as a result of net increases in the
average debt amounts for each period.
Restructuring Charges. As a result of the California Divestiture, the
Company recorded $140.0 million of pre-tax restructuring charges to reflect
the estimated costs associated with the sale, lease or closure of its Southern
California stores and the Riverside distribution center. See Note K of the
Notes to Consolidated Financial Statements of the Company included elsewhere
herein.
33
<PAGE>
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.
34
<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 airline ticket counters. Smitty's food
and drug combination stores offer a full selection of products and services,
including full-service fresh meat, delicatessen, seafood and bakery
departments, an expanded line of health care and beauty aids, a restaurant,
snack bar or food court and full-service banking.
Smitty's completed its comprehensive remodel program in November 1995 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 and 0.4% in the third quarter of fiscal
1996. In addition, the Easter holiday was included in the third quarter of
fiscal 1996 and in the fourth quarter of fiscal 1995. 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 $2.0 million in the 36 weeks ended April 9, 1995. Food
service sales and gross profit were $14.5 million and $9.1 million,
respectively, in the 36 weeks ended April 7, 1996.
35
<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
36 weeks ended April 7, 1996, the 36 weeks ended April 9, 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 36 WEEKS 36 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 36 WEEKS 36 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 1, JULY 31, JULY 30, APRIL 9, APRIL 7, AUGUST 1, JULY 31, JULY 30, APRIL 9, APRIL 7,
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 $423.8 $411.9 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 150.5 150.9 162.0 113.8 116.5 24.9 25.1 27.3 26.8 28.3
Operating, selling,
general and
administrative
expenses............... 147.5 128.2 131.4 91.5 95.6 24.4 21.4 22.1 21.6 23.2
Depreciation and
amortization........... 9.5 9.0 10.9 7.1 9.1 1.6 1.5 1.8 1.7 2.2
Operating income
(loss)................. (6.5) 13.8 19.7 15.1 11.8 (1.1) 2.3 3.3 3.6 2.9
</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 36 WEEKS ENDED APRIL 7,
1996 WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 36 WEEKS ENDED APRIL 9, 1995
Sales. Sales decreased $11.9 million, or 2.8%, from $423.8 million in the 36
weeks ended April 9, 1995 to $411.9 million in the 36 weeks ended April 7,
1996. The decrease is primarily the result of a decline in same store sales
and the closure of one store in the fourth 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 4.6% in the 36 weeks ended April 7, 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 and 0.4% in the 12 weeks
ended April 7, 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. In addition, the Easter holiday was included in the
third quarter of fiscal 1996 and the fourth quarter of fiscal 1995.
Gross Profit. Gross profit increased $2.7 million from $113.8 million, or
26.8% of sales, in the 36 weeks ended April 9, 1995 to $116.5 million, or
28.3% of sales, in the 36 weeks ended April 7, 1996. The increase in gross
profit margin in the 36 weeks ended April 7, 1996, is primarily attributable
to increased vendor allowances and rebates arising from improved procurement
practices and reduced inventory shortages.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses ("OSG&A") were $91.5 million, or 21.6% of
sales, in the 36 weeks ended April 9, 1995 and $95.6 million, or 23.2% of
sales, in the 36 weeks ended April 7, 1996. This increase was primarily
attributable to the fixed cost component of OSG&A being compared to a lower
sales base 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 36 weeks ended April 9, 1995, Smitty's had a $1.9 million benefit
resulting from the favorable Morrison litigation settlement.
Depreciation and Amortization. Depreciation and amortization was $7.1
million in the 36 weeks ended April 9, 1995, and $9.1 million in the 36 weeks
ended April 7, 1996. The increase relates primarily to the depreciation of new
stores, property and equipment, depreciation on new fixtures and equipment in
newly remodeled stores.
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<PAGE>
Operating Income. Operating income decreased $3.3 million from $15.1 million
in the 36 weeks ended April 9, 1995 to $11.8 million in the 36 weeks ended
April 7, 1996. The decrease in operating income is primarily attributable to
the factors described above.
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 21.2% in fiscal
1994 to 22.0% 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.
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<PAGE>
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 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.
During the first quarter of 1996, Smith's cash provided by operating
activities was $6.3 million reflecting balance fluctuations in operating
assets and liabilities resulting from the closure of the California region and
the execution of cash management policies based upon cash availability.
Payment of accrued restructuring charges in the first quarter of 1996 reduced
cash provided by operating activities by $42.9 million. The California closure
also caused the reduction of inventory, trade accounts payable and accrued
expense balances.
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. Cash provided by investing activities was $66.1 million
for the first quarter of 1996 as a result of proceeds from the sale of assets
in the California region offset by the expenditures of the Company's ongoing
expansion program.
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. Cash used in financing
activities totaled $77.5 million for the first quarter of 1996 as a result of
payments of long-term debt.
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<PAGE>
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 $805 million of New Term Loans and will have available a $190
million New Revolving Facility, of which approximately $7.9 million is
anticipated to be borrowed in connection with the Transactions. The Company
will also issue $575 million principal amount of Notes. The proceeds from the
New Credit Facility and the Offering will provide the sources of financing
required to consummate the Transactions and pay related fees and expenses
(including debt refinancing premiums). The Company will also assume certain
existing indebtedness of Smitty's. See "Summary--The Transactions--Sources and
Uses."
The New Revolving Facility will be available, subject to the satisfaction of
customary borrowing conditions, for working capital requirements and general
corporate purposes. A portion of the New Revolving Facility may be used to
support letters of credit, approximately $28 million of which are anticipated
to be outstanding upon consummation of the Transactions. The New Revolving
Facility will be non-amortizing and will have a six and one-quarter year term.
The Company will be required to reduce loans outstanding under the New
Revolving Facility to $75 million for a period of not less than 30 consecutive
days during each consecutive 12-month period following the Closing. At
December 30, 1995, on a pro forma basis, giving effect to the Transactions and
the California Disposition and letter of credit issuances, the Company's
remaining borrowing availability under the New Revolving Facility would have
been approximately $162.0 million. Pursuant to the New Credit Facility, the
New Term Loans will be issued in four tranches: (i) Tranche A, in the amount
of $325 million, will have a six and one-quarter year term; (ii) Tranche B, in
the amount of $160 million, will have a seven and one-half year term; (iii)
Tranche C, in the amount of $160 million, will have an eight and one-half year
term; and (iv) Tranche D, in the amount of $160 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, $124.3 million for fiscal 1995
and $16.5 million for the first quarter of 1996. The Company currently
anticipates that its aggregate capital expenditures for fiscal 1996 will be
approximately $100.0 million, excluding the approximately $17 million of
capital expenditures which are estimated to be required in connection with the
integration of Arizona operations. The Company intends to finance these
capital expenditures primarily with cash provided by operations and other
sources of liquidity including borrowings and leases. No assurance can be
given that sources of financing for capital expenditures will be available or
sufficient. However, the capital expenditure program has substantial
flexibility and is subject to revision based on various factors. Management
believes that if the Company were to substantially reduce or postpone these
programs, there would be no substantial impact on short-term operating
profitability. In the long term, however, if these programs were substantially
reduced, management believes its operating businesses, and ultimately its cash
flow, would be adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing
markets or to enter other markets. Future acquisitions may require the Company
to seek additional debt or equity financing depending on the size of the
transaction. With the exception of the Transactions, the Company is not
currently engaged in discussions concerning any material acquisition which it
considers probable.
Following the consummation of the Transactions, the Company will be highly
leveraged. Based upon current levels of operations and anticipated cost
savings and future growth, the Company believes that its cash flow from
operations, together with available borrowings under the New Revolving
Facility and its other sources of liquidity (including leases), will be
adequate to meet its anticipated requirements for working capital, capital
expenditures, lease payments, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels or that estimated
cost savings or growth can be achieved. See "Risk Factors--Leverage and Debt
Service."
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<PAGE>
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 adopted
this standard in the first quarter of 1996. The adoption of SFAS No. 121 did
not have a significant impact on the Company's financial condition.
EFFECTS OF INFLATION
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain gross profit margins by adjusting retail
prices, but competitive conditions may from time to time render the Company
unable to do so while maintaining its market share.
DEFERRED COMPENSATION AGREEMENTS
The Company has entered into agreements with certain of its executive
officers and other employees to provide certain additional retirement benefits
and supplemental compensation (collectively, the "Deferred Compensation
Agreements"). See "Executive Compensation--Pension Plan and other Retirement,
Death and Disability Arrangements" which is incorporated into this Prospectus
from the Company's 1996 Proxy Statement. Pursuant to the Recapitalization
Agreement, the Company has agreed to use its best efforts to amend its
supplemental compensation agreements with certain of its executive and other
officers to provide that if any such officer is terminated without cause
during the two-year period following the consummation of the Transactions, all
of such officer's unvested benefits under his agreement will become
immediately and fully vested. See "Certain Relationships and Related
Transactions--Company's Stock Options; Deferred Compensation Plans." It is the
Company's policy to accrue its liabilities for future payments under these
agreements during the period in which the individual becomes vested in the
benefits under the terms of the applicable Deferred Compensation Agreement.
The Company does not believe that its liabilities under the Deferred
Compensation Agreements will have a material adverse effect on its future
financial condition or results of operations.
40
<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 14.7% of the Company's
outstanding Common Stock following the Merger and the Recapitalization.
Following the Merger, the Company will consolidate its Arizona
operations with those of Smitty's. See "--Operating Strategy."
. California Disposition. The Company has completed the sale or lease of
16 stores, three non-operating properties and its primary distribution
facility in Southern California and has closed its remaining 18 stores
there. Management determined that because of the attractive growth
prospects in the Company's principal markets and the competitive
environment in Southern California, it would redeploy Company resources
from California into such other markets. Following the consummation of
the Transactions, the Company intends to accelerate the disposition of
its closed stores and excess land in California pursuant to the
California Asset Disposition.
. New Senior Management. The Company will enter into the five-year
Management Services Agreement with Yucaipa. Ronald W. Burkle, the
managing general partner of Yucaipa, will be appointed as Chief
Executive Officer of the Company. In addition, Allen R. Rowland recently
joined Smith's as President and Chief Operating Officer. Mr. Rowland was
employed by Albertson's, Inc. for 25 years and had senior executive
responsibilities for all of the principal regions in which Smith's
operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding Common Stock (excluding shares issuable in the Merger) for
$36.00 per share in cash in the Tender Offer. In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
For the fiscal year ended December 30, 1995, after giving pro forma effect
to the Transactions and the California Disposition, the Company would have had
net sales and EBITDA (as defined) of approximately $3.0 billion and $255.4
million, respectively. See "Unaudited Pro Forma Combined Financial
Statements." In addition, management believes that the Company will benefit
from significant operating synergies and cost saving opportunities following
the Merger.
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing and adjacent markets, (ii)
realize operating synergies and cost savings resulting from the Merger,
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(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 and Adjacent Markets. Management believes that
there are significant opportunities to increase the Company's sales and gain
efficiencies in its existing markets through new store openings and store
remodels. From 1991 through 1994, management primarily focused on the Southern
California market, opening 32 new stores in Southern California compared to a
net of 10 new stores in its other markets. In 1995, the Company opened a net
of 17 new stores, only two of which were located in California. In an effort
to more fully realize its market potential in its non-California markets, in
1995 the Company began opening smaller combination stores (54,000 to 60,000
square feet) in existing markets as part of a "fill-in" strategy. By pursuing
a growth strategy which emphasizes opening new stores within its existing and
adjacent markets, the Company believes it can increase its market share and
improve its distribution and other efficiencies, while taking advantage of
such markets' favorable growth prospects.
Realize Operating Synergies and Cost Savings Resulting from the
Merger. Management believes that approximately $25 million of net annual cost
savings are achievable over a three-year period following the Merger. The
majority of such cost savings opportunities relate to its Arizona operations
and are believed to be achievable (on an annualized basis) by the end of the
first full year of operations following the Merger. The estimates of potential
cost savings resulting from the Merger contained in this Prospectus are
forward looking statements that involve risks and inherent uncertainties that
could cause actual net annual cost savings to differ materially from those
projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's and Smitty's advertising programs in
the Phoenix and Tucson markets substantially overlap, and as a result of
the Merger, management expects that the Company will be able to
eliminate a substantial portion of the combined advertising expenses.
Management estimates that annualized advertising cost savings of
approximately $7 million are achievable by the end of the first full
year of operations following the Merger.
. General and Administrative Cost Savings. Management expects the Company
to achieve savings from the elimination of duplicative administrative
staff and headquarters facilities and the consolidation of management
information systems. Management estimates that annualized general and
administrative cost savings of approximately $13 million are achievable
by the end of the first full year of operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently operates
without any of its own distribution facilities. By incorporating the
Smitty's volume into Smith's Tolleson, Arizona warehousing and
distribution facilities, the Company expects to eliminate the expense
associated with Smitty's being supplied primarily by an independent
wholesaler, as well as reduce average unit costs resulting from improved
capacity utilization. Management estimates that annualized warehousing
and transportation cost savings of approximately $4 million are
achievable by the end of the second full year of operations following
the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to utilize Smith's electronic direct store
receiving system in all Smitty's stores, resulting in increased control
over direct store deliveries and corresponding payments. In addition, by
utilizing Smith's front-end systems in Smitty's stores, improvements in
the efficiency of Smitty's stores are expected. Management estimates
that annualized cost savings of approximately $2 million related to such
direct store delivery and store systems are achievable by the end of the
second full year of operations following the Merger.
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with aggregate annual sales (including the Company)
in excess of $11 billion. Management estimates that annualized cost
savings of approximately $6 million are achievable from such purchasing
improvements by the end of the third full year of operations following
the Merger.
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The sum of the components of the estimated annual cost savings exceeds $25
million; however, management expects that a portion of the savings will be
reinvested in the Company's operations. In connection with the Transactions,
the Company and Smitty's are evaluating the format mix of the combined Arizona
store base and are assessing the possibility of modifying the formats of
certain stores. It is anticipated that approximately $17 million of capital
expenditures and approximately $15 million of other expenses will be required
to integrate the Arizona operations over the next two years and realize such
cost savings.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
companies have achieved working capital improvements; however, there can be no
assurance that similar improvements can be achieved by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company recently
developed a price impact warehouse store format and during 1995 opened four of
these stores in the Las Vegas area operating under the name "PriceRite Grocery
Warehouse." Management believes that a number of the Company's markets are
underserved by price impact warehouse stores and that there are substantial
opportunities for expansion of the Company's PriceRite format through the
conversion of existing stores and the opening of new stores. Yucaipa, through
its management of other supermarket companies, has extensive experience in
expanding and profitably operating price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation of
the Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of its remaining real estate assets in
California which consist of 18 non-operating stores and excess land. On May
13, 1996, the Company entered into an agreement to dispose of seven of the
non-operating stores in California, subject to certain conditions, for an
aggregate price of $16.5 million. The Company intends to use the net cash
proceeds from the California Asset Disposition to either reinvest in the
Company's business or reduce indebtedness incurred in connection with the
Transactions. At December 30, 1995, the aggregate book value of such assets
was approximately $260 million. If this strategy is adopted, as anticipated,
the Company would record a pre-tax charge to earnings, which is presently
estimated to be approximately $125 million, to reflect the difference between
the anticipated cash proceeds from the accelerated dispositions and the
Company's existing book values for such assets. See "Risk Factors--Anticipated
Charges to Earnings Following the Transactions."
PRINCIPAL MARKETS
The Company's stores are located predominantly in Utah, Arizona, Nevada and
New Mexico, which are among the fastest growing states in terms of population
and employment. According to the U.S. Bureau of the Census, the population of
those four states has increased at a compound annual growth rate of 3.0% since
1990, compared to the national average of 1.1% over the same period. According
to the U.S. Bureau of Labor Statistics, employment in the same four states has
increased at a compound annual growth rate of 4.0% since 1990, compared to the
national average of 1.3% over the same period. In addition, management
believes that operating in distinct markets in several states provides
advantages due to the differences in economic cycles, demographics and
competitive conditions among such markets.
The Company has achieved strong competitive positions in each of its
principal markets. Smith's currently has leading market shares in Salt Lake
City (31%), Las Vegas (24%) and Albuquerque (23%) and, after giving effect to
the Merger, the Company will also have a leading market share in Phoenix
(24%). The Company believes its reputation for offering a broad selection of
quality products and low pricing combined with quality customer service has
created a valuable franchise with strong name recognition and customer
loyalty.
STORE FORMATS
Smith's operates three types of retail stores: (i) 114 food and drug
combination stores; (ii) four warehouse stores; and (iii) two conventional
supermarkets. The food and drug combination stores range in size from 30,000
to 88,000 square feet (with an average size of 63,000 square feet) and offer
an extensive line of supermarket, non-food and drug products. A typical
Smith's food and drug combination store offers approximately 50,000 SKUs, in
comparison to approximately 20,000 SKUs offered at the average conventional
supermarket
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nationwide. All stores carry a full line of supermarket products, including
groceries, meat, poultry, produce, dairy products, bakery goods, frozen foods
and health and beauty aids. In addition, combination stores carry a wide
variety of general merchandise, including drugs, toys, hardware, giftware and
small appliances. Within each category of merchandise, the stores offer
multiple selections of nationally advertised brand name items. In addition,
the stores carry an extensive selection of private label merchandise, which
provides comparable quality products priced lower than national brands. The
Company also carries a variety of bulk merchandise and generic brand products
which enhance the Company's low price image. These stores feature modern
layouts with wide aisles and well-lighted spaces to facilitate convenient
shopping, a variety of specialty departments along the periphery and
centralized checkout facilities. The Company's four price impact warehouse
stores operating under the PriceRite Grocery Warehouse name, average 55,000
square feet in size, and are targeted to price-conscious consumers rather than
conventional supermarket consumers. The PriceRite stores offer lower prices,
fewer SKUs and fewer service departments than the Company's food and drug
combination stores and conventional stores. The Company's conventional stores
average 26,000 square feet in size and have the appearance of traditional
supermarkets.
Smitty's, which will become a subsidiary of the Company upon consummation of
the Merger, currently operates (i) 21 food and general merchandise "super
combination" stores which average 105,000 square feet in size, (ii) six food
and drug combination stores, which average 52,000 square feet in size, and
(iii) one conventional supermarket. Smitty's has reached agreements relating
to the disposition of one of its stores in Phoenix and one of its stores in
Tucson. The "super combination" stores offer a full line of supermarket items,
a broad range of drug store and pharmaceutical items and an expanded selection
of general merchandise. These stores offer numerous services and specialty
departments, including fresh produce, full-service fresh meat, delicatessen,
seafood, bakery, prepared foods, fresh-cut flowers and video and photo
departments, pharmacies, food courts, restaurants and full-service bank
branches, family style hair salons and airline ticket counters. Smitty's food
and drug combination stores offer a full selection of products and services,
including full-service fresh meat, delicatessen, seafood and bakery
departments, an expanded line of health care and beauty aids, a restaurant,
snack bar or food court and full-service banking. In connection with the
Merger, the Company and Smitty's are evaluating the format mix of the combined
Arizona store base and are assessing the possibility of converting the format
of certain stores.
STORE DEVELOPMENT AND EXPANSION
The following table sets forth information concerning changes in the store
base of the Company and Smitty's over the last five years.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STORES OPENED (NET):
Smith's:
Intermountain and Southwest...................... 5 1 2 2 15
California....................................... 9 9 8 6 2
Smitty's.......................................... 0 2 3 0 (1)
TOTAL NUMBER OF STORES (END OF PERIOD):
Smith's:
Intermountain and Southwest...................... 100 101 103 105 120
California....................................... 9 18 26 32 34
Smitty's.......................................... 24 26 29 29 28
</TABLE>
After giving effect to the Merger, approximately 84% of the Company's stores
will have been opened or remodeled within the last seven years. Over the past
five fiscal years, the Company's capital expenditures for the construction of
new and remodeled stores (not including California operations) totaled
approximately $414 million. In addition, during the same period the Company
invested approximately $163 million in distribution, processing and other
support facilities (not including California operations). During the five year
period ended December 30, 1995, Smitty's spent approximately $72 million in
capital expenditures, including approximately $42 million since mid-1994 to
remodel substantially all of its Phoenix-area stores.
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The Company's real estate department locates, acquires and develops sites
for future stores. The Company's 48 years of operation have allowed it to
choose its store locations selectively as new residential areas have been
developed. The Company believes that many of its stores are in developed areas
where land values and the difficulties in locating suitable parcels would make
it difficult to replicate the Company's existing store base. The Company has
historically sought to purchase the best potential new store locations
available in any target market. If the Company cannot purchase the best
potential locations, however, it will consider leasing a location from its
owner or a local developer. As a result of this strategy, after giving effect
to the Merger, the Company will own 107 of its 146 stores, including the
underlying land with respect to 97 of such owned stores. See "Business--
Properties." In order to maximize its future capital expenditure resources,
the Company intends to place a greater emphasis on leasing new stores
following the consummation of the Transactions.
MERCHANDISING
The Company's merchandising strategy is to offer customers the ability to
fulfill a significant portion of their daily and weekly shopping needs at one
convenient location and to establish and promote its reputation as a low price
leader in the trade area of each of its stores. The cornerstones of this
strategy include:
Everyday Low Pricing. The Company offers its products on an everyday low
pricing ("EDLP") basis in all markets other than Phoenix and Tucson, where the
Company offers a combination of EDLP and promotional pricing. The Company
offers an EDLP program in most markets because the Company believes that it
generally allows for higher overall profitability than a promotional pricing
program. An EDLP program allows for more consistent prices over time than a
promotional program, which entails variable pricing and higher levels of
demand for sale products. As a result, EDLP simplifies inventory management
and lowers operating costs.
Quality Customer Service. The Company believes a key to its success is its
emphasis on quality customer service. The Company provides courteous and
efficient customer service by placing a high degree of emphasis on employee
training. Most stores have a customer service counter located near the store
entrance to answer questions and to assist customers in locating merchandise.
The Company also provides rapid in-store checkout services, aided by the use
of computerized scanning devices and the bagging of groceries at checkout. In
most locations, stores are open 24 hours each day.
Advertising and Promotion. The Company reinforces its low price image
through extensive television advertising and through print advertising in
newspapers and circulars. The Company divides its advertising budgets in a
similar manner across its markets, with approximately 80% committed to print
advertising and approximately 20% committed to radio and television
advertising. The Company also takes an active interest in the communities in
which its stores are located and maintains programs designed to contribute
funds, products and manpower to local charities and civic groups.
Specialty Departments. Each combination store provides certain specialty
departments designed to provide one-stop shopping convenience to customers and
to increase the frequency with which customers return to the store. The
specialty departments, which vary depending upon store size and location,
include delicatessens with prepared foods, full-service fresh fish and meat
departments, bakeries, dry cleaning drop-off facilities, U.S. Post Office
branches, pharmacies, video rental departments, take-out food counters, camera
and photo departments with on-site film processing, floral departments and in-
store banking provided by a regional or local bank.
Private Label Program. Through its private label program, the Company offers
in excess of one thousand items under the "Smith's," "Mountain Dairy," "Creek
View" and other brand names. These products provide customers with quality
comparable to that of national brands but at lower prices. Management believes
that the Company's private label program is one of the most successful
programs in the industry. The Company's owned manufacturing and processing
facilities, including its milk and beverage plants, cultured dairy products
plant, ice cream processing plant and frozen dough plant, supply the Company's
stores with private label milk, milk products, fruit punches, sour cream,
yogurt, cottage cheese, chip dip products, ice cream and novelty items, baked
goods and other products and allow the Company to generate gross margins on
such private label items that are generally higher than on national brands.
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Frequent Shopper Program. Smitty's has developed a proprietary information
system that updates and maintains a comprehensive customer database used for
its unique frequent shopper program, Shopper's Passport. Customers obtain a
Shopper's Passport bar-coded scan readable card which entitles them to receive
a number of benefits, including discounts on certain purchases, check cashing
authorization and participation in special promotions held throughout the
calendar year. Management believes that as a result of this program, Shopper's
Passport has established one of the most comprehensive supermarket customer
data bases in the country. The Company is evaluating plans to utilize the
Shoppers Passport program in Smith's stores throughout the Phoenix and Tucson
markets following the Merger.
OPERATIONS
The Company is divided into two major operating regions, the Intermountain
Region and the Southwest Region, which are segmented into eight geographic
districts. The Intermountain Region consists of stores in Utah, Idaho, Nevada
and Wyoming. The Southwest Region consists of stores in Arizona, New Mexico
and Texas. The districts are staffed with operational managers who are given
as much autonomy as possible while retaining the advantages of central control
over accounting, real estate, legal, data processing and other functions at
the Company's headquarters. This operational autonomy enables management to
react quickly to changes in local markets.
District and store managers are responsible for store operations, local
advertising formats, employee relations and development, customer relations,
community affairs and other functions relating to local operations. The
regional staff includes supervisors responsible for the meat, produce, bakery,
non-food, pharmacy, one-hour photo, deli and prepared foods departments, who
help each regional manager.
PURCHASING, DISTRIBUTION AND PROCESSING
The Company's purchasing activities are regionally centralized, with most
food products and all general merchandise being purchased in volume through
regional buyers supervised by headquarters' management. Certain specialized or
perishable products are purchased at regional warehouse levels. Management
believes that, following the Merger, the Company can achieve increased
promotional allowances and discounts through a coordinated buying effort with
Yucaipa-affiliated supermarket chains with aggregate annual sales (when
combined with the Company) in excess of $11 billion.
The Company owns and operates one of the most modern and efficient backstage
operations in the industry. The Company's warehousing, distribution and
processing facilities, which comprise approximately 3,000,000 square feet,
have all been built, expanded or remodeled in the last five years. Central
distribution facilities in Salt Lake City and Layton, Utah supply products to
all stores in the Intermountain Region and distributes the majority of non-
food merchandise, pharmaceutical products and certain bulk products to stores
in the Southwest Region. An integrated distribution and processing center in
Tolleson, Arizona includes complete warehousing operations and a dairy
processing plant. The facility supplies products to all stores in the
Southwest Region and Las Vegas. The Company also operates two produce
warehouses, one in Ontario, California and the other in Albuquerque, New
Mexico. See "--Properties." Approximately 80% of products sold in 1995 were
shipped through the Company's distribution network.
The Company transports food and merchandise from its distribution centers
primarily through a Company-owned fleet of tractors and trailers which
primarily serve nearby stores and through common carriers for stores located
at greater distances. As of December 30, 1995, the Company's owned fleet
included 158 tractors and 406 trailers. The Company seeks to lower costs on
shipments by taking advantage of backhauling opportunities where available.
The Company's processing facilities located in Tolleson, Arizona and Layton,
Utah produce a variety of products under the Company's private label for
distribution to Company stores. The Company's dairy plants process a variety
of milk, milk products and fruit punches. The Company's automated frozen dough
plant produces frozen bakery goods for final baking at in-store bakeries. The
Company's cultured dairy products plant
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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 seeks to maximize inventory turns and minimize investments in
inventory. Management believes the Company's backstage operations will be able
to accommodate the increased volume resulting from the integration of the
Smitty's operations in Arizona following the Merger and to support anticipated
future growth.
Smitty's currently makes approximately 60% of its annual purchases from
Fleming Companies, Inc. ("Fleming") under a supply agreement which by its
original terms expires in June, 1997. Smitty's has been engaged in discussions
with Fleming regarding the termination of the existing supply agreement,
subject to certain conditions, and the possibility of entering into a new
agreement whereby Fleming will no longer be a full-line supplier to Smitty's.
It is contemplated that under such a new agreement, Smitty's and, following
the Merger, the Company would purchase a minimum of $200 million of goods from
Fleming through the end of 1997. The terms of such a new agreement are subject
to ongoing discussions between the parties and no assurances can be given that
a new agreement will be signed. In any event, management does not believe that
the ultimate resolution of Smitty's ongoing discussions with Fleming will
adversely affect the Company's Arizona operations in any material respect.
Smitty's is also party to a second supply agreement with Fleming relating to
the purchase of general merchandise and health and beauty aids. The Company
and Fleming have discussed terminating this agreement for a specified cash
payment.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company is currently supported by a full range of advanced management
systems. Smith's has implemented store-level inventory and item management
systems developed on UNIX in-store processors using the Informix relational
database. This application includes direct store delivery store receiving,
which allows goods to be scanned electronically upon arrival at each store
receiving dock. This system also includes price verification and order entry
using hand-held personal computers. Store checkout is supported by NCR point-
of-sale scanning. Smith's stores are supported by pharmacy, video rental,
labor scheduling and time and attendance systems which help the Company
facilitate customer service while managing labor costs.
The Company's buying operations are supported by the AS/400-based E3
forecasting and purchasing system which uses statistical models of
seasonality, promotions and buying behavior to optimize inventory levels. The
Company's distribution centers operate utilizing leading software of the
Dallas Systems Company. The key components are the Distribution Center
Management Control System, which is used for all inventory processing, and the
Distribution Center Assignment Monitoring System (DCAMS), which is used for
labor standards management. To increase operating efficiency and decrease
labor costs, the DCAMS system transmits work assignments to lift drivers and
order selectors through a radio-frequency terminal. Smith's is currently
installing the OMI purchasing and forecasting system which will be used for
distribution center replenishment. The installation is expected to be
completed during 1996.
Smith's computer operations and applications development activities were
outsourced to Electronic Data Systems in 1992 under a ten-year outsourcing
agreement.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse-
style supermarkets, club stores, deep discount drug stores and "supercenters."
In addition, new competitors have entered the Company's markets in the past
and could do so in the future. Supermarket chains generally compete on the
basis of price, location, quality and variety of products, service and store
condition. The Company regularly monitors
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its competitors' prices and adjusts its prices and marketing strategy in light
of existing conditions. Some of the Company's competitors have greater
financial resources than the Company and could use those resources to take
steps which could adversely affect the Company's competitive position.
The Company's principal supermarket competitors in the Salt Lake City market
are Albertson's, Ream's Food Stores, Harmons, Fred Meyer, and Dan's Foods. In
the Phoenix market, the Company's principal supermarket competitors include
Fry's, Bashas Markets, Safeway, ABCO, Albertson's and Mega Foods and, prior to
the Merger, Smitty's. In Albuquerque, the Company's principal supermarket
competitors are Furr's, Jewel Osco and Albertson's, and in Las Vegas, the
Company's main supermarket competitors are Lucky, Vons and Albertson's. The
Company also competes with various drug chains and other non-food operators in
each of its markets. See "Risk Factors--Competition."
EMPLOYEES AND LABOR RELATIONS
The Company's policy is to train and develop its employees and promote from
within. The Company generally prefers to promote its own employees to store
manager positions. Management-level employees, including store department
managers, participate in incentive compensation programs tied to
profitability, and such compensation programs can represent a significant
percentage of such managers' total compensation. The Company believes that its
employee retention rate is high within the industry, especially at the store
manager level and above.
Excluding California operations, as of December 30, 1995, Smith's employed
approximately 16,000 persons, approximately 53% of whom were full-time and 47%
of whom were part-time. Approximately 42% of the Company's employees are
unionized. The Company's unionized employees work under 15 collective
bargaining agreements with local labor unions, primarily in Arizona, Nevada
and New Mexico, which typically have three-year terms. Management of the
Company believes that it will be able to renew existing agreements on terms
satisfactory to the Company. If it is unable to do so, however, there could be
a material adverse effect on the Company's operations. The wages and benefits
provided in the Company's collective bargaining agreements are substantially
similar to those of its supermarket competitors. The Company has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
As of January 14, 1996, Smitty's employed approximately 4,600 people, of
whom approximately 36% were full-time and approximately 64% were part-time.
Approximately 4,100 employees working in the stores, constituting
approximately 89% of Smitty's employees, are covered by a collective
bargaining agreement that expires in October 1997. Smitty's has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
From time to time the Company's unions and other employees have made, and in
the future may make, claims concerning various matters pertaining to
compensation, terms of employment or other related matters. While such claims
could be substantial, such claims have not had, and are not expected to have,
a material adverse effect on the Company. See also "--California Divestiture."
PROPERTIES
As of March 30, 1996, after giving effect to the Merger and the California
Divestiture, the Company would have owned 107 of its 146 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.................................. 39 17 56
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.................................. 107 39 146
=== === ===
</TABLE>
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<PAGE>
The Company leases or subleases 40 of its operating stores from third
parties under leases expiring between 1997 and 2023. Eleven of the Company-
owned stores are located on property which is ground-leased from third parties
under leases expiring between 2007 and 2045. In most cases, such building and
ground leases are subject to customary renewal options.
The Company owns a 1,180,000 square-foot distribution and dairy processing
center in Tolleson, Arizona, 573,000 square feet of grocery warehousing
facilities and 348,000 square feet of processing plants in Layton, Utah and a
226,000 square-foot non-food warehouse in Salt Lake City, Utah. The Company
also leases a 40,000 square-foot produce and forward-purchasing warehouse in
Albuquerque, New Mexico, a 408,000 square-foot non-foods warehouse in Salt
Lake City, Utah and a 205,000 square-foot produce warehouse in Ontario,
California, under leases expiring in 1997, 1997 and 1999, respectively.
The Company's corporate offices, data processing and records storage
facilities are located in over 100,000 square feet of office and warehouse
space owned by the Company in Salt Lake City, Utah.
CALIFORNIA DIVESTITURE
In late 1995, management determined that because of the attractive growth
prospects of the Company's principal markets and the competitive environment
in California, the Company would attempt to sell its California operations and
redeploy its resources into its non-California markets.
In December 1995, Smith's entered into an agreement to sublease its
Riverside, California distribution center to Ralphs. On January 29, 1996,
Ralphs commenced the sublease of the Riverside distribution center and dairy
plant for an initial term of 23 years. Ralphs also purchased certain equipment
and inventory for an aggregate purchase price (net of certain offsetting
payments) of approximately $8.7 million. The sublease provides for a subrental
of approximately $8.8 million per annum, which is substantially the same
amount as is payable by Smith's under the master lease, and requires Ralphs to
fulfill substantially all of the other monetary obligations of Smith's under
the master lease.
In January 1996, the Company entered into agreements to sell or lease 16 of
its California stores and three non-operating properties. The Company has
substantially completed the sale of these stores, including related equipment
and inventory. Of the stores being sold or leased, 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. In order to satisfy these conditions, the
Company is required to either (i) obtain fee simple title to the properties by
removing them from the Sale-Leaseback Financing (as defined below) and
delivering such title to the sublessee or (ii) obtaining certain estoppel,
non-disturbance and attornment agreements to protect the sublessee's interests
in such premises. If the Company is unable to satisfy either of these
conditions, then each sublessee will have the option to terminate the sublease
and receive indemnification for certain costs. In order to convey fee simple
title to the properties, the Company may be required to assume certain related
indebtedness and would apply the net proceeds of the sale to reduce other
indebtedness. See "--California Sale-Leaseback Financing" below.
The Company has 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 remaining California stores were closed by March
16, 1996. In connection with its decision to cease operations in California,
Smith's
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<PAGE>
recorded pre-tax restructuring charges of $140 million for the year ended
December 30, 1995 to reflect the anticipated cost to Smith's of the California
Divestiture. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." On May 13, 1996, Smith's entered into an agreement
to dispose of an additional seven of the non-operating stores in California
(three fee properties and four leaseholds), subject to certain conditions, for
an aggregate price of approximately $16.5 million (and the assumption of the
lease liabilities on the four leaseholds).
In connection with the California Divestiture, the Company entered into a
settlement agreement with the California Attorney General (the "CAG") relating
to the stores that were sold, leased, or closed. Under the settlement
agreement, the Company agreed that, for a period of five years, it would not
operate any of the closed stores as supermarkets without the permission of the
CAG. In addition, for the same five-year period, the Company agreed not to (i)
transfer the closed stores to third parties for supermarket use without the
CAG's approval, (ii) transfer such stores for non-supermarket use without
prior notice to the CAG, and (iii) sell any of such stores subject to
restrictions as to future supermarket use.
On January 8, 1996, the Company sent 60-day WARN Act notices to its
California employees in connection with the California Divestiture. In many
circumstances, the Company's stores were closed prior to the expiration of the
required 60-day period, making the Company responsible for the pay associated
with the number of shortfall days, which the Company duly paid. Certain labor
unions in California are asserting a claim for additional compensation to many
of the Company's California employees on the theory that the WARN Act notice
shortfall payments were not properly calculated by the Company. In addition,
as a result of the California Divestiture, such unions have asserted that
Smith's is liable for a retroactive payment to the health and welfare benefit
trust(s) associated with the unions by virtue of the union contract. The
Company does not believe that the unions' claims are meritorious and intends
to contest them vigorously. The Company does not believe that these claims
will have a material adverse effect on its financial condition or results of
operations.
CALIFORNIA SALE-LEASEBACK FINANCING
In order to finance its Riverside, California distribution center and eight
of its California stores the Company completed a sale-leaseback financing (the
"Sale-Leaseback Financing") in 1994. Pursuant to such financing, the Company
sold a portion of its interest in the properties to an owner trustee and
entered into an operating lease for each property. In order to provide the
financing for owner trustee's purchase of the properties, the Company filed a
registration statement with the Commission pertaining to a public offering of
$152.4 million of pass through certificates. Each of the pass through trusts
issuing the certificates used the proceeds of the offering to acquire notes
from the owner trustee (which in turn used the proceeds to acquire its
interest in the properties from the Company). Neither the notes nor the pass
through certificates are obligations of, nor are they guaranteed by, the
Company and, accordingly, are not reflected as indebtedness or other
liabilities of the Company under generally accepted accounting principles.
Under the terms of the Sale-Leaseback Financing, the Company may terminate
its lease with respect to the various California properties if it deems such
properties to be obsolete, uneconomic for use or surplus to the Company's
needs. In connection with any such termination, the Company may elect to
satisfy all of the rights and obligations of the owner trustee in respect of
the related notes by exchanging such notes for (a) if the property is sold to
a party other than the Company, unsecured, full recourse securities of the
Company or (b) if such property is sold to the Company, secured, full recourse
securities of the Company. In addition, the Company may substitute other
properties (including properties located outside California) for properties
which it deems to be obsolete, uneconomic for use or surplus to its needs. The
substitute properties must have a fair market value, utility and useful life
equal to or greater than that of the substituted property. The Company would
not be required to assume any indebtedness in connection with such a
substitution. Any such exchange or substitution may be made by the Company
only if certain conditions are satisfied.
In April 1996, the Company received a letter from a holder of pass through
certificates pointing out an inaccurate statement in the 1994 pass through
certificate prospectus. The letter referred to a statement in the prospectus
disclosing that holders of the certificates would not receive any covenant
protection in the event of a highly leveraged transaction involving the
Company, including any transaction resulting in a change of control. The
prospectus went on to state that none of the then-outstanding indebtedness of
the Company contained
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<PAGE>
provisions affording holders of such indebtedness protection in the event of a
change of control, which was characterized in the letter as a material
representation. At the date of such prospectus, a substantial amount of the
Company's then-existing indebtedness did contain such change of control
provisions. The Company has pointed out to the holder that consummation of the
Transactions will not result in a change of control of the Company under the
terms of such existing debt instruments although the indebtedness under such
debt instruments will be repaid in order to remove certain financial and other
covenants contained therein that would otherwise hinder the Company's ability
to consummate the Transactions. The Company is currently reviewing the
relevant facts and circumstances. The letter suggested that all interested
parties be made aware of the existence of the alleged misrepresentation, but
made no specific claim or demand on the Company. Although no assurances can be
given, the Company does not believe that any claims by the holders of the pass
through certificates, if made, would have a material adverse effect on the
Company or its ability to complete the California Disposition.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental laws, rules,
regulations and investigative or enforcement activities, as are other
companies in the same or similar business. The Company believes it is in
substantial compliance with such laws, rules and regulations. These laws,
rules, regulations and agency activities change from time to time, and such
changes may affect the ongoing business and operations of the Company. The
Company, from time to time, has or may in the future receive requests from
environmental regulatory authorities to provide information or to conduct
investigation or remediation activities. None of these requests is expected by
management to have a material adverse effect on the Company's business.
GOVERNMENTAL REGULATION
The Company is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies which regulate the
distribution and sale of alcoholic beverages, pharmaceuticals, milk and other
agricultural products, as well as various other food and drug items and also
regulate trade practices, advertising, building standards, labor, health,
safety and environmental matters. The Company from time to time receives
inquiries from state and federal regulatory authorities with respect to its
comparative advertising practices, pricing policies, employment practices and
other trade practices. None of these inquiries, individually or in the
aggregate, has resulted, or is expected by management to result, in any order,
judgment, fine or other action that has, or would have, a material adverse
effect on the business or financial position of the Company.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses a variety of trade names, service marks and trademarks in
its business including "Smith's," "Smith's Food & Drug Centers," "Mountain
Dairy," "Creek View," "PriceRite," and numerous others. While the Company
believes its trademarks are important to its business, except for "Smith's,"
"Smith's Food & Drug Centers," "PriceRite" and, following the Merger,
"Smitty's," "Smitty's Super Valu" and "Shoppers Passport," the Company does
not believe any of such trademarks are, or will be, critical to its business.
LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to various
legal actions. Management believes these are routine in nature and incidental
to the operations of the Company. Management believes that the outcome of any
proceedings to which the Company is currently a party will not, individually
or in the aggregate, have a material adverse effect on the operations or
financial condition of the Company.
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<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.................... 46 Chairman of the Board
Ronald W. Burkle.................... 43 Chief Executive Officer, Director
Allen R. Rowland.................... 51 President, Chief Operating Officer,
Director
Robert D. Bolinder.................. 65 Executive Vice President--Corporate
Planning and Development
Matthew G. Tezak.................... 40 Senior Vice President, Chief
Financial Officer
J. Craig Gilbert.................... 48 Senior Vice President, Regional
Manager--Intermountain Region
James W. Hallsey.................... 53 Senior Vice President, Regional
Manager--Southwest Region
Richard C. Bylski................... 57 Senior Vice President, Human
Resources
Michael C. Frei..................... 50 Senior Vice President, General
Counsel and Secretary
Kenneth A. Martindale............... 36 Senior Vice President, Marketing
Fred F. Urbanek..................... 60 Senior Vice President, Facility
Engineering
John T. Standley.................... 33 Senior Vice President,
Administration
Fred L. Smith....................... 48 Director
Linda McLoughlin Figel.............. 32 Director
Bruce Karatz........................ 50 Director
Bertram R. Zweig.................... 61 Director
</TABLE>
Jeffrey P. Smith has been a director of 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.
52
<PAGE>
Matthew G. Tezak has been Senior Vice President and Chief Financial Officer
of Smith's since 1993. He served as Senior Vice President, Finance and
Treasurer from 1992 to 1993 and Vice President, Finance and Treasurer from
1987 to 1992. Mr. Tezak, a certified public accountant, joined Smith's in 1979
as Assistant Controller.
J. Craig Gilbert has served as Senior Vice President, Regional Manager,
Intermountain Region of Smith's since 1993. From 1992 to 1993 he served as
Senior Vice President, Regional Manager, Southwest Region. From 1991 to 1992
he was Vice President, Regional Manager, Southwest Region and from 1985 to
1991 he served as Vice President, Sales and Merchandising, Intermountain
Region.
James W. Hallsey has served as Senior Vice President, Regional Manager,
Southwest Region since 1995. He rejoined Smith's in 1994 as Senior Vice
President, Special Projects after serving most of 1994 as Senior Vice
President at McKesson Drug Company, a pharmacy company. In 1993, Mr. Hallsey
retired as a director of Smith's (a capacity in which he served since 1985)
and Senior Vice President, Corporate Nonfoods Director (a capacity in which he
served since 1992). From 1980 to 1992 he served as Vice President, Corporate
Nonfoods Director of the Company.
Richard C. Bylski has been Senior Vice President, Human Resources of Smith's
since 1992. He served as Vice President, Human Resources of Smith's from 1985
to 1992.
Michael C. Frei joined Smith's in 1990 as Senior Vice President, General
Counsel and Secretary. Prior to that time, Mr. Frei served as Vice President
and General Counsel of Price Development Company, a commercial real estate
developer, since 1981.
Kenneth A. Martindale has served as Senior Vice President, Marketing of
Smith's since 1995. He served as Vice President, Merchandising, California
Region from 1991 to 1995. From 1984 to 1991, he served as a district manager
in the Intermountain Region.
Fred F. Urbanek has been Senior Vice President, Facility Engineering of
Smith's since 1992. He served as Vice President, Facility Engineering of
Smith's from 1985 to 1992.
John T. Standley is the Chief Financial Officer, Vice President and
Assistant Secretary of Smitty's and SSV, and upon consummation of the Merger,
will be the Senior Vice President, Administration of the Company. Mr. Standley
joined Smitty's in December 1994. Prior to that time, Mr. Standley was Vice
President of Finance for Food 4 Less Supermarkets, Inc. from 1991 to 1994.
Prior to 1991, he was a manager at Arthur Andersen & Company.
Fred L. Smith has been a director of 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. Fred Smith and Jeffrey P. Smith are brothers.
Linda McLoughlin Figel joined Yucaipa in 1989 and became a general partner
in 1991. Prior to that time, she was employed by Bankers Trust Company in its
Structured Finance Group.
Bruce Karatz has been the President, Chief Executive Officer and a director
of Kaufman and Broad Home Corporation since 1986 and its Chairman of the Board
since July 1993. Mr. Karatz is also a director of Honeywell, Inc., National
Golf Properties, Inc. and a Trustee of the National Park Foundation and the
RAND Corporation.
Bertram R. Zweig is a partner with the law firm of Jones, Day, Reavis &
Pogue. Mr. Zweig was with Jones, Day from 1962 to 1978, and rejoined the firm
in 1995. Between August 1992 and June 1995, Mr. Zweig was a partner with the
law firm of Graham and James, and from January 1988 to July 1992 he was a
partner with the law firm of Stroock & Stroock & Lavan. He is a member of the
Board of Directors of Wedbush Corporation, the parent of Wedbush Morgan
Securities, Inc., a regional investment banking firm in Los Angeles. Mr. Zweig
is a member of the Board of Directors of Aquatic Water Systems Incorporated.
53
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Amended and Restated Certificate of Incorporation of the Company will
provide that the full Board of Directors will be comprised of seven directors
and, without the unanimous approval of the directors then in office, the
number of directors may not be altered. The Board of Directors will be divided
into three classes as nearly equal in number as possible, with the term of
office of one class expiring each year and each director serving for a term
ending at the third annual meeting of stockholders of the Company following
the annual meeting at which such director was elected, except for the
directors to be elected at the Company's 1996 annual meeting of stockholders,
who shall have the one, two or three-year term for which such directors are
elected at such meeting.
Any increase in the number of directors or any vacancy on the Board of
Directors may be filled, subject to the rights of any holders of any series of
Preferred Stock to elect additional directors, only by the affirmative vote of
a majority of the remaining directors then in office, even though less than a
quorum of the Board. Any director elected in accordance with the preceding
sentence will hold office for the remainder of the full term of the class of
directors in which the new directorship was created or such vacancy occurred.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding ownership of the
Company's voting securities as of April 15, 1996, giving effect to the
Transactions. The table has been prepared based on the assumptions that (a)
50% of the outstanding Common Stock of each holder is purchased pursuant to
the Tender Offer, (b) 3,000,000 shares of Series I Preferred Stock are
purchased by the Company from the Dee Glen Smith Marital Trust I (2,100,000
shares) and Ida Smith (900,000 shares), and (c) 2,101,377 shares of Series I
Preferred Stock are directly or indirectly conveyed by the Dee Glen Smith
Marital Trust I to certain institutions. 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. The actual number of shares of Series I Preferred Stock
which (x) the Company elects to purchase and/or (y) the Dee Glen Smith Marital
Trust I directly or indirectly conveys to other parties in connection with the
consummation of the Transactions may be increased or decreased by amounts that
are not expected to have a material adverse effect on the Company.
<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 * 3,253,623(c) 32.7 29.5
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 -- -- 3,253,623(d) 32.7 20.8
Richard D. Smith
1550 South Redwood Road
Salt Lake City, UT
84104................... 1,174,463(e) 20.7 -- -- -- -- 7.0
Fred L. Smith
74285 Quail Lake Dr.
Indian Wells, CA 92210.. 957,498(f) 16.8 -- -- -- -- 5.7
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 -- -- -- -- 3.3
Corporation of the
President of
the Church of Jesus
Christ of Latter-day
Saints
50 East North Temple
Salt Lake City, UT 12.0
84150................... -- -- -- -- 2,000,009 20.1
University of Utah
Athletic Department
407 Park Building
Salt Lake City, UT
84112................... -- -- -- -- 1,267,731 12.7 7.6
University of Utah
Medical School
407 Park Building
Salt Lake City, UT
84112................... -- -- -- -- 1,000,000 10.0 6.0
Utah State University
Athletic Department
Logan, UT 84322......... -- -- -- -- 833,646 8.4 5.0
</TABLE>
55
<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... -- -- 2,325,406(i) 23.0 -- -- 1.4
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 * -- -- *
John T. Standley........ -- -- -- (i) -- -- -- --
Linda McLoughlin Figel.. -- -- -- (i) -- -- -- --
Bruce Karatz............ -- -- -- -- -- -- --
Bertram R. Zweig........ -- -- -- -- -- -- --
All directors and
officers as a group (16
persons)............... 2,861,711 50.4 2,374,323 23.5 3,253,623 32.7 38.2
</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) Includes 200,000 shares to be issued to Yucaipa as a prepayment of a
portion of the management fees payable to Yucaipa under the Management
Services Agreement and 2,125,406 shares held of record by the following
four limited partnerships of which Yucaipa is the general partner: Yucaipa
SSV Partners, L.P. (1,140,816); Yucaipa Smitty's Partners, L.P. (300,667);
Yucaipa Smitty's Partners II, L.P. (136,793); and Yucaipa Arizona
Partners, L.P. (547,130). Mr. Burkle is a limited partner in two of those
partnerships and is also the controlling general partner of Yucaipa. Linda
McLoughlin Figel, a nominee for director of the Company, is a limited
partner in Yucaipa SSV Partners, L.P. Mr. Standley, who will be the Senior
Vice President, Administration of the Company following the Merger, is a
limited partner in Yucaipa Smitty's Partners, L.P. and Yucaipa Smitty's
Partners II, L.P.
(j) Such shares are held of record by a trust for the benefit of Mr.
Martindale and his wife and of which Mr. Martindale is trustee.
(k) Includes 3,500 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(l) Includes 4,800 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(m) Includes 15,000 shares issuable upon exercise of vested options as of
April 15, 1996.
(n) Such shares are held of record by a trust for the benefit of Mr. Gilbert
and his wife and of which Mr. Gilbert is trustee.
(o) Includes 500 shares held of record by a child of Mr. Hallsey and of which
Mr. Hallsey is custodian.
(p) Includes 5,119 shares held of record by a partnership of which Mr. Bylski
is a general partner and 600 shares held of record by children of Mr.
Bylski and of which Mr. Bylski is custodian.
56
<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). The Company will prepay a portion of the management
fees payable to Yucaipa under the Management Services Agreement through the
issuance of 200,000 shares of the Company's Class B Common Stock, valued at
$16.50 per share, concurrently with the consummation of the Transactions.
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
57
<PAGE>
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. Any prepaid fees received by Yucaipa which have
not been earned at time of any such termination would be offset against the
termination fee or repaid in cash.
Yucaipa will agree that during the term of the Management Services Agreement
it will not, without the Company's prior written consent, provide management
or consulting services to, or make equity investments in excess of 5% in, any
business which operates in excess of five retail supermarkets in any market in
which the Company operates in excess of five retail supermarket stores,
subject to certain exceptions and conditions.
During the term of the Management Services Agreement, the Company will agree
to indemnify and hold harmless Yucaipa and each of its affiliates, partners,
officers, agents and the employees from and against all losses, claims,
damages, liabilities or expenses (collectively, "losses") resulting from any
claim, lawsuit or other proceeding by any person to which any of them may
become subject which is related to or arising out of the performance of the
services to be provided under the Management Services Agreement or the
Recapitalization Agreement, including all reasonable out-of-pocket expenses,
unless such losses result from (i) Yucaipa's or such party's gross negligence
or willful misconduct or any intentional, material breach of the Management
Services Agreement, or (ii) any settlement effected without the written
consent of the Company, which consent will not be unreasonably withheld.
STOCKHOLDERS' AGREEMENTS
On January 29, 1996, Smith's, Acquisition and certain stockholders of
Smitty's entered into a stockholders agreement (the "Smitty's Stockholders
Agreement") and Smitty's, Yucaipa and certain stockholders of Smith's entered
into a similar shareholders agreement (the "Smith's Shareholders Agreement").
Under the terms of the Smitty's Stockholders Agreement and the Smith's
Shareholders Agreement, each of the parties thereto agreed (i) to vote its
respective shares of Smitty's Common Stock or Smith's Common Stock, as
applicable, in favor of approval of the Recapitalization Agreement; (ii) to
refrain from soliciting any person other than Smitty's or Smith's, as
applicable, to purchase all or any material portion of the assets of, or
equity interests in, the Company; (iii) to refrain from transferring their
shares of the Company's stock without consent from Smith's or Smitty's, as
applicable, and the Company; and (iv) to take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied. Under the terms of the Smith's Shareholders
Agreement, the Smith's stockholders parties thereto have agreed to tender a
sufficient number of their shares of Common Stock in the Tender Offer to
enable Smith's to purchase 50% of the outstanding shares of Common Stock in
the Tender Offer.
STANDSTILL AGREEMENT
On January 29, 1996, the Company, Yucaipa and each of the limited
partnerships which own shares in Smitty's for which Yucaipa acts as the
general partner (the "Smitty's Principal Stockholders"; together with Yucaipa,
the "Yucaipa Group") entered into the Standstill Agreement. Pursuant to the
Standstill Agreement, the Yucaipa Group has agreed that for a 10-year period
ending on January 29, 2006, it will not acquire, offer to acquire, agree to
acquire, become the beneficial owner of, or obtain any rights in respect of
any Company Voting Securities (as defined below), by purchase or otherwise, or
take any action in furtherance thereof, if the effect of such action would be
to increase its aggregate beneficial ownership of securities that are entitled
to vote generally for the election of directors (the "Company Voting
Securities") above (x) 20% of the total number of votes that could be cast at
a stockholders' meeting of the Company (the "Combined Voting Power") or (y)
25% of the total number of Company Voting Securities outstanding, subject to
certain exceptions. In addition, without the approval of a majority of the
Disinterested Directors (defined as directors of the Company who are not
employees or officers of the Company, are not serving as designees of the
Yucaipa Group, and are not associates of Yucaipa or its affiliates) and
subject to certain limited exceptions, no member of the Yucaipa Group will
during such 10-year period (i) submit any proposals to acquire a majority of
the Combined Voting Power of Company Voting Securities (a "Change of Control
Proposal"), (ii) directly or indirectly sell, transfer any beneficial interest
in, pledge, hypothecate or otherwise dispose of any Company Voting Securities
or any shares of Company Common
58
<PAGE>
Stock to be acquired from the Company pursuant to the Warrant Agreement, other
than to another member of the Yucaipa Group or their respective affiliates in
any transaction or series of transactions that would result in a transfer of
greater than 3% of the Combined Voting Power or would result in any person
having, or having the right to acquire, beneficial ownership greater than 5%
of the Combined Voting Power, (iii) solicit any proxies, or assist any other
person in any way in solicitation of proxies, or submit any proposal for the
vote of stockholders of the Company, or induce another person to take any such
actions with respect to the voting of any of the Company Voting Securities,
(iv) directly or indirectly solicit or induce any person to bid for or acquire
Company Voting Securities in excess of 5% of the Combined Voting Power of
Company Voting Securities, 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 shares of
Common Stock on a fully diluted basis upon consummation of the Transactions.
The initial exercise price of the Warrants will be $50.00 per share. One-half
of the Warrants will be designated "Series A Warrants" and will be exercisable
at the election of Yucaipa on or prior to the fourth anniversary of the
Closing, and one-half of the Warrants will be designated "Series B Warrants"
and will be exercisable at the election of Yucaipa on or prior to the fifth
anniversary of the Closing. The foregoing expiration dates will each be
extended by five years in the event that, prior to such respective dates, the
market price of Class B Common Stock equals or exceeds the exercise price (as
adjusted from time to time) for a period of not less than 60 consecutive
trading
59
<PAGE>
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 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
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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.
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 Offering and the Recapitalization.
In December 1995, the Company entered into an agreement to sublease its
Riverside, California distribution center and dairy processing plant to
Ralphs, an affiliate of Yucaipa. Pursuant to the sublease, Ralphs will pay the
Company annual rent of approximately $8.8 million for the remaining 23-year
term of the lease. In connection with such transaction, Ralphs purchased
certain inventory, fixtures and equipment from the Company for an aggregate
purchase price (net of certain offsetting payments) of approximately $8.7
million. As part of the California Divestiture, in January 1996 the Company
entered into agreements to lease or sublease certain of its real property
located in California, including eight operating stores and one non-operating
store, to Ralphs, an affiliate of Yucaipa. See "Business--California
Divestiture."
CEO'S SEVERANCE AGREEMENT
The Company and Jeffrey Smith, the Chairman and Chief Executive Officer of
the Company, have reached an agreement in principle regarding the termination
of his employment with the Company. Although Mr. Smith will resign as the
Chief Executive Officer of the Company, he will continue as Chairman of the
Board after the consummation of the Transactions. Mr. Smith and the Company
have tentatively agreed to provide Mr. Smith, as a severance payment, with the
ownership of the Company airplane after the consummation of the Transactions.
The airplane has an appraised value of approximately $2 million.
COMPANY'S STOCK OPTIONS; DEFERRED COMPENSATION PLANS
In the Recapitalization Agreement, the Company has agreed to offer employees
who hold options under the Company's 1989 Amended Stock Option Plan
("Options") immediately prior to the Closing Date, the opportunity to elect
either to: (i) receive on the Closing Date cash payments with respect to half
of the shares subject to the Options in an amount equal to (A) the number of
shares of Common Stock that would be received by such holder upon exercise of
one-half of such Options multiplied by $36.00 per share minus (B) the
aggregate exercise price of such Options, and, in consideration of such
payments, to execute amendments to each existing option agreement such that
the remaining half of the shares subject to the Options will not be
exercisable prior to the exercise date stated therein (without regard to the
transactions contemplated by the Recapitalization Agreement) and will have the
exercise price reduced from $19.00 to $15.00 per share of Common Stock; or
(ii) have all such employees' Options continue to vest in accordance with the
stated terms of the Options as in effect as of the date of the
Recapitalization Agreement. Assuming that all of the Company's employees who
hold Options make the election set forth in clause (i) above, the estimated
aggregate value of the Company's proposed
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treatment of the Options will be approximately $16.9 million (comprised of
approximately $13.7 million representing the cash payment for half of the
Options and $3.2 million representing the exercise price reduction for the
remaining Options). Of such estimated aggregate value, approximately $252,000
will be for the account of members of the Smith Group and approximately $5.2
million will be for the account of the Company's other directors and executive
officers who are not members of the Smith Group but who have indicated their
intention to vote in favor of the Recapitalization Agreement.
In addition, the Company has agreed to use all reasonable efforts to amend
its deferred compensation agreements in effect as of the date of the
Recapitalization Agreement with each of Frederick F. Urbanek, James A. Acton,
Richard C. Bylski, Larry R. McNeill, Kenneth A. White, Matthew G. Tezak, Paul
D. Tezak, James W. Hallsey, Michael C. Frei and Harry M. Moskal to provide
that if within two years after the Closing Date the Company terminates such
officer's employment without cause (as such term will be defined in such
amendments to the reasonable satisfaction of such officers, the Company and
Yucaipa), all of such officer's unvested benefits under his deferred
compensation agreement will become immediately and fully vested.
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 Notes will be issued under an indenture (the "Indenture"), to be dated
as of May 23, 1996, by and among the Company and Fleet National Bank of
Connecticut, as Trustee (the "Trustee").
The following summary of certain provisions of the Notes and the Indenture
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 Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture 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 form of the Indenture has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration or transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to holders of
Notes (the "Holders"). The Company will pay principal (and premium, if any) on
the Notes at the Trustee's corporate office located in New York, New York. At
the Company's option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of the 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 Notes are limited in aggregate principal amount to $575,000,000 and will
mature on May 15, 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 May 15 and November 15, commencing on
November 15, 1996, to the Holders of record on the immediately preceding May 1
and November 1.
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
The 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 May 15, 2001, at the following
redemption prices (expressed as percentages of the principal amount) if
redeemed during the twelve-month period commencing on May 15 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.......................................... 104.219%
2002.......................................... 102.813%
2003.......................................... 101.406%
2004 and thereafter........................... 100.000%
</TABLE>
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In addition, on or prior to May 15, 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 Notes originally issued,
at the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the 12 months commencing on May 15 of the year set
forth below, plus, in each case, accrued and unpaid interest, if any, to the
date of redemption (provided that the redemption notice shall have been sent
not later than 60 days after the consummation of such Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... 111.250%
1997.......................................... 109.844%
1998.......................................... 108.438%
</TABLE>
The documents evidencing Senior Indebtedness will restrict the Company's
ability to optionally redeem Notes.
NOTICES AND SELECTION
In the event of a redemption of less than all of the Notes, the Notes will
be selected for redemption by the Trustee pro rata, by lot or by any other
method that the Trustee considers fair and appropriate and, if the 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 prohibited. Notice of
redemption will be mailed at least 30 days but not more than 60 days before
the date of redemption to each Holder to be redeemed at such Holder's
registered address. On and after the date of redemption, 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 (as defined under "--Certain
Covenants--Limitation on Asset Sales") 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 Trustee for cancellation.
SUBORDINATION
The payment of the Obligations on the Notes will be subordinated in right of
payment, as set forth in the 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 thereon subsequent to the
occurrence of any Event of Default specified in clause (vi) or (vii) of the
first paragraph under "--Event of Default" related to the Company, whether or
not such interest is an allowed claim enforceable against the Company under
any Bankruptcy Law.
Upon any payment or 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 and whether voluntary or
involuntary), the holders of Senior Indebtedness shall first be entitled to
receive payment in full in cash or Cash Equivalents of all amounts 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 Notes (excluding Permitted
Subordinated Reorganization Securities), and until all Obligations with
respect to Senior Indebtedness are paid in full in cash or Cash Equivalents,
any payment or distribution to which the Holders would be entitled (excluding
Permitted Subordinated Reorganization Securities) shall be made to the holders
of Senior Indebtedness.
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No direct or indirect payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) or distribution of any asset of the Company of any kind or
character by or on behalf of the Company of Obligations on the Notes or on
account of the purchase or redemption or other acquisition of the Notes
whether pursuant to the terms of the Notes or upon acceleration or otherwise
shall be made if, at the time of such payment or distribution, there exists a
default in the payment of all or any portion of principal of, premium, if any,
or interest on (i) any Designated Senior Indebtedness or (ii) any other Senior
Indebtedness which, at the time of determination, is equal to or greater than
$50 million in aggregate principal amount ("Significant Senior Indebtedness")
(and the 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 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 earlier to occur of (a) receipt by the
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 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) or distribution of any
asset of the Company of any kind or character shall be made by the Company
upon or in respect of the Notes (including without limitation on account of
any principal of, premium, if any, or interest on the Notes) or on account of
the purchase or redemption or other acquisition of 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
(provided such Designated Senior Indebtedness shall theretofore not have been
accelerated) (unless (x) such Payment Blockage Period shall be terminated by
written notice to the 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
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 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 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 Indenture and would enable the Holders to accelerate the
maturity of the Notes. 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.
At March 30, 1996, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the Company would have had
approximately $813.2 million aggregate amount of Senior Indebtedness
outstanding, which amount excludes any borrowings or amounts available to be
borrowed under the New Revolving Facility.
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In addition, the Notes will be effectively subordinated to all existing and
future liabilities, including Indebtedness, of the Subsidiaries. At March 30,
1996, after giving pro forma effect to the Transactions and the California
Disposition, the Subsidiaries would have had Indebtedness and other
liabilities reflected on the Company's consolidated balance sheet (other than
guarantees of Senior Indebtedness), including trade payables and accrued
expenses, of approximately $143.0 million.
The New Credit Facility permits the Company to pay interest on the Notes,
subject to the subordination provisions of the Indenture, so long as no event
of default or potential event of default has occurred under the New Credit
Facility.
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of a Change of Control,
each Holder will have the right to require the repurchase of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer"),
at a purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest to the date of repurchase (the "Change of Control Offer
Price").
The Indenture 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, with a copy to the Trustee, which notice
shall govern the terms of the Change of Control Offer. The Indenture shall
require that notice of an event giving rise to a Change of Control shall be
given on the same date and in the same manner to all Holders. Such notice
shall state, among other things, the purchase date, which must be no earlier
than 30 days nor later than 40 days from the date such notice is mailed, other
than as may be required by law (the "Change of Control Payment Date"). Holders
electing to have 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 Paying Agent at
the address specified in the notice prior to the close of business on the
Business Day prior to the Change of Control Payment Date. Each Change of
Control Offer is required to remain open for at least 20 Business Days or such
longer period as may be required by law.
The 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 (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 to permit the repurchase of the Notes as provided above. The Company
shall first comply with the covenant in the immediately preceding sentence
before it shall be required to repurchase 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 Indenture.
Notwithstanding the foregoing, the Company shall not be required to make a
Change of Control Offer, as provided above, if, in connection with any Change
of Control, it has made an offer to purchase (an "Alternate Offer") any and
all Notes validly tendered at a cash price equal to or higher than the Change
of Control Offer Price and has purchased all Notes properly tendered in
accordance with the terms of such Alternate Offer.
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of state and federal securities laws to the extent applicable in
connection with a Change of Control Offer or an Alternate Offer.
CERTAIN COVENANTS
Except as otherwise specified below, the Indenture will contain, among other
things, the following covenants:
Limitation on Restricted Payments. The Indenture will provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, directly
or indirectly, make any Restricted Payment if, at the time of such proposed
Restricted Payment, or after giving effect thereto, (a) a Default or an Event
of Default shall have occurred and be continuing, (b) the Company could not
Incur $1.00 of additional Indebtedness pursuant to the proviso in the covenant
described under "--Limitation on Incurrences of Additional Indebtedness" below
or (c) the aggregate amount expended for all Restricted Payments, including
such proposed Restricted Payment (the amount of any Restricted Payment, if
other than cash, to be the fair market value thereof at the date of payment as
determined in good faith by the Board of Directors of the Company as evidenced
by a Board Resolution),
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subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate
Consolidated Net Income (or if such aggregate Consolidated Net Income is a
loss, minus 100% of such loss) earned during the period beginning on the Issue
Date and ending on the date of the proposed Restricted Payment (the "Reference
Date") plus (ii) 100% of the aggregate Net Proceeds received by the Company
from any Person (other than a Subsidiary) from the issuance and sale
(including upon exchange or conversion for other securities of the Company)
subsequent to the Issue Date and on or prior to the Reference Date of
Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a
dividend on any Capital Stock or as interest on any Indebtedness and (B) any
Net Proceeds from issuances and sales financed directly or indirectly using
funds borrowed from the Company or any Subsidiary, until and to the extent
such borrowing is repaid), plus (iii) 100% of the Net Proceeds from (x) the
sale or other disposition of Investments (other than Permitted Investments
described in clauses (i)-(vii) inclusive of the definition thereof) made by
the Company or any Restricted Subsidiary after the Issue Date or (y) the sale
of the Capital Stock of any Unrestricted Subsidiary by the Company or any
Restricted Subsidiary or the sale of all or substantially all of the assets of
any Unrestricted Subsidiary to the extent that a liquidating dividend or
similar distribution is paid to the Company or any Restricted Subsidiary from
the proceeds of such asset sale.
The Indenture will provide that the provisions set forth in the immediately
preceding paragraph will not prevent (1) the payment of any dividend within 60
days after the date of its declaration if the dividend would have been
permitted on the date of declaration, (2) the acquisition of any shares of
Capital Stock of the Company in exchange for or solely out of the Net Cash
Proceeds of the substantially concurrent sale (other than to a Subsidiary) of
shares of Qualified Capital Stock of the Company, provided that no proceeds of
such sale of Qualified Capital Stock shall be included in clause (ii) of the
preceding paragraph, and (3) Permitted Payments; provided, however, that, at
the time of, and after giving effect to, any Restricted Payment made under
clause (3) no Default or Event of Default shall have occurred and be
continuing; provided, further, however, that the declaration of each dividend
paid in accordance with clause (1) above and each payment under clause (iv) of
the definition of "Permitted Payments" shall each be counted for purposes of
computing amounts expended pursuant to subclause (c) in the immediately
preceding paragraph, and no amounts expended pursuant to clause (2) above or
clause (i), (ii), (iii), (v), (vi) or (vii) of the definition of "Permitted
Payments" shall be so counted.
Limitation on Incurrences of Additional Indebtedness. The Indenture will
provide that the Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, Incur any Indebtedness other than
Permitted Indebtedness; provided, however, that if no Default with respect to
payment of principal of, or interest on, the Notes or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
Incurrence of any such Indebtedness, the Company or any Restricted Subsidiary
may Incur Indebtedness if immediately after giving effect to the Incurrence of
such Indebtedness the Operating Coverage Ratio would be greater than 2.0 to 1.0.
Limitation on Liens. The Indenture will provide that the Company shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than Permitted Liens)
that secures any Indebtedness of the Company which is expressly by its terms
subordinated in right of payment to any other Indebtedness of the Company on
any asset or property of the Company or any Restricted Subsidiary, unless the
Notes are secured by a Lien on such asset or property that is (x) pari passu
with such other Indebtedness if such other Indebtedness is pari passu with the
Notes or (y) if such other Indebtedness is subordinated to the Notes, senior
in priority to the Lien securing such other Indebtedness, in each case, until
such time as such obligations are no longer secured by a Lien.
Limitation on Asset Sales. The Indenture will provide that the Company shall
not, and shall not permit any Restricted Subsidiary to, consummate an Asset
Sale unless (a) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets sold or otherwise disposed of (as determined
in good faith by the Company) and (b) upon consummation of such Asset Sale,
the Company will within 365 days of the receipt of the proceeds therefrom: (i)
apply or cause such Restricted Subsidiary to apply the Net Cash Proceeds of
such Asset Sale to (A) a Related Business Investment, (B) an investment in
properties and assets that replace the properties and assets that are the
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subject of such Asset Sale or (C) an investment in properties and assets that
will be used in the business of the Company and the Restricted Subsidiaries
existing on the Issue Date or in businesses reasonably related thereto; (ii)
in the case of a sale of a store or stores, deem such Net Cash Proceeds to
have been applied to the extent of any capital expenditures made to acquire or
construct a replacement store in the general vicinity of the store sold within
365 days preceding the date of such Asset Sale; (iii) apply such Net Cash
Proceeds (or cause such Net Cash Proceeds to be applied) to the permanent
repayment of Pari Passu Indebtedness, any Indebtedness of any Restricted
Subsidiary or any Senior Indebtedness; provided, however, that the repayment
of any revolving loan (under the Credit Agreement or otherwise) shall result
in a permanent reduction in the commitment thereunder; (iv) use such Net Cash
Proceeds to secure Letter of Credit Obligations to the extent the related
letters of credit have not been drawn upon or returned undrawn; or (v) after
such time as the accumulated Net Cash Proceeds not applied pursuant to the
foregoing clauses (i) through (iv) equals or exceeds $15.0 million, apply such
Net Cash Proceeds (or cause such Net Cash Proceeds to be applied) to the
purchase of Notes tendered to the Company for purchase at a price equal to
100% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of purchase pursuant to an offer to purchase made by the Company
as set forth below (a "Net Proceeds Offer"); provided, however, that the
Company shall have the right to exclude from the foregoing provisions Asset
Sales subsequent to the Issue Date, the proceeds of which are derived from the
sale and substantially concurrent lease-back of a supermarket and/or related
assets or equipment which are acquired or constructed by the Company or a
Restricted Subsidiary subsequent to the date that is six months prior to the
Issue Date, provided that such sale and substantially concurrent lease-back
occurs within 365 days following such acquisition or the completion of such
construction, as the case may be. Pending the utilization of any Net Cash
Proceeds in the manner (and within the time period) described above, the
Company may use any such Net Cash Proceeds to repay revolving loans (under the
Credit Agreement or otherwise) without a permanent reduction of the commitment
thereunder.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders not less than 325 nor more than 365 days after the
relevant Asset Sale, with a copy to the Trustee, shall specify the purchase
date (which shall be no earlier than 30 days nor later than 40 days from the
date such notice is mailed) and shall otherwise comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer, Notes of tendering
Holders will be repurchased on a pro rata basis (based on amounts tendered). A
Net Proceeds Offer shall remain open for a period of 20 Business Days or such
longer period as may be required by law.
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of State and federal securities laws to the extent applicable in
connection with a Net Proceeds Offer.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture will provide that the Company shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, create or
suffer to exist, or allow to become effective any consensual Payment
Restriction with respect to any of the Restricted Subsidiaries, except for (a)
any such restrictions contained in (i) the Credit Agreement and related
documents as any such Payment Restriction may apply to any present or future
Subsidiary, (ii) the Indenture, (iii) any agreement in effect at or entered
into on the Issue Date, as each of the agreements referred to in the foregoing
clauses (i), (ii) or (iii) is in effect on the Issue Date or as thereafter
amended, supplemented or amended and restated in a manner, as it relates to
such restrictions, not materially adverse to the Holders and (iv) Indebtedness
of a Person existing at the time such Person becomes a Restricted Subsidiary
(provided that (x) such Indebtedness is not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary, (y) such
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person so acquired and (z) such Indebtedness is
otherwise permitted to be Incurred pursuant to the provisions of the covenant
described under "--Limitation on Incurrences of Additional Indebtedness"
above); (b) limitations contained in agreements governing secured Indebtedness
otherwise permitted to be Incurred pursuant to the provisions of the covenants
described under "--Limitation on Incurrences of Additional Indebtedness" and
"--Limitation on Liens" above on the right of the debtor to dispose of the
assets securing such Indebtedness; (c) customary non-assignment provisions
restricting subletting
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or assignment of any lease or other agreement entered into by a Restricted
Subsidiary; (d) customary net worth or similar provisions contained in leases
and other agreements entered into by a Restricted Subsidiary in the ordinary
course of business; (e) customary restrictions with respect to a Restricted
Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary; (f) customary provisions in joint venture agreements
and other similar agreements; (g) restrictions contained in Indebtedness
Incurred to refinance, refund, extend or renew Indebtedness referred to in
clauses (a) and (b) above; provided that the restrictions contained therein
are not materially more restrictive taken as a whole than those provided for
in such Indebtedness being refinanced, refunded, extended or renewed; and (h)
Payment Restrictions contained in any other Indebtedness permitted to be
Incurred subsequent to the Issue Date pursuant to the provisions of the
covenant described under""--Limitation on Incurrences of Additional
Indebtedness" above; provided that any such Payment Restrictions are ordinary
and customary with respect to the type of Indebtedness being Incurred (under
the relevant circumstances).
Limitation on Transactions with Affiliates. The Indenture will provide that
the Company shall not, and shall not permit any Restricted Subsidiary to, in a
single transaction or series of related transactions, (i) sell, lease,
transfer or otherwise dispose of any of its properties or assets or issue
securities (other than equity securities which do not constitute Disqualified
Capital Stock) to, (ii) purchase any property, assets or securities from,
(iii) make any Investment in, or (iv) enter into or suffer to exist any
contract or agreement with or for the benefit of, an Affiliate or Significant
Stockholder (or any Affiliate of such Significant Stockholder) of the Company
or any Subsidiary (any of the foregoing, an "Affiliate Transaction"), unless
(I) (A) such Affiliate Transaction is in the ordinary course of business or
otherwise on terms that are at least as favorable to the Company or such
Restricted Subsidiary, as the case may be, as might reasonably have been
obtainable at such time from an unaffiliated party; (B) in the case of an
Affiliate Transaction involving aggregate payments in excess of $2.0 million
and less than or equal to $5.0 million, the Company or such Restricted
Subsidiary, as the case may be, shall have delivered an officers' certificate
to the Trustee certifying that such Affiliate Transaction is on terms that are
at least as favorable to the Company or such Restricted Subsidiary, as the
case may be, as might reasonably have been obtainable at such time from an
unaffiliated party; and (C) in the case of an Affiliate Transaction involving
aggregate payments in excess of $5.0 million and less than or equal to $15.0
million, the Company or such Restricted Subsidiary, as the case may be, shall
have delivered an officers' certificate to the Trustee certifying to the same
effect as specified in clause (B) above and also that such Affiliate
Transaction has received the approval of a majority of the disinterested
members of the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, or, in the absence of any such approval, that
an Independent Financial Advisor has provided the Board of Directors with
written confirmation to the effect specified in clause (II) below and (D) in
the case of an Affiliate Transaction involving aggregate payments in excess of
$15.0 million, the Company or such Restricted Subsidiary, as the case may be,
shall have delivered to the Trustee a written opinion of an Independent
Financial Advisor to the effect specified in clause (II) below or (II) the
Company or such Restricted Subsidiary, as the case may be, shall have
delivered to the Trustee a written opinion of an Independent Financial Advisor
to the effect that such transaction is fair to the Company or such Restricted
Subsidiary, as the case may be, from a financial point of view or that the
terms of such Affiliate Transaction are at least as favorable to the Company
or such Restricted Subsidiary, as the case may be, as those that might
reasonably have been obtainable at such time from a Person that is not an
Affiliate of the Company or such Restricted Subsidiary, as the case may be.
The provisions of the foregoing paragraph shall not apply to (i) any
Permitted Payment, (ii) any Restricted Payment that is made in compliance with
the provisions of the covenant described under "--Limitation on Restricted
Payments" above, (iii) reasonable and customary fees and compensation paid to,
and indemnity provided on behalf of, officers, directors, consultants or
employees of the Company or any Restricted Subsidiary, as determined in good
faith by the Board of Directors of the Company or such Restricted Subsidiary
or the senior management thereof, (iv) transactions exclusively between or
among the Company and any of its wholly owned Restricted Subsidiaries or
exclusively between or among such wholly owned Restricted Subsidiaries;
provided such transactions are not otherwise prohibited by the Indenture, (v)
the Standstill Agreement and any other agreement in effect on the Issue Date
as in effect on such date (or any transaction contemplated thereby) or as
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amended thereafter (including transactions contemplated pursuant to such
amendment) so long as any such amendment is not disadvantageous to the Holders
in any material respect, (vi) the existence of, or the performance by the
Company or any of the Restricted Subsidiaries of its obligations under the
terms of, any stockholders agreement (including any registration rights
agreement or purchase agreement related thereto) to which it is a party as of
the Issue Date and any similar agreements which it may enter into thereafter;
provided, however, that the existence of, or the performance by the Company or
any Restricted Subsidiary of obligations under any future amendment to, any
such existing agreement or under any similar agreement entered into after the
Issue Date shall only be permitted by this clause (vi) to the extent that the
terms of any such amendment or new agreement are not otherwise disadvantageous
to the Holders in any material respect, (vii) transactions permitted by, and
complying with, the provisions of the covenant described under "--Limitation
on Mergers and Certain Other Transactions" below and (viii) transactions with
suppliers or other purchases or sales of goods or services, in each case in
the ordinary course of business (including, without limitation, pursuant to
joint venture agreements) and otherwise in compliance with the terms of the
Indenture which are fair to the Company, in the reasonable determination of
the Board of Directors of the Company or the senior management thereof, or are
on terms at least as favorable as might reasonably have been obtained at such
time from an unaffiliated party.
Limitation on Subsidiary Assets and Indebtedness. If at any time subsequent
to the Issue Date (i)(a) the Company transfers any of its property, plant or
equipment to one or more of the Restricted Subsidiaries (other than
Guarantors) and (b) as a result of such transfer or transfers, the book value
of all such transferred property, plant and equipment of the Company and the
Guarantors, as reflected on a balance sheet prepared in accordance with GAAP
in any filing made with the Commission, is greater than 35% of the then book
value of the total property, plant and equipment of the Company and the
Restricted Subsidiaries, on a consolidated basis; or (ii) any Restricted
Subsidiary (other than a Guarantor) incurs Indebtedness (other than Permitted
Indebtedness pursuant to clause (a) (to the extent such Indebtedness
represents a guarantee of obligations under the Credit Agreement or a
revolving loan thereunder), (b), (c), (d), (g), (h), (i), (j), (k) or (l) of
the definition thereof) that, together with any other Indebtedness (including
Permitted Indebtedness) Incurred subsequent to the Issue Date by all
Restricted Subsidiaries (other than those that are then Guarantors) then
outstanding, would represent more than 35% of the consolidated total long-term
Indebtedness of the Company and the Restricted Subsidiaries as reflected on a
balance sheet prepared in accordance with GAAP in any filing made with the
Commission (each of the foregoing clauses (i) and (ii) being referred to
herein as a "Guarantee Condition"), then the Company shall, promptly following
any such filing with the Commission, cause one or more of the Restricted
Subsidiaries to unconditionally guarantee, jointly and severally, the
Company's obligations under the Notes on a senior subordinated unsecured basis
(the "Guarantees"), pursuant to supplemental indentures satisfactory in form
to the Trustee, so that following the issuance of such Guarantees, neither of
the Guarantee Conditions shall exist. The Indebtedness represented by each
Guarantee (including the payment of Obligations on the Notes) will be
subordinated on the same basis to senior indebtedness of the Guarantors as the
Notes are subordinated to Senior Indebtedness. So long as no Default or Event
of Default shall have occurred and be continuing, one or more Guarantors may
be released within 10 Business Days following any filing with the Commission
from their Guarantees pursuant to supplemental indentures or such other
instruments satisfactory in form to the Trustee if after giving effect to such
release neither of the Guarantee Conditions shall exist. Notwithstanding the
foregoing, neither of the Guarantee Conditions shall be deemed to exist during
any period when the Company's Operating Coverage Ratio is greater than 3.0 to
1.0.
Upon the sale or disposition (whether by merger, stock sale, asset sale or
otherwise) to any Person which is not a Restricted Subsidiary of all of the
Company's or any Subsidiary's Capital Stock in, or all or substantially all of
the assets of, any Guarantor, which sale or disposition is otherwise in
compliance with the Indenture, in each case, such Guarantor shall be deemed
released from all its obligations under its Guarantee without any further
action required on the part of the Trustee or any Holder.
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The obligations of each Guarantor under its Guarantee shall be limited to
the maximum amount as will, after giving effect to all other contingent and
fixed liabilities of such Guarantor and after giving effect to any collections
from or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, result in the obligations of
such Guarantor under such Guarantee not constituting a fraudulent conveyance
or fraudulent transfer under federal or state law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount based on the relative net
assets of each Guarantor.
Limitation on Preferred Stock of Restricted Subsidiaries. The Indenture will
provide that the Company shall not permit any of the Restricted Subsidiaries
to issue any Preferred Stock (other than to the Company or to a wholly owned
Restricted Subsidiary) or permit any Person (other than the Company or a
wholly owned Restricted Subsidiary) to own any Preferred Stock of any
Restricted Subsidiary.
Limitation on Mergers and Certain Other Transactions. The Indenture will
provide that the Company, in a single transaction or through a series of
related transactions, shall not (i) consolidate with or merge with or into any
other Person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to another Person or group of affiliated Persons or (ii) adopt
a Plan of Liquidation, unless, in either case, (1) either the Company shall be
the continuing Person, or the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which all or
substantially all of the properties and assets of the Company as an entirety
or substantially as an entirety are transferred (or, in the case of a Plan of
Liquidation, any Person to which assets are transferred) (the Company or such
other Person being hereinafter referred to as the "Surviving Person") shall be
a corporation organized and validly existing under the laws of the United
States, any state thereof or the District of Columbia, and shall expressly
assume, by supplemental indenture, all the obligations of the Company under
the Indenture and the Notes; (2) immediately after and giving effect to such
transaction and the assumption contemplated by clause (1) above and the
Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in
connection therewith, the Surviving Person shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction; and (3) immediately before and immediately after
giving effect to such transaction and the assumption of the obligations as set
forth in clause (1) above and the Incurrence or anticipated Incurrence of any
Indebtedness to be Incurred in connection therewith, no Default or Event of
Default shall have occurred and be continuing.
The Indenture will provide that upon any consolidation or merger or any
transfer of all or substantially all of the assets of the Company or any
adoption of a Plan of Liquidation by the Company in accordance with the
foregoing, the surviving Person formed by such consolidation or into which the
Company is merged or to which such transfer is made (or, in the case of a Plan
of Liquidation, to which assets are transferred) shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such surviving Person had been named
as the Company therein; provided, however, that solely for purposes of
computing amounts described in subclause (c) of the first paragraph of the
covenant described under "--Limitation on Restricted Payments" above, any such
surviving Person shall be deemed to have succeeded to and be substituted for
the Company only with respect to periods subsequent to the effective time of
such merger, consolidation or transfer of assets.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Capital Stock of which constitutes all or substantially
all of the properties and assets of the Company shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
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Limitation on Other Senior Subordinated Indebtedness. The Indenture will
provide that the Company shall not, directly or indirectly, incur any
Indebtedness that by its terms (or by the terms of the agreement governing
such Indebtedness) is subordinate in right of payment to any other
Indebtedness of the Company unless such Indebtedness is also by its terms (or
the terms of the agreement governing such Indebtedness) made expressly either
(a) pari passu in right of payment with the Notes or (b) subordinate in right
of payment to the Notes in the same manner and at least to the same extent as
the Notes are subordinate to Senior Indebtedness.
Limitation on Restricted and Unrestricted Subsidiaries. The Indenture will
provide that the Board of Directors of the Company may, if no Default or Event
of Default shall have occurred and be continuing or would result therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such
designation is at that time permitted under "--Limitation on Restricted
Payments" above. The Indenture will also provide that the Board of Directors
of the Company may, if no Default or Event of Default shall have occurred and
be continuing or would result therefrom, designate an Unrestricted Subsidiary
to be a Restricted Subsidiary; provided, however, that (i) any such
redesignation shall be deemed to be an Incurrence as of the date of such
redesignation by the Company and the Restricted Subsidiaries of the
Indebtedness (if any) of such redesignated Subsidiary for purposes of "--
Limitation on Incurrences of Additional Indebtedness" above; and (ii) unless
such redesignated Subsidiary shall not have any Indebtedness outstanding
(other than Indebtedness which would be Permitted Indebtedness), no such
designation shall be permitted if immediately after giving effect to such
redesignation and the Incurrence of any such Indebtedness, the Company could
not incur $1.00 of additional Indebtedness pursuant to the proviso of the
covenant described under "--Limitation on Incurrences of Additional
Indebtedness" above. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by the filing with the Trustee of a
certified copy of the Board Resolution of the Company's Board of Directors
giving effect to such designation or redesignation and an officers'
certificate certifying that such designation or redesignation complied with
the foregoing conditions and setting forth in reasonable detail the underlying
calculations.
The Indenture will provide that Subsidiaries that are not designated by the
Board of Directors as Restricted or Unrestricted Subsidiaries will be deemed
to be Restricted Subsidiaries. The designation of a Restricted Subsidiary as
an Unrestricted Subsidiary shall be deemed to include a designation of all of
the subsidiaries of such Unrestricted Subsidiary as Unrestricted Subsidiaries.
REPORTS TO HOLDERS
The Indenture will provide that the Company shall deliver to the Trustee
within 15 days after the filing of the same with the Commission, copies of the
quarterly and annual reports 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. The 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 and Holders with such quarterly and
annual reports 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 the Indenture: (i)
failure to make any interest payment on the Notes 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 Notes when due, whether at maturity, upon
acceleration, redemption, required repurchase or otherwise, whether or not
prohibited by the provisions described under "--Subordination"; (iii) failure
by the Company to comply with any of its other agreements contained in the
Notes or the Indenture, if such failure continues unremedied for 30 days after
written notice given by the Trustee or the Holders of at least 25% in
principal amount of the Notes then outstanding (except in the case of a
default with respect to the covenants
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described under "--Change of Control," "--Certain Covenants--Limitation on
Restricted Payments," "--Limitation on Asset Sales" and "--Limitation on
Mergers and Certain Other Transactions," which shall constitute Events of
Default with notice but without passage of time); (iv) there shall be 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 final 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, aggregates
$20 million or more at any one time outstanding; (v) any final judgment, order
or decree of any court, regulatory agency, administrative agency, or other
body of competent jurisdiction for the payment of money in excess of $20
million, shall be entered against the Company or any Significant Subsidiary or
any of their respective properties and shall not be discharged and there shall
have been a period of 60 days after the date on which any period for appeal
has expired; (vi) either the Company or any Significant Subsidiary pursuant to
or within the meaning of any Bankruptcy Law: (a) commences a voluntary case or
proceeding; (b) consents to the entry of an order for relief against it in an
involuntary case or proceeding; (c) consents to the appointment of a Custodian
of it or for all or substantially all of its property; or (d) makes a general
assignment for the benefit of its creditors; (vii) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is
for relief against the Company or any Significant Subsidiary in an involuntary
case or proceeding; (b) appoints a Custodian of the Company or any Significant
Subsidiary, or for all or any substantial part of their respective properties;
or (c) orders the liquidation of the Company or any Significant Subsidiary,
and in each case the order or decree remains unstayed and in effect for 60
days; or (viii) the lenders under the Credit Agreement shall commence judicial
proceedings to foreclose upon any material portion of the assets of the
Company and the Subsidiaries.
In the event of a declaration of acceleration because an Event of Default
set forth in clause (iv) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
either (x) the holders of the Indebtedness which is the subject of such Event
of Default have waived such failure to pay at maturity or have rescinded the
acceleration in respect of such Indebtedness within 90 days of such maturity
or declaration of acceleration, as the case may be, and no other Event of
Default has occurred during such 90-day period which has not been cured or
waived, or (y) such Indebtedness shall have been discharged or the maturity
thereof shall have been extended such that it is not then due and payable, or
the underlying default has been cured (and any acceleration based thereon of
such other Indebtedness has been rescinded), within 90 days of such maturity
or declaration of acceleration, as the case may be.
If an Event of Default (other than an Event of Default under clause (vi) or
(vii) above with respect to the Company or a Significant Subsidiary) occurs
and is continuing, the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Notes may declare due and payable all unpaid
principal and interest accrued and unpaid on the then outstanding Notes by
notice in writing to the Company, the administrative agent under the Credit
Agreement and the Trustee specifying the respective Event of Default and that
it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i)
shall become immediately due and payable or (ii) if there is any Indebtedness
outstanding under the Credit Agreement, shall become due and payable upon the
first to occur of an acceleration under the Credit Agreement, or five business
days after receipt by the Company and the administrative agent under the
Credit Agreement of such Acceleration Notice. If an Event of Default under
clause (vi) or (vii) above with respect to the Company or a Significant
Subsidiary shall occur, all unpaid principal of and accrued interest on all
then outstanding Notes shall be immediately due and payable without any
declaration or other act on the part of the Trustee or any of the Holders.
After a declaration of acceleration under the Indenture, subject to certain
conditions, the Holders of a majority in principal amount of the then
outstanding Notes, by notice to the 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 Notes may waive a past Default and
its consequences, except a Default in the payment of or interest on any of the
Notes.
The Indenture will provide that if a Default or Event of Default occurs and
is continuing and if it is known to the Trustee, the Trustee shall mail to
each Holder notice of the Default or Event of Default within 90 days
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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 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 Trustee may withhold such notice if
it in good faith determines that withholding such notice is in the interest of
the Holders.
The Indenture provides that no Holder may pursue any remedy thereunder
unless the 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 Notes 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 principal of, premium, if any, or interest on,
Notes.
The Indenture provides that two officers of the Company are required to
certify to the 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 Notes
("Legal Defeasance"). Legal Defeasance means that the Company shall be deemed
to have paid and discharged the entire Indebtedness represented by the Notes
except for (i) the rights of Holders of Notes to receive payments in respect
of the principal of, premium, if any, and interest on Notes when such payments
are due solely from the funds held by the Trustee in the trust referred to
below; (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of Notes, replace mutilated, destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of Notes and
money for security payments held in trust in respect of Notes; (iii) the
rights, powers, trusts, duties and immunities of the Trustee and the Company's
obligations in connection therewith; and (iv) the Legal Defeasance provisions
of the 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 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.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must have irrevocably deposited with the Trustee, in trust, for the
benefit of the Holders, cash in U.S. dollars, U.S. Government Obligations (as
defined in the 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 Notes to redemption or maturity provided that the 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 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 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 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
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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 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 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 with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(vii) the Company shall have delivered to the 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 Indenture will be discharged and will cease to be of further effect as
to all outstanding Notes, when either (a) all 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 Trustee
for cancellation; or (b)(i) all Notes not theretofore delivered to the 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 Trustee as trust funds in trust for the
purpose an amount of money sufficient to pay and discharge the entire
indebtedness on Notes not theretofore delivered to the 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 Indenture; and (iv) the Company has delivered
irrevocable instructions to the Trustee to apply the deposited money toward
the payment of 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 Trustee stating that all conditions precedent to
satisfaction and discharge have been complied with.
MODIFICATION OF THE INDENTURE
The Indenture, the Notes or any Guarantee (if any), may be amended or
supplemented (and compliance with any provision thereof may be waived) by the
Company, the Guarantors (if any), the Trustee and the Holders of not less than
a majority in aggregate principal amount of Notes then outstanding, without
any notice to any other Holder, except that (i) without the consent of each
Holder of Notes affected, no such amendment, supplement or waiver may (1)
change the principal amount of the Notes the Holders of which must consent to
an amendment, supplement or waiver of any provision of the Indenture, the
Notes or any Guarantee (if any), (2) reduce the rate or extend the time for
payment of interest on any Notes, (3) reduce the principal amount of any
Notes, (4) change the Maturity Date or alter the redemption provisions in the
Indenture or the Notes 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 Notes, (6) make the principal of, or
interest on, any Notes payable with anything or in any manner other than as
provided for in the Indenture and the Notes or any Guarantee (if any), or (7)
modify the subordination provisions of the Indenture (including certain
related definitions) so as to adversely affect the ranking of any Note or any
Guarantee (if any); provided, however, that it is understood that any
amendment the purpose of which is to permit the Incurrence of additional
Indebtedness under the Indenture shall not be construed as adversely affecting
the ranking of any Note or any Guarantee (if any) and (ii) without the consent
of Holders of not less than 66 2/3% in aggregate principal amount of 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 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.
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In addition, the Indenture and the Notes may be amended by the Company, the
Guarantors (if any) and the Trustee, together, (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 TRUSTEE
The Indenture will provide that the Holders of a majority in principal
amount of the outstanding Notes may remove the 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 Notes 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 or of exercising any trust or power
conferred on the Trustee.
The Indenture will provide that, if a Default or an Event of Default has
occurred and is continuing, the Trustee shall exercise such of the rights and
powers vested in it by the 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 is under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless they shall have offered to the 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 Notes as shall have become due and
payable upon demand as specified in the Indenture, the Trustee, at the request
of the Holders of a majority in aggregate principal amount of 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.
The Indenture will contain limitations on the rights of the 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 Trustee is permitted to engage in
other transactions; however, if the Trustee acquires any "conflicting
interest," it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "affiliated," "controlling" and "controlled" have meanings correlative
to the foregoing; provided that Bankers Trust New York Corporation and The
Chase Manhattan Bank, N.A. and their respective Affiliates shall not be
considered to be Affiliates of the Company or any of its Subsidiaries. So long
as the Management Services Agreement is in effect or Yucaipa (together with
its Affiliates) owns voting securities representing more than 10% of the total
voting power of the then outstanding voting securities entitled to vote on a
regular basis for the Board of Directors of the Company, Yucaipa and its
Affiliates shall be deemed Affiliates of the Company.
"Asset Sale" means any sale, transfer or other disposition or series of
sales, transfers or other dispositions by the Company or any Restricted
Subsidiary (including, without limitation, any merger or consolidation of any
Restricted Subsidiary with or into another Person (other than the Company or
any wholly owned Restricted Subsidiary) whereby such Restricted Subsidiary
shall cease to be a Restricted Subsidiary) to any Person (other than to the
Company or a wholly owned Restricted Subsidiary) of any assets of the Company
or any Restricted Subsidiary, including, without limitation, assets consisting
of any Capital Stock or other securities held by the Company or any Restricted
Subsidiary, and any Capital Stock issued by any Restricted Subsidiary, in each
case, outside of the ordinary course of business, excluding, however, any
sale, transfer or other disposition, or series of related sales, transfers or
other dispositions (i) resulting in Net Proceeds to the Company and the
Restricted
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Subsidiaries of $500,000 or less, (ii) pursuant to any foreclosure of assets
or other remedy provided by applicable law to a creditor of the Company or any
Subsidiary with a Lien on such assets, which Lien is permitted under the
Indenture; provided that such foreclosure or other remedy is conducted in a
commercially reasonable manner or in accordance with any Bankruptcy Law, (iii)
involving only Cash Equivalents or inventory in the ordinary course of
business or obsolete equipment in the ordinary course of business consistent
with past practices of the Company; (iv) involving only the lease or sublease
of any real or personal property in the ordinary course of business; (v)
pursuant to the California Disposition or involving certain other assets set
forth on a schedule to the Indenture; or (vi) resulting from (a) the
designation of any Restricted Subsidiary as an Unrestricted Subsidiary, or the
contribution to the capital of any Unrestricted Subsidiary, in accordance with
the applicable provisions of the Indenture or (b) the sale of the Capital
Stock of any Unrestricted Subsidiary or the sale of all or substantially all
of the assets of any Unrestricted Subsidiary.
"Average Life" means, as of any date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products
of the number of years from the date of determination to the dates of each
successive scheduled principal payments of such debt security multiplied by
the amount of each such principal payment by (ii) the sum of all such
principal payments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or
foreign law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or of a subsidiary of such Person or any duly
authorized committee of that Board.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such Person.
"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or
obligations issued by any agency or instrumentality thereof and backed by the
full faith and credit of the United States of America, (ii) commercial paper
rated the highest grade by Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group and maturing not more than one year from the date of
creation thereof, (iii) time deposits with, and certificates of deposit and
banker's acceptances issued by, any bank having capital surplus and undivided
profits aggregating at least $500 million and maturing not more than one year
from the date of creation thereof, (iv) repurchase agreements that are secured
by a perfected security interest in an obligation described in clause (i) and
are with any bank described in clause (iii), (v) shares of any money market
mutual fund that (a) has at least 95% of its assets invested continuously in
the types of investments referred to in clauses (i) and (ii) above, (b) has
net assets of not less than $500 million, and (c) has the highest rating
obtainable from either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. and (vi) readily marketable direct obligations issued by any
state of the United States of America or any political subdivision thereof
having one of the two highest rating categories obtainable from either Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group.
"Change of Control" means the acquisition after the Issue Date, in one or
more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) by (i) any Person (other than any Permitted Holder) or
(ii) any group (within the meaning of Section 13(d)(3) of the Exchange Act) of
Persons (excluding any Permitted Holders), in either case, of any securities
of the Company such that, as a result of such
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acquisition, such Person or group beneficially owns (within the meaning of
Rule 13d-3 under the Exchange Act), directly or indirectly, voting securities
representing 40% or more of the total voting power of the then outstanding
voting securities entitled to vote on a regular basis for the Board of
Directors of the Company (but only to the extent that such beneficial
ownership is not shared with any Permitted Holder who has the power to direct
the vote thereof); provided, however, that no such Change of Control shall be
deemed to have occurred if (A) the Permitted Holders beneficially own, in the
aggregate, at such time, voting securities representing a greater percentage
of such voting power than such other Person or group or (B) at the time of
such acquisition, the Permitted Holders (or any of them) possess the ability
(by contract or otherwise) to elect, or cause the election, of a majority of
the members of the Company's Board of Directors.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however
designated and whether voting or nonvoting) of, such Person's common stock,
whether outstanding at the Issue Date or issued after the Issue Date, and
includes, without limitation, all series and classes of such common stock.
"Consolidated Interest Expense" means for any period, the aggregate amount
of interest, whether expensed or capitalized, paid, accrued or scheduled to be
paid or accrued during such period (except to the extent accrued in a prior
period) in respect of all Indebtedness of the Company and the Restricted
Subsidiaries (including (a) original issue discount on any Indebtedness
(including (without duplication), in the case of the Company, any original
issue discount on the Notes but excluding amortization of debt issuance costs)
and (b) the interest portion of all deferred payment obligations, calculated
in accordance with the effective interest method, in each case to the extent
attributable to such period but excluding the amortization of debt issuance
costs). For purposes of this definition, (a) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
by the Company to be the rate of interest implicit in such Capitalized Lease
Obligation in accordance with GAAP, (b) interest on Indebtedness that is
determined on a fluctuating basis shall be deemed to have accrued at a fixed
rate per annum equal to the rate of interest of such Indebtedness in effect on
the date Consolidated Interest Expense is being calculated, (c) interest on
Indebtedness that may optionally be determined at an interest rate based upon
a factor of a prime or similar rate, a eurocurrency interbank offered rate, or
other rate, shall be deemed to have been based upon the rate actually chosen,
or, if none, then based upon such optional rate chosen as the Company may
designate, and (d) Consolidated Interest Expense shall be increased or reduced
by the net cost (including amortization of discount) or benefit associated
with Interest Swap Obligations attributable to such period.
"Consolidated Net Income" means for any period, the aggregate of the net
income (or loss) of the Company and the Restricted Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP; provided
that (a) the net income of any other Person in which the Company or any
Restricted Subsidiary has an interest (which interest does not cause the net
income of such other Person to be consolidated with the net income of the
Company and the Restricted Subsidiaries in accordance with GAAP) shall be
included only to the extent of the amount of dividends or distributions
actually paid to the Company or such Restricted Subsidiary by such other
Person in such period; (b) the net income of any Restricted Subsidiary that is
subject to any Payment Restriction shall be excluded to the extent such
Payment Restriction would actually prevent the payment of an amount that
otherwise could have been paid to, or received by, the Company or a Restricted
Subsidiary not subject to any Payment Restriction; and (c)(i) the net income
(or loss) of any other Person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition, (ii) all gains and
losses realized on any Asset Sale or any other sale of assets that would
constitute an "Asset Sale" but for the exceptions set forth in clauses (i),
(ii), (v), or (vi) of the definition thereof; (iii) all gains realized upon or
in connection with or as a consequence of the issuance of the Capital Stock of
the Company or any Restricted Subsidiary and any gains on pension reversions
received by the Company or any Restricted Subsidiary, (iv) all gains and
losses realized on the purchase or other acquisition by the Company or any
Restricted Subsidiary of any securities of the Company or any Restricted
Subsidiary, (v) all gains and losses resulting from the cumulative effect of
any accounting change pursuant to the application of Accounting Principles
Board Opinion No. 20, as
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amended, or Statement of Financial Accounting Standards No. 121, (vi) all
other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) all
severance, deferred compensation or other employee termination costs, (C) up
to $20 million of compensation expenses resulting from the repurchase or
amendment of certain management stock options, (D) all debt refinancing
premiums and (E) any other reserves or charges (provided, however, that any
net cash payments actually made (after-tax) with respect to the liabilities
for which such reserves or charges were created shall be deducted from
Consolidated Net Income in the period when made), in each case under this
clause (vii), recorded by the Company or any Restricted Subsidiary in
connection with the Transactions and the California Disposition, including,
without limitation, the integration of operations in the State of Arizona,
(viii) losses incurred by the Company and the Restricted Subsidiaries
resulting from earthquakes and (ix) with respect to the Company and the
Restricted Subsidiaries, all deferred financing costs written off in
connection with the early extinguishment of any Indebtedness, shall each be
excluded.
"Consolidated Net Worth" means, with respect to any Person, the total
stockholders' equity (exclusive of any Disqualified Capital Stock) of such
Person and its Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP.
"Credit Agreement" means the Credit Agreement, dated as of the Issue Date,
by and among the Company as borrower, its subsidiaries as guarantors, the
Lenders referred to therein, Bankers Trust Company and The Chase Manhattan
Bank, as arrangers, and Bankers Trust Company, as administrative agent, as the
same may be amended, extended, renewed, restated, supplemented or otherwise
modified (in each case, in whole or in part, and without limitation as to
amount, terms, conditions, covenants and other provisions) from time to time,
and any agreement governing Indebtedness Incurred to refund, replace or
refinance any borrowings and commitments then outstanding or permitted to be
outstanding under such Credit Agreement or any such prior agreement as the
same may be amended, extended, renewed, restated, supplemented or otherwise
modified (in each case, in whole or in part, and without limitation as to
amount, terms, conditions, covenants and other provisions). The term "Credit
Agreement" shall include all related or ancillary documents, including,
without limitation, any guarantee agreements and security documents. The
Company shall promptly notify the Trustee of any such refunding or refinancing
of the Credit Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) in the event any Indebtedness is
outstanding under the Credit Agreement, all Senior Indebtedness under the
Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit
Agreement, any other issue of Senior Indebtedness which (a) at the time of the
determination is equal to or greater than $50 million in aggregate principal
amount and (b) is specifically designated in the instrument evidencing such
Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For
purposes of this definition, the term "Credit Agreement" shall not include any
agreement governing Indebtedness Incurred to refund, replace or refinance
borrowings or commitments under the Credit Agreement other than any such
agreements governing Indebtedness Incurred to refund, replace or refinance the
entirety of the borrowings and commitments then outstanding or permitted to be
outstanding thereunder.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person or its subsidiaries that, by its terms, by the terms of
any agreement related thereto or by the terms of any security into which it is
convertible, puttable or exchangeable, is, or upon the happening of any event
or the passage of time would be, required to be redeemed or repurchased by
such Person or its subsidiaries, including at the option of the holder
thereof, in whole or in part, or has, or upon the happening of an event or
passage of time would have, a redemption or similar payment due, on or prior
to the Maturity Date, or any other Capital Stock of such Person or its
subsidiaries designated as Disqualified Capital Stock by such Person at the
time of issuance; provided, however, that if such Capital Stock is either (i)
redeemable or repurchasable solely at the option of such Person
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or (ii) issued to employees of the Company or the Subsidiaries or to any plan
for the benefit of such employees, such Capital Stock shall not constitute
Disqualified Capital Stock unless so designated.
"EBITDA" means, for any period, the Consolidated Net Income for such period,
plus, in each case to the extent deducted in computing Consolidated Net Income
for such period (without duplication) (i) provisions for income taxes or
similar charges recognized by the Company and the Restricted Subsidiaries
accrued during such period, (ii) depreciation and amortization expense of the
Company and the Restricted Subsidiaries accrued during such period (but only
to the extent not included in Consolidated Interest Expense), (iii)
Consolidated Interest Expense of the Company and the Restricted Subsidiaries
for such period, (iv) LIFO charges (credits) of the Company and the Restricted
Subsidiaries for such period, (v) the amount of any restructuring reserve or
charge recorded during such period in accordance with GAAP, including any such
reserve or charge related to the Transactions or the California Disposition,
less, without duplication, the amount of all net cash payments made by the
Company and the Restricted Subsidiaries during such period to the extent that
such cash payments have been provided for in a restructuring reserve or charge
referred to in clause (v) above (and were not otherwise deducted in the
computation of EBITDA for such period).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Existing Indebtedness" means all indebtedness of the Company and the
Restricted Subsidiaries to the extent outstanding on the Issue Date after
giving effect to the Transactions (other than Indebtedness under the Credit
Agreement and the Indenture), including operating leases outstanding on the
Issue Date that are, or may be, required under GAAP to be reported or
reclassified after the Issue Date as Capitalized Lease Obligations.
"Foreign Exchange Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
against fluctuations in currency values.
"Guarantor" means each Restricted Subsidiary, if any, which becomes a
guarantor of the Notes in compliance with the provisions set forth under "--
Certain Covenants--Limitation on Subsidiary Assets and Indebtedness."
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligations or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing).
"Indebtedness" means with respect to any Person, without duplication, (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures, drafts accepted or similar instruments or letters of credit or
representing the balance deferred and unpaid of the purchase price of any
property (other than any such balance that represents an account payable or
any other monetary obligation to a trade creditor (whether or not an
Affiliate) Incurred by such Person in the ordinary course of business of such
Person in connection with obtaining goods, materials or services and due
within twelve months (or such longer period for payment as is customarily
extended by such trade creditor) of the Incurrence thereof, which account is
not overdue by more than 90 days, according to the original terms of sale,
unless such account payable is being contested in good faith), or (c) for the
payment of money relating to a Capitalized Lease Obligation; (ii) the maximum
fixed repurchase price of all Disqualified Capital Stock of such Person; (iii)
reimbursement obligations of such Person with respect to letters of credit;
(iv) obligations of such Person with respect to Interest Swap Obligations and
Foreign Exchange Agreements; (v) all liabilities of others of the kind
described in the preceding clause (i), (ii), (iii) or (iv) that such Person
has guaranteed or that is otherwise its legal liability; and (vi) all
obligations of others secured by a Lien to which any of the properties or
assets (including, without limitation, leasehold interests and any other
tangible or intangible property rights) of such Person are subject,
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whether or not the obligations secured thereby shall have been assumed by such
Person or shall otherwise be such Person's legal liability (provided that if
the obligations so secured have not been assumed by such Person or are not
otherwise such Person's legal liability, such obligations shall be deemed to
be in an amount equal to the fair market value of such properties or assets,
as determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution). For purposes of the
preceding sentence, the "maximum fixed repurchase price" of any Disqualified
Capital Stock that does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such
price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock (or any equity security for which it may be
exchanged or converted), such fair market value shall be determined in good
faith by the Board of Directors of such Person, which determination shall be
evidenced by a Board Resolution.
"Independent Financial Advisor" means a reputable accounting, appraisal or
nationally recognized investment banking or consulting firm that is, in the
reasonable judgment of the Board of Directors of the Company, qualified to
perform the tasks for which such firm has been engaged and independent with
respect to the Company and its Affiliates.
"Interest Swap Obligation" means any obligation of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a fixed or floating rate of interest on a stated notional
amount in exchange for periodic payments made by such Person calculated by
applying a fixed or floating rate of interest on the same notional amount;
provided that the term "Interest Swap Obligation" shall also include interest
rate exchange, collar, cap, swap option or similar agreements providing
interest rate protection.
"Investment" by any Person in any other Person means any investment by such
Person in such other Person, whether by share purchase, capital contribution,
loan, advance (other than reasonable loans and advances to employees for moving
and travel expenses, as salary advances or to permit the purchase of Qualified
Capital Stock of the Company and other similar customary expenses incurred, in
each case in the ordinary course of business consistent with past practice) or
similar credit extension constituting Indebtedness of such other Person, and
any guarantee of Indebtedness of any other Person. In addition, for purposes of
the covenant described under "--Limitation on Restricted Payments" above, (i)
an "Investment" shall be deemed to have been made at the time any Restricted
Subsidiary is designated as an Unrestricted Subsidiary in an amount
(proportionate to the Company's equity interest in such Subsidiary) equal to
the net worth of such Restricted Subsidiary at the time that such Restricted
Subsidiary is designated as an Unrestricted Subsidiary; and (ii) at any date
the aggregate of all Restricted Payments made as Investments since the Issue
Date shall exclude and be reduced by an amount (proportionate to the Company's
equity interest in such Subsidiary) equal to the net worth of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary (in each case "net worth" to be calculated based upon the
fair market value of the assets and liabilities of such Subsidiary as of any
such date of designation, as determined by the Company's Board of Directors).
"Issue Date" means the date of original issuance of the Notes under the
Indenture.
"Letter of Credit Obligations" means Indebtedness of the Company or any of
the Subsidiaries with respect to letters of credit issued pursuant to the
Credit Agreement, and for purposes of determining the aggregate amount of
Indebtedness at any time, shall be deemed to consist of (a) the aggregate
maximum amount then available to be drawn under all such letters of credit
(the determination of such maximum amount to assume compliance with all
conditions for drawing), and (b) the aggregate amount that has then been paid
by, and not reimbursed to, the issuers under such letters of credit.
"Lien" means, with respect to any asset or property, any mortgage, pledge,
lien, encumbrance, charge or security interest of any kind in respect of such
asset or property, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the
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nature thereof, any option or other agreement to sell or give a security
interest, and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction);
provided, however, that in no event shall an operating lease be deemed to
constitute a Lien.
"Management Services Agreement" means that certain Management Services
Agreement dated as of the Issue Date, between Smith's and Yucaipa (as such
Management Services Agreement may be amended or replaced, so long as such
amendment or replacement has been approved by a majority of the Independent
Directors (as defined in the Standstill Agreement) and is not disadvantageous
to the Holders in any material respect).
"Maturity Date" means May 15, 2007.
"Net Cash Proceeds" means Net Proceeds received in the form of cash or Cash
Equivalents.
"Net Proceeds" means (a) in the case of any Asset Sale or any issuance and
sale by any Person of Qualified Capital Stock, the aggregate net proceeds
received by such Person after payment of expenses, taxes, commissions and the
like incurred in connection therewith (and, in the case of any Asset Sale, net
of the amount of cash applied to repay Indebtedness secured by the asset
involved in such Asset Sale), whether such proceeds are in cash or in property
(valued at the fair market value thereof at the time of receipt as determined
with respect to any Asset Sale resulting in Net Proceeds in excess of $10
million in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution) and (b) in the case of
any conversion or exchange of any outstanding Indebtedness or Disqualified
Capital Stock of such Person for or into shares of Qualified Capital Stock of
the Company, the sum of (i) the fair market value of the proceeds received by
the Company in connection with the issuance of such Indebtedness or
Disqualified Capital Stock on the date of such issuance and (ii) any
additional amount paid by the holder thereof to the Company upon such
conversion or exchange.
"Obligations" means all obligations of every nature whether for principal,
reimbursements, premium, interest, fees, expenses, indemnities or otherwise,
and whether primary, secondary, direct, indirect, contingent, fixed or
otherwise (including obligations of performance) under the documentation
governing any Indebtedness.
"Operating Coverage Ratio" means the ratio of (1) EBITDA for the period (the
"Pro Forma Period") consisting of the most recent four full fiscal quarters
for which financial information in respect thereof is available immediately
prior to the date of the transaction giving rise to the need to calculate the
Operating Coverage Ratio (the "Transaction Date") to (2) the Consolidated
Interest Expense for the fiscal quarter in which the Transaction Date occurs
and the three fiscal quarters immediately subsequent to such fiscal quarter
(the "Forward Period") reasonably anticipated by the Board of Directors of the
Company to become due from time to time during such period. For purposes of
this definition, if the Transaction Date occurs prior to the first anniversary
of the Transactions, "EBITDA" for the Pro Forma Period shall be calculated
after giving effect on a pro forma basis to the Transactions and the
California Disposition as if they had occurred on the first day of the Pro
Forma Period. In addition to, but without duplication of, the foregoing, for
purposes of this definition, "EBITDA" shall be calculated after giving effect
(without duplication), on a pro forma basis for the Pro Forma Period (but no
longer), to (a) any Investment, during the period commencing on the first day
of the Pro Forma Period to and including the Transaction Date (the "Reference
Period"), in any other Person that, as a result of such Investment, becomes a
Restricted Subsidiary, (b) the acquisition, during the Reference Period (by
merger, consolidation or purchase of stock or assets) of any business or
assets, which acquisition is not prohibited by the Indenture, and (c) any
sales or other dispositions of any Restricted Subsidiary or any line of
business (or geographical area thereof) of the Company or any Restricted
Subsidiary occurring during the Reference Period, in each case as if such
incurrence, Investment, repayment, acquisition or asset sale had occurred on
the first day of the Reference Period. In addition, for purposes of this
definition, "Consolidated Interest Expense" shall be calculated after giving
effect (without duplication), on a pro forma basis for the Forward Period, to
any Indebtedness Incurred or repaid on or after the first day of the Forward
Period and prior to the Transaction Date. If the Company or any Restricted
Subsidiary directly or indirectly guarantees any Indebtedness of a third
Person,
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the Operating Coverage Ratio shall give effect to the Incurrence of such
Indebtedness as if the Company or such Restricted Subsidiary had directly
Incurred such guaranteed Indebtedness.
"operating lease" means any lease the obligations under which do not
constitute Capitalized Lease Obligations.
"Pari Passu Indebtedness" means the Notes and any Indebtedness of the
Company which ranks pari passu in right of payment to the Notes.
"Payment Restriction" means, with respect to a subsidiary of any Person, any
encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation, on the ability of (i) such
subsidiary to (a) pay dividends or make other distributions on its Capital
Stock or make payments on any obligation, liability or Indebtedness owed to
such Person or any other subsidiary of such Person, (b) make loans or advances
to such Person or any other subsidiary of such Person or (c) transfer any of
its properties or assets to such Person or any other subsidiary of such
Person, or (ii) such Person or any other subsidiary of such Person to receive
or retain any such (a) dividends, distributions or payments, (b) loans or
advances or (c) transfer of properties or assets.
"Permitted Holder" means (i) Yucaipa, or any entity controlled thereby or
any of the partners thereof, (ii) Jeffrey P. Smith, Richard D. Smith, Fred L.
Smith, Ida Smith, the Dee Glen Smith Marital Trust I, Trust for the Children
of Jeffrey Paul Smith, Trust for the Children of Richard Dee Smith, and Trust
for the Children of Fred Lorenzo Smith, (iii) an employee benefit plan of the
Company, or any of its subsidiaries or any participant therein, (iv) a trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries or (v) any Permitted Transferee of any of
the foregoing Persons.
"Permitted Indebtedness" means:
a. Indebtedness of the Company and the Restricted Subsidiaries (and the
Company and each Restricted Subsidiary (to the extent it is not the primary
obligor thereof) may guarantee such Indebtedness) (i) under the Credit
Agreement (including the Letter of Credit Obligations) in an aggregate
principal amount at any time outstanding not to exceed $1,025.0 million,
less all principal repayments of Term Loans and all permanent commitment
reductions under the revolving credit facility, in each case, pursuant to
and in accordance with the covenant described under "--Certain Covenants--
Limitation on Asset Sales" above or (ii) Incurred under the Credit
Agreement pursuant to and in compliance with (x) clause (n) of this
definition and (y) the proviso in the covenant described under the caption
"--Limitation on Incurrence of Additional Indebtedness" above;
b. Indebtedness of a Restricted Subsidiary owed to and held by the
Company or a Restricted Subsidiary; or Indebtedness of the Company owed to
and held by a Restricted Subsidiary;
c. Indebtedness Incurred by the Company or any Restricted Subsidiary in
connection with the purchase or improvement of property (real or personal)
or equipment or other capital expenditures in the ordinary course of
business (including for the purchase of assets or stock of any retail
grocery store or business) or consisting of Capitalized Lease Obligations,
provided that (i) at the time of the Incurrence thereof, such Indebtedness,
together with any other Indebtedness Incurred during the most recently
completed four fiscal quarter period in reliance upon this clause (c) does
not exceed, in the aggregate, 3% of net sales of the Company and the
Restricted Subsidiaries during the most recently completed four fiscal
quarter period on a consolidated basis (calculated on a pro forma basis if
the date of Incurrence is prior to the end of the fourth fiscal quarter
following the Issue Date) and (ii) such Indebtedness, together with all
then outstanding Indebtedness Incurred in reliance upon this clause (c)
does not exceed, in the aggregate, 3% of the aggregate net sales of the
Company and the Restricted Subsidiaries during the most recently completed
twelve fiscal quarter period on a consolidated basis (calculated on a pro
forma basis if the date of Incurrence is prior to the end of the twelfth
fiscal quarter following the Issue Date);
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d. Indebtedness Incurred by the Company or any Restricted Subsidiary in
connection with expenditures in an aggregate principal amount not to exceed
$25.0 million; provided that such expenditures relate solely to the
integration of the operations of the Company, Smitty's and their respective
subsidiaries as described in this Prospectus;
e. Indebtedness of the Company Incurred under Foreign Exchange Agreements
and Interest Swap Obligations entered into with respect to Indebtedness
otherwise permitted to be Incurred under the covenant described under "--
Certain Covenants--Limitation on Incurrences of Additional Indebtedness"
above, including this definition of "Permitted Indebtedness" (other than
this clause (e)), in a notional amount not exceeding the aggregate
principal amount of such Indebtedness;
f. guarantees Incurred in the ordinary course of business by the Company
or a Restricted Subsidiary of Indebtedness of any other Person in aggregate
not to exceed $20.0 million at any time outstanding;
g. Refinancing Indebtedness;
h. Indebtedness of the Company or any Restricted Subsidiary for letters
of credit relating to workers' compensation claims and self-insurance or
similar requirements in the ordinary course of business;
i. Existing Indebtedness;
j. Indebtedness arising from guarantees of Indebtedness of the Company or
any Restricted Subsidiary or other agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary, other than
guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose
of financing such acquisition; provided that the maximum aggregate
liability in respect of all such Indebtedness shall at no time exceed the
gross proceeds actually received by the Company and the Restricted
Subsidiary in connection with such disposition;
k. obligations in respect of performance bonds and completion guarantees
provided by the Company or any Restricted Subsidiary in the ordinary course
of business;
l. guarantees by the Company or a Restricted Subsidiary of Indebtedness
Incurred by the Company or a Restricted Subsidiary so long as the
Incurrence of such Indebtedness by the Company or any such Restricted
Subsidiary is otherwise permitted by the terms of the Indenture;
m. Indebtedness Incurred by the Company in connection with the
termination of a lease of, or the transfer to the Company or a third party
of, the California assets leased by the Company from certain trusts and
securing such trusts' obligations to the Smith's Food & Drug Centers, Inc.
1994-A Pass Through Trusts (the "Related Assets"); provided, however, that
(i) if the Related Assets are transferred to the Company, the Company shall
consummate an Asset Sale with respect to such Related Assets within 90 days
after the Incurrence of such Indebtedness and shall apply the Net Proceeds
of such Asset Sale to permanently reduce Pari Passu Indebtedness,
Indebtedness of any Restricted Subsidiary or Senior Indebtedness, and (ii)
if the Related Assets are transferred to any Person other than the Company
or any Subsidiary, the Company shall, within 90 days after the Incurrence
of such Indebtedness, apply any proceeds received from the owner trust in
respect of such transfer of the Related Assets to permanently reduce Pari
Passu Indebtedness, Indebtedness of any Restricted Subsidiary or Senior
Indebtedness; provided, further, however, that up to $5.0 million in
aggregate amount of Net Proceeds under clause (i) or proceeds under clause
(ii) may be applied to repay outstanding borrowings under the revolving
credit facility pursuant to the Credit Agreement without a corresponding
reduction in commitments; and
n. additional Indebtedness of the Company or any Restricted Subsidiary
(together with the Indebtedness Incurred pursuant to clause (a)(ii) above)
in an aggregate amount not to exceed $140.0 million at any time
outstanding.
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"Permitted Investment" by any Person means (i) any Related Business
Investment, (ii) Investments in securities not constituting cash or Cash
Equivalents and received in connection with an Asset Sale made pursuant to the
provisions of the covenant described under "--Certain Covenants--Limitation on
Asset Sales" above or any other disposition of assets not constituting an
Asset Sale by reason of the exceptions contained in the definition thereof,
(iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date,
(v) Investments specifically permitted by and made in accordance with the
second paragraph of the covenant described under "--Certain Covenants--
Limitation on Transactions with Affiliates," (vi) Investments in the Company
or the wholly owned Restricted Subsidiaries, (vii) guarantees by the Company
or any Restricted Subsidiary of Indebtedness under the Credit Agreement and
(viii) additional Investments in an aggregate amount not exceeding $15.0
million.
"Permitted Liens" shall mean (i) Liens for taxes, assessments and
governmental charges or claims not yet due or which are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted and if a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made therefor; (ii) statutory
Liens of landlords and carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen or other like Liens arising in the ordinary course of
business, deposits made to obtain the release of such Liens, and with respect
to amounts not yet delinquent for a period of more than 60 days or being
contested in good faith by an appropriate process of law, and for which a
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made; (iii) Liens incurred or pledges or deposits made in the
ordinary course of business to secure obligations under workers' compensation,
unemployment insurance and other types of social security or similar
legislation; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, zoning or other restrictions, minor defects or irregularities
in title and other similar charges or encumbrances not interfering in any
material respect with the business of the Company or any of the Restricted
Subsidiaries incurred in the ordinary course of business; (vi) Liens upon
specific items of inventory or other goods and proceeds of any Person securing
such Person's obligations in respect of bankers' acceptances issued or created
for the account of such Person to facilitate the purchase, shipment or storage
of such inventory or other goods in the ordinary course of business; (vii)
Liens securing reimbursement obligations with respect to letters of credit
which encumber documents and other property relating to such letters of credit
and the products and proceeds thereof; (viii) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of
nondelinquent customs duties in connection with the importation of goods; (ix)
judgment and attachment Liens not giving rise to a Default or Event of
Default; (x) leases or subleases granted to others not interfering in any
material respect with the business of the Company or any Restricted
Subsidiary; (xi) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that are
within the general parameters customary in the industry, in each case securing
Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements
and forward contracts, option futures contracts, futures options or similar
agreements or arrangements designed to protect the Company or any Restricted
Subsidiary from fluctuations in the price of commodities; (xii) Liens
encumbering deposits made in the ordinary course of business to secure
nondelinquent obligations arising from statutory, regulatory, contractual or
warranty requirements of the Company or the Restricted Subsidiaries for which
a reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made; (xiii) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Company or any
Restricted Subsidiary in the ordinary course of business in accordance with
past practices; (xiv) any interest or title of a lessor in the property
subject to any lease, whether characterized as capitalized or operating other
than any such interest or title resulting from or arising out of a default by
the Company or any Restricted Subsidiary of its obligations under such lease;
(xv) Liens arising from filing UCC financing statements for precautionary
purposes in connection with true leases of personal property that are
otherwise permitted under the applicable Indenture and under which the Company
or any Restricted Subsidiary is lessee; (xvi) Liens in favor of the Trustee
and any substantially equivalent Lien granted to any trustee or similar
institution under any indenture governing Indebtedness permitted to be
Incurred or outstanding under the Indenture; and (xvii) Liens securing
Indebtedness permitted to be Incurred pursuant to clause (m) of the definition
of Permitted Indebtedness above, provided that such Liens extend only to the
Related Assets (as defined in such clause (m)).
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"Permitted Payments" means
(i) the consummation of the Transactions as described herein;
(ii) payments by the Company to effect the mandatory redemption of its
Series I Preferred Stock; provided, however, that such payments shall not
be made on any date earlier, or in any amount greater, than the dates and
amounts provided for in the Company's Certificate of Incorporation as in
effect on the Issue Date;
(iii) any payment by the Company or any Subsidiary to Yucaipa or the
principals or any Affiliates thereof for consulting, management, investment
banking or similar services, or for reimbursement of costs and expenses (x)
pursuant to the Management Services Agreement or (y) as approved by a
majority of the Independent Directors (as defined in the Standstill
Agreement);
(iv) any payment to pay for the purchase, retirement or other acquisition
for value of any Capital Stock of the Company held by any future, present
or former employee or director of the Company or any Subsidiary pursuant to
any management equity plan or stock option plan or any other agreement,
provided that the aggregate amount of Restricted Payments made under this
clause does not exceed $3 million in any fiscal year (provided that any
unused amounts may be carried over to any subsequent fiscal year subject to
a maximum amount of $6 million in any fiscal year);
(v) pro rata dividends paid by any Restricted Subsidiary that is not
wholly owned by the Company or another wholly owned Restricted Subsidiary;
(vi) Investments in Unrestricted Subsidiaries in an aggregate amount not
to exceed $10.0 million; and
(vii) other Restricted Payments in an aggregate amount not to exceed
$20.0 million.
"Permitted Subordinated Reorganization Securities" means securities of the
Company issued in a plan of reorganization in a case under Bankruptcy Law
relating to the Company which constitutes either (x) Capital Stock (other than
Disqualified Capital Stock with the reference to "Maturity Date" in the
definition of such term modified to relate to the final stated maturity of any
debt securities issued in such plan of reorganization to the holders of
Designated Senior Indebtedness ("Senior Reorganization Securities")) or (y)
debt securities of the Company which are (i) unsecured, (ii) have no scheduled
mandatory amortization thereon prior to the final stated maturity of the
Senior Reorganization Securities and (iii) are subordinated in right of
payment to the Senior Reorganization Securities to at least the same extent as
the Notes are subordinated to Designated Senior Indebtedness.
"Permitted Transferees" means, with respect to any Person, (i) any Affiliate
of such Person, (ii) the heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership, the stockholders or
general or limited partners of which, include only such Person or his or her
parents, spouse or lineal descendants, in each case to whom such Person has
transferred the beneficial ownership of any securities of the Company, (iv)
any investment account whose investment managers and investment advisors
consist solely of such Person and/or Permitted Transferees of such Person and
(v) any investment fund or investment entity that is a subsidiary of such
Person or a Permitted Transferee of such Person.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, joint venture, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Plan of Liquidation" means, with respect to any Person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety
or substantially as an entirety and (ii) the distribution of all or
substantially
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all of the proceeds of such sale, lease, conveyance or other disposition and
all or substantially all of the remaining assets of such Person to holders of
Capital Stock of such Person.
"Preferred Stock" means, with respect to any Person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indentures, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as
interpreted by the Company's chief financial officer or Board of Directors in
consultation with its independent certified public accountants.
"Public Equity Offering" means an underwritten public offering of Common
Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act.
"Qualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person that is not Disqualified Capital Stock.
"Refinancing Indebtedness" means, with respect to any Person, Indebtedness
of such Person issued in exchange for, or the proceeds from the issuance and
sale or disbursement of which are used to substantially concurrently repay,
redeem, refund, refinance, discharge or otherwise retire for value, in whole
or in part (collectively, "repay"), or constituting an amendment, modification
or supplement to, or a deferral or renewal of (collectively, an "amendment"),
any Indebtedness of such Person existing on the Issue Date or Indebtedness
(other than Permitted Indebtedness, except Permitted Indebtedness Incurred
pursuant to clauses (c), (d), (g), (i) and (m) of the definition thereof)
Incurred in accordance with the applicable Indenture (a) in a principal amount
(or, if such Refinancing Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon the acceleration thereof,
with an original issue price) not in excess of (without duplication) (i) the
principal amount or the original issue price, as the case may be, of the
Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances
Indebtedness under a revolving credit facility or other agreement providing a
commitment for subsequent borrowings, with a maximum commitment not to exceed
the maximum commitment under such revolving credit facility or other
agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii)
premiums, penalties, fees and expenses actually incurred by such Person in
connection with the repayment or amendment thereof and (b) with respect to
Refinancing Indebtedness that repays or constitutes an amendment to
Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have
any fixed mandatory redemption or sinking fund requirement in an amount
greater than or at a time prior to the amounts and times specified in such
repaid or amended Subordinated Indebtedness, except to the extent that any
such requirement applies on a date after the Maturity Date and (y) shall
contain subordination and default provisions no less favorable in any material
respect to Holders than those contained in such repaid or amended Subordinated
Indebtedness.
"Related Business Investment" means (i) any Investment by a Person in any
other Person a majority of whose revenues are derived from the operation of
one or more retail grocery stores or supermarkets or any other line of
business engaged in by the Company or any of the Subsidiaries as of the Issue
Date; (ii) any Investment by such Person in any cooperative or other supplier,
including, without limitation, any joint venture which is intended to supply
any product or service useful to the business of the Company and the
Restricted Subsidiaries as it is conducted as of the Issue Date and as such
business may thereafter evolve or change; and (iii) any capital
expenditure or Investment, in each case reasonably related to the business of
the Company and the Restricted Subsidiaries as it is conducted as of the Issue
Date and as such business may thereafter evolve or change.
"Restricted Payment" means (i) any Stock Payment or (ii) any Investment
(other than a Permitted Investment).
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"Restricted Subsidiary" means any Subsidiary that, as of the date of
determination, is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, and all other Obligations with respect to, any Indebtedness of the
Company, whether outstanding on the Issue Date or thereafter Incurred, unless,
in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Without limiting the generality of the foregoing, "Senior Indebtedness"
shall include (x) the principal of, premium, if any, and interest on all
obligations of every nature of the Company from time to time owed to the
lenders under the Credit Agreement, including, without limitation, the Letter
of Credit Obligations and principal of and interest on, all fees and expenses
payable under the Credit Agreement, and (y) interest accruing thereon
subsequent to the occurrence of any Event of Default specified in clause (vi)
or (vii) under "-- Events of Default" relating to the Company, whether or not
the claim for such interest is allowed under any applicable Bankruptcy Law.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a)
Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly
subordinate or junior in right of payment to any Indebtedness of the Company,
(c) Indebtedness which, when Incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without recourse to
the Company (other than Capitalized Lease Obligations), (d) Indebtedness which
is represented by Disqualified Capital Stock, (e) obligations for goods,
materials or services purchased in the ordinary course of business or
obligations consisting of trade payables, (f) Indebtedness of or amounts owed
by the Company for compensation to employees or for services rendered to the
Company, (g) any liability for federal, state, local or other taxes owed or
owing by the Company, (h) Indebtedness of the Company to a Subsidiary of the
Company, and (i) that portion of any Indebtedness which is Incurred by the
Company in violation of the Indenture.
"Significant Stockholder" means, with respect to any Person, any other
Person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 10% of any class of equity securities of such
Person that are entitled to vote on a regular basis for the election of
directors of such Person.
"Significant Subsidiary" means each Restricted Subsidiary that is either (a)
a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under
the Securities Act and the Exchange Act (as such regulation is in effect on
the Issue Date) or (b) material to the financial condition or results of
operations of the Company and the Restricted Subsidiaries taken as a whole.
"Standstill Agreement" means the Standstill Agreement dated as of January
29, 1996 among the Company, Yucaipa and each of the limited partnerships that
owns shares in Smitty's for which Yucaipa acts as the general partner (as such
Standstill Agreement may be amended or replaced, so long as such amendment or
replacement has been approved by a majority of the Independent Directors (as
defined in the Standstill Agreement as in effect prior to such amendment or
replacement) and is not disadvantageous to the Holders in any material
respect).
"Stock Payment" means, with respect to any Person, (a) the declaration or
payment by such Person, either in cash or in property, of any dividend on
(except, in the case of the Company, dividends payable solely in
Qualified Capital Stock of the Company), or the making by such Person or any
of its subsidiaries of any other distribution in respect of, such Person's
Qualified Capital Stock or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock (other than exchangeable or
convertible Indebtedness of such Person), or (b) the redemption, repurchase,
retirement or other acquisition for value by such Person or any of its
subsidiaries, directly or indirectly, of such Person's Qualified Capital Stock
(and, in the case of a Subsidiary, Qualified Capital Stock of the Company) or
any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock (other than exchangeable or convertible Indebtedness of
such Person), other than, in the case of the Company, through the issuance in
exchange therefor solely of Qualified Capital Stock of the
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Company; provided, however, that in the case of a Restricted Subsidiary, the
term "Stock Payment" shall not include any such payment with respect to its
Capital Stock or warrants, rights or options to purchase or acquire shares of
any class of its Capital Stock that are owned solely by the Company or a
wholly owned Restricted Subsidiary.
"Subordinated Indebtedness" means Indebtedness of the Company which is
subordinated in right of payment to the Notes.
"subsidiary" of any Person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such Person, by one or more subsidiaries of such Person or by such Person and
one or more subsidiaries of such Person or (ii) a partnership in which such
Person or a subsidiary of such Person is, at the date of determination, a
general partner of such partnership, but only if such Person or its subsidiary
is entitled to receive more than fifty percent of the assets of such
partnership upon its dissolution, or (iii) any other Person (other than a
corporation or a partnership) in which such Person, a subsidiary of such
Person or such Person and one or more subsidiaries of such Person, directly or
indirectly, at the date of determination, has (x) at least a majority
ownership interest or (y) the power to elect or direct the election of a
majority of the directors or other governing body of such Person.
"Subsidiary" means any subsidiary of the Company.
"Term Loans" means the term loan facility under the Credit Agreement and any
agreement governing Indebtedness Incurred to refund, replace or refinance any
borrowings outstanding under such facility or under any prior refunding,
replacement or refinancing thereof (in each case, in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions).
"Unrestricted Subsidiary" means any Subsidiary (including its subsidiaries)
so designated by a Board Resolution adopted by the Board of Directors of the
Company in accordance with "--Certain Covenants--Limitation on Restricted and
Unrestricted Subsidiaries" above. Notwithstanding the foregoing, an
Unrestricted Subsidiary shall be deemed to be redesignated a Restricted
Subsidiary at any time if (a) the Company or any other Restricted Subsidiary
(i) provides credit support for, or a guarantee of, any Indebtedness of such
Unrestricted Subsidiary or any of its subsidiaries (including any undertaking,
agreement or instrument evidencing such Indebtedness) or (ii) is directly or
indirectly liable for any Indebtedness of such Unrestricted Subsidiary or any
of its subsidiaries, (b) a default with respect to any Indebtedness of such
Unrestricted Subsidiary or any of its subsidiaries (including any right which
the holders thereof may have to take enforcement action against any of them)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity or (c) such Unrestricted
Subsidiary or any of its subsidiaries Incurs Indebtedness pursuant to which
the lender has recourse to any of the assets of the Company or any Restricted
Subsidiary.
"Yucaipa" means The Yucaipa Companies, a California general partnership, or
any successor thereto which is an affiliate of Ronald W. Burkle or his
Permitted Transferees.
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<PAGE>
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. As of April 15, 1996, there were
11,366,532 shares of Class A Common Stock outstanding, 13,705,191 shares of
Class B Common Stock outstanding and 12,956,747 shares of Series I Preferred
Stock outstanding.
COMMON STOCK
All holders of shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Company's Board of Directors in its
discretion from funds legally available therefor, and upon liquidation or
dissolution are entitled to receive all assets available for distribution to
the holders of Common Stock. Under the Delaware Corporation Law, the Company
may declare and pay dividends only out of its surplus, or out of its net
profits for the fiscal year in which the dividend is declared or the preceding
year. Under certain of the Company's credit agreements, the Company's ability
to pay dividends is restricted based on various measures, including the
Company's net income for designated period. All of the outstanding shares of
Common Stock are legally issued, fully paid and nonassessable. Holders of
Common Stock have no preemptive or other rights to subscribe for additional
shares which the Company may issue and there are no redemption provisions or
sinking fund provisions applicable to any class of Common Stock, nor is the
Common Stock subject to calls or assessments by the Company.
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except the holders of
Class A Common Stock are entitled to ten votes per share and the holders of
Class B Common Stock are entitled to one vote per share on all matters
submitted to the vote of stockholders for their vote or approval, including
the election of directors. The holders of Class C Common Stock will not be
entitled to vote on matters submitted to the vote of Company stockholders.
However, if shares of Class C Common Stock are transferred to a holder other
than an Original Class C Holder (as defined in the Amended and Restated
Certificate of Incorporation), such transferred shares of Class C Common Stock
will be convertible, at the option of the holder, into shares of voting Class
B Common Stock. There is no provision made for cumulative voting, and no class
of outstanding Common Stock or Preferred Stock alone is entitled to elect any
directors. The holders of Class A Common Stock and the holders of Series I
Preferred Stock, voting together have, and after consummation of the
Transactions will continue to have, effective control of the Company through
holding approximately 94% of the combined voting power of the outstanding
capital stock and will have the ability to elect all the directors of the
Company and to effect or prevent certain corporate transactions which require
majority approval of the combined classes, including mergers and other
business combinations.
Under the Company's bylaws, directors may be removed with or without cause
by the holders of a majority of the votes entitled to be cast for the election
of directors. However, under Delaware law, stockholders in a company with a
staggered board (such as Smith's) may only remove directors for cause, unless
the certificate of incorporation provides otherwise. 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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<PAGE>
Each share of Class A Common Stock is convertible at any time at the option
of the holder into Class B Common Stock on a share-for-share basis. The
Company's Certificate of Incorporation also provides that each share of Class
A Common Stock will be converted automatically into one share of Class B
Common Stock if, at any time, the number of shares of Class A Common Stock
issued and outstanding shall be less than 2,910,885. The Class B Common Stock
has no conversion rights.
Shares of Class A Common Stock may not be sold, gifted, or transferred
except to and among the Company, a spouse, child, grandchild, sibling or
parent of the person to whom the Class A Common Stock was issued originally (a
"Permitted Transferee"), and certain entities controlled or owned by one or
more Permitted Transferees. The Company's Certificate of Incorporation
provides that any holder of shares of Class A Common Stock desiring to
transfer such shares to a person other than a Permitted Transferee or such
transferee must present such shares to the Company for conversion into an
equal number of shares of Class B Common Stock upon such transfer. Thereafter,
such shares of Class B Common Stock may be freely transferred to persons other
than Permitted Transferees.
SERIES I PREFERRED STOCK
Except as described below, each share of Series I Preferred Stock is
entitled to ten votes per share on all matters submitted to the vote of the
stockholders, including the election of directors, for their vote or approval.
Except as described below, holders of Series I Preferred Stock vote together
with the holders of Common Stock, including the election of directors. The
affirmative vote of the holders of a majority of the Series I Preferred Stock,
voting as a class, is required upon any amendment to the Company's Certificate
of Incorporation adversely affecting in any manner the rights of such holders.
Under the Company's Certificate of Incorporation, upon liquidation of the
Company, each share of Series I Preferred Stock is entitled to a liquidation
preference of $.33 1/3, on a pro-rata basis with any other series of Preferred
Stock ranking on parity with the Series I Preferred Stock, before any
distribution to the holders of any class of Common Stock.
All shares of Series I Preferred Stock are subject to redemption at any time
upon 60 days' notice at the option of the Board of Directors, in such numbers
as the Board may determine, at a redemption price of $.33 1/3 per share (the
"Redemption Price"). In addition, on December 1 of each year commencing in
1989, one-eleventh of the total authorized number of shares of Series I
Preferred Stock is subject to mandatory redemption at the Redemption Price.
The Series I Preferred Stock has no dividend requirement. If approved by a
majority of the outstanding shares of Series I Preferred Stock, the Amended
and Restated Certificate of Incorporation will include certain provisions with
respect to the Series I Preferred Stock which: (i) eliminate for a five-year
period the annual mandatory redemption of original outstanding shares of
Series I Preferred Stock (with mandatory redemptions of one-eleventh of the
outstanding shares of Series I Preferred Stock resuming thereafter), and (ii)
restrict for two-year period the optional redemption of shares of Series I
Preferred Stock, and (iii) the addition of transfer or sale restrictions which
reduce the number of allocated votes per share of Series I Preferred Stock
from ten votes to one vote per share in the event of transfers or sales not
made to certain affiliated or other designated transferees.
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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<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 $995 million of
financing under the New Credit Facility. The following is a summary of the
anticipated material terms and conditions of the New Credit Facility. This
summary does not purport to be a complete description of the New Credit
Facility and is subject to the detailed provisions of the loan agreement (the
"Loan Agreement") and various related documents to be 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 $805 million, comprised of the $325 million Tranche A Loans, the
$160 million Tranche B Loans, the $160 million Tranche C Loans and the $160
million Tranche D Loans; and (ii) the $190 million New Revolving Facility
under which working capital loans may be made and commercial or standby
letters of credit in the maximum aggregate amount to be agreed upon among the
Company and the Arrangers, under which approximately $28 million of letters of
credit are expected to be issued upon consummation of the Transactions.
Proceeds of the New Term Loans and loans under the Revolving Credit Facility
on the Closing, together with proceeds from the Offering and the California
Divestiture will be used to fund the cash requirements for the Tender Offer
and the Smitty's Refinancing, refinance certain other existing indebtedness of
Smith's, redeem a portion of Smith's Series I Preferred Stock, redeem Smith's
management options and pay various refinancing premiums fees, expenses and
other costs associated with the Transactions. The New Revolving Facility will
be available to provide for the working capital requirements and general
corporate purposes of the Company and to issue commercial and standby letters
of credit.
INTEREST RATE; FEES
Borrowings under (i) the New Revolving Facility and the Tranche A Loans will
bear interest at a rate equal to the Base Rate (as defined in the Loan
Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as
defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loans
will bear interest at the Base Rate plus 2.00% per annum or the reserve
adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loans will
bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted
Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loans will bear
interest at the Base Rate plus 2.75% per annum or the reserve adjusted Euro-
Dollar Rate plus 4.00% per annum, in each case as selected by the Company.
Applicable interest rates on Tranche A Loans and the New Revolving Facility
and the fees payable under the New Revolving Facility on letters of credit,
will be reduced in increments of 0.25% per annum, up to an aggregate of 0.50%
per annum, after the New Term Loans have been reduced by such amounts and if
the Company meets certain financial tests to be agreed upon among the Company
and the Arrangers. Up to $30 million of the New Revolving Facility will be
available as a swingline facility and loans outstanding under the swingline
facility shall bear interest at the Base Rate plus 1.00% per annum (subject to
adjustment as described in the preceding sentence). After the occurrence of a
default under the New Credit Facility, interest will accrue at the rate equal
to the rate on loans bearing interest at the rate determined by reference to
the Base Rate plus an additional 2.00% per annum. The Company will pay the
issuing bank a fee of 0.25% per annum on each standby letter of credit and
each commercial letter of credit and will pay the lenders under the New Credit
Facility a fee equal to the margin on Eurodollar Rate loans under the
Revolving Credit Facility (the "Eurodollar Margin") for standby letters of
credit and a fee equal to the Eurodollar Margin minus 1.00% per annum for
commercial letters of credit. Each of these fees will be calculated based on
the amount available to be drawn under a letter of credit. In addition, the
Company will pay a commitment fee of 0.50% per annum on the unused portions of
the New Revolving Facility and for purposes of calculating this fee, loans
under the swingline facility shall not be deemed
92
<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 $7.5 million, and thereafter commencing on the
first anniversary of the Closing on a quarterly basis in aggregate annual
amounts of $45 million in the second year, $55 million in the third year, $65
million in the fourth year, $65 million in the fifth year, $60 million in the
sixth year, and $13.75 million on the sixth anniversary of the Closing and in
the first quarter of the seventh year. The Tranche B Loan will mature seven
and one-half years after the Closing and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.6 million for the first six
years and in the seventh year payable in installments of $4.0 million in the
first quarter and $18 million in each of the last three quarters and in the
eighth year payable in installments of $22.7 million in the first quarter and
$69.7 million in the second quarter. The Tranche C Loans will mature eight and
one-half years after the Closing and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.6 million for the first
seven years and in the eighth year payable in installments of $0.4 million in
each of the first two quarters and $25 million in each of the last two
quarters and in the ninth year payable in installments of $25 million in the
first quarter and $73 million in the second quarter. The Tranche D Loans will
mature nine and one-quarter years after the Closing and will be subject to
amortization on a quarterly basis in aggregate annual amounts of$1.6 million
for the first eight years and in the ninth year payable in installments of
$0.4 million in each of the first two quarters, $29 million in the third
quarter and $32 million in the last quarter and in the tenth year in an
installment of $85.4 million in the first quarter. The New Revolving Facility
will mature on the same date as the Tranche A Loans. The Company will be
required to reduce loans outstanding under the New Revolving Facility to $75
million for a period of not less than 30 consecutive days during each
consecutive 12-month period following the Closing. The Company will be
required to make certain prepayments, subject to certain exceptions, on the
New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in
the Loan Agreement) and with the proceeds from certain asset sales, issuances
of debt and equity securities and any pension plan reversion. Such prepayments
will be allocated pro rata between the Tranche A Loans, Tranche B Loans,
Tranche C Loans and the Tranche D Loans and to scheduled amortization payments
of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche
D Loans pro rata, provided that at the election of the Company mandatory
prepayments of Tranche A Loans made with Excess Land Proceeds (as defined in
the Loan Agreement) may be applied to the Tranche A Loans in forward order of
maturity up to $50 million. At the option of the Company, mandatory
prepayments on the Tranche B Loans, the Tranche C Loans and the Tranche D
Loans will be used to make an offer to repay such Loans and to the extent not
accepted by the holders of such loans (x) in the event such mandatory
prepayments are to be made from Excess Land Proceeds, such mandatory
prepayments not so accepted will be applied to the prepayment of the Tranche A
Loans and (y) in the event of all other mandatory prepayments, 50% of such
amount will be applied to reduce Tranche A Loans on a pro rata basis and the
remaining 50% may be retained by the Company.
GUARANTEES AND COLLATERAL
All subsidiaries of the Company will guarantee the Company's obligations
under the New Credit Facility. The Company's obligations and the guarantees of
its subsidiaries will be secured by a first priority lien on all existing and
after-acquired personal property of the Company and its subsidiaries,
including a pledge of the stock of all subsidiaries of the Company and by
first priority liens on all unencumbered real property fee interests of the
Company and its subsidiaries and the Company and its subsidiaries will use
their reasonable economic efforts to provide the lenders with a first priority
lien on all unencumbered leasehold interests of the Company and its
subsidiaries.
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<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 Indenture. 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,
including a change of control (which may be defined differently than in the
Indenture). The occurrence of any of such events of default could result in
acceleration of the Company's obligations under the New Credit Facility and
foreclosure on the collateral securing such obligations, which could have
material adverse results to holders of the Notes.
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<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
UNDERWRITERS OF NOTES
------------ ----------------
<S> <C>
BT Securities Corporation.................................. $172,500,000
CS First Boston Corporation................................ 172,500,000
Donaldson, Lufkin & Jenrette
Securities Corporation ................................... 86,250,000
Goldman, Sachs & Co. ...................................... 86,250,000
Chase Securities Inc. ..................................... 57,500,000
------------
Total ................................................. $575,000,000
============
</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 0.25% of the
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 Offering
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. It is anticipated that Bankers Trust, Chase
Manhattan and Pearl Street L.P. (an affiliate of Goldman Sachs) will be
lenders under the New Credit Facility.
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<PAGE>
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 pursuant
to the Recapitalization Agreement is fair to the Company. Goldman Sachs has
been engaged by the Company to act as dealer manager in connection with the
Tender Offer. Goldman Sachs has received, and 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. CS First Boston has been engaged
by Smitty's to provide financial advisory services in connection with the
Merger and will receive customary fees in connection with such services.
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 Offering will be passed upon for the Underwriters by
Cahill Gordon and Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The consolidated financial statements of Smith's Food & Drug Centers, Inc.
at December 30, 1995 and December 31, 1994 and for each of three years in the
period ended December 30, 1995 included in this Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated balance sheet of Smitty's Supermarkets, Inc. as of July 30,
1995 and July 31, 1994 and the related consolidated statements of operations,
stockholder's equity, and cash flows for year ended July 31, 1995, and for the
period from June 29, 1994 (date of inception) to July 31, 1994 (Smitty's), and
for the period from August 2, 1993 to June 28, 1994 and the year ended August
1, 1993 (Predecessor), included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
96
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SMITH'S FOOD & DRUG CENTERS, INC.:
Report of Independent Auditors (Ernst & Young LLP)....................... F-2
Consolidated balance sheets at March 30, 1996 (unaudited), December 30,
1995 and December 31, 1994.............................................. F-3
Consolidated statements of income for the 13 weeks ended March 30, 1996
(unaudited) and the 13 weeks ended April 1, 1995 (unaudited) and the
years ended January 1, 1994, December 31, 1994 and December 30, 1995.... F-4
Consolidated statements of common stockholders' equity for the 13 weeks
ended March 30, 1996 (unaudited) and the years ended January 1, 1994,
December 31, 1994 and December 30, 1995................................. F-5
Consolidated statements of cash flows for the 13 weeks ended March 30,
1996 (unaudited) and the 13 weeks ended April 1, 1995 (unaudited) and
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-18
Consolidated balance sheets as of July 31, 1994 and July 30, 1995 and
April 7, 1996 (unaudited)............................................... F-19
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 36 weeks ended April 7,
1996 (unaudited) and the 36 weeks ended April 9, 1995 (unaudited)....... F-20
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 36 weeks ended
April 7, 1996 (unaudited)............................................... F-21
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 36 weeks ended April 7,
1996 (unaudited) and the 36 weeks ended April 9, 1995 (unaudited)....... F-22
Notes to consolidated financial statements............................... F-24
</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>
MARCH 30, DECEMBER 30, DECEMBER 31,
ASSETS 1996 1995 1994
------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents.............. $ 11,022 $ 16,079 $ 14,188
Rebates and accounts receivable........ 28,008 23,802 25,596
Inventories............................ 297,974 394,982 389,564
Prepaid expenses and deposits.......... 17,045 21,255 15,858
Deferred tax assets.................... 14,500 23,900 1,400
Assets held for sale................... 42,800 125,000
---------- ---------- ----------
Total Current Assets................. 411,349 605,018 446,606
Property and Equipment
Land................................... 279,573 276,626 303,701
Buildings.............................. 614,700 610,049 619,056
Leasehold improvements................. 54,795 55,830 42,369
Fixtures and equipment................. 498,367 509,524 589,480
---------- ---------- ----------
1,447,435 1,452,029 1,554,606
Less allowances for depreciation and
amortization.......................... 392,282 390,933 364,741
---------- ---------- ----------
1,055,153 1,061,096 1,189,865
Other Assets............................. 19,484 20,066 16,996
---------- ---------- ----------
$1,485,986 $1,686,180 $1,653,467
========== ========== ==========
<CAPTION>
LIABILITIES AND COMMON
STOCKHOLDERS' EQUITY
----------------------
<S> <C> <C> <C>
Current Liabilities
Trade accounts payable................. $ 163,998 $ 214,152 $ 235,843
Accrued sales and other taxes.......... 41,447 50,749 44,379
Accrued payroll and related benefits... 77,924 97,455 84,083
Current maturities of long-term debt... 24,093 20,932 19,011
Current maturities of Redeemable
Preferred Stock....................... 1,008 1,008 1,017
Accrued restructuring costs............ 15,060 58,000
---------- ---------- ----------
Total Current Liabilities............ 323,530 442,296 384,333
Long-term debt, less current maturities.. 648,681 725,253 699,882
Accrued restructuring costs, less current
portion................................. 40,000 40,000
Deferred income taxes.................... 58,800 58,600 89,500
Redeemable Preferred Stock, less current
maturities.............................. 3,311 3,311 4,410
Common Stockholders' Equity
Convertible Class A Common Stock
(shares issued and outstanding,
11,366,532 in 1996, 11,613,043 in 1995
and 12,140,317 in 1994)............... 114 116 121
Class B Common Stock (shares issued
18,595,479 in 1996, 18,348,968 in 1995
and 17,821,694 in 1994)............... 185 183 178
Additional paid-in capital............. 285,119 285,236 285,592
Retained earnings...................... 233,088 238,027 293,456
---------- ---------- ----------
518,506 523,562 579,347
Less cost of Common Stock in the
treasury (4,890,288 shares in 1996,
4,890,302 shares in 1995 and 4,772,822
shares in 1994)....................... 106,842 106,842 104,005
---------- ---------- ----------
411,664 416,720 475,342
---------- ---------- ----------
$1,485,986 $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>
13 WEEKS ENDED 52 WEEKS ENDED
------------------- ------------------------------------
MARCH 30, APRIL 1, DECEMBER 30, DECEMBER 31, JANUARY 1,
1996 1995 1995 1994 1994
--------- -------- ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $693,165 $746,673 $3,083,737 $2,981,359 $2,807,165
Cost of goods sold...... 546,606 578,351 2,386,707 2,312,228 2,169,987
-------- -------- ---------- ---------- ----------
146,559 168,322 697,030 669,131 637,178
Expenses:
Operating, selling and
administrative....... 111,353 112,770 461,401 440,844 430,258
Depreciation and
amortization......... 22,639 24,696 104,963 94,491 82,173
Interest.............. 14,545 15,077 60,478 53,715 44,627
Restructuring charges. 140,000
-------- -------- ---------- ---------- ----------
148,537 152,543 766,842 589,050 557,058
-------- -------- ---------- ---------- ----------
Income (loss) before in-
come taxes............. (1,978) 15,779 (69,812) 80,081 80,120
Income taxes............ (800) 6,300 (29,300) 31,300 34,300
-------- -------- ---------- ---------- ----------
Net income (loss)....... $ (1,178) $ 9,479 $ (40,512) $ 48,781 $ 45,820
======== ======== ========== ========== ==========
Net income (loss) per
share of Common Stock.. $ (0.05) $ 0.37 $ (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)
(INFORMATION WITH RESPECT TO THE END OF THE FIRST QUARTER OF
1996 AND THE PERIOD THEN ENDED IS UNAUDITED.)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
----------------- ---------------- ADDITIONAL
NUMBER OF PAR NUMBER OF PAR PAID-IN RETAINED TREASURY
SHARES VALUE SHARES VALUE CAPITAL EARNINGS STOCK TOTAL
---------- ----- ---------- ----- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 3,
1993................... 13,403,132 $134 16,558,879 $165 $285,980 $229,110 $515,389
Net income for 1993.... 45,820 45,820
Conversion of shares
from Class A to
Class B............... (785,687) (8) 785,687 8
Purchase of Class B
Common Stock for the
treasury.............. $ (11,074) (11,074)
Shares sold to the
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) $416,720
Net loss for the first
quarter 1996.......... (1,178) (1,178)
Conversion of shares
from Class A to
Class B............... (246,511) (2) 246,511 2
Purchase of Class B
Common Stock for the
treasury.............. (1,114) (1,114)
Shares sold under the
Employee Stock
Purchase Plan......... (294) 1,114 820
Cash dividends--$.15
per share............. (3,761) (3,761)
Other.................. 177 177
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at March 30,
1996................... 11,366,532 $114 18,595,479 $185 $285,119 $233,088 $(106,842) $411,664
========== ==== ========== ==== ======== ======== ========= ========
</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>
13 WEEKS ENDED 52 WEEKS ENDED
------------------ ------------------------------------
MARCH APRIL 1, DECEMBER 30, DECEMBER 31, JANUARY 1,
30, 1996 1995 1995 1994 1994
-------- -------- ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...... $ (1,178) $ 9,479 $ (40,512) $ 48,781 $ 45,820
Adjustments to
reconcile net income
(loss) to cash
provided by (used in)
operating activities:
Depreciation and
amortization........ 22,639 24,696 104,963 94,491 82,173
Deferred income
taxes............... 9,600 2,150 (53,400) 10,500 15,400
Restructuring
charges............. 140,000
Other................ 177 196 568 635 485
Changes in operating
assets and
liabilities:
Rebates and accounts
receivable......... (4,206) 1,307 1,794 (4,758) (4,038)
Inventories......... 97,008 14,049 (5,418) (11,625) (36,523)
Prepaid expenses and
deposits........... 4,210 (26,417) (5,397) (1,324) (518)
Trade accounts
payable............ (50,154) (39,319) (21,691) 50,618 1,119
Accrued sales and
other taxes........ (9,302) 4,369 6,370 5,616 6,625
Accrued payroll and
related benefits... (19,531) (6,442) 13,372 10,616 8,007
Accrued
restructuring
costs.............. (42,940)
-------- -------- --------- --------- ---------
Cash provided by (used
in) operating
activities............. 6,323 (15,932) 140,649 203,550 118,550
Investing Activities
Additions to property
and equipment......... (18,271) (25,220) (149,035) (146,676) (322,301)
Sale/leaseback
arrangements and other
property and equipment
sales................. 83,775 1,221 5,841 20,949 159,137
Other.................. 582 92 (3,070) (1,649) (1,258)
-------- -------- --------- --------- ---------
Cash provided by (used
in) investing
activities............. 66,086 (23,907) (146,264) (127,376) (164,422)
Financing Activities
Additions to long-term
debt.................. 51,000 45,978 27,000 262,000
Payments on long-term
debt.................. (73,411) (4,880) (18,686) (33,594) (149,197)
Redemptions of
Redeemable Preferred
Stock................. (350) (1,108) (1,042) (1,039)
Purchases of Treasury
Stock................. (1,114) (4,709) (9,039) (109,239) (11,074)
Proceeds from sales of
Treasury Stock........ 820 1,031 5,278 7,693 7,107
Payment of dividends... (3,761) (3,747) (14,917) (14,725) (15,530)
-------- -------- --------- --------- ---------
Cash provided by (used
in) financing
activities............. (77,466) 38,345 7,506 (123,907) 92,267
-------- -------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ (5,057) (1,494) 1,891 (47,733) 46,395
Cash and cash equiva-
lents at beginning of
period................. 16,079 14,188 14,188 61,921 15,526
-------- -------- --------- --------- ---------
Cash and cash equiva-
lents at end of period. $ 11,022 $ 12,694 $ 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.
Interim Financial Statements
The consolidated balance sheet of the Company as of March 30, 1996 and the
consolidated statements of income, common stockholders' equity and cash flows
for the interim periods ended March 30, 1996 and April 1, 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities less than three months. The amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Inventories
Inventories are valued at the lower of cost, determined on the last-in,
first-out (LIFO) method, or market. Approximately 95% of inventories in 1995
and 1994 were valued using the LIFO method. Other inventories were valued
using the first-in, first-out (FIFO) method. The FIFO cost exceeded the LIFO
value of inventories by $8.1 million in 1995 and $4.1 million in 1994. The
pretax LIFO charge was $4.0 million in 1995, $2.5 million in 1994, and $1.6
million in 1993.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided by the straight-line method based upon estimated useful lives.
Improvements to leased property are amortized over their estimated useful
lives or the remaining terms of the leases, whichever is shorter.
Accrued Insurance Claims
The Company is self-insured, with certain stop loss insurance coverage, for
workers' compensation, non-union employee health care and general liability
claims. Claims expense is recorded through the accrual of claims reserves
based on estimates of ultimate claim costs, including claims incurred but not
reported. The liabilities for accrued insurance claims were $31.8 million and
$25.3 million at the end of 1995 and 1994, respectively. These liabilities are
not discounted.
F-7
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pre-Operating and Closing Costs
Costs incurred in connection with the opening of new stores and distribution
facilities are expensed as incurred. The remaining net investment in stores
closed, less salvage value, is charged against earnings in the period of
closing. For leased stores that are closed and subleased to third parties, a
provision is made for the remaining lease liability, net of expected sublease
rental. For leased stores that are closed but not yet subleased, a provision
is made based on discounted lease payments through the estimated period until
subleased.
Interest Costs
Interest costs are expensed as incurred, except for interest costs which
have been capitalized as part of the cost of properties under development. The
Company's cash payments for interest (net of capitalized interest of
approximately $1.4 million in 1995, $5.8 million in 1994 and $14.5 million in
1993) amounted to $60.7 million in 1995, $54.0 million in 1994 and $39.8
million in 1993.
Income Taxes
The Company determines its deferred tax assets and liabilities based on
differences between the financial reporting and tax basis of its assets and
liabilities using the tax rates that will be in effect when the differences
are expected to reverse.
Net Income Per Share of Common Stock
Net income per share of Common Stock is computed by dividing the net income
by the weighted average number of shares of Common Stock outstanding of
25,030,882 in 1995, 28,176,907 in 1994 and 30,238,811 in 1993. Common Stock
equivalents in the form of stock options are excluded from the weighted
average number of common shares in 1995 due to the net loss.
Adoption of Accounting Standard
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Due to
the nature of the Company's operations and the number of estimates required to
assess the impact of Statement 121, the financial statement impact of adoption
has not yet been determined.
Litigation
The Company is a party to certain legal actions arising out of the ordinary
course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
Company's results of operations or financial position.
Reclassifications
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform with the 1995 presentation.
F-8
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--PROPERTY AND EQUIPMENT
The Company depreciates its buildings over 25 to 30 years and its fixtures
and equipment over a period of 2 to 9 years and amortizes its leasehold
improvements over their estimated useful lives or the life of the lease,
whichever is shorter. Property and equipment consists of the following (dollar
amounts in thousands):
<TABLE>
<CAPTION>
ALLOWANCES FOR CURRENT YEAR
DEPRECIATION AND NET DEPRECIATION AND
COST AMORTIZATION BOOK VALUE AMORTIZATION
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
DECEMBER 30, 1995
Land.................. $ 276,626 $ 276,626
Buildings............. 610,049 $108,985 501,064 $ 19,907
Leasehold
improvements......... 55,830 12,556 43,274 2,970
Fixtures and
equipment............ 509,524 269,392 240,132 82,086
---------- -------- ---------- --------
$1,452,029 $390,933 $1,061,096 $104,963
========== ======== ========== ========
DECEMBER 31, 1994
Land.................. $ 303,701 $ 303,701
Buildings............. 619,056 $ 92,542 526,514 $ 18,334
Leasehold
improvements......... 42,369 10,122 32,247 1,842
Fixtures and
equipment............ 589,480 262,077 327,403 74,315
---------- -------- ---------- --------
$1,554,606 $364,741 $1,189,865 $ 94,491
========== ======== ========== ========
</TABLE>
F-9
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Mortgage notes, collateralized by property and
equipment with a cost of $420.7 million in 1995
and $413.0 million in 1994, due through 2011
with interest at an average rate of 9.68% in
1995 and 9.73% in 1994.......................... $254,385 $270,082
Unsecured notes, due in 2002 through 2015 with
varying annual installments starting in 2000
which accrue interest at an average rate of
7.68% in 1995 and 1994.......................... 410,000 410,000
Revolving credit bank loans...................... 68,000 27,000
Industrial revenue bonds, collateralized by prop-
erty 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>
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.
F-10
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE F--INCOME TAXES
Income tax expense (benefit) consists of the following (dollar amounts in
thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Current:
Federal.................................. $ 20,220 $17,211 $15,715
State.................................... 3,880 3,589 3,185
-------- ------- -------
24,100 20,800 18,900
Deferred:
Federal.................................. (46,681) 9,247 13,012
State.................................... (6,719) 1,253 2,388
-------- ------- -------
(53,400) 10,500 15,400
-------- ------- -------
$(29,300) $31,300 $34,300
======== ======= =======
</TABLE>
Income tax expense included a charge of $1.95 million in 1993 resulting from
applying the increased federal tax rate to deferred tax items. Cash
disbursements for income taxes were $19.2 million in 1995, $21.7 million in
1994 and $17.3 million in 1993.
F-11
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between income tax expense (benefit) and the tax computed by
applying the statutory income tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Statutory federal income tax rate...... (35.0)% 35.0 % 35.0%
State income tax rate, net of federal
income tax effect..................... (4.3) 4.7 5.2
Effect of income tax rate changes on
deferred taxes........................ (3.6) 2.4
Other.................................. .9 (.6) .2
----- ---- ----
(42.0)% 39.1 % 42.8%
===== ==== ====
</TABLE>
The effect of temporary differences that give rise to deferred tax balances
are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................... $ 81,008 $ 98,186
Other............................................ 13,572 11,935
-------- --------
94,580 110,121
Deferred tax assets:
Accrued restructuring costs...................... (33,305)
Accrued insurance claims......................... (12,271) (10,126)
Rent............................................. (8,138) (6,006)
Other............................................ (6,166) (5,889)
-------- --------
(59,880) (22,021)
-------- --------
34,700 88,100
Net current deferred tax assets.................... 23,900 1,400
-------- --------
Net non-current deferred tax liabilities........... $ 58,600 $ 89,500
======== ========
</TABLE>
NOTE G--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related fair values of the Company's financial
instruments are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 31, 1994
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ 16,079 $ 16,079 $ 14,188 $ 14,188
Long-term debt.......................... 746,185 803,613 718,893 680,460
Redeemable Preferred Stock.............. 4,319 4,319 5,427 5,427
</TABLE>
The methods of determining the fair value of the Company's financial
instruments are disclosed in the respective notes to the consolidated
financial statements.
F-12
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--LEASE AND COMMITMENTS
The Company leases property and equipment under terms which include, in some
cases, renewal options, escalation clauses or contingent rentals which are
based on sales. Total rental expense for such leases amounted to the following
(dollar amounts in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Minimum rentals......................... $46,460 $39,852 $19,539
Contingent rentals...................... 235 293 281
------- ------- -------
46,695 40,145 19,820
Less sublease rental income............. 7,334 5,953 5,506
------- ------- -------
$39,361 $34,192 $14,314
======= ======= =======
</TABLE>
At December 30, 1995, future minimum rental payments and sublease rentals
for all noncancellable leases with initial or remaining terms of one year or
more consisted of the following (dollar amounts in thousands):
<TABLE>
<CAPTION>
MINIMUM LESS
RENTAL SUBLEASE
PAYMENTS RENTALS TOTAL
-------- -------- --------
<S> <C> <C> <C>
1996.............................................. $ 48,781 $ 16,419 $ 32,362
1997.............................................. 40,223 16,932 23,291
1998.............................................. 43,759 16,934 26,825
1999.............................................. 46,205 16,600 29,605
2000.............................................. 45,998 16,433 29,565
Thereafter........................................ 697,832 201,864 495,968
-------- -------- --------
$922,798 $285,182 $637,616
======== ======== ========
</TABLE>
At December 30, 1995 the Company had contract commitments of approximately
$3.6 million for future construction and a contract for information technology
services requiring payments of approximately $19.6 million in 1996, $21.3
million in 1997, $24.1 million in 1998, $26.7 million in 1999 and
$35.0 million in 2000.
NOTE I--EMPLOYEE STOCK PLANS
In 1993 the Company established a stock profit sharing plan under which year
end employees who are compensated for more than 1,000 hours during the year
are participants. Eligible employees are allocated shares of the Company's
Class B Common Stock based on hours of service up to 2,080 hours.
Contributions are made at the sole discretion of the Company based on its
profitability. The contribution expense was $1.4 million in 1995, $1.6 million
in 1994 and $3.0 million in 1993.
In 1993 the Company established a stock purchase plan which permits
employees to purchase shares of the Company's Class B Common Stock through
payroll deductions at 85% of fair market value at the time of purchase.
Employees purchased 282,485 shares, 309,553 shares and 180,950 shares from the
Treasury during 1995, 1994 and 1993, respectively.
F-13
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a Stock Option Plan which authorizes the Compensation
Committee of the Board of Directors to grant options to key employees for the
purchase of Class B Common Stock. The aggregate number of shares available for
grant under the plan is equal to 10% of the number of shares of Class B Common
Stock authorized. However, the number of outstanding and unexercised options
shall not exceed 10% of the number of shares of Class A and Class B Common
Stock outstanding. The number of unoptioned shares of Class B Common Stock
available for grant was 890,671 shares and 973,419 shares at the end of 1995
and 1994, respectively. The options may be either incentive stock options or
non-qualified stock options. Stock options granted to key employees and
options outstanding are as follows:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
------------ ---------
<S> <C> <C>
Balance at January 3, 1993........................ $19.00 1,107,500
Granted......................................... 19.00 622,000
Forfeited....................................... 19.00 (232,000)
---------
Balance at January 1, 1994........................ 19.00 1,497,500
Granted......................................... 19.00 81,000
Forfeited....................................... 19.00 (33,000)
---------
Balance at December 31, 1994...................... 19.00 1,545,500
Granted......................................... 19.00 317,000
Forfeited....................................... 19.00 (246,000)
---------
Balance at December 30, 1995...................... 19.00 1,616,500
=========
</TABLE>
The options are exercisable as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Options exercisable in the future
1997.......................................................... 25,000
1999.......................................................... 453,000
2000.......................................................... 130,000
2001.......................................................... 207,000
2002.......................................................... 64,500
2003.......................................................... 528,000
2004.......................................................... 11,000
2005.......................................................... 138,000
---------
1,556,500
Options currently exercisable................................... 60,000
---------
1,616,500
=========
</TABLE>
Compensation expense for the difference between the market value of the
options on the grant date and the grant price is recognized on a straight-line
basis over the vesting period of the options. The amount charged to operations
in 1995, 1994 and 1993 was immaterial.
F-14
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--PENSION PLANS
Employees whose terms of employment are determined by negotiations with
recognized collective bargaining units are covered by their respective multi-
employer defined benefit pension plans to which the Company contributes. The
costs charged to operations for these plans amounted to approximately $4.6
million in 1995, $4.2 million in 1994 and $3.3 million in 1993. Other
information for these multi-employer plans is not available to the Company.
The Company maintains a defined benefit pension plan for all other permanent
employees which provides for normal retirement at age 65. Employees are
eligible to join when they complete at least one year of service and have
reached age 21. The benefits are based on years of service and stated amounts
associated with those years of service. The Company's funding policy is to
contribute annually up to the maximum amount deductible for federal income tax
purposes. Net pension cost includes the following components (dollar amounts
in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Service cost--present value of benefits
earned during the period................. $ 2,119 $ 2,326 $ 1,869
Interest cost on projected benefit obliga-
tion..................................... 1,966 1,725 1,350
Actual return on plan assets.............. (9,692) 237 (1,053)
Net amortization and deferral............. 7,598 (1,615) (304)
------- ------- -------
$ 1,991 $ 2,673 $ 1,862
======= ======= =======
</TABLE>
The following table presents the plan's funded status and amounts recognized
in the Company's consolidated balance sheets (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Actuarial present value of accumulated bene-
fits based on service rendered to date:
Vested...................................... $29,649 $16,965
Non-vested.................................. 3,482 3,438
------- -------
33,131 20,403
Fair value of plan assets (primarily in equity
and fixed income funds and real estate)...... 37,934 20,993
------- -------
Fair value of plan assets in excess of pro-
jected benefit obligation.................... 4,803 590
Unrecognized net loss......................... 7,473 5,737
Prior service cost............................ 133 160
Unrecognized net asset........................ (978) (1,141)
------- -------
Net prepaid pension cost...................... $11,431 $ 5,346
======= =======
</TABLE>
The weighted average discount rate used to determine the actuarial present
value of the projected benefit obligation was 7.25% in 1995 and 8.5% in 1994.
The expected long-term rate of return on plan assets was 8.5% in 1995 and
1994, and 9.5% in 1993.
F-15
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company provides a 401(k) plan for virtually all employees. The plan is
entirely funded by employee contributions which are based on employee
compensation not to exceed certain limits.
NOTE K--RESTRUCTURING CHARGES
In December 1995, the Company recorded restructuring charges amounting to
$140 million related to its decision to sell, lease or close all 34 stores and
the distribution center comprising its Southern California Region. The
Southern California Region contributed sales of approximately $675 million,
$653 million and $473 million in 1995, 1994 and 1993, respectively, and
recognized operating losses of $14.2 million, $18.8 million and $12.9 million
in 1995, 1994 and 1993, respectively. These losses do not include allocations
for interest expense and corporate overhead. The restructuring charges include
the following components:
<TABLE>
<CAPTION>
ACCRUED
RESTRUCTURING
TOTAL ADJUSTMENTS COSTS
RESTRUCTURING TO -----------------
CHARGES CARRYING VALUE CURRENT LONG-TERM
------------- -------------- ------- ---------
<S> <C> <C> <C> <C>
Charges for lease obliga-
tions................... $ 65,600 $25,600 $40,000
Asset valuation adjust-
ments:
Closed stores.......... 21,700 $21,700
Assets sold............ 20,300 20,300
Inventory................ 16,000 16,000
Termination payments..... 10,000 10,000
Other.................... 6,400 6,400
-------- ------- ------- -------
$140,000 $42,000 $58,000 $40,000
======== ======= ======= =======
</TABLE>
The lease rental obligations primarily relate to closed stores and consist
of average annual lease expense over a five year period net of any sublease
income discounted at a rate of 9%. Also included is a $15 million charge for
certain fees associated with the sublease of the distribution center which is
expected to be paid by March 1996. The distribution center and nine stores
have been leased or subleased to another supermarket company controlled by the
same group of investors that controls Smitty's Supermarkets, Inc., with whom
the Company has entered into a definitive merger agreement (see Note L).
The charges for store and distribution center inventories represent
incremental losses for shrinkage, damage and liquidation sales expected to be
incurred during the closing process.
The termination payments relate to substantially all of the Company's 3,900
store and distribution center employees in the Southern California Region. The
termination payments are expected to be made by the end of March 1996 and have
been estimated based on existing employment contracts and involuntary
termination statutes.
The other costs represent charges for taxes, fees, contractual obligations,
and other costs associated with closing the region.
The restructuring charges include management's best estimates of the amounts
expected to be realized on the disposal of the remaining stores and closure of
the region. At December 30, 1995, the Company's carrying value of closed
stores, leased stores and excess land in California was approximately $260
million. The Company's current management has not determined the ultimate
disposition or use of these real estate assets and believes that their
disposal in the ordinary course of business would not result in a significant
impact on carrying
F-16
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 pay
premiums related to early repayment.
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 is expected to be consummated May 1996.
The merger with Smitty's is expected to be consummated concurrently with the
closing of the tender offer.
F-17
<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-18
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 7, JULY 30, JULY 31,
ASSETS 1996 1995 1994
------ ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and short-term investments............... $ 9,029 $ 25,653 $ 19,969
Accounts and notes receivable, net of allow-
ances of $458, $506 and $683................. 10,318 7,700 7,994
Inventories................................... 54,551 55,475 51,013
Prepaid expenses.............................. 3,223 3,767 2,177
Refundable income taxes....................... 492 2,471 546
-------- -------- --------
Total current assets......................... 77,613 95,066 81,699
Property and equipment, net.................... 135,124 128,289 119,218
Goodwill, net of accumulated amortization of
$1,471, $917 and $40.......................... 31,345 31,899 17,500
Property held for sale......................... 2,985 2,360 2,154
Other assets................................... 7,839 8,108 14,741
-------- -------- --------
$254,906 $265,722 $235,312
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable.............................. $ 36,206 $ 35,247 $ 25,396
Accrued compensation.......................... 5,600 6,514 4,876
Taxes, other than income taxes................ 6,686 5,482 4,781
Deferred income taxes......................... 4,642 4,642 3,356
Other accrued expenses........................ 12,810 19,764 12,805
Current portion of long-term debt............. 9,220 6,089 2,560
-------- -------- --------
Total current liabilities.................... 75,164 77,738 53,774
Long-term debt................................. 135,845 141,835 141,356
Deferred income taxes.......................... 13,767 13,767 15,658
Other liabilities.............................. 19,968 21,449 13,937
-------- -------- --------
Total liabilities............................ 244,744 254,789 224,725
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; 705,692 shares issued and
outstanding at April 7, 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)................... (884) (13) (359)
-------- -------- --------
Total stockholders' equity................... 10,162 10,933 10,587
-------- -------- --------
$254,906 $265,722 $235,312
======== ======== ========
</TABLE>
See accompanying notes.
F-19
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
--------------------------------------------------- -----------------------------
36 WEEKS 36 WEEKS PERIOD FROM PERIOD FROM
ENDED ENDED JUNE 29, 1994 AUGUST 2, 1993
APRIL 7, APRIL 9, 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................... $ 411,866 $ 423,848 $ 594,019 $ 48,411 $551,681 $605,132
Cost of sales........... 295,322 310,059 432,067 35,476 413,696 454,672
--------- --------- --------- --------- -------- --------
Gross profit............ 116,544 113,789 161,952 12,935 137,985 150,460
Operating, selling,
general, and
administrative
expenses............... 95,641 93,416 133,242 10,828 117,350 147,472
Litigation settlement... (1,866) (1,866)
Depreciation and
amortization........... 9,089 7,106 10,855 959 8,022 9,461
--------- --------- --------- --------- -------- --------
Operating income (loss). 11,814 15,133 19,721 1,148 12,613 (6,473)
Interest expense:
Interest expense,
excluding amortization
of deferred financing
costs................. 12,019 11,755 17,797 1,422 6,219 6,364
Amortization of
deferred financing
costs................. 666 625 923 83 134 182
--------- --------- --------- --------- -------- --------
12,685 12,380 18,720 1,505 6,353 6,546
--------- --------- --------- --------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (871) 2,753 1,001 (357) 6,260 (13,019)
Income taxes (benefit).. 1,826 655 2 2,492 (4,822)
--------- --------- --------- --------- -------- --------
Income (loss) before
extraordinary item..... (871) 927 346 (359) 3,768 (8,197)
Extraordinary item:
Loss on extinguishment
of debt, net of $413
income tax benefit.... (628)
--------- --------- --------- --------- -------- --------
Net income (loss)....... $ (871) $ 927 $ 346 $ (359) $ 3,140 $ (8,197)
========= ========= ========= ========= ======== ========
Income (loss) per share:
Income (loss) before
extraordinary item.... $ (0.87) $ 0.93 $ 0.35 $ (0.36) $ 3,716 $ (8,084)
Extraordinary item..... (619)
--------- --------- --------- --------- -------- --------
Income (loss).......... $ (0.87) $ 0.93 $ 0.35 $ (0.36) $ 3,097 $ (8,084)
========= ========= ========= ========= ======== ========
Weighted average common
shares outstanding..... 1,004,000 1,000,000 1,000,000 1,000,000 1,014 1,014
========= ========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-20
<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... 8,992 100 100
Net loss (unaudited)... (871) (871)
------- --- ------- --- ------- ----- -------
BALANCE AT APRIL 7, 1996
(UNAUDITED)............ 705,692 $ 7 303,300 $ 3 $11,036 $(884) $10,162
======= === ======= === ======= ===== =======
</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-21
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------------------------------------ -------------------------------
PERIOD FROM PERIOD FROM
36 WEEKS ENDED 36 WEEKS ENDED YEAR ENDED JUNE 29, 1994 AUGUST 2, 1993 YEAR ENDED
APRIL 7, 1996 APRIL 9, 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)....... $ (871) $ 927 $ 346 $ (359) $3,140 $(8,197)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and amor-
tization............. 9,089 7,106 10,855 959 8,286 9,461
Amortization of de-
ferred financing
costs and discount
on long-term debt.... 739 696 1,025 92 1,236 587
LIFO provision........ 538 538 325 270 228 708
Deferred income taxes. 8 374 26 3,172 (6,825)
Accreted interest on
debentures........... 1,659 1,482 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........ 97 (198) (169) 75 51 (904)
Changes in operating
assets and
liabilities, net of
acquisition
adjustments:
Accounts and notes
receivable......... (2,614) (267) 184 (340) (225) (413)
Inventories, net of
LIFO............... 386 (8,677) (4,514) 4,147 (5,953) (504)
Prepaid expenses.... (987) (989) (2,067) 400 (354) (919)
Refundable income
taxes.............. 1,979 546 (1,925) (24) (157) (410)
Other assets........ 62 2 54 165
Accounts payable.... 959 7,464 9,851 (4,261) (1,340) 2,315
Accrued expenses and
other liabilities.. (7,579) 6,337 3,938 (33) 285 (299)
Income taxes pay-
able............... 609 (775)
------ ------- ------- ------ ------ -------
Net cash provided by
operating activities... $3,457 $13,716 $18,151 $1,078 $9,013 $16,607
====== ======= ======= ====== ====== =======
</TABLE>
See accompanying notes.
F-22
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
36 WEEKS ENDED 36 WEEKS ENDED YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
APRIL 7, 1996 APRIL 9, 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........ $(21,842) $(11,042) $(22,855) $ (271) $ (3,729) $(16,233)
Proceeds from sale of
assets............... 7,880 3,260 8,464 4 6,074 13,745
Deferred gain on sale
of real estate....... 1,877
Payments for other
assets............... (1,671) (1,242) (392) (35) (375)
Repayment of notes
receivable........... 41 1,625 5,811 3,871 538
Advances to
partnerships......... (169) (1,901)
-------- -------- -------- ------- -------- --------
Net cash provided (used)
by investing activities (15,592) (7,399) (8,972) (267) 7,889 (4,226)
-------- -------- -------- ------- -------- --------
Cash provided (used) by
financing activities:
Proceeds from
borrowings........... 6,500 10,601
Principal payments on
borrowings........... (4,589) (2,514) (3,178) (108) (19,303) (20,712)
Payments of debt
issuance costs....... (317) (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 (4,489) (2,831) (3,495) 4,431 (13,388) (10,337)
-------- -------- -------- ------- -------- --------
Increase (decrease) in
cash and short-term
investments............ (16,624) 3,486 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................. $ 9,029 $ 23,455 $ 25,653 $19,969 $ 14,727 $ 11,213
======== ======== ======== ======= ======== ========
Supplemental cash flow
disclosures:
Interest paid.......... $ 9,658 $ 8,703 $ 14,299 $ 1,025 $ 7,232 $ 5,959
Income taxes paid...... 663 2,643 573 3,198
Income tax refunds
received.............. 1,979 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-23
<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 April 7, 1996 and the
consolidated statements of operations and cash flows for the interim periods
ended April 7, 1996 and April 9, 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-24
<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-25
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
allocation of the purchase price was finalized during 1995. Because of the
effects of the Acquisition, the consolidated financial statements of the
Company are not comparable to the consolidated financial statements of the
Predecessor.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $ 218,046
Fair value of liabilities assumed.............................. (226,094)
Excess costs over acquired net assets.......................... 32,816
---------
Total purchase price........................................... $ 24,768
=========
</TABLE>
In connection with the Acquisition on April 28, 1994, the Predecessor paid
$585 and transferred property and equipment and property held for sale with a
net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly-
owned subsidiary of the Predecessor's former sole shareholder, Steinberg
International, Inc. ("International"), in exchange for Holdings' preferred
stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased
certain shares of its common stock from International in consideration of a
$27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior
to the Acquisition, the Company transferred Holdings' preferred stock to
International in consideration of the repayment of the promissory note.
3. CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of short-term investments and receivables.
The Company's short-term investments are in high quality securities placed
with major banks and financial institutions. The Company's investment policy
limits its exposure to concentrations of credit risk.
The Company's receivables result primarily from vendor rebates and
allowances, and redemption of manufacturer coupons. The vendor rebates and
allowances reflect a broad base, while the coupons are concentrated with one
processor. As a consequence, concentrations of credit risk are limited. The
Company routinely assesses the financial strength of its vendors and coupon
processor.
4. INVENTORIES
If inventories had been valued using the FIFO method, inventories would have
been higher (lower) and gross profit and operating income would have been
greater as follows:
<TABLE>
<CAPTION>
GROSS
PROFIT AND
OPERATING
INVENTORIES INCOME
----------- ----------
<S> <C> <C>
THE COMPANY
July 30, 1995 and the year then ended............... $(4,370) $325
July 31, 1994 and the period from June 29, 1994 to
July 31, 1994...................................... $(4,695) $270
PREDECESSOR
June 28, 1994 and the period from August 2, 1993 to
June 28, 1994...................................... $ 4,776 $228
August 1, 1993 and the year then ended.............. $ 4,548 $708
</TABLE>
F-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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 $575 million of
new senior subordinated notes; borrow approximately $805 million under a new
$995 million bank credit facility; repay certain existing indebtedness and
engage in certain other recapitalization transactions (collectively, the
"Recapitalization") concurrently with the Merger. Smith's will also use its
reasonable efforts to cause Ronald W. Burkle, the Chairman of the Board of the
Company, to be elected Chief Executive Officer of Smith's upon the
consummation of the Merger and the Recapitalization.
F-35
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE 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.............................................................. 12
Pro Forma Capitalization.................................................. 17
Unaudited Pro Forma Combined Financial Statements......................... 18
Selected Historical Financial Data of Smith's............................. 27
Selected Historical Financial Data of Smitty's............................ 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 41
Management................................................................ 52
Principal Stockholders.................................................... 55
Certain Relationships and Related Transactions............................ 57
Description of Notes...................................................... 63
Description of Capital Stock.............................................. 90
Description of New Credit Facility........................................ 92
Underwriting.............................................................. 95
Legal Matters............................................................. 96
Experts................................................................... 96
Index to Financial Statements............................................. F-1
</TABLE>
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-----------------
PROSPECTUS
-----------------
[LOGO OF SMITH'S FOOD & DRUG CENTERS(R)]
$575,000,000
SMITH'S FOOD & DRUG
CENTERS, INC.
11 1/4% SENIOR SUBORDINATED NOTES DUE 2007
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
MAY 16, 1996
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