-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QEr4kjlJgWNZp400rSC3SXv0XcpjhrmO/hN2+8eDbWIjZo+PJHhMZ/gspp5B6jUl 1vYIKunLbp129mQbFg14MA== 0000950130-96-001359.txt : 19960506 0000950130-96-001359.hdr.sgml : 19960506 ACCESSION NUMBER: 0000950130-96-001359 CONFORMED SUBMISSION TYPE: SC 13E4 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960425 DATE AS OF CHANGE: 19960503 SROS: NYSE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SMITHS FOOD & DRUG CENTERS INC CENTRAL INDEX KEY: 0000850309 STANDARD INDUSTRIAL CLASSIFICATION: 5411 IRS NUMBER: 870258768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: SC 13E4 SEC ACT: 1934 Act SEC FILE NUMBER: 005-40785 FILM NUMBER: 96551020 BUSINESS ADDRESS: STREET 1: 1550 S REDWOOD RD CITY: SALT LAKE CITY STATE: UT ZIP: 84104 BUSINESS PHONE: 8019741400 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SMITHS FOOD & DRUG CENTERS INC CENTRAL INDEX KEY: 0000850309 STANDARD INDUSTRIAL CLASSIFICATION: 5411 IRS NUMBER: 870258768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: SC 13E4 BUSINESS ADDRESS: STREET 1: 1550 S REDWOOD RD CITY: SALT LAKE CITY STATE: UT ZIP: 84104 BUSINESS PHONE: 8019741400 SC 13E4 1 SCHEDULE 13E-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1996 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- SCHEDULE 13E-4 ISSUER TENDER OFFER STATEMENT (PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) ---------------- SMITH'S FOOD & DRUG CENTERS, INC. (NAME OF ISSUER AND PERSON FILING STATEMENT) CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLES OF CLASSES OF SECURITIES) ---------------- N/A (CUSIP NUMBER FOR CLASS A COMMON STOCK) 832388-10-2 (CUSIP NUMBER FOR CLASS B COMMON STOCK) MICHAEL C. FREI SENIOR VICE PRESIDENT AND GENERAL COUNSEL SMITH'S FOOD & DRUG CENTERS, INC. 1550 SOUTH REDWOOD ROAD SALT LAKE CITY, UTAH 84104 (801) 974-1400 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON FILING STATEMENT) ---------------- COPIES TO: ROBERT L. FRIEDMAN JOHN W. CARR SIMPSON THACHER & BARTLETT 425 LEXINGTON AVENUE NEW YORK, NY 10017 (212) 455-2000 ---------------- APRIL 25, 1996 (DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS) ---------------- CALCULATION OF FILING FEE - - -------------------------------------------------------------------------------
TRANSACTION VALUATION* AMOUNT OF FILING FEE - - ------------------------------------------------------------------------------ $451,291,032 $90,259
- - ------------------------------------------------------------------------------- * Assumes purchase of 50% of its outstanding shares of Common Stock (or 12,535,862 shares based on Common Stock outstanding as of April 15, 1996) at $36 per share. ---------------- [_]CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-11(A)(2) AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING. AMOUNT PREVIOUSLY PAID: N/A FILING PARTY: N/A FORM OR REGISTRATION NO.: N/A DATE FILED: N/A - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- ITEM 1. SECURITY AND ISSUER. (a) The name of the issuer is Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), which has its principal executive offices at 1550 South Redwood Road, Salt Lake City, Utah 84104 (telephone number (801) 974- 1400). (b) This Schedule 13E-4 relates to the offer by the Company to purchase, in the aggregate, 50% of its outstanding shares of Class A Common Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per share, of the Company (collectively, the "Shares") (or 12,535,862 Shares based on Shares outstanding as of April 15, 1996) at a price of $36 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated April 25, 1996 (the "Offer to Purchase"), and related Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively. The information set forth under "Introduction-- General," "The Tender Offer--Number of Shares; Proration; Extension of Offer" and "The Tender Offer--Interests of Certain Persons in the Transactions" of the Offer to Purchase is incorporated herein by reference. (c) The information set forth under "The Tender Offer--Price Range of Common Stock; Dividends" of the Offer to Purchase is incorporated herein by reference. (d) Not Applicable. ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(b) The information set forth under "Introduction--General"; "--Risk Factors--Leverage and Debt Service" and "Financing of the Recapitalization and Merger" of the Offer to Purchase is incorporated herein by reference. ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. (a)-(j) The information set forth under the "Introduction--General," "Introduction--Elimination of Dividends," "The Tender Offer--Purpose of the Offer; Recommendation of the Board of Directors," "The Tender Offer-- Background of the Transactions," "The Tender Offer--Certain Effects of the Offer on the Common Stock; Registration Under the Exchange Act," "The Company, Smitty's and Yucaipa," "Financial Data of the Company," "The Recapitalization Agreement," "Certain Related Agreements," "Financing of the Recapitalization and Merger," "Amendment and Restatement of Certificate of Incorporation" and "Available Information" of the Offer to Purchase is incorporated herein by reference. ITEM 4. INTEREST IN SECURITIES OF THE ISSUER. The information set forth under the "Introduction--General," "The Tender Offer--Interests of Certain Persons in the Transactions," "The Recapitalization Agreement" and "Certain Related Agreements" of the Offer to Purchase is incorporated herein by reference. ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE ISSUER'S SECURITIES. The information set forth under "Introduction--General," "The Tender Offer-- Background of the Transactions," "The Tender Offer--Interests of Certain Persons in the Transactions," "The Recapitalization Agreement," "Certain Related Agreements" and "Financing of the Recapitalization and Merger" of the Offer to Purchase is incorporated herein by reference. ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth under "The Tender Offer--Background of the Transactions" and "The Tender Offer--Fees and Expenses" of the Offer to Purchase is incorporated herein by reference. 1 ITEM 7. FINANCIAL INFORMATION. (a)-(b) The financial information set forth under "Financial Data of the Company" and "Index to Audited Financial Statements" of the Offer to Purchase is incorporated herein by reference. ITEM 8. ADDITIONAL INFORMATION. (a) The information set forth under "The Tender Offer--Interest of Certain Persons in the Transactions," "The Recapitalization Agreement" and "Certain Related Agreements" of the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "The Tender Offer--Certain Legal Matters; Regulatory and Foreign Approvals" and "The Recapitalization Agreement--Regulatory Approvals" of the Offer to Purchase is incorporated herein by reference. (c) The information set forth under "The Tender Offer--Certain Effects of the Offer on the Common Stock; Registration under the Exchange Act" of the Offer to Purchase is incorporated herein by reference. (d) Not Applicable. (e) Reference is hereby made to the Offer to Purchase and the related Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively, and incorporated in their entirety herein by reference. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Form of Offer to Purchase dated April 25, 1996. (a)(2) Form of Letter of Transmittal. (a)(3) Form of Notice of Guaranteed Delivery. (a)(4) Form of letter to brokers, dealers, commercial banks, trust companies and other nominees dated April 25, 1996. (a)(5) Form of letter to clients for use by brokers, dealers, commercial banks, trust companies and other nominees dated April 25, 1996. (a)(6) Form of letter to stockholders from the Chairman of the Board of the Company dated April 25, 1996. (a)(7) Form of summary advertisement dated April 25, 1996. (a)(8) Form of press release dated April 25, 1996. (c)(1) Recapitalization Agreement and Plan of Merger dated as of January 29, 1996 by and among the Company, Cactus Acquisition, Inc., Smitty's Supermarkets, Inc. and The Yucaipa Companies (incorporated by reference to Exhibit 2.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995). (c)(2) Standstill Agreement dated as of January 29, 1996 by and among the Company, The Yucaipa Companies, Yucaipa SSV Partners, L.P., Yucaipa Smitty's Partners, L.P., Yucaipa Smitty's Partners II, L.P., Yucaipa Arizona Partners, L.P., Jeffrey P. Smith, Richard D. Smith, Fred L. Smith, Ida Smith and the other shareholders of the Company named therein (incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996). (c)(3) Smith's Shareholder Agreement dated as of January 29, 1996 by and among Smitty's Supermarkets, Inc., The Yucaipa Companies and the shareholders of the Company named therein (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996).
2 (c)(4) Smitty's Stockholder Agreement dated as of January 29, 1996 by and among the Company, Cactus Acquisition, Inc. and the stockholders of Smitty's Supermarkets, Inc. named therein (incorporated by reference to Exhibit 10.4 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996). (c)(5) Form of Registration Rights Agreement by and among the Company and the holders of the Company's Common Stock named therein (incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996). (c)(6) Form of Management Services Agreement by and between the Company and The Yucaipa Companies (incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996). (c)(7) Form of Warrant Agreement by and between the Company and The Yucaipa Companies (incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996). (e) Not Applicable.
3 SIGNATURE AFTER DUE INQUIRY AND TO THE BEST OF MY KNOWLEDGE AND BELIEF, I CERTIFY THAT THE INFORMATION SET FORTH IN THIS STATEMENT IS TRUE, COMPLETE AND CORRECT. Smith's Food & Drug Centers, Inc. By: /s/ Michael C. Frei ---------------------------- Michael C. Frei Senior Vice President, General Counsel and Secretary Dated: April 25, 1996 4 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE ------- ----------- ------------ (a)(1) Form of Offer to Purchase dated April 25, 1996......... (a)(2) Form of Letter of Transmittal.......................... (a)(3) Form of Notice of Guaranteed Delivery.................. (a)(4) Form of letter to brokers, dealers, commercial banks, trust companies and other nominees dated April 25, 1996................................................... (a)(5) Form of letter to clients for use by brokers, dealers, commercial banks, trust companies and other nominees dated April 25, 1996................................... (a)(6) Form of letter to stockholders from the Chairman of the Board of the Company dated April 25, 1996.............. (a)(7) Form of summary advertisement dated April 25, 1996..... (a)(8) Form of press release dated April 25, 1996............. (c)(1) Recapitalization Agreement and Plan of Merger dated as of January 29, 1996 by and among the Company, Cactus Acquisition, Inc., Smitty's Supermarkets, Inc. and The Yucaipa Companies (incorporated by reference to Exhibit 2.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995)................... (c)(2) Standstill Agreement dated as of January 29, 1996 by and among the Company, The Yucaipa Companies, Yucaipa SSV Partners, L.P., Yucaipa Smitty's Partners, L.P., Yucaipa Smitty's Partners II, L.P., Yucaipa Arizona Partners, L.P., Jeffrey P. Smith, Richard D. Smith, Fred L. Smith, Ida Smith and the other shareholders of the Company named therein (incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996)..................... (c)(3) Smith's Shareholder Agreement dated as of January 29, 1996 by and among Smitty's Supermarkets, Inc., The Yucaipa Companies and the shareholders of the Company named therein (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S- 3 (Commission File No. 333-01601) which was initially filed on April 17, 1996)............................... (c)(4) Smitty's Stockholder Agreement dated as of January 29, 1996 by and among the Company, Cactus Acquisition, Inc. and the stockholders of Smitty's Supermarkets, Inc. named therein (incorporated by reference to Exhibit 10.4 of the Company's Registration Statement on Form S- 3 (Commission File No. 333-01601) which was initially filed on April 17, 1996)............................... (c)(5) Form of Registration Rights Agreement by and among the Company and the holders of the Company's Common Stock named therein (incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996)..................... (c)(6) Form of Management Services Agreement by and between the Company and The Yucaipa Companies (incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996)...........
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE ------- ----------- ------------ (c)(7) Form of Warrant Agreement by and between the Company and The Yucaipa Companies (incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-3 (Commission File No. 333-01601) which was initially filed on April 17, 1996)..................... (e) Not Applicable.........................................
EX-99.A1 2 OFFER TO PURCHASE DATED 4/25/96 SMITH'S FOOD & DRUG CENTERS, INC. OFFER TO PURCHASE FOR CASH 50% OF THE OUTSTANDING SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK AT $36 NET PER SHARE THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED. Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), is offering to purchase, in the aggregate, 50% of the outstanding shares of its Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and its Class B Common Stock, par value $.01 per share ("Class B Common Stock"; and, together with the Class A Common Stock, the "Common Stock" or the "Shares") (excluding shares issuable in the Merger referred to below), at $36 per Share, net to the seller in cash (the "Purchase Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which together constitute the "Offer"). Based on the outstanding 11,366,532 shares of Class A Common Stock and 13,705,191 shares of Class B Common Stock (excluding shares held in the Company's treasury) as of April 15, 1996, the Company is offering to purchase 12,535,862 Shares pursuant to the Offer. THE OFFER IS CONDITIONED UPON AMONG OTHER THINGS (I) AT LEAST 50% OF THE OUTSTANDING SHARES BEING VALIDLY TENDERED AND NOT WITHDRAWN BEFORE THE EXPIRATION OF THE OFFER, (II) THE COMPANY HAVING OBTAINED FINANCING NECESSARY TO PURCHASE 50% OF THE SHARES, REPAY CERTAIN INDEBTEDNESS, AND PAY CERTAIN FEES AND EXPENSES, AND (III) ALL OF THE CONDITIONS TO THE MERGER REFERRED TO BELOW (OTHER THAN THE CONSUMMATION OF THE OFFER) HAVING BEEN SATISFIED OR WAIVED. SEE INFORMATION BELOW AND "THE TENDER OFFER--CERTAIN CONDITIONS OF THE OFFER." The Offer relates to, among other things, the proposed recapitalization of the Company pursuant to the Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996 (the "Recapitalization Agreement"), among the Company, Cactus Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Acquisition"), Smitty's Supermarkets, Inc., a Delaware corporation ("Smitty's"), and The Yucaipa Companies, a California general partnership ("Yucaipa"). In the Recapitalization Agreement, the Company has agreed subject to certain terms and conditions to (i) commence the Offer and (ii) consummate the merger of Smitty's with Acquisition, pursuant to which Smitty's will become a wholly owned subsidiary of the Company and the stockholders of Smitty's will receive 3,038,888 shares of Class B Common Stock of the Company (the "Merger"). The shares of Class B Common Stock to be received by the stockholders of Smitty's are not eligible to be tendered in the Offer. It is anticipated that the Offer and the Merger will close simultaneously, except in certain limited circumstances described herein. EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. SEE "INTRODUCTION--ADVANTAGES OF TENDERING AND NOT TENDERING" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE OFFER. SEE ALSO "INTRODUCTION--RISK FACTORS." PURSUANT TO AN AGREEMENT (THE "SMITH'S SHAREHOLDER AGREEMENT") ENTERED INTO AS OF JANUARY 29, 1996 BY JEFFREY P. SMITH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF THE COMPANY, RICHARD SMITH, FRED SMITH (ALL OF WHOM ARE BROTHERS), IDA SMITH (THEIR MOTHER), AND CERTAIN RELATED FAMILY TRUSTS AND RELATED STOCKHOLDERS (COLLECTIVELY, THE "SMITH GROUP"), THE MEMBERS OF THE SMITH GROUP HAVE AGREED TO PARTICIPATE IN THE OFFER AND TENDER A SUFFICIENT NUMBER OF SHARES TO ENABLE THE COMPANY TO REPURCHASE 50% OF THE OUTSTANDING SHARES PURSUANT TO THE OFFER. IN ADDITION, DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY WHO HAVE NOT EXECUTED THE SMITH'S SHAREHOLDER AGREEMENT, WHO OWN APPROXIMATELY 7.6% OF THE OUTSTANDING SHARES, HAVE INDICATED THAT THEY INTEND TO TENDER THEIR SHARES IN THE OFFER. BECAUSE THE SMITH GROUP AND SUCH DIRECTORS AND OFFICERS OWN APPROXIMATELY 38% OF THE OUTSTANDING SHARES, THE MINIMUM TENDER CONDITION WILL BE SATISFIED IF OTHER STOCKHOLDERS TENDER SHARES REPRESENTING AT LEAST 12% OF THE OUTSTANDING SHARES. SEE "CERTAIN RELATED AGREEMENTS--SMITH'S SHAREHOLDER AGREEMENT." --------------- The Dealer Managers for the Offer are: GOLDMAN, SACHS & CO. --------------- The date of this Offer to Purchase is April 25, 1996 IMPORTANT Any stockholder desiring to tender all or any portion of his or her Shares should either (1) complete and sign the Letter of Transmittal (or a facsimile copy thereof) in accordance with the instructions in the Letter of Transmittal, mail or deliver it and any other required documents to the Depositary and either mail or deliver the stock certificates for such Shares to the Depositary along with the Letter of Transmittal or tender such Shares pursuant to the procedures for book-entry transfer set forth under "The Tender Offer--Procedure for Tendering Shares--Book-Entry Transfer," or (2) request his or her broker, dealer, commercial bank, trust company or other nominee to effect the transaction for him or her. Holders of Shares which are registered in the name of a broker, dealer, commercial bank, trust company or other nominee should contact such broker, dealer, commercial bank, trust company or other nominee if they desire to tender such Shares. Any stockholder who desires to tender Shares and whose certificates for such Shares are not immediately available or who cannot comply with the procedures for book-entry transfer by the expiration of the Offer may tender Shares by following the procedures for guaranteed delivery set forth under "The Tender Offer--Procedure for Tendering Shares--Guaranteed Delivery." STOCKHOLDERS MUST PROPERLY COMPLETE THE LETTER OF TRANSMITTAL IN ORDER TO EFFECT A VALID TENDER OF THEIR SHARES. Questions and requests for assistance or for additional copies of the Offer to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may be directed to the Information Agent or the Dealer Managers at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO MAKE ANY RECOMMENDATION ON BEHALF OF THE COMPANY TO ANY STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER ON BEHALF OF THE COMPANY OTHER THAN THOSE CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION, INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. All information contained or incorporated by reference in this Offer to Purchase relating to the Company was provided by the management and Board of Directors of the Company. All information contained in this Offer to Purchase relating to Smitty's was provided by the management and Board of Directors of Smitty's. All information contained in this Offer to Purchase relating to Yucaipa was provided by Yucaipa. TABLE OF CONTENTS
PAGE ---- INTRODUCTION.............................................................. 1 General................................................................. 1 Recommendation of the Board of Directors................................ 4 Advantages of Tendering and Not Tendering............................... 4 Risk Factors............................................................ 5 Elimination of Dividends................................................ 9 THE TENDER OFFER.......................................................... 10 Number of Shares; Proration; Extension of the Offer..................... 10 Procedure for Tendering Shares.......................................... 10 Valid Tender.......................................................... 10 Signature Guarantees and Method of Delivery........................... 11 Book-Entry Transfer................................................... 11 Guaranteed Delivery................................................... 12 Appointment As Proxy After Acceptance for Payment..................... 12 Determination of Validity; Defects.................................... 12 Federal Income Tax Withholding........................................ 13 Tender Constitutes an Agreement....................................... 13 Other Requirements.................................................... 13 Withdrawal Rights....................................................... 14 Purchase of Shares; Payment of Purchase Price........................... 14 Certain Conditions of the Offer......................................... 15 Extension of Tender Period; Termination; Amendment...................... 17 Price Range of Common Stock; Dividends.................................. 18 Background of the Transactions.......................................... 18 Purpose of the Offer; Recommendation of Board of Directors.............. 25 Certain Information Provided............................................ 28 Interest of Certain Persons in the Transactions......................... 28 Certain Effects of the Offer on the Common Stock; Registration Under the Exchange Act........................................................... 30 Certain Legal Matters; Regulatory and Foreign Approvals................. 31 Federal Income Tax Consequences......................................... 31 Fees and Expenses....................................................... 34 THE COMPANY, SMITTY'S AND YUCAIPA......................................... 36 The Company............................................................. 36 California Divestiture.................................................. 36 Recent Operating Results of the Company................................. 37 Smitty's................................................................ 37 Yucaipa................................................................. 38 Post-Recapitalization and Merger Company................................ 38 FINANCIAL DATA OF THE COMPANY............................................. 42 Pro Forma Capitalization................................................ 42 Selected Historical Financial Data...................................... 43 Unaudited Pro Forma Combined Financial Statements....................... 44 THE RECAPITALIZATION AGREEMENT............................................ 52 The Offer and Merger.................................................... 52 Conditions to the Merger................................................ 52 Repayment of Smitty's Indebtedness...................................... 54 Regulatory Approvals.................................................... 54
i
PAGE ---- Company's Stock Options; Deferred Compensation Plans.................. 55 Financing Arrangements by Yucaipa; Yucaipa Fee........................ 55 Composition of Board of Directors and Officers........................ 55 Termination........................................................... 56 Termination of Recapitalization....................................... 56 Amendment and Waiver.................................................. 57 Representations and Warranties........................................ 57 Conduct of Business Pending Merger.................................... 57 Additional Covenants.................................................. 59 CERTAIN RELATED AGREEMENTS.............................................. 61 Standstill Agreement.................................................. 61 Management Services Agreement......................................... 62 Warrant Agreement..................................................... 64 Registration Rights Agreement......................................... 65 Smith's Shareholder Agreement......................................... 66 Smitty's Stockholders' Agreement...................................... 66 FINANCING OF THE RECAPITALIZATION AND MERGER............................ 67 General............................................................... 67 New Credit Facility................................................... 69 New Senior Notes and New Senior Subordinated Notes.................... 71 New Preferred Stock................................................... 72 New Exchange Debentures............................................... 73 MANAGEMENT AFTER RECAPITALIZATION AND MERGER............................ 75 AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION............... 77 Description of Amendments............................................. 77 Antitakeover Effects of Certain Certificate of Incorporation Provi- sions................................................................ 78 AVAILABLE INFORMATION................................................... 79 MISCELLANEOUS........................................................... 79 INDEX TO AUDITED FINANCIAL STATEMENTS................................... F-1
ii TO THE HOLDERS OF COMMON STOCK OF SMITH'S FOOD & DRUG CENTERS, INC.: INTRODUCTION GENERAL Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), is offering to purchase, in the aggregate, 50% of the outstanding shares of its Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and its Class B Common Stock, par value $.01 per share ("Class B Common Stock"; and, together with the Class A Common Stock, the "Common Stock" or the "Shares") (excluding shares issuable in the Merger referred to below), at $36 per Share, net to the seller in cash (the "Purchase Price"), upon the terms and subject to the conditions set forth herein and in the related Letter of Transmittal (which together constitute the "Offer"). Based on the outstanding 11,366,532 shares of Class A Common Stock and 13,705,191 shares of Class B Common Stock (excluding shares held in the Company's treasury) as of April 15, 1996, the Company is offering to purchase 12,535,862 Shares pursuant to the Offer. THE OFFER IS CONDITIONED UPON AMONG OTHER THINGS (I) AT LEAST 50% OF THE OUTSTANDING SHARES BEING VALIDLY TENDERED AND NOT WITHDRAWN BEFORE THE EXPIRATION OF THE OFFER, (II) THE COMPANY HAVING OBTAINED FINANCING NECESSARY TO PURCHASE 50% OF THE SHARES, REPAY CERTAIN INDEBTEDNESS, AND PAY CERTAIN FEES AND EXPENSES, AND (III) ALL OF THE CONDITIONS TO THE MERGER REFERRED TO BELOW (OTHER THAN THE CONSUMMATION OF THE OFFER) HAVING BEEN SATISFIED OR WAIVED. SEE INFORMATION BELOW AND "THE TENDER OFFER--CERTAIN CONDITIONS OF THE OFFER." The Offer relates to, among other things, the proposed recapitalization of the Company pursuant to the Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996 (the "Recapitalization Agreement"), among the Company, Cactus Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Acquisition"), Smitty's Supermarkets, Inc., a Delaware corporation ("Smitty's"), and The Yucaipa Companies, a California general partnership ("Yucaipa"). In the Recapitalization Agreement, the Company has agreed subject to certain terms and conditions to (i) commence the Offer and (ii) consummate the merger of Smitty's with Acquisition, pursuant to which Smitty's will become a wholly owned subsidiary of the Company and the stockholders of Smitty's will receive 3,038,888 shares of Class B Common Stock of the Company (the "Merger"). The shares of Class B Common Stock to be received by the stockholders of Smitty's are not eligible to be tendered in the Offer. It is anticipated that the closing of the Offer (the "Offer Closing Date") and the closing of the Merger (the "Merger Closing Date"; together with the Offer Closing Date, the "Closing Date") will occur simultaneously, except in certain limited circumstances described herein. The closing of the Merger is subject to various conditions, including among other things the receipt of required regulatory approvals and the approval by the Company's stockholders of the Recapitalization Agreement and the other transactions contemplated thereby at the Stockholders' Meeting referred to below, and, except in certain limited circumstances described herein, the consummation of the Offer. See "The Recapitalization Agreement--Conditions to the Merger." On March 5, 1996, the Federal Trade Commission and the Antitrust Division granted early termination of the waiting period under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to the Merger effective immediately. If the number of Shares properly tendered prior to the Expiration Date (as defined under "The Tender Offer--Number of Shares; Proration; Extension of Offer") and not withdrawn is more than 50% of the outstanding Shares, the Company will, upon the terms and subject to the conditions of the Offer, purchase Shares on a pro rata basis from all stockholders who properly tender and do not withdraw Shares. See "The Tender Offer--Number of Shares; Proration; Extension of the Offer." All Shares not purchased pursuant to the Offer, including Shares not purchased because of proration, will be returned. Tendering stockholders will not be obligated to pay brokerage commissions, solicitation fees or, subject to the instructions to the Letter of Transmittal, stock transfer taxes on the purchase of Shares by the Company pursuant to the Offer. The Company will pay all fees and expenses of Goldman, Sachs & Co. ("Goldman Sachs" or the "Dealer Managers"), American Stock Transfer & Trust Company (the "Depositary") and MacKenzie Partners, Inc. (the "Information Agent") incurred in connection with the Offer. The purpose of the Offer is to permit all of the Company's stockholders the opportunity to exchange half of their Shares for a cash amount reflecting a significant premium over the price at which the Company's Common Stock has traded for some time and yet at the same time continue to participate in the future performance of the Company. See "The Tender Offer--Price Range of Common Stock; Dividends" and "The Tender Offer--Purpose of the Offer; Recommendation of Board of Directors." EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. SEE "INTRODUCTION--ADVANTAGES OF TENDERING AND NOT TENDERING" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE OFFER. SEE ALSO "INTRODUCTION--RISK FACTORS." PURSUANT TO THE SMITH'S SHAREHOLDER AGREEMENT, ENTERED INTO BY JEFFREY P. SMITH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF THE COMPANY, RICHARD SMITH, FRED SMITH (ALL OF WHOM ARE BROTHERS), IDA SMITH (THEIR MOTHER), AND CERTAIN RELATED FAMILY TRUSTS AND RELATED STOCKHOLDERS (COLLECTIVELY, THE "SMITH GROUP"), THE MEMBERS OF THE SMITH GROUP HAVE AGREED TO PARTICIPATE IN THE OFFER AND TENDER A SUFFICIENT NUMBER OF SHARES TO ENABLE THE COMPANY TO REPURCHASE 50% OF THE OUTSTANDING SHARES PURSUANT TO THE OFFER. IN ADDITION, DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY WHO HAVE NOT EXECUTED THE SMITH'S SHAREHOLDER AGREEMENT, WHO OWN APPROXIMATELY 7.6% OF THE OUTSTANDING SHARES, HAVE INDICATED THAT THEY INTEND TO TENDER THEIR SHARES IN THE OFFER. BECAUSE THE SMITH GROUP AND SUCH DIRECTORS AND OFFICERS OWN APPROXIMATELY 38% OF THE OUTSTANDING SHARES, THE MINIMUM TENDER CONDITION WILL BE SATISFIED IF OTHER STOCKHOLDERS TENDER SHARES REPRESENTING AT LEAST 12% OF THE OUTSTANDING SHARES. SEE "CERTAIN RELATED AGREEMENTS--SMITH'S SHAREHOLDER AGREEMENT." The Recapitalization Agreement, including the issuance by the Company of 3,038,888 shares of Class B Common Stock to the stockholders of Smitty's pursuant to the Merger, requires approval by the Company's stockholders at their Annual Meeting scheduled for Thursday, May 23, 1996 (the "Stockholders' Meeting"). At the Stockholders' Meeting, the Company's stockholders will also be asked to: (i) approve and adopt an Amended and Restated Certificate of Incorporation for the Company, creating a classified Board of Directors and a new non-voting Class C Common Stock, par value $.01 per share (the "Class C Common Stock"), and amending certain provisions with respect to the Company's Series I Preferred Stock, par value $.01 per share (the "Series I Preferred Stock"); (ii) elect a Board of Directors which will be divided into three classes, with the term of one class expiring each year; and (iii) ratify the selection of Ernst & Young LLP as the Company's independent auditors for 1996. See "Amendment and Restatement of Certificate of Incorporation" and "Management after Recapitalization and Merger." Concurrently with the mailing of this Offer to Purchase, the Company has mailed its Proxy Statement, dated April 25, 1996 (the "Proxy Statement"), to stockholders of record as of April 15, 1996. The Offer does not constitute a solicitation of proxies for any meeting of the Company's stockholders. Such solicitation by the Company will be made only pursuant to the Proxy Statement mailed by the Company in compliance with the requirements of Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, this Offer is neither an offer to sell nor a solicitation of offers to buy any securities which may be issued in the Merger. A tender of 2 Shares does not constitute a vote, or the appointment of a proxy, in connection with the Stockholders' Meeting. In order to vote at the Stockholders' Meeting, stockholders of the Company are required to submit a proxy or vote in person at the Stockholders' Meeting, or any postponement or adjournment thereof. Consummation of the Offer is subject to all of the conditions to the Merger having been satisfied, including that the stockholders of the Company have approved the Recapitalization Agreement and the other transactions contemplated by the Recapitalization at the Stockholders' Meeting. As a result the Company expects to extend the Expiration Date until after the Stockholders' Meeting which is scheduled for May 23, 1996 at 9:00 a.m. Mountain Time. As part of the Recapitalization (as defined herein) and Merger contemplated by the Recapitalization Agreement, the Company intends to: (i) purchase 50% of the outstanding Shares for $36 in cash per share (or approximately $451.3 million in the aggregate); (ii) repay approximately $667.1 million (pro forma at December 30, 1995) of indebtedness of the Company (the "Specified Company Indebtedness") and approximately $103.3 million (pro forma at December 30, 1995) of indebtedness of Smitty's (the "Specified Smitty's Indebtedness"); (iii) purchase up to half of the outstanding management stock options (the "Options") of the Company at a price per share of Common Stock covered by such Options equal to $36 per share minus the exercise price per share (or approximately $13.7 million in the aggregate); and (iv) purchase approximately three million shares of its Series I Preferred Stock for $.33 1/3 per share (or approximately $1 million in the aggregate). In addition, the Company will pay related debt refinancing premiums, accrued interest and fees and expenses in connection with the Recapitalization and Merger. The Offer, the Merger and the repayment of outstanding indebtedness are expected to close concurrently with the financing transactions referred to above. To consummate the Recapitalization and the Merger, the Company will require approximately $1,393.2 million (net of California Disposition proceeds of $68.0 million) of financing. The Company plans to obtain the necessary funds by (a) borrowings of approximately $818.2 million aggregate principal amount under a new senior credit facility (the "New Credit Facility") to be provided by a syndicate of banks led by Bankers Trust Company ("Bankers Trust") and The Chase Manhattan Bank ("Chase Manhattan"); (b) the issuance of up to $150 million of new senior notes (the "New Senior Notes"); (c) the issuance of up to $350 million of new senior subordinated notes (the "New Senior Subordinated Notes"); and (d) the issuance of new cumulative redeemable exchangeable preferred stock (the "New Preferred Stock") by the Company for gross proceeds of $75 million. In addition, the Company will assume approximately $43.6 million (at December 30, 1995) of existing indebtedness of Smitty's upon consummation of the Merger. See "Financing of the Recapitalization and Merger" and "Financial Data of the Company." As part of the Recapitalization, the Company will enter into a management services agreement (the "Management Services Agreement") with Yucaipa pursuant to which Yucaipa will provide certain management consulting services and Ronald W. Burkle, the managing general partner of Yucaipa, will become Chief Executive Officer of the Company. Mr. Burkle, along with another designee of Yucaipa, will be nominated to become a member of the Company's Board of Directors. The Company will also enter into a warrant agreement with Yucaipa (the "Warrant Agreement") pursuant to which the Company will issue warrants to Yucaipa to purchase shares of Class C Common Stock of the Company, representing 10% of the aggregate common shares on a fully diluted basis, for an initial exercise price of $50 per share, subject to certain conditions and exceptions. See "Certain Related Agreements--Management Services Agreement," "--Standstill Agreement" and "--Warrant Agreement." The "Recapitalization" as defined in the Recapitalization Agreement refers collectively to: (i) the execution, delivery and receipt of the proceeds under the Financing Agreements (as defined herein); (ii) the making and consummation of the Offer; (iii) the execution and delivery of the Management Services Agreement; (iv) the execution and delivery of, and the issuance of the warrants provided for 3 under, the Warrant Agreement; (v) the completion of certain transactions contemplated by the Recapitalization Agreement regarding the composition of the Company's Board of Directors, the election of Ronald Burkle as Chief Executive Officer, the cash payment for a portion of, and the reduction of the exercise price for a portion of, the Company's Options and the amendment of the Company's deferred compensation agreements; and (vi) the filing of the Amended and Restated Certificate of Incorporation for the Company. STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN TRANSACTIONS CONTEMPLATED IN THE RECAPITALIZATION AGREEMENT WILL INCREASE THE RISK ASSOCIATED WITH, AND MAY OTHERWISE ADVERSELY AFFECT THE VALUE OF, THEIR INVESTMENT IN THE COMPANY. STOCKHOLDERS SHOULD CONSIDER ALL OF THE INFORMATION CONTAINED IN THIS OFFER TO PURCHASE PRIOR TO MAKING A DECISION WHETHER TO TENDER THEIR SHARES IN THE OFFER. IN PARTICULAR, STOCKHOLDERS SHOULD CONSIDER THE FACTORS SET FORTH HEREIN UNDER "INTRODUCTION--ADVANTAGES OF TENDERING AND NOT TENDERING" AND "-- RISK FACTORS." RECOMMENDATION OF THE BOARD OF DIRECTORS At its January 28, 1996 meeting, the Company's Board of Directors unanimously determined that it was in the best interests of the Company and its stockholders that the Company enter into the Recapitalization Agreement and the related agreements and consummate all of the transactions contemplated by those agreements, including the Recapitalization and the Merger. The Board determined to recommend that the Company's stockholders approve the Recapitalization Agreement and the transactions contemplated thereby, including the issuance of 3,038,888 shares of the Company's Class B Common Stock to the stockholders of Smitty's in the Merger. See "The Tender Offer-- Purpose of the Offer; Recommendation of Board of Directors." EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. SEE "INTRODUCTION--ADVANTAGES OF TENDERING AND NOT TENDERING." ADVANTAGES OF TENDERING AND NOT TENDERING In deciding whether to tender their Shares pursuant to the Offer (and how many Shares to tender), stockholders should consider the following possible advantages of tendering and not tendering: CERTAIN ADVANTAGES OF TENDERING 1. The Purchase Price of $36 in cash per share represents a significant premium over market prices that had been prevailing prior to announcement of the Offer. 2. After the Expiration Date, the Shares are expected to trade at prices significantly below $36 per share. 3. The purchase of Shares pursuant to the Offer could have a significant adverse effect on the liquidity and market value of the outstanding Shares after the Offer. 4. The Company's high level of debt and debt service requirements will have several important effects on its future operations, including that the Company will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions and to competitive pressures. 5. The financial covenants and other restrictions contained in the New Credit Facility, the New Senior Notes and the New Senior Subordinated Notes will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends on, or repurchase, its Common Stock. In addition, funds available for working capital, capital expenditures, acquisitions and general corporate purposes will be limited. 6. The Company intends to discontinue the payment of cash dividends on the Common Stock following the consummation of the Recapitalization and Merger and the payment of future dividends will be severely restricted by the terms of the Financing Agreements entered into by the Company in connection with the Recapitalization and Merger. 4 7. Because the volume of Shares that are typically traded on a daily basis is not excessive, a stockholder wishing to sell a substantial block of Shares may find it difficult to sell that block on the New York Stock Exchange (the "NYSE") without adversely affecting the market price received for that block. The Offer will enable holders of large blocks to avoid that problem in disposing of a portion of their Shares. 8. The Offer gives all stockholders an opportunity to dispose of Shares without incurring any transaction costs. POSSIBLE ADVANTAGES OF NOT TENDERING Stockholders who do not tender Shares will experience an increase in their percentage ownership interest in the Company as a result of the Offer and thus an increase in their proportionate interest in the Company's future earnings. As a result such stockholders will benefit from any future growth in the Company's business to a greater degree than if they do tender shares. RISK FACTORS LEVERAGE AND DEBT SERVICE. As a result of the Recapitalization and Merger (including the Offer), the Company will be highly leveraged and the blended average rates of interest on the Company's outstanding indebtedness is expected to be higher than the rates of interest on the Company's indebtedness outstanding immediately prior to such transactions. At December 30, 1995, pro forma for the Recapitalization and Merger and the California Disposition (as defined under "The Company, Smitty's and Yucaipa--California Divestiture"), the Company's total debt and stockholders' equity (deficit) would have been $1,356.8 million and $(121.6) million, respectively, compared to actual debt and stockholders' equity of $746.2 million and $416.7 million, respectively, on such date. The Company would also have had additional borrowing availability under the New Credit Facility on a pro forma basis, subject to the borrowing conditions contained therein. In addition, as of December 30, 1995, pro forma for the Recapitalization and Merger, scheduled payments under net operating leases of the Company and its subsidiaries for the twelve months following the Recapitalization and the Merger would have been approximately $36.9 million. The Company's ability to make scheduled payments of the principal of, or interest on, or to refinance its indebtedness (including the New Senior Notes and the New Senior Subordinated Notes) and to make scheduled payments under its operating leases depends on its future performance, which is subject to economic, financial, competitive and other factors beyond its control. Based upon the current level of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with borrowings under the New Credit Facility and its other sources of liquidity, will be adequate to meet its anticipated requirements for working capital, capital expenditures, lease payments, interest payments and scheduled principal payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated cost savings or future growth can be achieved. In addition, no assurances can be given as to the timing of, or the net proceeds to be realized upon, the California Asset Disposition (as defined under "The Company, Smitty's and Yucaipa--California Divestiture") and, therefore, as to the timing or amount of receipts thereof as reflected in the unaudited pro forma combined financial statements. See "--Ability to Achieve Anticipated Cost Savings." If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital or other expenditures, or if its future cash flows are insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt following the Recapitalization and Merger and the fact that substantially all of its assets will be pledged to secure borrowings under the New Credit Facility and other secured obligations. 5 The Company's high level of debt and debt service requirements will have several important effects on its future operations, including the following: (a) the Company will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions and competition; (b) the Company's leveraged position will increase its vulnerability to competitive pressures; (c) the financial covenants and other restrictions contained in the New Credit Facility, the New Senior Notes and the New Senior Subordinated Notes will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends on, or repurchase, its common stock or preferred stock; and (d) funds available for working capital, capital expenditures, acquisitions and general corporate purposes will be limited. The Company's continued growth depends, in part, on its ability to continue its expansion and store conversion efforts, and therefore its inability to finance capital expenditures through borrowed funds or otherwise could have a material adverse effect on the Company's future operations. The Company's capital structure immediately after the Recapitalization and Merger will include a significant amount of floating rate indebtedness, causing the Company to be significantly more sensitive to prevailing interest rates than has historically been the case. The Company intends to enter into interest rate protection agreements which for the duration of such agreements will effectively provide fixed rates of interest or ceiling rates of interest on a portion of such floating rate indebtedness. There can be no assurance that the Company will be able to enter into such agreements on favorable terms. In the event of a bankruptcy of the Company, the Common Stock will rank below all claims of the Company's creditors, including those of the senior lenders under the New Credit Facility and the holders of the New Senior Notes and the New Senior Subordinated Notes. Because of the significantly increased leverage of the Company following the Recapitalization and Merger, such creditors' claims will be substantially greater than those now entitled to priority over the Common Stock. EFFECT ON TRADING MARKET OF COMMON STOCK. Following the consummation of the Recapitalization and Merger, shares of the Company's Class B Common Stock will trade at a value below their current level. In addition, the Company intends to discontinue for the foreseeable future the payment of cash dividends on the Common Stock following the Closing Date and the payment of future dividends will be severely restricted by the terms of the Financing Agreements (as defined) entered into by the Company in connection with the Recapitalization and Merger. The consummation of the Recapitalization and Merger is expected to cause the Company's credit ratings to be lowered. It is possible that the more speculative investment quality of the Common Stock following the consummation of the Recapitalization and Merger may increase the volatility of, decrease the liquidity of, and otherwise adversely affect the trading market for the Common Stock. FRAUDULENT CONVEYANCE RISKS; DELAWARE LAW CONSIDERATIONS. If a court in a lawsuit on behalf of any unpaid creditor of the Company or a representative of the Company's creditors were to find that, at the time the Company purchased Common Stock in the Offer or purchased management stock options and Series I Preferred Stock as contemplated by the Recapitalization, the Company (x) intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) did not receive fair consideration in good faith or reasonably equivalent value in connection with such distributions and the Company (i) was insolvent, (ii) was rendered insolvent by reason of such stock purchases, (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void such transactions, including payments to stockholders in the Offer, and require that such holders return such cash (or equivalent amounts) to the Company or to a fund for the benefit of its creditors. The Company may be viewed as insolvent at the time of or as a result of the Offer, 6 purchase of options and Series I Preferred Stock if the fair value of its assets does not exceed its probable liabilities at the time of or following such transactions. Section 160 of the Delaware General Corporation Law provides that a corporation may not purchase or redeem any of its own shares for cash or other property when the capital of the corporation is impaired or when such purchase or redemption would cause the impairment of the capital of the corporation. In case of any willful or negligent violation of such section, the Company's directors will be jointly and severally liable to the Company and its creditors for the full amount paid for such purchase or redemption. Based upon financial and other information currently available to it, management of the Company believes that the Recapitalization is being undertaken for proper purposes and in good faith. Certain courts have held, however, that a company's purchase of its own capital stock does not constitute reasonably equivalent value or fair consideration for incurring indebtedness. By extension, the purchase of options to purchase capital stock of a company may also be viewed as not constituting reasonably equivalent value or fair consideration to such company. The Company believes that it (i) is solvent and will continue to be solvent after making the purchases contemplated by the Recapitalization notwithstanding the fact that the Company, after completion of the Offer and such purchase of options and preferred stock, will have a negative net worth under generally accepted accounting principles, because the Company believes that the fair value of the Company's assets exceeds and will exceed its probable liabilities, (ii) will have sufficient capital for carrying on the business it intends to conduct after such distributions, and (iii) will be able to pay its debts as they mature. There can be no assurance, however, that a court would concur with such beliefs and positions. It is a condition to the consummation of the Offer that the Company shall have received an opinion from an independent valuation firm (i) as to the value of the Company's assets and liabilities, after giving effect to the consummation of the Recapitalization and Merger, and (ii) that the fair value of the Company's assets would exceed its total stated liabilities and identified contingent liabilities both before and after giving effect to the Recapitalization and Merger by at least the aggregate par value of its issued capital stock. Houlihan, Lokey, Howard & Zukin, Inc. has been retained by the Company to deliver such an opinion. ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS. Management of the Company has estimated that approximately $25 million of annualized net cost savings (as compared to such costs for the pro forma combined fiscal year ended December 30, 1995) can be achieved over a three-year period as a result of integrating the Arizona operations of the Company and Smitty's. These estimates of potential cost savings are forward looking statements that are inherently uncertain. Actual cost savings, if any, could differ materially from those projected. All of these forward looking statements are based on estimates and assumptions made by management of the Company, which although believed to be reasonable, are inherently uncertain and difficult to predict; therefore, undue reliance should not be placed upon such estimates. There can be no assurance that the savings anticipated in these forward looking statements will be achieved. The following important factors, among others, could cause the Company not to achieve the cost savings contemplated herein or otherwise cause the Company's results of operations to be adversely affected in future periods: (i) continued or increased competitive pressures from existing and new competitors and new entrants, including price-cutting strategies; (ii) unanticipated costs related to the Recapitalization and Merger and the operations of the Company and Smitty's; (iii) loss or retirement of key members of management or the termination of the Management Services Agreement with Yucaipa; (iv) inability to negotiate more favorable terms with suppliers or to improve working capital management; (v) increases in interest rates or the Company's cost of borrowing or a default under any material debt agreements; (vi) inability to develop new stores in advantageous locations or to successfully convert existing stores; (vii) prolonged labor disruption; (viii) deterioration in general or regional economic conditions; (ix) adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to 7 existing operations; (x) loss of customers as a result of the conversion of store formats; (xi) adverse determinations in connection with pending or future litigations or other material claims against the Company; (xii) inability to achieve future sales levels or other operating results that support the cost savings, and (xiii) the unavailability of funds for capital expenditures. Many of such factors are beyond the control of the Company. In addition, there can be no assurance that unforeseen costs and expenses or other factors will not offset the projected cost savings in whole or in part. ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE RECAPITALIZATION AND MERGER. Upon consummation of the Recapitalization and Merger, the Company anticipates that it would record charges to earnings in connection with: (i) the adoption of a strategy to accelerate the disposition of certain real estate assets in California pursuant to the California Asset Disposition; (ii) the payment of certain refinancing premiums and the write-off of certain debt issuance costs resulting from the refinancing of approximately $667.1 million (pro forma at December 30, 1995) of the Company's indebtedness and approximately $103.3 million (pro forma at December 30, 1995) of Smitty's indebtedness; (iii) the purchase of certain management stock options; and (iv) the integration of Arizona operations of the Company with Smitty's. As a result of the foregoing, the Company anticipates that it would record a substantial charge to earnings for the quarter in which the Transactions are consummated. The Company currently estimates that the total charge for all such items would be approximately $220 million (pre-tax). However, such estimate is based on information available as of the date of this Offer to Purchase and the actual total charge may differ materially from such estimate if the actual information available to the Company at the time the charge is recorded varies from the information currently available. COMPETITION. The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores and the newer "alternative format" food stores, including warehouse-style supermarkets, club stores, deep discount drug stores and "supercenters." The Company's competitors continue to open new stores in the Company's existing markets. In addition, new competitors have entered the Company's markets in the past and could do so in the future. Supermarket chains generally compete on the basis of price, location, quality of products, service, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use those resources to take steps which could adversely affect the Company's competitive position. The Company's ability to respond to competitive pressures could be adversely affected by its highly leveraged financial condition. CONTROL OF THE COMPANY; CHANGE OF CONTROL PROVISIONS. The Company's Class A Common Stock and Series I Preferred Stock are each entitled to ten votes per share and the Company's Class B Common Stock is entitled to one vote per share. Upon consummation of the Recapitalization and Merger, members of the Smith Group are expected to have beneficial ownership, in the aggregate, of approximately 24.5% of the outstanding Common Stock and 31.6% of the outstanding Series I Preferred Stock, representing approximately 41.8% of the aggregate voting power of the Company's capital stock, and certain affiliates of Yucaipa and each of the investment partnerships which own shares in Smitty's for which Yucaipa acts as the general partner (the "Yucaipa Group") will have beneficial ownership of approximately 13.6% of the outstanding Common Stock of the Company, representing approximately 1.3% of the aggregate voting power of the Company's outstanding shares of capital stock. Pursuant to a standstill agreement (as amended, the "Standstill Agreement") entered into by the Smith Group, the Yucaipa Group and the Company, upon consummation of the Recapitalization, the Company will use its best efforts to reconstitute its Board of Directors to consist of seven directors, and each of the Smith Group and the Yucaipa Group will have the right to nominate two directors so long as it holds at least 8% of the outstanding Common Stock and the right to 8 nominate one director of the Company so long as it holds at least 5% of the outstanding Common Stock. As a result of the ownership structure of the Company and the contractual rights described above, the voting and management control of the Company is highly concentrated. The Smith Group will continue to have effective control of the Company and, subject to compliance with the restrictions contained in the Financing Agreements, will have the ability to direct the actions of the Company with respect to matters such as the payment of dividends, material acquisitions and dispositions and other extraordinary corporate transactions. Changes contained in the Company's Amended and Restated Certificate of Incorporation and the control of the Common Stock referred to above may have the effect of making more difficult or discouraging a proxy contest involving the Company, certain mergers, a tender offer, an open market purchase program, or other purchases of Common Stock in circumstances that may be beneficial to stockholders. The classification of the Board of Directors provided for in the Company's Amended and Restated Certificate of Incorporation will make more difficult a change of control of the Company that is not approved by the Board of Directors. Such provision may tend to insulate current management against the possibility of removal in a takeover bid and may also have the effect of discouraging certain persons from purchasing Common Stock in circumstances that would give stockholders an opportunity to sell some or all of their Common Stock at a premium to prevailing market prices. See "Amendment and Restatement of Certificate of Incorporation." NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS. Upon consummation of the Recapitalization and Merger, substantially all of the existing members of the Company's Board of Directors will resign and be replaced by the new directors elected at the Stockholders' Meeting. See "Management after Recapitalization and Merger." Jeffrey Smith will remain as Chairman of the Board but will resign as Chief Executive Officer of the Company. Ronald Burkle, the managing general partner of Yucaipa, will be appointed Chief Executive Officer of the Company and Allen Rowland will continue his recent appointment as President and Chief Operating Officer. As a result, the Company's senior executive officers and a majority of the members of the Board of Directors will be new appointees. There can be no assurance that the changes in the Company's Board of Directors or senior management will not adversely affect the Company's operating performance. Mr. Burkle will provide his services as Chief Executive Officer pursuant to the Management Services Agreement between the Company and Yucaipa; however, such agreement does not require Mr. Burkle to spend any specified amount of time on Company affairs. Yucaipa will receive an annual fee of $1 million for providing the services of Mr. Burkle and the other partners and employees of Yucaipa. The Management Services Agreement may be terminated by the Company's Board of Directors on 90 days' notice or by either party upon the occurrence of certain events. If the Company seeks to terminate the Management Services Agreement, subject to limited exceptions, it is required to pay Yucaipa a termination fee of between $5 million and $10 million, depending on the time of termination. Yucaipa will also receive certain fees in connection with the consummation of the Recapitalization. See "Certain Related Agreements--Management Services Agreement." ELIMINATION OF DIVIDENDS The Company intends to discontinue the payment of cash dividends on the Common Stock following the consummation of the Recapitalization and Merger, and the payment of future dividends will be severely restricted by the terms of the Financing Agreements entered into by the Company in connection with the Recapitalization and Merger. The resumption of cash dividends at any future time will be dependent on various factors which the Board of Directors will evaluate at the time, principally including whether the Company will have sufficient excess cash on hand at the time after providing for its operating needs, servicing debt and reserving an appropriate amount of funds for the Company's expansion opportunities. There can be no assurance when or whether the Board might decide to resume paying dividends on the Common Stock. 9 THE TENDER OFFER NUMBER OF SHARES; PRORATION; EXTENSION OF THE OFFER Upon the terms and subject to the conditions of the Offer, the Company will accept for payment and thereby purchase 50% of its outstanding Shares (or 12,535,862 Shares based on the outstanding Shares as of April 15, 1996), which Shares are required to be validly tendered prior to the Expiration Date and not theretofore withdrawn in accordance with the withdrawal procedures set forth below under "The Tender Offer--Withdrawal Rights." As used herein, the term "Expiration Date" means 12:00 Midnight, New York City time, on May 22, 1996, unless and until the Company shall, in its sole discretion, have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall refer to the latest time and date at which the Offer, as so extended by the Company, shall expire. See "The Tender Offer-- Extension of Tender Period; Termination; Amendment" for a description of the Company's right to extend the period of time during which the Offer is open, and to delay, terminate or amend the Offer. If the Offer is oversubscribed, Shares tendered prior to the Expiration Date and not withdrawn will be subject to proration. The proration period also expires on the Expiration Date. The Company expects to extend the Expiration Date until after the Stockholders' Meeting scheduled for May 23, 1996 at 9:00 a.m. Mountain Time. All Shares purchased pursuant to the Offer will be purchased at the Purchase Price, net to the seller in cash. The Company reserves the right, in its sole discretion, to purchase more than 50% of its outstanding Shares pursuant to the Offer, but it has no current intention to do so. If the number of Shares validly tendered prior to the Expiration Date and not withdrawn is greater than 50% of its outstanding Shares (and, as is most likely, the Company elects not to purchase pursuant to the Offer any more than 50% of its outstanding Shares), the Company will, upon the terms and subject to the conditions of the Offer, accept for purchase Shares properly tendered and not withdrawn before the Expiration Date on a pro rata basis (with adjustments to avoid purchases of fractional Shares). THEREFORE, STOCKHOLDERS DESIRING TO PARTICIPATE FULLY IN THE OFFER SHOULD TENDER ALL OF THEIR SHARES TO ENSURE THAT THE COMPANY WILL PURCHASE, SUBJECT TO THE TERMS AND CONDITIONS THE OFFER, AT LEAST 50% OF SUCH STOCKHOLDERS' SHARES. In the likely event that proration of tendered Shares is required, the Company will determine the final proration factor as promptly as practicable after the Expiration Date. Proration for each stockholder tendering Shares will be based on the ratio of the number of Shares tendered by such stockholder to the total number of Shares tendered by all stockholders. Although the Company will announce preliminary results of proration by press release as promptly as practicable after the Expiration Date, the Company does not expect to be able to announce the final results of such proration until approximately seven NYSE trading days after the Expiration Date. Stockholders may obtain such preliminary information from the Information Agent and may be able to obtain such information from their brokers. The Company expressly reserves the right, in its sole discretion, at any time or from time to time, to extend the period of time during which the Offer is open by giving oral or written notice of such extension to the Depositary and making a public announcement thereof. See "The Tender Offer--Extension of Tender Period; Termination; Amendment." There can be no assurance that the Company will exercise its right to extend the Offer. PROCEDURE FOR TENDERING SHARES VALID TENDER. Except as set forth below, for Shares to be validly tendered pursuant to the Offer: (a) certificates representing such Shares (or confirmation of receipt of such Shares pursuant to the procedure for book-entry transfer set forth below, or an Agent's Message (as defined below) if the tendering stockholder has not delivered a Letter of Transmittal), together with a properly 10 completed and duly executed Letter of Transmittal (or manually executed facsimile thereof) with any required signature guarantees, and any other documents required by the Letter of Transmittal, must be received on or prior to the Expiration Date by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase, or (b) the tendering stockholder must comply with the guaranteed delivery procedures set forth below. SIGNATURE GUARANTEES AND METHOD OF DELIVERY. No signature guarantee is required on the Letter of Transmittal if the Letter of Transmittal is signed by the registered holder of the Shares exactly as the name of the registered holder appears on the certificate (which term includes any participant in The Depository Trust Company or the Philadelphia Depository Trust Company (collectively, the "Book-Entry Transfer Facilities") whose name appears on a security position listing as the owner of the Shares) tendered therewith, and payment and delivery are to be made directly to such registered holder at such holder's address shown on the records of the Company, or if Shares are tendered for the account of a member firm of a registered national securities exchange, a member in good standing of the Stock Transfer Association's approved Medallion Program (such as STAMP, SEMP or MSP) or a commercial bank, broker, dealer, credit union, savings association or other entity having an office, branch or agency in the United States (each such entity being hereinafter referred to as an "Eligible Institution"). In all other cases, all signatures on the Letter of Transmittal must be guaranteed by an Eligible Institution. See Instruction 1 of the Letter of Transmittal. If a certificate representing Shares is registered in the name of a person other than the signatory to a Letter of Transmittal, or if payment is to be made, or Shares not purchased or tendered are to be issued, to a person other than the registered holder, the certificate must be endorsed or accompanied by an appropriate stock power, in either case signed exactly as the name of the registered holder appears on the certificate, with the signature on the certificate or stock power guaranteed by an Eligible Institution. Notwithstanding any other provision hereof, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for such Shares (or a timely confirmation of a book-entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities, or an Agent's Message if the tendering stockholder has not delivered a Letter of Transmittal), a properly completed and duly executed Letter of Transmittal (or facsimile thereof) or an Agent's Message, with any required signature guarantees and any other documents required by the Letter of Transmittal. The term "Agent's Message" means a message transmitted by a Book-Entry Transfer Facility to and received by the Depositary and forming a part of a book-entry confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgement from the participant in such Book-Entry Transfer Facility tendering the Shares which are the subject of such book-entry confirmation that such participant has received and agrees to be bound by the Letter of Transmittal and that the Company may enforce such agreement against such participant. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING STOCK CERTIFICATES, THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. BOOK-ENTRY TRANSFER. The Depositary will establish accounts with respect to the Shares at each of the Book-Entry Transfer Facilities for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution which is a participant in any of the Book-Entry Transfer Facility systems may make book-entry delivery of Shares by causing a Book- Entry Transfer Facility to transfer the Shares into the Depositary's account in accordance with such Book-Entry Transfer Facility's procedure for such transfer. However, although delivery of Shares may be effected through book- entry transfer into the Depositary's account at a Book-Entry Transfer Facility, the Letter of Transmittal (or manually executed facsimile thereof), properly completed and duly executed, with any required signature guarantees or an Agent's Message, and any other required documents, must 11 in any case be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase on or prior to the Expiration Date, or the stockholder must comply with the guaranteed delivery procedures set forth below. DELIVERY OF THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. GUARANTEED DELIVERY. If a stockholder desires to tender Shares pursuant to the Offer and such stockholder's Share certificates are not immediately available or time will not permit all required documents to reach the Depositary on or prior to the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, such Shares may nevertheless be tendered if all of the following guaranteed delivery procedures are duly complied with: 1. such tender is made by or through an Eligible Institution; 2. the Depositary receives (by hand, mail, or facsimile transmission) by the Expiration Date a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Company; and 3. the certificates for all tendered Shares, in proper form for transfer (or a confirmation of a book-entry transfer of such Shares into the Depositary's account at a Book-Entry Transfer Facility) together with a properly completed and duly executed Letter of Transmittal (or manually executed facsimile thereof) with any required signature guarantees or an Agent's Message, and all other documents required by the Letter of Transmittal, are received by the Depositary within three NYSE trading days after the receipt of such Notice of Guaranteed Delivery by the Depositary. The Notice of Guaranteed Delivery must include a guarantee by an Eligible Institution in the form set forth in such Notice. DETERMINATION OF VALIDITY; DEFECTS. All questions as to the number of Shares to be purchased, the form of documents and the validity, eligibility (including time of receipt) and acceptance for payment of any tender of Shares will be determined by the Company, in its sole discretion, which determination shall be final and binding on all parties. The Company reserves the absolute right to reject any or all tenders of Shares determined by it not to be in proper form or the acceptance of or payment for which may, in the opinion of the Company's counsel, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Offer or any defect or irregularity in any tender of Shares by any particular stockholder, whether or not similar defects or irregularities are waived in the case of other stockholders. The Company's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of the Company, its affiliates, the Dealer Managers, the Depositary, the Information Agent or any other person will be under any duty to give notice of any defects or irregularities in tenders and none of them will incur any liability for failure to give any such notice. FEDERAL INCOME TAX WITHHOLDING. Unless an exemption applies under the applicable law and regulations concerning "backup withholding" of federal income tax, the Depositary will be required to withhold, and will withhold, 31% of the gross proceeds otherwise payable to a stockholder or other payee pursuant to the Offer unless the stockholder or other payee provides such person's taxpayer identification number (social security number or employer identification number) and certifies that such number is correct. If the Depositary is not provided with the correct taxpayer identification number, the Internal Revenue Service may subject the stockholder or other payee to a $50 penalty. Each tendering stockholder, other than a noncorporate foreign stockholder, should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal so as to provide the information and certification necessary to avoid backup withholding, unless an applicable exemption exists and is proved in a manner satisfactory to the Company and the Depositary. Noncorporate foreign stockholders may be required to complete and sign a Form W-8, Certificate of 12 Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. In the case of any foreign stockholder, the Depositary will withhold 30% of the gross proceeds paid to such stockholder in order to satisfy certain withholding requirements, unless such foreign stockholder proves in a manner satisfactory to the Company and the Depositary that (i) the sale of its Shares pursuant to the Offer will qualify as a sale or exchange, rather than a dividend, for Federal income tax purposes (see "The Tender Offer--Federal Income Tax Consequences"), in which case no withholding will be required, (ii) the foreign stockholder is eligible for a reduced tax treaty rate with respect to dividend income, in which case the Depositary will withhold at the reduced treaty rate, or (iii) no withholding is otherwise required. TENDER CONSTITUTES AN AGREEMENT. The tender of Shares pursuant to any one of the procedures described above will constitute a binding agreement between the tendering stockholder and the Company upon the terms and subject to the conditions of the Offer. OTHER REQUIREMENTS. It is a violation of Rule 14e-4 promulgated under the Exchange Act for a person, directly or indirectly, to tender Shares for his or her own account unless, at the time of the tender and at the Expiration Date, the person so tendering (i) has a net long position equal to or greater than the amount of (x) Shares tendered or (y) other securities immediately convertible into, exercisable or exchangeable for the amount of Shares tendered and upon acceptance of his or her tender will acquire such Shares for tender by conversion, exercise or exchange of such other securities, and (ii) will cause such Shares to be delivered in accordance with the terms of the Offer. Rule 14e-4 provides a similar restriction applicable to the tender or guarantee of a tender on behalf of another person. The tender of Shares pursuant to any one of the procedures described above will constitute the tendering stockholder's acceptance of the terms and conditions of the Offer as well as the tendering stockholder's representation and warranty that (i) such stockholder has a net long position in the Shares being tendered within the meaning of Rule 14e-4 promulgated under the Exchange Act and (ii) the tender of such Shares complies with Rule 14e-4. WITHDRAWAL RIGHTS Shares tendered may be withdrawn at any time prior to the Expiration Date and, unless accepted for payment by the Company, such Shares may also be withdrawn after June 21, 1996. Once accepted for payment, tenders of Shares made pursuant to the Offer are irrevocable. For a withdrawal to be effective, a written, telegraphic or facsimile notice of withdrawal must be received in a timely manner by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If the certificates for Shares have been delivered or otherwise identified to the Depositary, then, prior to the release of such certificates, the tendering stockholder must also submit to the Depositary the serial numbers shown on the particular certificates evidencing the Shares to be withdrawn and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution (except in the case of Shares tendered by an Eligible Institution). If Shares have been tendered pursuant to the procedure for book- entry transfer set forth under "The Tender Offer--Procedure for Tendering Shares," the notice of withdrawal must specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Shares and must otherwise comply with such Book-Entry Transfer Facility's procedures. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Company, in its sole discretion, which determination shall be final and binding on all parties. None of the Company, any of its affiliates, the Dealer Managers, the Depositary, the Information Agent or any other person will be under any duty to give any notice of any defects or 13 irregularities in any notice of withdrawal and none of them shall incur any liability for failure to give any such notice. A withdrawal of a tender of Shares may not be rescinded and any Shares properly withdrawn will not be deemed to have been tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered prior to the Expiration Date by following any of the procedures described under "The Tender Offer--Procedure for Tendering Shares." PURCHASE OF SHARES; PAYMENT OF PURCHASE PRICE Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), the Company will accept for payment and pay the Purchase Price in respect of 50% of its outstanding Shares (12,535,862 Shares based on the outstanding Shares as of April 15, 1996), which Shares are required to be validly tendered by the Expiration Date and not withdrawn promptly after the Expiration Date, subject to possible delay in the event of proration. For purposes of the Offer, the Company will be deemed to have accepted for payment and thereby purchased Shares which are validly tendered, subject to proration, and not withdrawn when, as and if the Company gives oral or written notice to the Depositary of its acceptance of such Shares for payment pursuant to the Offer. The Company will pay for Shares that it has purchased pursuant to the Offer by depositing the aggregate Purchase Price therefor with the Depositary, which will act as agent for the tendering stockholders for the purpose of receiving payment from the Company and transmitting payment to the tendering stockholders. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for such Shares (or of a timely confirmation of a book-entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities), a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal. In the likely event of proration, the Company will determine the proration factor and pay for those tendered Shares accepted for payment as promptly as practicable after the Expiration Date. However, the Company does not expect to be able to announce the final results of any such proration until approximately seven NYSE trading days after the Expiration Date. Certificates for all Shares not purchased, including Shares not purchased due to proration, will be returned (or in the case of Shares tendered by book-entry transfer, credited to the account maintained with one of the Book-Entry Transfer Facilities by the participant therein which so delivered such Shares) as promptly as practicable after the Expiration Date without expense to the tendering stockholder. Under no circumstances will the Company pay interest on the Purchase Price, regardless of any delay in making payment. In addition, if certain events occur, the Company may not be obligated to purchase Shares pursuant to the Offer. See "The Tender Offer--Certain Conditions of the Offer." The Company will pay all stock transfer taxes, if any, payable on the transfer to it of Shares purchased pursuant to the Offer. However, if payment of the Purchase Price is to be made to, or (in the circumstances permitted by the Offer) if unpurchased Shares are to be registered in the name of, any person other than the registered holder, or if tendered certificates are registered in the name of any person other than the person executing the Letter of Transmittal, the amount of all stock transfer taxes (whether imposed on the registered holder or such other person), if any, payable on account of the transfer to such person will be deducted from the Purchase Price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. See Instruction 6 to the Letter of Transmittal. ANY TENDERING STOCKHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY AND SIGN THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL (OR, IN THE CASE OF A FOREIGN INDIVIDUAL, FORM W-8 OBTAINABLE FROM THE DEPOSITARY) MAY BE SUBJECT TO REQUIRED FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS PROCEEDS PAID TO SUCH STOCKHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE "THE TENDER OFFER--PROCEDURE FOR TENDERING SHARES--FEDERAL INCOME TAX WITHHOLDING." 14 CERTAIN CONDITIONS OF THE OFFER Notwithstanding any other provision of the Offer, the Company will not be required to accept for payment or pay for any Shares tendered, and may terminate or amend the Offer or may postpone (subject to the requirements of the Exchange Act for prompt payment for or return of Shares) the acceptance for payment of, the purchase of and payment for, Shares tendered, if at any time at or before the acceptance for payment of any such shares or the payment therefor, any of the following events shall have occurred (or shall have been determined by the Company to have occurred) and which in the Company's sole judgment in any such case makes it inadvisable to proceed with the Offer or with such acceptance, purchase or payment: (a) The Company's stockholders shall not have validly tendered and not withdrawn prior to the Expiration Date of the Offer at least 50% of the outstanding Shares. (b) The Company shall not have obtained, pursuant to the terms of the Financing Agreements, all of the financing needed by the Company, together with other funds available to the Company, to (i) purchase 50% of the outstanding Shares, (ii) repay all outstanding principal and interest, and other amounts payable, under the Specified Company Indebtedness and the Specified Smitty's Indebtedness, and (iii) pay certain fees and expenses incurred in connection with the Recapitalization and the transactions contemplated by the Recapitalization Agreement. (c) The Company shall not have received from an independent valuation firm an opinion as to the value of the Company's assets and liabilities, after giving effect to the consummation of the transactions contemplated by the Recapitalization, that permits the Company to reasonably conclude that it will not have violated any applicable fraudulent conveyance laws as a result thereof and that the Company will not have violated any provisions of Delaware Law governing the purchase of its equity. (d) All of the conditions to the Merger (other than the satisfaction of the consummation of the Offer) set forth under "The Recapitalization Agreement--Conditions to the Merger" shall not have been satisfied. (e) Any action or proceeding, order, decree or injunction shall have been taken or threatened, instituted or pending, or any statute, rule, regulation, judgment, order, stay, decree or injunction shall have been sought, promulgated, enacted, entered, enforced or deemed applicable to the Offer or the Company and its subsidiaries (including Smitty's) (collectively, the "Combined Companies") taken as a whole, by or before any court or governmental, regulatory or administrative authority or agency or tribunal, which (i) challenges the making of the Offer, the acquisition of Shares pursuant to the Offer or any of the other transactions comprising part of the Recapitalization or might directly or indirectly prohibit, prevent, restrict or delay consummation of the Offer or any of the other transactions comprising part of the Recapitalization, or (ii) materially adversely affects the business, operations, condition (financial or otherwise), results of operations, prospects, assets, liabilities, working capital or reserves of the Combined Companies taken as a whole, or otherwise materially impairs in any way the contemplated future conduct of the business of the Combined Companies taken as a whole. (f) There shall have occurred (i) the declaration of any banking moratorium or suspension of payments in respect of banks in the United States, (ii) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the- counter market, (iii) the commencement of a war, armed hostilities or any other national or international crisis directly or indirectly involving the United States, (iv) any limitation (whether or not mandatory) by any government or governmental, regulatory or administrative agency or authority on, or any event which in the Company's sole judgment might adversely affect, the extension of credit by banks or other lending institutions in the United States, (v) any significant decline in the market price of the shares of Common Stock or any change in the general political, market, 15 economic or financial conditions in the United States or abroad that has a material adverse effect on the ability to obtain financing generally or on the trading in the shares of Common Stock or (vi) in the case of any of the foregoing existing at the time of the commencement of the Offer, a material acceleration or worsening thereof. (g) There shall have occurred any event that has resulted, or may in the sole judgment of the Company result, in an actual or threatened change in the business, operations, condition (financial or otherwise), results of operations, prospects, assets, liabilities, working capital or reserves of the Combined Companies taken as a whole. The Company has agreed in the Recapitalization Agreement that so long as it has satisfied the financing condition described in clause (b) above, if so requested by Yucaipa, the Company will waive the condition referred to in clause (f) above. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company in its sole discretion regardless of the circumstances (including any action or inaction by the Company) giving rise to any such conditions, or may be waived by the Company, in its sole discretion, in whole or in part at any time. The failure by the Company at any time to exercise its rights under any of the foregoing conditions shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances; and each such right shall be deemed an ongoing right which may be asserted at any time or from time to time. Any determination by the Company concerning the events described above shall be final and binding on all parties. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT The Company expressly reserves the right, in its sole discretion, at any time and from time to time, and regardless of whether or not any of the events set forth under "The Tender Offer--Certain Conditions of the Offer" have occurred or are deemed by the Company to have occurred, to extend the period of time during which the Offer is open and thereby delay acceptance for payment of, and payment for, any Shares by giving oral or written notice of such extension to the Depositary and making a public announcement thereof. During any such extension, all Shares previously tendered and not purchased or withdrawn will remain subject to the Offer, except to the extent that such Shares may be withdrawn. The Company expects to extend the period of time during which the Offer is open until after the Stockholders' Meeting scheduled for May 23, 1996 at 9:00 a.m. Mountain Time. The Company also expressly reserves the right, in its sole discretion, to terminate the Offer and not accept for payment or pay for any Shares not theretofore accepted for payment or, subject to applicable law, to postpone payment for Shares upon the occurrence of any of the conditions specified in this Offer to Purchase by giving oral or written notice of such termination to the Depositary and making a public announcement thereof. The Company's reservation of the right to delay payment for Shares which it has accepted for payment is limited by Rules 13e- 4(f)(2) and 13e-4(f)(5) promulgated under the Exchange Act. Rule 13e-4(f)(2) requires that the Company permit Shares tendered pursuant to the Offer to be withdrawn (i) at any time during the period the Offer remains open and (ii) if not yet accepted for payment, after the expiration of 40 business days from commencement of the Offer. Rule 13e-4(f)(5) requires that the Company pay the consideration offered or return the Shares tendered promptly after termination or withdrawal of a tender offer. Subject to compliance with applicable law, the Company further reserves the right, in its sole discretion, and regardless of whether or not any of the events set forth under "The Tender Offer--Certain Conditions of the Offer" have occurred or are deemed by the Company to have occurred, to amend the Offer in any respect (including without limitation by decreasing or increasing the price to be paid for Shares tendered pursuant to the Offer or by decreasing or increasing the number of Shares being sought in the Offer) or to waive the limitation on the maximum number of Shares to be purchased pursuant to the Offer. Amendments to the Offer may be made at any time and from time to time effected by public 16 announcement thereof, such announcement, in the case of an extension, to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Any public announcement made pursuant to the Offer will be disseminated promptly to stockholders in a manner reasonably designed to inform stockholders of such change. Without limiting the manner in which the Company may choose to make a public announcement, except as required by applicable law, the Company will have no obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release to the Dow Jones News Service. If (i) the Company increases or decreases the price to be paid for the Shares, or the Company increases the number of Shares being sought by an amount exceeding 2% of the outstanding Shares (250,718 Shares as of April 15, 1996), or the Company decreases the number of Shares being sought, and (ii) the Offer is scheduled to expire earlier than the tenth business day from the date that notice of such increase or decrease is first published, sent or given, the Offer will be extended until such tenth business day. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday or federal holiday, and consists of the time period from 12:01 a.m. through midnight, New York City time. If the Company otherwise materially changes the terms of the Offer or the information concerning the Offer, or if it waives a material condition of the Offer, the Company will extend the Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated under the Exchange Act. These rules require that the minimum period during which a tender offer must remain open following material changes in the terms of the offer or material information concerning the offer (other than a change in price or a change in the percentage of securities sought) will depend on the facts and circumstances, including the relative materiality of such terms or information. PRICE RANGE OF COMMON STOCK; DIVIDENDS The Class B Common Stock is listed and principally traded on the NYSE under the symbol "SFD." The following table sets forth for the periods indicated the high and low sales price per Share on the NYSE Composite Tape and cash dividends paid per Share.
CASH DIVIDENDS YEAR HIGH LOW PER SHARE ---- ------- ------- --------- Fiscal 1994: First Quarter....................................... $24 1/8 $20 1/8 $.13 Second Quarter...................................... 22 18 1/8 .13 Third Quarter....................................... 24 3/4 18 1/2 .13 Fourth Quarter...................................... 26 3/4 22 5/8 .13 Fiscal 1995: First Quarter....................................... $27 5/8 $ 23 $.15 Second Quarter...................................... 24 19 1/4 .15 Third Quarter....................................... 20 1/4 18 1/8 .15 Fourth Quarter...................................... 27 3/4 19 3/8 .15 Fiscal 1996: First Quarter....................................... $31 $23 1/4 $.15
On January 5, 1996, the last trading day before public announcement that the Company was in negotiations regarding a merger with Smitty's and considering a repurchase of as much as 50% of its Common Stock at a premium to recent trading levels, the high and low sales price of a share of the Company's Class B Common Stock was $28 3/4 and $27 3/4, respectively. On January 26, 1996, the last trading day before public announcement of the execution of the Recapitalization Agreement, the high and low sales price of a share of the Company's Class B Common Stock was $31 and $29 7/8, 17 respectively. On April 24, 1996, the most recent practicable date prior to the printing of this Offer to Purchase, the high and low sales price of a share of the Company's Class B Common Stock was $24 3/4 and $24 3/8, respectively. The Company urges stockholders to obtain current market quotations for the Class B Common Stock. The Class A Common Stock is not registered or listed; however, the Class A Common Stock can typically be converted into Class B Common Stock upon the request of the holder. After the Expiration Date, the Shares are expected to trade at prices significantly below $36 per Share. The Company intends to discontinue the payment of cash dividends on the Common Stock following the consummation of the Recapitalization and Merger, and the payment of future dividends will be severely restricted by the terms of the Financing Agreements entered into by the Company in connection with the Recapitalization and Merger. The resumption of cash dividends at any future time will be dependent on various factors which the Board of Directors will evaluate at the time, principally including whether the Company will have sufficient excess cash on hand at the time after providing for its operating needs, servicing debt and reserving an appropriate amount of funds for the Company's expansion opportunities. There can be no assurance when or whether the Board might decide to resume paying dividends on the Common Stock. BACKGROUND OF THE TRANSACTIONS At various times over the past two years various parties have expressed to management of the Company an interest in submitting a proposal to acquire the Company. In the spring and summer of 1994 two supermarket companies separately held preliminary discussions with management of the Company concerning the possible acquisition of the Company. In the summer of 1995 another supermarket company and a leveraged buy-out firm separately held preliminary discussions with management of the Company concerning the possible acquisition of the Company. The Company provided all of those companies or firms with some nonpublic information about the Company, and some of them conducted a due diligence review of the Company. But the price range that each of those companies or firms indicated to the Company on a preliminary basis for any acquisition proposal that they might submit was not at a level that management of the Company found to be sufficient to warrant continuation of the discussions, and as a result discussions with each company or firm were terminated. Jeffrey Smith, Chairman and Chief Executive Officer of the Company and the owner, along with the other members of the Smith Group, of 30.4% and 64.5% of the outstanding shares of Common Stock and Series I Preferred Stock respectively (and approximately 62.1% of the aggregate number of votes eligible to be cast at the Stockholders' Meeting) did not believe that any of the price indications expressed by those parties approached levels that would cause the Smith Group to consider a sale of its shares. In late September 1995, the Company decided to pursue the closure of its entire Southern California Region. Pursuant to this determination, the Company began to explore the possible disposition of its large distribution center and dairy facility in Riverside, California and the subsequent closure and sale of its stores in Southern California. At the Board meeting on October 26, 1995, the Board authorized the Company's pursuit of the California Divestiture. In connection with the divestiture of its Riverside distribution facility, the Company conducted discussions with a number of California supermarket companies and other parties to ascertain their interest in acquiring the facility and those discussions resulted in an agreement reached in early November 1995 to sublease the facility to Ralphs Grocery Company ("Ralphs"), a California supermarket operator controlled by Yucaipa. The sublease of the Riverside distribution facility to 18 Ralphs, which was consummated in January 1996, and the California Divestiture were not related to the transactions comprising the Recapitalization or the Merger. In the course of the discussions that took place in late September and in October 1995 concerning the Riverside facility between Jeffrey Smith and Ronald Burkle, managing general partner of Yucaipa (which controls Smitty's) and Chairman of Smitty's, Mr. Burkle expressed Yucaipa's interest in pursuing the possible acquisition of the Company by Yucaipa and a group of investors to be assembled by Yucaipa. At the same time Mr. Burkle proposed that prior to such acquisition of the Company by Yucaipa and other investors, the Company should acquire Smitty's. From October through mid-December 1995, Messrs. Smith and Burkle and other representatives of the Company, Yucaipa and Smitty's had numerous discussions about the possible acquisition of the Company by Yucaipa and other investors, both with and without the prior or simultaneous acquisition of Smitty's by the Company, as well as the possible acquisition of the Company by Smitty's. During that period the Company, on the one hand, and Smitty's and Yucaipa, on the other hand, exchanged nonpublic information and conducted due diligence reviews of each other. In October 1995, the Company retained Goldman Sachs to advise the Company and its Board of Directors in its discussions with Yucaipa concerning a possible transaction involving the Company. The discussions in November and early December 1995 between Messrs. Burkle and Smith and other representatives of the Company, Yucaipa and Smitty's resulted in preliminary indications from Yucaipa that, subject to satisfactory completion of its due diligence and satisfactory discussions with prospective senior lenders and underwriters of securities as to their willingness to provide the necessary financing for such a transaction, Yucaipa would be interested in preparing a proposal under which either Yucaipa or Smitty's would acquire the Company for consideration consisting of a combination of cash and equity securities having an aggregate per share value roughly estimated in the mid $30's (the "Original Yucaipa Acquisition Proposal"). However, in late December 1995, Mr. Burkle advised Mr. Smith that, having completed its due diligence and its discussions with prospective senior lenders and underwriters, any proposal that Yucaipa would make to acquire the Company would involve considerably less cash consideration and more equity securities than the Original Yucaipa Acquisition Proposal. After consulting with the Company's financial advisors, Mr. Smith advised Mr. Burkle that the Company would not be interested in the revised acquisition proposal because the value of the revised proposal was below the level at which the Company and the Smith Group would entertain the sale of the Company. Mr. Burkle then proposed as an alternative that the Company engage in a series of transactions comparable to the transactions contemplated by the Recapitalization and Merger--namely that (a) the Company acquire Smitty's in exchange for the issuance of 3,038,888 shares of Class B Common Stock, (b) the Company make a tender offer pursuant to which it would purchase 50% of its outstanding shares of Common Stock (excluding the shares to be issued to the stockholders of Smitty's) for $36 in cash per share, (c) the Company enter into a five-year agreement with Yucaipa calling for Yucaipa's provision of various management services to the Company, and (d) the Company's Board of Directors be reconstituted to comprise two representatives of the Smith Group, two representatives of Yucaipa, one senior manager of the Company and two independent directors. Mr. Burkle reported to Mr. Smith that the prospective senior lenders and underwriters with whom Yucaipa had been in contact concerning the possible acquisition of the Company by Yucaipa or Smitty's had indicated their willingness to finance the proposed Recapitalization by the Company. A few days later in the last week of December 1995, after consulting with the Company's financial and legal advisors and receiving the benefit of their analyses of this new transaction proposal, Mr. Smith responded favorably to the proposal and advised Mr. Burkle that he would submit it to the Company's Board of Directors. On January 3, 1996, the Board of Directors held a special meeting. At that meeting Mr. Smith reported on the preliminary discussions that had taken place in the past two years with the four parties referred to above concerning the possible acquisition of the Company, and explained that none of these discussions had resulted in the receipt of any satisfactory acquisition 19 proposals at price levels that management of the Company believed to be worth further discussion and that all such proposals had been at price levels that were significantly below the Original Yucaipa Acquisition Proposal. Mr. Smith further reported on the discussions with Yucaipa regarding the proposed acquisition of Smitty's by the Company, the simultaneous tender offer by the Company for 50% of its outstanding Common Stock and the other terms of the series of transactions outlined above that Yucaipa had proposed. Mr. Smith expressed his opinion that such transactions presented the best course of action for the Company among all of the strategic options that were then available to the Company. He expressed his belief that over time such transactions would deliver more value to the Company's stockholders than any acquisition proposal that the Company could reasonably expect to receive at the present time or in the foreseeable future and that therefore approval of the proposed transactions by the Board of Directors was in the best interests of all of the Company's stockholders. Mr. Smith advised the Board that he was interested in reducing his management role at the Company and that the Company needed to find an experienced individual to serve in the position of chief operating officer with significantly expanded management responsibilities. Mr. Smith expressed his view that in light of those developments the proposed management services agreement with Yucaipa would be particularly beneficial to the Company. Goldman Sachs discussed with the Board the financial aspects of the proposed transactions and related matters and the Company's legal advisors, Simpson Thacher & Bartlett, discussed the legal duties of the Company's directors and various aspects of the proposed transactions, including the fact that no change of control would result from the transactions under consideration since the Company's existing stockholders would retain approximately 77.5% of the Company's outstanding Common Stock following the Recapitalization and Merger, the Smith Group would continue to be the Company's largest stockholder with 23.2% of the outstanding Common Stock and 41.8% of the vote and Yucaipa would be entering into a standstill agreement with the Company which would limit Yucaipa's ability for 10 years to (a) increase its beneficial ownership of Common Stock beyond 20% of the outstanding votes, (b) sell its shares in large blocks, (c) submit any proposal regarding a change of control of the Company, (d) solicit proxies for any meeting of the Company's stockholders, or (e) take any other actions to seek control of the Company. The Board discussed the proposed transactions and related matters at length and set a subsequent meeting for January 12, 1996 to discuss the transactions further. In addition, the independent directors on the Board engaged separate legal counsel to assist them in evaluating the proposed transaction. On January 8, 1996, the Company issued the following press release: "Smith's Food & Drug Centers, Inc. announced today that it is in negotiations regarding a merger of Smitty's Super Valu, Inc., a regional supermarket operator based in Phoenix, Arizona, into Smith's. Smitty's, which operates 28 stores in the Phoenix and Tucson areas, is controlled by The Yucaipa Companies. In connection with the merger transaction, Smith's said it was also considering the repurchase of as much as 50% of its Class A and Class B common stock at a premium to recent trading levels. It is not anticipated that a change of control will result from any transaction under consideration. "Smith's cautioned that no agreement had been reached regarding the proposed transaction with Smitty's and that discussions regarding the transaction and the possible share repurchase are ongoing. No assurances can be made that any agreement will be reached or that any of the transactions will be consummated." 20 Later on January 8, 1996, the Company announced the closure of its operations in its Southern California Region. It reported that several of its stores were to be sold or leased to various supermarket companies and that its remaining California stores would be closed in the near future and that it was anticipated that they would be sold or leased to other retail companies. The announcement also reported that restructuring charges of approximately $85 million after taxes would be charged against earnings for the year ended December 30, 1995 as a result of these actions. On January 5, 1996, Rodney Brady submitted his resignation as a director of the Company, citing the press of other business commitments that made it impossible for him to attend the meetings of the Board that had been or would be scheduled to consider the various matters then under study by the Board and to devote sufficient attention to those important matters. On January 12, 1996, the Board of Directors met to continue its deliberation of the proposed series of transactions that had been presented to the Board at its January 3 meeting. At the commencement of the Board meeting, Jeffrey Smith received a faxed letter from Supermarket Company A expressing its interest in pursuing the acquisition of the Company for a consideration consisting of Supermarket Company A's stock, cash or some combination of Supermarket Company A's stock and cash having an aggregate value ranging from $28 to $32 per share of the Company's Common Stock, subject to satisfactory completion of a due diligence review. (Supermarket Company A was one of the four companies or firms that had expressed to management of the Company in 1994 or 1995 an interest in making a proposal to acquire the Company.) At the Board meeting on January 12, the Board discussed among various other issues the alternative courses of action then available to the Company, including effectuating the transactions contemplated by the Recapitalization and Merger and pursuing the possible sale of the Company. Mr. Smith advised the Board that the Smith family would not support a transaction involving the sale of the Company unless it resulted in a higher price than that proposed by Supermarket Company A or the prices that appeared to be obtainable from the various other parties with whom the Company previously had discussions. Mr. Smith expressed his view to the Board that based on those prior discussions with other parties, he did not believe such price levels were attainable at that time or in the foreseeable future. After a lengthy discussion, including discussions with Goldman Sachs and Simpson Thacher & Bartlett, it was the general consensus of the Board that management of the Company and its advisors should continue their negotiations with Yucaipa and Smitty's concerning the proposed transactions contemplated by the Recapitalization and Merger in an effort to reach agreement on the final terms of such transactions, but that at the same time management and the Company's advisors should also contact those parties who might principally be interested in making a proposal to acquire the Company and should provide access to nonpublic information about the Company to any potential bidder who demonstrated a serious interest and ability to make a bona fide proposal to acquire the Company. It was also the general view of the directors that if viable preliminary indications of interest for the acquisition of the Company that met the price objectives of the Smith family and the Board could not be obtained by the time of the Board's next regularly scheduled meeting on January 25, 1996, then the Company should pursue the transactions contemplated by the Recapitalization and Merger. On January 13, 1996, after being informed of the decisions of the Company's Board of Directors at its January 12 meeting, Mr. Burkle advised the Company's advisors that Yucaipa was no longer interested in pursuing either the sale of Smitty's to the Company or the other transactions contemplated by the Recapitalization. Mr. Burkle based that decision on the potential adverse effects to Smitty's operations if its executives, employees, customers and suppliers had to endure a two-week period (and possibly longer) of uncertainty as to whether Smitty's was being sold to the Company or would continue to operate as an independent company. 21 On January 15, 1996, the Company issued the following press release: "Smith's Food & Drug Centers, Inc. said that Smith's and Smitty's Super Valu, Inc. have terminated discussions concerning the possible merger of Smitty's with Smith's. "As a result, Smith's said it was terminating its plan to effectuate the related transaction which contemplates Smith's repurchase of as much as 50% of its Class A and Class B Common Stock at a significant premium over recent trading prices. "Smith's said that it is currently exploring various ways to enhance shareholder value, including a possible significant repurchase of stock, the possible sale of the Company or similar transactions. Smith's said there can be no assurance that any such transaction would be effected. "Smith's also reported that Rodney Brady has resigned as a director of Smith's, citing the press of other business commitments." During the week of January 15, 1996, Goldman Sachs contacted 10 supermarket companies and six leveraged buy-out firms (including all four of the companies or firms referred to earlier in this section which in 1994 or 1995 had expressed an interest in making a proposal to acquire the Company) to ascertain if they were interested in making a proposal to acquire the Company. Five of the parties that were contacted executed confidentiality agreements and received nonpublic information regarding the Company, and two of those parties decided to pursue discussions with the Company following their review of such information. One of those two companies was Supermarket Company A, which conducted an extensive due diligence review of the Company during the week of January 15, 1996 and advised Jeffrey Smith at the end of that week that any proposal it might submit would be at the low end of the value range quoted in its January 12 letter. As a result, discussions between the Company and Supermarket Company A were terminated. The other company that pursued discussions with the Company during the week of January 15, 1996 was Supermarket Company B, which conducted a preliminary due diligence review of the Company during that week. During the weeks of January 15 and January 22, representatives of Supermarket Company B met with Jeffrey Smith regarding a recapitalization transaction they proposed that was similar in many respects to the transactions contemplated by the Recapitalization and Merger except that instead of acquiring Smitty's the Company would acquire Supermarket Company B. On January 24, 1996, Mr. Smith and the Company's advisors met with representatives of Supermarket Company B to continue their discussions. At that meeting the representatives of Supermarket Company B presented a specific proposal for the recapitalization transaction referred to above. The parties conducted negotiations as to certain key aspects of the proposal, but those negotiations did not result in a proposal that Mr. Smith found to be as advantageous to the Company and its stockholders as the transactions contemplated by the Recapitalization and Merger. As a result, discussions between the Company and Supermarket Company B were terminated. On January 19, 1996, Alan Hoefer submitted his resignation as a director of the Company, explaining that given the termination of negotiations between the Company and Smitty's and given the fact that the Company was about to contact other parties to explore other ways to enhance shareholder value, he believed it best that he resign from the Board at that particular time. During the weeks of January 15 and January 22, 1996, discussions between representatives of the Company and representatives of Yucaipa resumed concerning the transactions contemplated by the Recapitalization and Merger. During the week of January 22, representatives of the Company, Yucaipa and Smitty's returned to negotiating the specific terms of the Recapitalization and Merger. Those negotiations advanced sufficiently that by January 24 the Company, Yucaipa and Smitty's had 22 reached agreement on many of the principal terms of the transactions contemplated by the Recapitalization and Merger. On January 25, 1996, the Company's Board of Directors held a regularly scheduled meeting at which Jeffrey Smith reported on the results of the Company's discussions with interested parties (as noted above) and its resumed negotiations with Yucaipa and Smitty's concerning the transactions contemplated by the Recapitalization and Merger. Mr. Smith reported that the Company, Yucaipa and Smitty's were close to reaching agreement on most of the principal terms of the transactions contemplated by the Recapitalization and Merger and he recommended that the Board approve continued negotiations on such transactions as the best course of action then available to the Company. Ronald Burkle was then invited into the meeting to make a presentation to the Board regarding Yucaipa's background, the potential benefits to the Company of the acquisition of Smitty's and the potential benefits that the Company would derive by entering into the Management Services Agreement with Yucaipa. After Mr. Burkle left the meeting and following a discussion by Goldman Sachs of the financial aspects of the transactions contemplated by the Recapitalization and Merger, there was a lengthy discussion by the Board of the proposed transactions and related matters. The general consensus of the Board was favorable regarding those transactions and the Board set a meeting for January 28, 1996 for action on those transactions to give the Company's management and advisors the opportunity to finalize negotiations with Yucaipa and Smitty's concerning the terms of those transactions. Later on January 25, the Company's management and financial and legal advisors met with representatives of Yucaipa and Smitty's and continued their negotiation of the principal terms of the transactions contemplated by the Recapitalization and Merger. On January 26, 27 and 28, the parties and their legal advisors finalized the terms of the Recapitalization Agreement and all related agreements. The parties and their advisors also negotiated during that period with senior lenders and securities firms concerning the terms of the commitment letter from the senior lenders and highly confident letter from the securities firms with respect to the financing for the Recapitalization. In addition, subject to the review of the final documentation, Goldman Sachs believed it would be in a position to deliver an opinion at the January 28 Board meeting to the effect that the Exchange Ratio pursuant to the Recapitalization Agreement is fair to the Company. On January 28, 1996, the Company's Board of Directors met. Jeffrey Smith reported that the final terms of all of the proposed transactions and related documentation had been agreed to by the Company, Yucaipa and Smitty's. The Board then unanimously approved the Recapitalization Agreement and all related agreements and the transactions contemplated by those agreements. Following the Board meeting, the Recapitalization Agreement and certain related agreements were executed by the Company, Yucaipa, Smitty's and the other parties to those agreements. At the same time, the Company, Bankers Trust and Chase Manhattan executed a commitment letter with respect to the senior bank financing for the Recapitalization, and five securities firms delivered a letter to the Company stating that, based upon their understanding of the transactions, the financing, the then current market conditions and subject to certain other conditions, they were highly confident of their ability to sell or place the offering of senior and subordinated debt and preferred stock required for the Recapitalization and Merger and the Company engaged those five firms to assist the Company in effecting such offerings. On January 29, 1996, the Company issued a press release a portion of which is set forth below: "Smith's Food & Drug Centers, Inc. made the following announcements today: Merger of Smitty's Supermarkets, Inc. "Smith's has entered into a definitive merger agreement with Smitty's Supermarkets, Inc. Smitty's, which operates 28 supermarkets in the Phoenix and Tucson areas, is controlled by 23 The Yucaipa Companies, a private investment company. Smitty's sales totaled approximately $590 million in 1995. Under the merger agreement, Smith's will issue 3,038,888 shares of its Class B Common Stock in exchange for all of Smitty's outstanding common stock and it will assume or refinance approximately $148 million of Smitty's debt. Repurchase of Stock "Smith's also said it will commence a self tender offer to purchase 50% of its Class A and Class B Common Stock for $36 per share, excluding shares to be issued in connection with the Smitty's merger. Consummation of the tender offer will be subject to the tender of at least 50% of Smith's outstanding common stock, the receipt of financing and various other conditions. Consummation of the Smitty's merger will be conditioned on Smith's purchase of shares pursuant to the self tender offer, receipt of financing, regulatory approvals, approval by Smith's stockholders and various other conditions. Smith's has received commitment letters and highly confident letters from several financial institutions with respect to all of the financing necessary to consummate the Smitty's merger and the self tender offer. "The tender offer is expected to commence around April 1, 1996 and be consummated around May 1, 1996. The Smitty's merger is expected to be consummated concurrently with the closing of the tender offer. "Upon consummation of the Smitty's merger and the self tender offer, the Smith family will continue to be Smith's largest stockholder with approximately 24% of the outstanding common stock and over 40% of the vote. The Yucaipa Companies will own approximately 14% of Smith's outstanding common stock and the other Smitty's stockholders will own approximately 6%. The Yucaipa Companies will enter into a 10 year standstill agreement with Smith's. Management Changes "Upon consummation of the Smitty's merger and the self tender offer, Smith's will enter into a five year management services agreement with The Yucaipa Companies under which Yucaipa will provide various management services to Smith's. As part of that arrangement, Ronald W. Burkle, managing partner of The Yucaipa Companies, will be appointed as Chief Executive Officer of Smith's upon consummation of the Smitty's merger and the self tender offer. In addition, at that time Smith's board of directors will be reconstituted to consist of two representatives of Yucaipa, two representatives of the Smith family, one other member of management, and two independent directors. "The Yucaipa Companies is a private investment company which in addition to Smitty's also controls Ralphs Grocery Company, the largest supermarket company in Southern California, operating stores under the Ralphs and Food 4 Less names, which also operates stores in Northern California under the Cala and Bell names and in the midwest under the Falley's and Food 4 Less names; and Dominick's Finer Foods, Inc., a leading Chicago area supermarket company, operating stores under the Dominick's and Omni names. "In addition, Smith's announced that it has hired Allen R. Rowland as President and Chief Operating Officer of Smith's. Mr. Rowland spent 25 years at Albertson's Inc., holding various senior executive positions at that company. "Jeffrey P. Smith, Chairman and CEO of Smith's, said: 'I am very excited about the transactions we are announcing today. The Smitty's merger will significantly enhance the combined companies' position in the Arizona market. The self tender offer will give all of Smith's stockholders the opportunity to receive substantial cash proceeds while permitting them at the same time to participate in Smith's future growth. Additionally, our management arrangements with Yucaipa will permit Smith's to benefit from Yucaipa's extensive management experience in the supermarket industry. I am particularly pleased about our 24 good fortune in hiring Al Rowland. He is one of the most accomplished senior executives in the supermarket industry and I believe Smith's will benefit greatly from his experience.' "Ron Burkle said: 'We look forward to consummating this exciting transaction. I have admired Jeff Smith and his company and we are delighted at the prospect of the combination of Smitty's and Smith's. I am committed to continuing the expansion of the combined company to benefit its shareholders, employees and customers."' [Portions of the release dealing with financial results for the fourth quarter of 1995 and the full 1995 fiscal year and other matters have been omitted.] PURPOSE OF THE OFFER; RECOMMENDATION OF BOARD OF DIRECTORS The purpose of the Offer is to permit all of the Company's stockholders the opportunity to exchange half of their Shares for a cash amount reflecting a significant premium over the price at which the Company's Common Stock has traded for some time and yet at the same time continue to participate in the future performance of the Company. At its meeting on January 28, 1996, the Company's Board of Directors unanimously determined that it was in the best interests of the Company and its stockholders that the Company enter into the Recapitalization Agreement and related agreements and consummate all of the transactions contemplated by those agreements, including the Recapitalization and Merger. The Board determined to recommend that the Company's stockholders approve the Recapitalization Agreement and the transactions contemplated thereby, including the issuance of 3,038,888 shares of the Company's Class B Common Stock to the stockholders of Smitty's in the Merger. In reaching this determination, the Board of Directors considered a number of factors, including without limitation the following: 1. The Board considered its knowledge of the management, business, operations, properties, assets, financial condition, operating results and prospects of the Company. See "The Tender Offer--Background of the Transactions." 2. The Board considered the strategic and financial benefits which would be derived from the combination of Smitty's operations with those of the Company. In considering such benefits, the Board reviewed the presentations of management and Ronald Burkle concerning the potential benefits to the Company of the acquisition of Smitty's and the potential cost savings and synergies in the Arizona markets. The Board also considered the uncertainties and risks associated with achieving such potential cost savings and synergies. 3. The Board considered the reports of management as to the results of their due diligence investigation on Smitty's and the financial assessments by management of Smitty's. 4. The Board considered the various reports from the Company's management and financial and legal advisors and the legal, tax, accounting and regulatory implications of the Recapitalization and Merger. 5. The Board considered the oral and written presentations of Goldman Sachs and the opinion of Goldman Sachs that, as of the date of such opinion, the Exchange Ratio pursuant to the Recapitalization Agreement is fair to the Company. 6. The Board considered the negotiations that had taken place with Smitty's and Yucaipa, and the results of discussions with other parties over the past two years concerning possible transactions with the Company. See "The Tender Offer--Background of the Transactions." 7. The Board considered the terms and conditions of the Recapitalization Agreement, the Standstill Agreement, the Management Services Agreement, the Warrant Agreement and the other agreements entered into or to be entered into in connection with the Recapitalization Agreement. The Board considered in particular the "Alternative Transaction" and termination provisions of the Recapitalization Agreement, which permitted the Company to terminate the 25 Recapitalization (subject to completing the Merger upon satisfaction of the conditions to the Merger) if in the exercise of the directors' fiduciary duties (i) such termination was required by reason of its acceptance of an Alternative Transaction, or (ii) the Board withdrew, modified or changed its recommendation of the Recapitalization. See "The Recapitalization Agreement--Termination of the Recapitalization." In considering such provisions the Board considered the impact of the "no-solicitation" provisions of the Recapitalization Agreement on the Company's ability to negotiate with third parties that were interested in entering into an acquisition or other significant transaction with the Company. While such "no-solicitation" provisions prohibited the Company from soliciting third party offers, it did not prohibit the Company from considering such offers if any were made. The Board believed that such provisions, while responsive to the requirements of Smitty's and Yucaipa that the Company be committed to the proposed Recapitalization and Merger, permitted the Board to fulfill its fiduciary duties in the event an unsolicited offer from a third party were received or the Board were to withdraw its recommendation of the Recapitalization. The Board considered the fact that if the Recapitalization were terminated and it was not obligated to enter into the Management Services Agreement or the Warrant Agreement, the Company would continue to be obligated to complete the Merger. While the Board understood that under such circumstances the Merger could have an adverse impact on the ability of the Company to consummate an Alternative Transaction, it did not believe that such adverse impact would preclude such an Alternative Transaction. In that connection, the Board was aware that if the Recapitalization were terminated and the Company consummated the Merger as it was obligated to do under the terms of the Recapitalization Agreement, the shares of the Company's Class B Common Stock to be issued to the Smitty's stockholders in the Merger could be expected to trade at considerably higher prices than if the Recapitalization were consummated, and that such shares could be expected to trade at even higher prices if an Alternative Transaction were to be effectuated by the Company in lieu of consummating the Recapitalization. The Board also considered the fact that in their negotiations Smitty's and Yucaipa had requested that the Company pay a break-up fee in the event that the Recapitalization was terminated, which request the Company had successfully rejected. 8. The Board considered the fact that the Recapitalization and Merger did not result in a change of control of the Company, that the Smith Group would continue to be the Company's largest stockholder with 24.5% of the outstanding Common Stock and 41.8% of the aggregate voting power and that Yucaipa and its affiliates would be subject to the significant restrictions set forth in the Standstill Agreement. 9. The Board considered the fact that the Smith Group, the current holders of 62.1% of the total votes represented by the Company's Common Stock and Series I Preferred Stock, had expressed its strong support of the Recapitalization and Merger. 10. The Board considered the commitment letter that was received from Bankers Trust and Chase Manhattan Bank to provide lending commitments to finance a portion of the Recapitalization and Merger, and the highly confident letter received from five securities firms as to such firms' confidence in their ability to raise the financing for a portion of the Recapitalization and Merger and the anticipated terms of such financing. 11. The Board considered Yucaipa's experience with highly leveraged transactions involving supermarket chains, including its experience and success in negotiating and obtaining the proceeds of the financing for such transactions. 12. The Board considered Yucaipa's experience in owning and operating supermarket chains, and in particular the experience of Mr. Burkle in the management of Yucaipa and its affiliated companies. The Board believed that this experience could be extremely valuable to the Company and its management in the integration of Smitty's operations with the Company's operations, and in improving the Company's strategic planning. 26 13. The Board considered the desire of Jeffrey Smith to reduce his involvement in the management of the Company and the Company's need to recruit an experienced candidate to serve as chief operating officer with significantly expanded management responsibilities. The Board also considered that Allen Rowland, a highly regarded supermarket executive with 25 years of experience at Albertson's, had agreed to become President and Chief Operating Officer of the Company after he had learned of the proposed Recapitalization and Merger. 14. The Board considered the fact that all stockholders would be receiving the opportunity to exchange half of their shares of Common Stock for a cash amount reflecting a significant premium over the price at which the Company's Common Stock has traded for some time and yet at the same time continue to participate in the future performance of the Company. 15. The Board considered the historical market price of the Class B Common Stock, which had ranged from $18.25 per share to $30.13 per share during the year ended January 26, 1996, the last trading day prior to announcement of the signing of the Recapitalization Agreement, and from $18.25 per share to $37.00 per share during the three years ended January 26, 1996. 16. The Board considered that the Recapitalization gave the Company's stockholders the potential for capital gains treatment upon the sale of their shares in the Offer. See "The Tender Offer--Federal Income Tax Consequences." The foregoing discussion of the information and factors considered and given weight by the Board is not intended to be exhaustive. In view of the variety of factors considered in connection with its evaluation of the Recapitalization and Merger, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations. In addition, individual members of the Board may have given different weights to different factors. CERTAIN INFORMATION PROVIDED In connection with the negotiation of the Recapitalization Agreement, the Company provided certain financial projections regarding its operations to Smitty's and Yucaipa, as well as to Goldman Sachs. Smitty's also provided certain financial projections regarding its operations to the Company and Goldman Sachs. As a matter of course, the Company does not publicly disclose projections as to future revenues, earnings or other financial information. In addition, the referenced projections were not prepared with a view to public disclosure or compliance with the published guidelines of the Commission regarding projections, nor were they prepared in accordance with the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial projections. The referenced projections were based upon a variety of estimates and assumptions which involve judgments with respect to, among other things, future economic and competitive conditions, financial market conditions and future business decisions, which, though considered reasonable by the Company, may not be realized, and are inherently subject to significant economic, competitive and business uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. While the Company believes that the estimates and assumptions relating to the projections prepared by it are reasonable, there can be no assurance that such projections will be realized, and actual results may vary materially from those indicated in the projections. The Company also makes no representation as to the reasonableness of the estimates and assumptions used by Smitty's in preparing the projections regarding Smitty's or the likelihood of those projections being realized. INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS Certain directors and officers of the Company, Yucaipa and certain of their affiliates and certain nominees have interests described herein that may present them with potential conflicts of interest as a result of the transactions contemplated by the Recapitalization Agreement. The Company's Board of 27 Directors was aware of such potential conflicts and considered them in connection with the approval of the Recapitalization Agreement and the transactions contemplated therein. See "The Tender Offer--Purpose of the Offer; Recommendation of Board of Directors." Except as otherwise described in this Offer to Purchase, during the 40 business days prior to the date of this Offer to Purchase, neither the Company nor, to the best of its knowledge, any of the directors (including director nominees) or executive officers of the Company, nor any associates of any of the foregoing, has effected any purchases, sales or other dispositions of or any other transactions in shares of Common Stock. Except as otherwise described in this Offer to Purchase, neither the Company nor, to the best of its knowledge, any of its directors (including director nominees), executive officers or affiliates is a party to any contract, arrangement, understanding or relationship with any other person relating, directly or indirectly, to the Offer or with respect to any securities of the Company, including but not limited to any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies, consents or authorizations. SMITH'S SHAREHOLDER AGREEMENT. In the Smith's Shareholder Agreement, each member of the Smith Group has agreed to participate in the Offer and tender a sufficient number of its shares of Common Stock to enable the Company to repurchase 50% of the outstanding shares of Common Stock pursuant to the Offer. In addition, directors and executive officers of the Company who have not executed the Smith's Shareholder Agreement, who own approximately 7.6% of the outstanding Shares, have indicated that they intend to tender their Shares in the Offer. Because the Smith Group and such directors and officers own approximately 38% of the outstanding Shares, the minimum tender condition will be satisfied if other stockholders tender Shares representing at least 12% of the outstanding Shares. See "Certain Related Agreements--Smith's Shareholder Agreement." COMPANY'S STOCK OPTIONS; BOARD MEMBERSHIP. As described under "The Recapitalization Agreement--Company's Stock Options; Deferred Compensation Plans," if the Recapitalization is consummated, the Company has agreed to offer employees who hold, immediately prior to the Offer Closing Date, Options to purchase Common Stock under the Company's 1989 Stock Option Plan the opportunity to elect either to: (i) receive on the Offer Closing Date cash payments for a portion of, and the reduction of the exercise price for a portion of, the Company's management stock options; or (ii) have all such employees' Options continue to vest in accordance with the stated terms of the Options as in effect as of the date of the Recapitalization Agreement. The Company has also agreed to use all reasonable efforts to amend its existing deferred compensation agreements with a number of its senior managers to provide for the full vesting of benefits under such manager's deferred compensation agreement with the Company if such manager is terminated without cause within two years of the Merger Closing Date. Effective as of the Closing Date, the Company has agreed in the Recapitalization Agreement to use all reasonable efforts, subject to the provisions of the Certificate of Incorporation and By-laws of the Company and the approval of the Company's stockholders at the Stockholders' Meeting, to: (i) cause the Company's Board of Directors to be reduced to seven directors and have nominated and elected as directors two designees of Jeffrey Smith, two designees of Yucaipa, one senior manager of the Company and two independent directors; and (ii) cause the Company's Board of Directors to elect Ronald Burkle as the Chief Executive Officer of the Company. Mr. Smith has designated himself and Fred Smith as his designees, Yucaipa has designated Mr. Burkle and Linda McLoughlin Figel as its designees, Allen Rowland, President and Chief Operating Officer of the Company, has been nominated for election as a director, and Bruce Karatz and Bertram R. Zweig have been nominated as independent directors. In addition, pursuant to the Standstill Agreement, each of the Smith Group and 28 the Yucaipa Group have agreed to vote all shares of stock of the Company beneficially owned by such Group in favor of the election to the Company's Board of Directors of the designees designated by such other Group. See "Certain Related Agreements--Standstill Agreement." For information concerning the nominees for election to the Board of Directors, see "Management After Recapitalization and Merger." CEO SEVERANCE DISCUSSIONS. The Company and Jeffrey Smith, the Chairman and Chief Executive Officer of the Company, have held limited discussions regarding the termination of his employment with the Company and the continuing role he might have with the Company. While he is not expected to continue to be actively engaged in the management of the Company, he will continue as Chairman of the Board after the consummation of the Transactions and may provide consulting services to the Company. In addition, Mr. Smith and the Company have had tentative discussions regarding an arrangement to provide Mr. Smith with the use and possible ownership of the Company airplane after the consummation of the Recapitalization and Merger. It is anticipated that a definitive agreement regarding such matters will be reached prior to the consummation of the Recapitalization and Merger. DIRECTORS' AND OFFICERS' INDEMNIFICATION. The Recapitalization Agreement provides that the Company will indemnify to the fullest extent permitted by law each current and former director and officer of each of the Company, Smitty's and their subsidiaries from any claims or other losses arising out of any matter existing or occurring at or prior to the Closing Date. Subject to certain conditions and exceptions, the Company will maintain in effect for at least four years after the Closing Date the current policies of directors' and officers' liability insurance maintained by the Company or Smitty's, as the case may be. See "The Recapitalization Agreement--Additional Covenants." REGISTRATION RIGHTS AGREEMENT; YUCAIPA AGREEMENTS. On the Merger Closing Date, the Company has agreed to enter into the Registration Rights Agreement (as defined herein) granting certain registration rights to each of the Smith Holder Group and the Yucaipa Holder Group for the Registrable Securities (as defined in such agreement) held by such Groups. See "Certain Related Agreements--Registration Rights Agreement." In addition, if the Recapitalization is consummated, the Company will: (i) enter into the Management Services Agreement and the Warrant Agreement with Yucaipa; (ii) appoint Ronald Burkle as the Chief Executive Officer of the Company; (iii) grant Yucaipa certain rights under the Standstill Agreement, including the right to nominate up to two directors of the Company; and (iv) pay to Yucaipa a fee in an amount equal to $15 million, in each case in the manner described herein. See "The Recapitalization Agreement--Financing Arrangements by Yucaipa; Yucaipa Fee," "Certain Related Agreements--Standstill Agreement," "--Management Services Agreement" and "--Warrant Agreement." The Company has also recently entered into an agreement with Ralphs, a California supermarket operator controlled by Yucaipa, for the sale or lease of certain of the Company's properties to Ralphs in connection with the Company's divestiture of its Southern California operations. See "The Company, Smitty's and Yucaipa-- California Divestiture." CERTAIN EFFECTS OF THE OFFER ON THE COMMON STOCK; REGISTRATION UNDER THE EXCHANGE ACT The purchase of Shares pursuant to the Offer will reduce the number of shares of Class B Common Stock that might otherwise trade publicly, is likely to reduce the number of holders of Common Stock and could adversely affect the liquidity and market value of the Shares after the Offer. The adverse effect on the liquidity and market value of the Class B Common Stock after the Offer could be significant. Nonetheless, the Company anticipates that there will still be a sufficient number of shares of Class B Common Stock outstanding and publicly traded following the Offer to ensure a continued trading market in the Class B Common Stock. Based upon the requirements of the NYSE, the Company does not believe that the purchase of Shares pursuant to the Offer will cause the Company's remaining shares of Class B Common Stock to be delisted from the NYSE. The Class A 29 Common Stock is not registered or listed; however, the Class A Common Stock can typically be converted into Class B Common Stock upon the request of the holder. As of April 15, 1996, there were 11,366,532 shares of Class A Common Stock outstanding and 13,705,191 shares of Class B Common Stock outstanding (excluding shares held in the Company's treasury). Shares of Class B Common Stock are currently "margin securities" under the rules of the Federal Reserve Board, which has the effect, among other things, of allowing brokers to extend credit on the collateral of shares of Class B Common Stock. The Company believes that, following the purchase of Shares pursuant to the Offer, shares of Class B Common Stock will continue to be margin securities for purposes of the Federal Reserve Board's margin regulations. Shares acquired by the Company pursuant to the Offer will be retired, will become authorized but unissued Shares and will be available for issuance by the Company without further stockholder action (except as required by applicable law). Shares acquired pursuant to the Offer could be issued without stockholder approval for general or other corporate purposes, including stock splits or dividends, the acquisition of other businesses, the raising of additional capital for use in the Company's business and the implementation of employee benefit plans. The Company's purchase of Shares pursuant to the Offer will prevent it from accounting for any acquisitions which it may effect during the two-year period following the Expiration Date as "pooling of interests" transactions. The Class B Common Stock is registered under the Exchange Act which requires, among other things, that the Company furnish certain information to its stockholders and to the Commission and comply with the Commission's proxy rules in connection with meetings of the Company's stockholders. See "Available Information." The Company believes that the purchase of Shares pursuant to the Offer will not result in the Class B Common Stock becoming eligible for deregistration under the Exchange Act. CERTAIN LEGAL MATTERS; REGULATORY AND FOREIGN APPROVALS The Company is not aware of any license or regulatory permit that it believes is material to the Company's business that might be adversely affected by the Company's purchase of Shares as contemplated by the Offer or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, that would be required for the Company's purchase of Shares as contemplated by the Offer. Should any such approval or other action be required, the Company currently contemplates that it will seek such approval or other action. The Company cannot predict whether it may be required to delay the acceptance for payment of, or payment for, Shares tendered pursuant to the Offer pending the outcome of any such matter. There can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that the failure to obtain any such approval or other action might not result in adverse consequences to the Company's business. The Company's obligations under the Offer to accept for payment and pay for Shares is subject to certain conditions. See "The Tender Offer-- Certain Conditions of the Offer." FEDERAL INCOME TAX CONSEQUENCES The following discussion describes the principal United States ("U.S.") federal income tax consequences that may be relevant to a Company stockholder who tenders shares of Class A or Class B Common Stock to the Company pursuant to the Offer (a "Tendering Stockholder"). The discussion assumes that the Common Stock tendered to the Company by a Tendering Stockholder pursuant to the Offer is held as a capital asset by such Tendering Stockholder and does not take into account any 30 rules or provisions of the Internal Revenue Code of 1986, as amended (the "Code") that may apply to Tendering Stockholders who are subject to special treatment under the Code (including, without limitation, insurance companies, dealers in securities, certain retirement plans, financial institutions, tax exempt organizations, Tendering Stockholders who acquired shares of Common Stock pursuant to the exercise of an employee stock option or otherwise as compensation or foreign persons). This discussion is based upon the Code, Treasury regulations promulgated thereunder and Internal Revenue Service ("IRS") rulings and pronouncements and judicial decisions thereunder, all as in effect on the date hereof and all of which are subject to change at any time, possibly with retroactive effect. The following discussion is intended to be only a general summary of the U.S. federal income tax consequences that may be relevant to a Tendering Stockholder who tenders shares of Common Stock to the Company pursuant to the Offer. The actual U.S. federal income tax consequences to a Tendering Stockholder of a disposition of such Shares pursuant to the Offer will be determined on a stockholder-by-stockholder basis and, thus, will depend upon each Tendering Stockholder's particular facts and circumstances. Consequently, this discussion cannot possibly describe the U.S. federal income tax consequences of a disposition of shares pursuant to the Offer to a particular Tendering Stockholder, nor does it address every U.S. federal income tax concern which may be applicable to a particular Tendering Stockholder. In addition, the discussion does not address the state, local or foreign tax consequences of the Offer to a Tendering Stockholder. ACCORDINGLY, EACH TENDERING STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE ACTUAL U.S. FEDERAL INCOME TAX CONSEQUENCES, AND THE STATE, LOCAL OR FOREIGN TAX CONSEQUENCES, TO SUCH TENDERING STOCKHOLDER OF A DISPOSITION OF COMMON STOCK PURSUANT TO THE OFFER. If the Company's repurchase of Common Stock from a Tendering Stockholder pursuant to the Offer is treated as a sale or exchange under section 302(b) of the Code, that particular Tendering Stockholder will recognize either capital gain or loss equal to the difference between the cash proceeds received from the Company by such stockholder in exchange for the Common Stock repurchased by the Company from such stockholder and the Tendering Stockholder's adjusted tax basis in such Common Stock. Such gain or loss generally will be long-term capital gain or loss if the Common Stock has been held as a capital asset by the Tendering Stockholder for more than one year. Under section 302(b) of the Code, the Company's repurchase of Common Stock pursuant to the Offer generally will be treated as a sale or exchange if such repurchase (a) is "substantially disproportionate" with respect to the Tendering Stockholder, (b) results in a "complete termination" of the Tendering Stockholder's stock ownership interest in the Company or (c) is "not essentially equivalent to a dividend" with respect to the Tendering Stockholder. These Code section 302(b) tests are applied on a stockholder-by-stockholder basis and thus the application of these tests to each Tendering Stockholder depends upon that stockholder's particular facts and circumstances. To a large degree however, the application of these Code section 302(b) tests to a particular Tendering Stockholder depends upon such stockholder's stock ownership in the Company immediately before and immediately after the Company's repurchase of Common Stock pursuant to the Offer. Moreover, in determining whether any of these Section 302(b) tests are satisfied, a Tendering Stockholder must take into account not only the stock of the Company that the stockholder actually owns, but also any stock of the Company that such stockholder is deemed to own under the constructive ownership rules set forth in section 318 of the Code. Pursuant to these constructive ownership rules, a Tendering Stockholder is deemed to constructively own any stock of the Company that is owned by certain related individuals or entities (each a "Related Party") and any stock of the Company that the stockholder has a right to acquire by exercise of an option or by conversion or exchange of a security. 31 In addition, a stockholder should be able to qualify a repurchase of his or her stock for capital gain treatment under Code section 302(b) by selling or otherwise disposing of (by gift or otherwise) some or all of the remaining shares of stock that the stockholder owns in the redeeming corporation concurrent with or immediately before or after such repurchase, provided that such repurchase and such sale or other disposition is part of a single, integrated plan. Moreover, an issuance or exchange of shares pursuant to a corporate reorganization also should be taken into account in determining a redeeming stockholder's stock ownership if the reorganization and the redemption are each part of an "integrated" transaction. An issuance of new shares of stock by the redeeming corporation also should be taken into account in determining a stockholder's stock ownership in the redeeming corporation after a redemption of such stockholder's stock if the redemption and issuance are integral parts of a single plan. The Recapitalization Agreement indicates that the Company's issuance of new shares of Class B Common Stock to the stockholders of Smitty's pursuant to the Merger and its issuance of shares of New Preferred Stock as part of the financing for the Recapitalization are all integral parts of a single plan, no part of which will be completed unless the other parts also are consummated (unless the Company's repurchase of Common Stock is abandoned by the Company in order to effect an Alternative Transaction). Accordingly, although the matter is not free from doubt, a Tendering Stockholder's actual and constructive stock ownership in the Company after the Offer should be determined by reference to the total amount of Company stock that is outstanding after the Offer, the Merger and any other related issuances or repurchases of stock by the Company have been consummated. In addition, such determination also should take into account any sales or other dispositions of Company stock made by a Tendering Stockholder (or a Related Party) in connection with the transactions described herein. The Company's repurchase of a Tendering Stockholder's Common Stock will be "substantially disproportionate" with respect to such stockholder if (i) the Tendering Stockholder's actual and constructive voting power immediately after the repurchase is less than 80% of his or her actual and constructive voting power immediately before the repurchase; (ii) the Common Stock actually and constructively owned by the Tendering Stockholder (based upon the aggregate fair market value of such Common Stock) immediately after the repurchase is less than 80% of his or her actual and constructive percentage ownership of such Common Stock immediately before the repurchase; and (iii) immediately after the repurchase, the Tendering Stockholder actually and constructively owns less than 50% of the total combined voting power of all classes of the Company stock that is entitled to vote. Tendering Stockholders should consult their own tax advisors with respect to the application of the Code section 302(b) "substantially disproportionate" test to their particular facts and circumstances. The Company's repurchase of a Tendering Stockholder's Common Stock will result in a "complete termination" of such Tendering Stockholder's interest in the Company if either (a) all the Company stock actually and constructively owned by the stockholder is repurchased by the Company pursuant to the Offer (or is sold or otherwise disposed of in connection with the Offer) or (b) all the Company stock actually owned by the Tendering Stockholder is repurchased by the Company pursuant to the Offer (or is sold or otherwise disposed of in connection with the Offer) and the stockholder is eligible to waive, and does effectively waive in accordance with section 302(c) of the Code, attribution of the ownership of any stock of the Company that otherwise would be considered to be constructively owned by such Tendering Stockholder. Tendering Stockholders should consult their own tax advisors with respect to the application of the Code section 302(b) "complete termination" test to their particular facts and circumstances. Even if the Company's repurchase of a Tendering Stockholder's Common Stock fails to satisfy the "substantially disproportionate" test or the "complete termination" test described above, the Company's repurchase of a Tendering Stockholder's Common Stock may nevertheless satisfy the "not essentially equivalent to a dividend" test if the stockholder's disposition of Common Stock pursuant to the Offer results in a "meaningful reduction" of such stockholder's proportionate stock ownership 32 interest in the Company. Whether the receipt of cash by a Tendering Stockholder will be considered "not essentially equivalent to a dividend" will depend upon such stockholder's facts and circumstances. In certain circumstances, even a small reduction in a stockholder's proportionate stock interest may satisfy this test. For example, the IRS has indicated in a published ruling that a 3.3% reduction in the proportionate stock interest of a small (substantially less than 1%) stockholder in a publicly held corporation who exercises no control over corporate affairs constitutes such a "meaningful reduction." Tendering Stockholders should consult with their own tax advisors as to the application of this test in their particular situation. A Tendering Stockholder may not be able to satisfy one of the above three tests because of contemporaneous acquisitions of Common Stock or other Company stock by such stockholder or a Related Party. Tendering Stockholders should consult their own tax advisors regarding the tax consequences of such acquisitions in their particular circumstances. In addition, a Tendering Stockholder may not be able to satisfy either the "substantially disproportionate" test or the "not essentially equivalent to a dividend" test if all of the Class A stockholders were to convert the remaining shares of their outstanding Class A Common Stock into shares of Class B Common Stock contemporaneously with or in close proximity to the Offer or the other transactions described herein. However, a Tendering Stockholder should be able to qualify the Company's repurchase of his or her Common Stock pursuant to the Offer for sale or exchange treatment under the "not essentially equivalent to a dividend" test if such Tendering Stockholder (x) owns (actually and constructively) less than 1% of the voting power of the Company's outstanding capital stock immediately prior to the Offer and exercises no control over the Company or its affairs, (y) the Smith family members and Smith family trusts that own shares of Class A Common Stock do not convert any of their remaining outstanding shares of such stock into shares of Class B Common Stock and (z) such Tendering Stockholder or a Related Party does not make any contemporaneous acquisitions of any capital stock of the Company. Smith family members and the trustees of the Smith family trusts that own shares of Class A Common Stock have represented to the Company that they have no present plan or intention to convert any shares of their Class A Common Stock into shares of Class B Common Stock. If a particular Tendering Stockholder cannot satisfy any of the three tests described above and to the extent the Company has sufficient current and/or accumulated earnings and profits, such stockholder will be treated as having received a dividend which will be includible in gross income (and treated as ordinary income) in an amount equal to the aggregate cash proceeds paid by the Company to such stockholder in exchange for such stockholder's Common Stock (without regard to gain or loss, if any). In the case of a Tendering Stockholder that is a corporation (a "corporate stockholder"), if the cash paid by the Company to such corporate stockholder in exchange for such stockholder's Common Stock is treated as a dividend, such dividend income may be eligible for the 70% dividends-received deduction. The dividends-received deduction is subject to certain limitations, and may not be available if the corporate stockholder does not satisfy certain holding period requirements with respect to its Common Stock or if its Common Stock is treated as "debt financed portfolio stock" within the meaning of Code Section 246A(c). It should be noted that recent legislative proposals, if enacted, would reduce the dividends-received deduction from 70% to 50%. In addition, such proposals would provide that a corporate stockholder would not be entitled to a dividends-received deduction on distributions on the Common Stock if such stockholder protects itself from risk of loss immediately before or immediately after the stockholder becomes entitled to the dividend. It is unclear whether, or in what form, such proposals will be enacted. Additionally, if a dividends-received deduction is available, the dividend may be treated as an "extraordinary dividend" under section 1059(a) of the Code, in which case a corporate stockholder's adjusted tax basis in the Common Stock retained by such stockholder would be reduced, but not below zero, by the amount of the nontaxed portion of 33 such dividend. Any amount of the nontaxed portion of the dividend in excess of the corporate stockholder's adjusted tax basis generally will be subject to tax upon a sale or other taxable disposition of such Common Stock. However, recently introduced legislation would require gain on the nontaxed portion of an extraordinary dividend to be recognized at the time when the extraordinary dividend is paid rather than at the time of the sale or other taxable disposition of the Common Stock. It is unclear whether, or in what form, such legislation will be enacted. Corporate stockholders are urged to consult their own tax advisors as to the effect of section 1059 of the Code on the adjusted tax basis of their Common Stock. FEES AND EXPENSES The Recapitalization Agreement provides that if (i) the Recapitalization and Merger are consummated, or (ii) the Merger is consummated but the Recapitalization is terminated, the fees and expenses of the Company, Yucaipa and Smitty's in connection with the transactions contemplated thereby (including all Financing Expenses (as defined below)) will be paid by the Company. In the event that neither the Recapitalization nor the Merger are consummated, each of the parties thereto will pay its own fees and expenses; provided, however, that the Company will bear 65% of the Financing Expenses and Smitty's will bear 35% of the Financing Expenses. Each of the Company and Smitty's will indemnify and hold harmless the other party to the extent it pays any portion of the Financing Expenses in excess of such percentages. "Financing Expenses" means all fees, costs and expenses incurred by the Company in connection with the Financing Agreements, including without limitation all fees, costs and expenses: (i) identified in the related financing letters (including without limitation the fees and expenses of counsel to the bank lenders), (ii) of counsel to the Company and Smitty's for the allocable portion of such counsel's time spent working on matters related to the Financing Agreements and the Recapitalization, (iii) of the Company's independent certified public accountants, and (iv) in connection with printing, engraving, messenger and delivery services customarily incurred in financing transactions similar to the Financing Agreements. Pursuant to a letter agreement dated January 10, 1996 (the "January Engagement Letter"), the Company engaged Goldman Sachs to undertake a study to enable it to render its opinion with respect to the fairness of the Merger. Pursuant to the terms of the January Engagement Letter, the Company paid Goldman Sachs $500,000 for rendering its opinion. In addition, pursuant to a letter agreement dated December 20, 1995 (the "December Engagement Letter"), the Company engaged Goldman Sachs to act as its financial advisor in its discussions with Yucaipa concerning a possible transaction with the Company. Pursuant to the terms of the December Engagement Letter, the Company has agreed to pay Goldman Sachs upon consummation of the Merger a transaction fee of 0.45% multiplied by the product of (i) the average of the last sales prices of the Common Stock for the ten trading days ending five days prior to the consummation of the Merger and (ii) the fully diluted shares outstanding of the Company plus the principal amount of all indebtedness for borrowed money as set forth on the most recent consolidated balance sheet of the Company prior to the consummation of the Merger. Pursuant to the January Engagement Letter and the December Engagement Letter, the Company has agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses, including attorney's fees, and to indemnify Goldman Sachs against certain liabilities, including certain liabilities under the federal securities laws. The Company has retained Goldman Sachs as Dealer Managers in connection with the Offer. In connection with Goldman Sachs acting as Dealer Managers, the Company has agreed to reimburse Goldman Sachs for certain reasonable out-of-pocket expenses incurred in connection with the Offer, including reasonable fees and disbursements of counsel, and to indemnify Goldman Sachs against certain liabilities, including certain liabilities under the federal securities laws. The Company has retained MacKenzie Partners, Inc. as Information Agent and American Stock Transfer & Trust Company as Depositary in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, telex, telegraph and personal interview and 34 may request brokers, dealers and other nominee security holders to forward materials relating to the Offer to beneficial owners. The Depositary and the Information Agent will receive reasonable and customary compensation for their services in connection with the Offer. The Company will also reimburse the Depositary and the Information Agent for reasonable out-of-pocket expenses, including reasonable attorneys' fees, and has agreed to indemnify the Depositary and the Information Agent against certain liabilities in connection with the Offer, including certain liabilities under the federal securities laws. The Company will not pay fees or commissions to any broker, dealer, commercial bank, trust company or other person (other than as described above) for soliciting the tender of any Shares pursuant to the Offer. However, the Company will on request reimburse such persons for customary handling and mailing expenses incurred in forwarding materials in respect of the Offer to the beneficial owners for which they act as nominees or in a fiduciary capacity. No such broker, dealer, commercial bank or trust company has been authorized to act as the Company's agent for purposes of the Offer. The Company will pay (or cause to be paid) any stock transfer taxes on its purchase of Shares pursuant to the Offer, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Other than as described above, no solicitation or similar fees will be paid to brokers, dealers or others by the Company in connection with the Offer. See "The Tender Offer--Purchase of Shares; Payment of Purchase Price." 35 THE COMPANY, SMITTY'S AND YUCAIPA THE COMPANY The Company is a leading supermarket company in the Intermountain and Southwestern regions of the United States, operating 120 stores located in Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and Wyoming (collectively, 14). Substantially all of the Company's stores offer one-stop shopping convenience through a food and drug combination format which features a full-line supermarket with drug and pharmacy departments and some or all of the following specialty departments: delicatessens, hot prepared food sections, in-store bakeries, video rental shops, floral shops, one-hour photo processing labs, full-service banking and frozen yogurt shops. The Company's 114 food and drug combination stores averaged approximately 63,000 square feet and $420,000 per week in sales volume in fiscal 1995. The Company has recently opened four price impact warehouse stores and also operates two conventional supermarkets. Through its 48 years of operations, the Company believes it has developed a valuable and strategically located store base, strong name recognition, customer loyalty and a reputation for quality and service. At December 30, 1995, the Company had 16,000 employees (excluding employees in California). The Company is a Delaware corporation with its principal executive offices located at 1550 South Redwood Road, Salt Lake City, Utah 84104 (telephone (801) 974-1400)). CALIFORNIA DIVESTITURE The Company has completed the sale, lease or closure of its Southern California regional operations (the "California Divestiture"). In December 1995, the Company entered into an agreement to sublease its Riverside, California distribution center and dairy plant to Ralphs, an affiliate of Yucaipa, for the remaining 23-year term of the Company's lease. Ralphs also agreed to purchase certain related equipment and inventory. The Company has completed the sale or lease of 16 stores and related equipment and inventory and three non-operating properties to various supermarket companies (including Ralphs) and others. As of March 16, 1996, the Company had closed its remaining California stores. It is anticipated that these closed stores will be sold or leased to other retail companies. Following the consummation of the Transactions, the Company intends to accelerate the disposition of its closed stores and excess land in California (the "California Asset Disposition", and together with the California Divestiture, the "California Disposition"). Since December 30, 1995, the Company has received net cash proceeds of approximately $67.2 million from the California Divestiture and expects to receive an additional $10.6 million shortly after the consummation of the Recapitalization and Merger. In connection with the California Divestiture, the Company recorded pre-tax restructuring charges of $140 million (the "California Divestiture Charge") for the year ended December 30, 1995 and classified the assets to be leased or sold as "assets held for sale." The California Divestiture Charge reflected (i) a provision for anticipated future lease obligations, (ii) the anticipated cost to the Company of closing its California stores and distribution center (primarily termination payments and inventory), and (iii) asset valuation adjustments for the equipment in all of the stores and the distribution center and for the land and buildings associated with the properties being sold or leased. The California Divestiture, including the transactions with Ralphs, was unrelated to the Recapitalization and Merger. In connection with the California Divestiture, the Company entered into a settlement agreement with the California Attorney General (the "CAG") relating to the stores that were sold, leased or closed. Under the settlement agreement, the Company agreed that, for a period of five years, it would not operate any of the closed stores as supermarkets without the permission of the CAG. In addition, for the same five-year period, the Company agreed not to (i) transfer the closed stores to third parties for supermarket use without the CAG's approval, (ii) transfer such stores for non-supermarket use without prior notice to the CAG, and (iii) sell any of such stores subject to restrictions as to future supermarket use. 36 After completion of the California Divestiture, the Company continues to own real estate assets in California having an aggregate book value at December 30, 1995 of approximately $260 million. These assets include the stores leased or subleased as part of the California Divestiture (having an aggregate book value at December 30, 1995 of $42.5 million), the closed stores (aggregate book value--$115.3 million) and certain non-operating stores and other excess real estate (aggregate book value--$102.2 million). These properties have annual carrying costs of approximately $7 million (excluding depreciation and amortization). Management's present policy is to own and manage its real estate assets, including those in California, in order to maximize their long- term values, and, as a result, the Company maintains a fully staffed real estate, construction and property management capability. The Company believes that there are several viable strategies for maximizing the value of its remaining California real estate assets over the next five years and that the implementation of these policies would not have any material negative impact on future earnings. Following the consummation of the Recapitalization and Merger, management, however, in conjunction with Yucaipa, anticipates that it will pursue a strategy to accelerate the disposition of its remaining real estate assets in California, including its non-operating stores and excess land. The Company would use the net cash proceeds from the sales of these assets to either reinvest in the Company's business or reduce indebtedness incurred in connection with the Recapitalization and Merger. If this strategy is adopted, as anticipated, the Company would record a charge to earnings, presently estimated to be approximately $125 million (pre-tax) (the "California Asset Disposition Charge"), to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. This charge will cause a substantial decrease in the Company's earnings for such period and net worth, but is not otherwise anticipated to adversely affect the Company's liquidity or ongoing results of operations. See "Financial Data of the Company--Unaudited Pro Forma Combined Financial Statements." In order to finance its Riverside, California distribution center and eight of its California stores, the Company completed a sale-leaseback financing (the "Sale-Leaseback Financing") in 1994. Pursuant to such financing, the Company sold a portion of its interest in the properties to an owner trustee and entered into an operating lease for each property. In order to provide the financing for the owner trustee's purchase of the properties, the Company filed a registration statement with the Commission pertaining to a public offering of $152.4 million of pass through certificates. Each of the pass through trusts issuing the certificates used the proceeds of the offering to acquire notes from the owner trustee (which in turn used the proceeds to acquire its interest in the properties from the Company). Neither the notes nor the pass through certificates are obligations of, nor are they guaranteed by, the Company and, accordingly, are not reflected as indebtedness or other liabilities of the Company under generally accepted accounting principles. Under the terms of the Sale-Leaseback Financing, the Company may terminate its lease with respect to the various California properties if it deems such properties to be obsolete, uneconomic for use or surplus to the Company's needs. In connection with any such termination, the Company may elect to satisfy all of the rights and obligations of the owner trustee in respect of the related notes by exchanging such notes for (a) if the property is sold to a party other than the Company, unsecured, full recourse securities of the Company or (b) if such property is sold to the Company, secured, full recourse securities of the Company. In addition, the Company may substitute other properties (including properties located outside California) for properties which it deems to be obsolete, uneconomic for use or surplus to its needs. The substitute properties must have a fair market value, utility and useful life equal to or greater than that of the substituted property. The Company would not be required to assume any indebtedness in connection with such a substitution. Any such exchange or substitution may be made by the Company only if certain conditions are satisfied. In April 1996, the Company received a letter from a holder of pass through certificates pointing out an inaccurate statement in the 1994 pass through certificate prospectus. The letter referred to a 37 statement in the prospectus disclosing that holders of the certificates would not receive any covenant protection in the event of a highly leveraged transaction involving the Company, including any transaction resulting in a change of control. The prospectus went on to state that none of the then- outstanding indebtedness of the Company contained provisions affording holders of such indebtedness protection in the event of a change of control, which was characterized in the letter as a material representation. At the date of such prospectus a substantial amount of the Company's then-existing indebtedness did contain such change of control provisions. The Company has pointed out to the holder that consummation of the Recapitalization and Merger will not result in a change of control of the Company under the terms of such existing debt instruments, although the indebtedness under such debt instruments will be repaid in order to remove certain financial and other covenants contained therein that would otherwise hinder the Company's ability to consummate the Recapitalization and Merger. The Company is currently reviewing the relevant facts and circumstances. The letter suggested that all interested parties be made aware of the existence of the alleged misrepresentation, but made no specific claim or demand on the Company. Although no assurances can be given, the Company does not believe that any claims by the holders of the pass through certificates, if made, would have a material adverse effect on the Company or its ability to complete the California Disposition. RECENT OPERATING RESULTS OF THE COMPANY Net sales decreased $53.5 million, or 7.2%, from $746.7 million for the thirteen weeks ended April 1, 1995 to $693.2 million for the thirteen weeks ended March 30, 1996. The sales decrease in 1996 was attributable to the closure of 34 stores in California, offset in part by the addition of 14 new stores outside of California from the same period a year ago. Same store sales for the thirteen week period decreased 5.6% in 1996. As adjusted to exclude the Company's California stores, net sales increased $35.7 million, or 6.1%, from $584.4 million in 1995 to $620.1 million in 1996. As adjusted to exclude the Company's California stores, same store sales for the thirteen week period decreased 2.7% in 1996, caused primarily by the Company's discontinuance of its "ad match" program in the Phoenix and Tucson markets. Earnings from operations decreased on a comparative basis from the first quarter of 1995 to the first quarter of 1996, primarily as a result of the winding down of the California retail operations. The California stores, which were operated during the first quarter and all closed by the end of the quarter, incurred losses connected with additional inventory clearance sales and other expenses affected by the disposal process. A California regional pre-tax loss of approximately $25 million significantly impacted first quarter earnings. Earnings from continuing operations in the Company's Intermountain and Southwest regions for the first quarter of 1996 were comparable to those in the first quarter of 1995. SMITTY'S Smitty's is a leading regional supermarket operator based in Phoenix, Arizona which through its wholly owned subsidiary, Smitty's Super Valu, operates 25 stores in the Phoenix area and three stores in the Tucson area. Smitty's stores provide high quality fresh and prepared foods, groceries, general merchandise, restaurants and ancillary services in a shopping environment which emphasizes service, convenience, quality, selection and customer satisfaction. Smitty's Super Valu's 35-year presence in the Phoenix community has enabled it to locate its stores in strategic and convenient sites. These locations, together with Smitty's unique super combination store format, have provided it with high name recognition and customer loyalty. On June 29, 1994, Smitty's acquired all of the outstanding shares of Smitty's Super Valu from Steinberg International, Inc. Smitty's was organized by Yucaipa prior to the acquisition for the purpose of acquiring Smitty's Super Valu. Smitty's is a holding company whose only material asset is the common stock of Smitty's Super Valu. 38 Store Formats. Smitty's currently operates (i) 21 food and general merchandise "super combination" stores which average 105,000 square feet in size, (ii) six food and drug combination stores, which average 52,000 square feet in size, and (iii) one conventional supermarket. Smitty's "super combination" stores offer a full line of supermarket items, a broad range of drug store and pharmaceutical items and an expanded selection of general merchandise. These stores offer numerous services and specialty departments, including fresh produce, full-service fresh meat, delicatessen, seafood, bakery, prepared foods, fresh-cut flowers and video and photo departments, pharmacies, food courts, restaurants and full-service bank branches, family style hair salons and airline ticket counters. The food and drug combination stores offer a full selection of products and services, including full-service fresh meat, delicatessen, seafood and bakery departments, an expanded line of health care and beauty aids, a restaurant, snack bar or food court and full- service banking. Purchasing and Distribution. Smitty's currently makes approximately 60% of its annual purchases from Fleming Companies, Inc. ("Fleming") under a supply agreement which by its original terms expires in June 1997. Smitty's is negotiating with Fleming to amend the supply agreement, subject to certain conditions, whereby Fleming will become a secondary supplier to Smitty's and, following the Merger, to the Company through the end of 1997. Pursuant to its discussions with Fleming, Smitty's would purchase inventory from Fleming in an amount not less than approximately $10 million per month through December 31, 1997. Notwithstanding the foregoing, it is anticipated that Smitty's would have the right to terminate the supply agreement at any time if its aggregate purchases of inventory from Fleming exceeded $200 million. Employees and Labor Relations. As of January 14, 1996, Smitty's employed 4,600 people, of whom approximately 36% were full-time and approximately 64% were part-time. Approximately 4,100 employees working in the stores, constituting approximately 89% of Smitty's employees, are covered by a collective bargaining agreement that expires in October 1997. Smitty's has not experienced a work stoppage in the past ten years and considers its relations with its employees and labor unions to be satisfactory. Trade Names, Service Marks and Trademarks. Smitty's uses a variety of trade names, service marks and trademarks. Except for Smitty's and "Shopper's Passport," Smitty's does not believe any of such tradenames, service marks or trademarks is material to its business. YUCAIPA Yucaipa is a private investment group specializing in the supermarket industry. In addition to Smitty's, Yucaipa also controls Ralphs, the largest supermarket company in Southern California, and Dominick's Finer Foods, Inc., a leading Chicago area supermarket company. Yucaipa is controlled by Ronald Burkle, its managing general partner. POST-RECAPITALIZATION AND MERGER COMPANY Company Strengths. Management believes the Company has the following principal strengths: (i) leading market positions, (ii) attractive markets, (iii) new and recently remodeled stores, (iv) prime store locations, (v) advanced backstage operations, and (vi) substantial owned real estate. Leading Market Positions. Pro forma for the Merger, the Company will operate 148 stores and will have the largest or second largest market share in each of its principal markets: Salt Lake City (31%), Phoenix (24%), Las Vegas (24%), and Albuquerque (23%). The Company believes its reputation for offering a broad selection of quality products combined with a high level of customer service has created a valuable franchise with strong name recognition and customer loyalty. Attractive Markets. The Company's stores are located predominantly in Utah, Arizona, Nevada and New Mexico, which are among the fastest growing states in population and 39 employment. According to the U.S. Bureau of the Census, the population of those four states has increased at a compound annual growth rate of 3.0% since 1990, compared to the national average of 1.1% over the same period. According to the U.S. Bureau of Labor Statistics, employment in the same four states has increased at a compound annual growth rate of 4.0% since 1990, compared to the national average of 1.3% over the same period. In addition, management believes that operating in distinct markets in several states provides advantages due to their differences in economic cycles, demographic and competitive conditions. New and Recently Remodeled Stores. After giving effect to the Merger and the California Divestiture, approximately 84% of the Company's stores will have been opened or remodeled within the last seven years. During the five fiscal years ended December 30, 1995, the Company spent approximately $414 million in capital expenditures (excluding capital expenditures associated with California operations), which have been primarily used to build new stores, and to expand and remodel existing stores. During the five-year period ended December 30, 1995, Smitty's spent approximately $72 million in capital expenditures, including approximately $42 million since mid-1994 to remodel substantially all of its Phoenix-area stores. Prime Store Locations. The Company's 48 years of operation have allowed it to choose its store locations selectively as new residential areas have been developed. The Company believes that many of its stores are in developed areas where land values and the unavailability of suitable parcels would make it difficult to replicate the Company's existing store base. Advanced Backstage Operations. The Company owns and operates one of the most modern and efficient backstage operations in the industry. During the five fiscal years ended December 30, 1995, the Company spent approximately $163 million (excluding the divested California operations) to build, expand or remodel its warehousing, distribution and processing facilities. Management believes that the Company's approximately 3,000,000 square feet of backstage facilities will be able to accommodate the Smitty's volume following the Merger and support anticipated future growth. Substantial Owned Real Estate. The Company will own 108 of the 148 stores it will operate upon consummation of the Merger. The Company also owns its primary warehousing, distribution and processing facilities. In addition, the Company owns land for development, expansion or sale, as well as other non-operating real estate assets. Operating Strategy. Management, in conjunction with Yucaipa, has developed a strategic plan for the Company following the consummation of the Recapitalization and Merger. Under such plan, the Company expects to: (i) expand operations in existing and adjacent markets, (ii) realize operating synergies and cost savings resulting from the Merger, (iii) improve working capital management, (iv) grow its recently introduced price impact warehouse stores, and (v) dispose of remaining California real estate subject to the completion of the Recapitalization and Merger. Expand Operations in Existing and Adjacent Markets. Management believes that there are significant opportunities to increase the Company's sales and gain efficiencies in its existing markets through new store openings and store remodels. From 1991 through 1994, management primarily focused on the Southern California market, opening 32 new stores in Southern California compared to a net of 10 new stores in its other markets. In 1995, the Company opened a net of 17 new stores, only two of which were located in California. In an effort to more fully realize its market potential in its non-California markets, in 1995 the Company began opening smaller combination stores (54,000 to 60,000 square feet) in existing markets as part of a "fill-in" strategy. By pursuing a growth strategy which emphasizes opening new stores within its existing and adjacent markets, the Company believes it can increase its market share and improve its distribution and other efficiencies, while taking advantage of such markets' favorable growth prospects. 40 Realize Operating Synergies and Cost Savings Resulting from the Merger. Management believes that approximately $25 million of net annual cost savings are achievable over a three-year period following the Merger. The majority of such cost savings opportunities relate to its Arizona operations and are believed to be achievable (on an annualized basis) by the end of the first full year of operations following the Merger. The estimates of potential cost savings resulting from the Merger contained in this Offer to Purchase are forward looking statements that involve risks and inherent uncertainties that could cause actual net annual cost savings to differ materially from those projected. See "Introduction--Risk Factors--Ability to Achieve Anticipated Cost Savings." . Advertising Cost Savings. The Company and Smitty's advertising programs in the Phoenix and Tucson markets substantially overlap and, as a result of the Merger, management expects that the Company will be able to eliminate a substantial portion of the combined advertising expenses. Management estimates that annualized advertising cost savings of approximately $7 million are achievable by the end of the first full year of operations following the Merger. . General and Administrative Cost Savings. Management expects the Company to achieve savings from the elimination of duplicative administrative staff and headquarters facilities and the consolidation of management information systems. Management estimates that annualized general and administrative cost savings to the Company of approximately $13 million are achievable by the end of the first full year of operations following the Merger. . Warehousing and Transportation Cost Savings. Smitty's currently operates without any of its own distribution facilities. By incorporating the Smitty's volume into the Company's Tolleson, Arizona warehousing and distribution facilities, the Company expects to eliminate the expense associated with Smitty's being supplied primarily by an independent wholesaler, as well as reduce average unit costs resulting from improved capacity utilization. Management estimates that annualized warehousing and transportation cost savings of approximately $4 million are achievable by the end of the second full year of operations following the Merger. . Direct Store Delivery and Store Systems. The Merger is expected to result in an opportunity to utilize the Company's electronic direct store receiving system in all Smitty's stores, resulting in increased control over direct store deliveries and corresponding payments. In addition, by utilizing the Company's front-end systems in Smitty's stores, improvements in the efficiency of Smitty's stores are expected. Management estimates that annualized cost savings to the Company of approximately $2 million related to such direct store delivery and store systems are achievable by the end of the second full year of operations following the Merger. . Purchasing Improvements. Management believes that the Company can achieve savings as a result of increased promotional allowances and discounts through a coordinated buying effort with Yucaipa-affiliated supermarket chains with an aggregate annual sales (when combined with the Company) in excess of $11 billion. Management estimates that annualized cost savings of approximately $6 million are achievable from such purchasing improvements by the end of the third full year of operations following the Merger. The sum of the components of the estimated annual cost savings exceeds $25 million; however, management expects that a portion of the savings will be reinvested in the Company's operations. In connection with the Recapitalization and Merger, the Company and Smitty's are evaluating the format mix of the combined Arizona store base and are assessing the possibility of modifying the formats of certain stores. It is anticipated that approximately $17 million of capital expenditures and approximately $15 million of other expenses will be required to integrate the Arizona operations over the next two years and realize such cost savings. 41 Improve Working Capital Management. Management believes that the Company can improve its working capital management. Under Yucaipa's management, other supermarket companies have achieved working capital improvements; however there can be no assurance that similar improvements can be achieved by the Company. Grow Recently Introduced Price Impact Warehouse Format. The Company recently developed a price impact warehouse store format and during 1995 opened four of these stores in the Las Vegas area operating under the name "PriceRite Grocery Warehouse." Management believes that a number of the Company's markets are underserved by price impact warehouse stores and that there are substantial opportunities for expansion of the Company's PriceRite format through the conversion of existing stores and the opening of new stores. Yucaipa, through its management of other supermarket companies, has extensive experience in expanding and profitably operating price impact warehouse formats. Dispose of Remaining California Real Estate. Following the consummation of the Recapitalization and Merger, management, in conjunction with Yucaipa, anticipates that it will pursue a strategy to dispose of its remaining real estate assets in California which consist of 18 non- operating stores and excess land. The Company would use the net cash proceeds from the California Asset Disposition to either reinvest in the Company's business or reduce indebtedness incurred in connection with the Recapitalization and Merger. At December 30, 1995, the aggregate book value of such assets was approximately $260 million. If this strategy is adopted, as anticipated, the Company would record a pre-tax charge to earnings, which is presently estimated to be approximately $125 million, to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. See "Introduction--Risk Factors--Anticipated Charges to Earnings Following the Recapitalization and Merger." 42 FINANCIAL DATA OF THE COMPANY PRO FORMA CAPITALIZATION The following table sets forth the consolidated pro forma capitalization of the Company at December 30, 1995, giving effect to the Recapitalization and Merger and the California Disposition. This table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the historical consolidated financial statements of the Company and Smitty's, and the related notes thereto, included elsewhere in this Offer to Purchase.
PRO FORMA --------------------- (DOLLARS IN MILLIONS) Current portion of long-term debt: New Term Loans.......................................... $ 12.3 Other indebtedness...................................... 1.4 -------- Total current portion of long-term debt............... $ 13.7 ======== Long-term debt: New Term Loans (a)...................................... $ 792.7 New Revolving Facility (a)(b)........................... -- New Senior Notes........................................ 150.0 New Senior Subordinated Notes........................... 350.0 Other indebtedness...................................... 50.4 -------- Total long-term debt.................................. 1,343.1 -------- Redeemable preferred stock, $.01 par value................ 3.3 New Preferred Stock, $.01 par value....................... 71.2 Common stockholders' equity: Common Stock, $.01 par value (c)........................ 0.2 Additional paid-in capital.............................. 164.9 Retained earnings (deficit)............................. (286.7) -------- Total common stockholders' equity (deficit)........... (121.6) -------- Total capitalization................................ $1,296.0 ========
- - -------- (a) The Company has obtained a commitment from Bankers Trust Company and The Chase Manhattan Bank for the New Credit Facility that will provide up to $805 million aggregate principal amount of New Term Loans and a $190 million New Revolving Facility. A portion of the New Revolving facility may be used to support letters of credit, approximately $28 million of which are anticipated to be issued at the Closing Date. The New Credit Facility will be guaranteed by all subsidiaries of the Company, including Smitty's. See "Financing of the Recapitalization and Merger--New Credit Facility." (b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures (each as defined under "The Recapitalization Agreement--Repayment of Smitty's Indebtedness") are tendered and accepted for purchase in connection with the Smitty's Debt Offer. If all of the outstanding Smitty's Notes and Smitty's Debentures are not tendered and accepted for purchase, the Company anticipates that it would reduce other borrowings. As a result of the assumed application of a portion of the proceeds of the California Disposition to eliminate pro forma revolving credit balances, pro forma total debt at December 30, 1995 does not reflect anticipated revolving credit facility borrowings upon consummation of the Recapitalization and Merger of $13.2 million. (c) Does not reflect (i) management options to purchase up to an aggregate of 808,250 shares of Class B Common Stock expected to be outstanding upon consummation of the Recapitalization and Merger, or (ii) Warrants to purchase shares of Class C Common Stock of the Company (to be issued at an initial exercise price of $50.00 per share) to be issued to Yucaipa upon consummation of the Recapitalization and Merger. See "Certain Related Agreements." 43 SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected consolidated historical financial and other data of the Company for the five fiscal years ended December 30, 1995, which have been derived from the financial statements of the Company audited by Ernst & Young LLP, independent auditors. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the historical consolidated financial statements of the Company and related notes thereto included elsewhere in this Offer to Purchase.
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, 1991 1993 1994 1994 1995 ------------ ---------- ---------- ------------ ------------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) OPERATING DATA: Net sales............... $ 2,217.4 $ 2,649.9 $ 2,807.2 $ 2,981.4 $ 3,083.7 Gross profit............ 498.6 611.6 637.2 669.1 697.0 Operating, selling and administrative expenses............... 344.4 419.7 430.3 440.8 461.4 Depreciation and amortization........... 50.5 67.8 82.2 94.5 105.0 Interest expense........ 30.3 36.1 44.6 53.7 60.5 Restructuring charges(a)............. -- -- -- -- 140.0 Net income (loss)....... 45.1 53.7 45.8 48.8 (40.5) Net income (loss) per common share........... $ 1.65 $ 1.79 $ 1.52 $ 1.73 $ (1.62) Weighted average common shares outstanding..... 27,397,973 29,962,011 30,238,811 28,176,907 25,030,882 BALANCE SHEET DATA (END OF PERIOD): Working capital......... $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7 Total assets............ 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2 Total debt(b)........... 395.4 612.7 725.5 718.9 746.2 Redeemable preferred stock.................. 8.5 7.5 6.5 5.4 4.3 Total stockholders' equity................. $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7 OTHER DATA: Stores open at end of period(c).............. 109 119 129 137 154 Capital expenditures.... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0 Ratio of earnings to fixed charges(d)....... 3.02x 3.06x 2.55x 2.18x --
- - -------- (a) Reflects charges in connection with the California Divestiture. See Note K to Notes to Consolidated Financial Statements of the Company included elsewhere herein. (b) Total debt includes long-term debt and current maturities of long-term debt. (c) After giving effect to the California Divestiture, the Company will operate 120 stores. See "The Company, Smitty's and Yucaipa--California Divestiture." (d) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs and one-third of rental expense (the portion deemed by the Company to be representative of the interest factor). For the five-year period ended December 30, 1995, the Company has not paid any preferred stock dividends. For the 52 weeks ended December 30, 1995, the Company's earnings were inadequate to cover fixed charges by $69.8 million. However, such earnings included non-cash charges of $105.4 million, primarily consisting of depreciation and amortization, and restructuring charges of $140.0 million. 44 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements of the Company for the 52 weeks ended December 30, 1995 give effect to (a) the Transactions and the application of the proceeds therefrom and (b) the California Disposition and the retention of the anticipated proceeds therefrom as cash (after reducing pro forma revolving credit balances to zero), in each case as if such transactions occurred on January 1, 1995, with respect to the pro forma operating and other data, and as of December 30, 1995, with respect to the pro forma balance sheet data. Such pro forma information: (i) eliminates the results of operations of the Company's California retail division and the related assets and liabilities as of and for the 52 weeks ended December 30, 1995 from the Company's results of operations and balance sheet data as of and for the 52 weeks ended December 30, 1995 and (ii) combines the operating results and balance sheet data of the Company, pro forma for the elimination of the Company's California retail division and the related assets and liabilities, as of and for the 52 weeks ended December 30, 1995 with the operating results and balance sheet data of Smitty's for the 52 weeks ended January 14, 1996. As indicated above, the unaudited pro forma combined financial statements give effect to the California Divestiture and the California Asset Disposition and the retention of the anticipated proceeds therefrom as cash. In connection with the California Divestiture, the Company entered into agreements to sell or lease 16 stores and related equipment and three non-operating properties. These transactions are expected to generate net cash proceeds of $77.8 million, of which $67.2 million has been received to date. The remaining 18 stores in California have been closed. In connection with the California Divestiture, the Company recorded the $140 million (pre-tax) California Divestiture Charge for the year ended December 30, 1995 and classified the assets to be leased or sold as assets held for sale. The California Divestiture Charge reflected (i) a provision for anticipated future lease obligations, (ii) the anticipated cost to the Company of closing its California stores and distribution center (primarily termination payments and inventory), and (iii) certain asset valuation adjustments. The asset valuation adjustments included in the California Divestiture Charge reflected the reduction in net realizable values for the equipment in all of the Company's California stores and distribution center and for the land and buildings associated with those properties being sold or leased. Pursuant to the California Asset Disposition, following the consummation of the Transactions the Company intends to accelerate the disposition of its 18 non-operating stores and its excess land in California. As a result of the adoption of this strategy, the Company intends to record a pre-tax charge to earnings of approximately $125 million (the California Asset Disposition Charge) to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. For purposes of the Unaudited Pro Forma Combined Balance Sheet, the Company has given effect to the California Asset Disposition as if each of the relevant properties had been sold for a cash amount equal to its net book value after giving effect to the California Asset Disposition Charge. The proceeds of such assumed sales, together with the proceeds of the California Divestiture, are reflected in the Company's pro forma cash balances (net of pro forma revolving credit borrowings, which have been eliminated) at December 30, 1995. INVESTORS ARE CAUTIONED THAT THE COMPANY HAS NOT ENTERED INTO ANY CONTRACTS RELATING TO THE CALIFORNIA ASSET DISPOSITION AND THAT THERE CAN BE NO ASSURANCE AS TO THE TIMING OR THE AMOUNT OF NET PROCEEDS, IF ANY, WHICH THE COMPANY WILL ACTUALLY RECEIVE FROM SUCH DISPOSITION. The pro forma adjustments to give effect to the California Disposition and the Transactions are based upon currently available information and upon certain assumptions that management believes are reasonable. The statement of results of operations used to derive the adjustments to eliminate the California results of operations differs from a complete statement in that allocations for interest expense and certain services provided by the Company, including, but not limited to, portions of legal assistance, employee benefits administration, treasury, accounting, auditing, tax functions and real estate, have not been made. The Merger will be accounted for by the Company as a purchase of Smitty's by the Company and Smitty's assets and liabilities will be recorded at their estimated fair market values at the date of the Merger. The adjustments included in the Unaudited Pro Forma Combined Financial Statements represent the Company's preliminary determination of these adjustments based upon available information. There can be no assurance that the actual adjustments will not differ significantly from the pro forma adjustments reflected in 45 the pro forma financial information. The Unaudited Pro Forma Combined Financial Statements are not necessarily indicative of either future results of operations or results that might have been achieved if the foregoing transactions had been consummated as of the indicated dates. The Unaudited Pro Forma Combined Financial Statements should be read in conjunction with the historical consolidated financial statements of the Company, together with the related notes thereto, included elsewhere in this Offer to Purchase. The Unaudited Pro Forma Combined Financial Statements do not reflect (i) any of the net annual cost savings which management believes are achievable by the end of the third full year of operations following the Merger, or (ii) the anticipated costs to be incurred in connection with the integration of operations in Arizona. The Unaudited Pro Forma Combined Statement of Operations included herein does not reflect the California Divestiture Charge, California Asset Disposition Charge, an extraordinary loss on extinguishment of debt, an anticipated charge relating to certain costs expected to be incurred by the Company in connection with the Merger, a potential severance payment to the Chairman and Chief Executive Officer of the Company or compensation expense in connection with the repurchase of certain management stock options as part of the Recapitalization. See Note (g) to the Unaudited Pro Forma Combined Statement of Operations. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
52 WEEKS ENDED ----------------------------------------------------- JANUARY 14, DECEMBER 30, 1995 1996 --------------------------------------- ------------ ADJUSTMENTS PRO FORMA PRO FORMA FOR CALIFORNIA COMBINED FOR THE COMPANY ADJUSTMENTS COMPANY FOR SMITTY'S DISPOSITION CALIFORNIA (HISTORICAL) FOR CALIFORNIA CALIFORNIA (HISTORICAL) AND DISPOSITION (AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS ------------ -------------- ----------- ------------ -------------- ---------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Net sales............... $ 3,083.7 $(674.6) $ 2,409.1 $ 584.3 $ -- $ 2,993.4 Cost of goods sold...... 2,386.7 (516.2) 1,870.5 419.6 2,290.1 ---------- ------- ---------- --------- ------ ---------- 697.0 (158.4) 538.6 164.7 703.3 Expenses: Operating, selling and administrative........ 461.4 (145.6) 315.8 136.0 0.4 (b) 452.2 Depreciation and amortization.......... 105.0 (27.0) 78.0 12.3 (1.3)(c) 0.9 (d) 89.9 Restructuring charges.. 140.0 (140.0) Interest............... 60.0 60.0 18.4 53.9 (e) 132.3 Amortization of debt issuance costs........ 0.4 0.4 1.0 8.4 (e) 9.8 ---------- ------- ---------- --------- ------ ---------- Income (loss) before income taxes........... (69.8) 154.2 84.4 (3.0) (62.3) 19.1 Income tax expense (benefit).............. (29.3) 63.2 33.9 (0.7) (23.9)(f) 9.3 ---------- ------- ---------- --------- ------ ---------- Net income (loss)(g).... (40.5) 91.0 50.5 (2.3) (38.4) 9.8 Preferred stock accretion.............. (10.2)(h) (10.2) ---------- ------- ---------- --------- ------ ---------- Income (loss) applicable to common shares....... $ (40.5) $ 91.0 $ 50.5 $ (2.3) $(48.6) $ (0.4) ========== ======= ========== ========= ====== ========== Net income (loss) per common share(g)........ $ (1.62) $ 2.00 $ (2.30) $ -- $ (0.03)(i) ========== ========== ========= ====== ========== Weighted average common shares outstanding..... 25,031,000 25,284,000 1,001,000 15,530,000 ========== ========== ========= ====== ========== Ratio of earnings to fixed charges(j)(k).... -- 2.27x 1.13x Ratio of earnings to fixed charges and preferred stock dividends(j)(k)........ -- 2.27x 1.01x
See Notes to Unaudited Pro Forma Combined Statement of Operations. 46 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (a) Reflects the elimination of the 1995 operating results for the California stores, excess real estate and distribution center which were sold, leased or closed, and the reversal of the restructuring charge recorded, in connection with the California Divestiture and the anticipated sale of the Company's remaining California real estate pursuant to the California Asset Disposition, but does not reflect the California Asset Disposition Charge of $125 million (pre-tax) which is anticipated to be recorded in connection with the adoption of a strategy to dispose of such remaining California assets following the consummation of the Transactions. (b) Represents fees payable to Yucaipa pursuant to the Management Services Agreement ($1.0 million) and the elimination of the historical Yucaipa management fees ($0.6 million) paid by Smitty's. (c) Represents a reduction in depreciation expense associated with the $14.1 million write-off of accumulated depreciation and amortization which adjusts Smitty's property and equipment to estimated fair market value. (d) Reflects the amortization of excess costs over net assets acquired in the Merger ($2.0 million) and the elimination of Smitty's historical amortization ($1.1 million). Amortization has been allocated on the straight line basis over a period of 40 years. (e) The following table presents a reconciliation of pro forma interest expense and amortization of debt issuance costs:
(DOLLARS IN MILLIONS) --------------------- Interest expense: Smitty's........................................... $ 18.4 Pro forma Company.................................. 60.0 ------ 78.4 ------ Plus:Interest on: New Term Loans..................................... 71.5 Bank fees.......................................... 0.3 New Senior Notes................................... 15.4 New Senior Subordinated Notes...................... 38.5 Less:Interest on: Old bank term loans: Pro forma Company................................ (59.5) Smitty's......................................... (3.1) Bank fees.......................................... (0.4) Smitty's Notes..................................... (6.5) Accretion of Smitty's Debentures................... (2.3) ------ Pro forma adjustment................................ 53.9 ------ Pro forma interest expense............................ $132.3 ====== Historical amortization of debt issuance costs........ $ 1.4 Plus: Financing fees--New Credit Facility................ 6.8 Financing fees--New Senior Notes and New Senior Subordinated Notes................................ 3.0 Less: Historical financing costs: (1.4) ------ Pro forma adjustment................................ 8.4 ------ Pro forma amortization of debt issuance costs......... $ 9.8 ======
(f) The pro forma adjustment to income tax benefit is based upon an assumed blended rate of 39% applied to the pro forma net loss adjusted for permanent differences between book and tax income. The deferred tax asset recognized in the unaudited pro forma financial statements is more likely than not to be realized due to the expected future reversal of taxable temporary differences and the existence of taxable income in each of the prior three carryback years available. (g) The unaudited pro forma results of operations does not reflect the California Asset Disposition Charge, the California Divestiture Charge or costs related to (i) expenses to be incurred in connection with the purchase of certain management stock options as part of the Recapitalization which are estimated to be $12.5 million, (ii) the integration of the Company's operations which are estimated to be $15.0 million over a two-year period and (iii) a potential severance payment to the Chairman and Chief Executive Officer of the Company (definitive agreements with respect to which have not yet been reached). The unaudited pro forma results of operations does not include an extraordinary item for the loss on extinguishment of debt of $42.5 million, net of $27.2 million income tax benefit. (h) Reflects the accretion of dividends compounded quarterly for the New Preferred Stock. 47 (i) Loss per common share has been computed using the weighted average number of shares of Common Stock outstanding after giving effect to the issuance of 3,038,888 shares of Class B Common Stock of the Company to the stockholders of Smitty's as consideration in the Merger and the purchase of 50% of the outstanding Common stock (excluding shares issuable in the Merger) in the Offer. Common stock equivalents in the form of stock options are excluded from the weighted average number of common shares due to the net loss. (j) For purposes of computing the ratio of earnings to fixed charges and the ratio of earnings to fixed charges and preferred stock dividends, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs, and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). "Preferred stock dividends" reflects the amount representing the pre-tax earnings that would be required to cover such dividend requirements. 48 UNAUDITED PRO FORMA COMBINED BALANCE SHEET
52 WEEKS ENDED ---------------------------------------------------- PRO FORMA JANUARY 14, ADJUSTMENTS COMBINED DECEMBER 30, 1995 1996 FOR FOR --------------------------------------- ------------ CALIFORNIA CALIFORNIA PRO FORMA DISPOSITION DISPOSITION THE COMPANY ADJUSTMENTS COMPANY FOR SMITTY'S AND AND (HISTORICAL) FOR CALIFORNIA CALIFORNIA (HISTORICAL) RECAPITALIZATION RECAPITALIZATION (AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) AND MERGER AND MERGER ------------ -------------- ----------- ------------ ---------------- ---------------- (DOLLARS IN MILLIONS) ASSETS Current Assets: Cash and cash equivalents........... $ 16.1 $ $ 16.1 $ 11.5 $ 82.7 (b)(c) $ 110.3 Rebates and accounts receivable............ 23.8 (5.0) 18.8 9.3 28.1 Inventories............ 395.0 (76.0) 319.0 56.7 1.0 (d) 376.7 Prepaid expenses and deposits.............. 21.3 (2.0) 19.3 3.3 22.6 Refundable income taxes................. 1.9 1.9 Deferred tax assets.... 23.9 13.1 37.0 18.0 (e) 55.0 Assets held for sale... 125.0 (125.0) -------- ------- -------- ------ ------ -------- Total current assets... 605.1 (194.9) 410.2 82.7 101.7 594.6 Property and equipment: Land................... 276.6 276.6 18.6 (128.3)(c) 166.9 Building............... 610.0 610.0 50.6 (107.2)(c)(f) 553.4 Leasehold improvements. 55.8 55.8 9.8 (20.2)(c)(f) 45.4 Furniture and equipment............. 509.5 509.5 69.9 (27.9)(c)(f) 551.5 -------- ------- -------- ------ ------ -------- Less allowances for depreciation and amortization.......... (390.9) (390.9) (14.1) 23.3 (c)(f) (381.7) -------- ------- -------- ------ ------ -------- Net property and equipment............ 1,061.0 1,061.0 134.8 (260.3) 935.5 Goodwill, net........... 31.5 46.6 (g) 78.1 Other assets............ 20.1 (4.6) 15.5 11.0 74.9 (h)(i) 101.4 -------- ------- -------- ------ ------ -------- $1,686.2 $(199.5) $1,486.7 $260.0 $(37.1) $1,709.6 ======== ======= ======== ====== ====== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Trade accounts payable. $ 214.2 $ (42.0) $ 172.2 $ 39.6 $ 0.0 $ 211.8 Accrued sales and other taxes and other liabilities........... 50.7 (12.0) 38.7 12.0 (12.6)(j) 10.0 (k) 48.1 Accrued payroll and related benefits...... 97.5 (32.0) 65.5 19.2 84.7 Current maturities of long-term debt........ 20.9 20.9 6.2 (13.4)(l) 13.7 Current maturities of Redeemable Preferred Stock................. 1.0 1.0 (1.0)(m) Accrued restructuring costs................. 58.0 (58.0) -------- ------- -------- ------ ------ -------- Total current liabilities........... 442.3 (144.0) 298.3 77.0 (17.0) 358.3 Long-term debt, less current maturities..... 725.3 (28.6) 696.7 139.8 536.4 (n) (39.4)(c) (0.9)(n) 4.6 (i) 13.4 (l) (7.5)(o) 1,343.1 Accrued restructuring costs, less current portion................ 40.0 (40.0) Deferred income taxes... 58.6 13.1 71.7 13.8 (27.2)(p) (30.7)(e) 27.6 Other liabilities....... 20.2 7.5 (o) 27.7 Redeemable Preferred Stock, less current maturities............. 3.3 3.3 3.3 Cumulative Redeemable Exchangeable Preferred Stock.................. 71.2 (m) 71.2 Common Stockholders' Equity: Convertible Class A Common Stock........... 0.1 0.1 0.1 Class B Common Stock.... 0.2 0.2 (0.1)(q) 0.1 Additional paid-in capital................ 285.2 285.2 11.0 (11.0)(r) (165.8)(q) 45.5 (s) 164.9 Retained earnings(t).... 238.0 238.0 (1.8) (35.2)(u) (405.9)(q) (76.3)(e) (7.3)(v) 1.8 (r) (286.7) -------- ------- -------- ------ ------ -------- 523.5 523.5 9.2 (654.3) (121.6) Less cost of common stock in the treasury.. (106.8) (106.8) (464.9)(q) 571.7 (q) -------- ------- -------- ------ ------ -------- 416.7 416.7 9.2 (547.5) (121.6) -------- ------- -------- ------ ------ -------- $1,686.2 $(199.5) $1,486.7 $260.0 $(37.1) $1,709.6 ======== ======= ======== ====== ====== ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 49 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) Reflects the sale of the California stores and other related assets, excess real estate and distribution center in connection with the California Divestiture. The Company has received $67.2 million subsequent to December 30, 1995 and expects to receive an additional $10.6 million shortly after the consummation of the Recapitalization and Merger. The net proceeds of such sale is reflected as a reduction of the historical revolving credit balance ($28.6 million) and payment of certain liabilities in the Company's pro forma balance sheet at December 30, 1995. (b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New Revolving Credit Facility, and (iii) the offerings used to finance the Recapitalization and Merger and pay related costs and fees as set forth in the following table:
(DOLLARS IN MILLIONS) --------------------- New Term Loans..................................... $ 805.0 New Senior Notes................................... 150.0 New Senior Subordinated Notes...................... 350.0 New Preferred Stock................................ 75.0 Repay Smitty's Notes............................... (50.0) Discount on Smitty's Notes......................... 0.4 Repay Smitty's Debentures.......................... (18.4) Discount on Smitty's Debentures.................... 0.5 Repay Smitty's Bank Credit Facility................ (34.9) Repay Company's Mortgage Notes and Other Indebtedness...................................... (667.1) Purchase existing Series I Preferred Stock......... (1.0) Purchase 50% of Common Stock....................... (451.3) Purchase Management Options........................ (13.7) Accrued Interest................................... (12.6) Fees and Expenses.................................. (145.1) ------- Use of California Proceeds (See Note (c)).......... $ 13.2 =======
(c) Assumes the anticipated sale of the Company's remaining California real estate pursuant to the California Asset Disposition. Also reflects the California Asset Disposition Charge of $125 million (pre-tax) in connection with the adoption of a strategy to dispose of such remaining California assets following the consummation of the Recapitalization and Merger.
(DOLLARS IN MILLIONS) --------------------- Disposal of Property and Equipment Land.............................................. $ 128.3 Buildings......................................... 104.0 Leasehold improvements............................ 19.6 Furniture and equipment........................... 17.6 ------- 269.5 Depreciation and amortization..................... (9.2) ------- Net book value of property and equipment.......... 260.3 Write-down of California assets to net realizable value............................................ (125.0) ------- Proceeds from California Asset Disposition........ 135.3 Reduction in historical revolving credit balance ................................................. (39.4) Reduction of anticipated indebtedness under the New Revolving Facility (See Note (b))................................... (13.2) ------- Cash provided by the California Asset Disposi- tion........................................... $ 82.7 =======
(d) Reflects the elimination of Smitty's historical LIFO reserve which adjusts Smitty's inventory to reflect current estimated selling prices less costs of disposal and a reasonable profit allowance for the acquiring company. (e) Represents the $125 million California Asset Disposition Charge, tax effected at 39% tax rate and the recognition of the related deferred tax asset. The California Asset Disposition Charge reflects the write-down of California assets, other than assets held for sale at December 30, 1995, under the Company's strategy to accelerate the disposition of its 18 non- operating stores and excess land in California following the consummation of the Recapitalization and Merger. (f) Reflects the write-off of accumulated depreciation and amortization which adjusts Smitty's property and equipment to estimated fair market value. (g) Reflects the excess of costs over the fair value of net assets of Smitty's acquired in connection with the Merger ($78.1 million) and the elimination of Smitty's historical goodwill ($31.5 million). The purchase price for Smitty's will be determined by reference to the trading price of the Company's Class B Common Stock following the consummation of the Merger. The purchase price and preliminary calculation of the excess of costs over the fair value of net assets acquired is as follows: 50 Purchase Price:
(DOLLARS IN MILLIONS) Company equity received in exchange for Smitty's equity with an assumed market value of $15.00/share....................................... $ 45.5 Fees and expenses................................... 1.3 ------ Total purchase price................................ 46.8 Fair value of assets acquired....................... 229.5 Fair value of liabilities assumed................... 260.8 ------ (31.3) ------ Goodwill............................................ $ 78.1 ======
(h) Reflects the debt issuance costs associated with the New Credit Facility ($50.0 million), the New Senior Notes ($11.3 million), and the New Senior Subordinated Notes ($21.0 million). These amounts have been capitalized as deferred financing costs. (i) Reflects the elimination of deferred financing costs associated with the Smitty's Bank Credit Facility ($1.8 million), the Smitty's Notes ($3.1 million), the Smitty's Debentures ($0.6 million), the Company's Mortgage Notes and Other Indebtedness ($1.9 million) and the write-off of an interest rate swap agreement ($4.6 million), included in historical long- term debt, to be refinanced in connection with the Merger. (j) Reflects the payment of accrued interest on Smitty's Bank Credit Facility ($0.1 million), Smitty's Notes ($0.6 million) and the Company's Mortgage Notes and Other Indebtedness ($11.9 million) to be repaid in connection with the Merger. (k) Represents severance payments and other costs associated with the integration of the Company and Smitty's. (l) Reflects the repayment and cancellation of the current maturities of the Smitty's Bank Credit Facility ($4.9 million) and the Company's Mortgage Notes and Other Indebtedness ($20.8 million) and the recording of the current maturities of the New Term Loans ($12.3 million). (m) Reflects the issuance of $75 million of New Preferred Stock, net of related issuance costs ($3.8 million), and the retirement of 3,000,000 shares of Series I Preferred Stock. (n) Reflects the repayment and cancellation of the Smitty's Bank Credit Facility, the Smitty's Notes, the Smitty's Debentures, the Company's Revolving Credit Facility, the Company's Mortgage Notes and Other Indebtedness and records borrowings under the New Term Loans and New Revolving Facility and the issuance of the New Senior Notes and New Senior Subordinated Notes.
(DOLLARS IN MILLIONS) New Term Loans.......... $ 805.0 New Senior Notes........ 150.0 New Senior Subordinated Notes.................. 350.0 Repay Smitty's Notes.... (50.0) Discount on Smitty's Notes.................. 0.4 Repay Smitty's Debentures............. (18.4) Discount on Smitty's Debentures............. 0.5 Repay Smitty's Bank Credit Facility........ (34.9) Repay Company's Mortgage Notes and Other Indebtedness........... (667.1) ------- $ 535.5 =======
(o) Represents a reclassification of $7.5 million of the Company's deferred compensation and other long-term liabilities to conform to the pro forma combined classification. (p) Represents the deferred tax asset associated with the write-off of the deferred debt issuance costs and the premium over book value on the Company's and Smitty's debt to be refinanced. The deferred tax asset recognized in the unaudited pro forma financial statements is more likely than not to be realized due to the expected future reversal of taxable temporary differences and the existence of taxable income in each of the prior three carryback years available. (q) Reflects redemption of 50% of outstanding Common Stock prior to the Merger at $36.00 in cash per share, the retirement of all treasury shares and the purchase of certain outstanding management stock options. (r) Reflects the elimination of Smitty's historical equity. (s) Represents the issuance of 3,038,888 shares of Common Stock at an assumed market value of $15.00 per share as consideration in the Merger. (t) The unaudited pro forma balance sheet does not include (i) certain costs related to the purchase of certain management stock options as part of the Recapitalization which are estimated to be $12.5 million, (ii) the integration of the Company's operations which are estimated to be $15.0 million over a two-year period and (iii) a potential severance payment to the Chairman and Chief Executive Officer of the Company (definitive agreements with respect to which have not yet been reached). 51 (u) Represents the premium over book value attributable to "make whole" payments and other premiums payable in connection with the retirement of the Company's Mortgage Notes and Other Indebtedness and the Smitty's Notes and Debentures, net of 39% tax rate. The actual amount of such payments may vary substantially based on the yields of certain U.S. Treasury debt securities at the time such indebtedness is actually repaid. (v) Represents the write-off of the historical deferred debt issuance costs of the Company and Smitty's related to its refinanced debt, net of 39% tax rate. 52 THE RECAPITALIZATION AGREEMENT The following is a brief summary of the material provisions of the Recapitalization Agreement, a copy of which has been incorporated by reference in the Schedule 13E-4 of which this Offer to Purchase is a part. The description set forth below of the terms of the Recapitalization Agreement is qualified in its entirety by reference thereto. See "Available Information" for instructions in obtaining a copy of the Recapitalization Agreement. THE OFFER AND MERGER The Recapitalization Agreement provides among other things for: (i) the Offer to be made by the Company for the purchase of 50% of the outstanding Shares (excluding Shares issuable in the Merger) at $36.00 in cash per share; and (ii) the Merger of Smitty's with Acquisition, a wholly owned subsidiary of the Company, with Smitty's continuing as the surviving corporation and a wholly owned subsidiary of the Company, subject in each case to certain terms and conditions described herein. The consummation of the Offer and the Merger will occur simultaneously, except in certain limited circumstances described herein. CONDITIONS TO THE MERGER COMPANY'S OBLIGATION TO CLOSE. The obligation of the Company to effect the Merger will be subject to the fulfillment of the following conditions on or prior to the effective time of the Merger (the "Effective Time"): (a) The representations and warranties of Smitty's and Yucaipa contained in the Recapitalization Agreement are true and correct in all material respects as of the Merger Closing Date with the same effect as though such representations and warranties had been made as of such date, except for representations and warranties that speak as of a specific date other than the Merger Closing Date (which need only be true and correct as of such date). (b) The covenants and agreements of Smitty's and Yucaipa to be performed or complied with prior to the Merger Closing Date have been performed and complied with in all material respects. (c) The waiting period and any extension thereof under the HSR Act and any other applicable federal or state antitrust or fair trade law has expired. There (i) is not in effect a temporary restraining order or a preliminary or permanent injunction or other order, decree or ruling by a court or a governmental, regulatory or administrative agency or commission which (A) restrains or prohibits the Merger or the consummation of any of the other transactions contemplated by the Recapitalization Agreement, (B) (1) prohibits or restricts the ownership or operation by the Company or any of its subsidiaries of any portion of their or Smitty's business or assets or (2) compels the Company or any of its subsidiaries to dispose of or hold separate any portion of their or Smitty's business or assets which in either case would be reasonably likely to have a material adverse effect on the Company and its subsidiaries taken as a whole or on Smitty's and its subsidiaries taken as a whole, (C) imposes any limitations on the ability of the Company or any of its subsidiaries effectively to control in any material respect the business and operations of Smitty's, or (D) is otherwise reasonably likely to have a material adverse effect on the Company and its subsidiaries taken as a whole, the value of Smitty's and its subsidiaries taken as a whole, the consummation of the transactions contemplated by the Recapitalization Agreement or on the Combined Companies taken as a whole; or (ii) is not pending before any court or administrative law judge or governmental, regulatory or administrative agency or commission, any action or proceeding which seeks as a relief a result described in clause (i) above; or (iii) has not been promulgated or enacted by a governmental authority a statute, rule, regulation or executive order which has an effect described in clause (i)(A), (B), (C) or (D) above. (d) All approvals, consents, authorizations and waivers from governmental and other regulatory agencies and other third parties disclosed to the Recapitalization Agreement (including 53 the expiration of any applicable waiting period under any regulation or statute other than the HSR Act and any other federal or state antitrust or fair trade law) have been obtained which, either individually or in the aggregate, if not obtained prior to the Merger Closing Date would have a material adverse effect on the Company and its subsidiaries taken as a whole or on Smitty's and its subsidiaries taken as a whole, or would adversely affect the validity or enforceability of the Recapitalization Agreement or the transactions contemplated thereby. (e) The stockholders of the Company have approved the Recapitalization Agreement and the other transactions contemplated by the Recapitalization at the Stockholders' Meeting, provided that, if the Company terminates the Recapitalization but not the Merger as described below under "The Recapitalization Agreement--Termination of the Recapitalization," then this condition will automatically be deemed to have been satisfied without any further action required by the Company. (f) The Standstill Agreement is in full force and effect. (g) The Offer has been consummated concurrently in accordance with its terms, resulting in the purchase of 50% of the outstanding Common Stock by the Company pursuant to the Offer, provided that, if the Company terminates the Recapitalization but not the Merger as described below under "The Recapitalization Agreement--Termination of the Recapitalization," then this condition will automatically be deemed to have been satisfied without any further action required by the Company. SMITTY'S OBLIGATION TO CLOSE. The obligation of Smitty's to effect the Merger will be subject to the fulfillment of the following conditions on or prior to the Effective Time: (a) The representations and warranties of the Company and Acquisition contained in the Recapitalization Agreement are true and correct in all material respects as of the Merger Closing Date with the same effect as though such representations and warranties had been made as of such date, except for representations and warranties that speak as of a specific date other than the Merger Closing Date (which need only be true and correct as of such date). (b) The covenants and agreements of the Company and Acquisition to be performed or complied with prior to the Merger Closing Date have been performed and complied with in all material respects. (c) The waiting period and any extension thereof under the HSR Act and any other applicable federal or state antitrust or fair trade law has expired. There (i) is not in effect a temporary restraining order or a preliminary or permanent injunction or other order, decree or ruling by a court or a governmental, regulatory or administrative agency or commission which (A) restrains or prohibits the Merger or the consummation of any of the other transactions contemplated by the Recapitalization Agreement, (B) (1) prohibits or restricts the ownership or operation by the Company or any of its subsidiaries of any portion of their or Smitty's business or assets or (2) compels the Company or any of its subsidiaries to dispose of or hold separate any portion of their or Smitty's business or assets which in either case would be reasonably likely to have a material adverse effect on the Company and its subsidiaries taken as a whole or on Smitty's and its subsidiaries taken as a whole, (C) imposes any limitations on the ability of the Company or any of its subsidiaries effectively to control in any material respect the business and operations of Smitty's, or (D) is otherwise reasonably likely to have a material adverse effect on the Smitty's stockholders, the value of the Merger Consideration, the consummation of the transactions contemplated by the Recapitalization Agreement or on the Combined Companies taken as a whole; or (ii) is not pending before any court or administrative law judge or governmental, regulatory or administrative agency or commission, any action or proceeding which seeks as relief a result described in clause (i) above; or (iii) has not been promulgated or enacted by a 54 governmental authority a statute, rule, regulation or executive order which has an effect described in clause (i)(A) or (B) above. (d) All approvals, consents, authorizations and waivers from governmental and other regulatory agencies and other third parties disclosed in the Recapitalization Agreement (including the expiration of any applicable waiting period under any regulation or statute other than the HSR Act and any other federal or state antitrust or fair trade law) have been obtained which, either individually or in the aggregate, if not obtained prior to the Merger Closing Date would have a material adverse effect on the Combined Companies taken as a whole. (e) The Registration Rights Agreement and, unless the Recapitalization has been terminated, the Management Services Agreement and the Warrant Agreement have been duly executed by the Company and are in full force and effect. REPAYMENT OF SMITTY'S INDEBTEDNESS In the Recapitalization Agreement, the Company has agreed that on the Merger Closing Date it will assume, repay, or cause to be repaid all outstanding principal and interest, and other amounts payable, under the Specified Smitty's Indebtedness (as defined below). As a result, (i) Smitty's will(A) offer to purchase all of the $29.025 million principal amount (accreted value of approximately $18.4 million at December 30, 1995) of its 13 3/4% Senior Discount Debentures due 2006 (the "Smitty's Debentures"), and (B) soliciting consents from the holders of Smitty's Debentures to certain amendments to the indenture under which the Smitty's Debentures were issued; and (ii) Smitty's Super Valu will (A) offer to purchase all of the $50.0 million principal amount of its 12 3/4% Senior Subordinated Notes due 2004 (the "Smitty Notes"), and (B) soliciting consents from the holders of Smitty's Notes, to certain amendments to the indenture under which the Smitty's Notes were issued. Such offers to purchase Smitty's Debentures and Smitty's Notes and the related consent solicitations are referred to as the "Smitty's Debt Offers." Consummation of the Smitty's Debt Offers is subject to consummation of the tender of, and receipt of consents from, a majority of the outstanding aggregate principal amount of Smitty's Notes and a majority of the aggregate principal amount at maturity of Smitty's Debentures, and offers to purchase will be conditioned on the receipt of financing and certain other conditions. The Offer and the Smitty's Debt Offers are expected to close concurrently with the closing of the Merger and the financing transactions described below. As used herein, "Specified Smitty's Indebtedness" means the collective reference to the Smitty's Notes, the Smitty's Debentures and all indebtedness under the Credit Agreement dated as of June 29, 1994 among Smitty's Super Valu, Chase Manhattan and the other lenders party thereto. As of December 30, 1995, there was $103.3 million aggregate principal amount outstanding of Specified Smitty's Indebtedness. Although the Company believes that it will be able to successfully repay or cause the repayment of the Specified Smitty's Indebtedness on terms reasonably satisfactory to the Company, there can be no assurance that the Company will in fact be able to do so. REGULATORY APPROVALS On March 5, 1996, the Federal Trade Commission and the Antitrust Division granted early termination of the waiting period under the HSR Act, with respect to the Merger effective immediately. Except for approvals otherwise described in this Offer to Purchase, the Company is not aware of any other government or regulatory approvals required for the consummation of the transactions contemplated by the Recapitalization Agreement. 55 COMPANY'S STOCK OPTIONS; DEFERRED COMPENSATION PLANS In the Recapitalization Agreement, the Company has agreed to offer employees who hold Options, immediately prior to the Offer Closing Date, the opportunity to elect either to: (i) receive on the Offer Closing Date cash payments with respect to half of the shares subject to the Options in an amount equal to (A) the number of shares of Common Stock that would be received by such holder upon exercise of one-half of such Options multiplied by $36.00 per share minus (B) the aggregate exercise price of such Options, and, in consideration of such payments, to execute amendments to each existing option agreement such that the remaining half of the shares subject to the Options will not be exercisable prior to the exercise date stated therein (without regard to the transactions contemplated by the Recapitalization Agreement) and will have the exercise price reduced from $19.00 to $15.00 per share of Common Stock; or (ii) have all such employees' Options continue to vest in accordance with the stated terms of the Options as in effect as of the date of the Recapitalization Agreement. Assuming that all of the Company's employees who hold Options make the election set forth in clause (i) above, the estimated aggregate value of the Company's proposed treatment of the Options will be approximately $16.9 million (comprised of approximately $13.7 million representing the cash payment for half of the Options and $3.2 million representing the exercise price reduction for the remaining Options). Of such estimated aggregate value, approximately $252,000 will be for the account of members of the Smith Group and approximately $5.2 million will be for the account of the Company's other directors and executive officers who are not members of the Smith Group but have indicated their intention to vote in favor of the Recapitalization Agreement. In addition, the Company has agreed to use all reasonable efforts to amend its deferred compensation agreements in effect as of the date of the Recapitalization Agreement with each of Frederick F. Urbanek, James A. Acton, Richard C. Bylski, Larry R. McNeill, Kenneth A. White, Matthew G. Tezak, Paul D. Tezak, James W. Hallsey, Michael C. Frei, Harry M. Moskal and Robert C. Bolinder to provide that if within two years after the Closing Date the Company terminates such officer's employment without cause (as such term will be defined in such amendments to the reasonable satisfaction of such officers, the Company and Yucaipa), all of such officer's unvested benefits under his deferred compensation agreement will become immediately and fully vested. FINANCING ARRANGEMENTS BY YUCAIPA; YUCAIPA FEE Yucaipa has agreed in the Recapitalization Agreement to use all reasonable efforts to consult with the Company concerning and, as appropriate, assist the Company in arranging for the Company to enter into one or more Financing Agreements, with terms and conditions which are consistent with the related financing letters and are otherwise reasonably satisfactory to the Company. See "Financing of the Recapitalization and Merger" for additional information with respect to the Company's Financing Agreements. The Recapitalization Agreement also provides that if the Offer is consummated, the Company will pay to Yucaipa a fee of $15 million on the Closing Date. COMPOSITION OF BOARD OF DIRECTORS AND OFFICERS Effective as of the Closing Date, the Company has agreed in the Recapitalization Agreement to use all reasonable efforts, subject to the provisions of the Certificate of Incorporation and By-laws of the Company and the approval of the Company's stockholders at the Stockholders' Meeting, to:(i) cause the Company's Board of Directors to be reduced to seven directors and have nominated and elected as directors two designees of Jeffrey Smith, two designees of Yucaipa, one senior manager of the Company and two independent directors; and (ii) cause the Company's Board of Directors to elect 56 Ronald Burkle as the Chief Executive Officer of the Company. Mr. Smith has designated himself and Fred Smith as his designees, Yucaipa has designated Mr. Burkle and Linda McLoughlin Figel as its designees, Allen Rowland, President and Chief Operating Officer of the Company, has been nominated for election as a director, and Bruce Karatz and Bertram R. Zweig have been nominated as independent directors. For information concerning the nominees for election to the Board of Directors, see "Management After Recapitalization and Merger." TERMINATION The Recapitalization Agreement may be terminated at any time prior to the Closing Date: (a) by mutual consent of the Company and Smitty's in a written instrument; (b) by either the Company or Smitty's, if neither the Merger nor the Offer has been consummated by July 30, 1996 (the "Termination Date"); or (c) by the Company, if Smitty's or Yucaipa is in material breach of its obligations under the Recapitalization Agreement, or by Smitty's, if the Company or Acquisition is in material breach of its obligations under the Recapitalization Agreement; provided that no party will be entitled to terminate the Recapitalization Agreement by reason of clause (c) if it or any of its affiliates is in material breach of its obligations under the Recapitalization Agreement. In the event of termination of the Recapitalization Agreement, the Recapitalization Agreement will become void and no party will have any liability or further obligation to any other party under the Recapitalization Agreement or the transactions contemplated thereby, except as otherwise provided in the Recapitalization Agreement. TERMINATION OF RECAPITALIZATION At any time prior to the Offer Closing Date, if in the exercise of its fiduciary duties to the Company's stockholders under applicable law, the Company's Board of Directors (i) determines that the termination of the Recapitalization is required by reason of the Company's acceptance of an Alternative Transaction, or (ii) withdraws or materially modifies or changes its recommendation of the Recapitalization, the Company may terminate the Company's obligation to consummate the Recapitalization. However, in such event the Company will be obligated to consummate the Merger and the Company's stockholders will not be required to approve the Recapitalization Agreement and the transactions contemplated thereby. In addition, under such circumstances, the Company will not approve and adopt the separate amendments to the Company's Certificate of Incorporation, including the classification of the Board of Directors in the manner contemplated thereby. The "Recapitalization" as defined in the Recapitalization Agreement refers to: (i) the execution, delivery and receipt of the proceeds under the Financing Agreements; (ii) the making and consummation of the Offer; (iii) the execution and delivery of the Management Services Agreement; (iv) the execution and delivery of, and the issuance of the warrants provided for under, the Warrant Agreement; (v) the completion of certain transactions contemplated by the Recapitalization Agreement regarding the composition of the Company's Board of Directors, the election of Mr. Burkle as Chief Executive Officer, the cash payment for a portion of, and the reduction of the exercise price for a portion of, the Company's management stock options and the amendment of the Company's deferred compensation agreements; and (vi) the filing of the Amended and Restated Certificate of Incorporation for the Company. An "Alternative Transaction" as defined in the Recapitalization Agreement means any tender or exchange offer involving the capital stock of the Company or any subsidiary of the Company, any proposal or offer to acquire in any manner a substantial equity interest in, or a substantial portion of the business or assets of, the Company or any subsidiary of the Company, any proposal or offer with respect to any recapitalization or restructuring with respect to the Company or any subsidiary of the 57 Company or any proposal or offer with respect to any other transaction similar to any of the foregoing with respect to the Company or any subsidiary of the Company, other than pursuant to the transactions to be effected pursuant to the Recapitalization Agreement. AMENDMENT AND WAIVER The Recapitalization Agreement may not be amended except by action of each of the parties thereto set forth in a written instrument signed by each of the parties thereto. At any time prior to the Closing Date, any party to the Recapitalization Agreement may (i) extend the time for the performance of any of the obligations or other acts of any other party thereto; (ii) waive any inaccuracies in the representations and warranties of any other party contained therein or in any document delivered pursuant thereto; or (iii) waive compliance with any of the agreements of any other party or with any conditions to its own obligations. No waiver of any of the provisions of the Recapitalization Agreement will be deemed to constitute a waiver of any other provision (whether or not similar), nor will such waiver constitute a continuing waiver, unless otherwise expressly provided. REPRESENTATIONS AND WARRANTIES The Recapitalization Agreement contains customary representations and warranties (subject to certain conditions and exceptions) of the Company relating among other things to (a) corporate organization and similar corporate matters; (b) the capital structure of the Company; (c) authorization, execution, delivery, performance and enforceability of the Recapitalization Agreement and the other related agreements; (d) absence of certain material changes or events since the end of the last fiscal year of the Company; (e) no material conflicts or violations with organizational documents, applicable laws or material contracts or agreements and no material consents or approvals; (f) the absence of material litigation; (g) compliance with applicable laws; (h) the accuracy of documents filed with the Commission; (i) retirement and other employee plans and matters relating to the Employee Retirement Income Security Act of 1974, as amended; (j) filing of tax returns and payment of taxes; (k) brokers' and finders' fees; and (l) the accuracy of information supplied by the Company in connection with this Offer to Purchase and other documents to be publicly filed by the Company in connection with the Offer and the Merger. The Recapitalization Agreement also contains customary representations and warranties of Smitty's, including representations and warranties that are similar to those provided by the Company and in addition representations and warranties relating to: (a) ownership of or valid leasehold interests in Smitty's properties and stores; (b) material contracts; (c) labor relations; and (d) insurance. The Recapitalization Agreement further contains representations and warranties of Yucaipa relating among other things to (a) due organization and proper authorization; (b) ownership of Smitty's Common Stock; (c) no material conflicts or violations and no material consents or approvals; and (d) no agreements to sell or dispose of Smitty's Common Stock or any material portion of Smitty's assets. CONDUCT OF BUSINESS PENDING MERGER Pursuant to the Recapitalization Agreement, the Company and Smitty's have each agreed to carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as conducted prior to the execution of the Recapitalization Agreement. THE COMPANY. In addition, the Company has agreed that until the Merger Closing Date, neither the Company nor any of its subsidiaries will, except as otherwise provided in the Recapitalization Agreement: (a) (i) amend its Certificate of Incorporation or By-laws (other than 58 amendments to defer the redemption of the Series I Preferred Stock for up to five years), (ii) split, combine or reclassify any of its outstanding equity securities or declare, set aside or pay any dividend payable in cash, stock or property or make any other distribution with respect to any of its equity securities, except regularly scheduled dividends on its Common Stock consistent with past practice, or (iii) redeem, purchase or otherwise acquire, directly or indirectly, any shares of its equity securities (other than redemptions of Series I Preferred Stock in accordance with the Company's certificate of incorporation); (b)(i) issue or sell or agree to issue or sell any additional shares of, or options, warrants or rights of any kind to acquire any shares of, its capital stock of any class or series, (ii) enter into any contract or commitment out of the ordinary course of its business to dispose of or acquire, or relating to the disposition or acquisition of, a segment of its business, (iii) except in the ordinary course of business, sell, pledge, dispose of or encumber any material assets (including without limitation any indebtedness owed to it or any material claims held by it), (iv) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or make any material investment, either by purchase of stock or securities, contribution to capital, property transfer or purchase of any material amount of property or assets, in any other individual or entity, or (v) enter into any contract, commitment or arrangement with respect to any of the foregoing; (c) adopt or amend any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund or other arrangement for the benefit or welfare of any employee or increase in any manner the compensation or fringe benefits of any employee or pay any benefit not required by any existing plan, arrangement or agreement; (d) incur any material amount of indebtedness for borrowed money, or make any loans or advances or capital contributions to any other person other than a wholly owned subsidiary of the Company, or issue or sell any debt securities, other than borrowings under existing lines of credit in the ordinary course of business or acquire any debt instruments of others; (e) make or commit to make any capital expenditures in excess of $1,000,000 in the aggregate, other than expenditures for (i) routine maintenance and repair or (ii) pursuant to existing contracts or commitments; (f) enter into or amend any contract for the purchase of inventory which is not cancelable within 90 days without penalty, cost or liability or any other contract in excess of $100,000 which is not cancelable within 30 days without penalty, cost or liability; (g) grant any severance or termination pay (other than pursuant to policies or agreements in effect on the date of the Recapitalization Agreement) or increase the benefits payable under its severance or termination pay policies or agreements in effect on the date of the Recapitalization Agreement; and (h) take or permit any action which would prevent the Merger from qualifying as a reorganization under Section 368 of the Code. Notwithstanding the foregoing provisions, if the Recapitalization has been terminated, the Company will not be required to comply with the provisions referred to in clause (b) through (h) above following the date of such termination. SMITTY'S. Smitty's has agreed that, until the Merger Closing Date, Smitty's will and will cause its subsidiaries to: (i) maintain reasonably comparable advertising and promotional expenditures; (ii) maintain reasonably comparable overall levels of inventory subject to seasonal variation and changes in sales volume; (iii) maintain comparable insurance coverage at commercially reasonable rates; (iv) pay amounts due to vendors consistent with past practices; and (v) perform customary maintenance on its properties and provide for the security of such properties in accordance with past practices. In addition, Smitty's has agreed that until the Merger Closing Date, neither Smitty's nor any of its subsidiaries will, except as otherwise provided in the Recapitalization Agreement or as the Company may specifically consent in writing, which consent will not be unreasonably withheld: (a) close any facility, except as required by applicable law or in the event of casualty or as a result of the expiration of any lease which after reasonable efforts is not renewed; (b) enter into any new lease, lease termination agreement or material amendment (excluding any extension or renewal of any lease in 59 accordance with past practices) of any agreement to lease such real property; (c) sell, assign or sublease any facility or property; (d) (1) sell, assign or sublease any fixtures and equipment or other material assets, the aggregate sales prices and the annual rental payments of which are $100,000 or more in the aggregate, other than in the ordinary course of business, or (2) enter into any sale-leaseback transaction resulting in annual rental payments in excess of $100,000, except for sale-leaseback transactions for fixtures and equipment in the ordinary course of business consistent with past practice; (e) make any capital expenditures in excess of $250,000 in the aggregate, other than expenditures for routine maintenance and repair or pursuant to existing contracts or commitments; (f) incur any material amount of indebtedness for borrowed money, or make any loans or advances or capital contributions to any other person other than a wholly owned subsidiary of Smitty's, or issue or sell any debt securities, other than borrowings under existing lines of credit in the ordinary course of business or acquire any debt instruments of others; (g) make any transfer of assets from Smitty's or any of its subsidiaries to any affiliate; (h) materially reduce any store operating hours except as consistent with past practices as a result of security concerns, material changes in sales volume or as required by law; (i) (1) amend its certificate of incorporation or by-laws or the charter or by- laws of any of its subsidiaries, (2) split, combine or reclassify the outstanding shares of its capital stock or declare, set aside or pay any dividend payable in cash, stock or property or make any other distribution with respect to such shares of capital stock, (3) redeem, purchase or otherwise acquire, directly or indirectly, any shares of its capital stock, or (4) sell or pledge any stock of any of its subsidiaries; (j) (1) issue or sell or agree to issue or sell any additional shares of, or options, warrants or rights of any kind to acquire any shares of, its capital stock of any class, (2) enter into any contract or commitment out of the ordinary course of its business to dispose of or acquire or relating to the disposition or acquisition of a segment of its business, (3) except in the ordinary course of business, sell, pledge, dispose of or encumber any material assets, (4) acquire any corporation, partnership or other business organization or division thereof or make any material investment, either by purchase of stock or securities, contribution to capital, property transfer or purchase of any material amount of property or assets, in any other person, or (5) enter into any agreement, commitment or arrangement with respect to any of the foregoing; (k) fail to preserve intact its business organization, or fail to keep available the services of its present officers and key employees, and fail to preserve the good will of customers and other persons having business relationships with it; (l) grant any severance or termination pay (other than pursuant to policies or agreements in effect on the date of the Recapitalization Agreement) or increase the benefits payable under its severance or termination pay policies or agreements in effect on the date of the Recapitalization Agreement; (m) adopt or amend any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund or other arrangement for the benefit or welfare of any employee or increase in any manner the compensation or fringe benefits of any employee or pay any benefit not required by any existing plan, arrangement or agreement; (n) enter into or amend any contract for the purchase of inventory which is not cancelable within 90 days without penalty, cost or liability or any other contract in excess of $100,000 which is not cancelable within 30 days without penalty, cost or liability; (o) negotiate, enter into or modify any agreement or agree to be bound by any agreement with any collective bargaining agent relating to its business, except for agreements with respect to routine employee grievance matters in the ordinary course of business; (p) take or permit any action which would prevent the Merger from qualifying as a reorganization under Section 368 of the Code; and (q) make any material change in its tax or accounting policies or any material reclassification of assets or liabilities. ADDITIONAL COVENANTS FURTHER ASSURANCES AND COOPERATION. Each of the parties to the Recapitalization Agreement has agreed to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly 60 as practicable the transactions contemplated by the Recapitalization Agreement and to cooperate with each other in connection therewith (a) to obtain all necessary waivers, consents and approvals from other parties to material loan agreements, leases and other contracts (provided that Smitty's will not agree to any substantial modification to any such agreement, lease or contract or to any payment of funds in order to obtain such waiver, consent or approval without the prior written consent of the Company), (b) to effect all necessary registrations and filings, (c) to negotiate and enter into the Financing Agreements on terms reasonably satisfactory to the Company and to satisfy all conditions thereto, and (d) to fulfill all conditions to the Recapitalization Agreement. CERTAIN FILINGS AND CONSENTS. Each party to the Recapitalization Agreement has agreed that it will (a) as promptly as practicable make any required filings and submissions under the HSR Act with respect to the Merger, (b) cooperate with each other in determining whether any other filings are required to be made or consents, approvals, permits or authorizations are required to be obtained under any other federal, state, local or foreign law or regulation or whether any consents, approvals or waivers are required to be obtained from other parties to loan agreements, leases or other contracts in connection with the consummation of the transactions contemplated by the Financing Agreements, the Offer, the Merger and the other transactions contemplated by the Recapitalization Agreement, and (c) actively assist each other in obtaining any consents, permits, authorizations, approvals or waivers which are required. The parties have agreed to cooperate in connection with reaching any understandings, undertakings or agreements involving the Federal Trade Commission, the Department of Justice or any other governmental authority in connection with the transactions contemplated by the Recapitalization Agreement. The Company has agreed to use all reasonable efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated by the Recapitalization Agreement under any applicable federal or state antitrust laws; provided, however, that in no event will the Company be required in that connection to (i) effect any divestitures of any material assets of the Company, Smitty's or their respective subsidiaries, (ii) hold separate any such material assets or (iii) agree to any material restrictions on the operations of the Company, Smitty's or their respective subsidiaries of any material portion of the business or assets of the Company, Smitty's or their respective subsidiaries. ACCESS TO INFORMATION. Each party to the Recapitalization Agreement has agreed that it will upon reasonable notice, afford the other parties and their representatives, full access during normal business hours to all of its officers, agents, properties, books, contracts, commitments and records (including but not limited to tax returns) and during such period will furnish promptly to such persons all information concerning its business, properties and personnel as such persons may reasonably request. ALTERNATIVE PROPOSALS. Each of the Company and Smitty's (each, a "Restricted Party") have agreed not to, and to use their best efforts to ensure that their respective officers, directors, employees, investment bankers, attorneys, accountants and other agents do not, directly or indirectly: (i) initiate, solicit or encourage, or take any action to facilitate the making of, any offer or proposal which constitutes or is reasonably likely to lead to any Alternative Transaction or an inquiry with respect thereto, or (ii) in the event of an unsolicited Alternative Transaction for such Restricted Party or any subsidiary or affiliate of such Restricted Party, engage in negotiations or discussions with, or provide any information or data to, any corporation, partnership, person or other entity or group relating to any Alternative Transaction, except in the case of clause (ii) above to the extent that (x) the Alternative Transaction is a bona fide written proposal submitted to the Restricted Party's Board of Directors and (y) the Restricted Party's Board of Directors determines, after having received the oral or written opinion of outside legal counsel, that the failure to engage in such negotiations or discussions or provide such information would result in a breach of the Board of Directors' fiduciary duties under applicable law. 61 Pursuant to the Smith's Shareholder Agreement, the members of the Smith Group have also agreed to refrain from soliciting anyone other than Smitty's to purchase interests in the Company or transferring their shares of Company's capital stock without consent from the Company and Smitty's. See "Certain Related Agreements--Smith's Shareholder Agreement." Pursuant to the Smitty's Stockholders' Agreement, each of the parties to such agreement has agreed to refrain from soliciting anyone other than the Company or Acquisition to purchase interests in Smitty's or transferring their shares of Smitty's Common Stock without consent from the Company and Smitty's. See "Certain Related Agreements--Smitty's Stockholders' Agreement." DIRECTORS AND OFFICERS' INSURANCE AND INDEMNIFICATION. The Company has agreed that after the Closing Date, with respect to each person who is or has been a director or officer of the Company, any of its subsidiaries (including Smitty's), or its successors and assigns, the Company will indemnify each such person to the fullest extent permitted by law against any claim, liability, loss, damage, judgment, fine, penalty, amount paid in settlement or compromise, cost or expense, including reasonable fees and expenses of legal counsel, arising out of any matter existing or occurring on or prior to the Closing Date, whether commenced, asserted or claimed before or after the Closing Date. The Company will maintain in effect for not less than four years after the Closing Date, the current policies of directors' and officers' liability insurance maintained by the Company or its subsidiaries on the date the Recapitalization Agreement was signed (provided that the Company may substitute therefor policies having at least the same coverage and containing terms and conditions which are no less advantageous to the persons currently covered by such policies as insured) with respect to matters existing or occurring prior to the Closing Date and the Company will use its best efforts to prepay premiums with respect to the foregoing insurance for the four-year period following the Closing Date; provided, however, that if the aggregate annual premiums for such insurance during such period exceed 200% of the per annum rate of the aggregate premium currently paid by the Company or its subsidiaries for such insurance on the date the Recapitalization Agreement was signed, then the Company will cause the Surviving Corporation to provide the maximum coverage then available at an annual premium equal to 200% of such rate. CERTAIN RELATED AGREEMENTS STANDSTILL AGREEMENT On January 29, 1996, the Company and each member of the Yucaipa Group (which is comprised of Yucaipa and each of the limited partnerships which own shares in Smitty's for which Yucaipa acts as the general partner) entered into the Standstill Agreement. STANDSTILL PROVISION; NO SOLICITATION. The Yucaipa Group has agreed that for a 10-year period ending on January 29, 2006, it will not acquire, offer to acquire, agree to acquire, become the beneficial owner of, or obtain any rights in respect of any Company Voting Securities (as defined below), by purchase or otherwise, or take any action in furtherance thereof, if the effect of such action would be to increase its aggregate beneficial ownership of securities that are entitled to vote generally for the election of directors (the "Company Voting Securities") above (x) 20% of the total number of votes that could be cast at a stockholders' meeting of the Company (the "Combined Voting Power") or (y) 25% of the total number of Company Voting Securities outstanding. In addition, without the approval of a majority of the Disinterested Directors (defined as directors of the Company who are not employees or officers of the Company, are not serving as designees of the Yucaipa Group, and are not associates of Yucaipa or its affiliates) and subject to certain limited exceptions, no member of the Yucaipa Group will during such 10-year period (i) submit any proposals to acquire a majority of the Combined Voting Power of Company Voting Securities (a "Change of Control Proposal"), (ii) directly or indirectly sell, transfer any beneficial interest in, pledge, hypothecate or otherwise dispose of any 62 Company Voting Securities or any shares of Company Common Stock to be acquired from the Company pursuant to the Warrant Agreement, other than to another member of the Yucaipa Group or their respective affiliates in any transaction or series of transactions that would result in a transfer of greater than 3% of the Combined Voting Power or would result in any person having or having the right to acquire beneficial ownership greater than 5% of the Combined Voting Power, (iii) solicit any proxies, or assist any other person in any way in solicitation of proxies, or submit any proposal for the vote of stockholders of the Company, or induce another person to take any such actions with respect to the voting of any of the Company Voting Securities, (iv) directly or indirectly solicit or induce any person to bid for or acquire Company Voting Securities in excess of 5% of the Combined Voting Power of Company Voting Securities, (v) engage in certain affiliate transactions, or (vi) form, join in or in any other way participate in any partnership, pooling agreement, syndicate, voting trust or other group (other than the Yucaipa Group) with respect to Company Voting Securities. BOARD COMPOSITION. In the Standstill Agreement the Company has agreed to use its best efforts to cause to be elected to the Company's Board of Directors two designees of the Smith Group, two designees of the Yucaipa Group, one member of the senior management of the Company and two "independent directors" (as required by the rules of the NYSE) who are also Disinterested Directors. BOARD NOMINEES. Subject to the provisions of the Certificate of Incorporation and By-laws of the Company and the approval of the Company's stockholders, as long as the members of the Smith Group and the Yucaipa Group and their respective affiliates each beneficially own at least 8% of the outstanding shares of Common Stock, each such Group will have the right to designate two directors of the Company, and so long as the members of the Smith Group and the Yucaipa Group and their respective affiliates each beneficially own at least 5% of the outstanding shares of Common Stock, each such Group will have the right to designate one director of the Company. However, no individual who is an officer, director, partner, or principal stockholder of any Significant Competitor (as defined in the Management Services Agreement) of the Company or any of its subsidiaries will serve as director. At any time when the Yucaipa Group and its affiliates or the Smith Group and its affiliates no longer beneficially own at least 5% of the outstanding shares of Common Stock, such Group will not have the right to designate any director of the Company, such Group's rights with regard to the voting of Company securities will terminate and such Group will cause its designees to the Board of Directors to resign. Jeffrey Smith and Fred Smith have been nominated to be directors of the Company as designees of the Smith Group and Ronald Burkle and Linda McLoughlin Figel have been nominated to be directors of the Company as designees of the Yucaipa Group. In addition, each of the Smith Group and the Yucaipa Group has agreed that they each will, at any annual or special meeting of the stockholders at which the directors of the Company are to be elected or in connection with a solicitation of consents through which directors of the Company are to be selected, to vote (or give a written consent with respect to) all of their respective Company Voting Securities in favor of the election to the Company's Board of Directors of the nominees designated by such other Group. TERMINATION; AMENDMENT. The Standstill Agreement will terminate at any time that the Yucaipa Group and its affiliates own less than 2% of the outstanding shares of Common Stock. The Standstill Agreement may be amended or waived if such amendment or waiver is in writing and executed by all parties thereto; provided that any amendment or waiver requires the approval of a majority of the Disinterested Directors of the Company. MANAGEMENT SERVICES AGREEMENT On the Closing Date, the Company will enter into the Management Services Agreement with Yucaipa. 63 TERM, DUTIES, FEES AND EXPENSES. Yucaipa through its partners, employees or other designated representatives or agents, will agree to provide, the Company and its subsidiaries, subject to the supervision of the Board of Directors of the Company, management consultation and advice regarding strategic planning and development, budgeting, future financing plans, selection and retention of management employees, integration strategy, legal and government affairs, and such other similar management services as may be requested by the Board of Directors from time to time for a term of five years. In return, the Company will agree to pay Yucaipa an annual management fee of $1 million and will reimburse Yucaipa for its reasonable out-of-pocket costs and expenses incurred in connection with the performance of its obligations under the Management Services Agreement. In the event that during the term of the Management Services Agreement, the Board of Directors requests Yucaipa to provide (i) consulting services in connection with any proposed acquisition or divestiture transaction or any debt or equity financing, or (ii) any other services not otherwise covered by such agreement, Yucaipa will be entitled to such additional compensation for such services as may be agreed upon by Yucaipa and the Company (and approved by a majority of the Company's disinterested directors). Under certain circumstances, the Company may prepay a portion of the management fees payable to Yucaipa under the Management Services Agreement through the issuance of up to 100,000 shares of the Company's Class B Common Stock at its then current fair market value. The Company will also agree that in connection with Yucaipa's services, Ronald Burkle will have the right to serve as the Chief Executive Officer of the Company during the term of the Management Services Agreement and will have all the rights and responsibilities customarily vested in a chief executive officer. Mr. Burkle will not receive any compensation for serving in such capacity beyond the compensation paid to Yucaipa under the Management Services Agreement. TERMINATION RIGHTS. The Management Services Agreement will be terminable by the Company (i) at any time following the determination of the Company's Board of Directors to effect such termination by giving Yucaipa at least 90 days' notice, (ii) if Yucaipa fails to reasonably perform any material covenant, agreement, term or provision of the Management Services Agreement following 60 days' notice, (iii) at any time if, in connection with its performance under the Management Services Agreement, Yucaipa or any of its partners commits any act of fraud, dishonesty or gross negligence which is materially detrimental to the business or reputation of the Company, (iv) if certain payment or other defaults occur under the Company's New Credit Facility or new senior or senior subordinated debt indentures entered into in connection with the Recapitalization or any other material debt agreements entered into to refinance such indebtedness, subject to certain cure periods and conditions, (v) if Yucaipa or any member of the Yucaipa Group is in material default under the Standstill Agreement which default will not have been cured or waived within 90 days' notice, or (vi) if at any time, Yucaipa or any member of the Yucaipa Group owns less than 50% of the shares of Class B Common Stock of the Company originally acquired by them in the Merger. The Management Services Agreement will be terminable by Yucaipa (i) if the Company fails to reasonably perform any material covenant, agreement, term or provisions of the Management Services Agreement following 60 days' notice, (ii) if the Company fails to make any payment due to Yucaipa under the Management Services Agreement, if such payments are not made in full within 30 days' notice, (iii) if the designees of the Yucaipa Group cease to be members of the Board of Directors as required by the Standstill Agreement, (iv) if the Board of Directors fails to approve certain material recommendations by Yucaipa or if the Board of Directors otherwise takes action which materially interferes with the ability of Yucaipa to perform its responsibilities under the Management Services Agreement and such interference will continue for 60 days after notice is given, or (v) if Ronald Burkle ceases to be Chief Executive Officer of the Company, other than by reason of his death, disability, termination due to his commission of any act of fraud, dishonesty or gross negligence which is 64 materially detrimental to the business or reputation of the Company, or any felony conviction or voluntary resignation. The Management Services Agreement may be terminated, at the election of either party if during its term there is a "change of control" of the Company (defined generally as either (i) the acquisition of beneficial ownership by any person or group of any securities of the Company such that, as a result such group or person beneficially owns 40% or more of the Company's then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of the Company, or (ii) the sale of substantially all of the Company's assets or capital stock in a transaction or series of related transactions (excluding any transaction with Yucaipa or any of its partners or affiliates or any member of the Smith Group). TERMINATION FEE. In the event the Management Services Agreement is terminated by (i) the Company without cause, (ii) Yucaipa for cause in accordance with such agreement, or (iii) pursuant to a change of control of the Company, the Company has agreed to pay or cause to be paid to Yucaipa a termination payment equal to the greater of (x) $5 million and (y) twice the total consulting fees that would have been earned by Yucaipa during the remaining term of the Management Services Agreement as if such agreement had not been terminated, without regard to sums previously paid by the Company to Yucaipa as part of its management fee. NON-COMPETE. Yucaipa will agree that during the term of the Management Services Agreement it will not, without the Company's prior written consent, provide management or consulting services to, or make equity investments over 5% in, any business which operates in excess of five retail supermarket stores in any market in which the Company operates in excess of five retail supermarket stores (a "Significant Competitor"), subject to certain exceptions and conditions. INDEMNIFICATION. The Company will agree to indemnify and hold harmless Yucaipa and each of its affiliates, partners, officers, agents and the employees from and against all losses, claims, damages, liabilities or expenses (collectively, "losses") resulting from any claim, lawsuit or other proceeding by any person to which any of them may become subject which is related to or arising out of the performance of the services to be provided under the Management Services Agreement or the Recapitalization Agreement, including all reasonable out-of-pocket expenses, unless such losses result from (i) Yucaipa's or such party's gross negligence or willful misconduct or any intentional, material breach of the Management Services Agreement, or (ii) any settlement effected without the written consent of the Company, which consent will not be unreasonably withheld. WARRANT AGREEMENT On the Closing Date, the Company and Yucaipa will enter into the Warrant Agreement, pursuant to which the Company will issue Yucaipa the Warrants to purchase shares of the Company's newly designated Class C Common Stock ("Warrant Shares") representing 10% of the aggregate shares of the outstanding Common Stock on a fully diluted basis upon consummation of the Recapitalization and Merger. The Warrants will be exercisable at an initial exercise price of $50 per share, subject to adjustment (the "Exercise Price"). Half of the Warrants will be exercisable for a term of four years and the remaining half of the Warrants will be exercisable for a term of five years, subject in each case to extension for a five-year period if the market price of the Class B Common Stock is at least equal to the Exercise Price for a period of not less than 60 consecutive trading days. Each holder of Warrants, upon exercise, may elect to either receive from the Company, (i) the number of fully paid and nonassessable Warrant Shares which the holder may be entitled to receive upon exercise of the Warrants and payment of the Exercise Price then in effect, or (ii) the number of 65 Warrant Shares, on a net basis, equal to the number of Warrant Shares otherwise issuable upon exercise of the Warrants less the number of Warrant Shares having a fair market value equal to the aggregate Exercise Price that would have been paid by the holder of the Warrants, without the exchange of any funds. The Class C Common Stock to be issued to Yucaipa upon exercise of its Warrants will be identical in all respects to the Class B Common Stock, except that the Class C Common Stock will be non-voting. Shares of Class C Common Stock will be convertible into an equal number of shares of Class B Common Stock following the transfer of such shares by Yucaipa to any person or entity not affiliated with Yucaipa. The number of shares issued upon exercise of the Warrants and the Exercise Price are subject to adjustment under standard anti-dilution provisions. REGISTRATION RIGHTS AGREEMENT On the Closing Date, the Company will enter into a registration rights agreement (the "Registration Rights Agreement") with Jeffrey Smith, Yucaipa, and certain holders of Smitty's Common Stock who will receive Class B Common Stock in the Merger. Under the terms of the Registration Rights Agreement, each of (i) the holders of a majority of the Registrable Securities (as defined in such agreement) held by Yucaipa, its affiliates and the holders of Smitty's Common Stock receiving Class B Common Stock in the Merger, and transferees of the foregoing, as a group (the "Yucaipa Holder Group"), and (ii) the holders of a majority of the Registrable Securities held by Jeffrey Smith and his affiliates, and transferees of the foregoing, as a group (the "Smith Holder Group") will each be entitled to two written requests (the "Demand Registrations") upon the Company for the registration under the Securities Act of all or a part (but not less than 20% of the original number of the Registrable Securities held by the persons making such demand) of their shares of Registrable Securities. Such Demand Registration may at the election of the demanding holders be in the form of an underwritten offering and such demanding holders shall be entitled to select the underwriters. The Company will only be required to effect one Demand Registration during any six-month period. If at any time the Company proposes to file a registration statement under the Securities Act with respect to an offering by the Company for its own account or for the account of any holders of any class of common equity securities (other than (i) a registration statement on Form S-4 or S-8 or (ii) a registration statement filed in connection with a Demand Registration or a Shelf Registration (as defined herein) or (iii) a registration statement filed in connection with an offer of securities solely to existing security holders of the Company), the Company will give notice of such proposed filing to the holders of Registrable Securities who are parties to the Registration Rights Agreement and their transferees and will offer such holders the opportunity to register their Registrable Securities as part of such registration (the "Piggyback Registrations"). Upon the request of holders of a majority of the Registrable Securities held by the Yucaipa Holder Group at any time prior to the second anniversary of the Closing Date, the Company will cause to be filed with the Commission as promptly as practicable after such request, but in no event later than 60 days thereafter, a shelf registration statement (the "Shelf Registration") which will provide for resales of Registrable Securities held by members of the Yucaipa Holder Group who have provided information required by the Registration Rights Agreement. The Company will agree to use its best efforts to have such Shelf Registration declared effective and to keep such Shelf Registration continuously effective, for a period of at least 120 days following the date on which it becomes effective under the Securities Act, provided that if the Registrable Securities received by the Yucaipa Holder Group are "restricted securities" within the meaning of Rule 144 of the Securities Act, any Shelf Registration Statement shall be kept continuously effective until such Registrable Securities are no longer subject to the two- year holding period imposed under Rule 144(c). However, in no event will 66 the Company be required to keep the Shelf Registration in effect after the second anniversary of the Closing Date. In the event the Company is not able to fulfill all requests for the Registrable Securities to be included in any Demand Registration or Piggyback Registration, the Company has granted certain priority rights to the Smith Holder Group which enables the Smith Holder Group to have its Registrable Securities up to certain designated amounts included in such registrations before the Yucaipa Holder Group is entitled to include its Registrable Securities in such registrations. The Company will be obligated to pay its expenses associated with registration of the Registrable Securities, regardless of whether any registration statement required by the Registration Rights Agreement becomes effective, and the reasonable fees and disbursements of the holders of Registrable Securities of not more than one counsel chosen by the holders of a majority in number of such Registrable Securities. In addition, the Company will provide customary securities law indemnification to any party who participates in any registration effected under the Registration Rights Agreement. The Registration Rights Agreement will terminate upon the earlier to occur of (i) the mutual agreement by the parties thereto, (ii) with respect to any holder, such holder ceasing to own any Registrable Securities, (iii) the fifteenth anniversary of the Closing Date, or (iv) with respect to the Yucaipa Holder Group or the Smith Holder Group, the date on which the aggregate number of shares of outstanding Registrable Securities held by the Yucaipa Holder Group or the Smith Holder Group, as applicable, is less than 20%, of the Registrable Securities Shares originally held by the Yucaipa Holder Group or the Smith Holder Group, as applicable, immediately following the consummation of the Merger and the Recapitalization (except with respect to any holder that is an "affiliate" of the Company within the meaning of the Securities Act). SMITH'S SHAREHOLDER AGREEMENT On January 29, 1996, each member of the Smith Group entered into the Smith's Shareholder Agreement with Smitty's and Yucaipa. The Smith Group consists of Jeffrey Smith, Chairman and Chief Executive Officer of the Company, Richard Smith, Vice Chairman of the Company, Fred Smith, a director of the Company (all of whom are brothers), and Ida W. Smith (their mother) and certain other related stockholders, along with certain family trusts controlled by those persons. In the Smith's Shareholder Agreement, members of the Smith Group, who are holders of approximately 30.4% and 64.5% of the outstanding shares of Common Stock and Series I Preferred Stock respectively (and approximately 62.1% of the aggregate number of votes eligible to be cast at the Stockholders' Meeting), have agreed to: (i) take no action inconsistent with the Recapitalization Agreement or that would prevent any condition precedent to the Merger from being satisfied; (ii) in the event the Company commences an Offer, tender a sufficient number of their shares of Common Stock to enable the Company to repurchase 50% of the outstanding shares of Common Stock pursuant to the Offer; (iii) refrain from soliciting, from any person other than Smitty's, offers relating to any acquisition or purchase of all, or any material portion of the assets of, or any equity interest in the Company; (iv) refrain from transferring their shares of the Company's capital stock without consent from the Company or Smitty's, and (v) vote their shares in favor of the Merger. SMITTY'S STOCKHOLDERS' AGREEMENT On January 29, 1996, the Smitty's Principal Stockholders entered into, and Smitty's and Yucaipa have agreed to use their best efforts to cause each other stockholder of Smitty's to enter into, an agreement (the "Smitty's Stockholders' Agreement") with the Company. As of the date of this Offer to Purchase, holders of 70% of the outstanding shares of Smitty's Common Stock have entered into the Smitty's Stockholders' Agreement. 67 Each Smitty's stockholder who is a party to the Smitty's Stockholders' Agreement has agreed to (i) take no action inconsistent with the Recapitalization Agreement or that would prevent any condition precedent to the Merger from being satisfied, (ii) vote its shares in favor of the Recapitalization Agreement and the transactions contemplated thereby, including the Merger, at the meeting of the stockholders called for such purpose (and every adjournment thereof) or by written action without a meeting or otherwise, (iii) refrain from directly or indirectly soliciting offers from any person other than the Company or Acquisition relating to any acquisition or purchase of all or any material portion of the assets of, or any equity interest in Smitty's or its subsidiaries or transferring their shares of the Company's capital stock, without the consent of the Company and Smitty's. On April 10, 1996, holders of a majority of the outstanding shares of Smitty's Common Stock approved the Recapitalization Agreement and the transactions contemplated thereby, including the Merger, by delivering to Smitty's a written consent in accordance with Smitty's bylaws and Delaware law. FINANCING OF THE RECAPITALIZATION AND MERGER GENERAL To consummate the Recapitalization and the Merger, the Company will require approximately $1,393.2 million (net of California Disposition proceeds of $68.0 million) of financing to purchase Common Stock in the Offer, repay certain outstanding indebtedness of the Company and Smitty's, purchase shares of Series I Preferred Stock, purchase management stock options, and pay related fees and expenses. The Company plans to obtain the necessary funds by (a) borrowings of approximately $818.2 million aggregate principal amount under the New Credit Facility to be provided by a syndicate of banks led by Bankers Trust and Chase Manhattan; (b) the issuance of up to $150 million of New Senior Notes; (c) the issuance of up to $350 million of New Senior Subordinated Notes; and (d) the issuance of New Preferred Stock by the Company for gross proceeds of $75 million. In addition, the Company will assume approximately $43.6 million (at December 30, 1995) of existing indebtedness of Smitty's upon consummation of the Merger. Yucaipa has caused to be delivered to the Company and the Company has accepted, a commitment letter dated January 25, 1996 (as amended, the "Bank Commitment Letter") from Bankers Trust and Chase Manhattan, as arrangers, providing for borrowings by the Company in an aggregate principal amount of approximately $995 million under the New Credit Facility. Yucaipa has also caused to be delivered to the Company and the Company has accepted a letter dated January 25, 1996 (the "Highly Confident Letter") from BT Securities Corporation, CS First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co. and Chase Securities Inc. (the "Investment Banks") relating to the issuance and sale by the Company of the following new securities (the "New Securities"): (i) $150 million aggregate principal amount of New Senior Notes, (ii) $350 million aggregate principal amount of New Senior Subordinated Notes, and (iii) $75 million in gross proceeds of New Preferred Stock. In the Highly Confident Letter, the Investment Banks stated that, based upon their understanding of the transactions and financing summarized in such letter and current market conditions and subject to the conditions contained in such letter, they are highly confident of their ability to sell or place the New Securities. Yucaipa has agreed in the Recapitalization Agreement to use all reasonable efforts to consult with the Company concerning and, as appropriate, assist the Company in arranging for the Company to enter into one or more agreements providing for financing (collectively the "Financing Agreements"), with terms and conditions which are consistent with the related Commitment Letter and the Highly Confident Letter and are otherwise reasonably satisfactory to the Company. 68 The following table illustrates the pro forma sources and uses of funds to consummate the Recapitalization and Merger, assuming such transactions are consummated as of December 30, 1995. Although management believes the pro forma amounts estimated below are reasonable under the circumstances, actual sources and uses may differ from those set forth below: SOURCES AND USES (dollars in millions)
SOURCES ------- New Term Loans(a).............. $ 805.0 New Revolving Facility(a)(b)... 13.2 New Senior Notes............... 150.0 New Senior Subordinated Notes.. 350.0 New Preferred Stock............ 75.0 California Disposition Proceeds(b)................... 68.0 -------- Total Sources................ $1,461.2 ========
USES ---- Purchase Company's Common Stock......................... $ 451.3 Purchase Company's Management Options....................... 13.7 Purchase Company's Series I Preferred Stock............... 1.0 Repay Company's Mortgage Notes. 257.1 Repay Company's Unsecured Notes......................... 410.0 Repay Company's Revolving Credit Facility(b)............ 68.0 Repay Smitty's Notes(c)........ 50.0 Repay Smitty's Debentures(c)... 18.4 Repay Smitty's Bank Credit Fa- cility........................ 34.9 Debt Refinancing Premiums...... 56.8 Accrued Interest............... 12.6 Fees and Expenses.............. 87.4 -------- Total Uses................... $1,461.2 ========
- - -------- (a) The Company has obtained a commitment from Bankers Trust and Chase Manhattan for the New Credit Facility that will provide up to $805 million aggregate principal amount of term loans ("New Term Loans") and a $190 million revolving credit facility (the "New Revolving Facility") which will be available for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit, approximately $28 million of which are anticipated to be issued upon consummation of the Recapitalization and Merger. The New Credit Facility will be guaranteed by all subsidiaries of the Company, including Smitty's. See "Financing of Recapitalization and Merger--New Credit Facility." (b) The information presented is derived from the Unaudited Pro Forma Financial Statements contained elsewhere herein which reflect (i) the receipt of cash proceeds from the California Divestiture and the assumed receipt of cash proceeds from the sale of the Company's remaining California assets, pursuant to the California Asset Disposition, in an amount equal to the net book value of such assets after giving effect to the California Asset Disposition Charge; and (ii) the application of a portion of the cash proceeds therefrom to repay (A) the Company's historical revolving credit balances at December 30, 1995 ($68.0 million) and (B) $13.2 million of indebtedness anticipated to be incurred under the New Revolving Facility in connection with the consummation of the Recapitalization and Merger. Subsequent to December 30, 1995, the Company has received net cash proceeds from the California Divesture of $67.2 million and expects to receive an additional $10.6 million in proceeds from the California Divesture shortly after the Closing Date. The Company intends to use such additional proceeds to reduce revolving loans under the New Revolving Facility. The Company has not entered into any contracts relating to the California Asset Disposition and there can be no assurance as to the timing or the amount of net proceeds, if any, which the Company will actually receive from such disposition. See "Unaudited Pro Forma Combined Financial Statements" and "The Company, Smitty's and Yucaipa--The California Divestiture." (c) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are tendered and accepted for purchase in connection with the Smitty's Debt Tenders. If all of the outstanding Smitty's Notes and Smitty's Debentures are not tendered and accepted for purchase, the Company anticipates that it would reduce other borrowings. On or prior to the Offer Closing Date, the Company has agreed in the Recapitalization Agreement to effect the borrowings and issuances and sales, as applicable, under the Financing Agreements, the funds of which will be used upon expiration of the Offer together with other funds available to: (i) 69 purchase 50% of its outstanding Common Stock for approximately $451.3 million; (ii) repay approximately $667.1 million (pro forma at December 30, 1995) of indebtedness of the Company and $103.3 million (pro forma at December 30, 1995) of indebtedness of Smitty's; (iii) purchase up to half of the outstanding management stock options of the Company for approximately $13.7 million; and (iv) purchase approximately $1 million of its outstanding Series I Preferred Stock. In connection therewith, the Company has agreed to use all reasonable efforts to negotiate, prepare and enter into definitive Financing Agreements to provide for the financing on terms and conditions which are consistent with those contained in the Commitment Letter and the Highly Confident Letter and are otherwise reasonably satisfactory to the Company. The Company, Acquisition, Smitty's and Yucaipa agreed in the Recapitalization Agreement to use all reasonable efforts to satisfy, on or before the Offer Closing Date, all requirements of the Financing Agreements which are conditions to closing the transactions constituting the financings. The Company has agreed to prepare registration statements for filing pursuant to the Securities Act in order to permit the public offering of the New Securities and to take such other actions in connection therewith as may be appropriate to complete such public offerings. NEW CREDIT FACILITY In connection with the Recapitalization and Merger, the Company will enter into the New Credit Facility with a syndicate of financial institutions for whom Bankers Trust will act as administrative agent. The Company has accepted the Bank Commitment Letter from Bankers Trust and Chase Manhattan pursuant to which Bankers Trust and Chase Manhattan, as arrangers (the "Arrangers"), have agreed, subject to certain conditions, to provide the Company $995 million of financing under the New Credit Facility. The following is a summary of the anticipated material terms and conditions of the New Credit Facility. This summary does not purport to be a complete description of the New Credit Facility and is subject to the detailed provisions of the loan agreement (the "Loan Agreement") and various related documents to be negotiated and entered into in connection with the New Credit Facility. GENERAL. The New Credit Facility will provide for (i) the New Term Loans in the aggregate amount of $805 million, comprised of the $325 million Tranche A Loans, the $160 million Tranche B Loans, the $160 million Tranche C Loans and the $160 million Tranche D Loans; and (ii) the $190 million New Revolving Facility under which working capital loans may be made and commercial or standby letters of credit in the maximum aggregate amount to be agreed upon among the Company and the Arrangers, under which approximately $28 million of letters of credit are expected to be issued upon consummation of the Recapitalization and Merger. Proceeds of the New Term Loans and loans under the New Revolving Facility on the Closing Date, together with proceeds from the New Securities and the California Divestiture will be used to fund the cash requirements for the Offer, refinance certain existing indebtedness of the Company and Smitty's, purchase a portion of the Series I Preferred Stock, purchase certain of the Company's management options and pay various refinancing premium fees, expenses and other costs associated with the Recapitalization and Merger. The New Revolving Facility will be available to provide for the working capital requirements and general corporate purposes of the Company and to issue commercial and standby letters of credit. INTEREST RATE; FEES. Borrowings under (i) the New Revolving Facility and the Tranche A Loans will bear interest at a rate equal to the Base Rate (as defined in the Loan Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loans will bear interest at the Base Rate plus 2.00% per annum or the reserve adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loans will bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loans will bear interest at the Base Rate plus 2.75% per annum or the 70 reserve adjusted Euro-Dollar Rate plus 4.00% per annum, in each case as selected by the Company. Applicable interest rates on Tranche A Loans and the New Revolving Facility and the fees payable under the New Revolving Facility on letters of credit, will be reduced in increments of 0.25% per annum, up to an aggregate of 0.50% per annum, after the New Term Loans have been reduced by such amounts and if the Company meets certain financial tests to be agreed upon among the Company and the Arrangers. Up to $30 million of the New Revolving Facility will be available as a swingline facility and loans outstanding under the swingline facility shall bear interest at the Base Rate plus 1.00% per annum (subject to adjustment as described in the preceding sentence). After the occurrence of a default under the New Credit Facility, interest will accrue at the rate equal to the rate on loans bearing interest at the rate determined by reference to the Base Rate plus an additional 2.00% per annum. The Company will pay the issuing bank a fee of 0.25% per annum on each standby letter of credit and each commercial letter of credit and will pay the lenders under the New Credit Facility a fee equal to the margin on Eurodollar Rate loans under the Revolving Credit Facility (the "Eurodollar Margin") for standby letters of credit and a fee equal to the Eurodollar Margin minus 1.00% per annum for commercial letters of credit. Each of these fees will be calculated based on the amount available to be drawn under a letter of credit. In addition, the Company will pay a commitment fee of 0.50% per annum on the unused portions of the New Revolving Facility and for purposes of calculating this fee, loans under the swingline facility shall not be deemed to be outstanding. The New Credit Facility will require the Company to enter into hedging agreements to limit its exposure to increases in interest rates for a period of not less than two years after the Closing Date. The New Credit Facility may be prepaid in whole or in part without premium or penalty. AMORTIZATION; PREPAYMENTS. The Tranche A Loans will mature six and one- quarter years after the Closing and will be subject to amortization, commencing on the nine month anniversary of the Closing in the amount of $7.5 million, and thereafter commencing on the first anniversary of the Closing on a quarterly basis in aggregate annual amounts of $45 million in the second year, $55 million in the third year, $65 million in the fourth year, $65 million in the fifth year, $60 million in the sixth year, and $13.75 million on the sixth anniversary of the Closing and in the first quarter of the seventh year. The Tranche B Loan will mature seven and one-half years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.6 million for the first six years and in the seventh year payable in installments of $4.0 million in the first quarter and $18 million in each of the last three quarters and in the eighth year payable in installments of $22.7 million in the first quarter and $69.7 million in the second quarter. The Tranche C Loans will mature eight and one-half years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.6 million for the first seven years and in the eighth year payable in installments of $0.4 million in each of the first two quarters and $25 million in each of the last two quarters and in the ninth year payable in installments of $25 million in the first quarter and $73 million in the second quarter. The Tranche D Loans will mature nine and one- quarter years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.6 million for the first eight years and in the ninth year payable in installments of $0.4 million in each of the first two quarters, and $29 million in the third quarter and $32 million in the last quarter and in the tenth year in an installment of $85.4 million in the first quarter. The New Revolving Facility will mature on the same date as the Tranche A Loans. The Company will be required to reduce loans outstanding under the New Revolving Facility to $85 million for a period of not less than 30 consecutive days during the first 12-month period following the Closing and to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period thereafter. The Company will be required to make certain prepayments, subject to certain exceptions, on the New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in the Loan Agreement) and with the proceeds from certain asset sales, issuances of debt and equity securities and any pension plan reversion. Such prepayments will be allocated pro rata between the Tranche A Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans and to scheduled amortization payments of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche D Loans pro rata, provided that at the election of the Company mandatory 71 prepayments of Tranche A Loans made with Excess Land Proceeds (as defined in the Loan Agreement) may be applied to the Tranche A Loans in forward order of maturity up to $50 million. At the option of the Company, mandatory prepayments on the Tranche B Loans, the Tranche C Loans and the Tranche D Loans will be used to make an offer to repay such Loans and to the extent not accepted by the holders of such loans (x) in the event such mandatory prepayments are to be made from Excess Land Proceeds, such mandatory prepayments not so accepted will be applied to the prepayment of the Tranche A Loans and (y) in the event of all other mandatory prepayments, 50% of such amount will be applied to reduce Tranche A Loans on a pro rata basis and the remaining 50% may be retained by the Company. GUARANTEES AND COLLATERAL. All subsidiaries of the Company will guarantee the Company's obligations under the New Credit Facility. The Company's obligations and the guarantees of its subsidiaries will be secured by a first priority lien on all existing and after-acquired personal property of the Company and its subsidiaries, including a pledge of the stock of all subsidiaries of the Company and by first priority liens on all unencumbered real property fee interests of the Company and its subsidiaries and the Company and its subsidiaries will use their reasonable economic efforts to provide the lenders with a first priority lien on all unencumbered leasehold interests of the Company and its subsidiaries. COVENANTS. The obligation of the lenders under the New Credit Facility to advance funds is subject to the satisfaction of certain conditions customary in agreements of this type. In addition, the Company will be subject to certain customary affirmative and negative covenants in the New Credit Facility, including, without limitation, covenants that restrict, subject to specified exceptions, (i) the incurrence of additional indebtedness and other obligations, (ii) mergers and acquisitions, (iii) asset sales, (iv) the granting of liens, (v) prepayment or repurchase of other indebtedness, (vi) engaging in transactions with affiliates, (vii) capital expenditures, (vii) the making of investments, (ix) dividends and other payments with respect to equity interests, or (x) rental payments. In addition, the New Credit Facility will require that the Company maintain certain specified financial covenants, including a minimum fixed charge coverage, a minimum operating cash flow, a maximum ratio of total debt to operating cash flow and a minimum net worth. EVENTS OF DEFAULT. The New Credit Facility also provides for customary events of default. The occurrence of any of such events of default could result in acceleration of the Company's obligations under the New Credit Facility and foreclosure on the collateral securing such obligations, which could have material adverse results to holders of the New Securities. NEW SENIOR NOTES AND NEW SENIOR SUBORDINATED NOTES As part of the financing required to consummate the Recapitalization and the Merger, it is anticipated that the Company will offer $150 million aggregate principal amount of its New Senior Notes and $350 million aggregate principal amount of its New Senior Subordinated Notes (the New Senior Subordinated Notes, together with the New Senior Notes, the "New Notes"). The New Senior Notes will mature on the tenth anniversary of the Closing Date and the New Senior Subordinated Notes will mature on the eleventh anniversary of the Closing Date. The New Notes will bear interest, payable semiannually, at the respective rates to be determined by the Company and the Investment Banks prior to the consummation of the Recapitalization. The following is a summary of the anticipated material terms and conditions of the New Notes. This summary does not purport to be a complete description of the New Notes and is subject to the detailed provisions of the indentures and various related documents to be negotiated and entered into in connection with the New Notes. It is anticipated that the New Notes will be redeemable, in whole or in part, at the option of the Company, at any time on and after the fifth anniversary of their issue date at the respective redemption prices, representing a premium that declines ratably to par over an anticipated four- year period, to be 72 determined by the Company and the Investment Banks. In addition, it is expected that on or prior to the third anniversary of the issue date of the New Notes, the Company may, at its option, use the net cash proceeds of public equity offerings to redeem up to an aggregate of 35% of the New Senior Notes originally issued and up to 35% of the New Senior Subordinated Notes originally issued, at the respective redemption prices to be determined by the Company and the Investment Banks. Upon a change of control of the Company (as defined in the indentures pursuant to which the New Notes will be issued), each holder of New Notes will have the right to require the Company to repurchase such holder's New Notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase. The New Senior Notes will be senior unsecured obligations of the Company and will rank pari passu in right of payment with other senior unsecured indebtedness of the Company. However, the New Senior Notes will be effectively subordinated to all secured indebtedness of the Company, including indebtedness under the New Credit Facility. The New Senior Notes will rank senior in right of payment to all subordinated indebtedness of the Company, including the New Senior Subordinated Notes. The New Senior Subordinated Notes will be senior subordinated unsecured obligations of the Company and will be subordinated in right of payment to all Senior Indebtedness (as defined in the indentures) of the Company, including the Company's obligations under the New Credit Facility and the New Senior Notes. It is anticipated that the indenture pursuant to which the New Senior Notes will be issued will contain certain covenants, including, but not limited to, covenants with respect to the following:(i) limitation on restricted payments; (ii) limitation on incurrences of additional indebtedness;(iii) limitation on liens; (iv) limitation on asset sales; (v) limitation on dividend and other payment restrictions affecting subsidiaries; (vi) limitation on transactions with affiliates; (vii) limitation on subsidiary assets and indebtedness; (viii) limitation on mergers and certain other transactions; and (ix) limitation on preferred stock of subsidiaries. It is anticipated that the indenture pursuant to which the New Senior Subordinated Notes will be issued will contain the foregoing covenants, as well as a prohibition on incurrence of any indebtedness subordinated to any other indebtedness but senior to the New Senior Subordinated Notes. NEW PREFERRED STOCK As part of the financing required to consummate the Recapitalization and the Merger, it is anticipated that the Company will offer $75 million liquidation preference of New Preferred Stock. The following is a summary of the anticipated material terms and conditions of the New Preferred Stock. This summary does not purport to be a complete description of the New Preferred Stock and is subject to the detailed provisions of the certificate of designation and various related documents to be entered into in connection with the New Preferred Stock. The New Preferred Stock will be nonvoting, except as otherwise required by law and except in certain circumstances described herein, including (i) amending certain rights of the holders of the New Preferred Stock and (ii) the issuance of any class of equity securities that ranks on parity with or senior to the New Preferred Stock. In addition, if the Company (i) fails to pay dividends in respect of more than six quarters in the aggregate (or if after the fifth anniversary of the issue date such dividends are not paid in cash), (ii) fails to discharge any redemption obligation, or (iii) fails to make a required change of control offer, holders of a majority of the outstanding shares of New Preferred Stock, voting as a class, will be entitled to elect two additional members to the Company's Board of Directors. The New Preferred Stock will, with respect to dividend rights, rights on liquidation and winding-up and dissolution of the Company, rank, subject to certain conditions, (i) senior to (a) all classes of Common Stock of the Company and (b) each other class of capital stock or series of preferred stock 73 issued by the Company after the issuance of the New Preferred Stock the terms of which specifically provide that such class or series will rank junior to the New Preferred Stock or junior or on parity with any class of Common Stock or which do not specify their rank, (ii) on parity with the Series I Preferred Stock and each other class of capital stock or series of preferred stock issued by the Company after the issuance of the New Preferred Stock the terms of which specifically provide that such class or series will rank on parity with the New Preferred Stock as to dividend distributions and distributions upon liquidation, winding-up and dissolution of the Company and (iii) junior to each other class of capital stock or other series of preferred stock issued by the Company after the issuance of the New Preferred Stock the terms of which specifically provide that such series will rank senior to the New Preferred Stock. Dividends on the New Preferred Stock will accrue from the date of issuance and will be payable quarterly at a rate per annum to be determined by the Company and the Investment Banks. The Company, at its option, may pay dividends on any dividend payment date occurring on or before the fifth anniversary of the issue date by adding an amount equal to such dividends to the then effective liquidation preference of the New Preferred Stock. The New Credit Facility and the indentures governing the Notes will restrict the payment of cash dividends on the New Preferred Stock. The New Preferred Stock will be redeemable, subject to certain conditions, at the option of the Company, in whole at any time or in part from time to time on or after the fifth anniversary of the issue date at the redemption prices to be determined by the Company and the Investment Banks, plus, without duplication, an amount equal to accrued and unpaid dividends to the date of redemption. In addition, on or prior to the third anniversary of the Closing Date, the Company may, at its option and subject to certain conditions, use the net cash proceeds of one or more public equity offerings to redeem up to an aggregate of 35% of the shares of New Preferred Stock originally issued at a redemption price to be determined by the Company and the Investment Banks, plus, without duplication, an amount equal to accrued and unpaid dividends to the date of redemption. The Company will be required, subject to certain conditions, to redeem all of the shares of New Preferred Stock outstanding on the twelfth anniversary of the Closing Date at a redemption price equal to 100% of the then effective liquidation preference thereof, plus, without duplication, an amount equal to accrued and unpaid dividends to the date of redemption. Upon the occurrence of a change of control (as defined), the Company will, subject to certain conditions, offer to purchase all outstanding shares of New Preferred Stock at a price equal to 101% of the then effective liquidation preference thereof, plus, without duplication, an amount equal to accrued and unpaid dividends to the date of purchase. The New Credit Facility and the indentures governing the New Notes will limit the ability of the Company to make an offer to purchase the New Preferred Stock in the event of a change of control. NEW EXCHANGE DEBENTURES Subject to certain conditions, the New Preferred Stock will be exchangeable in whole, but not in part, at the option of the Company, on any dividend payment date, for the Company's Subordinated Exchange Debentures due 2008 (including any such securities paid in lieu of cash interest, as described herein, the "New Exchange Debentures"). Interest on the New Exchange Debentures will be payable at a rate to be determined by the Company and the Investment Banks and will accrue from the date of exchange thereof. Interest on the New Exchange Debentures will be payable semi-annually in cash or, at the option of the Company, on or prior to the fifth anniversary of the Closing Date, in additional New Exchange Debentures, commencing on the first such date after the exchange of the New Preferred Stock for the New Exchange Debentures. The New Exchange Debentures will mature on the twelfth anniversary of the Closing Date and are, subject to certain conditions, redeemable, at the option of the Company, in whole or in part, on or after the fifth anniversary of the Closing Date, at the redemption prices to be determined by the Company and the Investment Banks, plus accrued and 74 unpaid interest to the date of redemption. In addition, on or prior to the third anniversary of the Closing Date, the Company may, at its option and subject to certain conditions, use the net cash proceeds of one or more public equity offerings to redeem up to an aggregate of 35% of the principal amount of the New Exchange Debentures originally issued. The New Exchange Debentures will be subordinated to all existing and future Senior Indebtedness of the Company, including the New Credit Facility and the New Notes. In addition, the New Exchange Debentures will be effectively subordinated to all existing and future liabilities, including indebtedness, of the subsidiaries of the Company. In the event of a change of control, the Company will, subject to certain conditions, offer to purchase all outstanding New Exchange Debentures at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The New Credit Facility and the indentures governing the New Notes will limit the Company's ability to make an offer to purchase the New Exchange Debentures in the event of a change of control. 75 MANAGEMENT AFTER RECAPITALIZATION AND MERGER The following table sets forth certain information with respect to the persons who are expected to serve as the executive officers and directors of the Company following the consummation of the Recapitalization and Merger. Following the Recapitalization, the Board of Directors will be comprised of seven directors, including two designees of the Smith Group and two designees of the Yucaipa Group. See "Certain Related Agreements--Standstill Agreement."
NAME AGE POSITION ---- --- -------- Jeffrey P. Smith....... 46 Chairman of the Board Ronald W. Burkle....... 43 Chief Executive Officer, Director Allen R. Rowland....... 51 President, Chief Operating Officer, Director Robert D. Bolinder..... 65 Executive Vice President--Corporate Planning and Development Matthew G. Tezak....... 40 Senior Vice President, Chief Financial Officer J. Craig Gilbert....... 48 Senior Vice President, Regional Manager-- Intermountain Region James W. Hallsey....... 53 Senior Vice President, Regional Manager--Southwest Region Richard C. Bylski...... 57 Senior Vice President, Human Resources Michael C. Frei........ 50 Senior Vice President, General Counsel and Secretary Kenneth A. Martindale.. 36 Senior Vice President, Marketing Fred F. Urbanek........ 60 Senior Vice President, Facility Engineering John T. Standley....... 32 Senior Vice President, Administration Fred L. Smith.......... 48 Director Linda McLoughlin Figel. 32 Director Bruce Karatz........... 50 Director Bertram R. Zweig....... 61 Director
JEFFREY P. SMITH has been a director of the Company since 1971. He has been Chairman and Chief Executive Officer of the Company since 1988. He served as Chief Operating Officer and President of the Company from 1984 to 1988. RONALD W. BURKLE has been the Chairman of the Board of Smitty's and a director of Smitty's Super Valu since 1994 and Chairman of the Board of Smitty's Super Valu since October 1995. It is intended that Mr. Burkle will be appointed as the Company's Chief Executive Officer in connection with the Recapitalization and Merger. Mr. Burkle co-founded Yucaipa in 1986 and has served as a director of Ralphs Grocery Company since 1995. Mr. Burkle served as Chairman of the Board of Ralphs Grocery Company from 1995 to January 1996 and as Chief Executive Officer and a director of its predecessor, Food 4 Less Supermarkets, Inc. since 1987. Mr. Burkle served as Chief Executive Officer and a director of Dominick's Supermarkets, Inc. from 1995 to 1996 and currently serves as its Chairman of the Board. From 1986 to 1988, Mr. Burkle was Chairman and Chief Executive Officer of Jurgensen's, a Southern California gourmet food retailer. Mr. Burkle has served as a director of Kaufman and Broad Home Corporation since March 1995. ALLEN R. ROWLAND has been President and Chief Operating Officer since joining the Company in January 1996. Prior to that time, from 1989 to 1996 he served as a Senior Vice President/Regional Manager of Albertson's Inc. From 1982 to 1989, he was a Vice President/Division Manager with the Florida and Texas Divisions of Albertson's, Inc. ROBERT D. BOLINDER has been a director of Smith's since 1985. He has served as Executive Vice President, Corporate Planning and Development of Smith's since 1993. He served as Executive Vice President and Chief Financial Officer of Smith's from 1988 to 1993, after serving four years as a supermarket industry management consultant. He is also a director of Hannaford Bros. Company, Inc., a regional supermarket chain, and Idaho Power Company, a public utility company. Prior to 1984, Mr. Bolinder was Vice Chairman and a director of Albertson's, Inc. for many years. 76 MATTHEW G. TEZAK has been Senior Vice President and Chief Financial Officer of Smith's since 1993. He served as Senior Vice President, Finance and Treasurer from 1992 to 1993 and Vice President, Finance and Treasurer from 1987 to 1992. Mr. Tezak, a certified public accountant, joined Smith's in 1979 as Assistant Controller. J. CRAIG GILBERT has served as Senior Vice President, Regional Manager, Intermountain Region of Smith's since 1993. From 1992 to 1993 he served as Senior Vice President, Regional Manager, Southwest Region. From 1991 to 1992 he was Vice President, Regional Manager, Southwest Region and from 1985 to 1991 he served as Vice President, Sales and Merchandising, Intermountain Region. JAMES W. HALLSEY has served as Senior Vice President, Regional Manager, Southwest Region since 1995. He rejoined Smith's in 1994 as Senior Vice President, Special Projects after serving most of 1994 as Senior Vice President at McKesson Drug Company, a pharmacy company. In 1993, Mr. Hallsey retired as a director of Smith's (a capacity in which he served since 1985) and Senior Vice President, Corporate Nonfoods Director (a capacity in which he served since 1992). From 1980 to 1992 he served as Vice President, Corporate Nonfoods Director of the Company. RICHARD C. BYLSKI has been Senior Vice President, Human Resources of Smith's since 1992. He served as Vice President, Human Resources of Smith's from 1985 to 1992. MICHAEL C. FREI joined Smith's in 1990 as Senior Vice President, General Counsel and Secretary. Prior to that time, Mr. Frei served as Vice President and General Counsel of Price Development Company, a commercial real estate developer, since 1981. KENNETH A. MARTINDALE has served as Senior Vice President, Marketing of Smith's since 1995. He served as Vice President, Merchandising, California Region from 1991 to 1995. From 1984 to 1991, he served as a district manager in the Intermountain Region. FRED F. URBANEK has been Senior Vice President, Facility Engineering of Smith's since 1992. He served as Vice President, Facility Engineering of Smith's from 1985 to 1992. JOHN T. STANDLEY is the Chief Financial Officer, Vice President and Assistant Secretary of Smitty's and SSV, and upon consummation of the Merger, will be the Senior Vice President, Administration of the Company. Mr. Standley joined Smitty's in December 1994. Prior to that time, Mr. Standley was Vice President of Finance for Food 4 Less Supermarkets, Inc. from 1991 to 1994. Prior to 1991, he was a manager at Arthur Andersen & Company. FRED L. SMITH has been a director of the Company since 1968. Since 1988, he has been President of Fred Smith's Honda Automobiles of Palm Springs, an auto dealership, prior to which time he was a private investor. Since 1989, he has also been President of Fred Smith's Jaguar/Rolls Royce of Rancho Mirage, an auto dealership. LINDA MCLOUGHLIN FIGEL joined Yucaipa in 1989 and became a general partner in 1991. Prior to that time, she was employed by Bankers Trust Company in its Structured Finance Group. BRUCE KARATZ has been the President, Chief Executive Officer and a director of Kaufman and Broad Home Corporation since 1986 and its Chairman of the Board since July 1993. Mr. Karatz is also a director of Honeywell, Inc, National Golf Properties, Inc. and a Trustee of the National Park Foundation and the RAND Corporation. BERTRAM R. ZWEIG is a partner in the Los Angeles office of Jones, Day, Reavis & Pogue. Mr. Zweig was with Jones, Day from 1962 to 1978, and rejoined the firm in 1995. Between August 1992 and June 1995, Mr. Zweig was a partner with the law firm of Graham and James, and from January 1988 to July 1992 he was a partner with the law firm of Stroock & Stroock & Lavan. He is a member of the Board of Directors of Wedbush Corporation, the parent of Wedbush Morgan Securities, Inc., a regional investment banking firm in Los Angeles. Mr. Zweig is a member of the Board of Directors of Aquatic Water Systems Incorporated. Jeffrey Smith and Fred Smith are brothers. 77 The Company has nominated for election at the Stockholders' Meeting each of (i) Jeffrey Smith, Ronald Burkle and Allen Rowland for a one-year term expiring at the Company's 1997 Annual Meeting of Stockholders, (ii) Fred Smith and Linda McLoughlin Figel for a two-year term expiring at the Company's 1998 Annual Meeting of Stockholders, and (iii) Bruce Karatz and Bertram R. Zweig for a three-year term expiring at the Company's 1999 Annual Meeting of Stockholders. AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION DESCRIPTION OF AMENDMENTS In connection with the consummation of the Recapitalization, the Company's Board of Directors proposes to adopt the Amended and Restated Certificate of Incorporation. The Amended and Restated Certificate of Incorporation includes among other things the following changes from the Company's Certificate of Incorporation as in effect as of the date hereof. (a) The authorization of 20,000,000 shares of Class C Common Stock, par value $.01 per share, of the Company; (b) The reduction in the number of directors to seven and the classification of the Board of Directors into three classes of directors serving staggered three-year terms; and (c) The amendment of certain redemption and voting provisions with respect to the Series I Preferred Stock. CLASS C COMMON STOCK. The Class C Common Stock will be issuable to the holders of the Warrants which are to be issued to Yucaipa pursuant to the Warrant Agreement. See "Certain Related Agreements--Warrant Agreement." The Class C Common Stock will have all the same rights and preferences as the other classes of Common Stock, except that the Class C Common Stock will not have any voting rights while such stock is owned by an "Original Class C Stockholder" (as such term is defined in the Amended and Restated Certificate of Incorporation). Upon any transfer of shares of Class C Common Stock by an Original Class C Stockholder to a third party other than another Original Class C Stockholder, the transferee of such Class C Stockholder may convert such shares of Class C Common Stock into an equal number of shares of Class B Common Stock. No conversion of Class C Common Stock into Class B Common Stock will be permitted for shares of Class C Common Stock held by an Original Class C Stockholder or any party bound by the terms of the Standstill Agreement as a member of the Yucaipa Group. CLASSIFIED BOARD OF DIRECTORS. The Amended and Restated Certificate of Incorporation will provide that upon the adoption thereof the full Board of Directors will be comprised of seven directors and without the unanimous approval of the directors then in office the number of directors may not be altered. The Board of Directors will be divided into three classes as nearly equal in number as possible, with the term of office of one class expiring each year and each director serving for a term ending at the third annual meeting of stockholders of the Company following the annual meeting at which such director was elected, except for the directors to be elected at the Stockholders' Meeting, who shall have the term for which such directors are elected at such meeting. Any increase in the number of directors or vacancy on the Board of Directors may be filled, subject to the rights of any holders of any series of Preferred Stock to elect additional directors, only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or such vacancy occurred. SERIES I PREFERRED STOCK AMENDMENTS. The Amended and Restated Certificate of Incorporation will include certain provisions with respect to the Series I Preferred Stock providing for: 78 (i) the elimination for a five-year period of the annual mandatory redemption of original outstanding shares of Series I Preferred Stock, (ii) the restriction for a two-year period of the optional redemption of shares of Series I Preferred Stock, and (iii) the addition of transfer or sale restrictions which reduce the number of allocated votes per share of Series I Preferred Stock from ten votes to one vote per share in the event of transfers or sales not made to a Permitted Series I Transferee (as defined below). A "Permitted Series I Transferee" is defined generally as either (x) a family member or an affiliate of the holder of Series I Preferred Stock, (y) any person to whom shares of Series I Preferred Stock were originally issued, or (z) any person which is an original party to the Standstill Agreement. The Company is seeking stockholders' approval and adoption of the Amended and Restated Certificate of Incorporation at the Stockholders' Meeting. The Offer does not constitute a solicitation of proxies for the Stockholders' Meeting. Such solicitation by the Company will be made only pursuant to the Proxy Statement. A copy of the form of the Amended and Restated Certificate of Incorporation has been filed as an annex to the Proxy Statement. ANTITAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION PROVISIONS GENERAL. Certain provisions of the Company's Certificate of Incorporation and the By-laws could have an antitakeover effect. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors of the Company and in the policies formulated by the Board of Directors and to discourage certain types of transactions described below which may involve an actual or threatened change of control of the Company. The provisions are designed to reduce the vulnerability of the Company to an unsolicited proposal for a takeover of the Company that does not contemplate the acquisition of all of its outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of the Company. The provisions are also intended to discourage certain tactics that may be used in proxy fights. The Board of Directors believes that as a general rule such takeover proposals would not be in the best interests of the Company and its stockholders. CLASSIFIED BOARD. The Amended and Restated Certificate of Incorporation will provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one- third of the Board of Directors will be elected each year. The overall effect of the provisions in the Amended and Restated Certificate of Incorporation with respect to the staggered Board may be to render more difficult a change in control of the Company or the removal of incumbent management. In addition, under Delaware law, stockholders in a company with a classified board of directors may only remove directors for cause. OWNERSHIP OF SHARES BY SMITH GROUP AND YUCAIPA GROUP. Upon consummation of the Recapitalization and the Merger, (i) 24.5% of the outstanding shares of Common Stock and 31.6% of the outstanding shares of Series I Preferred Stock (and 41.8% of the aggregate number of votes eligible to be cast at any meeting of the Company's stockholders) will be beneficially owned by the Smith Group and its affiliates and (ii) approximately 13.6% of the outstanding shares of Class B Common Stock (and approximately 1.3% of the aggregate number of votes eligible to be cast at any meeting of the Company's stockholders) will be beneficially owned by the Yucaipa Group and its affiliates. Pursuant to the Standstill Agreement, each of the Smith Group and the Yucaipa Group have agreed among other things to vote their shares in favor of director nominees designated by the other Group. As a result of the ownership structure of the Company and the contractual rights described above, the voting and management control of the Company will be highly concentrated. The Smith Group is expected to continue to have effective control of the Company and, subject to compliance with the restrictions contained in the Financing Agreements, is expected to continue to have the ability to direct the actions of the Company with respect to such matters as the payment of dividends, material acquisitions and dispositions and other extraordinary corporate transactions. 79 AVAILABLE INFORMATION The Company is subject to the reporting and other informational requirements of the Exchange Act and the rules and regulations promulgated thereunder, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at its offices at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, New York 10048, 500 West Madison Street, CitiCorp Center, Suite 1400, Chicago, Illinois 60661 and 5670 Wilshire Boulevard, Suite 500, Los Angeles, California 90036- 3648. Copies of such materials can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, material filed by the Company may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. The Company has filed an Issuer Tender Offer on Schedule 13E-4, which includes this Offer to Purchase, as well as its Proxy Statement, with the Commission. Statements contained in this Offer to Purchase as to the contents of any contract or other document filed as an exhibit to the Company's Issuer Tender Offer on Schedule 13E-4 are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed therewith as an exhibit. MISCELLANEOUS The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares residing in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. The Company is not aware of any jurisdiction where the making of the Offer or the tender of Shares would not be in compliance with applicable law. If the Company becomes aware of any jurisdiction where the making of the Offer or the tender of Shares is not in compliance with any applicable law, the Company will make a good faith effort to comply with such law. If after such good faith effort the Company cannot comply with such law, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares residing in such jurisdiction. In any jurisdiction in which the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on behalf of the Company by the Dealer Managers one or more registered brokers or dealers licensed under the laws of such jurisdiction. The Offer is not being made to, nor will the Company accept tenders from or on behalf of, holders of Shares in any jurisdiction in which the Offer or the acceptance thereof would not be in compliance with the securities or blue sky or other laws of such jurisdiction. Smith's Food & Drug Centers, Inc. April 25, 1996 80 INDEX TO AUDITED FINANCIAL STATEMENTS Report of Independent Auditors (Ernst & Young LLP)......................... F-2 Consolidated balance sheets at December 30, 1995 and December 31, 1994..... F-3 Consolidated statements of income for the years ended December 30, 1995, December 31, 1994 and January 1, 1994..................................... F-4 Consolidated statements of common stockholders' equity for the years ended December 30, 1995, December 31, 1994 and January 1, 1994.................. F-5 Consolidated statements of cash flows for the years ended December 30, 1995, December 31, 1994 and January 1, 1994............................... F-6 Notes to consolidated financial statements................................. F-7
F-1 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 SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ ASSETS Current Assets Cash and cash equivalents.......................... $ 16,079 $ 14,188 Rebates and accounts receivable.................... 23,802 25,596 Inventories........................................ 394,982 389,564 Prepaid expenses and deposits...................... 21,255 15,858 Deferred tax assets................................ 23,900 1,400 Assets held for sale............................... 125,000 ---------- ---------- Total Current Assets............................. 605,018 446,606 Property and Equipment Land............................................... 276,626 303,701 Buildings.......................................... 610,049 619,056 Leasehold improvements............................. 55,830 42,369 Fixtures and equipment............................. 509,524 589,480 ---------- ---------- 1,452,029 1,554,606 Less allowances for depreciation and amortization.. 390,933 364,741 ---------- ---------- 1,061,096 1,189,865 Other Assets........................................ 20,066 16,996 ---------- ---------- $1,686,180 $1,653,467 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable............................. $ 214,152 $ 235,843 Accrued sales and other taxes...................... 50,749 44,379 Accrued payroll and related benefits............... 97,455 84,083 Current maturities of long-term debt............... 20,932 19,011 Current maturities of Redeemable Preferred Stock... 1,008 1,017 Accrued restructuring costs........................ 58,000 ---------- ---------- Total Current Liabilities......................... 442,296 384,333 Long-term debt, less current maturities............ 725,253 699,882 Accrued restructuring costs, less current portion.. 40,000 Deferred income taxes.............................. 58,600 89,500 Redeemable Preferred Stock, less current maturi- ties.............................................. 3,311 4,410 Common Stockholders' Equity Convertible Class A Common Stock (shares issued and outstanding, 11,613,043 in 1995 and 12,140,317 in 1994).............................. 116 121 Class B Common Stock (shares issued, 18,348,968 in 1995 and 17,821,694 in 1994)..................... 183 178 Additional paid-in capital......................... 285,236 285,592 Retained earnings.................................. 238,027 293,456 ---------- ---------- 523,562 579,347 Less cost of Common Stock in the treasury (4,890,302 shares in 1995 and 4,772,822 shares in 1994)............................................. 106,842 104,005 ---------- ---------- 416,720 475,342 ---------- ---------- $1,686,180 $1,653,467 ========== ==========
See notes to consolidated financial statements. F-3 SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED ------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- Net sales................................. $3,083,737 $2,981,359 $2,807,165 Cost of goods sold........................ 2,386,707 2,312,228 2,169,987 ---------- ---------- ---------- 697,030 669,131 637,178 Expenses: Operating, selling and administrative.... 461,401 440,844 430,258 Depreciation and amortization............ 104,963 94,491 82,173 Interest................................. 60,478 53,715 44,627 Restructuring charges.................... 140,000 ---------- ---------- ---------- 766,842 589,050 557,058 ---------- ---------- ---------- Income (loss) before income taxes......... (69,812) 80,081 80,120 Income taxes.............................. (29,300) 31,300 34,300 ---------- ---------- ---------- Net income (loss)......................... $ (40,512) $ 48,781 $ 45,820 ---------- ---------- ---------- Net income (loss) per share of Common Stock.................................... $ (1.62) $ 1.73 $ 1.52 ========== ========== ==========
See notes to consolidated financial statements. F-4 SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 ---------- ----- ---------- ----- ---------- -------- --------- -------- Balance at January 3, 1993................... 13,403,132 $134 16,558,879 $165 $285,980 $229,110 $515,389 Net income for 1993.... 45,820 45,820 Conversion of shares from Class A to Class B..................... (785,687) (8) 785,687 8 Purchase of Class B Common Stock for the treasury.............. $ (11,074) (11,074) Shares sold to the Em- ployee Stock Profit Sharing Plan.......... (212) 3,237 3,025 Shares sold under the Employee Stock Pur- chase Plan............ (771) 4,853 4,082 Cash dividends--$.52 per share............. (15,530) (15,530) Other.................. 485 485 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at January 1, 1994................... 12,617,445 126 17,344,566 173 285,482 259,400 (2,984) 542,197 Net income for 1994.... 48,781 48,781 Conversion of shares from Class A to Class B..................... (477,128) (5) 477,128 5 Purchase of Class B Common Stock for the treasury.............. (109,239) (109,239) Shares sold to the Em- ployee Stock Profit Sharing Plan.......... 143 1,505 1,648 Shares sold under the Employee Stock Pur- chase Plan............ (668) 6,713 6,045 Cash dividends--$.52 per share............. (14,725) (14,725) Other.................. 635 635 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at December 31, 1994................... 12,140,317 121 17,821,694 178 285,592 293,456 (104,005) 475,342 Net loss for 1995...... (40,512) (40,512) Conversion of shares from Class A to Class B..................... (527,274) (5) 527,274 5 Purchase of Class B Common Stock for the treasury.............. (9,039) (9,039) Shares sold to the Em- ployee Stock Profit Sharing Plan.......... 2 108 110 Shares sold under the Employee Stock Pur- chase Plan............ (926) 6,094 5,168 Cash dividends--$.60 per share............. (14,917) (14,917) Other.................. 568 568 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at December 30, 1995................... 11,613,043 $116 18,348,968 $183 $285,236 $238,027 $(106,842) $416,720 ========== ==== ========== ==== ======== ======== ========= ========
See notes to consolidated financial statements. F-5 SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
52 WEEKS ENDED ------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- OPERATING ACTIVITIES Net income (loss)........................ $ (40,512) $ 48,781 $ 45,820 Adjustments to reconcile net income (loss) to cash provided by operating ac- tivities: Depreciation and amortization........... 104,963 94,491 82,173 Deferred income taxes................... (53,400) 10,500 15,400 Restructuring charges................... 140,000 Other................................... 568 635 485 Changes in operating assets and liabili- ties: Rebates and accounts receivable......... 1,794 (4,758) (4,038) Inventories............................. (5,418) (11,625) (36,523) Prepaid expenses and deposits........... (5,397) (1,324) (518) Trade accounts payable.................. (21,691) 50,618 1,119 Accrued sales and other taxes........... 6,370 5,616 6,625 Accrued payroll and related benefits.... 13,372 10,616 8,007 --------- --------- --------- Cash provided by operating activities.... 140,649 203,550 118,550 Investing Activities Additions to property and equipment..... (149,035) (146,676) (322,301) Sale/leaseback arrangements and other property and equipment sales........... 5,841 20,949 159,137 Other................................... (3,070) (1,649) (1,258) --------- --------- --------- Cash used in investing activities........ (146,264) (127,376) (164,422) Financing Activities Additions to long-term debt............. 45,978 27,000 262,000 Payments on long-term debt.............. (18,686) (33,594) (149,197) Redemptions of Redeemable Preferred Stock.................................. (1,108) (1,042) (1,039) Purchases of Treasury Stock............. (9,039) (109,239) (11,074) Proceeds from sales of Treasury Stock... 5,278 7,693 7,107 Payment of dividends.................... (14,917) (14,725) (15,530) --------- --------- --------- Cash provided by (used in) financing ac- tivities................................ 7,506 (123,907) 92,267 --------- --------- --------- Net increase (decrease) in cash and cash equivalents............................. 1,891 (47,733) 46,395 Cash and cash equivalents at beginning of year.................................... 14,188 61,921 15,526 ========= ========= ========= Cash and cash equivalents at end of year. $ 16,079 $ 14,188 $ 61,921 ========= ========= =========
See notes to consolidated financial statements. F-6 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A--SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Smith's Food & Drug Centers, Inc. and its wholly-owned subsidiaries (the "Company"), after the elimination of significant intercompany transactions and accounts. The Company operates a regional supermarket and drug store chain in the Intermountain and Southwestern regions of the United States. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DEFINITION OF ACCOUNTING PERIOD The Company's fiscal year ends on the Saturday nearest to December 31. Fiscal year operating results include 52 weeks for each year. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and short-term investments with maturities less than three months. The amount reported in the balance sheet for cash and cash equivalents approximates its fair value. INVENTORIES Inventories are valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. Approximately 95% of inventories in 1995 and 1994 were valued using the LIFO method. Other inventories were valued using the first-in, first-out (FIFO) method. The FIFO cost exceeded the LIFO value of inventories by $8.1 million in 1995 and $4.1 million in 1994. The pretax LIFO charge was $4.0 million in 1995, $2.5 million in 1994, and $1.6 million in 1993. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided by the straight-line method based upon estimated useful lives. Improvements to leased property are amortized over their estimated useful lives or the remaining terms of the leases, whichever is shorter. ACCRUED INSURANCE CLAIMS The Company is self-insured, with certain stop loss insurance coverage, for workers' compensation, non-union employee health care and general liability claims. Claims expense is recorded through the accrual of claims reserves based on estimates of ultimate claim costs including claims incurred but not reported. The liabilities for accrued insurance claims were $31.8 million and $25.3 million at the end of 1995 and 1994, respectively. These liabilities are not discounted. PRE-OPERATING AND CLOSING COSTS Costs incurred in connection with the opening of new stores and distribution facilities are expensed as incurred. The remaining net investment in stores closed, less salvage value, is charged F-7 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) against earnings in the period of closing. For leased stores that are closed and subleased to third parties, a provision is made for the remaining lease liability, net of expected sublease rental. For leased stores that are closed but not yet subleased, a provision is made based on discounted lease payments through the estimated period until subleased. INTEREST COSTS Interest costs are expensed as incurred, except for interest costs which have been capitalized as part of the cost of properties under development. The Company's cash payments for interest (net of capitalized interest of approximately $1.4 million in 1995, $5.8 million in 1994 and $14.5 million in 1993) amounted to $60.7 million in 1995, $54.0 million in 1994 and $39.8 million in 1993. INCOME TAXES The Company determines its deferred tax assets and liabilities based on differences between the financial reporting and tax basis of its assets and liabilities using the tax rates that will be in effect when the differences are expected to reverse. NET INCOME PER SHARE OF COMMON STOCK Net income per share of Common Stock is computed by dividing the net income by the weighted average number of shares of Common Stock outstanding of 25,030,882 in 1995, 28,176,907 in 1994 and 30,238,811 in 1993. Common Stock equivalents in the form of stock options are excluded from the weighted average number of common shares in 1995 due to the net loss. ADOPTION OF ACCOUNTING STANDARD In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Due to the nature of the Company's operations and the number of estimates required to assess the impact of Statement 121, the financial statement impact of adoption has not yet been determined. LITIGATION The Company is a party to certain legal actions arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial position. RECLASSIFICATIONS Certain reclassifications have been made to the 1993 and 1994 financial statements to conform with the 1995 presentation. F-8 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):
ALLOWANCES FOR CURRENT YEAR DEPRECIATION DEPRECIATION COST AND AMORTIZATION NET BOOK VALUE AND AMORTIZATION ---------- ---------------- -------------- ---------------- December 30, 1995 Land.................. $ 276,626 $ 276,626 Buildings............. 610,049 $108,985 501,064 $ 19,907 Leasehold improve- ments................ 55,830 12,556 43,274 2,970 Fixtures and equip- ment................. 509,524 269,392 240,132 82,086 ---------- -------- ---------- -------- $1,452,029 $390,933 $1,061,096 $104,963 ========== ======== ========== ======== December 31, 1994 Land.................. $ 303,701 $ 303,701 Buildings............. 619,056 $ 92,542 526,514 $ 18,334 Leasehold improve- ments................ 42,369 10,122 32,247 1,842 Fixtures and equip- ment................. 589,480 262,077 327,403 74,315 ---------- -------- ---------- -------- $1,554,606 $364,741 $1,189,865 $ 94,491 ========== ======== ========== ========
NOTE C--LONG-TERM DEBT Long-term debt consists of the following (dollar amounts in thousands):
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ Mortgage notes, collateralized by property and equipment with a cost of $420.7 million in 1995 and $413.0 million in 1994, due through 2011 with interest at an average rate of 9.68% in 1995 and 9.73% in 1994..................... $254,385 $ 270,082 Unsecured notes, due in 2002 through 2015 with varying annual installments starting in 2000 which accrue interest at an average rate of 7.68% in 1995 and 1994........................ 410,000 410,000 Revolving credit bank loans.................... 68,000 27,000 Industrial revenue bonds, collateralized by property and equipment with a cost of $11.7 million in 1995 and $11.6 million in 1994 due in 2000 through 2010 plus interest at an aver- age rate of 7.44% in 1995 and 7.47% in 1994... 6,308 6,597 Other.......................................... 7,492 5,214 -------- --------- 746,185 718,893 Less current maturities........................ 20,932 19,011 -------- --------- $725,253 $699,882 ======== =========
F-9 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest rates on the revolving credit bank loans averaged 6.06% in 1995 and 5.89% in 1994. The agreements are reviewed annually with the banks, at which time the date each installment is due is generally extended one year. At December 30, 1995, the Company had unused lines of credit related to unsecured revolving credit bank loans of $60.0 million. The Company's loan agreements contain provisions which require the Company to maintain a specified level of consolidated net worth, fixed charge coverage and ratio of debt to net worth. Maturities of the Company's long-term debt for the five fiscal years succeeding December 30, 1995 are approximately $20.9 million in 1996, $22.1 million in 1997, $23.7 million in 1998, $45.4 million in 1999 and $28.9 million in 2000. The amounts classified as revolving credit bank loans approximate their fair value. The fair value of the Company's long-term debt was estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of debt arrangements. NOTE D--REDEEMABLE PREFERRED STOCK The Company has 85,000,000 shares of $.01 per share par value Preferred Stock authorized. The Company has designated 34,524,579 of these shares as Series I Preferred Stock, of which 12,956,747 shares and 16,281,777 shares were issued and outstanding in 1995 and 1994, respectively. The redeemable Series I Preferred Stock has no dividend requirement. All shares of the Company's Series I Preferred Stock are subject to redemption at any time at the option of the Board of Directors, in such numbers as the Board may determine, and at a redemption price of $.33 1/3 per share. The scheduled redemptions of the Company's Series I Preferred Stock are approximately $1.0 million each year until all outstanding shares are redeemed. Upon liquidation of the Company, each share of Series I Preferred Stock is entitled to a liquidation preference of $.33 1/3, on a pro rata basis with any other series of Preferred Stock, before any distribution to the holders of Class A Common Stock or Class B Common Stock. Each share of Series I Preferred Stock is entitled to ten votes. Series I Preferred Stock is stated at redemption value in the balance sheet. The amount included in the balance sheet for Series I Preferred Stock approximates its fair value. NOTE E--COMMON STOCKHOLDERS' EQUITY The voting powers, preferences and relative rights of Class A Common Stock and Class B Common Stock are identical in all respects, except that the holders of Class A Common Stock have ten votes per share and the holders of Class B Common Stock have one vote per share. Each share of Class A Common Stock is convertible at any time at the option of the holder into one share of Class B Common Stock. The Company's Certificate of Incorporation also provides that each share of Class A Common Stock will be converted automatically into one share of Class B Common Stock if at any time the number of shares of Class A Common Stock issued and outstanding shall be less than 2,910,885. Future sales or transfers of the Company's Class A Common Stock are restricted to the Company or immediate family members of the original Class A Common Stockholders unless first presented to the Company for conversion into an equal number of Class B Common Stock shares. The Class B Common Stock has no conversion rights. At December 30, 1995 there were 20,000,000 shares of $.01 per share par value Class A Common Stock and 100,000,000 shares of $.01 per share par value Class B Common Stock authorized. F-10 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE F--INCOME TAXES Income tax expense (benefit) consists of the following (dollar amounts in thousands):
52 WEEKS ENDED ------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- Current: Federal............................... $ 20,220 $17,211 $15,715 State................................. 3,880 3,589 3,185 -------- ------- ------- 24,100 20,800 18,900 Deferred: Federal............................... (46,681) 9,247 13,012 State................................. ( 6,719) 1,253 2,388 -------- ------- ------- (53,400) 10,500 15,400 -------- ------- ------- $(29,300) $31,300 $34,300 ======== ======= =======
Income tax expense included a charge of $1.95 million in 1993 resulting from applying the increased federal tax rate to deferred tax items. Cash disbursements for income taxes were $19.2 million in 1995, $21.7 million in 1994 and $17.3 million in 1993. The difference between income tax expense (benefit) and the tax computed by applying the statutory income tax rate to income before income taxes is as follows:
52 WEEKS ENDED ------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- 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% ===== ==== ====
F-11 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The effect of temporary differences that give rise to deferred tax balances are as follows (dollar amounts in thousands):
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ 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 ======== ========
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):
DECEMBER 30, 1995 DECEMBER 31, 1994 ----------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- ------------------- 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
The methods of determining the fair value of the Company's financial instruments are disclosed in the respective notes to the consolidated financial statements. NOTE H--LEASE AND COMMITMENTS The Company leases property and equipment under terms which include, in some cases, renewal options, escalation clauses or contingent rentals which are based on sales. Total rental expense for such leases amounted to the following (dollar amounts in thousands):
52 WEEKS ENDED ------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- 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 ======= ======= =======
F-12 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 30, 1995, future minimum rental payments and sublease rentals for all noncancellable leases with initial or remaining terms of one year or more consisted of the following (dollar amounts in thousands):
MINIMUM LESS RENTAL SUBLEASE PAYMENTS RENTALS TOTAL -------- -------- -------- 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 ======== ======== ========
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 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:
OPTION PRICE NUMBER OF PER SHARE SHARES ------------ --------- 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 ====== =========
The options are exercisable as follows:
NUMBER OF SHARES --------- 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 =========
Compensation expense for the difference between the market value of the options on the grant date and the grant price is recognized on a straight-line basis over the vesting period of the options. The amount charged to operations in 1995, 1994 and 1993 was immaterial. NOTE J--PENSION PLANS Employees whose terms of employment are determined by negotiations with recognized collective bargaining units are covered by their respective multi- employer defined benefit pension plans to which F-14 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the Company contributes. The costs charged to operations for these plans amounted to approximately $4.6 million in 1995, $4.2 million in 1994 and $3.3 million in 1993. Other information for these multi-employer plans is not available to the Company. The Company maintains a defined benefit pension plan for all other permanent employees which provides for normal retirement at age 65. Employees are eligible to join when they complete at least one year of service and have reached age 21. The benefits are based on years of service and stated amounts associated with those years of service. The Company's funding policy is to contribute annually up to the maximum amount deductible for federal income tax purposes. Net pension cost includes the following components (dollar amounts in thousands):
52 WEEKS ENDED ------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- Service cost--present value of benefits earned during the period............... $ 2,119 $ 2,326 $ 1,869 Interest cost on projected benefit obli- gation................................. 1,966 1,725 1,350 Actual return on plan assets............ (9,692) 237 (1,053) Net amortization and deferral........... 7,598 (1,615) (304) ------- ------- ------- $ 1,991 $ 2,673 $ 1,862 ======= ======= =======
The following table presents the plan's funded status and amounts recognized in the Company's consolidated balance sheets (dollar amounts in thousands):
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ Actuarial present value of accumulated benefits based on service rendered to date: Vested.......................................... $29,649 $16,965 Non-vested...................................... 3,482 3,438 ------- ------- 33,131 20,403 Fair value of plan assets (primarily in equity and fixed income funds and real estate).............. 37,934 20,993 ------- ------- Fair value of plan assets in excess of projected benefit obligation............................... 4,803 590 Unrecognized net loss............................. 7,473 5,737 Prior service cost................................ 133 160 Unrecognized net asset............................ (978) (1,141) ------- ------- Net prepaid pension cost.......................... $11,431 $ 5,346 ======= =======
The weighted average discount rate used to determine the actuarial present value of the projected benefit obligation was 7.25% in 1995 and 8.5% in 1994. The expected long-term rate of return on plan assets was 8.5% in 1995 and 1994, and 9.5% in 1993. The Company provides a 401(k) plan for virtually all employees. The plan is entirely funded by employee contributions which are based on employee compensation not to exceed certain limits. F-15 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE K--RESTRUCTURING CHARGES In December 1995, the Company recorded restructuring charges amounting to $140 million related to its decision to sell, lease or close all 34 stores and the distribution center comprising its Southern California Region. The Southern California Region contributed sales of approximately $675 million, $653 million and $473 million in 1995, 1994 and 1993, respectively, and recognized operating losses of $14.2 million, $18.8 million and $12.9 million in 1995, 1994 and 1993, respectively. These losses do not include allocations for interest expense and corporate overhead. The restructuring charges include the following components.
ACCRUED RESTRUCTURING TOTAL ADJUSTMENTS COSTS RESTRUCTURING TO ---------------------- CHARGES CARRYING VALUE CURRENT LONG-TERM ------------- -------------- ---------- ----------- 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 ======== ======= ========== ==========
The lease rental obligations primarily relate to closed stores and consist of average annual lease expense over a five-year period net of any sublease income, discounted at a rate of 9%. Also included is a $15 million charge for certain fees associated with the sublease of the distribution center which is expected to be paid by March 1996. The distribution center and nine stores have been leased or subleased to another supermarket company controlled by the same group of investors that controls Smitty's Supermarkets, Inc., with whom the Company has entered into a definitive merger agreement (see Note L). The charges for store and distribution center inventories represent incremental losses for shrinkage, damage and liquidation sales expected to be incurred during the closing process. The termination payments relate to substantially all of the Company's 3,900 store and distribution center employees in the Southern California Region. The termination payments are expected to be made by the end of March 1996 and have been estimated based on existing employment contracts and involuntary termination statutes. The other costs represent charges for taxes, fees, contractual obligations, and other costs associated with closing the region. The restructuring charges include management's best estimates of the amounts expected to be realized on the disposal of the remaining stores and closure of the region. At December 30, 1995, the Company's carrying value of closed stores and excess land in California was approximately $260 million. The Company's current management has not determined the ultimate disposition or use of these real estate assets and believes that their disposal in the ordinary course of business would not result in a significant impact on carrying values. However, should the Company complete the subsequent event (see Note L), management may decide to pursue the sale of these assets. The amounts the Company may realize on disposal could differ significantly in the near term from the carrying values. F-16 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) NOTE L--SUBSEQUENT EVENT On January 29, 1996, the Company announced it had entered into a definitive merger agreement with Smitty's Supermarkets, Inc. ("Smitty's") in which Smitty's will become a wholly owned subsidiary of the Company. The merger will be completed by issuing 3,038,888 shares of the Company's Class B Common Stock for all of Smitty's outstanding common stock, subject to adjustment under certain circumstances. The Company will assume or refinance approximately $148 million of Smitty's debt. The Company also announced it will commence a self tender offer to purchase 50% of its outstanding Class A and Class B Common Stock for $36 per share, excluding shares to be issued in connection with the Smitty's merger. Debt of approximately $1.4 billion is expected to be issued at various interest rates to finance the stock purchase, repay certain existing indebtedness, and premiums related to early repayment. In addition, the Company plans to offer preferred stock to raise approximately $75 million. Completion of the tender offer will be subject to the tender of at least 50% of the Company's outstanding Common Stock, the receipt of adequate financing and various other conditions. Completion of the merger with Smitty's will be conditioned on the Company's purchase of shares pursuant to the self tender offer, receipt of adequate financing, regulatory approvals, approval by the Company's stockholders and various other conditions. The tender offer is expected to commence in April 1996 and be consummated in May 1996. The merger with Smitty's is expected to be consummated concurrently with the closing of the tender offer. F-17 Facsimile copies of the Letter of Transmittal, properly completed and duly executed, will be accepted from Eligible Institutions. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each stockholder of the Company or his or her broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below: The Depositary is: AMERICAN STOCK TRANSFER & TRUST COMPANY By Mail: By Facsimile: By Hand: 40 Wall Street (718) 234-5001 40 Wall Street New York, New York 10005 (For Eligible New York, New York 10005 Institutions Only) Any questions or requests for assistance may be directed to the Information Agent or the Dealer Managers at their respective addresses and telephone numbers set forth below. Additional copies of this Offer to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may be obtained from the Information Agent as set forth below, and will be furnished promptly at the Company's expense. You may also contact your local broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer. The Information Agent is: [LOGO] MacKenzie Partners, Inc. 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (call collect) or Call Toll Free (800) 322-2885 The Dealer Managers are: GOLDMAN, SACHS & CO. 85 Broad Street New York, New York 10004 In New York State: (212) 902-1000 (collect) Other Areas: (800) 323-5678 (toll free) EX-99.A2 3 LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL TO TENDER SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK OF SMITH'S FOOD & DRUG CENTERS, INC. PURSUANT TO ITS OFFER TO PURCHASE DATED APRIL 25, 1996 THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED. To: American Stock Transfer & Trust Company, Depositary By Mail: By Facsimile By Hand or Overnight Transmission: Courier: 40 WALL STREET, (FOR ELIGIBLE 40 WALL STREET, NEW YORK, NEW YORK INSTITUTIONS ONLY) NEW YORK, NEW YORK 10005 (718) 234-5001 10005 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be used by stockholders if certificates for Shares (as defined below) are to be forwarded herewith or, unless an Agent's Message (as defined in the Offer to Purchase) is utilized, if delivery of Shares is to be made by book-entry transfer to the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company (hereinafter collectively referred to as the "Book-Entry Transfer Facilities") pursuant to the procedures set forth under "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase dated April 25, 1996. Stockholders who cannot deliver the certificates for their Shares and all other documents required hereby to the Depositary on or prior to the Expiration Date (as defined in the Offer to Purchase) or who cannot complete the procedures for book-entry transfer on a timely basis, or who cannot deliver a Letter of Transmittal and all other required documents to the Depositary on or prior to the Expiration Date, must tender their Shares pursuant to the guaranteed delivery procedure set forth under "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase. See Instruction 2. DELIVERY OF DOCUMENTS TO ONE OF THE BOOK-ENTRY TRANSFER FACILITIES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. The name(s) and address(es) of the registered holder(s) should be printed below, if they are not already printed below, exactly as they appear on the certificate(s) representing the Shares tendered herewith. The certificate(s) and the number of Shares that the registered holder(s) wish(es) to tender should be indicated in the appropriate boxes below. DESCRIPTION OF SHARES TENDERED - - -------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON SHARE CERTIFICATES) SHARES TENDERED (ATTACH ADDITIONAL LIST IF NECESSARY) - - ---------------------------------------------------------------------------------------------------------------- CLASS AND TOTAL NUMBER OF CERTIFICATE SHARES REPRESENTED NUMBER OF SHARES NUMBER(S)* BY CERTIFICATE(S)* TENDERED** ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ TOTAL SHARES
- - ------------------------------------------------------------------------------- * NEED NOT BE COMPLETED BY STOCKHOLDERS TENDERING BY BOOK-ENTRY TRANSFER. ** UNLESS OTHERWISE INDICATED, IT WILL BE ASSUMED THAT ALL SHARES REPRESENTED BY ANY CERTIFICATES DELIVERED TO THE DEPOSITARY ARE BEING TENDERED. See Instruction 4. [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND COMPLETE THE FOLLOWING: Name of Tendering Institution ___________________________________________ Account No. _____________________________________________________________ Check Box of Book-Entry Transfer Facility: [_] The Depository Trust Company [_] Philadelphia Depository Trust Company Transaction Code No. ____________________________________________________ [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Tendering Stockholder(s) _____________________________________ Window Ticket Number (if any) ___________________________________________ Date of Execution of Notice of Guaranteed Delivery ______________________ Name of Institution which Guaranteed Delivery ___________________________ If delivery is by book entry transfer: Name of Tendering Institution ___________________________________________ [_] DTC [_] PHILADEP (check one) Account No. _________________________ Transaction Code No. _________________________________________________ NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), the above-described shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and/or Class B Common Stock, par value $.01 per share ("Class B Common Stock"; and, together with the Class A Common Stock, the "Shares") pursuant to the Company's offer to purchase 50% of the outstanding Shares at a price of $36 per share (the "Purchase Price"), net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated April 25, 1996 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which together constitute the "Offer"). Subject to, and effective upon, acceptance for payment of the Shares tendered herewith in accordance with the terms of the Offer, including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment, the undersigned hereby sells, assigns and transfers to or upon the order of the Company all right, title and interest in and to all the Shares that are being tendered hereby, or orders the registration of such Shares delivered by book-entry transfer, that are purchased pursuant to the Offer and hereby irrevocably constitutes and appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (a) deliver certificates for such Shares, or transfer ownership of such Shares on the account books maintained by any of the Book-Entry Transfer Facilities, together, in any such case, with all accompanying evidences of transfer and authenticity, to or upon the order of the Company, upon receipt by the Depositary, as the undersigned's agent, of the Purchase Price, (b) present certificates for such Shares for cancellation and transfer on the books of the Company and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares, all in accordance with the terms of the Offer. A tender of Shares does not constitute a vote, or the appointment of a proxy, in connection with the Annual Meeting scheduled for Thursday, May 23, 1996 (the "Stockholders' Meeting"). In order to vote at the Stockholders' Meeting, stockholders of the Company are required to submit a proxy or vote in person at the Stockholders' Meeting, or any postponement or adjournment thereof. The undersigned hereby represents and warrants that (a) the undersigned "owns" the Shares tendered hereby within the meaning of Rule 14e-4 promulgated under the Securities Exchange Act of 1934, as amended, and has full power and authority to validly tender, sell, assign and transfer the Shares tendered hereby; (b) the tender of Shares by the undersigned complies with Rule 14e-4; (c) when and to the extent the Shares are accepted for payment by the Company, the Company will acquire good and marketable title and unencumbered ownership thereto, free and clear of all liens, restrictions, charges, security interests, conditional sales agreements, encumbrances or other obligations relating to their sale or transfer, and not subject to any adverse claims; and (d) the undersigned has read and agrees to all the terms of the Offer. For a description of certain provisions of Rule 14e-4, see "The Tender Offer- Procedure for Tendering Shares--Other Requirements" in the Offer to Purchase. The undersigned will, upon request, execute and deliver any additional documents deemed by the Depositary or the Company to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer, this tender is irrevocable. The undersigned understands that tenders of Shares pursuant to any one of the procedures described under "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Offer. The undersigned recognizes that, under certain circumstances set forth in the Offer to Purchase, the Company may terminate or amend the Offer or may not be required to accept for payment any of the Shares tendered herewith or may accept for payment, pro rata with Shares tendered by other stockholders, fewer than all of the Shares tendered herewith. Unless otherwise indicated under "Special Payment Instructions" below, please issue the check for the Purchase Price and/or return or issue the certificate(s) evidencing any Shares included herewith but not tendered or not accepted for payment in the name(s) of the undersigned. Similarly, unless otherwise indicated under "Special Delivery Instructions" below, please mail the check for the Purchase Price and/or return the certificate(s) evidencing any Shares not tendered or not accepted for payment (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s). In the event that both "Special Payment Instructions" and "Special Delivery Instructions" are completed, please issue the check for the Purchase Price and/or return the certificate(s) evidencing any Shares not tendered or not accepted for payment in the name(s) of, and deliver said check and/or return said certificate(s) to, the person or persons so indicated. Stockholders tendering Shares by book-entry transfer may request that any Shares not accepted for payment be returned by crediting such account maintained at such Book-Entry Transfer Facility as such stockholder may designate by making an appropriate entry under "Special Payment Instructions." The undersigned recognizes that the Company has no obligation pursuant to the "Special Payment Instructions" to transfer any Shares from the name of the registered holder thereof if the Company does not accept for payment any of the Shares so tendered. SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 4, 5, 6 AND 7) (SEE INSTRUCTIONS 1, 4, 5, 6 AND 7) To be completed ONLY if the To be completed ONLY if the check for the aggregate Purchase check for the aggregate Purchase Price of Shares purchased and/or Price of Shares purchased and/or certificates for Shares not ten- certificates for Shares not ten- dered or not purchased are to be dered or not purchased are to be issued in the name of someone mailed to someone other than the other than the undersigned. undersigned or to the undersigned at an address other than that shown below the undersigned's signature(s). Issue [_] check, and or [_] certificates to: Name _____________________________ Mail [_] check, (Please Print) and/or [_] certificates to: Address __________________________ __________________________________ Name______________________________ (Include Zip Code) (Please Print) __________________________________ Address __________________________ (Taxpayer Identification No. or __________________________________ Social Security No.) (Complete (Include Zip Code) Substitute Form W-9) SIGN HERE (SEE INSTRUCTIONS 1 AND 5) (PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW) X _______________________________________________________________ SIGN HERE Signature(s) of Owner(s) X ---------------------------------------------------------------------------- Dated_________________________,_1996________________________________________ Name(s) ____________________________________________________________________ (Please Print) ---------------------------------------------------------------------------- Capacity (full title) ______________________________________________________ Address ____________________________________________________________________ ---------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone No. ________________________________________________ Tax Identification or Social Security No. __________________________________ (Complete Substitute W-9 Below) (Must be signed by registered holder(s) exactly as name(s) appear(s) on certificate(s) or on a security position listing or by person(s) authorized to become registered holder(s) by certificates and/or documents transmitted herewith. If signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please set forth such person's full title and see Instruction 5.) GUARANTEE OF SIGNATURE(S) (SEE INSTRUCTIONS 1 AND 5) Name of Firm _______________________________________________________________ Authorized Signature _______________________________________________________ Name _______________________________________________________________________ Address ____________________________________________________________________ Area Code and Telephone Number _____________________________________________ Dated _________________________ , 1996 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by an "Eligible Institution" (as defined in the Offer to Purchase). Signatures on this Letter of Transmittal need not be guaranteed if (a) this Letter of Transmittal is signed by the registered holder(s) of the Shares exactly as the name of the registered holder(s) appears on the certificate (which term, for purposes of this Letter of Transmittal, shall include any participant in one of the Book-Entry Transfer Facilities whose name appears on a security position listing as the owner of Shares) tendered herewith and such holder(s) have not completed either of the boxes entitled "Special Payment Instructions" or "Special Delivery Instructions" on this Letter of Transmittal or (b) such Shares are tendered for the account of an Eligible Institution. See Instruction 5. 2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARES This Letter of Transmittal is to be used either if certificates are to be forwarded herewith or if delivery of Shares is to be made by Agent's Message in connection with a book-entry transfer pursuant to the procedures set forth in "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase. Certificates for all Shares, or a confirmation of a book-entry transfer into the Depositary's account at one of the Book-Entry Transfer Facilities of all Shares delivered electronically, as well as a properly completed and duly executed Letter of Transmittal (or manually executed facsimile thereof) and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the front page of this Letter of Transmittal on or prior to the Expiration Date. Delivery of documents to one of the Book-Entry Transfer Facilities does not constitute delivery to the Depositary. Stockholders who cannot deliver the certificates for their Shares and all other documents required hereby to the Depositary on or prior to the Expiration Date or who cannot complete the procedures for book-entry transfer on a timely basis or who cannot deliver a Letter of Transmittal and all other required documents to the Depositary on or prior to the Expiration Date must tender their Shares pursuant to the guaranteed delivery procedure set forth in "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase. Pursuant to such procedure: (a) such tender must be made by or through an Eligible Institution, (b) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by the Company must be received by the Depositary on or prior to the Expiration Date and (c) the certificates for all physically delivered Shares, in proper form for transfer, or a confirmation of a book-entry transfer into the Depositary's account at one of the Book-Entry Transfer Facilities of such Shares delivered electronically, as well as a properly completed and duly executed Letter of Transmittal (or manually executed facsimile thereof with any required signature guarantees) (or, in the case of a book-entry delivery, an Agent's Message) and any other documents required by this Letter of Transmittal, must be received by the Depositary within three New York Stock Exchange trading days after the receipt of such Notice of Guaranteed Delivery by the Depositary, all as provided in "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase. If Shares are forwarded separately to the Depositary, each must be accompanied by a duly executed Letter of Transmittal (or facsimile thereof). THE METHOD OF DELIVERY OF SHARES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH BOOK-ENTRY TRANSFER FACILITIES, IS AT THE OPTION AND SOLE RISK OF THE TENDERING STOCKHOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted, and no fractional Shares will be purchased. By executing this Letter of Transmittal (or manually executed facsimile thereof), the tendering stockholder waives any right to receive any notice of the acceptance for payment of such Shares. 3. INADEQUATE SPACE If the space provided in the box captioned "Description of Shares Tendered" is inadequate, the certificate numbers and/or the number of Shares should be listed on a separate schedule attached hereto and separately signed on each page thereof in the same manner as this Letter of Transmittal is signed. 4. PARTIAL TENDERS (NOT APPLICABLE TO STOCKHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER) If fewer than all the Shares represented by any certificate delivered to the Depositary are to be tendered, fill in the number of Shares that are to be tendered in the box entitled "Number of Shares Tendered." If such Shares are purchased, a new certificate for the remainder of the Shares represented by the old certificate will be sent to and in the name of the person(s) signing this Letter of Transmittal, unless otherwise provided in either of the boxes entitled "Special Payment Instructions" or "Special Delivery Instructions" on this Letter of Transmittal, as promptly as practicable following the expiration or termination of the Offer. All Shares represented by the certificates listed and delivered to the Depositary in accordance with the procedures set forth in the Offer to Purchase and this Letter of Transmittal will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the certificates without alteration, enlargement or any change whatsoever. If any of the Shares tendered hereby are held of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered hereby are registered in different names on different certificates, the holder thereof must complete, sign and submit as many separate Letters of Transmittal as there are different registrations of certificates. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of certificates or separate stock powers are required unless payment of the Purchase Price is to be made in the name of, and/or the certificates for Shares not tendered or not purchased are to be returned to, any person other than the registered holder(s). Signatures on any such certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on the certificates for such Shares. Signature(s) on any such certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any certificate or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to the Company of the authority of such person so to act must be submitted. 6. STOCK TRANSFER TAXES The Company will pay any stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. However, if (i) payment of the Purchase Price is to be made to, or if certificates for Shares not tendered or not purchased are to be returned in the name of, any person other than the registered holder(s), (ii) tendered certificates are registered in the name of any person other than the person(s) signing this Letter of Transmittal, or (iii) a transfer tax is imposed for any reason other than the sale or transfer of Shares to the Company pursuant to the Offer, then the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) will be deducted from the Purchase Price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted herewith. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THE BOX ENTITLED "DESCRIPTION OF SHARES TENDERED" ON THIS LETTER OF TRANSMITTAL. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS If the check for the Purchase Price of any Shares purchased is to be issued, or any Shares not tendered or not purchased are to be returned in the name of, a person other than the person(s) signing this Letter of Transmittal or if the check or any certificates for Shares not tendered or not purchased are to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person signing this Letter of Transmittal at an address other than that shown in the box entitled "Description of Shares Tendered", the boxes entitled "Special Payment Instructions" and/or "Special Delivery Instructions" on this Letter of Transmittal should be completed. Stockholders tendering Shares by book-entry transfer may request that Shares not purchased be credited to such account at any of the Book-Entry Transfer Facilities as such stockholder may designate under "Special Payment Instructions." If no such instructions are given, any such Shares not purchased will be returned by crediting the account at the Book-Entry Transfer Facilities designated above. 8. SUBSTITUTE FORM W-9 Under the federal income tax laws, the Depositary will be required to backup withhold 31% of the amount of any payments made to certain stockholders pursuant to the Offer. In order to avoid such backup withholding, each tendering stockholder, and, if applicable, each other payee, must provide the Depositary with such stockholder's or payees's correct taxpayer identification number and certify that such stockholder or payee is not subject to such backup withholding by completing the Substitute Form W-9 set forth below. In general, if a stockholder or payee is an individual, the taxpayer identification number is the Social Security number of such individual. If the Depositary is not provided with the correct taxpayer identification number, the stockholder or payee may be subject to a $50 penalty imposed by the Internal Revenue Service ("IRS"). Certain stockholders or payees (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order to satisfy the Depositary that a foreign individual qualifies as an exempt recipient, such stockholder or payee must submit a statement, signed under penalties of perjury, attesting to that individual's exempt status. Such statements may be obtained from the Depositary. For further information concerning backup withholding and instructions for completing the Substitute Form W-9 (including how to obtain a taxpayer identification number if you do not have one and how to complete the Substitute Form W-9 if Shares are held in more than one name), consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. Failure to complete the Substitute Form W-9 will not, by itself, cause Shares to be deemed invalidly tendered, but may require the Depositary to withhold 31% of the amount of any payments made pursuant to the Offer. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of a person subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is furnished to the IRS. NOTE: FAILURE TO COMPLETE AND RETURN THE SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 9. WITHHOLDING ON FOREIGN STOCKHOLDERS The Depositary will withhold federal income taxes equal to 30% of the gross payments to a foreign stockholder or his agent with respect to purchases by the Company pursuant to the Offer unless the Depositary determines that a reduced rate of withholding is available pursuant to a tax treaty or an exemption from withholding is applicable because such gross proceeds are effectively connected with the conduct of a trade or business in the United States. The Depositary may require a foreign stockholder to deliver to the Depositary a properly executed IRS Form 1001 in order for the stockholder to claim a reduced rate of withholding under any such treaty. (Exemption from backup withholding does not exempt a foreign stockholder from the 30% withholding.) For this purpose, a foreign stockholder is any stockholder that is not (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or (iii) an estate or trust the income of which is subject to United States federal income taxation regardless of the source of such income. The Depositary will determine a stockholder's status as a foreign stockholder and eligibility for a reduced rate of, or an exemption from, withholding by reference to the stockholder's address and to any outstanding certificates or statements concerning eligibility for a reduced rate of, or exemption from, withholding unless facts and circumstances indicate that reliance is not warranted. In order to obtain an exemption from withholding on the grounds that the gross proceeds paid pursuant to the Offer are effectively connected with the conduct of a trade or business within the United States, a foreign stockholder must deliver to the Depositary a properly executed IRS Form 4224 before the date of payment of gross proceeds. Such forms may be obtained from the Depositary or Information Agent. A foreign stockholder who has not previously submitted the appropriate certificates or statements with respect to a reduced rate of, or exemption from, withholding for which such stockholder may be eligible should consider doing so in order to avoid excess withholding. A foreign stockholder may be eligible to obtain a refund of all or a portion of any tax withheld if the sale to the Company pursuant to the Offer is not treated as a dividend for federal income tax purposes (see "The Tender Offer--Federal Income Tax Consequences" in the Offer to Purchase) or is otherwise able to establish that no tax or a reduced amount of tax was due. Foreign stockholders are strongly urged to consult their tax advisors regarding the application of federal income tax withholding, including eligibility for a withholding tax reduction or exemption and the refund procedures. 10. IRREGULARITIES All questions as to the number of Shares to be purchased, the form of documents and the validity, (eligibility including time of receipt) and acceptance for payment of any tender of Shares will be determined by the Company, in its sole discretion, and its determination will be final and binding on all parties. The Company reserves the absolute right to reject any or all tenders which it determines not to be in proper form or the acceptance of or payment for which may, in the opinion of the Company's counsel, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Offer or any defect or irregularity in the tender of Shares by any particular stockholder, whether or not similar defects or irregularities are waived in the case of other stockholders. The Company's interpretation of the terms and conditions of the Offer (including this Letter of Transmittal and the instructions hereto) will be final and binding. No tender of Shares will be deemed to be validly made until all defects and irregularities have been cured or waived. Unless waived, any defects or irregularities in connection with tenders must be cured within such time as the Company will determine. None of the Company, its affiliates, the Dealer Managers, the Depositary, the Information Agent or any other person will be obligated to give notice of any defects or irregularities in tenders, and none of them will incur any liability for failure to give any such notice. 11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES Requests for assistance or additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent or the Dealer Managers at their respective addresses or telephone numbers set forth below. 12. LOST, DESTROYED OR STOLEN CERTIFICATES If any certificate(s) representing Shares has been lost, destroyed or stolen, the stockholder should promptly notify the Depositary. Instructions will then be given as to what steps must be taken to obtain a replacement certificate(s). The Letter of Transmittal and related documents cannot be processed until the procedures for replacing such missing certificate(s) have been followed. TO BE COMPLETED BY ALL TENDERING STOCKHOLDERS (SEE INSTRUCTION 8) PAYOR'S NAME: ______________________________________________ PART 1--PLEASE PROVIDE YOUR SUBSTITUTE TIN IN THE BOX AT RIGHT AND ---------------------- FORM W-9 CERTIFY BY SIGNING AND Social Security Number DATING BELOW. OR ------------------- PAYOR'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) PART 2--Awaiting TIN [_] Employer Identification Number -------------------------------------------------------- - - ------------------------------------------------------------------------------- CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE - - ------------------------------------------------------------------------------- Name _______________________________________________________________________ (PLEASE PRINT) Address ____________________________________________________________________ (INCLUDING ZIP CODE) Signature __________________________ Date _____________________________ YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office, or (b) I intend to mail or deliver an application in the near future. I understand that, notwithstanding that I have checked the box on Part 2 (and have completed this Certificate of Awaiting Taxpayer Identification Number), all reportable payments made to me prior to the time I provide the Depositary with a properly certified taxpayer identification number will be subject to a 31% backup withholding tax. Signature __________________________ Date _____________________________ NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS. Facsimile copies of the Letter of Transmittal, properly completed and duly executed, will be accepted. The Letter of Transmittal, certificates of Shares and any other required documents should be sent or delivered by each stockholder of the Company or his broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below: Depositary for the Offer is: AMERICAN STOCK TRANSFER & TRUST COMPANY By Mail: By Facsimile By Hand or Overnight Transmission: Courier: 40 Wall Street (718) 234-5001 40 Wall Street New York, New York (For Eligible New York, New York 10005 Institutions Only) 10005 Questions and requests for assistance may be directed to the Information Agent or the Dealer Managers at their respective addresses and telephone numbers listed below. Additional copies of the Offer to Purchase, this Letter of Transmittal and other tender offer materials may be obtained from the Information Agent as set forth below, and will be furnished promptly at the Company's expense. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning this Offer. The Information Agent is: MACKENZIE PARTNERS, INC. 156 Fifth Avenue New York, New York 10010 CALL COLLECT (212) 929-5500 or CALL TOLL FREE (800) 322-2885 The Dealer Managers are: GOLDMAN, SACHS & CO. 85 Broad Street New York, New York 10004 In New York State: (212) 902-1000 (collect) Other Areas: (800) 323-5678 (toll free) GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. Social Security numbers have nine digits separated by two hyphens, i.e., 000- 00-0000. Employer identification numbers have nine digits separated by only one hyphen, i.e., 00-0000000. The table below will help determine the number to give the payer. - - ----------------------------------- -----------------------------------
GIVE THE SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: NUMBER OF: - - --------------------------------------------- 1. An individual's account The individual 2. Two or more individuals The actual owner (joint account) of the account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint The actual owner account) of the account or, if joint funds, either person(1) 4. Custodian account of a The minor(2) minor (Uniform Gifts to Minors Act) 5. Adult and minor (joint The adult or, if account) the minor is the only contributor, the minor(1) 6. Account in the name of The ward, minor, guardian or committee or incompetent for the designated ward, person(3) minor, or incompetent person 7. a. The unusual revocable The grantor- savings trust account trustee(1) (grantor is also trustee) b. So-called trust account that is not legal or valid trust under state law 8. Sole proprietorship The owner(4) account - - ---------------------------------------------
GIVE THE EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF: --- 9. A valid trust, estate or The legal entity pension trust. (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, The organization or educational organization account 12. Partnership account The partnership held in the name of the business 13. Association, club, or The organization other tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the The public Department of entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments ---
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: . A corporation. . A financial institution. . An organization exempt from tax under section 501(a), or an individual retirement plan. . The United States or any agency or instrumentality thereof. . A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. . A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. . An international organization or any agency, or instrumentality thereof. . A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. . A real estate investment trust. . A common trust fund operated by a bank under section 584(a). . An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). . An entity registered at all times under the Investment Company Act of 1940. . A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. . Payments of patronage dividends where the amount received is not paid in money. . Payments made by certain foreign organizations. Payments of interest not generally subject to backup withholding include the following: . Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). . Payments described in section 6049(b)(5) to non-resident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. Exempt payees described above must still complete the Substitute Form W-9 enclosed herewith to avoid possible erroneous backup withholding. FILE SUBSTITUTE FORM W-9 WITH THE PAYER, REMEMBERING TO CERTIFY YOUR TAXPAYER IDENTIFICATION NUMBER ON THE FORM AND WRITE "EXEMPT" ON THE FACE OF THE FORM. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Beginning January 1, 1993, payers must generally withhold 31% of taxable interest, dividend and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you fail to include any portion of an includible payment for interest, dividends, or patronage dividends in gross income and such failure is due to negligence, a penalty of 20% is imposed on any portion of an under-payment attributable to that failure. (3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.A3 4 NOTICE OF GUARANTEED DELIVERY NOTICE OF GUARANTEED DELIVERY (NOT TO BE USED FOR SIGNATURE GUARANTEE) TO TENDER SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK OF SMITH'S FOOD & DRUG CENTERS, INC. PURSUANT TO THE OFFER TO PURCHASE DATED APRIL 25, 1996 This Notice of Guaranteed Delivery, or a facsimile hereof, must be used to accept the Offer (as defined in the Company's Offer to Purchase dated April 25, 1996 (the "Offer to Purchase")) if (i) certificates for shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and/or Class B Common Stock, par value $.01 per share ("Class B Common Stock"; and, together with the Class A Common Stock, the "Common Stock" or the "Shares") of Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), and all other documents required by the Letter of Transmittal cannot be delivered to the Depositary by the expiration of the Offer, or (ii) the procedures for delivery of book-entry transfer cannot be completed on a timely basis. This Notice of Guaranteed Delivery may be delivered by hand or sent by facsimile transmission or mail to the Depositary. See "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase. THE DEPOSITARY FOR THE OFFER IS: American Stock Transfer & Trust Company By Facsimile By Hand or Overnight By Mail: Transmission: Courier: 40 Wall Street (718) 234-5001 40 Wall Street New York, New York 10005 (For Eligible New York, New York 10005 Institutions Only) DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" (as defined in the Offer to Purchase) under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to the Company, upon the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal (which together constitute the "Offer"), receipt of which is hereby acknowledged, the number (indicated below) of Shares pursuant to the guaranteed delivery procedure set forth in "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase. Number of Shares Being Tendered SIGN HERE Hereby ______________________________ _____________________________________ (SIGNATURE(S)) Certificate No.(s). _____________________________________ (if available): (SIGNATURE(S)) _____________________________________ _____________________________________ (NAME(S) OF RECORD HOLDERS) (PLEASE PRINT) _____________________________________ _____________________________________ (ADDRESS) If shares will be tendered by book- _____________________________________ entry transfer: (ZIP CODE) _____________________________________ Name of Tendering Institution________ (AREA CODE AND TELEPHONE NO.) _____________________________________ Account No. _________________________ at: [_] The Depository Trust Company [_] Philadelphia Depository Trust Company GUARANTEE (not to be used for signature guarantee) The undersigned, an "Eligible Institution", guarantees (a) that the above named person(s) "own(s)" the Shares tendered hereby within the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) that such tender of Shares complies with Rule 14e-4 and (c) to deliver to the Depositary either the stock certificates representing the Shares tendered hereby, together with a properly completed and duly executed Letter(s) of Transmittal (or manually executed facsimile(s) thereof) with any required signature guarantees or an Agent's Message (as defined in the Offer to Purchase) in the case of a book-entry delivery, and any other required documents, all within three New York Stock Exchange trading days of the date hereof. _____________________________________ (NAME OF FIRM) _____________________________________ (AUTHORIZED SIGNATURE) _____________________________________ (NAME) _____________________________________ (ADDRESS) _____________________________________ (ZIP CODE) Dated: ______________________ , 1996. _____________________________________ (AREA CODE AND TELEPHONE NO.) DO NOT SEND STOCK CERTIFICATES WITH THIS FORM. YOUR STOCK CERTIFICATES MUST BE SENT WITH THE LETTER OF TRANSMITTAL. EX-99.A4 5 LETTER TO BROKERS, DEALERS GOLDMAN, SACHS & CO. 85 BROAD STREET NEW YORK, NEW YORK 10004 OFFER TO PURCHASE FOR CASH 50% OF THE OUTSTANDING SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK OF SMITH'S FOOD & DRUG CENTERS, INC. AT $36 NET PER SHARE THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED. April 25, 1996 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), to act as Dealer Managers in connection with the Company's offer to purchase, in the aggregate, 50% of the outstanding shares of its Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and Class B Common Stock, par value $.01 per share ("Class B Common Stock; and, together with the Class A Common Stock, the "Shares"), at $36 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Company's Offer to Purchase dated April 25, 1996 (the "Offer to Purchase") and the related Letter of Transmittal (which together constitute the "Offer"). For your information and for forwarding to your clients for whom you hold Shares registered in your name or in the name of your nominee, we are enclosing the following documents: 1. Offer to Purchase dated April 25, 1996; 2. Letter of Transmittal to tender Shares for your use and for the information of your clients, together with Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 providing information relating to backup federal income tax withholding (facsimile copies of the Letter of Transmittal may be used to tender Shares); 3. Notice of Guaranteed Delivery to be used to accept the Offer if the certificates for the Shares being tendered and all other required documents cannot be delivered to the Depositary by the Expiration Date (as defined in the Offer to Purchase) or if procedures for book-entry transfer cannot be completed by the Expiration Date; 4. A printed form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; and 5. A letter to the Company's stockholders from Jeffrey P. Smith, Chairman and Chief Executive Officer of the Company. YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED. EACH STOCKHOLDER SHOULD MAKE ITS OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Company will accept for payment and pay for the Shares which are validly tendered prior to the Expiration Date and not theretofore properly withdrawn when, as and if the Company gives oral or written notice to the Depositary of the Company's acceptance of such Shares for payment pursuant to the Offer. Payment for Shares purchased pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of certificates for the Shares or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company, pursuant to the procedures described in "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase, a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) or an Agent's Message in connection with a book-entry transfer, and all other documents required by the Letter of Transmittal. If holders of Shares wish to tender, but it is impracticable for them to forward their certificates or other required documents to the Depositary on or prior to the Expiration Date or to comply with the book-entry transfer procedure on a timely basis, a tender may be effected by following the guaranteed delivery procedures specified in "The Tender Offer--Procedure for Tendering Shares" in the Offer to Purchase. The Company will not pay any fees or commissions to any broker or dealer or other person (other than to the Dealer Managers as described in the Offer to Purchase) for soliciting tenders of Shares pursuant to the Offer. The Company will, however, upon request, reimburse such persons for customary handling and mailing expenses incurred by them in forwarding materials with respect to the Offer to their customers. The Company will pay all stock transfer taxes applicable to its purchase of Shares pursuant to the Offer, subject to Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Offer should be addressed to, and additional copies of the enclosed materials may be obtained from, the Information Agent or the Dealer Managers at the addresses and telephone numbers set forth on the back cover of the Offer to Purchase and the Letter of Transmittal. Very truly yours, GOLDMAN, SACHS & CO. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE COMPANY, THE DEALER MANAGERS, THE INFORMATION AGENT OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN. EX-99.A5 6 LETTER TO CLIENTS SMITH'S FOOD & DRUG CENTERS, INC. OFFER TO PURCHASE FOR CASH 50% OF THE OUTSTANDING SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK OF SMITH'S FOOD & DRUG CENTERS, INC. AT $36 NET PER SHARE THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED. April 25, 1996 To our Clients: Enclosed for your consideration are the Offer to Purchase dated April 25, 1996 (the "Offer to Purchase") and the related Letter of Transmittal (which, together with any amendments or supplements thereto, constitute the "Offer") in connection with the offer by Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), to purchase, in the aggregate, 50% of the outstanding shares of its Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and Class B Common Stock, par value $.01 per share ("Class B Common Stock"; and, together with the Class A Common Stock, the "Shares"), at a price of $36 per share, net to the seller in cash, upon the terms and conditions set forth in the Offer. We are the holder of record of Shares held for your account. A tender of such Shares can be made only by us as the holder of record and pursuant to your instructions. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. EACH STOCKHOLDER SHOULD MAKE ITS OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. We request instructions as to whether you wish us to tender any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer. Please note carefully the following: 1. The tender price is $36 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer. 2. The Offer, proration period and withdrawal rights will expire at 12:00 midnight, New York City time, on Wednesday, May 22, 1996, unless extended. 3. The Offer is being made for an aggregate of 50% of the outstanding Shares (or 12,535,862 Shares based on Shares outstanding at April 15, 1996). If the number of Shares validly tendered prior to the Expiration Date (as defined in the Offer to Purchase) and not withdrawn is greater than 50% of its outstanding Shares (and, as is most likely, the Company elects not to purchase pursuant to the Offer any more than 50% of its outstanding Shares), the Company will, upon the terms and subject to the conditions of the Offer, accept for purchase all Shares properly tendered and not withdrawn before the Expiration Date on a pro rata basis (with adjustments to avoid purchases of fractional Shares). 4. The Offer is conditioned upon, among other things, (1) at least 50% of the outstanding Shares being validly tendered and not withdrawn before the expiration of the Offer, (2) the Company having obtained sufficient financing necessary to purchase 50% of the Shares, repay certain indebtedness and pay certain fees and expenses, and (3) all of the conditions to the Merger (as defined in the Offer to Purchase), other than the consummation of the Offer, having been satisfied or waived. See "Tender Offer--Certain Conditions of the Offer" in the Offer to Purchase. 5. Any brokerage fees, commissions or stock transfer taxes applicable to the sale of Shares to the Company pursuant to the Offer will be paid by the Company, except as otherwise provided in Instruction 6 of the Letter of Transmittal. If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing, detaching and returning to us the attached instruction form. An envelope to return your instructions to us is enclosed. If you authorize tender of your Shares, all such Shares will be tendered unless otherwise specified on the attached instruction form. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF BY THE EXPIRATION OF THE OFFER. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS THE COMPANY EXTENDS THE OFFER. THE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF, HOLDERS OF SHARES IN ANY JURISDICTION IN WHICH THE MAKING OF THE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION. IN THOSE JURISDICTIONS THE LAWS OF WHICH REQUIRE THAT THE OFFER BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE DEEMED TO BE MADE ON BEHALF OF THE COMPANY BY ONE OR MORE REGISTERED BROKERS OR DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION. INSTRUCTIONS WITH RESPECT TO OFFER TO PURCHASE FOR CASH 50% OF THE OUTSTANDING SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK OF SMITH'S FOOD & DRUG CENTERS, INC. AT $36 NET PER SHARE The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase dated April 25, 1996 and the related Letter of Transmittal in connection with the offer by Smith's Food & Drug Centers, Inc., a Delaware corporation, to purchase, in the aggregate, of 50% of the outstanding shares of its Class A Common Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per share (collectively, the "Shares"). This will instruct you to tender the number of Shares indicated below held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal. Number of Shares to be Tendered: _____ Shares* Account Number: ___________________ Dated: ______________________ ,1996 ___________________________________ * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. SIGN HERE ___________________________________ ___________________________________ Signature(s) ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ Please print name(s) and address(es) here EX-99.A6 7 LETTER TO STOCKHOLDERS [SMITH'S FOOD & DRUG LOGO APPEARS HERE] April 25, 1996 To our Stockholders: Smith's Food & Drug Centers, Inc. is offering to purchase, in the aggregate, 50% of the outstanding shares of its Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and its Class B Common Stock, par value $.01 per share ("Class B Common Stock"; and, together with the Class A Common Stock, the "Common Stock" or the "Shares"), at $36 per Share, net to the seller in cash. Based on the outstanding 11,366,532 shares of Class A Common Stock and 13,705,191 shares of Class B Common Stock (excluding shares held in the Company's treasury) as of April 15, 1996, the Company is offering to purchase 12,535,862 Shares pursuant to the tender offer. The tender offer relates to, among other things, the proposed recapitalization of the Company pursuant to a Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996, among the Company, Cactus Acquisition, Inc., a wholly owned subsidiary of the Company, Smitty's Supermarkets, Inc., and The Yucaipa Companies. In the Recapitalization Agreement, the Company has agreed subject to certain terms and conditions to (i) commence the tender offer, and (ii) consummate the merger of Smitty's with Acquisition, pursuant to which Smitty's will become a wholly owned subsidiary of the Company and the stockholders of Smitty's will receive 3,038,888 shares of Class B Common Stock of the Company. The shares of Class B Common Stock to be received by the stockholders of Smitty's are not eligible to be tendered in the tender offer. At its January 28, 1996 meeting, the Company's Board of Directors unanimously determined that it was in the best interests of the Company and its stockholders that the Company enter into the Recapitalization Agreement and the related agreements and consummate all of the transactions contemplated by those agreements, including the tender offer. The Board determined to recommend that the Company's stockholders approve the Recapitalization Agreement and the transactions contemplated thereby, including the issuance of 3,038,888 shares of the Company's Class B Common Stock to the stockholders of Smitty's in the Merger. The purpose of the tender offer is to permit all of the Company's stockholders the opportunity to exchange half of their Shares for a cash amount reflecting a significant premium over the price at which the Company's Common Stock has traded for some time and yet at the same time continue to participate in the future performance of the Company. The tender offer is explained in detail in the enclosed Offer to Purchase and Letter of Transmittal. If you wish to tender Shares, the instructions for tendering are also set forth in detail in the enclosed materials. I urge you to read these materials carefully before making any decision with respect to the tender offer. In particular, please see "Introduction--Advantages of Tendering and Not Tendering" in the Offer to Purchase for a discussion of certain factors that should be considered in evaluating the offer; "Financial Data of the Company" in the Offer to Purchase for important historical, pro forma and other financial information; and "The Tender Offer--Interest of Certain Persons in the Transactions" in the Offer to Purchase for information as to the intentions of the Company's directors, executive officers and principal stockholders with respect to tendering shares (including the intentions of the members of the Smith Group (as defined in the Offer to Purchase) and the Company's directors and executive officers to participate in the tender offer and tender a sufficient number of Shares to enable the Company, pursuant to a shareholder's agreement, to repurchase 50% of the outstanding Shares pursuant to the Offer). Because the Smith Group and such directors and officers own approximately 38% of the outstanding Shares, the minimum tender condition will be satisfied if other stockholders tender Shares representing at least 12% of the outstanding Shares. EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. If you have any questions regarding the tender offer, please call Mackenzie Partners, Inc., the Information Agent for the tender offer, or Goldman, Sachs & Co., the Dealer Managers for the tender offer, at the appropriate telephone number set forth on the back cover of the Offer to Purchase. Very truly yours, /s/ Jeffrey P. Smith Jeffrey P. Smith Chairman and Chief Executive Officer 2 EX-99.A7 8 SUMMARY ADVERTISEMENT DATED 4/25/96 This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares. The Offer is made solely by the Offer to Purchase dated April 25, 1996 and the related Letter of Transmittal and is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares residing in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. In those jurisdictions whose laws require that the Offer be made by a licensed broker or dealer, the Offer shall be deemed made on behalf of the Company by Goldman, Sachs & Co. or one or more registered brokers or dealers licensed under the laws of such jurisdiction. Notice of Offer to Purchase for Cash 50% of the Outstanding Shares of Class A Common Stock and Class B Common Stock of Smith's Food & Drug Centers, Inc. at $36 Net Per Share Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), is offering to purchase 50% of the outstanding shares of its Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and its Class B Common Stock, par value $.01 per share ("Class B Common Stock"; and, together with the Class A Common Stock, the "Common Stock" or the "Shares") (excluding shares issuable in the Merger referred to below), at $36 per Share, net to the seller in cash (the "Purchase Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase dated April 25, 1996 and in the related Letter of Transmittal (which together constitute the "Offer"). Based on the outstanding 11,366,532 shares of Class A Common Stock and 13,705,191 shares of Class B Common Stock as of April 15, 1996, the Company is offering to purchase 12,535,862 Shares pursuant to the Offer. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, MAY 22, 1996, UNLESS EXTENDED. THE OFFER IS CONDITIONED UPON AMONG OTHER THINGS (i) AT LEAST 50% OF THE OUTSTANDING SHARES BEING VALIDLY TENDERED AND NOT WITHDRAWN BEFORE THE EXPIRATION OF THE OFFER, (ii) THE COMPANY HAVING OBTAINED FINANCING NECESSARY TO PURCHASE 50% OF THE SHARES, REPAY CERTAIN INDEBTEDNESS, AND PAY CERTAIN FEES AND EXPENSES, AND (iii) ALL OF THE CONDITIONS TO THE MERGER REFERRED TO BELOW (OTHER THAN THE CONSUMMATION OF THE OFFER) HAVING BEEN SATISFIED OR WAIVED. The Offer relates to, among other things, the proposed recapitalization of the Company pursuant to the Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996 (the "Recapitalization Agreement"), among the Company, Cactus Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Acquisition"), Smitty's Supermarkets, Inc., a Delaware corporation ("Smitty's"), and The Yucaipa Companies, a California general partnership. In the Recapitalization Agreement, the Company has agreed subject to certain terms and conditions to (i) commence the Offer and (ii) consummate the merger of Smitty's with Acquisition, pursuant to which Smitty's will become a wholly owned subsidiary of the Company and the stockholders of Smitty's will receive 3,038,888 shares of Class B Common Stock of the Company (the "Merger"). The shares of Class B Common Stock to be received by the stockholders of Smitty's are not eligible to be tendered in the Offer. It is anticipated that the Offer and the Merger will close simultaneously, except in certain limited circumstances described in the Offer to Purchase. The purpose of the Offer is to permit all of the Company's stockholders the opportunity to exchange half of their Shares for a cash amount reflecting a significant premium over the price at which the Company's Common Stock has traded for some time and yet at the same time continue to participate in the future performance of the Company. Each stockholder should make his or her own decision whether to tender Shares and, if so, how many Shares to tender. Pursuant to the Smith's Shareholder Agreement entered into by Jeffrey P. Smith, Chairman and Chief Executive Officer of the Company, Richard Smith, Fred Smith (all of whom are brothers), Ida Smith (their mother), and certain related family trusts and related stockholders (collectively, the "Smith Group"), the members of the Smith Group have agreed to participate in the Offer and tender a sufficient number of Shares to enable the Company to repurchase 50% of the outstanding Shares pursuant to the Offer. In addition, directors and executive officers of the Company who have not executed the Smith's Shareholder Agreement, who own approximately 7.6% of the outstanding Shares, have indicated that they intend to tender their Shares in the Offer. Because the Smith Group and such directors and officers own approximately 38% of the outstanding Shares, the minimum tender condition will be satisfied if other stockholders tender Shares representing at least 12% of the outstanding Shares. Upon the terms and subject to the conditions of the Offer, the Company will accept for payment and thereby purchase 50% of its outstanding Shares, which Shares are required to be validly tendered prior to the Expiration Date and not theretofore withdrawn in accordance with the withdrawal procedures set forth in the Offer to Purchase. The term "Expiration Date" means 12:00 Midnight, New York City time, on May 22, 1996, unless and until the Company shall, in its sole discretion, have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall refer to the latest time and date at which the Offer, as so extended by the Company, shall expire. If the Offer is oversubscribed, Shares tendered prior to the Expiration Date and not withdrawn will be subject to proration. The proration period also expires on the Expiration Date. The Company reserves the right, in its sole discretion, to purchase more than 50% of its outstanding Shares pursuant to the Offer, but it has no current intention to do so. If the number of Shares validly tendered prior to the Expiration Date and not withdrawn is greater than 50% of its outstanding Shares (and, as is most likely, the Company elects not to purchase pursuant to the Offer any more than 50% of its outstanding Shares), the Company will, upon the terms and subject to the conditions of the Offer, accept for purchase Shares properly tendered and not withdrawn before the Expiration Date on a pro rata basis (with adjustments to avoid purchases of fractional Shares). In the likely event that proration of tendered Shares is required, the Company will determine the final proration factor as promptly as practicable after the Expiration Date. Proration for each stockholder tendering Shares will be based on the ratio of the number of Shares tendered by such stockholder to the total number of Shares tendered by all stockholders. Although the Company will announce preliminary results of proration by press release as promptly as practicable after the Expiration Date, the Company does not expect to be able to announce the final results of such proration until approximately seven NYSE trading days after the Expiration Date. Stockholders may obtain such preliminary information from the Information Agent and may be able to obtain such information from their brokers. The Company expressly reserves the right, in its sole discretion, at any time or from time to time, to extend the period of time during which the Offer is open by giving oral or written notice of such extension to American Stock Transfer & Trust Company (the "Depositary") and making a public announcement thereof. The Company will be deemed to have accepted for payment, and thereby purchased, Shares properly tendered to the Company and not withdrawn as, if and when the Company gives oral or written notice to the Depositary of the Company's acceptance for payment of such Shares. Payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for such Shares (or a confirmation of book-entry transfer of such Shares into the Depositary's account at a Book-Entry Transfer Facility (as defined in the Offer to Purchase)), a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and any other required documents. Under no circumstances will interest be paid by the Company on the Purchase Price of the Shares, regardless of any delay in making such payment. Shares tendered may be withdrawn at any time prior to the Expiration Date and, unless accepted for payment by the Company, such Shares may also be withdrawn after June 21, 1996. Once accepted for payment, tenders of Shares made pursuant to the Offer are irrevocable. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be received in a timely manner by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase and must specify the name of the person having tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from the name of the person who tendered such Shares. If the certificates for Shares have been delivered or otherwise identified to the Depositary, then, prior to the release of such certificates, the tendering stockholder must also submit to the Depositary the serial numbers shown on the particular certificates evidencing the Shares to be withdrawn and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in the Offer to Purchase). If Shares have been tendered by book-entry transfer, any notice of withdrawal must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with such Book- Entry Transfer Facility's procedures. The Offer to Purchase and the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares and furnished to brokers, dealers, banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder lists or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. The information required to be disclosed by Rule 13e-4(d)(1) under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Offer to Purchase and the related Letter of Transmittal contain important information and should be read in their entirety before any decision is made with respect to the Offer. Requests for copies of the Offer to Purchase and the Letter of Transmittal may be directed to the Information Agent or the Dealer Managers as set forth below, and copies will be furnished promptly at the Company's expense. The Information Agent for the Offer is: [MACKENZIE LOGO] 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (call collect) or Call Toll-Free (800) 322-2885 The Dealer Managers for the Offer are: Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 in New York State: (212) 902-1000 (collect) Other Areas: (800) 323-5678 (toll free) April 25, 1996 23181 MacKenzie Partners, Inc. Farrington & Favia Inc. (212) 475-7600 Description: Smith's Food & Drug Centers, Inc. April96/MacKenzie/23181-D-01 4/24/96 jn/et/jn Proof 5 4 EX-99.A8 9 PRESS RELEASE DATED 4/25/96 APRIL 25, 1996 SMITH'S FOOD & DRUG CENTERS, INC. COMMENCES OFFER TO PURCHASE 50% OF ITS CLASS A COMMON STOCK AND CLASS B COMMON STOCK AT $36 PER SHARE (Salt Lake City, UT) - Smith's Food & Drug Centers, Inc. (NYSE: SFD) ("Smith's") announced today that it has commenced an offer to purchase 50%, in the aggregate, of its outstanding Class A Common Stock and Class B Common Stock (the "Shares") at a price of $36 per share in cash. The offer is scheduled to expire at 12:00 midnight, New York City time, on Wednesday, May 22, 1996. The offer is being made pursuant to a previously announced Recapitalization Agreement and Plan of Merger entered into by Smith's. In connection with the proposed recapitalization, a subsidiary of Smith's will consummate a merger with Smitty's Supermarkets, Inc. ("Smitty"s). Smitty's operates 28 supermarkets in the Phoenix and Tucson areas and is controlled by The Yucaipa Companies, a private investment group. Smith's said that the offer will be made only by an Offer to Purchase and other offering documents, copies of which are being filed today with the Securities and Exchange Commission and mailed to Smith's stockholders. The offer is conditioned on the tender of 50% of the Shares, the receipt of financing for the recapitalization, as well as certain other conditions. Smith's will also file definitive proxy materials with the SEC today in connection with its annual stockholders meeting to be held May 23, 1996. Goldman, Sachs & Co. are dealer managers for the offer and MacKenzie Partners, Inc. is the information agent. Smith's also announced that it intends to refile a registration statement with the Securities and Exchange Commission relating to the issuance and sale of $150 million of Senior Notes due 2006, $350 million of Senior Subordinated Notes due 2007 (collectively, the "Notes") and 750,000 shares of Cumulative Redeemable Exchangeable Preferred Stock (the "Preferred Stock"). The amount of Notes (MORE) SMITH'S FOOD & DRUG CENTERS, INC. Press Release -- Smith's Commences Offer Page 2 proposed to be offered has been reduced from the amount previously filed as a result of a corresponding increase in the size of the new credit facility which Smith's will obtain in connection with the recapitalization. BT Securities Corporation; CS First Boston Corporation; Donaldson, Lufkin & Jenrette Securities Corporation; Goldman, Sachs & Co. and Chase Securities Inc. will act as underwriters in connection with the offering of Notes and Preferred Stock. A registration statement relating to the Notes and Preferred Stock has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. # # # -----END PRIVACY-ENHANCED MESSAGE-----