-----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, Dzx3sKnC6E/p+iRMSHZfPey53nlzXlgNikUdX/A9IfqcFkLHRN9fiiAhuopxxK5s WWspYaaZ4kpFp+Q+PpK2bA== 0000898430-96-001605.txt : 19960507 0000898430-96-001605.hdr.sgml : 19960507 ACCESSION NUMBER: 0000898430-96-001605 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960506 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITHS FOOD & DRUG CENTERS INC CENTRAL INDEX KEY: 0000850309 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 870258768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-01601 FILM NUMBER: 96556694 BUSINESS ADDRESS: STREET 1: 1550 S REDWOOD RD CITY: SALT LAKE CITY STATE: UT ZIP: 84104 BUSINESS PHONE: 8019741400 S-3/A 1 FORM S-3/A, AMENDMENT #3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1996 REGISTRATION NO. 333-01601 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 3 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- SMITH'S FOOD & DRUG CENTERS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 1550 SOUTH REDWOOD ROAD 87-0258768 (STATE OR OTHER SALT LAKE CITY, UTAH 84104 (IRS EMPLOYER JURISDICTION OF (801) 974-1400 IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- MICHAEL C. FREI SENIOR VICE PRESIDENT AND GENERAL COUNSEL SMITH'S FOOD & DRUG CENTERS, INC. 1550 SOUTH REDWOOD ROAD SALT LAKE CITY, UTAH 84104 (801) 974-1400 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- COPIES TO: THOMAS C. SADLER, ESQ. MICHAEL A. BECKER, ESQ. LATHAM & WATKINS CAHILL GORDON & REINDEL 633 WEST FIFTH STREET 80 PINE STREET LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10005 (213) 485-1234 (212) 701-3000 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE(A) - --------------------------------------------------------------------------------- % Senior Subordinated Notes due 2007 $575,000,000 100% $575,000,000 $198,276 - ---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (a) The registration fees were paid in connection with the original filing of the Registration Statement on March 11, 1996. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 6, 1996 PROSPECTUS LOGO [LOGO OF SMITH'S FOOD & DRUG CENTERS] $575,000,000 SMITH'S FOOD & DRUG CENTERS, INC. % SENIOR SUBORDINATED NOTES DUE 2007 ---------- The offering (the "Offering") by Smith's Food & Drug Centers, Inc. ("Smith's" or the "Company") of its % Senior Subordinated Notes due 2007 (the "Notes") is part of the financing required to consummate the Recapitalization (as defined) of Smith's and the Merger (as defined) of Smitty's Supermarkets, Inc. ("Smitty's") with a subsidiary of Smith's. Consummation of the Offering is conditioned upon the closing of the Merger and the Recapitalization. Interest on the Notes will be payable semiannually on each May 15 and November 15, commencing on November 15, 1996. The Notes will be redeemable, in whole or in part, at the option of the Company, at any time on and after May 15, 2001, at the respective redemption prices set forth herein. In addition, on or prior to May 15, 1999, the Company may, at its option, use the Net Cash Proceeds (as defined) of one or more Public Equity Offerings (as defined) to redeem up to an aggregate of 35% of the Notes originally issued, at the respective redemption prices set forth herein. Upon a Change of Control (as defined), each holder of Notes will have the right to require the Company to repurchase such holder's Notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase. The Notes will be senior subordinated unsecured obligations of the Company and will be subordinated in right of payment to all Senior Indebtedness (as defined) of the Company, including the New Credit Facility (as defined). At December 30, 1995, on a pro forma basis after giving effect to the Transactions (as defined) and the California Disposition (as defined), the aggregate outstanding amount of Senior Indebtedness of the Company would have been approximately $813.2 million, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility (as defined). The Notes will be effectively subordinated to all existing and future liabilities, including indebtedness, of the Company's subsidiaries. At December 30, 1995, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company's subsidiaries would have had indebtedness and other liabilities reflected on the Company's consolidated balance sheet, including trade payables and accrued expenses (but excluding guarantees of Senior Indebtedness), of approximately $148.4 million. The Company does not intend to apply for listing of the Notes on any national securities exchange. See "Underwriting." ---------- SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================= PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) COMPANY(3) - --------------------------------------------------------------------------------- Per Note................................... % % % - --------------------------------------------------------------------------------- Total...................................... $575,000,000 $ $ =================================================================================
(1) Plus accrued interest, if any, from date of original issuance. (2) The Company has agreed to indemnify the Underwriters (as defined) against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses of the Offering payable by the Company, estimated at $ . ---------- The Notes are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval of certain legal matters by counsel. It is expected that delivery of the Notes will be made on or about , 1996, at the offices of BT Securities Corporation, One Bankers Trust Plaza, New York, New York. ---------- BT SECURITIES CORPORATION CS FIRST BOSTON DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. CHASE SECURITIES INC. ---------- The date of this Prospectus is , 1996. IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Notes. Each of the Company and Smitty's is subject to the reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, and in accordance therewith files reports and other information with the Commission. Such reports and other information filed by the Company or Smitty's with the Commission can be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048; 500 West Madison Street, Chicago, Illinois 60601; and 5670 Wilshire Boulevard, Suite 500, Los Angeles, California 90036. Copies of such materials can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The Class B Common Stock of the Company is listed on the New York Stock Exchange and reports, proxy statements and other information concerning the Company can also be inspected at the office of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. This Prospectus summarizes the contents and terms of documents not included herewith. These documents are available upon request from Smith's Food & Drug Centers, Inc. at 1550 South Redwood Road, Salt Lake City, Utah 84104, telephone number (801) 974-1400, Attn: Michael C. Frei, General Counsel and Secretary. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by Smith's with the Commission under the Exchange Act are incorporated herein by reference: (i) Smith's Annual Report on Form 10-K for its fiscal year ended December 30, 1995; (ii) Smith's current report on Form 8-K dated February 19, 1996, and (iii) the sections of Smith's 1996 Proxy Statement for its Annual Meeting of Stockholders entitled "The Recapitalization Agreement," and "Executive Compensation." In addition, all documents filed by Smith's with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the Offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document that also is, or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of documents incorporated herein by reference (excluding exhibits unless such exhibits are specifically incorporated herein by reference) may be obtained without charge upon request from Smith's Food & Drug Centers, Inc. at 1550 South Redwood Road, Salt Lake City, Utah 84104, telephone number (801) 974-1400, Attn: Michael C. Frei, General Counsel and Secretary. i SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the Financial Statements and notes thereto, appearing elsewhere in this Prospectus. Except as otherwise stated, references in this Prospectus to numbers of stores prior to the consummation of the Merger are as of May 1, 1996. References to the "pro forma" number of stores to be operated by the Company following the consummation of the Merger are based on the May 1, 1996 totals for Smith's and Smitty's, but give effect to the California Divestiture, as described herein. Unless otherwise noted, the market share data contained herein has been prepared by management of the Company based upon internal research. THE COMPANY Smith's is a leading supermarket company in the Intermountain and Southwestern regions of the United States, operating 120 stores located in Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and Wyoming (collectively, 14). Substantially all of Smith's stores offer one-stop shopping convenience through a food and drug combination format which features a full- line supermarket with drug and pharmacy departments and some or all of the following specialty departments: delicatessens, hot prepared food sections, in- store bakeries, video rental shops, floral shops, one-hour photo processing labs, full-service banking and frozen yogurt shops. The Company's 114 food and drug combination stores averaged approximately 63,000 square feet and $420,000 per week in sales volume in fiscal 1995. The Company has recently opened four price impact warehouse stores and also operates two conventional supermarkets. Through its 48 years of operations, the Company believes it has developed a valuable and strategically located store base, strong name recognition, customer loyalty and a reputation for quality and service. The Company is pursuing a series of transactions designed to enhance stockholder value and liquidity: . Arizona Merger and Consolidation. The Company has entered into an agreement to acquire Smitty's Supermarkets, Inc. ("Smitty's"), a regional supermarket operator with 28 stores in the Phoenix and Tucson markets, in a stock-for-stock exchange (the "Merger"). The Merger will significantly enhance the Company's market position in Arizona. Smitty's is controlled by affiliates of The Yucaipa Companies ("Yucaipa"), a private investment group specializing in the supermarket industry. Affiliates of Yucaipa will own approximately 13.6% of the Company's outstanding common stock following the Merger and the Recapitalization (as defined). . California Disposition. The Company has completed the sale or lease of 16 stores, three non-operating properties and its primary distribution facility in Southern California and has closed its remaining 18 stores there (the "California Divestiture"). Management determined that because of the attractive growth prospects in the Company's principal markets and the competitive environment in Southern California, it would redeploy Company resources from California into such other markets. Following the consummation of the Transactions, the Company intends to accelerate the disposition of its closed stores and excess land in California (the "California Asset Disposition", and together with the California Divestiture, the "California Disposition"). . New Senior Management. The Company will enter into a five-year management services agreement (the "Management Services Agreement") with Yucaipa. Ronald W. Burkle, the managing general partner of Yucaipa, will be appointed as Chief Executive Officer of the Company. In addition, Allen R. Rowland recently joined Smith's as President and Chief Operating Officer. Mr. Rowland was employed by Albertson's, Inc. for 25 years and had senior executive responsibilities for all of the principal regions in which Smith's operates. . Recapitalization. The Company is offering to purchase 50% of its outstanding common stock (excluding shares issuable in the Merger) for $36.00 in cash per share (the "Tender Offer"). In addition, the Company is refinancing certain of its existing indebtedness and is refinancing or assuming certain existing indebtedness of Smitty's concurrently with the consummation of the Merger. 1 For the fiscal year ended December 30, 1995, after giving pro forma effect to the Transactions and the California Disposition, the Company would have had net sales and EBITDA (as defined) of approximately $3.0 billion and $255.4 million, respectively. See "Unaudited Pro Forma Combined Financial Statements." In addition, management believes that the Company will benefit from significant operating synergies and cost saving opportunities following the Merger. COMPANY STRENGTHS Management believes the Company has the following principal strengths: (i) leading market positions, (ii) attractive markets, (iii) new and recently remodeled stores, (iv) prime store locations, (v) advanced backstage operations and (vi) substantial owned real estate. Leading Market Positions. Pro forma for the Merger, the Company will operate 148 stores and will have the largest or second largest market share in each of its principal markets: Salt Lake City (31%), Phoenix (24%), Las Vegas (24%) and Albuquerque (23%). The Company believes its reputation for offering a broad selection of quality products and low pricing combined with a high level of customer service has created a valuable franchise with strong name recognition and customer loyalty. Attractive Markets. The Company's stores are located predominantly in Utah, Arizona, Nevada and New Mexico, which are among the fastest growing states in terms of population and employment. According to the U.S. Bureau of the Census, the population of those four states has increased at a compound annual growth rate of 3.0% since 1990, compared to the national average of 1.1% over the same period. According to the U.S. Bureau of Labor Statistics, employment in the same four states has increased at a compound annual growth rate of 4.0% since 1990, compared to the national average of 1.3% over the same period. In addition, management believes that operating in distinct markets in several states provides advantages due to their differences in economic cycles, demographics and competitive conditions. New and Recently Remodeled Stores. After giving effect to the Merger and the California Divestiture, approximately 84% of the Company's stores will have been opened or remodeled within the last seven years. During the five fiscal years ended December 30, 1995, Smith's spent approximately $414 million in capital expenditures (excluding capital expenditures associated with California operations), which have been primarily used to build new stores and to expand and remodel existing stores. During the five-year period ended December 30, 1995, Smitty's spent approximately $72 million in capital expenditures, including approximately $42 million since mid-1994 to remodel substantially all of its Phoenix-area stores. Prime Store Locations. The Company's 48 years of operation have allowed it to choose its store locations selectively as new residential areas have been developed. The Company believes that many of its stores are in developed areas where land values and the unavailability of suitable parcels would make it difficult to replicate the Company's existing store base. Advanced Backstage Operations. The Company owns and operates one of the most modern and efficient backstage operations in the industry. During the five fiscal years ended December 30, 1995, the Company spent approximately $163 million (excluding the divested California operations) to build, expand or remodel its warehousing, distribution and processing facilities. Management believes that the Company's approximately 3,000,000 square feet of backstage facilities will be able to accommodate the Smitty's volume following the Merger and support anticipated future growth. Substantial Owned Real Estate. The Company will own 108 of the 148 stores it will operate upon consummation of the Merger. The Company also owns its primary warehousing, distribution and processing facilities. In addition, the Company owns land for development, expansion or sale, as well as other non-operating real estate assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." 2 THE CALIFORNIA DIVESTITURE Smith's has completed the sale, lease or closure of its Southern California regional operations. In December 1995, Smith's entered into an agreement to sublease its Riverside, California distribution center and dairy plant to Ralphs Grocery Company ("Ralphs"), an affiliate of Yucaipa, for the remaining 23-year term of Smith's lease. Ralphs also agreed to purchase certain related equipment and inventory. In January 1996, Smith's entered into agreements to sell or lease 16 stores and related equipment and three non-operating properties to various supermarket companies (including Ralphs) and others. Smith's has closed the remaining 18 stores and it is anticipated that these closed stores will be sold or leased to other retail companies. Since December 30, 1995, the Company has received net cash proceeds of approximately $67.2 million from the California Divestiture and expects to receive an additional $10.6 million shortly after the consummation of the Transactions. In connection with the California Divestiture, the Company recorded pre-tax restructuring charges of $140 million (the "California Divestiture Charge") for the year ended December 30, 1995 and classified the assets to be leased or sold as "assets held for sale." The California Divestiture Charge reflected (i) a provision for anticipated future lease obligations, (ii) the anticipated cost to the Company of closing its California stores and distribution center (primarily termination payments and inventory), and (iii) asset valuation adjustments for the equipment in all of the California stores and the distribution center and for the land and buildings associated with the properties being sold or leased. The California Divestiture, including the transactions with Ralphs, was unrelated to the Merger or the Recapitalization. OPERATING STRATEGY Management, in conjunction with Yucaipa, has developed a strategic plan designed to: (i) expand operations in existing and adjacent markets, (ii) realize operating synergies and cost savings resulting from the Merger, (iii) improve working capital management, (iv) grow its recently introduced price impact warehouse stores and (v) dispose of remaining California real estate following the consummation of the Transactions. Expand Operations in Existing and Adjacent Markets. Management believes that there are significant opportunities to increase the Company's sales and gain efficiencies in its existing markets through new store openings and store remodels. From 1991 through 1994, management primarily focused on the Southern California market, opening 32 new stores in Southern California compared to a net of 10 new stores in its other markets. In 1995, the Company opened a net of 17 new stores, only two of which were located in California. In an effort to more fully realize its market potential in its non-California markets, in 1995 the Company began opening smaller combination stores (54,000 to 60,000 square feet) in existing markets as part of a "fill-in" strategy. By pursuing a growth strategy which emphasizes opening new stores within its existing and adjacent markets, the Company believes it can increase its market share and improve its distribution and other efficiencies, while taking advantage of such markets' favorable growth prospects. Realize Operating Synergies and Cost Savings Resulting from the Merger. Management believes that approximately $25 million of net annual cost savings are achievable over a three-year period following the Merger. The majority of such cost savings opportunities relate to its Arizona operations and are believed to be achievable (on an annualized basis) by the end of the first full year of operations following the Merger. The estimates of potential cost savings resulting from the Merger contained in this Prospectus are forward looking statements that involve risks and inherent uncertainties that could cause actual net annual cost savings to differ materially from those projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings." . Advertising Cost Savings. Smith's and Smitty's advertising programs in the Phoenix and Tucson markets substantially overlap and, as a result of the Merger, management expects that the Company will be able to eliminate a substantial portion of the combined advertising expenses. Management estimates that annualized advertising cost savings of approximately $7 million are achievable by the end of the first full year of operations following the Merger. 3 . General and Administrative Cost Savings. Management expects the Company to achieve savings from the elimination of duplicative administrative staff and headquarters facilities and the consolidation of management information systems. Management estimates that annualized general and administrative cost savings of approximately $13 million are achievable by the end of the first full year of operations following the Merger. . Warehousing and Transportation Cost Savings. Smitty's currently operates without any of its own distribution facilities. By incorporating the Smitty's volume into Smith's Tolleson, Arizona warehousing and distribution facilities, the Company expects to eliminate the expense associated with Smitty's being supplied primarily by an independent wholesaler, as well as reduce average unit costs resulting from improved capacity utilization. Management estimates that annualized warehousing and transportation cost savings of approximately $4 million are achievable by the end of the second full year of operations following the Merger. . Direct Store Delivery and Store Systems. The Merger is expected to result in an opportunity to utilize Smith's electronic direct store receiving system in all Smitty's stores, resulting in increased control over direct store deliveries and corresponding payments. In addition, by utilizing Smith's front-end systems in Smitty's stores, improvements in the efficiency of Smitty's stores are expected. Management estimates that annualized cost savings of approximately $2 million related to such direct store delivery and store systems are achievable by the end of the second full year of operations following the Merger. . Purchasing Improvements. Management believes that the Company can achieve savings as a result of increased promotional allowances and discounts through a coordinated buying effort with Yucaipa-affiliated supermarket chains with aggregate annual sales (when combined with the Company) in excess of $11 billion. Management estimates that annualized cost savings of approximately $6 million are achievable from such purchasing improvements by the end of the third full year of operations following the Merger. The sum of the components of the estimated annual cost savings exceeds $25 million; however, management expects that a portion of the savings will be reinvested in the Company's operations. In connection with the Transactions, the Company and Smitty's are evaluating the format mix of the combined Arizona store base and are assessing the possibility of modifying the formats of certain stores. It is anticipated that approximately $17 million of capital expenditures and approximately $15 million of other expenses will be required to integrate the Arizona operations over the next two years and realize such cost savings. Improve Working Capital Management. Management believes that the Company can improve its working capital management. Under Yucaipa's management, other companies have achieved working capital improvements; however, there can be no assurance that similar improvements can be achieved by the Company. Grow Recently Introduced Price Impact Warehouse Format. The Company recently developed a price impact warehouse store format and during 1995 opened four of these stores in the Las Vegas area operating under the name "PriceRite Grocery Warehouse." Management believes that a number of the Company's markets are underserved by price impact warehouse stores and that there are substantial opportunities for expansion of the Company's PriceRite format through the conversion of existing stores and the opening of new stores. Yucaipa, through its management of other supermarket companies, has extensive experience in expanding and profitably operating price impact warehouse formats. Dispose of Remaining California Real Estate. Following the consummation of the Transactions, management, in conjunction with Yucaipa, anticipates that it will pursue a strategy to dispose of its remaining real estate assets in California which consist of 18 non-operating stores and excess land. The Company would use the net cash proceeds from the California Asset Disposition to either reinvest in the Company's business or 4 reduce indebtedness incurred in connection with the Transactions. At December 30, 1995, the aggregate book value of such assets was approximately $260 million. If this strategy is adopted, as anticipated, the Company would record a pre-tax charge to earnings, which is presently estimated to be approximately $125 million (the "California Asset Disposition Charge") to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. See "Risk Factors--Anticipated Charges to Earnings Following the Transactions." THE TRANSACTIONS The Merger. On January 29, 1996, Smith's and a wholly owned subsidiary of Smith's ("Acquisition"), entered into a Recapitalization Agreement and Plan of Merger (the "Recapitalization Agreement") with Smitty's and Yucaipa. Pursuant to the terms of the Recapitalization Agreement, Smitty's will merge with Acquisition, as a result of which Smitty's will become a wholly owned subsidiary of Smith's. The consideration payable to the stockholders of Smitty's in the Merger will consist of 3,038,888 shares of Class B Common Stock of the Company. Tender Offer. Smith's is offering to purchase 50% of its outstanding Class A Common Stock and Class B Common Stock (collectively, the "Common Stock") for $36.00 per share in cash in the Tender Offer. The shares issuable to the stockholders of Smitty's will not be eligible to participate in the Tender Offer. Smith's is also offering to purchase for cash certain outstanding options to purchase Common Stock held by certain officers and employees of Smith's for an aggregate purchase price estimated to be approximately $13.7 million. Smith's Debt Refinancing and Preferred Stock Redemption. Smith's will repay in full substantially all of its existing indebtedness ($667.1 million at December 30, 1995), including all outstanding borrowings under its existing revolving credit facilities, and will purchase approximately $1.0 million of its outstanding Series I Preferred Stock. Smitty's Debt Refinancing. At the time the Merger is consummated, the Company will cause Smitty's and its subsidiary, Smitty's Super Valu, Inc. ("SSV"), to repay in full certain existing indebtedness (approximately $34.9 million principal amount at December 30, 1995), including all outstanding borrowings under SSV's bank credit facility. In addition, Smitty's is offering to purchase all of the $29.025 million principal amount at maturity (accreted value of $18.4 million at December 30, 1995) of its Senior Discount Debentures due 2006 (the "Smitty's Debentures"), and SSV is offering to purchase all of the $50.0 million principal amount of its Senior Subordinated Notes due 2004 (the "Smitty's Notes"). Smitty's and SSV will concurrently solicit consents from the holders of such securities to certain amendments to the respective indentures under which such securities were issued. The foregoing debt refinancing transactions of Smitty's and SSV are referred to herein collectively as the "Smitty's Refinancing." The Offering, the Tender Offer, the purchase of certain management stock options, the Series I Preferred Stock purchase, the Smith's debt refinancings described above and the closing under a new senior credit facility (the "New Credit Facility") to be provided to the Company are collectively referred to herein as the "Recapitalization." The Recapitalization, the Merger and the Smitty's Refinancing are collectively referred to herein as the "Transactions." 5 The following table illustrates the pro forma sources and uses of funds to consummate the Transactions, assuming the Transactions and the California Disposition had been consummated as of December 30, 1995. Although management believes the pro forma amounts estimated below are reasonable under the circumstances, actual sources and uses may differ from those set forth below. SOURCES AND USES (dollars in millions)
SOURCES USES ------- ---- New Term Loans (a)...... $ 805.0 Purchase Smith's Common Stock............... $ 451.3 New Revolving Facility (a)(b)................. 13.2 Purchase Smith's Management Options......... 13.7 Notes................... 575.0 Purchase Smith's Series I Preferred Stock... 1.0 California Disposition Proceeds (b)........... 68.0 Repay Smith's Mortgage Notes................ 257.1 Repay Smith's Unsecured Notes............... 410.0 Repay Smith's Revolving Credit Facility (b). 68.0 Repay Smitty's Notes (c).................... 50.0 Repay Smitty's Debentures (c)............... 18.4 Repay Smitty's Bank Credit Facility......... 34.9 Debt Refinancing Premiums................... 56.8 Accrued Interest............................ 12.6 Fees and Expenses........................... 87.4 -------- -------- Total Sources........... $1,461.2 Total Uses.................................. $1,461.2 ======== ========
- -------- (a) The Company has obtained a commitment from Bankers Trust Company ("Bankers Trust") and The Chase Manhattan Bank ("Chase Manhattan") for a new senior credit facility that will provide up to $805 million aggregate principal amount of term loans ("New Term Loans") and a $190 million revolving credit facility (the "New Revolving Facility") which will be available for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit, approximately $28 million of which are anticipated to be issued upon consummation of the Transactions (the "Closing"). The New Credit Facility will be guaranteed by all subsidiaries of the Company, including Smitty's. See "Description of New Credit Facility." (b) The information presented is derived from the Unaudited Pro Forma 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 Transactions. Subsequent to December 30, 1995, the Company has received net cash proceeds from the California Divestiture of $67.2 million and expects to receive an additional $10.6 million in proceeds from the California Divestiture shortly after the Closing. The Company intends to use such additional proceeds to reduce revolving loans under the New Revolving Facility. The Company has not entered into any contracts relating to the California Asset Disposition and there can be no assurance as to the timing or the amount of net proceeds, if any, which the Company will actually receive from such disposition. See "Unaudited Pro Forma Combined Financial Statements" and "Business--The California Divestiture." (c) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are tendered and accepted for purchase in connection with the Smitty's Refinancing. If all of the outstanding Smitty's Notes and Smitty's Debentures are not tendered and accepted for purchase, the Company anticipates that it would reduce other borrowings. 6 THE OFFERING Securities Offered...... $575,000,000 aggregate principal amount of % Senior Subordinated Notes due 2007. Maturity Date........... May 15, 2007. Interest Rate........... The Notes will bear interest at the rate % per annum. Interest Payment Dates.. May 15 and November 15 commencing on November 15, 1996. Optional Redemption..... The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after May 15, 2001, at the following redemption prices if redeemed during the 12-month period commencing on May 15 of the year set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2001................................................. % 2002................................................. % 2003................................................. % 2004 and thereafter.................................. 100.0%
in each case plus accrued and unpaid interest to the date of redemption. In addition, on or prior to May 15, 1999, the Company may, at its option, use the Net Cash Proceeds from one or more Public Equity Offerings to redeem up to an aggregate of 35% of the principal amount of the Notes originally issued, at a redemption price equal to % of the principal amount thereof plus accrued and unpaid interest to the date of redemption. Ranking................. The Notes will be senior subordinated unsecured obligations of the Company and will be subordinated in right of payment to all Senior Indebtedness (as defined) of the Company, including the Company's obligations under the New Credit Facility. At December 30, 1995, on a pro forma basis after giving effect to the Transactions and the California Disposition, the aggregate outstanding amount of Senior Indebtedness of the Company would have been approximately $813.2 million, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. The Notes will be effectively subordinated to all existing and future liabilities, including indebtedness of the Company's subsidiaries. At December 30, 1995, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company's subsidiaries would have had indebtedness and other liabilities reflected on the Company's consolidated balance sheet, including trade payables and accrued expenses (but excluding guarantees of Senior Indebtedness), of approximately $148.4 million. Change of Control....... Upon the occurrence of a Change of Control (as defined), each holder will have the right to require the Company to repurchase such holder's Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. 7 Certain Covenants....... The indenture pursuant to which the Notes will be issued (the "Indenture") will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries (as defined) to make restricted payments, incur additional indebtedness, create liens, sell assets, create dividend or other payment restrictions affecting Restricted Subsidiaries, enter into transactions with affiliates, consummate mergers or certain other transactions or incur indebtedness subordinated to any other indebtedness but senior to the Notes and the ability of the Restricted Subsidiaries to issue preferred stock. The Company does not intend to apply for listing of the Notes on any national securities exchange. See "Underwriting." 8 SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA The following table sets forth summary unaudited pro forma combined financial data for the 52 weeks ended December 30, 1995, after giving effect to the (a) Transactions and the application of the proceeds therefrom and (b) the California Disposition and the retention of the anticipated proceeds therefrom as cash (after reducing pro forma revolving credit balances to zero), in each case as if they had occurred on January 1, 1995 with respect to the pro forma operating and other data, and as of December 30, 1995, with respect to the pro forma balance sheet data. Such pro forma information: (i) eliminates the results of operations of the Company's California retail division and the related assets and liabilities as of and for the 52 weeks ended December 30, 1995 from Smith's results of operations and balance sheet data as of and for the 52 weeks ended December 30, 1995 and (ii) combines the operating results and balance sheet data of Smith's, pro forma for the elimination of the Company's California retail division and the related assets and liabilities, as of and for the 52 weeks ended December 30, 1995 with the operating results and balance sheet data of Smitty's as of and for the 52 weeks ended January 14, 1996. The pro forma financial data set forth below is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of the dates indicated, or that may be achieved in the future. The pro forma combined financial data does not reflect (i) any of the net annual cost savings which management believes are achievable by the end of the third full year of operations following the Merger, or (ii) the anticipated costs expected to be incurred in connection with the integration of operations in Arizona following the Merger. In addition, the summary pro forma combined operating data does not reflect the California Divestiture Charge, the California Asset Disposition Charge, an extraordinary loss on extinguishment of debt, an anticipated charge relating to certain costs expected to be incurred by Smith's in connection with the Merger, a potential severance payment to the Chairman and Chief Executive Officer of the Company or compensation expense in connection with the repurchase of certain management stock options as part of the Recapitalization. See Note (g) to the Unaudited Pro Forma Combined Statement of Operations. The following pro forma financial data should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Smith's and Smitty's, and related notes thereto, included elsewhere in this Prospectus.
52 WEEKS ENDED DECEMBER 30, 1995(A) --------------------- (DOLLARS IN MILLIONS) OPERATING DATA: Net sales............................................ $2,993.4 Gross profit......................................... 703.3 Operating, selling and administrative expenses....... 452.2 Depreciation and amortization........................ 89.9 Interest expense..................................... 141.7 Net income........................................... $ 3.8 Ratio of earnings to fixed charges(b)................ 1.06x BALANCE SHEET DATA (END OF PERIOD): Total assets......................................... $1,713.4 Total debt(c)........................................ 1,431.8 Redeemable preferred stock........................... 3.3 Common stockholders' equity (deficit)................ $ (121.6) OTHER DATA: Capital expenditures................................. $ 159.7 EBITDA (as defined)(d)(e)............................ $ 255.4 EBITDA margin(f)..................................... 8.53% Ratio of EBITDA (as defined) to interest expense..... 1.80x Ratio of total debt to EBITDA (as defined)........... 5.60x
9 - -------- (a) For purposes of the Summary Unaudited Pro Forma Combined Financial Data, the Company has given effect to the California Asset Disposition as if each of the relevant properties had been sold for a cash amount equal to its net book value after giving effect to the California Asset Disposition Charge. The proceeds of such assumed sales, together with the proceeds of the California Divestiture, are reflected in the Company's pro forma cash balances (net of pro forma revolving credit balances, which have been eliminated) at December 30, 1995. INVESTORS ARE CAUTIONED THAT THE COMPANY HAS NOT ENTERED INTO ANY CONTRACTS RELATING TO THE CALIFORNIA ASSET DISPOSITION AND THAT THERE CAN BE NO ASSURANCE AS TO THE TIMING OR THE AMOUNT OF NET PROCEEDS, IF ANY, WHICH THE COMPANY WILL ACTUALLY RECEIVE FROM SUCH DISPOSITION. (b) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs, and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). (c) Total debt includes long-term debt and current maturities of long-term debt. As a result of the assumed application of a portion of the proceeds of the California Disposition (see note (a) above) to eliminate pro forma revolving credit balances, pro forma total debt at December 30, 1995 does not reflect anticipated revolving credit facility borrowings upon consummation of the Transactions of $13.2 million. (d) EBITDA (as defined) represents income (loss) before interest expense, income taxes, depreciation and amortization, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt and, with certain variations in definition, is an indicator of compliance with various covenants in the Company's debt agreements. However, EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning the Company's historical cash flows, see "Selected Historical Financial Data of Smith's" and the Consolidated Statements of Cash Flows included elsewhere herein. (e) Pro forma EBITDA (as defined) does not give effect to net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended December 30, 1995) which management believes are achievable by the end of the third full year of combined operations following the Merger. The sum of the components of the estimated annual cost savings exceeds $25 million; however, management's estimate of $25 million in net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. The estimates of potential cost savings resulting from the Merger contained in this Prospectus are forward looking statements that involve risks and inherent uncertainties that could cause actual net annual cost savings to differ materially from those projected. See "Risk Factors-- Ability to Achieve Anticipated Cost Savings." The sum of the Company's pro forma EBITDA (as defined) ($255.4 million) and the full amount of the estimated net annual cost savings to be realizable by the end of the third full year of operations following the Merger ($25.0 million) is $280.4 million. See "--Operating Strategy--Realize Operating Synergies and Cost Savings Resulting from the Merger." (f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales. 10 SUMMARY HISTORICAL FINANCIAL DATA OF SMITH'S The following table sets forth summary historical financial data of Smith's for the five fiscal years ended December 30, 1995, which have been derived from the financial statements of Smith's audited by Ernst & Young LLP, independent auditors. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Smith's and related notes thereto included elsewhere in this Prospectus.
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) OPERATING DATA: Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7 Gross profit........... 498.6 611.6 637.2 669.1 697.0 Operating, selling and administrative expenses.............. 344.4 419.7 430.3 440.8 461.4 Depreciation and amor- tization.............. 50.5 67.8 82.2 94.5 105.0 Interest expense....... 30.3 36.1 44.6 53.7 60.5 Restructuring charges(a)............ -- -- -- -- 140.0 Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5) Ratio of earnings to fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x -- BALANCE SHEET DATA (END OF PERIOD): Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7 Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2 Total debt(c).......... 395.4 612.7 725.5 718.9 746.2 Redeemable preferred stock................. 8.5 7.5 6.5 5.4 4.3 Common stockholders' equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7 OTHER DATA: Stores open at end of period(d)............. 109 119 129 137 154 Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0 EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6 EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8%
- -------- (a) Reflects charges in connection with the California Divestiture. See Note K to Notes to Consolidated Financial Statements of Smith's included elsewhere herein. (b) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). For the 52 weeks ended December 30, 1995, the Company's earnings were inadequate to cover fixed charges by $69.8 million. However, such earnings include non-cash charges of $105.4 million, primarily consisting of depreciation and amortization, and restructuring charges of $140.0 million. (c) Total debt includes long-term debt and current maturities of long-term debt. (d) See "Business--Store Development and Expansion." (e) EBITDA (as defined) represents income (loss) before interest expense, income taxes, depreciation and amortization expense, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Smith's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning the Company's historical cash flows, see "Selected Historical Financial Data of Smith's" and the Consolidated Statements of Cash Flows included elsewhere herein. (f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales. 11 RISK FACTORS Prospective investors should carefully consider the following factors, in addition to the other matters described in this Prospectus, before purchasing the securities being sold in the Offerings. LEVERAGE AND DEBT SERVICE Following the consummation of the Transactions, the Company will be highly leveraged. At December 30, 1995, pro forma for the Transactions and the California Disposition, the Company's total debt and stockholders' equity (deficit) would have been $1,431.8 million and $(121.6) million, respectively, compared to actual debt and stockholders' equity of $746.2 million and $416.7 million, respectively, on such date. The Company would also have had additional borrowing availability under the New Revolving Facility on a pro forma basis, subject to the borrowing conditions contained therein. In addition, as of December 30, 1995, after giving effect to the Transactions and the California Disposition, scheduled payments under net operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been approximately $36.9 million. The Company's ability to make scheduled payments of the principal of, or interest on, or to refinance its indebtedness (including the Notes) and to make scheduled payments under its operating leases depends on its future performance, which is subject to economic, financial, competitive and other factors beyond its control. Based upon the current level of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with borrowings under the New Revolving Facility and its other sources of liquidity, will be adequate to meet its anticipated requirements for working capital, capital expenditures, lease payments, interest payments and scheduled principal payments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated cost savings or future growth can be achieved. In addition, no assurances can be given as to the timing of, or the net proceeds to be realized upon, the California Asset Disposition and, therefore, as to the timing or amount of receipts thereof as reflected in the Unaudited Pro Forma Combined Financial Statements. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital or other expenditures, or if its future cash flows are insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt following the Transactions and the fact that substantially all of its assets will be pledged to secure borrowings under the New Credit Facility and other secured obligations. The Company's high level of debt and debt service requirements will have several important effects on its future operations, including the following: (a) the Company will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions and competition; (b) the Company's leveraged position will increase its vulnerability to competitive pressures; (c) the financial covenants and other restrictions contained in the New Credit Facility and other agreements relating to the Company's indebtedness and in the Indenture will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends on, or repurchase, preferred or common stock; and (d) funds available for working capital, capital expenditures, acquisitions and general corporate purposes will be limited. The Company's continued growth depends, in part, on its ability to continue its expansion and store conversion efforts, and therefore its inability to finance capital expenditures through borrowed funds or otherwise could have a material adverse effect on the Company's future operations. Moreover, any default under the documents governing the indebtedness of the Company could have a significant adverse effect on the market value of the Notes. The Company's capital structure immediately after the Transactions will include a significant amount of floating rate indebtedness, causing the Company to be significantly more sensitive to prevailing interest rates than has historically been the case. The Company intends to enter into interest rate protection agreements which, for the duration of such agreements, will effectively provide fixed rates of interest or ceiling rates of interest on 12 a portion of such floating rate indebtedness. There can be no assurance that the Company will be able to enter into such agreements on favorable terms. See "Description of New Credit Facility." In addition, following the Transactions, the Company's blended average rates of interest are anticipated to be higher than the rates of interest on the Company's indebtedness outstanding immediately prior to the Transactions. ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS Management of the Company has estimated that approximately $25 million of annualized net cost savings (as compared to such costs for the pro forma combined fiscal year ended December 30, 1995) can be achieved over a three- year period as a result of integrating the Arizona operations of Smith's and Smitty's. The estimates of potential cost savings contained in this Prospectus are forward looking statements that are inherently uncertain. Actual cost savings, if any, could differ materially from those projected. All of these forward looking statements are based on estimates and assumptions made by management of the Company, which although believed to be reasonable, are inherently uncertain and difficult to predict; therefore, undue reliance should not be placed upon such estimates. There can be no assurance that the savings anticipated in these forward looking statements will be achieved. The following important factors, among others, could cause the Company not to achieve the cost savings contemplated herein (principally those set forth in "Summary--Operating Strategy" and "Business-- Operating Strategy") or otherwise cause the Company's results of operations to be adversely affected in future periods: (i) continued or increased competitive pressures from existing competitors and new entrants, including price-cutting strategies; (ii) unanticipated costs related to the Transactions and the integration strategy; (iii) loss or retirement of key members of management or the termination of the Management Services Agreement with Yucaipa; (iv) inability to negotiate more favorable terms with suppliers or to improve working capital management; (v) increases in interest rates or the Company's cost of borrowing or a default under any material debt agreements; (vi) inability to develop new stores in advantageous locations or to successfully convert existing stores; (vii) prolonged labor disruption; (viii) deterioration in general or regional economic conditions; (ix) adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations; (x) loss of customers as a result of the conversion of store formats; (xi) adverse determinations in connection with pending or future litigations or other material claims against the Company; (xii) inability to achieve future sales levels or other operating results that support the cost savings, and (xiii) the unavailability of funds for capital expenditures. Many of such factors are beyond the control of the Company. In addition, there can be no assurance that unforeseen costs and expenses or other factors will not offset the projected cost savings in whole or in part. ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE TRANSACTIONS Upon consummation of the Transactions, the Company anticipates that it would record charges to earnings in connection with (i) the adoption of a strategy to accelerate the disposition of certain real estate assets in California pursuant to the California Asset Disposition, (ii) the payment of certain refinancing premiums and the write-off of certain debt issuance costs, (iii) the purchase of certain management stock options, and (iv) the integration of its Arizona operations with Smitty's. As a result of the foregoing, the Company anticipates that it would record a substantial charge to earnings for the quarter in which the Transactions are consummated. The Company currently estimates that the total charge for all such items would be approximately $220 million (pre-tax). However, such estimate is based on information available as of the date of this Prospectus and the actual total charge may differ materially from such estimate if the actual information available to the Company at the time the charge is recorded varies from the information currently available. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores and the newer "alternative format" food stores, including warehouse- style supermarkets, club stores, deep discount drug stores and "supercenters." The Company's competitors continue to open new stores in the Company's existing markets. In addition, new competitors have entered the Company's markets in 13 the past and could do so in the future. Supermarket chains generally compete on the basis of price, location, quality of products, service, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use those resources to take steps which could adversely affect the Company's competitive position. The Company's ability to respond to competitive pressures could be adversely affected by its highly leveraged financial condition. See "Business-- Competition." CONTROL OF THE COMPANY The Company's Class A Common Stock and Series I Preferred Stock are each entitled to ten votes per share and the Company's Class B Common Stock is entitled to one vote per share. Upon consummation of the Transactions, members of the Smith Group (as defined) are expected to have beneficial ownership, in the aggregate, of approximately 24.5% of the outstanding Common Stock and 31.6% of the outstanding Series I Preferred Stock of the Company, representing approximately 41.8% of the aggregate voting power of the Company's capital stock, and certain affiliates of Yucaipa will have beneficial ownership of approximately 13.6% of the total outstanding Common Stock of the Company, representing approximately 1.3% of the aggregate voting power of the Company's outstanding capital stock. Pursuant to a standstill agreement (the "Standstill Agreement") entered into by such Smith family members (the "Smith Group"), certain affiliates of Yucaipa (the "Yucaipa Group") and the Company, upon consummation of the Recapitalization the Company will use its best efforts to reconstitute its Board of Directors to consist of seven directors, and each of the Smith Group and the Yucaipa Group will have the right to nominate two directors so long as it holds at least 8% of the outstanding Common Stock and the right to nominate one director so long as it holds at least 5% of the outstanding Common Stock. As a result of the ownership structure of the Company and the contractual rights described above, the voting and management control of the Company is highly concentrated. The Smith Group has effective control of the Company and will effectively be able to direct the actions of the Company with respect to matters such as the payment of dividends, material acquisitions and dispositions and other extraordinary corporate transactions. See "Certain Relationships and Related Transactions," "Principal Stockholders" and "Description of Capital Stock." NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS Upon consummation of the Transactions, substantially all of the existing members of the Company's Board of Directors will resign and be replaced by the new directors identified in this Prospectus. Jeffrey P. Smith will remain as Chairman of the Board but will resign as Chief Executive Officer of the Company. Ronald W. Burkle, the managing general partner of Yucaipa, will be appointed Chief Executive Officer of the Company and Allen R. Rowland will continue his recent appointment as President and Chief Operating Officer. As a result, the Company's senior executive officers and a majority of the members of the Board of Directors will be new appointees. There can be no assurance that the changes in the Company's Board of Directors or senior management will not adversely affect the Company's operating performance. Mr. Burkle will provide his services as Chief Executive Officer pursuant to the Management Services Agreement between the Company and Yucaipa; however, such agreement does not require Mr. Burkle to spend any specified amount of time on Company affairs. Yucaipa will receive an annual fee of $1 million for providing the services of Mr. Burkle and the other partners and employees of Yucaipa. The Management Services Agreement may be terminated by the Company's Board of Directors on 90 days' notice or by either party upon the occurrence of certain events. If the Company seeks to terminate the Management Services Agreement, subject to limited exceptions, it is required to pay Yucaipa a termination fee of between $5 million and $10 million, depending on the time of termination. Yucaipa will also receive certain fees in connection with the consummation of the Recapitalization. See "Management" and "Certain Relationships and Related Transactions." 14 CONTINGENT LIABILITIES RELATING TO CALIFORNIA DIVESTITURE In connection with closing stores and otherwise redeploying assets, the Company has assigned leases and subleased stores and other facilities at various times, including the sublease to Ralphs of the Company's Riverside, California distribution center and dairy plant and the assignment or sublease of 10 stores to various supermarket companies (including nine to Ralphs) in connection with the California Divestiture. Since the Company will generally remain either primarily or secondarily liable for the underlying lease obligations with respect to these stores and other facilities, the Company has a contingent liability to the extent the Company's sublessees or assignees default in the performance of their obligations under their respective sublease or underlying lease. See "Business--California Divestiture." FRAUDULENT CONVEYANCE RISKS Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court to subordinate or avoid the Notes in favor of other existing or future creditors of the Company. Proceeds of the Offering are being used, in part, to purchase shares of Smith's Common Stock in the Tender Offer, to redeem options to purchase Common Stock held by Smith's management, and to purchase shares of Smith's Series I Preferred Stock. If a court in a lawsuit on behalf of any unpaid creditor of the Company or a representative of the Company's creditors were to find that, at the time the Company issued the Notes, the Company (x) intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) did not receive fair consideration in good faith or reasonably equivalent value for issuing the Notes and the Company (i) was insolvent, (ii) was rendered insolvent by reason of such stock purchases and redemptions, (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void the Notes and void such transactions. Alternatively, in such event, claims of the holders of Notes could be subordinated to claims of other creditors of the Company. The Company may be viewed as insolvent at the time of or as a result of the Tender Offer, redemption of options and preferred stock, if the fair value of its assets does not exceed its probable liabilities at the time of, or following such transactions. Based upon financial and other information currently available to it, management of the Company believes that the Notes are being incurred for proper purposes and in good faith. Certain courts have held, however, that a company's purchase of its own capital stock does not constitute reasonably equivalent value or fair consideration for incurring indebtedness. By extension, the redemption of options to purchase capital stock of a company may also be viewed as not constituting reasonably equivalent value or fair consideration to the company. The Company believes that it (i) is solvent and will continue to be solvent after issuing the Notes notwithstanding the fact that the Company, after completion of the Tender Offer, redemption of options and redemption of preferred stock, will have a negative net worth under generally accepted accounting principles, because the Company believes that the fair value of the Companys' assets exceeds and will exceed its probable liabilities, (ii) will have sufficient capital for carrying on the business it intends to conduct after such issuance, and (iii) will be able to pay its debts as they mature. See "Management's Discussions and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." There can be no assurance, however, that a court would concur with such beliefs and positions. It is a condition to the consummation of the Tender Offer that the Company shall have received an opinion from an independent valuation firm (i) as to the value of the Company's assets and liabilities, after giving effect to the consummation of the Transactions, and (ii) that the fair value of the Company's assets would exceed its total stated liabilities and identified contingent liabilities both before and after giving effect to the Transactions by at least the aggregate par value of its issued capital stock. Houlihan, Lokey, Howard & Zukin, Inc. has been retained by the Company to deliver such an opinion. 15 SUBORDINATION OF THE NOTES The payment of principal, premium, if any, and interest on, and any other amounts owing in respect of, the Notes will be subordinated to the prior payment in full of all existing and future Senior Indebtedness, including indebtedness under the New Credit Facility. As of December 30, 1995, on a pro forma basis after giving effect to the Transactions and the California Disposition, the aggregate outstanding amount of Senior Indebtedness of the Company would have been approximately $813.2 million, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. In the event of the bankruptcy, liquidation, dissolution, reorganization or other winding up of the Company, the assets of the Company will be available to pay obligations on the Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes. In addition, under certain circumstances, the Company may not pay principal of, premium, if any, or interest on, or any other amounts owing in respect of, the Notes, or purchase, redeem or otherwise retire the Notes, if a payment default or a non- payment default exists with respect to certain Senior Indebtedness and, in the case of a non-payment default, a payment blockage notice has been received by the Trustee (as defined). See "Description of the Notes--Subordination." The Notes will be effectively subordinated to all secured indebtedness of the Company and its subsidiaries. The borrowings and obligations under the New Credit Facility are secured by substantially all of the assets of the Company and its subsidiaries. At December 30, 1995, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company would have had approximately $813.2 million aggregate amount of secured indebtedness and other obligations outstanding, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. The Notes will also be effectively subordinated to all existing and future liabilities, including indebtedness, of the Company's subsidiaries. The obligations of the Company under the New Credit Facility will be guaranteed, jointly and severally, by the Company's subsidiaries, including Smitty's. At December 30, 1995, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company's subsidiaries would have had indebtedness and other liabilities reflected on the Company's consolidated balance sheet, including trade payables and accrued expenses (but excluding guarantees of Senior Indebtedness), of approximately $148.4 million. Claims of creditors of the Company's subsidiaries, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of the Company and the holders of the Company's indebtedness, including the Notes. ABSENCE OF ESTABLISHED MARKET FOR THE NOTES There is no established market for the Notes and there can be no assurance as to the liquidity of any markets that may develop for the Notes, the ability of holders of the Notes to sell their Notes, or the price at which holders would be able to sell their Notes. Future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Underwriters have advised the Company that they currently intend to make a market in the Notes. However, the Underwriters are not obligated to do so and any market-making may be discontinued at any time, by any or all of them, without notice. 16 PRO FORMA CAPITALIZATION The following table sets forth the consolidated pro forma capitalization of the Company at December 30, 1995, giving effect to the Transactions and the California Disposition. This table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the historical consolidated financial statements of Smith's and Smitty's, and the related notes thereto, included elsewhere in this Prospectus.
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)...................... -- Senior Subordinated Notes......................... 575.0 Other indebtedness................................ 50.4 -------- Total long-term debt............................ 1,418.1 -------- Redeemable preferred stock, $.01 par value.......... 3.3 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.......................... $1,299.8 ========
- -------- (a) The Company has obtained a commitment from Bankers Trust and Chase Manhattan for the New Credit Facility that will provide up to $805 million aggregate principal amount of New Term Loans and a $190 million New Revolving Facility which will be available for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit, approximately $28 million of which are anticipated to be issued at Closing. The New Credit Facility will be guaranteed by all subsidiaries of the Company, including Smitty's. See "Description of New Credit Facility." (b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are tendered and accepted for purchase in connection with the Smitty's Refinancing. If all of the outstanding Smitty's Notes and Smitty's Debentures are not tendered and accepted for purchase, the Company anticipates that it would reduce other borrowings. As a result of the assumed application of a portion of the proceeds of the California Disposition to eliminate pro forma revolving credit balances, pro forma total debt at December 30, 1995 does not reflect anticipated revolving credit facility borrowings upon consummation of the Transactions of $13.2 million. (c) Does not reflect (i) management options to purchase up to an aggregate of 808,250 shares of Class B Common Stock expected to be outstanding upon consummation of the Transactions or (ii) Warrants to purchase shares of Class C Common Stock of the Company (at an initial exercise price of $50.00 per share) to be issued to Yucaipa upon consummation of the Transactions. See "Certain Relationships and Related Transactions." 17 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements of the Company for the 52 weeks ended December 30, 1995 give effect to (a) the Transactions and the application of the proceeds therefrom and (b) the California Disposition and the retention of the anticipated proceeds therefrom as cash (after reducing pro forma revolving credit balances to zero), in each case as if such transactions occurred on January 1, 1995, with respect to the pro forma operating and other data, and as of December 30, 1995, with respect to the pro forma balance sheet data. Such pro forma information: (i) eliminates the results of operations of the Company's California retail division and the related assets and liabilities as of and for the 52 weeks ended December 30, 1995 from Smith's results of operations and balance sheet data as of and for the 52 weeks ended December 30, 1995 and (ii) combines the operating results and balance sheet data of Smith's, pro forma for the elimination of the Company's California retail division and the related assets and liabilities, as of and for the 52 weeks ended December 30, 1995 with the operating results and balance sheet data of Smitty's as of and for the 52 weeks ended January 14, 1996. As indicated above, the Unaudited Pro Forma Combined Financial Statements give effect to the California Divestiture and the California Asset Disposition and the retention of the anticipated proceeds therefrom as cash. In connection with the California Divestiture, Smith's entered into agreements to sell or lease 16 stores and related equipment and three non-operating properties. These transactions are expected to generate net cash proceeds of $77.8 million, of which $67.2 million has been received to date. The remaining 18 stores in California have been closed. In connection with the California Divestiture, the Company recorded the $140 million (pre-tax) California Divestiture Charge for the year ended December 30, 1995 and classified the assets to be leased or sold as "assets held for sale." The California Divestiture Charge reflected (i) a provision for anticipated future lease obligations, (ii) the anticipated cost to the Company of closing its California stores and distribution center (primarily termination payments and inventory), and (iii) certain asset valuation adjustments. The asset valuation adjustments included in the California Divestiture Charge reflected the reduction in net realizable values for the equipment in all of the Company's California stores and distribution center and for the land and buildings associated with those properties being sold or leased. Pursuant to the California Asset Disposition, following the consummation of the Transactions the Company intends to accelerate the disposition of its 18 non-operating stores and its excess land in California. As a result of the adoption of this strategy, the Company intends to record a pre-tax charge to earnings of approximately $125 million (the California Asset Disposition Charge) to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. For purposes of the Unaudited Pro Forma Combined Balance Sheet, the Company has given effect to the California Asset Disposition as if each of the relevant properties had been sold for a cash amount equal to its net book value after giving effect to the California Asset Disposition Charge. The proceeds of such assumed sales, together with the proceeds of the California Divestiture, are reflected in the Company's pro forma cash balances (net of pro forma revolving credit borrowings, which have been eliminated) at December 30, 1995. INVESTORS ARE CAUTIONED THAT THE COMPANY HAS NOT ENTERED INTO ANY CONTRACTS RELATING TO THE CALIFORNIA ASSET DISPOSITION AND THAT THERE CAN BE NO ASSURANCE AS TO THE TIMING OR THE AMOUNT OF NET PROCEEDS, IF ANY, WHICH THE COMPANY WILL ACTUALLY RECEIVE FROM SUCH DISPOSITION. The pro forma adjustments to give effect to the California Disposition and the Transactions are based upon currently available information and upon certain assumptions that management believes are reasonable. The statement of results of operations used to derive the adjustments to eliminate the California results of operations differs from a complete statement in that allocations for interest expense and certain services provided by the Company, including, but not limited to, portions of legal assistance, employee benefits administration, treasury, accounting, auditing, tax functions and real estate, have not been made. The Merger will be accounted for by the Company as a purchase of Smitty's by Smith's and Smitty's assets and liabilities will be recorded at their estimated fair market values at the date of the Merger. The adjustments included in the Unaudited Pro Forma Combined Financial Statements represent the Company's preliminary determination of these adjustments based upon available information. There can be no assurance that the actual adjustments will not differ significantly from the pro forma adjustments reflected in the pro forma financial information. The Unaudited Pro Forma Combined Financial Statements are not necessarily indicative of either future results of operations or results that 18 might have been achieved if the foregoing transactions had been consummated as of the indicated dates. The Unaudited Pro Forma Combined Financial Statements should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Smith's and Smitty's, together with the related notes thereto, included elsewhere in this Prospectus. The Unaudited Pro Forma Combined Financial Statements do not reflect (i) any of the net annual cost savings which management believes are achievable by the end of the third full year of operations following the Merger, or (ii) the anticipated costs to be incurred in connection with the integration of operations in Arizona following the Merger. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." The Unaudited Pro Forma Combined Statement of Operations included herein does not reflect the California Divestiture Charge, the California Asset Disposition Charge, an extraordinary loss on extinguishment of debt, an anticipated charge relating to certain costs expected to be incurred by Smith's in connection with the Merger, 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. 19 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED ----------------------------------------------------------- JANUARY 14, ADJUSTMENTS DECEMBER 30, 1995 1996 FOR PRO FORMA ---------------------------------------------- ------------ CALIFORNIA COMBINED FOR SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA (HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION (AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS ------------ --------------- ----------------- ------------ ------------ ---------------- 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 63.3 (e) 141.7 Amortization of debt issuance costs....... 0.4 0.4 1.0 8.8 (e) 10.2 ---------- ------- ---------- --------- ------ ---------- Income (loss) before income taxes........... (69.8) 154.2 84.4 (3.0) (72.1) 9.3 Income tax expense (benefit).............. (29.3) 63.2 33.9 (0.7) (27.7)(f) 5.5 ---------- ------- ---------- --------- ------ ---------- Net income (loss) (g)... $ (40.5) $ 91.0 $ 50.5 $ (2.3) $(44.4) $ 3.8 ========== ======= ========== ========= ====== ========== Net income (loss) per common share (g).............. $ (1.62) $ 2.00 $ (2.30) $ 0.24 (h) ========== ========== ========= ========== Weighted average common shares outstanding..... 25,031,000 25,284,000 1,001,000 15,530,000 ========== ========== ========= ========== Ratio of earnings to fixed charges (i)(j)... -- 2.27x 1.06x
See Notes to Unaudited Pro Forma Combined Statement of Operations. 20 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (a) Reflects the elimination of the 1995 operating results for the California stores, excess real estate and distribution center which were sold, leased or closed, and the reversal of the restructuring charge recorded, in connection with the California Divestiture and the anticipated sale of the Company's remaining California real estate pursuant to the California Asset Disposition, but does not reflect the California Asset Disposition Charge of $125 million (pre-tax) which is anticipated to be recorded in connection with the adoption of a strategy to dispose of such remaining California assets following the consummation of the Transactions. (b) Represents fees payable to Yucaipa pursuant to the Management Services Agreement ($1.0 million) and the elimination of the historical Yucaipa management fees ($0.6 million) paid by Smitty's. See "Certain Relationships and Related Transactions--Management Services Agreement." (c) Represents a reduction in depreciation expense associated with the $14.1 million write-off of accumulated depreciation and amortization which adjusts Smitty's property and equipment to estimated fair market value. (d) Reflects the amortization of excess costs over net assets acquired in the Merger ($2.0 million) and the elimination of Smitty's historical amortization ($1.1 million). Amortization has been allocated on the straight line basis over a period of 40 years. (e) The following table presents a reconciliation of pro forma interest expense and amortization of debt issuance costs:
(DOLLARS IN MILLIONS) --------------------- Interest expense: Smitty's.......................................... $ 18.4 Pro forma Smith's................................. 60.0 ------ 78.4 ------ Plus: Interest on: New Term Loans.................................... 71.5 Bank fees......................................... 0.3 Notes............................................. 63.3 Less: Interest on: Old bank term loans: Pro forma Smith's............................... (59.5) Smitty's........................................ (3.1) Bank fees......................................... (0.4) Smitty's Notes.................................... (6.5) Accretion of Smitty's Debentures.................. (2.3) ------ Pro forma adjustment............................... 63.3 ------ Pro forma interest expense.......................... $141.7 ====== Historical amortization of debt issuance costs...... $ 1.4 Plus: Financing fees--New Credit Facility............... 7.2 Financing fees--Notes............................. 3.0 Less: Historical financing costs:....................... (1.4) ------ Pro forma adjustment............................... 8.8 ------ Pro forma amortization of debt issuance costs....... $ 10.2 ======
(f) The pro forma adjustment to income tax benefit is based upon an assumed blended rate of 39% applied to the pro forma net loss adjusted for permanent differences between book and tax income. The deferred tax asset recognized in the Unaudited Pro Forma Combined Financial Statements is more likely than not to be realized due to the expected future reversal of taxable temporary differences and the existence of taxable income in each of the prior three carryback years available. (g) The Unaudited Pro Forma Statement of Operations does not reflect the California Asset Disposition Charge, the California Divestiture Charge or costs related to (i) expenses to be incurred in connection with the purchase of certain management stock options as part of the Recapitalization which are estimated to be $12.5 million, (ii) the integration of the Company's operations which are estimated to be $15.0 million over a two-year period and (iii) a potential severance payment to the Chairman and Chief Executive Officer of the Company (definitive agreements with respect to which have not yet been reached). See "Business--Operating Strategy" and "Certain Relationships and Related Transactions--CEO's Severance Discussions." The unaudited pro forma results of operations also does not include an extraordinary item for the loss on extinguishment of debt of $42.5 million, net of $27.2 million income tax benefit. (h) Net income (loss) per common share has been computed using the weighted average number of shares of Smith's Common Stock outstanding after giving effect to the issuance of 3,038,888 shares of Class B Common Stock of the Company to the stockholders of Smitty's as consideration in the Merger and the purchase of 50% of the outstanding Smith's Common Stock (excluding shares issuable in the Merger) in the Tender Offer. Common stock equivalents in the form of stock options do not have an impact on the weighted average number of common shares. 21 (i) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs, and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). (j) EBITDA (as defined) represents loss before income taxes, plus interest expense, depreciation and amortization, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt and, with certain variations in definition, is an indicator of compliance with various covenants in the Company's debt agreements. However, EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following table presents a reconciliation of pro forma EBITDA (as defined):
52 WEEKS ENDED DECEMBER 30, 1995 --------------------- (DOLLARS IN MILLIONS) EBITDA (as defined): Pro forma Smith's EBITDA (as defined)............. $226.8 Historical Smitty's EBITDA (as defined)........... 29.0 Less: Pro forma adjustments......................... (0.4) ------ Pro forma EBITDA (as defined)....................... $255.4 ======
22 UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN MILLIONS)
52 WEEKS ENDED ----------------------------------------------------------- JANUARY 14, ADJUSTMENTS DECEMBER 30, 1995 1996 FOR PRO FORMA ---------------------------------------------- ------------ CALIFORNIA COMBINED FOR SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA (HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION (AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS ------------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 46.7 (g) 78.2 Other assets............ 20.1 (4.6) 15.5 11.0 78.6 (h)(i) 105.1 -------- ------- -------- ------ ------- -------- $1,686.2 $(199.5) $1,486.7 $260.0 $ (33.3) $1,713.4 ======== ======= ======== ====== ======= ======== 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) 696.7 139.8 611.4 (n) (39.4)(c) (0.9)(n) 4.6 (i) 13.4 (l) (7.5)(o) 1,418.1 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 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 $ (33.3) $1,713.4 ======== ======= ======== ====== ======= ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 23 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 Transactions. 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 Unaudited Pro Forma Combined Balance Sheet at December 30, 1995. (b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New Revolving Facility, and (iii) the Offering used to finance the Transactions and pay related costs and fees as set forth in the following table:
(DOLLARS IN MILLIONS) --------------------- New Term Loans...................................... $ 805.0 Notes............................................... 575.0 Repay Smitty's Notes................................ (50.0) Discount on Smitty's Notes.......................... 0.4 Repay Smitty's Debentures........................... (18.4) Discount on Smitty's Debentures..................... 0.5 Repay Smitty's Bank Credit Facility................. (34.9) Repay Smith's Mortgage Notes and Other Indebtedness. (667.1) Purchase existing Smith's Series I Preferred Stock.. (1.0) Purchase 50% of Smith's Common Stock................ (451.3) Purchase Management Options......................... (13.7) Accrued Interest.................................... (12.6) Fees and Expenses................................... (145.1) ------- Use of California Proceeds (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 Transactions.
(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 Transactions. (f) Reflects the write-off of accumulated depreciation and amortization which adjusts Smitty's property and equipment to estimated fair market value. 24 (g) Reflects the excess of costs over the fair value of net assets of Smitty's acquired in connection with the Merger ($78.2 million) and the elimination of Smitty's historical goodwill ($31.5 million). The purchase price for Smitty's will be determined by reference to the trading price of the Company's Class B Common Stock following the consummation of the Merger. The purchase price and preliminary calculation of the excess of costs over the fair value of net assets acquired is as follows: Purchase Price:
(DOLLARS IN MILLIONS) --------------------- Smith's equity received in exchange for Smitty's equity with an assumed market value of $15.00/share...... $ 45.5 Fees and expenses.................................. 1.4 ------- Total purchase price............................... 46.9 Fair value of assets acquired...................... 229.5 Fair value of liabilities assumed.................. 260.8 ------- (31.3) ------- Goodwill........................................... $ 78.2 =======
(h) Reflects the debt issuance costs associated with the New Credit Facility ($52.5 million) and the Notes ($33.5 million). These amounts have been capitalized as deferred financing costs. (i) Reflects the elimination of deferred financing costs associated with the Smitty's Bank Credit Facility ($1.8 million), the Smitty's Notes ($3.1 million), the Smitty's Debentures ($0.6 million), the Smith's Mortgage Notes and Other Indebtedness ($1.9 million) and the write-off of an interest rate swap agreement ($4.6 million), included in historical long- term debt, to be refinanced in connection with the Merger. (j) Reflects the payment of accrued interest on Smitty's Bank Credit Facility ($0.1 million), Smitty's Notes ($0.6 million) and Smith's Mortgage Notes and Other Indebtedness ($11.9 million) to be repaid in connection with the Merger. (k) Represents severance payments and other costs associated with the integration of Smith's and Smitty's. (l) Reflects the repayment and cancellation of the current maturities of the Smitty's Bank Credit Facility ($4.9 million) and Smith's Mortgage Notes and Other Indebtedness ($20.8 million) and the recording of the current maturities of the New Term Loans ($12.3 million). (m) Reflects the retirement of 3,000,000 shares of Series I Preferred Stock. (n) Reflects the repayment and cancellation of the Smitty's Bank Credit Facility, the Smitty's Notes, the Smitty's Debentures, the Smith's Revolving Credit Facility, the Smith's Mortgage Notes and Other Indebtedness and records borrowings under the New Term Loans and New Revolving Facility and the issuance of the Notes.
(DOLLARS IN MILLIONS) --------------------- New Term Loans..................................... $ 805.0 Notes.............................................. 575.0 Repay Smitty's Notes............................... (50.0) Discount on Smitty's Notes ........................ 0.4 Repay Smitty's Debentures.......................... (18.4) Discount on Smitty's Debentures ................... 0.5 Repay Smitty's Bank Credit Facility................ (34.9) Repay Smith's Mortgage Notes and Other Indebtedness...................................... (667.1) ------- $ 610.5 =======
(o) Represents a reclassification of $7.5 million of Smith's deferred compensation and other long-term liabilities to conform to the pro forma combined classification. (p) Represents the deferred tax asset associated with the write-off of the deferred debt issuance costs and the premium over book value on Smith's and Smitty's debt to be refinanced. The deferred tax asset recognized in the Unaudited Pro Forma Combined Financial Statements is more likely than not to be realized due to the expected future reversal of taxable temporary differences and the existence of taxable income in each of the prior three carryback years available. (q) Reflects redemption of 50% of Smith's outstanding Common Stock prior to the Merger at $36.00 per share, the retirement of all treasury shares and the purchase of certain outstanding management stock options. (r) Reflects the elimination of Smitty's historical equity. (s) Represents the issuance of 3,038,888 shares of Smith's Common Stock at an assumed market value of $15.00 per share as consideration in the Merger. (t) The Unaudited Pro Forma Combined Balance Sheet does not include (i) certain costs related to the purchase of certain management stock options as part of the Recapitalization which are estimated to be $12.5 million, (ii) the integration of the Company's operations which are estimated to be $15.0 million over a two-year period and (iii) a potential severance payment to the Chairman and Chief Executive Officer of the Company (definitive agreements with respect to which have not yet been reached). See "Certain Relationships and Related Transactions--CEO's Severance Discussions." (u) Represents the premium over book value attributable to "make whole" payments and other premiums payable in connection with the retirement of Smith's Mortgage Notes and Other Indebtedness and the Smitty's Notes and Debentures, net of 39% tax rate. The actual amount of such payments may vary substantially based on the yields of certain U.S. Treasury debt securities at the time such indebtedness is actually repaid. (v) Represents the write-off of the historical deferred debt issuance costs of Smith's and Smitty's related to its refinanced debt, net of 39% tax rate. 25 SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S The following table sets forth selected historical financial data of Smith's for the five fiscal years ended December 30, 1995 which have been derived from the financial statements of Smith's audited by Ernst & Young LLP, independent auditors. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Smith's and related notes thereto included elsewhere in this Prospectus.
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) OPERATING DATA: Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7 Gross profit........... 498.6 611.6 637.2 669.1 697.0 Operating, selling and administrative ex- penses................ 344.4 419.7 430.3 440.8 461.4 Depreciation and amor- tization.............. 50.5 67.8 82.2 94.5 105.0 Interest expense....... 30.3 36.1 44.6 53.7 60.5 Restructuring charges(a)............ -- -- -- -- 140.0 Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5) Ratio of earnings to fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x -- BALANCE SHEET DATA (END OF PERIOD): Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7 Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2 Total debt(c).......... 395.4 612.7 725.5 718.9 746.2 Redeemable preferred stock................. 8.5 7.5 6.5 5.4 4.3 Common stockholders' equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7 OTHER DATA: Stores open at end of period(d)............. 109 119 129 137 154 Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0 Cash provided by oper- ating activities...... 61.9 84.6 118.6 203.6 140.6 Cash used in investing activities............ (277.4) (286.6) (164.4) (127.4) (146.3) Cash provided by (used in) financing activities............ 212.8 203.1 92.3 (123.9) 7.5 EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6 EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8%
- -------- (a) Reflects charges in connection with the California Divestiture. See Note K to Notes to Consolidated Financial Statements of Smith's included elsewhere herein. (b) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs, and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). For the 52 weeks ended December 30, 1995, the Company's earnings were inadequate to cover fixed charges by $69.8 million. However, such earnings include non-cash charges of $105.4 million, primarily consisting of depreciation and amortization, and restructuring charges of $140.0 million. (c) Total debt includes long-term debt and current maturities of long-term debt. (d) See "Business--Store Development and Expansion." (e) EBITDA (as defined) represents income (loss) before interest expense, income taxes, depreciation and amortization expense, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Smith's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales. 26 SELECTED HISTORICAL FINANCIAL DATA OF SMITTY'S The following table sets forth certain selected consolidated historical financial and operating data of Smitty's and its Predecessor. The operating and balance sheet data of Smitty's as of and for the year ended July 30, 1995 and the period from June 29, 1994 to July 31, 1994, and of the Predecessor as of for the period from August 2, 1993 to June 28, 1994, the 52 weeks ended August 1, 1993, the 53 weeks ended August 2, 1992 and the 52 weeks ended July 28, 1991 set forth in the table below have been derived from the financial statements of Smitty's and its Predecessor audited by Coopers & Lybrand L.L.P., independent accountants. The operating and balance sheet data of Smitty's as of and for the 24 weeks ended January 14, 1996 and the 24 weeks ended January 15, 1995 have been derived from unaudited financial statements of Smitty's which, in the opinion of management, reflect all material adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the historical consolidated financial statements of Smitty's and its predecessor, and related notes thereto, included elsewhere in this Prospectus.
PREDECESSOR SMITTY'S ---------------------------------------- -------------------------------------------- PERIOD FROM PERIOD FROM 52 WEEKS 53 WEEKS 52 WEEKS AUGUST 2, JUNE 29, 52 WEEKS 24 WEEKS 24 WEEKS ENDED ENDED ENDED 1993 TO 1994 TO ENDED ENDED ENDED JULY 28, AUGUST 2, AUGUST 1, JUNE 28, JULY 31, JULY 30, JANUARY 15, JANUARY 14, 1991 1992 1993 1994 1994 1995 1995 1996 -------- --------- --------- ----------- ----------- -------- ----------- ----------- (DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS) OPERATING DATA: Sales(a)............... $625.3 $599.1 $605.1 $551.7 $ 48.4 $594.0 $286.2 $276.5 Gross profit........... 158.9 160.9 150.5 138.0 12.9 162.0 73.7 76.4 Operating, selling, general and administrative expenses(b)(c)(d)..... 143.9 138.8 147.5 117.4 10.8 131.4 59.0 63.6 Depreciation and amortization.......... 10.2 10.2 9.5 8.0 1.0 10.9 4.6 6.0 Interest expense(e).... 10.1 7.3 6.5 6.4 1.5 18.7 7.9 8.6 Net income (loss)...... $ (3.0) $ 2.3 $ (8.2) $ 3.1 $ (0.4) $ 0.3 $ 0.9 $ (1.8) BALANCE SHEET DATA (END OF PERIOD): Working capital........ $ 0.8 $ 5.0 $ 5.3 $ 31.5 $ 27.9 $ 17.3 $ 23.6 $ 5.7 Total assets(f)........ 245.1 242.8 242.8 204.8 235.3 265.7 258.2 260.0 Total debt(g)(h)....... 72.5 59.9 66.6 140.3 143.9 147.9 154.0 146.0 Total stockholders' equity(h)............. $126.4 $128.7 $120.5 $ 11.2 $ 10.6 $ 10.9 $ 11.4 $ 9.3 OTHER DATA: Stores open at end of period................ 24 24 28 27 27 28 29 28 Capital expenditures... $ 3.1 $ 7.2 $ 16.2 $ 3.7 $ 0.3 $ 22.9 $ 6.2 $ 18.7 Cash provided by operating activities.. 10.7 18.9 16.6 9.0 1.1 18.2 7.1 1.1 Cash provided by (used in) investing activities............ (2.0) (7.2) (4.2) 7.9 (0.3) (9.0) (5.1) (12.4) Cash provided by (used in) financing activities............ (7.3) (13.2) (10.3) (13.4) 4.4 (3.5) (2.0) (2.9) EBITDA (as defined) (i)................... $ 13.6 $ 22.9 $ 26.9 $ 26.1 $ 2.4 $ 29.0 $ 13.2 $ 13.2 EBITDA margin (j)...... 2.2% 3.8% 4.5% 4.7% 5.0% 4.9% 4.6% 4.8%
- ------- (a) In fiscal 1993, Smitty's leased its food service operations to Morrison, Incorporated, thereby increasing operating income but decreasing sales and gross profit. In September 1994, Smitty's resumed its food service operations. As a result, food service sales and attributable costs are included in the consolidated results of operation subsequent to such date. Food service sales were $9.6 million, $6.6 million, $17.8 million, $0, $2.5 million and $24.9 million for the 24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993 and fiscal 1992, respectively. Food service gross profit was $6.0 million, $4.3 million, $11.4 million, $0, $1.5 million and $16.5 million for the 24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993 and fiscal 1992, respectively. (b) In November 1993, Smitty's agreed to a settlement of a litigation which required Smitty's to pay $4.75 million in cash and issue a $6.25 million two-year mortgage note. Fiscal 1993 results of operations include an $11.0 million charge for the settlement, plus a $1.8 million charge for Smitty's litigation costs. Smitty's used the proceeds from a four-year term loan to finance the cash payment. Also in November 1993, Smitty's reached a settlement of a litigation filed by a former supplier providing for a $0.5 million cash payment and a $0.5 million one-year mortgage note. Fiscal 1993 results of operations include a $1.0 million charge for this settlement. Both mortgage notes were repaid on June 29, 1994. 27 (c) Included in operating, selling, general and administrative expenses are parent reorganization costs incurred by Smitty's in connection with efforts initiated by its former stockholder, Steinberg International, Inc., to sell its interest in Smitty's. Reorganization costs were $0.7 million and $0.6 million for fiscal 1994 and 1993, respectively. There were no reorganization costs for the 24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995, fiscal 1992 and fiscal 1991. In fiscal 1995, Smitty's had a $1.9 million benefit resulting from the Morrison litigation settlement. (d) A real estate development partnership in which Smitty's was a partner was liquidated in July 1993. In connection with this liquidation, Smitty's obtained ownership of an operating shopping center property and an undeveloped shopping center property in exchange for the forgiveness of notes and accrued interest receivable from the partnership and its managing partner. Fiscal 1993 results of operations include an $8.9 million charge representing the difference between the current value of these two properties and the carrying value of the notes and accrued interest receivable. Such properties were transferred to Steinberg International, Inc. prior to the acquisition of SSV by Smitty's. (e) Includes amortization of deferred financing costs of $0.4 million, $0.4 million, $0.9 million, $0.2 million, $0.2 million, $0.2 million, and $0.2 million for the 24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, and fiscal 1991, respectively. Interest expense for the 24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995 and fiscal 1994 includes $1.1 million, $1.0 million, $2.1 million and $0.2 million, respectively, of non-cash interest expense attributable to the Smitty's Debentures. (f) Except at January 14, 1996, January 15, 1995, July 30, 1995 and July 31, 1994, total assets includes certain properties which were not purchased by Smitty's in the acquisition from Steinberg International, Inc. that had a net book value of $27.5 million at August 1, 1993. (g) Total debt includes total long-term debt and current maturities of long- term debt. (h) During fiscal 1991, Smitty's issued 688 shares of common stock to Steinberg International, Inc. in exchange for $1.2 million cash and the cancellation of $65.6 million of indebtedness. (i) EBITDA (as defined) represents income (loss) before income taxes, plus interest expense, depreciation and amortization, severance and employment contract termination costs, loss on store closing, LIFO provision and Non- Operating Expenses. Non-Operating Expenses are defined as parent reorganization costs, gain (loss) on real estate disposals, loss on partnership liquidation, and litigation settlements, all of which are included in operating, selling, general and administrative expenses. EBITDA is a widely accepted financial indicator of a company's ability to service debt and, with certain variations in definition, is an indicator of compliance with various covenants in Smitty's debt agreements. However, EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Smitty's operating performance or as a measure of liquidity. (j) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Due to the Transactions and the California Divestiture, the Company believes that its future operating results may not be directly comparable to its historical operating results. Certain factors which are expected to affect the future operating results of the Company (or their comparability to prior periods) are discussed below. California Divestiture. Smith's has historically focused on expansion into high growth markets, which led to its entrance into Southern California in 1991. During the period from 1991 through 1995, Smith's opened 34 stores in Southern California and a 1,100,000 square foot distribution center and dairy plant in Riverside, California. Management determined that because of the attractive growth prospects in the Company's principal markets and the competitive environment in Southern California, it would redeploy Company resources from California into such other markets. In December 1995, the Company executed a sublease with Ralphs pursuant to which Ralphs agreed to sublease the Riverside distribution center and dairy plant for the remaining 23-year term of Smith's lease. Ralphs also agreed to purchase certain related equipment and inventory. The sublease term commenced and the related purchases were consummated on January 29, 1996. In January 1996, the Company entered into agreements to sell or lease 16 of its California stores and related equipment and three non-operating properties to various supermarket companies (including Ralphs) and others. Smith's has closed the remaining 18 stores and it is anticipated that these stores will be sold or leased to other retail companies. Of the stores being sold or leased, four stores owned by Smith's are being sold outright, two store leases are being assigned, three stores owned by Smith's are being leased and seven leased stores are being subleased. Since December 30, 1995, the Company has received net cash proceeds of approximately $67.2 million from the California Divestiture and expects to receive an additional approximately $10.6 million shortly after the consummation of the Transactions. All of the remaining California stores were closed by March 16, 1996. In connection with its decision to cease operations in California, Smith's recorded the California Divestiture Charge of $140 million (pre-tax) for the year ended December 30, 1995 and classified the assets to be leased or sold pursuant to the California Divestiture as "assets held for sale" on its balance sheet at such date. The California Divestiture Charge reflected (i) a provision for anticipated future lease obligations, (ii) the anticipated cost to the Company of closing its California stores and distribution center (primarily termination payments and inventory), and (iii) certain asset valuation adjustments. The asset valuation adjustments included in the California Divestiture Charge reflected the reduction in net realizable values for the equipment in all of the Company's California stores and distribution center and for the land and buildings associated with those properties being sold or leased. See Note K of the Notes to Consolidated Financial Statements of Smith's. Certain information pertaining to the Company's California operations is summarized below:
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) California stores at end of period.............. 9 18 26 32 34 Net sales............... $ 35.9 $320.4 $472.8 $652.9 $674.6 Capital expenditures: Stores................ 118.4 160.0 136.1 53.0 23.4 Backstage facilities.. 1.1 33.8 80.6 2.7 1.3 ------ ------ ------ ------ ------ Total capital expenditures....... $119.5 $193.8 $216.7 $ 55.7 $ 24.7 ====== ====== ====== ====== ======
Remaining California Real Estate. After completion of the California Divestiture, Smith's continues to own real estate assets in California having an aggregate book value at December 30, 1995 of approximately $260 million. These assets include the stores leased or subleased as part of the California Divestiture (having an aggregate book value at December 30, 1995 of $42.5 million), the closed stores (aggregate book value--$115.3 29 million) and certain non-operating stores and other excess real estate (aggregate book value--$102.2 million). These properties have annual carrying costs of approximately $7 million (excluding depreciation and amortization). Management's present policy is to own and manage its real estate assets, including those in California, in order to maximize their long-term values, and, as a result, the Company maintains a fully staffed real estate, construction and property management capability. The Company believes that there are several viable strategies for maximizing the value of its remaining California real estate assets over the next five years and that the implementation of these policies would not have any material negative impact on future earnings. Following the consummation of the Transactions, however, management, in conjunction with Yucaipa, anticipates that it will pursue a strategy to accelerate the disposition of its remaining real estate assets in California including its non-operating stores and excess land. The Company would use the net cash proceeds from the sales of these assets to either reinvest in the Company's business or reduce indebtedness incurred in connection with the Transactions. If this strategy is adopted, as anticipated, the Company would record a charge to earnings, presently estimated to be approximately $125 million (pre-tax), to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. This charge will cause a substantial decrease in the Company's earnings for such period and net worth, but is not otherwise anticipated to adversely affect the Company's liquidity or ongoing results of operations. See the "Unaudited Pro Forma Combined Financial Statements" included elsewhere herein. Debt Refinancing and Recapitalization Charges. In connection with the anticipated consummation of the Transactions, the Company will refinance substantially all of its existing mortgage notes and unsecured indebtedness (approximately $667.1 million at December 30, 1995), including all outstanding borrowings under its existing revolving credit facilities. The Company will also refinance approximately $103.3 million of existing indebtedness of Smitty's (pro forma at December 30, 1995 and assuming a 100% tender of the existing Smitty's Notes and Smitty's Debentures). In connection with such debt refinancings, the Company will pay make-whole and other premiums estimated at approximately $56.8 million. These refinancing premiums, together with approximately $12.0 million of debt issuance costs, will be written off upon the consummation of the Transactions and reflected as an extraordinary charge for the quarter in which the Transactions are consummated. It is estimated that this charge, net of taxes, will be approximately $42.5 million. The Company will also record approximately $12.5 million of pre-tax compensation expense in connection with the purchase of certain management stock options as part of the Recapitalization. Integration of Arizona Operations. Following the Merger, management of the Company has estimated that approximately $25 million of net annual cost savings (as compared to costs for the pro forma combined fiscal year ended December 30, 1995) are achievable by the end of the third year of combined operations. Management believes that approximately $17 million in Merger- related capital expenditures and approximately $15 million of other expenses will be required to integrate Arizona operations over the next two years and realize such cost savings. Management anticipates that a charge related to such costs will be recorded in the quarter in which the Transactions are consummated. Purchase Accounting. The Merger will be accounted for as a purchase of Smitty's by Smith's. As a result, the assets and liabilities of Smitty's will be recorded at their estimated fair value as of the date the Merger is consummated. The purchase price for Smitty's will be determined by reference to the trading price of the Company's Class B Common Stock following the consummation of the Merger. The purchase price in excess of the fair value of Smitty's assets will be recorded as goodwill and amortized over a 40-year period. The purchase price allocation reflected in the pro forma statements is based on management's preliminary estimates. The actual purchase accounting adjustments will be determined following the Merger and may vary from the amounts reflected in the Unaudited Pro Forma Combined Financial Statements included elsewhere herein. RECENT OPERATING RESULTS OF SMITH'S Net sales decreased $53.5 million, or 7.2%, from $746.7 million for the thirteen weeks ended April 1, 1995 to $693.2 million for the thirteen weeks ended March 30, 1996. The sales decrease in 1996 was attributable to the closure of 34 stores in California, offset in part by the addition of 14 new stores outside of California from 30 the same period a year ago. Same store sales for the thirteen week period decreased 5.6% in 1996. As adjusted to exclude the Company's California stores, net sales increased $35.7 million, or 6.1%, from $584.4 million in 1995 to $620.1 million in 1996. As adjusted to exclude the Company's California stores, same store sales for the thirteen week period decreased 2.7% in 1996, caused primarily by the Company's discontinuance of its "ad match" program in the Phoenix and Tucson markets. Earnings from operations decreased on a comparative basis from the first quarter of 1995 to the first quarter of 1996, primarily as a result of the winding down of the California retail operations. The California stores, which were operated during the first quarter and all closed by the end of the quarter, incurred losses connected with additional inventory clearance sales and other expenses affected by the disposal process. A California regional pre-tax loss of approximately $25 million significantly impacted first quarter earnings. Earnings from continuing operations in the Company's Intermountain and Southwest regions for the first quarter of 1996 were comparable to those in the first quarter of 1995. RESULTS OF OPERATIONS OF SMITH'S The Company's fiscal year ends on the Saturday closest to December 31. The following table sets forth the selected historical operating results of Smith's for the three fiscal years ended December 30, 1995:
AS A PERCENTAGE OF SALES ------------------------------------ 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 1, DECEMBER 31, DECEMBER 30, 1994 1994 1995 1994 1994 1995 ---------- ------------ ------------ ---------- ------------ ------------ (DOLLARS IN MILLIONS) Net sales............... $2,807.2 $2,981.4 $3,083.7 100.0% 100.0% 100.0% Gross profit............ 637.2 669.1 697.0 22.7 22.4 22.6 Operating, selling and administrative expenses............... 430.3 440.8 461.4 15.3 14.8 15.0 Depreciation and amortization........... 82.2 94.5 105.0 2.9 3.2 3.4 Operating income........ 124.7 133.8 130.7 4.4 4.5 4.2 Interest expense........ 44.6 53.7 60.5 1.6 1.8 2.0 Restructuring charges... -- -- 140.0 -- -- 4.5 Income taxes (benefit).. 34.3 31.3 (29.3) 1.2 1.1 (1.0) Net income (loss)....... 45.8 48.8 (40.5) 1.6 1.6 (1.3)
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER 30, 1995 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER 31, 1994 Net Sales. Net sales increased $102.3 million, or 3.4%, from $2,981.4 million in 1994 to $3,083.7 million in 1995. The sales increase in 1995 was attributable to a net increase of 17 stores as of the end of 1995, offset in part by a 3.4% decrease in same store sales. As adjusted to exclude the Company's California stores, net sales increased $80.7 million, or 3.5%, from $2,328.5 million in 1994 to $2,409.2 million in 1995. As adjusted to exclude the Company's California stores, same store sales decreased 3.2% in 1995, caused primarily by the Company's discontinuance of its "ad match" program in the Phoenix and Tucson markets and new stores opened by competitors in the Company's markets. Gross Profit. Gross profit increased $27.9 million, or 4.2%, from $669.1 million in 1994 to $697.0 million in 1995. Gross margins during 1995 and 1994 were 22.6% and 22.4%, respectively. The increase in 1995 is due primarily to less aggressive promotional activity in the Phoenix and Tucson markets following the discontinuance of the Company's "ad match" program, reduced charges for inventory shrinkage and improved competitive conditions in Utah, which were partially offset by the increase in the LIFO charge and increased new store openings. The pre-tax LIFO charge was $4.0 million in 1995 compared to $2.5 million in 1994. Newly opened stores apply pressure on gross margins until the stores become established in their respective markets. Smith's opened 19 new stores during 1995 (including two in California) compared to eight stores in 1994 (including six in California). 31 Operating, Selling and Administrative Expenses. Operating, selling and administrative expenses ("OS&A") increased $20.6 million, or 4.7%, from $440.8 million in 1994 to $461.4 million in 1995. As a percent of net sales, OS&A increased from 14.8% in 1994 to 15.0% in 1995. The increase was caused principally by the increase in new store opening costs compared to the prior year. The decrease in same store sales also contributed to the increase of OS&A as a percentage of net sales. Depreciation and Amortization Expenses. Depreciation and amortization expenses increased by $10.5 million, or 11.1%, from $94.5 million in 1994 to $105.0 million in 1995, primarily due to the addition of new combination stores and equipment replacements in remodeled stores. Interest Expense. Interest expense increased $6.8 million from $53.7 million in 1994 to $60.5 million in 1995 primarily as a result of net increases in the average debt amounts for each period. Restructuring Charges. As a result of the California Divestiture, the Company recorded $140.0 million of pre-tax restructuring charges to reflect the estimated costs associated with the sale, lease or closure of its Southern California stores and the Riverside distribution center. See Note K of the Notes to Consolidated Financial Statements of the Company included elsewhere herein. Income Taxes. The Company recorded a tax benefit of $29.3 million in 1995 compared to an expense of $31.3 million in 1994. The benefit recorded in 1995 reflects an adjustment (benefit) of $53.4 million of the Company's deferred taxes as a result of losses incurred in connection with the California Divestiture. Net Income (Loss). Net income before restructuring charges decreased by $5.3 million, or 10.9%, from $48.8 million in 1994 to $43.5 million in 1995. Income per common share before restructuring charges decreased 0.6% from $1.73 in 1994 to $1.72 in 1995. Primarily as a result of the restructuring charges, the Company recorded a net loss of $40.5 million for 1995 ($1.62 per share) compared to net income of $48.8 million in 1994 ($1.73 per share). The weighted average number of common shares outstanding was 25,030,882 in 1995 and 28,176,907 in 1994. COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER 31, 1994 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 1, 1994 Net Sales. Net sales increased $174.2 million, or 6.2%, from $2,807.2 million in 1993 to $2,981.4 million in 1994. The sales increase in 1994 was attributable to a net increase of eight stores as of the end of 1994, offset in part by a 2.3% decrease in same store sales. As adjusted to exclude the Company's California stores, net sales decreased $5.9 million, or 0.3%, from $2,334.4 million in 1993 to $2,328.5 million in 1994. As adjusted to exclude the Company's California stores, same store sales decreased 1.3% in 1994. The decrease in same store sales (excluding California) in 1994 was caused primarily by competitive new store openings in the Company's principal market areas and increased overall price competition in Utah. Gross Profit. Gross profit increased $31.9 million, or 5.0%, from $637.2 million in 1993 to $669.1 million in 1994. Gross margins during 1994 and 1993 were 22.4% and 22.7%, respectively. The decrease in gross margin in 1994 was caused primarily by Smith's aggressive Utah pricing program which commenced in the second half of 1993 and continued through most of 1994. To reinforce Smith's everyday low price program, prices in Utah stores were lowered on more than 10,000 grocery, meat and produce items. Smith's opened eight new stores during 1994 (including six in California) compared to ten new stores during 1993 (including eight in California). Operating, Selling and Administrative Expenses. OS&A increased $10.5 million, or 2.4%, from $430.3 million in 1993 to $440.8 million in 1994. As a percent of net sales, OS&A decreased from 15.3% in 1993 to 14.8% in 1994. The decrease in 1994, resulting primarily from Smith's program to reduce operating costs, was somewhat offset by the higher operating and labor costs associated with the expansion into Southern California. 32 Depreciation and Amortization Expenses. Depreciation and amortization expenses increased by $12.3 million, or 15.0%, from $82.2 million in 1993 to $94.5 million in 1994, due to the addition of new food and drug combination stores and distribution and processing facilities. Interest Expense. Interest expense increased $9.1 million from $44.6 million in 1993 to $53.7 million in 1994 as a result of net increases in the average debt amounts for each period. Income Taxes. Income taxes as a percent of income before income taxes were 39.1% in 1994 and 42.8% in 1993. The Omnibus Budget Reconciliation Act of 1993 increased Smith's Federal tax rate from 34% to 35%. As a result of the increased tax rate, net income for 1993 was reduced by $2.75 million, or $0.09 per common share. This reduction consisted of $0.8 million, or $0.03 per common share, for the rate increase on income earned in 1993 and $1.95 million, or $.06 per common share, for the increase in recorded deferred taxes. Net Income. Net income increased 6.6% from $45.8 million in 1993 to $48.8 million in 1994. However, as a result of a reduction in the number of shares outstanding through Smith's buy-back programs, net income per common share increased 14% from $1.52 to $1.73. During 1994, Smith's repurchased 4.9 million shares of Common Stock in the open market. The weighted average number of shares of Common Stock outstanding in 1994 was reduced by approximately 1.9 million shares, which increased net income per common share by $0.11. RESULTS OF OPERATIONS OF SMITTY'S Smitty's is a leading regional supermarket operator based in Phoenix, Arizona with 25 stores in the Phoenix area and three stores in the Tucson area. Smitty's stores offer high quality fresh and prepared foods, groceries and general merchandise, restaurants and ancillary services in a shopping environment which emphasizes service, convenience, quality, selection and customer satisfaction. On June 29, 1994, Smitty's became the sole stockholder of SSV when it acquired all of the outstanding shares of common stock of SSV from Steinberg International, Inc. ("Steinberg"). Smitty's was formed in April 1994 by affiliates of Yucaipa for the purpose of effecting such acquisition. Smitty's currently operates (i) 21 food and general merchandise "super combination" stores which average 105,000 square feet in size, (ii) six food and drug combination stores, which average 52,000 square feet in size, and (iii) one conventional supermarket. The "super combination" stores offer a full line of supermarket items, a broad range of drug store and pharmaceutical items and an expanded selection of general merchandise. These stores offer numerous services and specialty departments, including video and photo departments, pharmacies, food courts, restaurants and full-service bank branches, family style hair salons and airline ticket counters. Smitty's food and drug combination stores offer a full selection of products and services, including full-service fresh meat, delicatessen, seafood and bakery departments, an expanded line of health care and beauty aids, a restaurant, snack bar or food court and full-service banking. At the end of the second quarter of fiscal 1996, Smitty's had completed its comprehensive remodel program which included 18 stores and resulted in 93% of its stores being new or remodeled within the last three years. Upon completion of the remodel program, Smitty's launched an extensive marketing program to promote its newly remodeled stores which included an increase of 50% in both broadcast and print media, a billboard campaign estimated to have been seen by 50% of the Phoenix population and a customer service training program that included substantially all of Smitty's employees. Smitty's management believes the extensive marketing program and the newly remodeled stores were significant factors in the reduction of the decline in same store sales from 10.8% in the first quarter to 2.4% in the second quarter of fiscal 1996. The remodel program includes an increased allocation of floor space to the supermarket section of each store resulting in at least 60% of the square footage in each super combination store being devoted to supermarket items compared to 40% prior to the remodel. The expanded supermarket selling areas provide increased display and shelf space and enlarged self-service bakeries, dairy, frozen food and produce departments. Display cases and related refrigeration in meat, deli, bakery, produce, frozen foods and dairy departments have generally been replaced and upgraded. 33 On September 25, 1994, the lease by which Morrison, Incorporated ("Morrison") leased and operated Smitty's food service operations was rescinded in connection with the litigation between Smitty's and Morrison. In connection with such rescission, Morrison paid Smitty's $2.6 million and transferred title to all of the inventories, fixtures and equipment to Smitty's and Smitty's began operating food service operations. Rental income from Morrison was $1.4 million in the 24 weeks ended January 15, 1995. Food service sales and gross profit were $9.6 million and $6.0 million, respectively, in the 24 weeks ended January 14, 1996. Smitty's fiscal year ends on the Sunday closest to July 31. The following table sets forth the selected historical operating results of Smitty's for the 24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, the 52 weeks ended July 30, 1995 ("fiscal 1995"), the 52 weeks ended July 31, 1994 ("fiscal 1994") and the 52 weeks ended August 1, 1993 ("fiscal 1993"):
AS A PERCENTAGE OF SALES --------------------------------------------------- 52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14, AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14, 1993 1994(1) 1995 1995 1996 1993 1994 1995 1995 1996 --------- -------- -------- ----------- ----------- --------- -------- -------- ----------- ----------- (DOLLARS IN MILLIONS) Sales........... $605.1 $600.1 $594.0 $286.2 $276.5 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit.... 150.5 150.9 162.0 73.7 76.4 24.9 25.1 27.3 25.7 27.6 Operating, selling, general and administrative expenses....... 147.5 128.2 131.4 59.0 63.6 24.4 21.4 22.1 20.6 22.9 Depreciation and amortization... 9.5 9.0 10.9 4.6 6.0 1.6 1.5 1.8 1.6 2.2 Operating income (loss)......... (6.5) 13.8 19.7 10.2 6.8 (1.1) 2.3 3.3 3.6 2.5
- -------- (1) The operating results for the 52-week period ended July 31, 1994 combines the results of operations of Smitty's for the period from June 29, 1994 to July 31, 1994 with the results of operations of its predecessor for the period from August 2, 1993 to June 28, 1994. COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY 14, 1996 WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY 15, 1995 Sales. Sales decreased $9.7 million, or 3.4%, from $286.2 million in the 24 weeks ended January 15, 1995 to $276.5 million in the 24 weeks ended January 14, 1996. The decrease is primarily the result of a decline in same store sales and the closure of one store in the third quarter of fiscal 1995, partially offset by sales from food service operations and sales increases from the opening of two stores in the second quarter of fiscal 1995. Although same store sales decreased 6.6% in the 24 weeks ended January 14, 1996, the decline in same store sales has improved from 10.8% in the 12 weeks ended October 22, 1995 to 2.4% in the 12 weeks ended January 14, 1996 due in part to the completion of the remodel program and increased advertising and promotions associated with the grand re-opening of the remodeled stores. Gross Profit. Gross profit increased $2.7 million from $73.7 million, or 25.7% of sales, in the 24 weeks ended January 15, 1995 to $76.4 million, or 27.6% of sales, in the 24 weeks ended January 14, 1996. The increase in gross profit margin in the 24 weeks ended January 14, 1996, is primarily attributable to increased vendor allowances and rebates arising from improved procurement practices and the operation of food service for an additional eight weeks compared to the prior year. Operating, Selling, General and Administrative Expenses. Operating, selling, general and administrative expenses ("OSG&A") were $59.0 million, or 20.6% of sales, in the 24 weeks ended January 15, 1995 and $63.6 million, or 22.9% of sales, in the 24 weeks ended January 14, 1996. This increase was primarily attributable to the fixed cost component of OSG&A being compared to a lower sales base, the addition of food service operations, and increased rent expense associated with new and remodeled stores. In addition, Smitty's incurred $1.8 million of advertising and promotional expenses for an extensive marketing program implemented in the second quarter of fiscal 1996. These additional expenses were offset by advertising allowances received in 34 connection with the marketing program. In the 24 weeks ended January 15, 1995, Smitty's had a $1.9 million benefit resulting from the favorable Morrison litigation settlement. Depreciation and Amortization. Depreciation and amortization was $4.6 million in the 24 weeks ended January 15, 1995, and $6.0 million in the 24 weeks ended January 14, 1996. The increase relates primarily to the depreciation of new stores, property and equipment, depreciation on new fixtures and equipment in newly remodeled stores and additional depreciation on the equipment Smitty's received in the Morrison settlement. Operating Income. Operating income decreased $3.4 million from $10.2 million in the 24 weeks ended January 15, 1995 to $6.8 million in the 24 weeks ended January 14, 1996. The decrease in operating income is primarily attributable to the factors described above. COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 30, 1995 (FISCAL 1995) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 31, 1994 (FISCAL 1994). Sales. Sales decreased $6.1 million, or 1.0%, from $600.1 million in fiscal 1994 to $594.0 million in fiscal 1995. The decrease was primarily the result of a 6.7% decline in same store sales and the closure of one store partially offset by sales from food service operations and sales increases from the opening of two new stores in Phoenix and the new store that opened in fiscal 1994. The same store sales decline was attributable to sales lost at stores undergoing remodels and competitive factors, including an increase in new stores opened by competitors and pricing and promotional activities. Gross Profit. Gross profit increased $11.1 million from $150.9 million, or 25.1% of sales, in fiscal 1994 to $162.0 million, or 27.3% of sales, in fiscal 1995. Excluding food service, gross profit as a percentage of sales increased from 25.1% in fiscal 1994 to 26.1% in fiscal 1995. These increases were primarily attributable to reduced cost of goods sold, reduced inventory shortages and additional vendor allowances and rebates arising from improved procurement practices. Operating, Selling, General and Administrative Expenses. OSG&A was $131.4 million and $128.2 million in fiscal 1995 and 1994, respectively. Excluding food service expenses and rental income from Morrison, OSG&A decreased $0.2 million from $127.1 million in fiscal 1994 to $126.9 million in fiscal 1995. On this basis, OSG&A as a percentage of sales increased from 21.2% in fiscal 1994 to 22.0% in fiscal 1995. This increase was primarily attributable to increased advertising and promotional expenditures, new union pension fund contributions and increased rent expense associated with new stores. Additionally, in fiscal 1994, Smitty's incurred severance and employment termination costs consisting of a $2.0 million payment to the former Chief Executive Officer of Smitty's in connection with the termination of certain rights under his employment contract, a $0.5 million loss relating to closing a store which was subleased, and a $2.9 million expense primarily from real estate disposals and reorganization costs. In fiscal 1995 Smitty's had a $1.9 million benefit resulting from the favorable Morrison litigation settlement. Depreciation and Amortization. Depreciation and amortization increased by $1.9 million from $9.0 million in fiscal 1994 to $10.9 million in fiscal 1995. These increases related primarily to depreciation of new stores property and equipment and increased amortization of beneficial leaseholds. Operating Income. Operating income increased $5.9 million from $13.8 million in fiscal 1994 to $19.7 million in fiscal 1995. The increase in operating income was primarily attributable to the factors described above. 35 COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 31, 1994 (FISCAL 1994) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED AUGUST 1, 1993 (FISCAL 1993). Sales. Sales decreased $5.0 million, or 0.8%, from $605.1 million in fiscal 1993 to $600.1 million in fiscal 1994. The decrease was primarily the result of a 5.8% decline in same store sales and the closure of two stores in 1994, partially offset by the opening of one new store in Tucson, and sales increases from four new stores opened in fiscal 1993. The same store sales decline was attributable to competitive factors, including an increase in new stores opened by competitors and pricing and promotional activities. Gross Profit. Gross profit increased $0.4 million from $150.5 million or 24.9% of sales in fiscal 1993 to $150.9 million or 25.1% of sales in fiscal 1994. These increases were primarily attributable to additional vendor allowances and rebates earned during fiscal 1994. Operating, Selling, General and Administrative Expenses. OSG&A was $128.2 million and $147.5 million in fiscal 1994 and 1993, respectively. OSG&A was affected by severance and employment contract termination costs in fiscal 1994 consisting of a $2.0 million payment to the Chief Executive Officer of Smitty's in connection with the termination of certain rights under his employment contract and a charge of $0.5 million relating to the loss on the closing of a store which was subleased during the period. In addition, Smitty's incurred other expense of $23.3 million and $2.9 million in fiscal 1993 and fiscal 1994, respectively. The fiscal 1993 expense consisted primarily of $8.9 million arising from the liquidation of a partnership whose former properties have been transferred to Steinberg and $13.8 million related to litigation settlements. The fiscal 1994 expense consisted primarily of a $2.2 million loss on real estate disposals. Excluding the items noted above, OSG&A decreased by $1.4 million from $124.2 million in fiscal 1993 to $122.8 million in fiscal 1994. On this basis, OSG&A, as a percentage of sales, remained constant at 20.5% for both periods. The decrease in OSG&A primarily reflected reductions in supplies expenses and liability insurance costs and a lower sales base. Depreciation and Amortization. Depreciation and amortization decreased by $0.5 million due to the sale and leaseback in fiscal 1993 of certain fixtures and equipment related to four stores and the completion of the amortization of deferred Shoppers Passport card costs in fiscal 1993. Shoppers Passport is Smitty's "frequent shopper" program. Operating Income. Operating income increased $20.3 million from an operating loss of $6.5 million in fiscal 1993 to operating income of $13.8 million in fiscal 1994. The increase in operating income was primarily attributable to the factors described above. COMPANY LIQUIDITY AND CAPITAL RESOURCES Smith's cash flow from operating activities was $140.6 million for fiscal 1995 and $203.6 million for fiscal 1994. The decrease in cash flow from operating activities was due primarily to balance fluctuations in operating assets and liabilities resulting from the execution of cash management policies based upon cash availability. Trade accounts payable decreased cash provided by operating activities by $21.7 million in 1995 and increased cash provided by operating activities by $50.6 million in 1994. One of the Company's principal uses of cash in its operating activities is inventory purchases. However, supermarket operators typically require small amounts of working capital since inventory is generally sold prior to the time that payments to suppliers are due. This reduces the need for short-term borrowings and allows cash from operations to be used for non-current purposes such as financing capital expenditures and other investing activities. Smith's cash used in investing activities was $146.3 million during fiscal 1995 and $127.4 million during fiscal 1994. Investing activities consisted primarily of additions to property and equipment for new stores, remodels and equipment purchases. Smith's received approximately $7.5 million of cash from financing activities for fiscal 1995 and used approximately $123.9 million of cash in financing activities in fiscal 1994. The primary difference in financing activities from 1994 to 1995 of $131.4 million was the repurchase of Common Stock in 1994. In 1994, the Company purchased approximately $109.2 million of its Common Stock under its stock buy-back program. 36 In order to consummate the Transactions, Smith's expects to utilize total new financing proceeds in the amount of approximately $1.4 billion. The Company will enter into the New Credit Facility pursuant to which it will borrow up to $805 million of New Term Loans and will have available a $190 million New Revolving Facility, of which approximately $13.2 million is anticipated to be borrowed in connection with the Transactions. The Company will also issue $575 million principal amount of Notes. The proceeds from the New Credit Facility and the Offering will provide the sources of financing required to consummate the Transactions and pay related fees and expenses (including debt refinancing premiums). The Company will also assume certain existing indebtedness of Smitty's. See "Summary--The Transactions--Sources and Uses." The New Revolving Facility will be available, subject to the satisfaction of customary borrowing conditions, for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit, approximately $28 million of which are anticipated to be outstanding upon consummation of the Transactions. The New Revolving Facility will be non-amortizing and will have a six and one-quarter year term. The Company will be required to reduce loans outstanding under the New Revolving Facility to $85 million for a period of not less than 30 consecutive days during the first 12 months following the Merger and to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period thereafter. At December 30, 1995, on a pro forma basis, giving effect to the Transactions and the California Disposition and letter of credit issuances, the Company's remaining borrowing availability under the New Revolving Facility would have been approximately $162.0 million. Pursuant to the New Credit Facility, the New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of $325 million, will have a six and one-quarter year term; (ii) Tranche B, in the amount of $160 million, will have a seven and one-half year term; (iii) Tranche C, in the amount of $160 million, will have an eight and one-half year term; and (iv) Tranche D, in the amount of $160 million, will have a nine and one-quarter year term. The New Term Loans will require quarterly amortization payments. The New Credit Facility will be guaranteed by each of the Company's subsidiaries and secured by liens on substantially all of the unencumbered assets of the Company and its subsidiaries and by a pledge of the Company's stock in such subsidiaries. The New Credit Facility will contain financial covenants which are expected to require, among other things, the maintenance of specified levels of cash flow and stockholders' equity. See "Description of New Credit Facility." The capital expenditures of the Company (excluding expenditures in California) were $91.0 million for fiscal 1994 and $124.3 million for fiscal 1995. The Company currently anticipates that its aggregate capital expenditures for fiscal 1996 will be approximately $100.0 million, excluding the approximately $17 million of capital expenditures which are estimated to be required in connection with the integration of Arizona operations. The Company intends to finance these capital expenditures primarily with cash provided by operations and other sources of liquidity including borrowings and leases. No assurance can be given that sources of financing for capital expenditures will be available or sufficient. However, the capital expenditure program has substantial flexibility and is subject to revision based on various factors. Management believes that if the Company were to substantially reduce or postpone these programs, there would be no substantial impact on short-term operating profitability. In the long term, however, if these programs were substantially reduced, management believes its operating businesses, and ultimately its cash flow, would be adversely affected. The capital expenditures discussed above do not include potential acquisitions which the Company could make to expand within its existing markets or to enter other markets. Future acquisitions may require the Company to seek additional debt or equity financing depending on the size of the transaction. With the exception of the Transactions, the Company is not currently engaged in discussions concerning any material acquisition which it considers probable. Following the consummation of the Transactions, the Company will be highly leveraged. Based upon current levels of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with available borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, lease payments, interest payments and scheduled principal payments. There can be no assurance, 37 however, that the Company's business will continue to generate cash flow at or above current levels or that estimated cost savings or growth can be achieved. See "Risk Factors--Leverage and Debt Service." ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long- lived Assets and for Long-lived Assets to be Disposed Of." The Company will be required to adopt this standard in the first quarter of 1996. The adoption of SFAS No. 121 will not have a significant impact on the Company's financial condition. EFFECTS OF INFLATION The Company's primary costs, inventory and labor, are affected by a number of factors that are beyond its control, including availability and price of merchandise, the competitive climate and general and regional economic conditions. As is typical of the supermarket industry, the Company has generally been able to maintain gross profit margins by adjusting retail prices, but competitive conditions may from time to time render the Company unable to do so while maintaining its market share. 38 BUSINESS GENERAL Smith's is a leading supermarket company in the Intermountain and Southwestern regions of the United States, operating 120 stores located in Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and Wyoming (collectively, 14). Substantially all of Smith's stores offer one-stop shopping convenience through a food and drug combination format which features a full-line supermarket with drug and pharmacy departments and some or all of the following specialty departments: delicatessens, hot prepared food sections, in-store bakeries, video rental shops, floral shops, one-hour photo processing labs, full-service banking and frozen yogurt shops. The Company's 114 food and drug combination stores averaged approximately 63,000 square feet and $420,000 per week in sales volume in fiscal 1995. The Company has recently opened four price impact warehouse stores and also operates two conventional supermarkets. Through its 48 years of operations, the Company believes it has developed a valuable and strategically located store base, strong name recognition, customer loyalty and a reputation for quality and service. The Company is pursuing a series of transactions designed to enhance stockholder value and liquidity: . Arizona Merger and Consolidation. The Company has entered into an agreement to acquire Smitty's, a regional supermarket operator with 28 stores in the Phoenix and Tucson markets, in a stock-for-stock exchange. The Merger will significantly enhance the Company's market position in Arizona. Smitty's is controlled by affiliates of Yucaipa, a private investment group specializing in the supermarket industry. Such affiliates of Yucaipa will own approximately 13.6% of the Company's outstanding Common Stock following the Merger and the Recapitalization. Following the Merger, the Company will consolidate its Arizona operations with those of Smitty's. See "--Operating Strategy." . California Disposition. The Company has completed the sale or lease of 16 stores, three non-operating properties and its primary distribution facility in Southern California and has closed its remaining 18 stores there. Management determined that because of the attractive growth prospects in the Company's principal markets and the competitive environment in Southern California, it would redeploy Company resources from California into such other markets. Following the consummation of the Transactions, the Company intends to accelerate the disposition of its closed stores and excess land in California pursuant to the California Asset Disposition. . New Senior Management. The Company will enter into the five-year Management Services Agreement with Yucaipa. Ronald W. Burkle, the managing general partner of Yucaipa, will be appointed as Chief Executive Officer of the Company. In addition, Allen R. Rowland recently joined Smith's as President and Chief Operating Officer. Mr. Rowland was employed by Albertson's, Inc. for 25 years and had senior executive responsibilities for all of the principal regions in which Smith's operates. . Recapitalization. The Company is offering to purchase 50% of its outstanding Common Stock (excluding shares issuable in the Merger) for $36.00 per share in cash in the Tender Offer. In addition, the Company is refinancing certain of its existing indebtedness and is refinancing or assuming certain existing indebtedness of Smitty's concurrently with the consummation of the Merger. For the fiscal year ended December 30, 1995, after giving pro forma effect to the Transactions and the California Disposition, the Company would have had net sales and EBITDA (as defined) of approximately $3.0 billion and $255.4 million, respectively. See "Unaudited Pro Forma Combined Financial Statements." In addition, management believes that the Company will benefit from significant operating synergies and cost saving opportunities following the Merger. OPERATING STRATEGY Management, in conjunction with Yucaipa, has developed a strategic plan designed to: (i) expand operations in existing and adjacent markets, (ii) realize operating synergies and cost savings resulting from the Merger, 39 (iii) improve working capital management, (iv) grow its recently introduced price impact warehouse stores and (v) dispose of remaining California real estate following consummation of the Transactions. Expand Operations in Existing and Adjacent Markets. Management believes that there are significant opportunities to increase the Company's sales and gain efficiencies in its existing markets through new store openings and store remodels. From 1991 through 1994, management primarily focused on the Southern California market, opening 32 new stores in Southern California compared to a net of 10 new stores in its other markets. In 1995, the Company opened a net of 17 new stores, only two of which were located in California. In an effort to more fully realize its market potential in its non-California markets, in 1995 the Company began opening smaller combination stores (54,000 to 60,000 square feet) in existing markets as part of a "fill-in" strategy. By pursuing a growth strategy which emphasizes opening new stores within its existing and adjacent markets, the Company believes it can increase its market share and improve its distribution and other efficiencies, while taking advantage of such markets' favorable growth prospects. Realize Operating Synergies and Cost Savings Resulting from the Merger. Management believes that approximately $25 million of net annual cost savings are achievable over a three-year period following the Merger. The majority of such cost savings opportunities relate to its Arizona operations and are believed to be achievable (on an annualized basis) by the end of the first full year of operations following the Merger. The estimates of potential cost savings resulting from the Merger contained in this Prospectus are forward looking statements that involve risks and inherent uncertainties that could cause actual net annual cost savings to differ materially from those projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings." . Advertising Cost Savings. Smith's and Smitty's advertising programs in the Phoenix and Tucson markets substantially overlap, and as a result of the Merger, management expects that the Company will be able to eliminate a substantial portion of the combined advertising expenses. Management estimates that annualized advertising cost savings of approximately $7 million are achievable by the end of the first full year of operations following the Merger. . General and Administrative Cost Savings. Management expects the Company to achieve savings from the elimination of duplicative administrative staff and headquarters facilities and the consolidation of management information systems. Management estimates that annualized general and administrative cost savings of approximately $13 million are achievable by the end of the first full year of operations following the Merger. . Warehousing and Transportation Cost Savings. Smitty's currently operates without any of its own distribution facilities. By incorporating the Smitty's volume into Smith's Tolleson, Arizona warehousing and distribution facilities, the Company expects to eliminate the expense associated with Smitty's being supplied primarily by an independent wholesaler, as well as reduce average unit costs resulting from improved capacity utilization. Management estimates that annualized warehousing and transportation cost savings of approximately $4 million are achievable by the end of the second full year of operations following the Merger. . Direct Store Delivery and Store Systems. The Merger is expected to result in an opportunity to utilize Smith's electronic direct store receiving system in all Smitty's stores, resulting in increased control over direct store deliveries and corresponding payments. In addition, by utilizing Smith's front-end systems in Smitty's stores, improvements in the efficiency of Smitty's stores are expected. Management estimates that annualized cost savings of approximately $2 million related to such direct store delivery and store systems are achievable by the end of the second full year of operations following the Merger. . Purchasing Improvements. Management believes that the Company can achieve savings as a result of increased promotional allowances and discounts through a coordinated buying effort with Yucaipa-affiliated supermarket chains with aggregate annual sales (including the Company) in excess of $11 billion. Management estimates that annualized cost savings of approximately $6 million are achievable from such purchasing improvements by the end of the third full year of operations following the Merger. 40 The sum of the components of the estimated annual cost savings exceeds $25 million; however, management expects that a portion of the savings will be reinvested in the Company's operations. In connection with the Transactions, the Company and Smitty's are evaluating the format mix of the combined Arizona store base and are assessing the possibility of modifying the formats of certain stores. It is anticipated that approximately $17 million of capital expenditures and approximately $15 million of other expenses will be required to integrate the Arizona operations over the next two years and realize such cost savings. Improve Working Capital Management. Management believes that the Company can improve its working capital management. Under Yucaipa's management, other companies have achieved working capital improvements; however, there can be no assurance that similar improvements can be achieved by the Company. Grow Recently Introduced Price Impact Warehouse Format. The Company recently developed a price impact warehouse store format and during 1995 opened four of these stores in the Las Vegas area operating under the name "PriceRite Grocery Warehouse." Management believes that a number of the Company's markets are underserved by price impact warehouse stores and that there are substantial opportunities for expansion of the Company's PriceRite format through the conversion of existing stores and the opening of new stores. Yucaipa, through its management of other supermarket companies, has extensive experience in expanding and profitably operating price impact warehouse formats. Dispose of Remaining California Real Estate. Following the consummation of the Transactions, management, in conjunction with Yucaipa, anticipates that it will pursue a strategy to dispose of its remaining real estate assets in California which consist of 18 non-operating stores and excess land. The Company would use the net cash proceeds from the California Asset Disposition to either reinvest in the Company's business or reduce indebtedness incurred in connection with the Transactions. At December 30, 1995, the aggregate book value of such assets was approximately $260 million. If this strategy is adopted, as anticipated, the Company would record a pre-tax charge to earnings, which is presently estimated to be approximately $125 million, to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. See "Risk Factors--Anticipated Charges to Earnings Following the Transactions." PRINCIPAL MARKETS The Company's stores are located predominantly in Utah, Arizona, Nevada and New Mexico, which are among the fastest growing states in terms of population and employment. According to the U.S. Bureau of the Census, the population of those four states has increased at a compound annual growth rate of 3.0% since 1990, compared to the national average of 1.1% over the same period. According to the U.S. Bureau of Labor Statistics, employment in the same four states has increased at a compound annual growth rate of 4.0% since 1990, compared to the national average of 1.3% over the same period. In addition, management believes that operating in distinct markets in several states provides advantages due to the differences in economic cycles, demographics and competitive conditions among such markets. The Company has achieved strong competitive positions in each of its principal markets. Smith's currently has leading market shares in Salt Lake City (31%), Las Vegas (24%) and Albuquerque (23%) and, after giving effect to the Merger, the Company will also have a leading market share in Phoenix (24%). The Company believes its reputation for offering a broad selection of quality products and low pricing combined with quality customer service has created a valuable franchise with strong name recognition and customer loyalty. STORE FORMATS Smith's operates three types of retail stores: (i) 114 food and drug combination stores; (ii) four warehouse stores; and (iii) two conventional supermarkets. The food and drug combination stores range in size from 30,000 to 88,000 square feet (with an average size of 63,000 square feet) and offer an extensive line of supermarket, non-food and drug products. A typical Smith's food and drug combination store offers approximately 50,000 SKUs, in comparison to approximately 20,000 SKUs offered at the average conventional supermarket 41 nationwide. All stores carry a full line of supermarket products, including groceries, meat, poultry, produce, dairy products, bakery goods, frozen foods and health and beauty aids. In addition, combination stores carry a wide variety of general merchandise, including drugs, toys, hardware, giftware and small appliances. Within each category of merchandise, the stores offer multiple selections of nationally advertised brand name items. In addition, the stores carry an extensive selection of private label merchandise, which provides comparable quality products priced lower than national brands. The Company also carries a variety of bulk merchandise and generic brand products which enhance the Company's low price image. These stores feature modern layouts with wide aisles and well-lighted spaces to facilitate convenient shopping, a variety of specialty departments along the periphery and centralized checkout facilities. The Company's four price impact warehouse stores operating under the PriceRite Grocery Warehouse name, average 55,000 square feet in size, and are targeted to price-conscious consumers rather than conventional supermarket consumers. The PriceRite stores offer lower prices, fewer SKUs and fewer service departments than the Company's food and drug combination stores and conventional stores. The Company's conventional stores average 26,000 square feet in size and have the appearance of traditional supermarkets. Smitty's, which will become a subsidiary of the Company upon consummation of the Merger, currently operates (i) 21 food and general merchandise "super combination" stores which average 105,000 square feet in size, (ii) six food and drug combination stores, which average 52,000 square feet in size, and (iii) one conventional supermarket. The "super combination" stores offer a full line of supermarket items, a broad range of drug store and pharmaceutical items and an expanded selection of general merchandise. These stores offer numerous services and specialty departments, including fresh produce, full- service fresh meat, delicatessen, seafood, bakery, prepared foods, fresh-cut flowers and video and photo departments, pharmacies, food courts, restaurants and full-service bank branches, family style hair salons and airline ticket counters. Smitty's food and drug combination stores offer a full selection of products and services, including full-service fresh meat, delicatessen, seafood and bakery departments, an expanded line of health care and beauty aids, a restaurant, snack bar or food court and full-service banking. In connection with the Merger, the Company and Smitty's are evaluating the format mix of the combined Arizona store base and are assessing the possibility of converting the format of certain stores. STORE DEVELOPMENT AND EXPANSION The following table sets forth information concerning changes in the store base of the Company and Smitty's over the last five years.
1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- STORES OPENED (NET): Smith's: Intermountain and Southwest...................... 5 1 2 2 15 California....................................... 9 9 8 6 2 Smitty's.......................................... 0 2 3 0 (1) TOTAL NUMBER OF STORES (END OF PERIOD): Smith's: Intermountain and Southwest...................... 100 101 103 105 120 California....................................... 9 18 26 32 34 Smitty's.......................................... 24 26 29 29 28
After giving effect to the Merger, approximately 84% of the Company's stores will have been opened or remodeled within the last seven years. Over the past five fiscal years, the Company's capital expenditures for the construction of new and remodeled stores (not including California operations) totaled approximately $414 million. In addition, during the same period the Company invested approximately $163 million in distribution, processing and other support facilities (not including California operations). During the five year period ended December 30, 1995, Smitty's spent approximately $72 million in capital expenditures, including approximately $42 million since mid-1994 to remodel substantially all of its Phoenix-area stores. 42 The Company's real estate department locates, acquires and develops sites for future stores. The Company's 48 years of operation have allowed it to choose its store locations selectively as new residential areas have been developed. The Company believes that many of its stores are in developed areas where land values and the difficulties in locating suitable parcels would make it difficult to replicate the Company's existing store base. The Company has historically sought to purchase the best potential new store locations available in any target market. If the Company cannot purchase the best potential locations, however, it will consider leasing a location from its owner or a local developer. As a result of this strategy, after giving effect to the Merger, the Company will own 108 of its 148 stores, including the underlying land with respect to 97 of such owned stores. See "Business-- Properties." In order to maximize its future capital expenditure resources, the Company intends to place a greater emphasis on leasing new stores following the consummation of the Transactions. MERCHANDISING The Company's merchandising strategy is to offer customers the ability to fulfill a significant portion of their daily and weekly shopping needs at one convenient location and to establish and promote its reputation as a low price leader in the trade area of each of its stores. The cornerstones of this strategy include: Everyday Low Pricing. The Company offers its products on an everyday low pricing ("EDLP") basis in all markets other than Phoenix and Tucson, where the Company offers a combination of EDLP and promotional pricing. The Company offers an EDLP program in most markets because the Company believes that it generally allows for higher overall profitability than a promotional pricing program. An EDLP program allows for more consistent prices over time than a promotional program, which entails variable pricing and higher levels of demand for sale products. As a result, EDLP simplifies inventory management and lowers operating costs. Quality Customer Service. The Company believes a key to its success is its emphasis on quality customer service. The Company provides courteous and efficient customer service by placing a high degree of emphasis on employee training. Most stores have a customer service counter located near the store entrance to answer questions and to assist customers in locating merchandise. The Company also provides rapid in-store checkout services, aided by the use of computerized scanning devices and the bagging of groceries at checkout. In most locations, stores are open 24 hours each day. Advertising and Promotion. The Company reinforces its low price image through extensive television advertising and through print advertising in newspapers and circulars. The Company divides its advertising budgets in a similar manner across its markets, with approximately 80% committed to print advertising and approximately 20% committed to radio and television advertising. The Company also takes an active interest in the communities in which its stores are located and maintains programs designed to contribute funds, products and manpower to local charities and civic groups. Specialty Departments. Each combination store provides certain specialty departments designed to provide one-stop shopping convenience to customers and to increase the frequency with which customers return to the store. The specialty departments, which vary depending upon store size and location, include delicatessens with prepared foods, full-service fresh fish and meat departments, bakeries, dry cleaning drop-off facilities, U.S. Post Office branches, pharmacies, video rental departments, take-out food counters, camera and photo departments with on-site film processing, floral departments and in- store banking provided by a regional or local bank. Private Label Program. Through its private label program, the Company offers in excess of one thousand items under the "Smith's," "Mountain Dairy," "Creek View" and other brand names. These products provide customers with quality comparable to that of national brands but at lower prices. Management believes that the Company's private label program is one of the most successful programs in the industry. The Company's owned manufacturing and processing facilities, including its milk and beverage plants, cultured dairy products plant, ice cream processing plant and frozen dough plant, supply the Company's stores with private label milk, milk products, fruit punches, sour cream, yogurt, cottage cheese, chip dip products, ice cream and novelty items, baked goods and other products and allow the Company to generate gross margins on such private label items that are generally higher than on national brands. 43 Frequent Shopper Program. Smitty's has developed a proprietary information system that updates and maintains a comprehensive customer database used for its unique frequent shopper program, Shopper's Passport. Customers obtain a Shopper's Passport bar-coded scan readable card which entitles them to receive a number of benefits, including discounts on certain purchases, check cashing authorization and participation in special promotions held throughout the calendar year. Management believes that as a result of this program, Shopper's Passport has established one of the most comprehensive supermarket customer data bases in the country. The Company is evaluating plans to utilize the Shoppers Passport program in Smith's stores throughout the Phoenix and Tucson markets following the Merger. OPERATIONS The Company is divided into two major operating regions, the Intermountain Region and the Southwest Region, which are segmented into eight geographic districts. The Intermountain Region consists of stores in Utah, Idaho, Nevada and Wyoming. The Southwest Region consists of stores in Arizona, New Mexico and Texas. The districts are staffed with operational managers who are given as much autonomy as possible while retaining the advantages of central control over accounting, real estate, legal, data processing and other functions at the Company's headquarters. This operational autonomy enables management to react quickly to changes in local markets. District and store managers are responsible for store operations, local advertising formats, employee relations and development, customer relations, community affairs and other functions relating to local operations. The regional staff includes supervisors responsible for the meat, produce, bakery, non-food, pharmacy, one-hour photo, deli and prepared foods departments, who help each regional manager. PURCHASING, DISTRIBUTION AND PROCESSING The Company's purchasing activities are regionally centralized, with most food products and all general merchandise being purchased in volume through regional buyers supervised by headquarters' management. Certain specialized or perishable products are purchased at regional warehouse levels. Management believes that, following the Merger, the Company can achieve increased promotional allowances and discounts through a coordinated buying effort with Yucaipa-affiliated supermarket chains with aggregate annual sales (when combined with the Company) in excess of $11 billion. The Company owns and operates one of the most modern and efficient backstage operations in the industry. The Company's warehousing, distribution and processing facilities, which comprise approximately 3,000,000 square feet, have all been built, expanded or remodeled in the last five years. Central distribution facilities in Salt Lake City and Layton, Utah supply products to all stores in the Intermountain Region and distributes the majority of non- food merchandise, pharmaceutical products and certain bulk products to stores in the Southwest Region. An integrated distribution and processing center in Tolleson, Arizona includes complete warehousing operations and a dairy processing plant. The facility supplies products to all stores in the Southwest Region and Las Vegas. The Company also operates two produce warehouses, one in Ontario, California and the other in Albuquerque, New Mexico. See "--Properties." Approximately 80% of products sold in 1995 were shipped through the Company's distribution network. The Company transports food and merchandise from its distribution centers primarily through a Company-owned fleet of tractors and trailers which primarily serve nearby stores and through common carriers for stores located at greater distances. As of December 30, 1995, the Company's owned fleet included 158 tractors and 406 trailers. The Company seeks to lower costs on shipments by taking advantage of backhauling opportunities where available. The Company's processing facilities located in Tolleson, Arizona and Layton, Utah produce a variety of products under the Company's private label for distribution to Company stores. The Company's dairy plants process a variety of milk, milk products and fruit punches. The Company's automated frozen dough plant produces frozen bakery goods for final baking at in-store bakeries. The Company's cultured dairy products plant 44 produces sour cream, yogurt, cottage cheese and chip dip products. The Company's ice cream processing plant supplies all stores with Smith's private label ice cream and novelty items. The Company believes that its central distribution facilities provide several advantages. Management is able to control inventory levels throughout its system in order to maximize the Company's in-stock position, while at the same time optimizing the use of store shelf space. Costs of products are reduced through centralized volume purchases and effective management of per- item transportation costs. Stores are also served more efficiently through central control of delivery schedules. By managing overall inventory levels, the Company seeks to maximize inventory turns and minimize investments in inventory. Management believes the Company's backstage operations will be able to accommodate the increased volume resulting from the integration of the Smitty's operations in Arizona following the Merger and to support anticipated future growth. Smitty's currently makes approximately 60% of its annual purchases from Fleming Companies, Inc. ("Fleming") under a supply agreement which by its original terms expires in June, 1997. Smitty's 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. INFORMATION SYSTEMS AND TECHNOLOGY The Company is currently supported by a full range of advanced management systems. Smith's has implemented store-level inventory and item management systems developed on UNIX in-store processors using the Informix relational database. This application includes direct store delivery store receiving, which allows goods to be scanned electronically upon arrival at each store receiving dock. This system also includes price verification and order entry using hand-held personal computers. Store checkout is supported by NCR point- of-sale scanning. Smith's stores are supported by pharmacy, video rental, labor scheduling and time and attendance systems which help the Company facilitate customer service while managing labor costs. The Company's buying operations are supported by the AS/400-based E3 forecasting and purchasing system which uses statistical models of seasonality, promotions and buying behavior to optimize inventory levels. The Company's distribution centers operate utilizing leading software of the Dallas Systems Company. The key components are the Distribution Center Management Control System, which is used for all inventory processing, and the Distribution Center Assignment Monitoring System (DCAMS), which is used for labor standards management. To increase operating efficiency and decrease labor costs, the DCAMS system transmits work assignments to lift drivers and order selectors through a radio-frequency terminal. Smith's is currently installing the OMI purchasing and forecasting system which will be used for distribution center replenishment. The installation is expected to be completed during 1996. Smith's computer operations and applications development activities were outsourced to Electronic Data Systems in 1992 under a ten-year outsourcing agreement. COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse- style supermarkets, club stores, deep discount drug stores and "supercenters." In addition, new competitors have entered the Company's markets in the past and could do so in the future. Supermarket chains generally compete on the basis of price, location, quality and variety of products, service and store condition. The Company regularly monitors 45 its competitors' prices and adjusts its prices and marketing strategy in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use those resources to take steps which could adversely affect the Company's competitive position. The Company's principal supermarket competitors in the Salt Lake City market are Albertson's, Ream's Food Stores, Harmons, Fred Meyer, and Dan's Foods. In the Phoenix market, the Company's principal supermarket competitors include Fry's, Bashas Markets, Safeway, ABCO, Albertson's and Mega Foods and, prior to the Merger, Smitty's. In Albuquerque, the Company's principal supermarket competitors are Furr's, Jewel Osco and Albertson's, and in Las Vegas, the Company's main supermarket competitors are Lucky, Vons and Albertson's. The Company also competes with various drug chains and other non-food operators in each of its markets. See "Risk Factors--Competition." EMPLOYEES AND LABOR RELATIONS The Company's policy is to train and develop its employees and promote from within. The Company generally prefers to promote its own employees to store manager positions. Management-level employees, including store department managers, participate in incentive compensation programs tied to profitability, and such compensation programs can represent a significant percentage of such managers' total compensation. The Company believes that its employee retention rate is high within the industry, especially at the store manager level and above. Excluding California operations, as of December 30, 1995, Smith's employed approximately 16,000 persons, approximately 53% of whom were full-time and 47% of whom were part-time. Approximately 42% of the Company's employees are unionized. The Company's unionized employees work under 15 collective bargaining agreements with local labor unions, primarily in Arizona, Nevada and New Mexico, which typically have three-year terms. Management of the Company believes that it will be able to renew existing agreements on terms satisfactory to the Company. If it is unable to do so, however, there could be a material adverse effect on the Company's operations. The wages and benefits provided in the Company's collective bargaining agreements are substantially similar to those of its supermarket competitors. The Company has not experienced a work stoppage in the past ten years and considers its relations with its employees and labor unions to be satisfactory. As of January 14, 1996, Smitty's employed approximately 4,600 people, of whom approximately 36% were full-time and approximately 64% were part-time. Approximately 4,100 employees working in the stores, constituting approximately 89% of Smitty's employees, are covered by a collective bargaining agreement that expires in October 1997. Smitty's has not experienced a work stoppage in the past ten years and considers its relations with its employees and labor unions to be satisfactory. PROPERTIES As of December 30, 1995, after giving effect to the Merger and the California Divestiture, the Company would have owned 108 of its 148 operating stores, including the underlying land with respect to 97 of such owned stores. The Company's stores are located throughout a seven-state area as follows:
STATE STORES OWNED STORES LEASED TOTAL ----- ------------ ------------- ----- Arizona.................................. 40 18 58 Utah..................................... 30 5 35 Nevada................................... 12 10 22 New Mexico............................... 15 4 19 Idaho.................................... 4 1 5 Wyoming.................................. 3 2 5 Texas.................................... 4 0 4 --- --- --- Total.................................. 108 40 148 === === ===
46 The Company leases or subleases 40 of its operating stores from third parties under leases expiring between 1997 and 2023. Eleven of the Company- owned stores are located on property which is ground-leased from third parties under leases expiring between 2007 and 2045. In most cases, such building and ground leases are subject to customary renewal options. The Company owns a 1,180,000 square-foot distribution and dairy processing center in Tolleson, Arizona, 573,000 square feet of grocery warehousing facilities and 348,000 square feet of processing plants in Layton, Utah and a 226,000 square-foot non-food warehouse in Salt Lake City, Utah. The Company also leases a 40,000 square-foot produce and forward-purchasing warehouse in Albuquerque, New Mexico, a 408,000 square-foot non-foods warehouse in Salt Lake City, Utah and a 205,000 square-foot produce warehouse in Ontario, California, under leases expiring in 1997, 1997 and 1999, respectively. The Company's corporate offices, data processing and records storage facilities are located in over 100,000 square feet of office and warehouse space owned by the Company in Salt Lake City, Utah. CALIFORNIA DIVESTITURE In late 1995, management determined that because of the attractive growth prospects of the Company's principal markets and the competitive environment in California, the Company would attempt to sell its California operations and redeploy its resources into its non-California markets. In December 1995, Smith's entered into an agreement to sublease its Riverside, California distribution center to Ralphs. On January 29, 1996, Ralphs commenced the sublease of the Riverside distribution center and dairy plant for an initial term of 23 years. Ralphs also purchased certain equipment and inventory for an aggregate purchase price (net of certain offsetting payments) of approximately $8.7 million. The sublease provides for a subrental of approximately $8.8 million per annum, which is substantially the same amount as is payable by Smith's under the master lease, and requires Ralphs to fulfill substantially all of the other monetary obligations of Smith's under the master lease. In January 1996, the Company entered into agreements to sell or lease 16 of its California stores and three non-operating properties. The Company has substantially completed the sale of these stores, including related equipment and inventory. Of the stores being sold or leased, the Company has leased or subleased eight operating stores and one non-operating store to Ralphs. The non-operating store, located in Beaumont, California, is partially completed, and has been subleased by Ralphs in "as is" condition. The subleases to Ralphs are for terms, and at subrentals, that are substantially equivalent to the terms of, and the rentals payable under, the master store leases (except that Ralphs is not responsible for rent escalations in the master store lease of one of the subleased stores). The remaining eight stores were sold to other supermarket companies, four pursuant to outright sales, two pursuant to assignments of underlying leases and two pursuant to subleases. The two subleases are subject to early termination if the Company has not satisfied certain conditions within 18 months. In order to satisfy these conditions, the Company is required to either (i) obtain fee simple title to the properties by removing them from the Sale-Leaseback Financing (as defined below) and delivering such title to the sublessee or (ii) obtaining certain estoppel, non-disturbance and attornment agreements to protect the sublessee's interests in such premises. If the Company is unable to satisfy either of these conditions, then each sublessee will have the option to terminate the sublease and receive indemnification for certain costs. In order to convey fee simple title to the properties, the Company may be required to assume certain related indebtedness and would apply the net proceeds of the sale to reduce other indebtedness. See "--California Sale-Leaseback Financing" below. The Company has completed the California Divestiture transactions described above and, since December 30, 1995, has received net cash proceeds of approximately $67.2 million (excluding store inventory). The Company expects to receive approximately $10.6 million of additional cash proceeds from the sale of certain undeveloped real estate shortly following the consummation of the Transactions. All of the remaining California stores were closed by March 16, 1996. In connection with its decision to cease operations in California, Smith's 47 recorded pre-tax restructuring charges of $140 million for the year ended December 30, 1995 to reflect the anticipated cost to Smith's of the California Divestiture. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In connection with the California Divestiture, the Company entered into a settlement agreement with the California Attorney General (the "CAG") relating to the stores that were sold, leased, or closed. Under the settlement agreement, the Company agreed that, for a period of five years, it would not operate any of the closed 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. CALIFORNIA SALE-LEASEBACK FINANCING In order to finance its Riverside, California distribution center and eight of its California stores the Company completed a sale-leaseback financing (the "Sale-Leaseback Financing") in 1994. Pursuant to such financing, the Company sold a portion of its interest in the properties to an owner trustee and entered into an operating lease for each property. In order to provide the financing for owner trustee's purchase of the properties, the Company filed a registration statement with the Commission pertaining to a public offering of $152.4 million of pass through certificates. Each of the pass through trusts issuing the certificates used the proceeds of the offering to acquire notes from the owner trustee (which in turn used the proceeds to acquire its interest in the properties from the Company). Neither the notes nor the pass through certificates are obligations of, nor are they guaranteed by, the Company and, accordingly, are not reflected as indebtedness or other liabilities of the Company under generally accepted accounting principles. Under the terms of the Sale-Leaseback Financing, the Company may terminate its lease with respect to the various California properties if it deems such properties to be obsolete, uneconomic for use or surplus to the Company's needs. In connection with any such termination, the Company may elect to satisfy all of the rights and obligations of the owner trustee in respect of the related notes by exchanging such notes for (a) if the property is sold to a party other than the Company, unsecured, full recourse securities of the Company or (b) if such property is sold to the Company, secured, full recourse securities of the Company. In addition, the Company may substitute other properties (including properties located outside California) for properties which it deems to be obsolete, uneconomic for use or surplus to its needs. The substitute properties must have a fair market value, utility and useful life equal to or greater than that of the substituted property. The Company would not be required to assume any indebtedness in connection with such a substitution. Any such exchange or substitution may be made by the Company only if certain conditions are satisfied. In April 1996, the Company received a letter from a holder of pass through certificates pointing out an inaccurate statement in the 1994 pass through certificate prospectus. The letter referred to a statement in the prospectus disclosing that holders of the certificates would not receive any covenant protection in the event of a highly leveraged transaction involving the Company, including any transaction resulting in a change of control. The prospectus went on to state that none of the then-outstanding indebtedness of the Company contained provisions affording holders of such indebtedness protection in the event of a change of control, which was characterized in the letter as a material representation. At the date of such prospectus, a substantial amount of the Company's then-existing indebtedness did contain such change of control provisions. The Company has pointed out to the holder that consummation of the Transactions will not result in a change of control of the Company under the terms of such existing debt instruments although the indebtedness under such debt instruments will be repaid in order to remove certain financial and other covenants contained therein that would otherwise hinder the Company's ability to consummate the Transactions. The Company is currently reviewing the relevant facts and circumstances.The letter suggested that all interested parties be made aware of the existence of the alleged misrepresentation, but made no specific claim or demand on the Company. Although no assurances can be given, the Company does not believe that any claims by the holders of the pass through certificates, if made, would have a material adverse effect on the Company or its ability to complete the California Disposition. 48 ENVIRONMENTAL MATTERS The Company is subject to a variety of environmental laws, rules, regulations and investigative or enforcement activities, as are other companies in the same or similar business. The Company believes it is in substantial compliance with such laws, rules and regulations. These laws, rules, regulations and agency activities change from time to time, and such changes may affect the ongoing business and operations of the Company. The Company, from time to time, has or may in the future receive requests from environmental regulatory authorities to provide information or to conduct investigation or remediation activities. None of these requests is expected by management to have a material adverse effect on the Company's business. GOVERNMENTAL REGULATION The Company is subject to regulation by a variety of governmental authorities, including federal, state and local agencies which regulate the distribution and sale of alcoholic beverages, pharmaceuticals, milk and other agricultural products, as well as various other food and drug items and also regulate trade practices, advertising, building standards, labor, health, safety and environmental matters. The Company from time to time receives inquiries from state and federal regulatory authorities with respect to its comparative advertising practices, pricing policies, employment practices and other trade practices. None of these inquiries, individually or in the aggregate, has resulted, or is expected by management to result, in any order, judgment, fine or other action that has, or would have, a material adverse effect on the business or financial position of the Company. TRADE NAMES, SERVICE MARKS AND TRADEMARKS The Company uses a variety of trade names, service marks and trademarks in its business including "Smith's," "Smith's Food & Drug Centers," "Mountain Dairy," "Creek View," "PriceRite," and numerous others. While the Company believes its trademarks are important to its business, except for "Smith's," "Smith's Food & Drug Centers," "PriceRite" and, following the Merger, "Smitty's," "Smitty's Super Valu" and "Shoppers Passport," the Company does not believe any of such trademarks are, or will be, critical to its business. LEGAL PROCEEDINGS The Company, in the ordinary course of its business, is party to various legal actions. Management believes these are routine in nature and incidental to the operations of the Company. Management believes that the outcome of any proceedings to which the Company is currently a party will not, individually or in the aggregate, have a material adverse effect on the operations or financial condition of the Company. 49 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the persons who are expected to serve as the executive officers and directors of the Company following the consummation of the Transactions. Following the Recapitalization, the Board of Directors will be comprised of seven directors, including two nominees of the Smith Group (as defined) and two nominees of the Yucaipa Group (as defined). See "Certain Relationships and Related Transactions--Standstill Agreement."
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 Smith's since 1971. He has served as Chairman of the Board and Chief Executive Officer since 1988. He served as Chief Operating Officer of Smith's from 1984 to 1988. Ronald W. Burkle has been the Chairman of the Board of Smitty's and a director of SSV since 1994 and Chairman of the Board of SSV since October 1995. Mr. Burkle co-founded Yucaipa in 1986 and has served as a director of Ralphs Grocery Company since 1995. Mr. Burkle served as Chairman of the Board of Ralphs Grocery Company from 1995 to January 1996 and as Chief Executive Officer and a director of its predecessor, Food 4 Less Supermarkets, Inc. since 1987. Mr. Burkle served as Chief Executive Officer and a director of Dominick's Supermarkets, Inc. from 1995 to 1996 and currently serves as its Chairman of the Board. From 1986 to 1988, Mr. Burkle was Chairman and Chief Executive Officer of Jurgensen's, a Southern California gourmet food retailer. Mr. Burkle has served as a director of Kaufman and Broad Home Corporation since March 1995. Allen R. Rowland has been President and Chief Operating Officer since joining Smith's in January 1996. From 1989 to 1996 he served as a Senior Vice President/Regional Manager of Albertson's, Inc. From 1982 to 1989 he was a Vice President/Division Manager with the Florida and Texas Divisions of Albertson's, Inc. Robert D. Bolinder has been a director of Smith's since 1985. He has served as Executive Vice President, Corporate Planning and Development of Smith's since 1993. He served as Executive Vice President and Chief Financial Officer of Smith's from 1988 to 1993, after serving four years as a supermarket industry management consultant. He is also a director of Hannaford Bros. Company, Inc., a regional supermarket chain, and Idaho Power Company, a public utility company. Prior to 1984, Mr. Bolinder was Vice Chairman and a director of Albertson's, Inc. for many years. 50 Matthew G. Tezak has been Senior Vice President and Chief Financial Officer of Smith's since 1993. He served as Senior Vice President, Finance and Treasurer from 1992 to 1993 and Vice President, Finance and Treasurer from 1987 to 1992. Mr. Tezak, a certified public accountant, joined Smith's in 1979 as Assistant Controller. J. Craig Gilbert has served as Senior Vice President, Regional Manager, Intermountain Region of Smith's since 1993. From 1992 to 1993 he served as Senior Vice President, Regional Manager, Southwest Region. From 1991 to 1992 he was Vice President, Regional Manager, Southwest Region and from 1985 to 1991 he served as Vice President, Sales and Merchandising, Intermountain Region. James W. Hallsey has served as Senior Vice President, Regional Manager, Southwest Region since 1995. He rejoined Smith's in 1994 as Senior Vice President, Special Projects after serving most of 1994 as Senior Vice President at McKesson Drug Company, a pharmacy company. In 1993, Mr. Hallsey retired as a director of Smith's (a capacity in which he served since 1985) and Senior Vice President, Corporate Nonfoods Director (a capacity in which he served since 1992). From 1980 to 1992 he served as Vice President, Corporate Nonfoods Director of the Company. Richard C. Bylski has been Senior Vice President, Human Resources of Smith's since 1992. He served as Vice President, Human Resources of Smith's from 1985 to 1992. Michael C. Frei joined Smith's in 1990 as Senior Vice President, General Counsel and Secretary. Prior to that time, Mr. Frei served as Vice President and General Counsel of Price Development Company, a commercial real estate developer, since 1981. Kenneth A. Martindale has served as Senior Vice President, Marketing of Smith's since 1995. He served as Vice President, Merchandising, California Region from 1991 to 1995. From 1984 to 1991, he served as a district manager in the Intermountain Region. Fred F. Urbanek has been Senior Vice President, Facility Engineering of Smith's since 1992. He served as Vice President, Facility Engineering of Smith's from 1985 to 1992. John T. Standley is the Chief Financial Officer, Vice President and Assistant Secretary of Smitty's and SSV, and upon consummation of the Merger, will be the Senior Vice President, Administration of the Company. Mr. Standley joined Smitty's in December 1994. Prior to that time, Mr. Standley was Vice President of Finance for Food 4 Less Supermarkets, Inc. from 1991 to 1994. Prior to 1991, he was a manager at Arthur Andersen & Company. Fred L. Smith has been a director of Smith's since 1968. Since 1988, he has been President of Fred Smith's Honda Automobiles of Palm Springs, an auto dealership, prior to which time he was a private investor. Since 1989, he has also been President of Fred Smith's Jaguar/Rolls Royce of Rancho Mirage, an auto dealership. Linda McLoughlin Figel joined Yucaipa in 1989 and became a general partner in 1991. Prior to that time, she was employed by Bankers Trust Company in its Structured Finance Group. Bruce Karatz has been the President, Chief Executive Officer and a director of Kaufman and Broad Home Corporation since 1986 and its Chairman of the Board since July 1993. Mr. Karatz is also a director of Honeywell, Inc., National Golf Properties, Inc. and a Trustee of the National Park Foundation and the RAND Corporation. Bertram R. Zweig is a partner with the law firm of Jones, Day, Reavis & Pogue. Mr. Zweig was with Jones, Day from 1962 to 1978, and rejoined the firm in 1995. Between August 1992 and June 1995, Mr. Zweig was a partner with the law firm of Graham and James, and from January 1988 to July 1992 he was a partner with the law firm of Stroock & Stroock & Lavan. He is a member of the Board of Directors of Wedbush Corporation, the parent of Wedbush Morgan Securities, Inc., a regional investment banking firm in Los Angeles. Mr. Zweig is a member of the Board of Directors of Aquatic Water Systems Incorporated. 51 CLASSIFIED BOARD OF DIRECTORS The Amended and Restated Certificate of Incorporation of the Company will provide that the full Board of Directors will be comprised of seven directors and, without the unanimous approval of the directors then in office, the number of directors may not be altered. The Board of Directors will be divided into three classes as nearly equal in number as possible, with the term of office of one class expiring each year and each director serving for a term ending at the third annual meeting of stockholders of the Company following the annual meeting at which such director was elected, except for the directors to be elected at the Company's 1996 annual meeting of stockholders, who shall have the one, two or three-year term for which such directors are elected at such meeting. Any increase in the number of directors or any vacancy on the Board of Directors may be filled, subject to the rights of any holders of any series of Preferred Stock to elect additional directors, only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or such vacancy occurred. 52 PRINCIPAL STOCKHOLDERS The following table provides certain information regarding ownership of the Company's voting securities as of April 15, 1996, giving effect to the Transactions. The table has been prepared based on the assumptions that (a) 50% of the outstanding Common Stock of each holder is purchased pursuant to the Tender Offer, (b) 3,000,000 shares of Series I Preferred Stock are purchased by the Company from the Dee Glen Smith Marital Trust I (2,100,000 shares) and Ida Smith (900,000 shares), and (c) 2,206,000 shares of Series I Preferred Stock are directly or indirectly conveyed by the Dee Glen Smith Marital Trust I to certain charitable organizations. Based on such assumptions and giving effect to the foregoing events, the following table sets forth the ownership of Common Stock and Series I Preferred Stock of the Company by each person who to the knowledge of Smith's will own 5% or more of any class of the Company's outstanding voting stock, by each person who will be a director or executive officer of the Company, and by all executive officers and directors of the Company as a group. Share amounts and percentage ownership information set forth below are subject to change pending finalization of the Recapitalization and may vary depending on the actual number and class of shares tendered in the Tender Offer. The actual number of shares of Series I Preferred Stock which (x) the Company elects to purchase and/or (y) the Dee Glen Smith Marital Trust I directly or indirectly conveys to charitable organizations in connection with the consummation of the Transactions may be increased or decreased by amounts that are not expected to have a material adverse effect on the Company.
CLASS A CLASS B SERIES I COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF ----------------- ------------- ------------------- ALL VOTES OF NUMBER NUMBER NUMBER ALL CLASSES OF SHARES % OF SHARES % OF SHARES % OF STOCK --------- ---- --------- --- ----------- ----- ------------ BENEFICIAL OWNER(A) - ------------------- Jeffrey P. Smith 1550 S. Redwood Rd. Salt Lake City, UT 84104................... 1,670,954(b) 29.4 5,300 * 3,149,000(c) 31.6 29.0 Dee Glen Smith Marital Trust I c/o Ida W. Smith 1066 North East Capital Blvd. Salt Lake City, UT 84103................... 231,210(d) 4.1 -- -- 3,149,000(d) 31.6 20.3 Richard D. Smith 1550 South Redwood Road Salt Lake City, UT 84104................... 1,174,463(e) 20.7 -- -- -- -- 7.1 Fred L. Smith 74285 Quail Lake Dr. Indian Wells, CA 92210.. 957,498(f) 16.8 -- -- -- -- 5.8 Trust for the Children of Jeffrey P. Smith 2551 Brentwood Circle Salt Lake City, UT 84121................... 577,650(d) 10.2 -- -- -- -- 3.5 Trust for the Children of Fred L. Smith 74285 Quail Lake Dr. Indian Wells, CA 92210.. 577,650(g) 10.2 -- -- -- -- 3.5 Trust for the Children of Richard D. Smith 1038 North East Capital Blvd. Salt Lake City, UT 84103................... 557,650(h) 9.8 -- -- -- -- 3.4 Corporation of the President of the Church of Jesus Christ of Latter-day Saints 50 East North Temple Salt Lake City, UT 84150................... -- -- -- -- 2,000,009 20.1 12.0 University of Utah Medical School 407 Park Building Salt Lake City, UT 84112................... -- -- -- -- 1,000,000 10.0 6.0
53
CLASS A CLASS B SERIES I COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF ----------------- ----------------- --------------- ALL VOTES OF NUMBER NUMBER NUMBER ALL CLASSES OF SHARES % OF SHARES % OF SHARES % OF STOCK --------- ---- --------- ---- --------------- ---- ------------ City of Hope 1500 East Duarte Road Duarte, CA 91010........ -- -- -- -- 500,004 5.0 3.0 Ronald W. Burkle c/o The Yucaipa Companies 10000 Santa Monica Blvd. Los Angeles, CA 90067... -- -- 2,125,406(i) 21.5 -- -- 1.3 Allen P. Martindale..... 310,000(j) 5.5 -- -- -- -- 1.9 Allen R. Rowland........ -- -- -- -- -- -- -- Kenneth A. Martindale... 53,500(k) * 9,497(l) * -- -- * Robert D. Bolinder...... 50,000 * 15,000(m) * -- -- * J. Craig Gilbert........ 32,500(n) * -- -- -- -- * Matthew G. Tezak........ 30,000 * 16,048 * -- -- * James W. Hallsey........ 16,750(o) * -- -- -- -- * Michael C. Frei......... -- -- 1,584 * -- -- * Richard C. Bylski....... 28,009(p) * 983 * -- -- * Fred F. Urbanek......... 22,500 * 505 * -- -- * John T. Standley........ -- -- -- (i) -- -- -- -- Linda McLoughlin Figel.. -- -- -- (i) -- -- -- -- Bruce Karatz............ -- -- -- -- -- -- -- Bertram R. Zweig........ -- -- -- -- -- -- -- All directors and officers as a group (16 persons)............... 2,861,711 50.4 2,174,323 22.0 3,149,000 31.6 37.5
- -------- * Less than one-percent. (a) Each person has sole investment and voting power with respect to the shares indicated, except as otherwise set forth in the footnotes to this table. Each share of Class A Common Stock is convertible at any time at the option of the holder into one share of Class B Common Stock. (b) Includes 771,055 shares which are held of record by four trusts of which Jeffrey P. Smith is the trustee and of which his children and the children of Richard D. Smith are beneficiaries, and 231,210 shares held of record by a trust for benefit of Ida W. Smith and of which Mr. Smith is trustee. (c) Such shares are held of record by a trust for the benefit of Ida W. Smith and of which Jeffrey P. Smith is trustee. (d) Included in the shares shown for Jeffrey P. Smith. (e) Includes 733,501 shares which are held of record by four trusts of which Richard D. Smith is trustee and of which his children and the children of Jeffrey P. Smith are beneficiaries and 5,871 shares held of record by Mr. Smith's wife. (f) Includes 679,389 shares which are held of record by four trusts of which Fred L. Smith is trustee and of which his children are beneficiaries, and 17,600 shares held of record by Mr. Smith's wife. (g) Included in the shares shown for Fred L. Smith. (h) Included in the shares shown for Richard D. Smith. (i) Such shares are held of record by the following four limited partnerships of which Yucaipa is the general partner: Yucaipa SSV Partners, L.P. (1,140,816); Yucaipa Smitty's Partners, L.P. (300,667); Yucaipa Smitty's Partners II, L.P. (136,793); and Yucaipa Arizona Partners, L.P. (547,130). Mr. Burkle is a limited partner in two of those partnerships and is also the controlling general partner of Yucaipa. Linda McLoughlin Figel, a nominee for director of the Company, is a limited partner in Yucaipa SSV Partners, L.P. Mr. Standley, who will be the Senior Vice President, Administration of the Company following the Merger, is a limited partner in Yucaipa Smitty's Partners, L.P. and Yucaipa Smitty's Partners II, L.P. Under certain circumstances, the Company may prepay a portion of the management fees payable to Yucaipa under the Management Services Agreement through the issuance of up to 100,000 shares of the Company's Class B Common Stock at its then current fair market value. (j) Such shares are held of record by a trust for the benefit of Mr. Martindale and his wife and of which Mr. Martindale is trustee. (k) Includes 3,500 shares held of record by two children of Mr. Martindale and of which Mr. Martindale is custodian. (l) Includes 4,800 shares held of record by two children of Mr. Martindale and of which Mr. Martindale is custodian. (m) Includes 15,000 shares issuable upon exercise of vested options as of April 15, 1996. (n) Such shares are held of record by a trust for the benefit of Mr. Gilbert and his wife and of which Mr. Gilbert is trustee. (o) Includes 500 shares held of record by a child of Mr. Hallsey and of which Mr. Hallsey is custodian. (p) Includes 5,119 shares held of record by a partnership of which Mr. Bylski is a general partner and 600 shares held of record by children of Mr. Bylski and of which Mr. Bylski is custodian. 54 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT SERVICES AGREEMENT Yucaipa will provide certain management services to the Company pursuant to the Management Services Agreement to be executed upon consummation of the Transactions. The Management Services Agreement will have a five-year term and will provide for annual management fees of $1,000,000, plus reimbursement of all of Yucaipa's reasonable out-of-pocket costs and expenses. Under the Management Services Agreement, Yucaipa, through its partners, employees or other designated agents, will provide the Company with management consultation and advice regarding strategic planning and development, budgeting and future financing plans, selection and retention of management personnel, integration strategy, legal and governmental affairs, board presentations and similar management services as may be requested from time to time. In addition, the Company may retain Yucaipa in an advisory capacity in connection with certain acquisitions or sale transactions, debt and equity financings, or any other services not otherwise covered by the Management Services Agreement, for which the Company will pay Yucaipa additional compensation in an amount to be agreed upon by the Company and Yucaipa (and approved by a majority of the Company's disinterested directors). Under certain circumstances, the Company may prepay a portion of the management fees payable to Yucaipa under the Management Services Agreement through the issuance of up to 100,000 shares of the Company's Class B Common Stock at its then current fair market value. During the term of the Management Services Agreement, Ronald W. Burkle, the managing general partner of Yucaipa, will, if he so elects, have the right to serve as the Chief Executive Officer of the Company and will have all rights and responsibilities customarily vested in a Chief Executive Officer. Mr. Burkle will not receive any compensation for serving in such capacity beyond the management fees paid to Yucaipa under the Management Services Agreement. The Management Services Agreement may be terminated by the Company: (a) at any time by giving Yucaipa at least 90 days' written notice; (b) if Yucaipa shall fail to reasonably perform any material covenant, agreement, term or provision under the Management Services Agreement following 60 days' written notice of such failure; (c) at any time if Yucaipa commits any act of fraud, dishonesty or gross negligence in connection with its performance under the Management Services Agreement which is materially detrimental to the Company's business or reputation; (d) upon the occurrence of certain defaults or events of default under the Indentures, the New Credit Facility, or any other material debt agreements entered into to refinance such indebtedness, if such default is not cured or waived within a specified period; (e) if Yucaipa is in material default under the Standstill Agreement following 90 days' written notice of such default; or (f) at any time if Yucaipa and its affiliates own less than 50% of the shares of Class B Common Stock acquired by them in the Merger. Yucaipa may terminate the Management Services Agreement: (a) if the Company fails to reasonably perform any material covenant, agreement, term or provision under the Management Services Agreement following 60 days' written notice; (b) if the Company fails to make any payment to Yucaipa under the Management Services Agreement following 30 days' written notice of such failure; (c) if the Yucaipa nominees cease to hold Board seats as required by the Standstill Agreement; (d) if the Board of Directors fails to approve two or more material recommendations by Yucaipa to the Board (provided that Yucaipa may not designate more than four such matters during any calendar year as material) or the Board otherwise takes action which materially interferes with the ability of Yucaipa to perform its responsibilities under the Management Services Agreement following 60 days' written notice; or (e) if Mr. Burkle ceases to be Chief Executive Officer of the Company, other than by reason of his death, disability, termination for cause or voluntary resignation. Either Yucaipa or the Company may terminate the Management Services Agreement upon a change of control of the Company (defined generally, subject to certain exceptions and conditions, as either (i) the acquisition of beneficial ownership of 40% or more of the Company's outstanding shares of voting stock, or (ii) the sale of substantially all of the Company's assets or capital stock, excluding any transaction with Yucaipa or any of its partners or affiliates or any member of the Smith Group). If the Management Services Agreement is terminated (i) by the Company for the reason set forth in clause (a) of the first sentence of this paragraph, (ii) by Yucaipa in accordance with the Management Services Agreement, or (iii) pursuant to a change of control of the Company, Yucaipa will be 55 entitled to the greater of (x) $5 million, or (y) twice the total fees that would have been earned by Yucaipa under the then remaining term of the Management Services Agreement. Yucaipa will agree that during the term of the Management Services Agreement it will not, without the Company's prior written consent, provide management or consulting services to, or make equity investments in excess of 5% in, any business which operates in excess of five retail supermarkets in any market in which the Company operates in excess of five retail supermarket stores, subject to certain exceptions and conditions. During the term of the Management Services Agreement, the Company will agree to indemnify and hold harmless Yucaipa and each of its affiliates, partners, officers, agents and the employees from and against all losses, claims, damages, liabilities or expenses (collectively, "losses") resulting from any claim, lawsuit or other proceeding by any person to which any of them may become subject which is related to or arising out of the performance of the services to be provided under the Management Services Agreement or the Recapitalization Agreement, including all reasonable out-of-pocket expenses, unless such losses result from (i) Yucaipa's or such party's gross negligence or willful misconduct or any intentional, material breach of the Management Services Agreement, or (ii) any settlement effected without the written consent of the Company, which consent will not be unreasonably withheld. STOCKHOLDERS' AGREEMENTS On January 29, 1996, Smith's, Acquisition and certain stockholders of Smitty's entered into a stockholders agreement (the "Smitty's Stockholders Agreement") and Smitty's, Yucaipa and certain stockholders of Smith's entered into a similar shareholders agreement (the "Smith's Shareholders Agreement"). Under the terms of the Smitty's Stockholders Agreement and the Smith's Shareholders Agreement, each of the parties thereto agreed (i) to vote its respective shares of Smitty's Common Stock or Smith's Common Stock, as applicable, in favor of approval of the Recapitalization Agreement; (ii) to refrain from soliciting any person other than Smitty's or Smith's, as applicable, to purchase all or any material portion of the assets of, or equity interests in, the Company; (iii) to refrain from transferring their shares of the Company's stock without consent from Smith's or Smitty's, as applicable, and the Company; and (iv) to take no action inconsistent with the Recapitalization Agreement or that would prevent any condition precedent to the Merger from being satisfied. Under the terms of the Smith's Shareholders Agreement, the Smith's stockholders parties thereto have agreed to tender a sufficient number of their shares of Common Stock in the Tender Offer to enable Smith's to purchase 50% of the outstanding shares of Common Stock in the Tender Offer. STANDSTILL AGREEMENT On January 29, 1996, the Company, Yucaipa and each of the limited partnerships which own shares in Smitty's for which Yucaipa acts as the general partner (the "Smitty's Principal Stockholders"; together with Yucaipa, the "Yucaipa Group") entered into the Standstill Agreement. Pursuant to the Standstill Agreement, the Yucaipa Group has agreed that for a 10-year period ending on January 29, 2006, it will not acquire, offer to acquire, agree to acquire, become the beneficial owner of, or obtain any rights in respect of any Company Voting Securities (as defined below), by purchase or otherwise, or take any action in furtherance thereof, if the effect of such action would be to increase its aggregate beneficial ownership of securities that are entitled to vote generally for the election of directors (the "Company Voting Securities") above (x) 20% of the total number of votes that could be cast at a stockholders' meeting of the Company (the "Combined Voting Power") or (y) 25% of the total number of Company Voting Securities outstanding, subject to certain exceptions. In addition, without the approval of a majority of the Disinterested Directors (defined as directors of the Company who are not employees or officers of the Company, are not serving as designees of the Yucaipa Group, and are not associates of Yucaipa or its affiliates) and subject to certain limited exceptions, no member of the Yucaipa Group will during such 10-year period (i) submit any proposals to acquire a majority of the Combined Voting Power of Company Voting Securities (a "Change of Control Proposal"), (ii) directly or indirectly sell, transfer any beneficial interest in, pledge, hypothecate or otherwise dispose of any Company Voting Securities or any shares of Company Common 56 Stock to be acquired from the Company pursuant to the Warrant Agreement, other than to another member of the Yucaipa Group or their respective affiliates in any transaction or series of transactions that would result in a transfer of greater than 3% of the Combined Voting Power or would result in any person having, or having the right to acquire, beneficial ownership greater than 5% of the Combined Voting Power, (iii) solicit any proxies, or assist any other person in any way in solicitation of proxies, or submit any proposal for the vote of stockholders of the Company, or induce another person to take any such actions with respect to the voting of any of the Company Voting Securities, (iv) directly or indirectly solicit or induce any person to bid for or acquire Company Voting Securities in excess of 5% of the Combined Voting Power of Company Voting Securities, or (v) engage in certain affiliate transactions. Pursuant to the Standstill Agreement, the Company will use its best efforts to cause to be elected to the Company's Board of Directors two designees of the Smith Group, two designees of the Yucaipa Group, one member of the senior management of the Company and two "independent directors" (as required by the rules of the NYSE) who are also Disinterested Directors. Subject to the provisions of the Certificate of Incorporation and By-laws of the Company and the approval of the Company's stockholders, as long as the members of the Smith Group and the Yucaipa Group and their respective affiliates each beneficially own at least 8% of the outstanding shares of Common Stock, each such Group will have the right to designate two directors of the Company, and so long as the members of the Smith Group and the Yucaipa Group and their respective affiliates each beneficially own at least 5% of the outstanding shares of Common Stock, each such Group will have the right to designate one director of the Company. However, no individual who is an officer, director, partner, or principal stockholder of any Significant Competitor (as defined in the Management Services Agreement) of the Company or any of its subsidiaries will serve as director. At any time when the Yucaipa Group and its affiliates or the Smith Group and its affiliates no longer beneficially own at least 5% of the outstanding shares of Common Stock, such Group will not have the right to designate any director of the Company, such Group's rights with regard to the voting of Company securities will terminate and such Group will cause its designees to the Board of Directors to resign. Jeffrey Smith and Fred Smith have been nominated to be directors of the Company as designees of the Smith Group and Ronald Burkle and Linda McLoughlin Figel have been nominated to be directors of the Company as designees of the Yucaipa Group. In addition, each of the Smith Group and the Yucaipa Group has agreed that they each will, at any annual or special meeting of the stockholders at which the directors of the Company are to be elected or in connection with a solicitation of consents through which directors of the Company are to be selected, to vote (or give a written consent with respect to) all of their respective Company Voting Securities in favor of the election to the Company's Board of Directors of the nominees designated by such other Group. The Standstill Agreement will terminate at any time that the Yucaipa Group and its affiliates own less than 2% of the outstanding shares of Common Stock. The Standstill Agreement may be amended or waived if such amendment or waiver is in writing and executed by all parties thereto; provided that any amendment or waiver requires the approval of a majority of the Disinterested Directors of the Company. YUCAIPA WARRANT Upon closing of the Recapitalization, the Company has agreed to issue Yucaipa warrants to purchase shares of Class C Common Stock of the Company (the "Warrants") representing approximately 10% of the outstanding shares of Common Stock on a fully diluted basis upon consummation of the Transactions. The initial exercise price of the Warrants will be $50.00 per share. One-half of the Warrants will be designated "Series A Warrants" and will be exercisable at the election of Yucaipa on or prior to the fourth anniversary of the Closing, and one-half of the Warrants will be designated "Series B Warrants" and will be exercisable at the election of Yucaipa on or prior to the fifth anniversary of the Closing. The foregoing expiration dates will each be extended by five years in the event that, prior to such respective dates, the market price of Class B Common Stock equals or exceeds the exercise price (as adjusted from time to time) for a period of not less than 60 consecutive trading 57 days. The cashless exercise provisions of the Warrants allow the holder to elect to exercise the Warrants without the payment of cash consideration, provided that the Company will withhold from the shares otherwise issuable upon such exercise a number of shares having a fair market value as of the exercise date equal to the aggregate exercise price. The Class C Common Stock to be issued to Yucaipa upon exercise of its Warrants will be identical in all respects to the Class B Common Stock, except that the Class C Common Stock will be non-voting. Shares of Class C Common Stock will be convertible into an equal number of shares of Class B Common Stock following the transfer of such shares by Yucaipa to any person or entity not affiliated with Yucaipa. The number of shares to be issued upon exercise of the Warrants and the exercise price are each subject to adjustment under standard anti-dilution provisions. REGISTRATION RIGHTS AGREEMENT Pursuant to the Recapitalization Agreement, upon consummation of the Merger the Company will enter into a registration rights agreement (the "Registration Rights Agreement") with Jeffrey Smith, Yucaipa, and certain holders of Smitty's Common Stock who will receive Class B Common Stock as consideration in the Merger (collectively, the "Holders"). Under the terms of the Registration Rights Agreement, each of (i) Yucaipa and the holders of Smitty's Common Stock receiving Class B Common Stock in the Merger and their transferees, as a group (the "Yucaipa Holder Group"), and (ii) Jeffrey Smith and his affiliates and transferees, as a group (the "Smith Holder Group"), will be entitled to require the Company to effect a registration under the Securities Act (a "Demand Registration") of all or a portion (but not less than 20%) of the Registrable Securities (as defined) held by such Holders, subject to certain limitations. Upon such demand, the Company will give prompt notice thereof to each registered holder of Registrable Securities and will prepare, file and use its best efforts to cause to become effective a registration statement in respect of all Registrable Securities requested to be included therein. Each of the Smith Holder Group and the Yucaipa Holder Group will be entitled to two Demand Registrations. Notwithstanding the foregoing, the Company will not be required to effect more than one Demand Registration during any six-month period. Such Demand Registration may, at the election of the demanding Holders, be in the form of an underwritten offering and such demanding Holders shall be entitled to select the underwriters. Members of the Yucaipa Holder Group may at any time prior to the second anniversary of the Closing Date demand that the Company promptly file a shelf registration statement pursuant to Rule 415 under the Securities Act which will provide for resales of Registrable Securities held by the Yucaipa Group. The Company will keep such Shelf Registration statement continuously effective for at least 120 days following the effective date (or such longer period as such Holders' Registrable Securities constitute "restricted securities" under Rule 144 and are subject to the two-year holding period for affiliates under Rule 144(c)); provided that in no event will the Company be required to keep such shelf registration statement effective after the second anniversary of the Closing Date. Holders of Registrable Securities will also have the right to include such Registrable Securities in any registration statement under the Securities Act filed by the Company for its own account or for the account of any of its securityholders (other than (i) a registration statement on Form S-4 or S-8, (ii) a registration statement filed in connection with a Demand Registration or a Shelf Registration or (iii) a registration statement filed in connection with an offer of securities solely to existing securityholders) for sale on the same terms and conditions as the securities of Smitty's or any other selling securityholder included therein (a "Piggy-Back Registration"). In the event that, pursuant to any Demand Registration or any Piggy-Back Registration, the Company is advised by the managing underwriter therefor that the total number of shares proposed to be included therein is such as to materially and adversely affect the success of the offering, the Company has granted certain priority rights to the Smith Group which enables the Smith Group to have its Registrable Securities (up to certain designated amounts) included in such registrations before the Yucaipa Group is entitled to include its Registrable Securities in such registrations. The Company will be obligated to pay its expenses associated with registration of the Registrable Securities, regardless of whether any registration statement required by the Registration Rights Agreement becomes 58 effective, and the reasonable fees and expenses of any party to the Registration Rights Agreement who participates in any registration effected thereunder. In addition, the Company will provide a customary securities law indemnification to any party who participates in any registration effected under the Registration Rights Agreement. The Registration Rights Agreement will terminate upon the earlier to occur of (i) the mutual agreement by the parties thereto, (ii) with respect to any Holder, such Holder ceasing to own any Registrable Securities, (iii) the fifteenth anniversary of the Closing Date, or (iv) with respect to the Smith Holder Group or the Yucaipa Holder Group, the date on which the aggregate number of shares of outstanding Registrable Securities held by the Smith Holder Group or the Yucaipa Holder Group, as applicable, is less than 20% of the Registrable Shares originally held by the Smith Holder Group or the Yucaipa Holder Group, as applicable, immediately following the consummation of the Transactions (except with respect to any Holder that is an "affiliate" of the Company within the meaning of the Securities Act). OTHER TRANSACTIONS WITH YUCAIPA OR ITS AFFILIATES Pursuant to the Recapitalization Agreement, Yucaipa will receive a success fee of $15 million upon consummation of the Offering and the Recapitalization. In December 1995, the Company entered into an agreement to sublease its Riverside, California distribution center and dairy processing plant to Ralphs, an affiliate of Yucaipa. Pursuant to the sublease, Ralphs will pay the Company annual rent of approximately $8.8 million for the remaining 23-year term of the lease. In connection with such transaction, Ralphs purchased certain inventory, fixtures and equipment from the Company for an aggregate purchase price (net of certain offsetting payments) of approximately $8.7 million. As part of the California Divestiture, in January 1996 the Company entered into agreements to lease or sublease certain of its real property located in California, including eight operating stores and one non-operating store, to Ralphs, an affiliate of Yucaipa. See "Business--California Divestiture." CEO'S SEVERANCE DISCUSSIONS The Company and Jeffrey Smith, the Chairman and Chief Executive Officer of the Company, have held limited discussions regarding the termination of his employment with the Company and the continuing role he might have with the Company. While he is not expected to continue to be actively engaged in the management of the Company, he will continue as Chairman of the Board after the consummation of the Transactions and may provide consulting services to the Company. In addition, Mr. Smith and the Company have had tentative discussions regarding an arrangement to provide Mr. Smith with the use and possible ownership of the Company airplane after the consummation of the Transactions. It is anticipated that a definitive agreement regarding such matters will be reached prior to the consummation of the Transactions. OTHER TRANSACTIONS During fiscal 1995, Smith's paid $217,524 in advertising fees to radio and television stations operated by subsidiary companies of Bonneville International Corporation ("Bonneville"). Rodney H. Brady, a former director of Smith's, serves as President and Chief Executive Officer of Bonneville, but has no role in Smith's advertising decisions. Also during fiscal 1995, Smith's paid $15,385 to an automobile dealership owned by Fred Smith, one of Smith's directors, in connection with the purchase of an automobile for use by Smith's. In January 1996, Alan R. Hoefer, a former director of Smith's, received consulting fees from the Company in an aggregate amount equal to $250,000 in connection with certain financial consulting services rendered by him in 1995. Smith's believes that the terms of the foregoing transactions were no less favorable to Smith's than those which could have been obtained from unaffiliated third parties. 59 DESCRIPTION OF NOTES GENERAL The Notes will be issued under an indenture (the "Indenture"), to be dated as of , 1996, by and among the Company and , as Trustee (the "Trustee"). The following summary of certain provisions of the Notes and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Notes and the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the TIA. The definitions of certain capitalized terms used in the following summary are set forth below under "--Certain Definitions." A copy of the form of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The Notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders of Notes (the "Holders"). The Company will pay principal (and premium, if any) on the Notes at the Trustee's corporate office located in New York, New York. At the Company's option, interest may be paid at the Trustee's corporate trust office or by check mailed to the registered address of the Holders. As used below in this "Description of Notes," the "Company" means Smith's Food & Drug Centers, Inc., but not any of the Subsidiaries. PRINCIPAL AND MATURITY OF AND INTEREST ON THE NOTES The Notes are limited in aggregate principal amount to $575,000,000 and will mature on May 15, 2007. Interest on the Notes will accrue at the rates per annum set forth on the cover page of this Prospectus. Interest on the Notes will be payable semi-annually on each May 15 and November 15, commencing on November 15, 1996, to the Holders of record on the immediately preceding May 1 and November 1. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. OPTIONAL REDEMPTION The Notes will be redeemable, at the option of the Company, in whole at any time or in part from time to time, on and after May 15, 2001, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on May 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
REDEMPTION YEAR PRICE ---- ---------- 2001.......................................... % 2002.......................................... % 2003.......................................... % 2004 and thereafter........................... 100.0%
60 In addition, on or prior to May 15, 1999, the Company may, at its option, use the Net Cash Proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the principal amount of the Notes originally issued, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the 12 months commencing on May 15 of the year set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption (provided that the redemption notice shall have been sent not later than 60 days after the consummation of such Public Equity Offering):
REDEMPTION YEAR PRICE ---- ---------- 1996.......................................... % 1997.......................................... % 1998.......................................... %
The documents evidencing Senior Indebtedness will restrict the Company's ability to optionally redeem Notes. NOTICES AND SELECTION In the event of a redemption of less than all of the Notes, the Notes will be selected for redemption by the Trustee pro rata, by lot or by any other method that the Trustee considers fair and appropriate and, if the Notes are listed on any securities exchange, by a method that complies with the requirements of such exchange; provided, however, that any redemption of the Notes pursuant to the provisions relating to a Public Equity Offering shall be made on a pro rata basis unless such method is otherwise prohibited. Notice of redemption will be mailed at least 30 days but not more than 60 days before the date of redemption to each Holder to be redeemed at such Holder's registered address. On and after the date of redemption, interest will cease to accrue on Notes or portions thereof called for redemption (unless the Company shall default in the payment of the redemption price or accrued interest). Notes that are redeemed by the Company or that are purchased by the Company pursuant to a Net Proceeds Offer (as defined under "--Certain Covenants--Limitation on Asset Sales") or pursuant to a Change of Control Offer as described under "--Change of Control" below or that are otherwise acquired by the Company will be surrendered to the Trustee for cancellation. SUBORDINATION The payment of the Obligations on the Notes will be subordinated in right of payment, as set forth in the Indenture, to the prior payment in full in cash or Cash Equivalents of all Senior Indebtedness, whether outstanding on the Issue Date or thereafter Incurred, including, with respect to Designated Senior Indebtedness, any interest accruing subsequent to a bankruptcy or other similar proceeding whether or not such interest is an allowed claim enforceable against the Company in a bankruptcy case under Title 11 of the United States Code. Upon any distribution of assets of the Company of any kind or character, whether in cash, property or securities upon any dissolution, winding up, total or partial liquidation or reorganization of the Company (including, without limitation, in bankruptcy, insolvency, or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of the Company's assets and liabilities), the holders of Senior Indebtedness shall first be entitled to receive payment in full in cash or Cash Equivalents of all amounts payable under Senior Indebtedness (including, with respect to Designated Senior Indebtedness, any interest accruing after the commencement of any such proceeding at the rate specified in the applicable Designated Senior Indebtedness whether or not such interest is an allowed claim enforceable against the Company in any such proceeding) before the Holders will be entitled to receive any payment with respect to the Notes (excluding Permitted Subordinated Reorganization Securities), and until all Obligations with respect to Senior Indebtedness are paid in full in cash or Cash Equivalents, any distribution to which the Holders would be entitled (excluding Permitted Subordinated Reorganization Securities) shall be made to the holders of Senior Indebtedness. 61 No direct or indirect payment (other than payments by a trust previously established pursuant to the provisions described under "--Defeasance of Indenture" below) by or on behalf of the Company of Obligations on the Notes whether pursuant to the terms of the Notes or upon acceleration or otherwise shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of principal of, premium, if any, or interest on (i) any Designated Senior Indebtedness or (ii) any other Senior Indebtedness which, at the time of determination, is equal to or greater than $50 million in aggregate principal amount ("Significant Senior Indebtedness") (and the Trustee has received written notice thereof), and such default shall not have been cured or waived by or on behalf of the holders of such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, or shall have ceased to exist, until such default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, shall have been discharged or paid in full in cash or Cash Equivalents, after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. In addition, during the continuance of any other event of default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated, upon the earliest to occur of (a) receipt by the Trustee of written notice from the holders of a majority of the outstanding principal amount of the Designated Senior Indebtedness or their representative, or (b) if such event of default results from the acceleration of the Notes, the date of such acceleration, no such payment (other than payments by a trust previously established pursuant to the provisions described under "--Defeasance of Indenture" below) may be made by the Company upon or in respect of the Notes for a period ("Payment Blockage Period") commencing on the earlier of the date of receipt of such notice or the date of such acceleration and ending 179 days thereafter (unless (x) such Payment Blockage Period shall be terminated by written notice to the Trustee from the holders of a majority of the outstanding principal amount of such Designated Senior Indebtedness or their representative who delivered such notice or (y) such default is cured or waived, or ceases to exist or such Designated Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents), after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. Notwithstanding anything herein to the contrary, in no event will a Payment Blockage Period extend beyond 179 days from the date on which such Payment Blockage Period was commenced. Not more than one Payment Blockage Period may be commenced with respect to the Notes during any period of 365 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the holders of such Designated Senior Indebtedness or their representative whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provisions referred to above, such failure would constitute an Event of Default under the Indenture and would enable the Holders to accelerate the maturity of the Notes. See "--Events of Default." By reason of such subordination, in the event of the insolvency of the Company, the Holders may recover less, ratably, than holders of Senior Indebtedness. At December 30, 1995, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company would have had approximately $813.2 million aggregate amount of Senior Indebtedness outstanding, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. In addition, the Notes will be effectively subordinated to all existing and future liabilities, including Indebtedness, of the Subsidiaries. At December 30, 1995, after giving pro forma effect to the Transactions and the California Disposition, the Subsidiaries would have had Indebtedness and other liabilities reflected on the Company's consolidated balance sheet (other than guarantees of Senior Indebtedness), including trade payables and accrued expenses, of approximately $148.4 million. 62 CHANGE OF CONTROL The Indenture will provide that, upon the occurrence of a Change of Control, each Holder will have the right to require the repurchase of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase (the "Change of Control Offer Price"). The Indenture will provide that no later than 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. The Indenture shall require that notice of an event giving rise to a Change of Control shall be given on the same date and in the same manner to all Holders. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Payment Date. Each Change of Control Offer is required to remain open for at least 20 Business Days or such longer period as may be required by law. The Indenture will further provide that, notwithstanding the foregoing, prior to the mailing of the notice of a Change of Control Offer referred to above, within 30 days following a Change of Control, the Company shall either (a) repay in full all Indebtedness, and terminate all commitments, under the Credit Agreement to the extent required upon a change of control pursuant to the terms thereof (or offer to repay in full all such Indebtedness and terminate all such commitments and repay all such Indebtedness owed to each lender which has accepted such offer and terminate all such commitments of each such lender), or (b) obtain the requisite consents under the Credit Agreement, the terms of which require repayment upon a change of control, to permit the repurchase of the Notes as provided above. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Notes pursuant to the provisions described above. The Company's failure to comply with the covenants described in this paragraph shall constitute an Event of Default under the Indenture. Notwithstanding the foregoing, the Company shall not be required to make a Change of Control Offer, as provided above, if, in connection with any Change of Control, it has made an offer to purchase (an "Alternate Offer") any and all Notes validly tendered at a cash price equal to or higher than the Change of Control Offer Price and has purchased all Notes properly tendered in accordance with the terms of such Alternate Offer. The Company must comply with Rule 14e-1 under the Exchange Act and other provisions of state and federal securities laws to the extent applicable in connection with a Change of Control Offer or an Alternate Offer. CERTAIN COVENANTS Except as otherwise specified below, the Indenture will contain, among other things, the following covenants: Limitation on Restricted Payments. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment if, at the time of such proposed Restricted Payment, or after giving effect thereto, (a) a Default or an Event of Default shall have occurred and be continuing, (b) the Company could not Incur $1.00 of additional Indebtedness pursuant to the proviso in the covenant described under "--Limitation on Incurrences of Additional Indebtedness" below or (c) the aggregate amount expended for all Restricted Payments, including such proposed Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment as determined in good faith by the Board of Directors of the Company as evidenced by a Board Resolution), 63 subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such aggregate Consolidated Net Income is a loss, minus 100% of such loss) earned during the period beginning on the Issue Date and ending on the date of the proposed Restricted Payment (the "Reference Date") plus (ii) 100% of the aggregate Net Proceeds received by the Company from any Person (other than a Subsidiary) from the issuance and sale (including upon exchange or conversion for other securities of the Company) subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from issuances and sales financed directly or indirectly using funds borrowed from the Company or any Subsidiary, until and to the extent such borrowing is repaid), plus (iii) 100% of the Net Proceeds from (x) the sale or other disposition of Investments (other than Permitted Investments described in clauses (i)-(vi) inclusive of the definition thereof) made by the Company or any Restricted Subsidiary or (y) the sale of the Capital Stock of any Unrestricted Subsidiary by the Company or any Restricted Subsidiary or the sale of all or substantially all of the assets of any Unrestricted Subsidiary to the extent that a liquidating dividend or similar distribution is paid to the Company or any Restricted Subsidiary from the proceeds of such asset sale. The Indenture will provide that the provisions set forth in the immediately preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of declaration, (2) the acquisition of any shares of Capital Stock of the Company or the repurchase, redemption or other repayment of any Subordinated Indebtedness, in each case, in exchange for or solely out of the Net Cash Proceeds of the substantially concurrent sale (other than to a Subsidiary) of shares of Qualified Capital Stock of the Company, provided that no proceeds of such sale of Qualified Capital Stock shall be included in clause (ii) of the preceding paragraph, (3) the repurchase, redemption or other repayment of any Subordinated Indebtedness in exchange for or solely out of the Net Cash Proceeds of the substantially concurrent sale (other than to a Subsidiary) of Subordinated Indebtedness of the Company with an Average Life equal to or greater than the then remaining Average Life of the Subordinated Indebtedness repurchased, redeemed or repaid, and (4) Permitted Payments; provided, however, that, at the time of, and after giving effect to, any Restricted Payment made under clause (3) or (4), no Default or Event of Default shall have occurred and be continuing; provided, further, however, that the declaration of each dividend paid in accordance with clause (1) above and each payment under clause (iv) of the definition of "Permitted Payments" shall each be counted for purposes of computing amounts expended pursuant to subclause (c) in the immediately preceding paragraph, and no amounts expended pursuant to clause (2) or (3) above or clause (i), (ii), (iii), (v), (vi) or (vii) of the definition of "Permitted Payments" shall be so counted. Limitation on Incurrences of Additional Indebtedness. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness oth er than Permitted Indebtedness; provided, however, that if no Default with respect to payment of principal of, or interest on, the Notes or Event of Default shall have occurred and be continuing at the time or as a consequence of the Incurrence of any such Indebtedness, the Company or any Restricted Subsidiary may Incur Indebtedness if immediately after giving effect to the Incurrence of such Indebtedness the Operating Coverage Ratio would be greater than 2.0 to 1.0. Limitation on Liens. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien (other than Permitted Liens) that secures any Indebtedness of the Company which is expressly by its terms subordinated in right of payment to any other Indebtedness of the Company on any asset or property of the Company or any Restricted Subsidiary, unless the Notes are secured by a Lien on such asset or property that is (x) pari passu with such other Indebtedness if such other Indebtedness is pari passu with the Notes or (y) if such other Indebtedness is subordinated to the Notes, senior in priority to the Lien securing such other Indebtedness, in each case, until such time as such obligations are no longer secured by a Lien. Limitation on Asset Sales. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, consummate an Asset Sale unless (a) the Company or such Restricted Subsidiary, as 64 the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company) and (b) upon consummation of such Asset Sale, the Company will within 365 days of the receipt of the proceeds therefrom: (i) apply or cause such Restricted Subsidiary to apply the Net Cash Proceeds of such Asset Sale to (A) a Related Business Investment, (B) an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale or (C) an investment in properties and assets that will be used in the business of the Company and the Restricted Subsidiaries existing on the Issue Date or in businesses reasonably related thereto; (ii) in the case of a sale of a store or stores, deem such Net Cash Proceeds to have been applied to the extent of any capital expenditures made to acquire or construct a replacement store in the general vicinity of the store sold within 365 days preceding the date of such Asset Sale; (iii) apply such Net Cash Proceeds (or cause such Net Cash Proceeds to be applied) to the permanent repayment of Pari Passu Indebtedness, any Indebtedness of any Restricted Subsidiary or any Senior Indebtedness; provided, however, that the repayment of any revolving loan (under the Credit Agreement or otherwise) shall result in a permanent reduction in the commitment thereunder; (iv) use such Net Cash Proceeds to secure Letter of Credit Obligations to the extent the related letters of credit have not been drawn upon or returned undrawn; or (v) after such time as the accumulated Net Cash Proceeds not applied pursuant to the foregoing clauses (i) through (iv) equals or exceeds $20.0 million, apply such Net Cash Proceeds (or cause such Net Cash Proceeds to be applied) to the purchase of Notes tendered to the Company for purchase at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase pursuant to an offer to purchase made by the Company as set forth below (a "Net Proceeds Offer"); provided, however, that the Company shall have the right to exclude from the foregoing provisions Asset Sales subsequent to the Issue Date, the proceeds of which are derived from the sale and substantially concurrent lease-back of a supermarket and/or related assets or equipment which are acquired or constructed by the Company or a Restricted Subsidiary subsequent to the date that is six months prior to the Issue Date, provided that such sale and substantially concurrent lease- back occurs within 365 days following such acquisition or the completion of such construction, as the case may be. Pending the utilization of any Net Cash Proceeds in the manner (and within the time period) described above, the Company may use any such Net Cash Proceeds to repay revolving loans (under the Credit Agreement or otherwise) without a permanent reduction of the commitment thereunder. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders not less than 325 nor more than 365 days after the relevant Asset Sale, with a copy to the Trustee, shall specify the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed) and shall otherwise comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer, Notes of tendering Holders will be repurchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 Business Days or such longer period as may be required by law. The Company must comply with Rule 14e-1 under the Exchange Act and other provisions of State and federal securities laws to the extent applicable in connection with a Net Proceeds Offer. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or suffer to exist, or allow to become effective any consensual Payment Restriction with respect to any of the Restricted Subsidiaries, except for (a) any such restrictions contained in (i) the Credit Agreement and related documents as any such Payment Restriction may apply to any present or future Subsidiary, (ii) the Indenture, (iii) any agreement in effect at or entered into on the Issue Date, as each of the agreements referred to in the foregoing clauses (i), (ii) or (iii) is in effect on the Issue Date or as thereafter amended, supplemented or amended and restated in a manner, as it relates to such restrictions, not materially adverse to the Holders and (iv) Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary (provided that (x) such Indebtedness is not Incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary, (y) such restriction is not applicable to any Person, or the properties or assets of any 65 Person, other than the Person so acquired and (z) such Indebtedness is otherwise permitted to be Incurred pursuant to the provisions of the covenant described under "--Limitation on Incurrences of Additional Indebtedness" above); (b) limitations contained in agreements governing secured Indebtedness otherwise permitted to be Incurred pursuant to the provisions of the covenants described under "--Limitation on Incurrences of Additional Indebtedness" and "--Limitation on Liens" above on the right of the debtor to dispose of the assets securing such Indebtedness; (c) customary non-assignment provisions restricting subletting or assignment of any lease or other agreement entered into by a Restricted Subsidiary; (d) customary net worth or similar provisions contained in leases and other agreements entered into by a Restricted Subsidiary in the ordinary course of business; (e) customary restrictions with respect to a Restricted Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary; (f) customary provisions in joint venture agreements and other similar agreements; (g) restrictions contained in Indebtedness Incurred to refinance, refund, extend or renew Indebtedness referred to in clauses (a) and (b) above; provided that the restrictions contained therein are not materially more restrictive taken as a whole than those provided for in such Indebtedness being refinanced, refunded, extended or renewed; and (h) Payment Restrictions contained in any other Indebtedness permitted to be Incurred subsequent to the Issue Date pursuant to the provisions of the covenant described under""--Limitation on Incurrences of Additional Indebtedness" above; provided that any such Payment Restrictions are ordinary and customary with respect to the type of Indebtedness being Incurred (under the relevant circumstances). Limitation on Transactions with Affiliates. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, in a single transaction or series of related transactions, (i) sell, lease, transfer or otherwise dispose of any of its properties or assets or issue securities (other than equity securities which do not constitute Disqualified Capital Stock) to, (ii) purchase any property, assets or securities from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, an Affiliate or Significant Stockholder (or any Affiliate of such Significant Stockholder) of the Company or any Subsidiary (any of the foregoing, an "Affiliate Transaction"), unless (I) (A) such Affiliate Transaction is in the ordinary course of business or otherwise on terms that are at least as favorable to the Company or such Restricted Subsidiary, as the case may be, as might reasonably have been obtainable at such time from an unaffiliated party; (B) in the case of an Affiliate Transaction involving aggregate payments in excess of $2.0 million and less than or equal to $5.0 million, the Company or such Restricted Subsidiary, as the case may be, shall have delivered an officers' certificate to the Trustee certifying that such Affiliate Transaction is on terms that are at least as favorable to the Company or such Restricted Subsidiary, as the case may be, as might reasonably have been obtainable at such time from an unaffiliated party; and (C) in the case of an Affiliate Transaction involving aggregate payments in excess of $5.0 million and less than or equal to $15.0 million, the Company or such Restricted Subsidiary, as the case may be, shall have delivered an officers' certificate to the Trustee certifying to the same effect as specified in clause (B) above and also that such Affiliate Transaction has received the approval of a majority of the disinterested members of the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, or, in the absence of any such approval, that an Independent Financial Advisor has provided the Board of Directors with written confirmation to the effect specified in clause (II) below and (D) in the case of an Affiliate Transaction involving aggregate payments in excess of $15.0 million, the Company or such Restricted Subsidiary, as the case may be, shall have delivered to the Trustee a written opinion of an Independent Financial Advisor to the effect specified in clause (II) below or (II) the Company or such Restricted Subsidiary, as the case may be, shall have delivered to the Trustee a written opinion of an Independent Financial Advisor to the effect that such transaction is fair to the Company or such Restricted Subsidiary, as the case may be, from a financial point of view or that the terms of such Affiliate Transaction are at least as favorable to the Company or such Restricted Subsidiary, as the case may be, as those that might reasonably have been obtainable at such time from a Person that is not an Affiliate of the Company or such Restricted Subsidiary, as the case may be. The provisions of the foregoing paragraph shall not apply to (i) any Permitted Payment, (ii) any Restricted Payment that is made in compliance with the provisions of the covenant described under "--Limitation on 66 Restricted Payments" above, (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors, consultants or employees of the Company or any Restricted Subsidiary, as determined in good faith by the Board of Directors of the Company or such Restricted Subsidiary or the senior management thereof, (iv) transactions exclusively between or among the Company and any of its wholly owned Restricted Subsidiaries or exclusively between or among such wholly owned Restricted Subsidiaries; provided such transactions are not otherwise prohibited by the Indenture, (v) the Standstill Agreement and any other agreement in effect on the Issue Date as in effect on such date (or any transaction contemplated thereby) or as amended thereafter (including transactions contemplated pursuant to such amendment) so long as any such amendment is not disadvantageous to the Holders in any material respect, (vi) the existence of, or the performance by the Company or any of the Restricted Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Issue Date and any similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by the Company or any Restricted Subsidiary of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders in any material respect, (vii) transactions permitted by, and complying with, the provisions of the covenant described under "--Limitation on Mergers and Certain Other Transactions" below and (viii) transactions with suppliers or other purchases or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of the Indenture which are fair to the Company, in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. Limitation on Subsidiary Assets and Indebtedness. If at any time subsequent to the Issue Date (i)(a) the Company transfers any of its property, plant or equipment to one or more of the Restricted Subsidiaries (other than Guarantors) and (b) as a result of such transfer or transfers, the book value of all such transferred property, plant and equipment of the Company and the Guarantors, as reflected on a balance sheet prepared in accordance with GAAP in any filing made with the Commission, is greater than 35% of the then book value of the total property, plant and equipment of the Company and the Restricted Subsidiaries, on a consolidated basis; or (ii) any Restricted Subsidiary (other than a Guarantor) incurs Indebtedness (other than Permitted Indebtedness pursuant to clause (a) (to the extent such Indebtedness represents a guarantee of obligations under the Credit Agreement or a revolving loan thereunder), (b), (c), (d), (g), (h), (i), (j), (k) or (l) of the definition thereof) that, together with any other Indebtedness (including Permitted Indebtedness) Incurred subsequent to the Issue Date by all Restricted Subsidiaries (other than those that are then Guarantors) then outstanding, would represent more than 35% of the consolidated total long-term Indebtedness of the Company and the Restricted Subsidiaries as reflected on a balance sheet prepared in accordance with GAAP in any filing made with the Commission (each of the foregoing clauses (i) and (ii) being referred to herein as a "Guarantee Condition"), then the Company shall, promptly following any such filing with the Commission, cause one or more of the Restricted Subsidiaries to unconditionally guarantee, jointly and severally, the Company's obligations under the Notes on a senior subordinated unsecured basis (the "Guarantees"), pursuant to supplemental indentures satisfactory in form to the Trustee, so that following the issuance of such Guarantees, neither of the Guarantee Conditions shall exist. The Indebtedness represented by each Guarantee (including the payment of Obligations on the Notes) will be subordinated on the same basis to senior indebtedness of the Guarantors as the Notes are subordinated to Senior Indebtedness. So long as no Default or Event of Default shall have occurred and be continuing, one or more Guarantors may be released within 10 Business Days following any filing with the Commission from their Guarantees pursuant to supplemental indentures or such other instruments satisfactory in form to the Trustee if after giving effect to such release neither of the Guarantee Conditions shall exist. Notwithstanding the foregoing, neither of the Guarantee Conditions shall be deemed to exist during any period when the Company's Operating Coverage Ratio is greater than 3.0 to 1.0. Upon the sale or disposition (whether by merger, stock sale, asset sale or otherwise) to any Person which is not a Restricted Subsidiary of all of the Company's or any Subsidiary's Capital Stock in, or all or substantially 67 all of the assets of, any Guarantor, which sale or disposition is otherwise in compliance with the Indenture, in each case, such Guarantor shall be deemed released from all its obligations under its Guarantee. The obligations of each Guarantor under its Guarantee would be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Guarantor under such Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in a pro rata amount based on the relative net assets of each Guarantor. Limitation on Preferred Stock of Restricted Subsidiaries. The Indenture will provide that the Company shall not permit any of the Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a wholly owned Restricted Subsidiary) or permit any Person (other than the Company or a wholly owned Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. Limitation on Mergers and Certain Other Transactions. The Indenture will provide that the Company, in a single transaction or through a series of related transactions, shall not (i) consolidate with or merge with or into any other Person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another Person or group of affiliated Persons or (ii) adopt a Plan of Liquidation, unless, in either case, (1) either the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any state thereof or the District of Columbia, and shall expressly assume, by supplemental indenture, all the obligations of the Company under the Indenture and the Notes; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in connection therewith, the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; and (3) immediately before and immediately after giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing. The Indenture will provide that upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company or any adoption of a Plan of Liquidation by the Company in accordance with the foregoing, the surviving Person formed by such consolidation or into which the Company is merged or to which such transfer is made (or, in the case of a Plan of Liquidation, to which assets are transferred) shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such surviving Person had been named as the Company therein; provided, however, that solely for purposes of computing amounts described in subclause (c) of the first paragraph of the covenant described under "--Limitation on Restricted Payments" above, any such surviving Person shall be deemed to have succeeded to and be substituted for the Company only with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. 68 Limitation on Other Senior Subordinated Indebtedness. The Indenture will provide that the Company shall not, directly or indirectly, incur any Indebtedness that by its terms (or by the terms of the agreement governing such Indebtedness) is subordinate in right of payment to any other Indebtedness of the Company unless such Indebtedness is also by its terms (or the terms of the agreement governing such Indebtedness) made expressly either (a) pari passu in right of payment with the Notes or (b) subordinate in right of payment to the Notes in the same manner and at least to the same extent as the Notes are subordinate to Senior Indebtedness. Limitation on Restricted and Unrestricted Subsidiaries. The Indenture will provide that the Board of Directors of the Company may, if no Default or Event of Default shall have occurred and be continuing or would result therefrom, designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation is at that time permitted under "--Limitation on Restricted Payments" above. The Indenture will also provide that the Board of Directors of the Company may, if no Default or Event of Default shall have occurred and be continuing or would result therefrom, designate an Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that (i) any such redesignation shall be deemed to be an Incurrence as of the date of such redesignation by the Company and the Restricted Subsidiaries of the Indebtedness (if any) of such redesignated Subsidiary for purposes of "-- Limitation on Incurrences of Additional Indebtedness" above; and (ii) unless such redesignated Subsidiary shall not have any Indebtedness outstanding (other than Indebtedness which would be Permitted Indebtedness), no such designation shall be permitted if immediately after giving effect to such redesignation and the Incurrence of any such Indebtedness, the Company could not incur $1.00 of additional Indebtedness pursuant to the proviso of the covenant described under "--Limitation on Incurrences of Additional Indebtedness" above. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by the filing with the Trustee of a certified copy of the Board Resolution of the Company's Board of Directors giving effect to such designation or redesignation and an officers' certificate certifying that such designation or redesignation complied with the foregoing conditions and setting forth in reasonable detail the underlying calculations. The Indenture will provide that Subsidiaries that are not designated by the Board of Directors as Restricted or Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries. The designation of a Restricted Subsidiary as an Unrestricted Subsidiary shall be deemed to include a designation of all of the subsidiaries of such Unrestricted Subsidiary as Unrestricted Subsidiaries. REPORTS TO HOLDERS The Indenture will provide that the Company shall deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture will further provide that, notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the Commission, to the extent permitted, and provide the Trustee and Holders with such quarterly and annual reports and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA (S) 314(a). EVENTS OF DEFAULT The following events constitute "Events of Default" under the Indenture: (i) failure to make any interest payment on the Notes when due and the continuance of such default for a period of 30 days, whether or not prohibited by the provisions described under "--Subordination"; (ii) failure to pay principal of, or premium, if any, on the Notes when due, whether at maturity, upon acceleration, redemption, required repurchase or otherwise, whether or not prohibited by the provisions described under "--Subordination"; (iii) failure to comply with any other agreement contained in the Notes or the Indenture, if such failure continues unremedied for 30 days after written notice given by the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding (except in the case of a default with respect to the covenants described under "--Change 69 of Control," "--Certain Covenants--Limitation on Restricted Payments," "-- Limitation on Asset Sales" and "--Limitation on Mergers and Certain Other Transactions," which shall constitute Events of Default with notice but without passage of time); (iv) a default under any Indebtedness of the Company or any Restricted Subsidiary, whether such Indebtedness now exists or shall hereinafter be created, if both (A) such default either (1) results from the failure to pay any such Indebtedness at its stated final maturity or (2) relates to an obligation other than the obligation to pay such Indebtedness at its stated final maturity and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated maturity and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at stated final maturity or the maturity of which has been so accelerated, aggregates $20 million or more at any one time outstanding; (v) any final judgment or order for payment of money in excess of $20 million shall be entered against the Company or any Significant Subsidiary and shall not be discharged for a period of 60 days after such judgment becomes final and nonappealable; (vi) either the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case or proceeding; (b) consents to the entry of an order for relief against it in an involuntary case or proceeding; (c) consents to the appointment of a Custodian of it or for all or substantially all of its property; or (d) makes a general assignment for the benefit of its creditors; (vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any Significant Subsidiary in an involuntary case or proceeding; (b) appoints a Custodian of the Company or any Significant Subsidiary, or for all or any substantial part of their respective properties; or (c) orders the liquidation of the Company or any Significant Subsidiary, and in each case the order or decree remains unstayed and in effect for 60 days; or (viii) the lenders under the Credit Agreement shall commence judicial proceedings to foreclose upon any material portion of the assets of the Company and the Subsidiaries. In the event of a declaration of acceleration because an Event of Default set forth in clause (iv) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if either (x) the holders of the Indebtedness which is the subject of such Event of Default have waived such failure to pay at maturity or have rescinded the acceleration in respect of such Indebtedness within 90 days of such maturity or declaration of acceleration, as the case may be, and no other Event of Default has occurred during such 90-day period which has not been cured or waived, or (y) such Indebtedness shall have been discharged or the maturity thereof shall have been extended such that it is not then due and payable, or the underlying default has been cured (and any acceleration based thereon of such other Indebtedness has been rescinded), within 90 days of such maturity or declaration of acceleration, as the case may be. If an Event of Default (other than an Event of Default under clause (vi) or (vii) above with respect to the Company or a Significant Subsidiary) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare due and payable all unpaid principal and interest accrued and unpaid on the then outstanding Notes by notice in writing to the Company, the administrative agent under the Credit Agreement and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i) shall become immediately due and payable or (ii) if there is any Indebtedness outstanding under the Credit Agreement, shall become due and payable upon the first to occur of an acceleration under the Credit Agreement, or five business days after receipt by the Company and the administrative agent under the Credit Agreement of such Acceleration Notice. If an Event of Default under clause (vi) or (vii) above with respect to the Company or a Significant Subsidiary shall occur, all unpaid principal of and accrued interest on all then outstanding Notes shall be immediately due and payable without any declaration or other act on the part of the Trustee or any of the Holders. After a declaration of acceleration under the Indenture, subject to certain conditions, the Holders of a majority in principal amount of the then outstanding Notes, by notice to the Trustee, may rescind such declaration if all existing Events of Default are remedied. In certain cases the Holders of a majority in principal amount of outstanding Notes may waive a past Default and its consequences, except a Default in the payment of or interest on any of the Notes. The Indenture provides that if a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder notice of the Default or Event of Default within 90 days after 70 such Default or Event of Default occurs; provided, however, that, except in the case of a Default or Event of Default in the payment of the principal of or interest on any Notes, including the failure to make payment on a Change of Control Payment Date pursuant to a Change of Control Offer or payment when due pursuant to a Net Proceeds Offer, the Trustee may withhold such notice if it in good faith determines that withholding such notice is in the interest of the Holders. The Indenture provides that no Holder may pursue any remedy thereunder unless the Trustee (i) shall have failed to act for a period of 60 days after receiving written notice of a continuing Event of Default by such Holder and a request to act by Holders of at least 25% in principal amount of Notes and (ii) has received indemnification satisfactory to it; provided, however, that such provision does not affect the right of any Holder to sue for enforcement of any overdue payment of principal of, premium, if any, or interest on, Notes. The Indenture provides that two officers of the Company are required to certify to the Trustee within 120 days after the end of each fiscal year of the Company whether or not they know of any Default that occurred during such fiscal year and, if applicable, describe such Default and the status thereof. DEFEASANCE OF INDENTURE The Company may, at its option and at any time, elect to have the obligations of the Company discharged with respect to the outstanding Notes ("Legal Defeasance"). Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the Notes except for (i) the rights of Holders of Notes to receive payments in respect of the principal of, premium, if any, and interest on Notes when such payments are due solely from the funds held by the Trustee in the trust referred to below; (ii) the Company's obligations to issue temporary Notes, register the transfer or exchange of Notes, replace mutilated, destroyed, lost or stolen Notes and maintain an office or agency for payments in respect of Notes and money for security payments held in trust in respect of Notes; (iii) the rights, powers, trusts, duties and immunities of the Trustee and the Company's obligations in connection therewith; and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time elect to have the obligations of the Company released with respect to certain covenants described above under "--Certain Covenants" ("Covenant Defeasance"), and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must have irrevocably deposited with the Trustee, in trust, for the benefit of the Holders, cash in U.S. dollars, U.S. Government Obligations (as defined in the Indenture), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding Notes to redemption or maturity provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes on the maturity date or such redemption date, as the case may be; (ii) the Company shall have delivered to the Trustee one or more opinions of independent counsel to the effect that (A) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance or Covenant Defeasance, as the case may be, and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance or Covenant Defeasance, as the case may be, had not occurred (which opinion, in the case of Legal Defeasance, shall be based upon a change in the applicable federal income tax law since the Issue Date or a ruling received from or published by the Internal Revenue Service), (B) after the 91st day following the deposit the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and will not be subject to any rights of holders of Senior Indebtedness and (C) the deposit will not cause the Trustee or the trust so created to be subject to the Investment Company Act of 1940; (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (vi) and (vii) under the first paragraph under "--Events of Default" above are concerned, at any time in the period ending on the 91st day after the date of deposit; (iv) such Legal Defeasance or Covenant Defeasance shall not cause the 71 Trustee to have a conflicting interest with respect to the Notes; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, the Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound (and in that connection, the Trustee shall have received a certificate from the administrative agent under the Credit Agreement to that effect with respect to such Credit Agreement if then in effect); (vi) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or Covenant Defeasance, have been complied with. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect as to all outstanding Notes, when either (a) all Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust and thereafter repaid to the Company) have been delivered to the Trustee for cancellation; or (b)(i) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise and the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on Notes not theretofore delivered to the Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption; (ii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which it is bound; (iii) the Company has paid all sums payable by it under the Indenture; and (iv) the Company has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of Notes at maturity or the redemption date, as the case may be. In addition, the Company must deliver an officers' certificate and an opinion of counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been complied with. MODIFICATION OF THE INDENTURE The Indenture and the Notes may be amended or supplemented (and compliance with any provision thereof may be waived) by the Company, the Trustee and the Holders of not less than a majority in aggregate principal amount of Notes then outstanding, except that (i) without the consent of each Holder of Notes affected, no such amendment, supplement or waiver may (1) change the principal amount of the Notes the Holders of which must consent to an amendment, supplement or waiver of any provision of the Indenture or the Notes, (2) reduce the rate or extend the time for payment of interest on any Notes, (3) reduce the principal amount of any Notes, (4) change the Maturity Date or alter the redemption provisions in the Indenture or the Notes in a manner adverse to any Holder, (5) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders or the rights of Holders to recover the principal of, interest on or redemption payment with respect to any Notes, (6) make the principal of, or interest on, any Notes payable with anything or in any manner other than as provided for in the Indenture and the Notes or (7) modify the subordination provisions of the Indenture (including certain related definitions) so as to adversely affect the ranking of any Note; provided, however, that it is understood that any amendment the purpose of which is to permit the Incurrence of additional Indebtedness under the Indenture shall not be construed as adversely affecting the ranking of any Note and (ii) without the consent of Holders of not less than 66 2/3% in aggregate principal amount of Notes then outstanding, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of Notes pursuant to the covenant described under "--Change of Control" above in a manner adverse to any Holder or waive a Default or Event of Default resulting from a failure to comply with the covenant described under "--Change of Control" above. 72 In addition, the Indenture and the Notes may be amended by the Company and the Trustee (a) to cure any ambiguity, defect or inconsistency therein; provided that such amendment or supplement does not adversely affect the rights of any Holder or (b) to make any other change that does not adversely affect the rights of any Holder in any material respect. THE TRUSTEE The Indenture will provide that the Holders of a majority in principal amount of the outstanding Notes may remove the Trustee and appoint a successor trustee with the Company's consent, by so notifying the trustee to be so removed and the Company. In addition, the Holders of a majority in principal amount of the outstanding Notes have the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Indenture will provide that, if a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in the exercise thereof, as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. Subject to the latter provision, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless they shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred thereby. If the Company fails to pay such amounts of principal of, premium, if any, or interest on, the Notes as shall have become due and payable upon demand as specified in the Indenture, the Trustee, at the request of the Holders of a majority in aggregate principal amount of Notes at the time outstanding, and upon being offered such reasonable indemnity as it may be required against the costs, expenses and liabilities incurred by it, except as a result of its negligence or bad faith, shall institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and collect in the manner provided by law the monies adjudged or decreed to be payable. The Indenture contains limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases or to be realized on certain property received by it in respect of any such claims, securities or otherwise. The Trustee is permitted to engage in other transactions; however, if the Trustee acquires any "conflicting interest," it must eliminate such conflict or resign. CERTAIN DEFINITIONS "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. So long as the Management Services Agreement is in effect or Yucaipa (together with its Affiliates) owns voting securities representing more than 10% of the total voting power of the then outstanding voting securities entitled to vote on a regular basis for the Board of Directors of the Company, Yucaipa and its Affiliates shall be deemed Affiliates of the Company. "Asset Sale" means any sale, transfer or other disposition or series of sales, transfers or other dispositions by the Company or any Restricted Subsidiary (including, without limitation, any merger or consolidation of any Restricted Subsidiary with or into another Person (other than the Company or any wholly owned Restricted Subsidiary) whereby such Restricted Subsidiary shall cease to be a Restricted Subsidiary) to any Person (other than to the Company or a wholly owned Restricted Subsidiary) of any assets of the Company or any Restricted Subsidiary, including, without limitation, assets consisting of any Capital Stock or other securities held by the Company or any Restricted Subsidiary, and any Capital Stock issued by any Restricted Subsidiary, in each case, outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions (i) resulting in Net Proceeds to the Company and the Restricted 73 Subsidiaries of $500,000 or less, (ii) pursuant to any foreclosure of assets or other remedy provided by applicable law to a creditor of the Company or any Subsidiary with a Lien on such assets, which Lien is permitted under the Indenture; provided that such foreclosure or other remedy is conducted in a commercially reasonable manner or in accordance with any Bankruptcy Law, (iii) involving only Cash Equivalents or inventory in the ordinary course of business or obsolete equipment in the ordinary course of business consistent with past practices of the Company; (iv) involving only the lease or sublease of any real or personal property in the ordinary course of business; (v) pursuant to the California Disposition or involving certain other assets set forth on a schedule to the Indenture; or (vi) resulting from (a) the designation of any Restricted Subsidiary as an Unrestricted Subsidiary, or the contribution to the capital of any Unrestricted Subsidiary, in accordance with the applicable provisions of the Indenture or (b) the sale of the Capital Stock of any Unrestricted Subsidiary or the sale of all or substantially all of the assets of any Unrestricted Subsidiary. "Average Life" means, as of any date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principal payments of such debt security multiplied by the amount of each such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors. "Board of Directors" means, with respect to any Person, the Board of Directors of such Person or of a subsidiary of such Person or any duly authorized committee of that Board. "Board Resolution" means, with respect to any Person, a duly adopted resolution of the Board of Directors of such Person. "Capital Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such Person. "Capitalized Lease Obligation" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Equivalents" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group and maturing not more than one year from the date of creation thereof, (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500 million and maturing not more than one year from the date of creation thereof, (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any bank described in clause (iii), (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500 million, and (c) has the highest rating obtainable from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc. and (vi) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group. "Change of Control" means the acquisition after the Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) by (i) any Person (other than any Permitted Holder) or (ii) any group (within the meaning of Section 13(d)(3) of the Exchange Act) of Persons (excluding any Permitted Holders), in either case, of any securities of the Company such that, as a result of such 74 acquisition, such Person or group beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, voting securities representing 40% or more of the total voting power of the then outstanding voting securities entitled to vote on a regular basis for the Board of Directors of the Company (but only to the extent that such beneficial ownership is not shared with any Permitted Holder who has the power to direct the vote thereof); provided, however, that no such Change of Control shall be deemed to have occurred if (A) the Permitted Holders beneficially own, in the aggregate, at such time, voting securities representing a greater percentage of such voting power than such other Person or group or (B) at the time of such acquisition, the Permitted Holders (or any of them) possess the ability (by contract or otherwise) to elect, or cause the election, of a majority of the members of the Company's Board of Directors. "Commission" means the Securities and Exchange Commission. "Common Stock" means, with respect to any Person, any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or nonvoting) of, such Person's common stock, whether outstanding at the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated Interest Expense" means for any period, the aggregate amount of interest, whether expensed or capitalized, paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) in respect of all Indebtedness of the Company and the Restricted Subsidiaries (including (a) original issue discount on any Indebtedness (including (without duplication), in the case of the Company, any original issue discount on the Notes but excluding amortization of debt issuance costs) and (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, in each case to the extent attributable to such period but excluding the amortization of debt issuance costs). For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Company to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest of such Indebtedness in effect on the date Consolidated Interest Expense is being calculated, (c) interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as the Company may designate, and (d) Consolidated Interest Expense shall be increased or reduced by the net cost (including amortization of discount) or benefit associated with Interest Swap Obligations attributable to such period. "Consolidated Net Income" means for any period, the aggregate of the net income (or loss) of the Company and the Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any other Person in which the Company or any Restricted Subsidiary has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of the Company and the Restricted Subsidiaries in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions actually paid to the Company or such Restricted Subsidiary by such other Person in such period; (b) the net income of any Restricted Subsidiary that is subject to any Payment Restriction shall be excluded to the extent such Payment Restriction would actually prevent the payment of an amount that otherwise could have been paid to, or received by, the Company or a Restricted Subsidiary not subject to any Payment Restriction; and (c)(i) the net income (or loss) of any other Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale or any other sale of assets that would constitute an "Asset Sale" but for the exceptions set forth in clauses (i), (ii), (v), or (vi) of the definition thereof; (iii) all gains realized upon or in connection with or as a consequence of the issuance of the Capital Stock of the Company or any Restricted Subsidiary and any gains on pension reversions received by the Company or any Restricted Subsidiary, (iv) all gains and losses realized on the purchase or other acquisition by the Company or any Restricted Subsidiary of any securities of the Company or any Restricted Subsidiary, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as 75 amended, or Statement of Financial Accounting Standards No. 121, (vi) all other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) all severance, deferred compensation or other employee termination costs, (C) up to $20 million of compensation expenses resulting from the repurchase or amendment of certain management stock options, (D) all debt refinancing premiums and (E) any other reserves or charges (provided, however, that any net cash payments actually made (after-tax) with respect to the liabilities for which such reserves or charges were created shall be deducted from Consolidated Net Income in the period when made), in each case under this clause (vii), recorded by the Company or any Restricted Subsidiary in connection with the Transactions and the California Disposition, including, without limitation, the integration of operations in the State of Arizona, (viii) losses incurred by the Company and the Restricted Subsidiaries resulting from earthquakes and (ix) with respect to the Company and the Restricted Subsidiaries, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. "Consolidated Net Worth" means, with respect to any Person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such Person and its Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP. "Credit Agreement" means the Credit Agreement, dated as of the Issue Date, by and among Smith's as borrower, its subsidiaries as guarantors, the Lenders referred to therein, Bankers Trust Company and The Chase Manhattan Bank, as arrangers, and Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness Incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or any such prior agreement as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all related or ancillary documents, including, without limitation, any guarantee agreements and security documents. The Company shall promptly notify the Trustee of any such refunding or refinancing of the Credit Agreement. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event or condition that is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (i) in the event any Indebtedness is outstanding under the Credit Agreement, all Senior Indebtedness under the Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement, any other issue of Senior Indebtedness which (a) at the time of the determination is equal to or greater than $50 million in aggregate principal amount and (b) is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For purposes of this definition, the term "Credit Agreement" shall not include any agreement governing Indebtedness Incurred to refund, replace or refinance borrowings or commitments under the Credit Agreement other than any such agreements governing Indebtedness Incurred to refund, replace or refinance the entirety of the borrowings and commitments then outstanding or permitted to be outstanding thereunder. "Disqualified Capital Stock" means, with respect to any Person, any Capital Stock of such Person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security into which it is convertible, puttable or exchangeable, is, or upon the happening of any event or the passage of time would be, required to be redeemed or repurchased by such Person or its subsidiaries, including at the option of the holder thereof, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date, or any other Capital Stock of such Person or its subsidiaries designated as Disqualified Capital Stock by such Person at the time of issuance; provided, however, that if such Capital Stock is either (i) redeemable or repurchasable solely at the option of such Person 76 or (ii) issued to employees of the Company or the Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated. "EBITDA" means, for any period, the Consolidated Net Income for such period, plus, in each case to the extent deducted in computing Consolidated Net Income for such period (without duplication) (i) provisions for income taxes or similar charges recognized by the Company and the Restricted Subsidiaries accrued during such period, (ii) depreciation and amortization expense of the Company and the Restricted Subsidiaries accrued during such period (but only to the extent not included in Consolidated Interest Expense), (iii) Consolidated Interest Expense of the Company and the Restricted Subsidiaries for such period, (iv) LIFO charges (credits) of the Company and the Restricted Subsidiaries for such period, (v) the amount of any restructuring reserve or charge recorded during such period in accordance with GAAP, including any such reserve or charge related to the Transactions or the California Disposition, less, without duplication, the amount of all net cash payments made by the Company and the Restricted Subsidiaries during such period to the extent that such cash payments have been provided for in a restructuring reserve or charge referred to in clause (v) above (and were not otherwise deducted in the computation of EBITDA for such period). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. "Existing Indebtedness" means all indebtedness of the Company and the Restricted Subsidiaries to the extent outstanding on the Issue Date after giving effect to the Transactions (other than Indebtedness under the Credit Agreement and the Indentures), including operating leases outstanding on the Issue Date that are, or may be, required under GAAP to be reported or reclassified after the Issue Date as Capitalized Lease Obligations. "Foreign Exchange Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. "Guarantor" means each Restricted Subsidiary, if any, which becomes a guarantor of the Notes in compliance with the provisions set forth under "-- Certain Covenants--Limitation on Subsidiary Assets and Indebtedness." "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligations or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings correlative to the foregoing). "Indebtedness" means with respect to any Person, without duplication, (i) all liabilities, contingent or otherwise, of such Person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) Incurred by such Person in the ordinary course of business of such Person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the Incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such Person; (iii) reimbursement obligations of such Person with respect to letters of credit; (iv) obligations of such Person with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such Person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such Person are subject, 77 whether or not the obligations secured thereby shall have been assumed by such Person or shall otherwise be such Person's legal liability (provided that if the obligations so secured have not been assumed by such Person or are not otherwise such Person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such Person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such Person, which determination shall be evidenced by a Board Resolution. "Independent Financial Advisor" means a reputable accounting, appraisal or nationally recognized investment banking or consulting firm that is, in the reasonable judgment of the Board of Directors of the Company, qualified to perform the tasks for which such firm has been engaged and independent with respect to the Company and its Affiliates. "Interest Swap Obligation" means any obligation of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or floating rate of interest on the same notional amount; provided that the term "Interest Swap Obligation" shall also include interest rate exchange, collar, cap, swap option or similar agreements providing interest rate protection. "Investment" by any Person in any other Person means any investment by such Person in such other Person, whether by share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances or to permit the purchase of Qualified Capital Stock of the Company and other similar customary expenses incurred, in each case in the ordinary course of business consistent with past practice) or similar credit extension constituting Indebtedness of such other Person, and any guarantee of Indebtedness of any other Person. In addition, for purposes of the covenant described under "-- Limitation on Restricted Payments" above, (i) an "Investment" shall be deemed to have been made at the time any Restricted Subsidiary is designated as an Unrestricted Subsidiary in an amount (proportionate to the Company's equity interest in such Subsidiary) equal to the net worth of such Restricted Subsidiary at the time that such Restricted Subsidiary is designated as an Unrestricted Subsidiary; and (ii) at any date the aggregate of all Restricted Payments made as Investments since the Issue Date shall exclude and be reduced by an amount (proportionate to the Company's equity interest in such Subsidiary) equal to the net worth of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary (in each case "net worth" to be calculated based upon the fair market value of the assets and liabilities of such Subsidiary as of any such date of designation, as determined by the Company's Board of Directors). "Issue Date" means the date of original issuance of the Notes under the Indenture. "Letter of Credit Obligations" means Indebtedness of the Company or any of the Subsidiaries with respect to letters of credit issued pursuant to the Credit Agreement, and for purposes of determining the aggregate amount of Indebtedness at any time, shall be deemed to consist of (a) the aggregate maximum amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "Lien" means, with respect to any asset or property, any mortgage, pledge, lien, encumbrance, charge or security interest of any kind in respect of such asset or property, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the 78 nature thereof, any option or other agreement to sell or give a security interest, and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction); provided, however, that in no event shall an operating lease be deemed to constitute a Lien. "Management Services Agreement" means that certain Management Services Agreement dated as of the Issue Date, between Smith's and Yucaipa (as such Management Services Agreement may be amended or replaced, so long as such amendment or replacement has been approved by a majority of the Independent Directors (as defined in the Standstill Agreement) and is not disadvantageous to the Holders in any material respect). "Maturity Date" means May 15, 2007. "Net Cash Proceeds" means Net Proceeds received in the form of cash or Cash Equivalents. "Net Proceeds" means (a) in the case of any Asset Sale or any issuance and sale by any Person of Qualified Capital Stock, the aggregate net proceeds received by such Person after payment of expenses, taxes, commissions and the like incurred in connection therewith (and, in the case of any Asset Sale, net of the amount of cash applied to repay Indebtedness secured by the asset involved in such Asset Sale), whether such proceeds are in cash or in property (valued at the fair market value thereof at the time of receipt as determined with respect to any Asset Sale resulting in Net Proceeds in excess of $10 million in good faith by the Board of Directors of such Person, which determination shall be evidenced by a Board Resolution) and (b) in the case of any conversion or exchange of any outstanding Indebtedness or Disqualified Capital Stock of such Person for or into shares of Qualified Capital Stock of the Company, the sum of (i) the fair market value of the proceeds received by the Company in connection with the issuance of such Indebtedness or Disqualified Capital Stock on the date of such issuance and (ii) any additional amount paid by the holder thereof to the Company upon such conversion or exchange. "Obligations" means all obligations of every nature whether for principal, reimbursements, interest, fees, expenses, indemnities or otherwise, and whether primary, secondary, direct, indirect, contingent, fixed or otherwise (including obligations of performance) under the documentation governing any Indebtedness. "Operating Coverage Ratio" means the ratio of (1) EBITDA for the period (the "Pro Forma Period") consisting of the most recent four full fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Operating Coverage Ratio (the "Transaction Date") to (2) the Consolidated Interest Expense for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter (the "Forward Period") reasonably anticipated by the Board of Directors of the Company to become due from time to time during such period. For purposes of this definition, if the Transaction Date occurs prior to the first anniversary of the Transactions, "EBITDA" for the Pro Forma Period shall be calculated after giving effect on a pro forma basis to the Transactions and the California Disposition as if they had occurred on the first day of the Pro Forma Period. In addition to, but without duplication of, the foregoing, for purposes of this definition, "EBITDA" shall be calculated after giving effect (without duplication), on a pro forma basis for the Pro Forma Period (but no longer), to (a) any Investment, during the period commencing on the first day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other Person that, as a result of such Investment, becomes a Restricted Subsidiary, (b) the acquisition, during the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, which acquisition is not prohibited by the Indenture, and (c) any sales or other dispositions of any Restricted Subsidiary or any line of business (or geographical area thereof) of the Company or any Restricted Subsidiary occurring during the Reference Period, in each case as if such incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, "Consolidated Interest Expense" shall be calculated after giving effect (without duplication), on a pro forma basis for the Forward Period, to any Indebtedness Incurred or repaid on or after the first day of the Forward Period and prior to the Transaction Date. If the Company or any Restricted Subsidiary directly or indirectly guarantees any Indebtedness of a third Person, 79 the Operating Coverage Ratio shall give effect to the Incurrence of such Indebtedness as if the Company or such Restricted Subsidiary had directly Incurred such guaranteed Indebtedness. "operating lease" means any lease the obligations under which do not constitute Capitalized Lease Obligations. "Pari Passu Indebtedness" means the Notes and any Indebtedness of the Company which ranks pari passu in right of payment to the Notes. "Payment Restriction" means, with respect to a subsidiary of any Person, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) such subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to such Person or any other subsidiary of such Person, (b) make loans or advances to such Person or any other subsidiary of such Person or (c) transfer any of its properties or assets to such Person or any other subsidiary of such Person, or (ii) such Person or any other subsidiary of such Person to receive or retain any such (a) dividends, distributions or payments, (b) loans or advances or (c) transfer of properties or assets. "Permitted Holder" means (i) Yucaipa, or any entity controlled thereby or any of the partners thereof, (ii) Jeffrey P. Smith, Richard D. Smith, Fred L. Smith, Ida Smith, the Dee Glen Smith Marital Trust I, Trust for the Children of Jeffrey Paul Smith, Trust for the Children of Richard Dee Smith, and Trust for the Children of Fred Lorenzo Smith, (iii) an employee benefit plan of the Company, or any of its subsidiaries or any participant therein, (iv) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or (v) any Permitted Transferee of any of the foregoing Persons. "Permitted Indebtedness" means: a. Indebtedness of the Company and the Restricted Subsidiaries (and the Company and each Restricted Subsidiary (to the extent it is not the primary obligor thereof) may guarantee such Indebtedness) (i) under the Credit Agreement (including the Letter of Credit Obligations) in an aggregate principal amount at any time outstanding not to exceed $1,025.0 million, less all principal repayments of Term Loans and all permanent commitment reductions under the revolving credit facility, in each case, pursuant to and in accordance with the covenant described under "--Certain Covenants-- Limitation on Asset Sales" above or (ii) Incurred under the Credit Agreement pursuant to and in compliance with (x) clause (n) of this definition and (y) the proviso in the covenant described under the caption "--Limitation on Incurrence of Additional Indebtedness" above; b. Indebtedness of a Restricted Subsidiary owed to and held by the Company or a Restricted Subsidiary; or Indebtedness of the Company owed to and held by a Restricted Subsidiary; c. Indebtedness Incurred by the Company or any Restricted Subsidiary in connection with the purchase or improvement of property (real or personal) or equipment or other capital expenditures in the ordinary course of business (including for the purchase of assets or stock of any retail grocery store or business) or consisting of Capitalized Lease Obligations, provided that (i) at the time of the Incurrence thereof, such Indebtedness, together with any other Indebtedness Incurred during the most recently completed four fiscal quarter period in reliance upon this clause (c) does not exceed, in the aggregate, 3% of net sales of the Company and the Restricted Subsidiaries during the most recently completed four fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of Incurrence is prior to the end of the fourth fiscal quarter following the Issue Date) and (ii) such Indebtedness, together with all then outstanding Indebtedness Incurred in reliance upon this clause (c) does not exceed, in the aggregate, 3% of the aggregate net sales of the Company and the Restricted Subsidiaries during the most recently completed twelve fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of Incurrence is prior to the end of the twelfth fiscal quarter following the Issue Date); 80 d. Indebtedness Incurred by the Company or any Restricted Subsidiary in connection with expenditures in an aggregate principal amount not to exceed $25.0 million; provided that such expenditures relate solely to the integration of the operations of Smith's, Smitty's and their respective subsidiaries as described in this Prospectus; e. Indebtedness of the Company Incurred under Foreign Exchange Agreements and Interest Swap Obligations entered into with respect to Indebtedness otherwise permitted to be Incurred under the covenant described under "-- Certain Covenants--Limitation on Incurrences of Additional Indebtedness" above, including this definition of "Permitted Indebtedness" (other than this clause (e)), in a notional amount not exceeding the aggregate principal amount of such Indebtedness; f. guarantees Incurred in the ordinary course of business by the Company or a Restricted Subsidiary of Indebtedness of any other Person in aggregate not to exceed $20.0 million at any time outstanding; g. Refinancing Indebtedness; h. Indebtedness of the Company or any Restricted Subsidiary for letters of credit relating to workers' compensation claims and self-insurance or similar requirements in the ordinary course of business; i. Existing Indebtedness; j. Indebtedness arising from guarantees of Indebtedness of the Company or any Restricted Subsidiary or other agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred in connection with the disposition of any business, assets or Restricted Subsidiary, other than guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition; provided that the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and the Restricted Subsidiary in connection with such disposition; k. obligations in respect of performance bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; l. guarantees by the Company or a Restricted Subsidiary of Indebtedness Incurred by the Company or a Restricted Subsidiary so long as the Incurrence of such Indebtedness by the Company or any such Restricted Subsidiary is otherwise permitted by the terms of the Indenture; m. Indebtedness Incurred by the Company in connection with the transfer to the Company or a third party of the California assets leased by the Company from certain trusts and securing such trusts' obligations to the Smith's Food & Drug Centers Inc. 1994-A Pass Through Trusts (the "Related Assets"); provided, however, that (i) if the Related Assets are transferred to the Company, the Company shall consummate an Asset Sale with respect to such Related Assets within 90 days after the Incurrence of such Indebtedness and shall apply the Net Proceeds of such Asset Sale to permanently reduce Pari Passu Indebtedness, Indebtedness of any Restricted Subsidiary or Senior Indebtedness, and (ii) if the Related Assets are transferred to any Person other than the Company or any Subsidiary, the Company shall, within 90 days after the Incurrence of such Indebtedness, apply any proceeds received from the owner trust in respect of such transfer of the Related Assets to permanently reduce Pari Passu Indebtedness, Indebtedness of any Restricted Subsidiary or Senior Indebtedness; provided, further, however, that up to $5.0 million in aggregate amount of Net Proceeds under clause (i) or proceeds under clause (ii) may be applied to repay outstanding borrowings under the revolving credit facility pursuant to the Credit Agreement without a corresponding reduction in commitments; and n. additional Indebtedness of the Company or any Restricted Subsidiary (together with the Indebtedness Incurred pursuant to clause (a)(ii) above) in an aggregate amount not to exceed $140.0 million at any time outstanding. 81 "Permitted Investment" by any Person means (i) any Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale made pursuant to the provisions of the covenant described under "--Certain Covenants--Limitation on Asset Sales" above or any other disposition of assets not constituting an Asset Sale by reason of the exceptions contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with the second paragraph of the covenant described under "--Certain Covenants-- Limitation on Transactions with Affiliates," (vi) Investments in the Company or the wholly owned Restricted Subsidiaries and (vii) additional Investments in an aggregate amount not exceeding $15.0 million. "Permitted Liens" shall mean (i) Liens for taxes, assessments and governmental charges or claims not yet due or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other like Liens arising in the ordinary course of business, deposits made to obtain the release of such Liens, and with respect to amounts not yet delinquent for a period of more than 60 days or being contested in good faith by an appropriate process of law, and for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (iii) Liens incurred or pledges or deposits made in the ordinary course of business to secure obligations under workers' compensation, unemployment insurance and other types of social security or similar legislation; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, zoning or other restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of the Restricted Subsidiaries incurred in the ordinary course of business; (vi) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods in the ordinary course of business; (vii) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of nondelinquent customs duties in connection with the importation of goods; (ix) judgment and attachment Liens not giving rise to a Default or Event of Default; (x) leases or subleases granted to others not interfering in any material respect with the business of the Company or any Restricted Subsidiary; (xi) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business that are within the general parameters customary in the industry, in each case securing Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements and forward contracts, option futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any Restricted Subsidiary from fluctuations in the price of commodities; (xii) Liens encumbering deposits made in the ordinary course of business to secure nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or the Restricted Subsidiaries for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (xiii) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any Restricted Subsidiary in the ordinary course of business in accordance with past practices; (xiv) any interest or title of a lessor in the property subject to any lease, whether characterized as capitalized or operating other than any such interest or title resulting from or arising out of a default by the Company or any Restricted Subsidiary of its obligations under such lease; (xv) Liens arising from filing UCC financing statements for precautionary purposes in connection with true leases of personal property that are otherwise permitted under the applicable Indenture and under which the Company or any Restricted Subsidiary is lessee; (xvi) Liens in favor of the Trustee and any substantially equivalent Lien granted to any trustee or similar institution under any indenture governing Indebtedness permitted to be Incurred or outstanding under the Indenture; and (xvii) Liens securing Indebtedness permitted to be Incurred pursuant to clause (m) of the definition of Permitted Indebtedness above, provided that such Liens extend only to the Related Assets (as defined in such clause (m)). 82 "Permitted Payments" means (i) the consummation of the Transactions as described herein; (ii) payments by the Company to effect the mandatory redemption of its Series I Preferred Stock; provided, however, that such payments shall not be made on any date earlier, or in any amount greater, than the dates and amounts provided for in the Company's Certificate of Incorporation as in effect on the Issue Date; (iii) any payment by the Company or any Subsidiary to Yucaipa or the principals or any Affiliates thereof for consulting, management, investment banking or similar services, or for reimbursement of costs and expenses (x) pursuant to the Management Services Agreement or (y) as approved by a majority of the Independent Directors (as defined in the Standstill Agreement); (iv) any payment to pay for the purchase, retirement or other acquisition for value of any Capital Stock of the Company held by any future, present or former employee or director of the Company or any Subsidiary pursuant to any management equity plan or stock option plan or any other agreement, provided that the aggregate amount of Restricted Payments made under this clause does not exceed $5 million in any fiscal year (provided that any unused amounts may be carried over to any subsequent fiscal year subject to a maximum amount of $10 million in any fiscal year); (v) pro rata dividends paid by any Restricted Subsidiary that is not wholly owned by the Company or another wholly owned Restricted Subsidiary; (vi) Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed $10.0 million; and (vii) other Restricted Payments in an aggregate amount not to exceed $25.0 million. "Permitted Subordinated Reorganization Securities" means securities of the Company issued in a plan of reorganization in a case under Bankruptcy Law relating to the Company which constitutes either (y) Capital Stock (other than Disqualified Capital Stock with the reference to "Maturity Date" in the definition of such term modified to relate to the final stated maturity of any debt securities issued in such plan of reorganization to the holders of Designated Senior Indebtedness ("Senior Reorganization Securities")) or (z) debt securities of the Company which are (i) unsecured, (ii) have no scheduled mandatory amortization thereon prior to the final stated maturity of the Senior Reorganization Securities and (iii) are subordinated in right of payment to the Senior Reorganization Securities to at least the same extent as the Notes are subordinated to Designated Senior Indebtedness. "Permitted Transferees" means, with respect to any Person, (i) any Affiliate of such Person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such Person, (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such Person or his or her parents, spouse or lineal descendants, in each case to whom such Person has transferred the beneficial ownership of any securities of the Company, (iv) any investment account whose investment managers and investment advisors consist solely of such Person and/or Permitted Transferees of such Person and (v) any investment fund or investment entity that is a subsidiary of such Person or a Permitted Transferee of such Person. "Person" means any individual, corporation, limited or general partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially 83 all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Preferred Stock" means, with respect to any Person, Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms of the Indentures, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as interpreted by the Company's chief financial officer or Board of Directors in consultation with its independent certified public accountants. "Public Equity Offering" means an underwritten public offering of Common Stock of the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act. "Qualified Capital Stock" means, with respect to any Person, any Capital Stock of such Person that is not Disqualified Capital Stock. "Refinancing Indebtedness" means, with respect to any Person, Indebtedness of such Person issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of such Person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness Incurred pursuant to clauses (c), (d), (g), (i) and (m) of the definition thereof) Incurred in accordance with the applicable Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such Person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date and (y) shall contain subordination and default provisions no less favorable in any material respect to Holders than those contained in such repaid or amended Subordinated Indebtedness. "Related Business Investment" means (i) any Investment by a Person in any other Person a majority of whose revenues are derived from the operation of one or more retail grocery stores or supermarkets or any other line of business engaged in by the Company or any of the Subsidiaries as of the Issue Date; (ii) any Investment by such Person in any cooperative or other supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of the Company and the Restricted Subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment, in each case reasonably related to the business of the Company and the Restricted Subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change. "Restricted Payment" means (i) any Stock Payment or (ii) any Investment (other than a Permitted Investment). 84 "Restricted Subsidiary" means any Subsidiary that, as of the date of determination, is not an Unrestricted Subsidiary. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Senior Indebtedness" means the principal of, premium, if any, and interest on, and all other Obligations with respect to, any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter Incurred, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Without limiting the generality of the foregoing, "Senior Indebtedness" shall include (x) the principal of, premium, if any, and interest on all obligations of every nature of the Company from time to time owed to the lenders under the Credit Agreement, including, without limitation, the Letter of Credit Obligations and principal of and interest on, all fees and expenses payable under the Credit Agreement, and (y) interest accruing thereon subsequent to the occurrence of any Event of Default specified in clause (vi) or (vii) under "-- Events of Default" relating to the Company, whether or not the claim for such interest is allowed under any applicable Bankruptcy Law. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a) Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly subordinate or junior in right of payment to any Indebtedness of the Company, (c) Indebtedness which, when Incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company (other than Capitalized Lease Obligations), (d) Indebtedness which is represented by Disqualified Capital Stock, (e) obligations for goods, materials or services purchased in the ordinary course of business or obligations consisting of trade payables, (f) Indebtedness of or amounts owed by the Company for compensation to employees or for services rendered to the Company, (g) any liability for federal, state, local or other taxes owed or owing by the Company, (h) Indebtedness of the Company to a Subsidiary of the Company, and (i) that portion of any Indebtedness which is Incurred by the Company in violation of the Indenture. "Significant Stockholder" means, with respect to any Person, any other Person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such Person that are entitled to vote on a regular basis for the election of directors of such Person. "Significant Subsidiary" means each Restricted Subsidiary that is either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the Securities Act and the Exchange Act (as such regulation is in effect on the Issue Date) or (b) material to the financial condition or results of operations of the Company and the Restricted Subsidiaries taken as a whole. "Standstill Agreement" means the Standstill Agreement dated as of January 29, 1996 among the Company, Yucaipa and each of the limited partnerships that owns shares in Smitty's for which Yucaipa acts as the general partner (as such Standstill Agreement may be amended or replaced, so long as such amendment or replacement has been approved by a majority of the Independent Directors (as defined in the Standstill Agreement as in effect prior to such amendment or replacement) and is not disadvantageous to the Holders in any material respect). "Stock Payment" means, with respect to any Person, (a) the declaration or payment by such Person, either in cash or in property, of any dividend on (except, in the case of the Company, dividends payable solely in Qualified Capital Stock of the Company), or the making by such Person or any of its subsidiaries of any other distribution in respect of, such Person's Qualified Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such Person), or (b) the redemption, repurchase, retirement or other acquisition for value by such Person or any of its subsidiaries, directly or indirectly, of such Person's Qualified Capital Stock (and, in the case of a Subsidiary, Qualified Capital Stock of the Company) or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such Person), other than, in the case of the Company, through the issuance in exchange therefor solely of Qualified Capital Stock of the 85 Company; provided, however, that in the case of a Restricted Subsidiary, the term "Stock Payment" shall not include any such payment with respect to its Capital Stock or warrants, rights or options to purchase or acquire shares of any class of its Capital Stock that are owned solely by the Company or a wholly owned Restricted Subsidiary. "Subordinated Indebtedness" means Indebtedness of the Company which is subordinated in right of payment to the Notes. "subsidiary" of any Person means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly, owned by such Person, by one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person or (ii) a partnership in which such Person or a subsidiary of such Person is, at the date of determination, a general partner of such partnership, but only if such Person or its subsidiary is entitled to receive more than fifty percent of the assets of such partnership upon its dissolution, or (iii) any other Person (other than a corporation or a partnership) in which such Person, a subsidiary of such Person or such Person and one or more subsidiaries of such Person, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such Person. "Subsidiary" means any subsidiary of the Company. "Term Loans" means the term loan facility under the Credit Agreement and any agreement governing Indebtedness Incurred to refund, replace or refinance any borrowings outstanding under such facility or under any prior refunding, replacement or refinancing thereof (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). "Unrestricted Subsidiary" means any Subsidiary (including its subsidiaries) so designated by a Board Resolution adopted by the Board of Directors of the Company in accordance with "--Certain Covenants--Limitation on Restricted and Unrestricted Subsidiaries" above. Notwithstanding the foregoing, an Unrestricted Subsidiary shall be deemed to be redesignated a Restricted Subsidiary at any time if (a) the Company or any other Restricted Subsidiary (i) provides credit support for, or a guarantee of, any Indebtedness of such Unrestricted Subsidiary or any of its subsidiaries (including any undertaking, agreement or instrument evidencing such Indebtedness) or (ii) is directly or indirectly liable for any Indebtedness of such Unrestricted Subsidiary or any of its subsidiaries, (b) a default with respect to any Indebtedness of such Unrestricted Subsidiary or any of its subsidiaries (including any right which the holders thereof may have to take enforcement action against any of them) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity or (c) such Unrestricted Subsidiary or any of its subsidiaries Incurs Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any Restricted Subsidiary. "Yucaipa" means The Yucaipa Companies, a California general partnership, or any successor thereto which is an affiliate of Ronald W. Burkle or his Permitted Transferees. 86 DESCRIPTION OF CAPITAL STOCK GENERAL Upon filing of the Amended and Restated Certificate of Incorporation, the Company's authorized capital stock will consist of (i) 20,000,000 shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), (ii) 100,000,000 shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), (iii) 20,000,000 shares of Class C Common Stock, par value $.01 (the "Class C Common Stock"), and (iv) 85,000,000 shares of Preferred Stock, par value $.01 per share, of which 34,524,579 shares are designated as Series I Preferred Stock. As of April 15, 1996, there were 11,366,532 shares of Class A Common Stock outstanding, 13,705,191 shares of Class B Common Stock outstanding and 12,956,747 shares of Series I Preferred Stock outstanding. COMMON STOCK All holders of shares of Class A Common Stock, Class B Common Stock and Class C Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company's Board of Directors in its discretion from funds legally available therefor, and upon liquidation or dissolution are entitled to receive all assets available for distribution to the holders of Common Stock. Under the Delaware Corporation Law, the Company may declare and pay dividends only out of its surplus, or out of its net profits for the fiscal year in which the dividend is declared or the preceding year. Under certain of the Company's credit agreements, the Company's ability to pay dividends is restricted based on various measures, including the Company's net income for designated period. All of the outstanding shares of Common Stock are legally issued, fully paid and nonassessable. Holders of Common Stock have no preemptive or other rights to subscribe for additional shares which the Company may issue and there are no redemption provisions or sinking fund provisions applicable to any class of Common Stock, nor is the Common Stock subject to calls or assessments by the Company. The voting powers, preferences and relative rights of Class A Common Stock and Class B Common Stock are identical in all respects, except the holders of Class A Common Stock are entitled to ten votes per share and the holders of Class B Common Stock are entitled to one vote per share on all matters submitted to the vote of stockholders for their vote or approval, including the election of directors. The holders of Class C Common Stock will not be entitled to vote on matters submitted to the vote of Company stockholders. However, if shares of Class C Common Stock are transferred to a holder other than an Original Class C Holder (as defined in the Amended and Restated Certificate of Incorporation), such transferred shares of Class C Common Stock will be convertible, at the option of the holder, into shares of voting Class B Common Stock. There is no provision made for cumulative voting, and no class of outstanding Common Stock or Preferred Stock alone is entitled to elect any directors. The holders of Class A Common Stock and the holders of Series I Preferred Stock, voting together have, and after consummation of the Transactions will continue to have, effective control of the Company through holding approximately 94% of the combined voting power of the outstanding capital stock and will have the ability to elect all the directors of the Company and to effect or prevent certain corporate transactions which require majority approval of the combined classes, including mergers and other business combinations. Under the Company's bylaws, directors may be removed with or without cause by the holders of a majority of the votes entitled to be cast for the election of directors. However, under Delaware law, stockholders in a company with a staggered board (such as Smith's) may only remove directors for cause, unless the certificate of incorporation provides otherwise. A vacancy on the Board created by the removal or resignation of a director or by expansion of the authorized number of directors may be filled by the remaining directors then in office or by the stockholders at a special meeting. Under the Delaware General Corporation Law, the holders of Class A Common Stock, Class B Common Stock and Class C Common Stock are entitled to vote as separate classes on any amendment to the Company's Amended and Restated Certificate of Incorporation that would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. 87 Each share of Class A Common Stock is convertible at any time at the option of the holder into Class B Common Stock on a share-for-share basis. The Company's Certificate of Incorporation also provides that each share of Class A Common Stock will be converted automatically into one share of Class B Common Stock if, at any time, the number of shares of Class A Common Stock issued and outstanding shall be less than 2,910,885. The Class B Common Stock has no conversion rights. Shares of Class A Common Stock may not be sold, gifted, or transferred except to and among the Company, a spouse, child, grandchild, sibling or parent of the person to whom the Class A Common Stock was issued originally (a "Permitted Transferee"), and certain entities controlled or owned by one or more Permitted Transferees. The Company's Certificate of Incorporation provides that any holder of shares of Class A Common Stock desiring to transfer such shares to a person other than a Permitted Transferee or such transferee must present such shares to the Company for conversion into an equal number of shares of Class B Common Stock upon such transfer. Thereafter, such shares of Class B Common Stock may be freely transferred to persons other than Permitted Transferees. SERIES I PREFERRED STOCK Except as described below, each share of Series I Preferred Stock is entitled to ten votes per share on all matters submitted to the vote of the stockholders, including the election of directors, for their vote or approval. Except as described below, holders of Series I Preferred Stock vote together with the holders of Common Stock, including the election of directors. The affirmative vote of the holders of a majority of the Series I Preferred Stock, voting as a class, is required upon any amendment to the Company's Certificate of Incorporation adversely affecting in any manner the rights of such holders. Under the Company's Certificate of Incorporation, upon liquidation of the Company, each share of Series I Preferred Stock is entitled to a liquidation preference of $.33 1/3, on a pro-rata basis with any other series of Preferred Stock ranking on parity with the Series I Preferred Stock, before any distribution to the holders of any class of Common Stock. All shares of Series I Preferred Stock are subject to redemption at any time upon 60 days' notice at the option of the Board of Directors, in such numbers as the Board may determine, at a redemption price of $.33 1/3 per share (the "Redemption Price"). In addition, on December 1 of each year commencing in 1989, one-eleventh of the total authorized number of shares of Series I Preferred Stock is subject to mandatory redemption at the Redemption Price. The Series I Preferred Stock has no dividend requirement. If approved by a majority of the outstanding shares of Series I Preferred Stock, the Amended and Restated Certificate of Incorporation will include certain provisions with respect to the Series I Preferred Stock which: (i) eliminate for a five-year period the annual mandatory redemption of original outstanding shares of Series I Preferred Stock (with mandatory redemptions of one-eleventh of the outstanding shares of Series I Preferred Stock resuming thereafter), and (ii) restrict for two-year period the optional redemption of shares of Series I Preferred Stock, and (iii) the addition of transfer or sale restrictions which reduce the number of allocated votes per share of Series I Preferred Stock from ten votes to one vote per share in the event of transfers or sales not made to certain affiliated or other designated transferees. UNDESIGNATED PREFERRED STOCK Additional Preferred Stock may be issued from time to time in one or more series and the Board of Directors, without further approval of the stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking funds and any other rights, preferences, privileges and restrictions applicable to each such series of Preferred Stock. However, under the Company's Amended and Restated Certificate of Incorporation, no series of Preferred Stock may have rights or preferences superior to the Series I Preferred Stock, and no share of Preferred Stock other than shares designated as Series I Preferred Stock may be entitled to more than one vote upon any matter presented to the Company's stockholders for vote or approval, including the election of directors. 88 DESCRIPTION OF NEW CREDIT FACILITY In connection with the Transactions, Smith's will enter into the New Credit Facility with a syndicate of financial institutions for whom Bankers Trust will act as administrative agent. Smith's has accepted a commitment letter (the "Commitment Letter") from Bankers Trust and Chase Manhattan pursuant to which Bankers Trust and Chase Manhattan, as Arrangers (the "Arrangers"), have agreed, subject to certain conditions, to provide the Company $995 million of financing under the New Credit Facility. The following is a summary of the anticipated material terms and conditions of the New Credit Facility. This summary does not purport to be a complete description of the New Credit Facility and is subject to the detailed provisions of the loan agreement (the "Loan Agreement") and various related documents to be entered into in connection with the New Credit Facility. GENERAL The New Credit Facility will provide for (i) term loans in the aggregate amount of $805 million, comprised of the $325 million Tranche A Loans, the $160 million Tranche B Loans, the $160 million Tranche C Loans and the $160 million Tranche D Loans; and (ii) the $190 million New Revolving Facility under which working capital loans may be made and commercial or standby letters of credit in the maximum aggregate amount to be agreed upon among the Company and the Arrangers, under which approximately $28 million of letters of credit are expected to be issued upon consummation of the Transactions. Proceeds of the New Term Loans and loans under the Revolving Credit Facility on the Closing, together with proceeds from the Offering and the California Divestiture will be used to fund the cash requirements for the Tender Offer and the Smitty's Refinancing, refinance certain other existing indebtedness of Smith's, redeem a portion of Smith's Series I Preferred Stock, redeem Smith's management options and pay various refinancing premiums fees, expenses and other costs associated with the Transactions. The New Revolving Facility will be available to provide for the working capital requirements and general corporate purposes of the Company and to issue commercial and standby letters of credit. INTEREST RATE; FEES Borrowings under (i) the New Revolving Facility and the Tranche A Loans will bear interest at a rate equal to the Base Rate (as defined in the Loan Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loans will bear interest at the Base Rate plus 2.00% per annum or the reserve adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loans will bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loans will bear interest at the Base Rate plus 2.75% per annum or the reserve adjusted Euro- Dollar Rate plus 4.00% per annum, in each case as selected by the Company. Applicable interest rates on Tranche A Loans and the New Revolving Facility and the fees payable under the New Revolving Facility on letters of credit, will be reduced in increments of 0.25% per annum, up to an aggregate of 0.50% per annum, after the New Term Loans have been reduced by such amounts and if the Company meets certain financial tests to be agreed upon among the Company and the Arrangers. Up to $30 million of the New Revolving Facility will be available as a swingline facility and loans outstanding under the swingline facility shall bear interest at the Base Rate plus 1.00% per annum (subject to adjustment as described in the preceding sentence). After the occurrence of a default under the New Credit Facility, interest will accrue at the rate equal to the rate on loans bearing interest at the rate determined by reference to the Base Rate plus an additional 2.00% per annum. The Company will pay the issuing bank a fee of 0.25% per annum on each standby letter of credit and each commercial letter of credit and will pay the lenders under the New Credit Facility a fee equal to the margin on Eurodollar Rate loans under the Revolving Credit Facility (the "Eurodollar Margin") for standby letters of credit and a fee equal to the Eurodollar Margin minus 1.00% per annum for commercial letters of credit. Each of these fees will be calculated based on the amount available to be drawn under a letter of credit. In addition, the Company will pay a commitment fee of 0.50% per annum on the unused portions of the New Revolving Facility and for purposes of calculating this fee, loans under the swingline facility shall not be deemed 89 to be outstanding. The New Credit Facility will require the Company to enter into hedging agreements to limit its exposure to increases in interest rates for a period of not less than two years after the Closing. The New Credit Facility may be prepaid in whole or in part without premium or penalty. AMORTIZATION; PREPAYMENTS The Tranche A Loans will mature six and one-quarter years after the Closing and will be subject to amortization, commencing on the nine month anniversary of the Closing in the amount of $7.5 million, and thereafter commencing on the first anniversary of the Closing on a quarterly basis in aggregate annual amounts of $45 million in the second year, $55 million in the third year, $65 million in the fourth year, $65 million in the fifth year, $60 million in the sixth year, and $13.75 million on the sixth anniversary of the Closing and in the first quarter of the seventh year. The Tranche B Loan will mature seven and one-half years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.6 million for the first six years and in the seventh year payable in installments of $4.0 million in the first quarter and $18 million in each of the last three quarters and in the eighth year payable in installments of $22.7 million in the first quarter and $69.7 million in the second quarter. The Tranche C Loans will mature eight and one-half years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.6 million for the first seven years and in the eighth year payable in installments of $0.4 million in each of the first two quarters and $25 million in each of the last two quarters and in the ninth year payable in installments of $25 million in the first quarter and $73 million in the second quarter. The Tranche D Loans will mature nine and one-quarter years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of$1.6 million for the first eight years and in the ninth year payable in installments of $0.4 million in each of the first two quarters, $29 million in the third quarter and $32 million in the last quarter and in the tenth year in an installment of $85.4 million in the first quarter. The New Revolving Facility will mature on the same date as the Tranche A Loans. The Company will be required to reduce loans outstanding under the New Revolving Facility to $85 million for a period of not less than 30 consecutive days during the first 12- month period following the Closing and to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period thereafter. The Company will be required to make certain prepayments, subject to certain exceptions, on the New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in the Loan Agreement) and with the proceeds from certain asset sales, issuances of debt and equity securities and any pension plan reversion. Such prepayments will be allocated pro rata between the Tranche A Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans and to scheduled amortization payments of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche D Loans pro rata, provided that at the election of the Company mandatory prepayments of Tranche A Loans made with Excess Land Proceeds (as defined in the Loan Agreement) may be applied to the Tranche A Loans in forward order of maturity up to $50 million. At the option of the Company, mandatory prepayments on the Tranche B Loans, the Tranche C Loans and the Tranche D Loans will be used to make an offer to repay such Loans and to the extent not accepted by the holders of such loans (x) in the event such mandatory prepayments are to be made from Excess Land Proceeds, such mandatory prepayments not so accepted will be applied to the prepayment of the Tranche A Loans and (y) in the event of all other mandatory prepayments, 50% of such amount will be applied to reduce Tranche A Loans on a pro rata basis and the remaining 50% may be retained by the Company. GUARANTEES AND COLLATERAL All subsidiaries of the Company will guarantee the Company's obligations under the New Credit Facility. The Company's obligations and the guarantees of its subsidiaries will be secured by a first priority lien on all existing and after-acquired personal property of the Company and its subsidiaries, including a pledge of the stock of all subsidiaries of the Company and by first priority liens on all unencumbered real property fee interests of the Company and its subsidiaries and the Company and its subsidiaries will use their reasonable economic efforts to provide the lenders with a first priority lien on all unencumbered leasehold interests of the Company and its subsidiaries. 90 COVENANTS The obligation of the lenders under the New Credit Facility to advance funds is subject to the satisfaction of certain conditions customary in agreements of this type. In addition, the Company will be subject to certain customary affirmative and negative covenants contained in the New Credit Facility, including, without limitation, covenants that restrict, subject to specified exceptions, (i) the incurrence of additional indebtedness and other obligations, (ii) mergers and acquisitions, (iii) asset sales, (iv) the granting of liens, (v) prepayment or repurchase of other indebtedness, (vi) engaging in transactions with affiliates, (vii) capital expenditures, (vii) the making of investments, (ix) dividends and other payments with respect to equity interests, or (x) rental payments. Certain of these covenants may be more restrictive than those in favor of holders of the Notes as described herein and as set forth in the Indenture. In addition, the New Credit Facility will require that the Company maintain certain specified financial covenants, including a minimum fixed charge coverage, a minimum EBITDA, a maximum ratio of total debt to EBITDA and a minimum net worth. EVENTS OF DEFAULT The New Credit Facility also provides for customary events of default, including a change of control (which may be defined differently than in the Indenture). The occurrence of any of such events of default could result in acceleration of the Company's obligations under the New Credit Facility and foreclosure on the collateral securing such obligations, which could have material adverse results to holders of the Notes. 91 UNDERWRITING Subject to the terms and conditions of the underwriting agreement (the "Underwriting Agreement") among Smith's and BT Securities Corporation ("BT Securities"), CS First Boston Corporation ("CS First Boston"), Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Goldman, Sachs & Co. ("Goldman Sachs") and Chase Securities Inc. ("Chase") (collectively, the "Underwriters"), the Underwriters have agreed to purchase, and the Company has agreed to sell to the Underwriters, the entire principal amount of the Notes offered hereby. The Underwriting Agreement provides that the obligation of the Underwriters to pay for and accept delivery of the Notes is subject to the approval of certain legal matters by counsel and to various other conditions. The nature of each Underwriter's obligation is such that each is severally committed to purchase the aggregate principal amount of Notes set forth opposite its name if it purchases any.
PRINCIPAL AMOUNT UNDERWRITERS OF NOTES ------------ ---------------- BT Securities Corporation.................................. $ CS First Boston Corporation................................ Donaldson, Lufkin & Jenrette Securities Corporation.................................... Goldman, Sachs & Co. ...................................... Chase Securities Inc. ..................................... ------------ Total.................................................. $575,000,000 ============
The Underwriters propose to offer the Notes directly to the public at the public offering price set forth on the cover page hereof, and to certain dealers at such price less a concession not in excess of $ per $1,000 principal amount of the Notes. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per $1,000 principal amount of the Notes. After the initial public offering of the Notes, the public offering prices and other selling terms may be changed. The Company does not intend to apply for listing of the Notes on a national securities exchange, but has been advised by each of the Underwriters that it presently intends to make a market in the Notes, as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the Notes, and any such market making may be discontinued at any time by one or all of the Underwriters at the sole discretion of such Underwriters. There can be no assurance that an active public market for the Notes will develop. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. BT Securities and CS First Boston have been engaged by Smitty's to act as dealer managers and consent solicitation agents in connection with the Smitty's Refinancing. BT Securities and CS First Boston will receive customary fees in connection with such services. Chase Manhattan, an affiliate of Chase, has been the administrative agent and a lender under SSV's existing credit facilities. Proceeds of the Offering will be used, in part, to repay indebtedness to Chase Manhattan and the other lenders under such credit facilities. Bankers Trust, an affiliate of BT Securities, and Chase Manhattan are the Arrangers of the New Credit Facility, and Bankers Trust will act as administrative agent for the New Credit Facility. Bankers Trust and Chase Manhattan will receive customary fees in connection with such services. It is anticipated that Bankers Trust, Chase Manhattan and Pearl Street L.P. (an affiliate of Goldman Sachs) will be lenders under the New Credit Facility. 92 An affiliate of Chase is a limited partner in a partnership controlled by Yucaipa which owns shares of Smitty's Class A Common Stock. The partnership will receive shares of Smith's Class B Common Stock in the Merger in exchange for such shares. Goldman Sachs is serving as financial advisor to the Company in connection with the Transactions and has delivered a written opinion to the Company's Board of Directors that, as of January 29, 1996, the exchange ratio pursuant to the Recapitalization Agreement is fair to the Company. Goldman Sachs has been engaged by the Company to act as dealer manager in connection with the Tender Offer. Goldman Sachs has received, and will receive, customary fees in connection with such services. Affiliates of CS First Boston own shares of Smitty's Class B Common Stock and will receive shares of Smith's Common Stock in the Merger in exchange for such shares of Smitty's Class B Common Stock. Each of the Underwriters has from time to time provided investment banking and financial advisory services to one or more of Smith's, Smitty's, Yucaipa and/or their respective affiliates and may continue to do so in the future. The Underwriters have received customary fees for such services. LEGAL MATTERS The validity of the Notes offered hereby will be passed upon for the Company by Latham & Watkins, Los Angeles, California. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Cahill Gordon and Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated financial statements of Smith's Food & Drug Centers, Inc. at December 30, 1995 and December 31, 1994 and for each of three years in the period ended December 30, 1995 included in this Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated balance sheet of Smitty's Supermarkets, Inc. as of July 30, 1995 and July 31, 1994 and the related consolidated statements of operations, stockholder's equity, and cash flows for year ended July 31, 1995, and for the period from June 29, 1994 (date of inception) to July 31, 1994 (Smitty's), and for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 (Predecessor), included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 93 INDEX TO FINANCIAL STATEMENTS
PAGE ---- SMITH'S FOOD & DRUG CENTERS, INC.: Report of Independent Auditors (Ernst & Young LLP)....................... F-2 Consolidated balance sheets at December 30, 1995 and December 31, 1994... F-3 Consolidated statements of income for the years ended January 1, 1994, December 31, 1994 and December 30, 1995................................. F-4 Consolidated statements of common stockholders' equity for the years ended January 1, 1994, December 31, 1994 and December 30, 1995.......... F-5 Consolidated statements of cash flows for the years ended January 1, 1994, December 31, 1994 and December 30, 1995........................... F-6 Notes to consolidated financial statements............................... F-7 SMITTY'S SUPERMARKETS, INC.: Report of Independent Auditors (Coopers & Lybrand L.L.P.)................ F-17 Consolidated balance sheets as of July 31, 1994 and July 30, 1995 and January 14, 1996 (unaudited)............................................ F-18 Consolidated statements of operations for the 52 weeks ended July 30, 1995 and for the period from June 29, 1994 (date of inception) to July 31, 1994; for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 (Predecessor); for the 24 weeks ended January 14, 1996 (unaudited) and the 24 weeks ended January 15, 1995 (unaudited)............................................................. F-19 Consolidated statements of stockholders' equity for the 52 weeks ended July 30, 1995 and for the period from June 29, 1994 (date of inception) to July 31, 1994; for the period from August 2, 1992 to June 29, 1994 and the year ended August 1, 1993 (Predecessor); for the 24 weeks ended January 14, 1996 (unaudited)............................................ F-20 Consolidated statements of cash flows for the 52 weeks ended July 30, 1995 and for the period from June 29, 1994 (date of inception) to July 31, 1994; for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 (Predecessor); for the 24 weeks ended January 14, 1996 (unaudited) and the 24 weeks ended January 15, 1995 (unaudited)............................................................. F-21 Notes to consolidated financial statements............................... F-23
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, ASSETS 1995 1994 ------ ------------ ------------ Current Assets Cash and cash equivalents........................... $ 16,079 $ 14,188 Rebates and accounts receivable..................... 23,802 25,596 Inventories......................................... 394,982 389,564 Prepaid expenses and deposits....................... 21,255 15,858 Deferred tax assets................................. 23,900 1,400 Assets held for sale................................ 125,000 ---------- ---------- Total Current Assets.............................. 605,018 446,606 Property and Equipment Land................................................ 276,626 303,701 Buildings........................................... 610,049 619,056 Leasehold improvements.............................. 55,830 42,369 Fixtures and equipment.............................. 509,524 589,480 ---------- ---------- 1,452,029 1,554,606 Less allowances for depreciation and amortization... 390,933 364,741 ---------- ---------- 1,061,096 1,189,865 Other Assets.......................................... 20,066 16,996 ---------- ---------- $1,686,180 $1,653,467 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY ------------------------------------------- Current Liabilities Trade accounts payable.............................. $ 214,152 $ 235,843 Accrued sales and other taxes....................... 50,749 44,379 Accrued payroll and related benefits................ 97,455 84,083 Current maturities of long-term debt................ 20,932 19,011 Current maturities of Redeemable Preferred Stock.... 1,008 1,017 Accrued restructuring costs......................... 58,000 ---------- ---------- Total Current Liabilities......................... 442,296 384,333 Long-term debt, less current maturities............... 725,253 699,882 Accrued restructuring costs, less current portion..... 40,000 Deferred income taxes................................. 58,600 89,500 Redeemable Preferred Stock, less current maturities... 3,311 4,410 Common Stockholders' Equity
Convertible Class A Common Stock (shares issued and outstanding, 11,613,043 in 1995 and 12,140,317 in 1994)................................................. 116 121 Class B Common Stock (shares issued, 18,348,968 in 1995 and 17,821,694 in 1994)............................... 183 178 Additional paid-in capital............................. 285,236 285,592 Retained earnings...................................... 238,027 293,456 ---------- ---------- 523,562 579,347 Less cost of Common Stock in the treasury (4,890,302 shares in 1995 and 4,772,822 shares in 1994).......... 106,842 104,005 ---------- ---------- 416,720 475,342 ---------- ---------- $1,686,180 $1,653,467 ========== ==========
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 PAIDIN 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 Employee Stock Profit Sharing Plan.......... (212) 3,237 3,025 Shares sold under the Employee Stock Purchase Plan......... (771) 4,853 4,082 Cash dividends--$.52 per share............. (15,530) (15,530) Other.................. 485 485 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at January 1, 1994................... 12,617,445 126 17,344,566 173 285,482 259,400 (2,984) 542,197 Net income for 1994.... 48,781 48,781 Conversion of shares from Class A to Class B.... (477,128) (5) 477,128 5 Purchase of Class B Common Stock for the treasury.............. (109,239) (109,239) Shares sold to the Employee Stock Profit Sharing Plan.......... 143 1,505 1,648 Shares sold under the Employee Stock Purchase Plan......... (668) 6,713 6,045 Cash dividends--$.52 per share............. (14,725) (14,725) Other.................. 635 635 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at December 31, 1994................... 12,140,317 121 17,821,694 178 285,592 293,456 (104,005) 475,342 Net loss for 1995...... (40,512) (40,512) Conversion of shares from Class A to Class B.... (527,274) (5) 527,274 5 Purchase of Class B Common Stock for the treasury.............. (9,039) (9,039) Shares sold to the Employee Stock Profit Sharing Plan.......... 2 108 110 Shares sold under the Employee Stock Purchase Plan......... (926) 6,094 5,168 Cash dividends--$.60 per share............. (14,917) (14,917) Other.................. 568 568 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at December 30, 1995................... 11,613,043 $116 18,348,968 $183 $285,236 $238,027 $(106,842) $416,720 ========== ==== ========== ==== ======== ======== ========= ========
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 activities: Depreciation and amortization.......... 104,963 94,491 82,173 Deferred income taxes.................. (53,400) 10,500 15,400 Restructuring charges.................. 140,000 Other.................................. 568 635 485 Changes in operating assets and liabilities: Rebates and accounts receivable....... 1,794 (4,758) (4,038) Inventories........................... (5,418) (11,625) (36,523) Prepaid expenses and deposits......... (5,397) (1,324) (518) Trade accounts payable................ (21,691) 50,618 1,119 Accrued sales and other taxes......... 6,370 5,616 6,625 Accrued payroll and related benefits.. 13,372 10,616 8,007 --------- --------- --------- Cash provided by operating activities..... 140,649 203,550 118,550 Investing Activities Additions to property and equipment...... (149,035) (146,676) (322,301) Sale/leaseback arrangements and other property and equipment sales............ 5,841 20,949 159,137 Other.................................... (3,070) (1,649) (1,258) --------- --------- --------- Cash used in investing activities......... (146,264) (127,376) (164,422) Financing Activities Additions to long-term debt.............. 45,978 27,000 262,000 Payments on long-term debt............... (18,686) (33,594) (149,197) Redemptions of Redeemable Preferred Stock................................... (1,108) (1,042) (1,039) Purchases of Treasury Stock.............. (9,039) (109,239) (11,074) Proceeds from sales of Treasury Stock.... 5,278 7,693 7,107 Payment of dividends..................... (14,917) (14,725) (15,530) --------- --------- --------- Cash provided by (used in) financing activities............................... 7,506 (123,907) 92,267 --------- --------- --------- Net increase (decrease) in cash and cash equivalents.............................. 1,891 (47,733) 46,395 Cash and cash equivalents at beginning of year..................................... 14,188 61,921 15,526 --------- --------- --------- Cash and cash equivalents at end of year.. $ 16,079 $ 14,188 $ 61,921 ========= ========= =========
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. F-7 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pre-Operating and Closing Costs Costs incurred in connection with the opening of new stores and distribution facilities are expensed as incurred. The remaining net investment in stores closed, less salvage value, is charged against earnings in the period of closing. For leased stores that are closed and subleased to third parties, a provision is made for the remaining lease liability, net of expected sublease rental. For leased stores that are closed but not yet subleased, a provision is made based on discounted lease payments through the estimated period until subleased. Interest Costs Interest costs are expensed as incurred, except for interest costs which have been capitalized as part of the cost of properties under development. The Company's cash payments for interest (net of capitalized interest of approximately $1.4 million in 1995, $5.8 million in 1994 and $14.5 million in 1993) amounted to $60.7 million in 1995, $54.0 million in 1994 and $39.8 million in 1993. Income Taxes The Company determines its deferred tax assets and liabilities based on differences between the financial reporting and tax basis of its assets and liabilities using the tax rates that will be in effect when the differences are expected to reverse. Net Income Per Share of Common Stock Net income per share of Common Stock is computed by dividing the net income by the weighted average number of shares of Common Stock outstanding of 25,030,882 in 1995, 28,176,907 in 1994 and 30,238,811 in 1993. Common Stock equivalents in the form of stock options are excluded from the weighted average number of common shares in 1995 due to the net loss. Adoption of Accounting Standard In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Due to the nature of the Company's operations and the number of estimates required to assess the impact of Statement 121, the financial statement impact of adoption has not yet been determined. Litigation The Company is a party to certain legal actions arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial position. Reclassifications Certain reclassifications have been made to the 1993 and 1994 financial statements to conform with the 1995 presentation. F-8 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 AND NET DEPRECIATION AND COST AMORTIZATION BOOK VALUE AMORTIZATION ---------- ---------------- ---------- ---------------- DECEMBER 30, 1995 Land.................. $ 276,626 $ 276,626 Buildings............. 610,049 $108,985 501,064 $ 19,907 Leasehold improvements......... 55,830 12,556 43,274 2,970 Fixtures and equipment............ 509,524 269,392 240,132 82,086 ---------- -------- ---------- -------- $1,452,029 $390,933 $1,061,096 $104,963 ========== ======== ========== ======== DECEMBER 31, 1994 Land.................. $ 303,701 $ 303,701 Buildings............. 619,056 $ 92,542 526,514 $ 18,334 Leasehold improvements......... 42,369 10,122 32,247 1,842 Fixtures and equipment............ 589,480 262,077 327,403 74,315 ---------- -------- ---------- -------- $1,554,606 $364,741 $1,189,865 $ 94,491 ========== ======== ========== ========
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 average rate of 7.44% in 1995 and 7.47% in 1994........... 6,308 6,597 Other......................................... 7,492 5,214 -------- -------- 746,185 718,893 Less current maturities....................... 20,932 19,011 -------- -------- $725,253 $699,882 ======== ========
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 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 de- ferred taxes............................. (3.6) 2.4 Other..................................... .9 (.6) .2 -------- ------- ------- (42.0)% 39.1 % 42.8% ======== ======= =======
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 ======== ========
F-11 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE G--FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and related fair values of the Company's financial instruments are as follows (dollar amounts in thousands):
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 ======== ======== ======== 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. F-12 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In 1993 the Company established a stock purchase plan which permits employees to purchase shares of the Company's Class B Common Stock through payroll deductions at 85% of fair market value at the time of purchase. Employees purchased 282,485 shares, 309,553 shares and 180,950 shares from the Treasury during 1995, 1994 and 1993, respectively. The Company has a Stock Option Plan which authorizes the Compensation Committee of the Board of Directors to grant options to key employees for the purchase of Class B Common Stock. The aggregate number of shares available for grant under the plan is equal to 10% of the number of shares of Class B Common Stock authorized. However, the number of outstanding and unexercised options shall not exceed 10% of the number of shares of Class A and Class B Common Stock outstanding. The number of unoptioned shares of Class B Common Stock available for grant was 890,671 shares and 973,419 shares at the end of 1995 and 1994, respectively. The options may be either incentive stock options or non-qualified stock options. Stock options granted to key employees and options outstanding are as follows:
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. F-13 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE J--PENSION PLANS Employees whose terms of employment are determined by negotiations with recognized collective bargaining units are covered by their respective multi- employer defined benefit pension plans to which the Company contributes. The costs charged to operations for these plans amounted to approximately $4.6 million in 1995, $4.2 million in 1994 and $3.3 million in 1993. Other information for these multi-employer plans is not available to the Company. The Company maintains a defined benefit pension plan for all other permanent employees which provides for normal retirement at age 65. Employees are eligible to join when they complete at least one year of service and have reached age 21. The benefits are based on years of service and stated amounts associated with those years of service. The Company's funding policy is to contribute annually up to the maximum amount deductible for federal income tax purposes. Net pension cost includes the following components (dollar amounts in thousands):
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 obliga- tion..................................... 1,966 1,725 1,350 Actual return on plan assets.............. (9,692) 237 (1,053) Net amortization and deferral............. 7,598 (1,615) (304) ------- ------- ------- $ 1,991 $ 2,673 $ 1,862 ======= ======= =======
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 bene- fits based on service rendered to date: Vested...................................... $29,649 $16,965 Non-vested.................................. 3,482 3,438 ------- ------- 33,131 20,403 Fair value of plan assets (primarily in equity and fixed income funds and real estate)...... 37,934 20,993 ------- ------- Fair value of plan assets in excess of pro- jected benefit obligation.................... 4,803 590 Unrecognized net loss......................... 7,473 5,737 Prior service cost............................ 133 160 Unrecognized net asset........................ (978) (1,141) ------- ------- Net prepaid pension cost...................... $11,431 $ 5,346 ======= =======
The weighted average discount rate used to determine the actuarial present value of the projected benefit obligation was 7.25% in 1995 and 8.5% in 1994. The expected long-term rate of return on plan assets was 8.5% in 1995 and 1994, and 9.5% in 1993. The Company provides a 401(k) plan for virtually all employees. The plan is entirely funded by employee contributions which are based on employee compensation not to exceed certain limits. F-14 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, leased stores and excess land in California was approximately $260 million. The Company's current management has not determined the ultimate disposition or use of these real estate assets and believes that their disposal in the ordinary course of business would not result in a significant impact on carrying values. However, should the Company complete the subsequent event (see Note L), management may decide to pursue the sale of these assets. The amounts the Company may realize on disposal could differ significantly in the near term from the carrying values. F-15 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. Completion of the tender offer will be subject to the tender of at least 50% of the Company's outstanding Common Stock, the receipt of adequate financing and various other conditions. Completion of the merger with Smitty's will be conditioned on the Company's purchase of shares pursuant to the self tender offer, receipt of adequate financing, regulatory approvals, approval by the Company's stockholders and various other conditions. The tender offer is expected to commence in April 1996 and be consummated in May 1996. The merger with Smitty's is expected to be consummated concurrently with the closing of the tender offer. F-16 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Smitty's Supermarkets, Inc. We have audited the accompanying consolidated balance sheets of Smitty's Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended July 30, 1995 and the period from June 29, 1994 (date of inception) to July 31, 1994. We have also audited the consolidated statements of operations, stockholders' equity and cash flows of the Company's predecessor (the "Predecessor") for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smitty's Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and the consolidated results of their operations and their cash flows for the year ended July 30, 1995 and the period from June 28, 1994 (date of inception) to July 31, 1994 and the consolidated results of the Predecessor's operations and cash flows for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Phoenix, Arizona October 3, 1995, except for Note 18 as to which the date is January 29, 1996 F-17 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS)
JANUARY 14, JULY 30, JULY 31, ASSETS 1996 1995 1994 ------ ----------- -------- -------- (UNAUDITED) Current Assets Cash and short-term investments............... $ 11,505 $ 25,653 $ 19,969 Accounts and notes receivable, net of allow- ances of $440, $506 and $683..................................... 9,290 7,700 7,994 Inventories................................... 56,726 55,475 51,013 Prepaid expenses.............................. 3,279 3,767 2,177 Refundable income taxes....................... 1,895 2,471 546 -------- -------- -------- Total current assets......................... 82,695 95,066 81,699 Property and equipment, net.................... 134,843 128,289 119,218 Goodwill, net of accumulated amortization of $1,296, $917 and $40.......................... 31,520 31,899 17,500 Property held for sale......................... 3,209 2,360 2,154 Other assets................................... 7,769 8,108 14,741 -------- -------- -------- $260,036 $265,722 $235,312 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities Accounts payable.............................. $ 39,620 $ 35,247 $ 25,396 Accrued compensation.......................... 5,335 6,514 4,876 Taxes, other than income taxes................ 7,372 5,482 4,781 Deferred income taxes......................... 4,642 4,642 3,356 Other accrued expenses........................ 13,851 19,764 12,805 Current portion of long-term debt............. 6,216 6,089 2,560 -------- -------- -------- Total current liabilities.................... 77,036 77,738 53,774 Long-term debt................................. 139,830 141,835 141,356 Deferred income taxes.......................... 13,767 13,767 15,658 Other liabilities.............................. 20,147 21,449 13,937 -------- -------- -------- Total liabilities............................ 250,780 254,789 224,725 Stockholders' Equity Preferred stock, $.01 par value; 10,000 shares authorized Class A common stock, $.01 par value; 1,000,000 shares authorized; 696,700 shares issued and outstanding at July 30, 1995 and July 31, 1994; 705,697 shares issued and outstanding at January 14, 1996.............. 7 7 7 Class B common stock, $.01 par value; 500,000 shares authorized; 303,300 shares issued and outstanding.................................. 3 3 3 Additional paid-in capital.................... 11,036 10,936 10,936 Retained earnings (deficit)................... (1,790) (13) (359) -------- -------- -------- Total stockholders' equity................... 9,256 10,933 10,587 -------- -------- -------- $260,036 $265,722 $235,312 ======== ======== ========
See accompanying notes. F-18 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THE COMPANY THE PREDECESSOR --------------------------------------------------- ----------------------------- 24 WEEKS 24 WEEKS PERIOD FROM PERIOD FROM ENDED ENDED JUNE 29, 1994 AUGUST 2, 1993 JANUARY 14, JANUARY 15, YEAR ENDED TO TO YEAR ENDED 1996 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 ----------- ----------- ------------- ------------- -------------- -------------- (UNAUDITED) (UNAUDITED) Sales................... $ 276,507 $ 286,245 $ 594,019 $ 48,411 $551,681 $605,132 Cost of sales........... 200,100 212,579 432,067 35,476 413,696 454,672 --------- --------- --------- --------- -------- -------- Gross profit............ 76,407 73,666 161,952 12,935 137,985 150,460 Operating, selling, general, and administrative expenses............... 63,596 60,832 133,242 10,828 117,350 147,472 Litigation settlement... (1,866) (1,866) Depreciation and amortization........... 6,010 4,566 10,855 959 8,022 9,461 --------- --------- --------- --------- -------- -------- Operating income (loss). 6,801 10,134 19,721 1,148 12,613 (6,473) Interest expense: Interest expense, excluding amortization of deferred financing costs................. 8,136 7,508 17,797 1,422 6,219 6,364 Amortization of deferred financing costs................. 442 407 923 83 134 182 --------- --------- --------- --------- -------- -------- 8,578 7,915 18,720 1,505 6,353 6,546 --------- --------- --------- --------- -------- -------- Income (loss) before income taxes and extraordinary item..... (1,777) 2,219 1,001 (357) 6,260 (13,019) Income taxes (benefit).. 1,360 655 2 2,492 (4,822) --------- --------- --------- --------- -------- -------- Income (loss) before extraordinary item..... (1,777) 859 346 (359) 3,768 (8,197) Extraordinary item: Loss on extinguishment of debt, net of $413 income tax benefit.... (628) --------- --------- --------- --------- -------- -------- Net income (loss)....... $ (1,777) $ 859 $ 346 $ (359) $ 3,140 $ (8,197) ========= ========= ========= ========= ======== ======== Income (loss) per share: Income (loss) before extraordinary item.... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,716 $ (8,084) Extraordinary item..... (619) --------- --------- --------- --------- -------- -------- Income (loss).......... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,097 $ (8,084) ========= ========= ========= ========= ======== ======== Weighted average common shares outstanding..... 1,002,196 1,000,000 1,000,000 1,000,000 1,014 1,014 ========= ========= ========= ========= ======== ========
See accompanying notes. F-19 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS)
CLASS A CLASS B COMMON STOCK COMMON STOCK ------------- ------------- ADDITIONAL RETAINED TOTAL PAR PAR PAID-IN EARNINGS STOCKHOLDERS' SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) EQUITY ------- ----- ------- ----- ---------- --------- ------------- THE COMPANY BALANCE AT JUNE 29, 1994 (INCEPTION) Sale of common stock... 696,700 $7 303,300 $ 3 $10,936 $ 0 $10,946 Net loss............... (359) (359) ------- --- ------- --- ------- ------- ------- BALANCE AT JULY 31, 1994................... 696,700 7 303,300 3 10,936 (359) 10,587 Net income............. 346 346 ------- --- ------- --- ------- ------- ------- BALANCE AT JULY 30, 1995................... 696,700 7 303,300 3 10,936 (13) 10,933 Sale of common stock... 8,997 100 100 Net loss (unaudited)... (1,777) (1,777) ------- --- ------- --- ------- ------- ------- BALANCE AT JANUARY 14, 1996................... 705,697 $ 7 303,300 $ 3 $11,036 $(1,790) $ 9,256 ======= === ======= === ======= ======= =======
COMMON STOCK ------------- ADDITIONAL RETAINED TOTAL PAR PAID-IN EARNINGS STOCKHOLDERS' SHARES VALUE CAPITAL (DEFICIT) EQUITY ------ ----- ---------- --------- ------------- PREDECESSOR BALANCE AT AUGUST 2, 1992...... 1,014 $ 1 $126,420 $ 2,260 $128,681 Net loss...................... (8,197) (8,197) ----- ---- -------- ------- -------- BALANCE AT AUGUST 1, 1993...... 1,014 1 126,420 (5,937) 120,484 Purchase of common stock...... (284) (27,823) (27,823) Net income.................... 3,140 3,140 ----- ---- -------- ------- -------- BALANCE AT JUNE 29, 1994 (pre-acquisition)............. 730 1 98,597 (2,797) 95,801 Cancellation of Predecessor equity....................... (730) (1) (98,597) 2,797 (95,801) ----- ---- -------- ------- -------- BALANCE AT JUNE 29, 1994 (post-acquisition)............ -- $-- $ -- $ -- $ -- ===== ==== ======== ======= ========
See accompanying notes. F-20 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
THE COMPANY PREDECESSOR ---------------------------------------------------------------- ------------------------------- PERIOD FROM PERIOD FROM 24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 AUGUST 2, 1993 YEAR ENDED JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 TO JULY 31, 1994 TO JUNE 28, 1994 AUGUST 1, 1993 ---------------- ---------------- ------------- ---------------- ---------------- -------------- (UNAUDITED) (UNAUDITED) Cash provided (used) by operating activities: Net income (loss)....... $(1,777) $ 859 $ 346 $ (359) $3,140 $(8,197) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amor- tization............. 6,010 4,566 10,855 959 8,286 9,461 Amortization of de- ferred financing costs and discount on long-term debt................. 489 454 1,025 92 1,236 587 LIFO provision........ 359 359 325 270 228 708 Deferred income taxes. 81 374 26 3,172 (6,825) Accreted interest on debentures........... 1,085 973 2,136 195 Loss (gain) on disposals of assets.. (344) (69) 590 (88) Loss on partnership liquidation.......... 8,900 Litigation settle- ments................ (1,866) (1,866) 13,805 Adjust rentals to straight-line........ 75 (220) (169) 75 51 (904) Changes in operating assets and liabilities, net of acquisition adjustments: Accounts and notes receivable......... (1,599) (709) 184 (340) (225) (413) Inventories, net of LIFO............... (1,610) (9,385) (4,514) 4,147 (5,953) (504) Prepaid expenses.... (360) (494) (2,067) 400 (354) (919) Refundable income taxes.............. 576 546 (1,925) (24) (157) (410) Other assets........ 2 54 165 Accounts payable.... 4,373 7,170 9,851 (4,261) (1,340) 2,315 Accrued expenses and other liabilities.. (6,504) 4,022 3,938 (33) 285 (299) Income taxes pay- able............... 733 (775) ------- ------ ------- ------ ------ ------- Net cash provided by operating activities............. $ 1,117 $7,089 $18,151 $1,078 $9,013 $16,607 ======= ====== ======= ====== ====== =======
See accompanying notes. F-21 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
THE COMPANY PREDECESSOR ----------------------------------------------------------------- -------------------------------- PERIOD FROM PERIOD FROM 24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 ---------------- ---------------- ------------- ----------------- ----------------- -------------- (UNAUDITED) (UNAUDITED) Cash provided (used) by investing activities: Purchase of property and equipment....... $(18,714) $(6,192) $(22,855) $ (271) $ (3,729) $(16,233) Proceeds from sale of assets.............. 7,656 681 8,464 4 6,074 13,745 Deferred gain on sale of real estate...... 1,877 Payments for other assets.............. (1,334) (1,183) (392) (35) (375) Repayment of notes receivable.......... 37 1,625 5,811 3,871 538 Advances to partnerships........ (169) (1,901) -------- ------- -------- ------- -------- -------- Net cash provided (used) by investing activities............ (12,355) (5,069) (8,972) (267) 7,889 (4,226) -------- ------- -------- ------- -------- -------- Cash provided (used) by financing activities: Proceeds from borrowings.......... 6,500 10,601 Principal payments on borrowings.......... (3,010) (1,863) (3,178) (108) (19,303) (20,712) Payments of debt issuance costs...... (166) (317) (915) (226) Proceeds from sale of stock............... 100 Proceeds from acquisition financing, net...... 8,401 Payment of acquisition costs... (2,947) Purchase of preferred stock from affiliate........... (585) -------- ------- -------- ------- -------- -------- Net cash provided (used) by financing activities............ (2,910) (2,029) (3,495) 4,431 (13,388) (10,337) -------- ------- -------- ------- -------- -------- Increase (decrease) in cash and short- term investments........... (14,148) (9) 5,684 5,242 3,514 2,044 Cash and short-term investments, beginning of period............. 25,653 19,969 19,969 14,727 11,213 9,169 -------- ------- -------- ------- -------- -------- Cash and short-term investments, end of period................ $ 11,505 $19,960 $ 25,653 $19,969 $ 14,727 $ 11,213 ======== ======= ======== ======= ======== ======== Supplemental cash flow disclosures: Interest paid......... $ 7,518 $ 5,811 $ 14,299 $ 1,025 $ 7,232 $ 5,959 Income taxes paid..... 2,643 573 3,198 Income tax refunds received............. 576 1,958 1,578 11 Non-cash investing and financing activities: Capital lease obligations entered into................ $10,889 $ 4,948 $ 10,933 $ 4,929 Notes receivable obtained through sales of property and equipment....... 11,126 Assets transferred to affiliate in exchange for preferred stock..... 27,238 Notes receivable obtained in exchange for preferred stock. 27,823 Common stock acquired from cancellation of note receivable..... 27,823
See accompanying notes. F-22 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 1. SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Smitty's Supermarkets, Inc. (the "Company") and its wholly-owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation. The Company is a partner in a real estate development partnership which is being accounted for under the equity method. Statement Presentation On June 29, 1994, the Company acquired Smitty's Super Valu, Inc. (the "Predecessor"). The financial statements for both the Company and the Predecessor are included herein. Fiscal Year The Company's fiscal year ends on the Sunday nearest the last day of July. The 1995, 1994 and 1993 fiscal years consisted of 52 weeks each. Interim Financial Statements The consolidated balance sheet of the Company as of January 14, 1996 and the consolidated statements of operations and cash flows for the interim periods ended January 14, 1996 and January 15, 1995 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated financial position, results of operations and cash flows for these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles, and, therefore, should be read in conjunction with the Company's financial statements and notes thereto included herein. Results of operations for interim periods are not necessarily indicative of the results for a full fiscal year. Short-Term Investments Short-term investments consist of highly liquid investments with original maturities of three months or less. The Company considers such investments to be cash equivalents for purposes of determining cash flow. Inventories Merchandise inventories are valued at LIFO (last-in, first-out) cost, which is lower than market, for about 95% of the total inventory, and at the lower of FIFO (first-in, first-out) cost or market for the balance of the inventory. Property and Equipment Owned property and equipment are stated at cost and capital lease assets are stated at the present value of future rentals, less accumulated depreciation and amortization. Maintenance and repairs are charged against operations in the year incurred and major additions to property and equipment are capitalized. Depreciation and amortization are computed by the straight-line method based upon the following lives: Buildings and improvements................................. 40 years Store fixtures and equipment............................... 10 years Transportation equipment................................... 6 to 12 years Leasehold improvements, capital leases and beneficial leaseholds................................................ Term of lease
F-23 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) Goodwill Goodwill represents the excess of the purchase price over the fair value of acquired assets, less accumulated amortization. Goodwill is amortized on the straight-line method over forty years. It is the Company's policy to periodically review and evaluate the recoverability of the acquired intangibles by assessing current and future profitability and cash flows and to determine whether the amortization of the balance over its remaining life can be recovered through expected future results and cash flows. Deferred Charges Deferred debt issuance costs are amortized using the interest method. Property Held for Sale Property held for sale is comprised of several undeveloped properties and is valued at the lower of cost or estimated net realizable value. Self-Insurance The Company self-insures, with certain stop loss insurance coverage, for workers' compensation, non-union employee health care and general liability claims. Claims expense is recorded in the year of occurrence through the accrual of claim reserves based on estimates of ultimate claims costs and settlement expenses discounted at a rate of 8%. Pre-opening and Remodel Costs All costs associated with store openings and promotional costs associated with major store remodels are charged to operations ratably over the twelve months following store openings and remodel completion dates, respectively. Income Taxes Effective August 2, 1993, the Predecessor adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under the provisions of SFAS 109, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Reclassifications Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the presentation in the 1995 financial statements. 2. BUSINESS ACQUISITION On June 29, 1994, the Company acquired the Predecessor for $24,768 net of transaction costs and the repayment or assumption of certain liabilities (the "Acquisition"). The Acquisition has been accounted for by the purchase method. Accordingly, the costs of the Acquisition were allocated to the assets acquired and liabilities assumed based upon their respective fair values. The F-24 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) allocation of the purchase price was finalized during 1995. Because of the effects of the Acquisition, the consolidated financial statements of the Company are not comparable to the consolidated financial statements of the Predecessor. The purchase price was allocated as follows: Fair value of assets acquired.................................. $ 218,046 Fair value of liabilities assumed.............................. (226,094) Excess costs over acquired net assets.......................... 32,816 --------- Total purchase price........................................... $ 24,768 =========
In connection with the Acquisition on April 28, 1994, the Predecessor paid $585 and transferred property and equipment and property held for sale with a net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly- owned subsidiary of the Predecessor's former sole shareholder, Steinberg International, Inc. ("International"), in exchange for Holdings' preferred stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased certain shares of its common stock from International in consideration of a $27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior to the Acquisition, the Company transferred Holdings' preferred stock to International in consideration of the repayment of the promissory note. 3. CONCENTRATIONS OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of short-term investments and receivables. The Company's short-term investments are in high quality securities placed with major banks and financial institutions. The Company's investment policy limits its exposure to concentrations of credit risk. The Company's receivables result primarily from vendor rebates and allowances, and redemption of manufacturer coupons. The vendor rebates and allowances reflect a broad base, while the coupons are concentrated with one processor. As a consequence, concentrations of credit risk are limited. The Company routinely assesses the financial strength of its vendors and coupon processor. 4. INVENTORIES If inventories had been valued using the FIFO method, inventories would have been higher (lower) and gross profit and operating income would have been greater as follows:
GROSS PROFIT AND OPERATING INVENTORIES INCOME ----------- ---------- THE COMPANY July 30, 1995 and the year then ended............... $(4,370) $325 July 31, 1994 and the period from June 29, 1994to July 31, 1994...................................... $(4,695) $270 PREDECESSOR June 28, 1994 and the period from August 2, 1993to June 28, 1994...................................... $ 4,776 $228 August 1, 1993 and the year then ended.............. $ 4,548 $708
F-25 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) 5. PROPERTY AND EQUIPMENT Property and equipment including assets under capitalized leases consist of the following:
JULY 30, 1995 JULY 31, 1994 ------------- ------------- Land and improvements........................ $ 19,861 $ 24,332 Buildings and improvements................... 76,528 69,748 Store fixtures and equipment................. 32,163 16,697 Beneficial leaseholds........................ 9,233 9,233 -------- -------- 137,785 120,010 Less accumulated depreciation and amortiza- tion........................................ (9,496) (792) -------- -------- $128,289 $119,218 ======== ========
Included in property and equipment above are assets recorded under capital leases consisting of the following:
JULY 30, 1995 JULY 31, 1994 ------------- ------------- Land and improvements......................... $ 1,358 $ 1,358 Buildings and improvements.................... 21,211 21,296 Store fixtures and equipment.................. 4,948 Beneficial leaseholds......................... 9,233 9,233 ------- ------- 36,750 31,887 Less accumulated amortization................. (1,982) (165) ------- ------- $34,768 $31,722 ======= =======
At July 31, 1994, store fixtures and equipment and accumulated depreciation and amortization includes $1,295 and $28, respectively, relating to subleased equipment. At July 30, 1995 there were no store fixtures and equipment subleased. Depreciation expense relating to property and equipment are as follows: THE COMPANY Year ended July 30, 1995.......................................... $9,432 Period from June 29, 1994 to July 31, 1994........................ $ 792 PREDECESSOR Period from August 2, 1993 to June 28, 1994....................... $7,324 Year ended August 1, 1993......................................... $8,261
F-26 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) 6. LONG-TERM DEBT Long-term debt consists of the following:
JULY 30, 1995 JULY 31, 1994 ------------- ------------- Term loan payable to banks, interest at LIBOR rate plus 2%, 8% at July 30, 1995, maturities to 1999. $ 37,382 $ 40,000 Senior subordinated notes, 12 3/4% interest, net of debt discount of $496 and $552, respectively, due 2004......................................... 49,504 49,448 Senior discount debentures, 13 3/4% interest, net of debt discount of $506 and $552, respectively, due 2006......................................... 16,819 14,637 Sinking fund bonds, 10 1/2% interest, semi-annual maturities to 2016............................... 12,123 12,198 Mortgage notes payable, repaid in 1995............ 77 Capital lease obligations......................... 32,096 27,556 -------- -------- 147,924 143,916 Less current portion.............................. (6,089) (2,560) -------- -------- $141,835 $141,356 ======== ========
In July, 1994, the Company's subsidiary entered into a Credit Agreement whereby the lender agreed to provide a $40,000 Term Loan Facility (the "Term Loan") and a $20,000 Revolving Credit Facility (the "Revolving Loan"). At July 30, 1995, $37,382 was outstanding under the term loan and $1,640 of the revolving loan was utilized for various outstanding letters of credit. No compensating balances are required. The interest rate for both facilities is equal to, at the Company's option, the bank's prime rate plus 0.75% or LIBOR rate plus 2%. In connection with the Acquisition described in Note 2, the Company issued $29,025 Senior Discount Debentures (the "Debentures"). The Debentures are issued at a discount to their aggregate principal amount and the original issue discount in the Debenture accretes from the issue date until June 15, 1999. Cash interest will not accrue on the Debentures prior to June 15, 1999. The Debentures will bear cash interest payable semi-annually in arrears on June 15 and December 15. The Debentures may be redeemed beginning in 1999 at a redemption price of 105%. The redemption price declines ratably to 100% in 2004. The Company's subsidiary issued $50,000 principal amount of Senior Subordinated Notes (the "Subordinated Notes") in connection with the Acquisition described in Note 2. The Subordinated Notes bear interest, payable semi-annually on June 15 and December 15 at an annual rate of 12.75%. The Subordinated Notes are subordinated to all Senior Indebtedness (as defined) of the Company's subsidiary, and may be redeemed on or after June 15, 1999 at a redemption price of 105%. The redemption price declines ratably to 100% in 2000. Under the most restrictive covenants of the Company's long-term debt agreements, payments of cash dividends and acquisition of capital stock are not permitted. Additionally, the agreements require maintenance of specified ratios. At July 30, 1995, substantially all of the Company's assets were pledged as collateral for the Term Loan, the Revolving Loan and the Sinking fund bonds. F-27 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) Maturities of the long-term obligations as of July 30, 1995 are as follows: 1996........................................................... $ 6,089 1997........................................................... 10,194 1998........................................................... 12,169 1999........................................................... 14,282 2000........................................................... 1,755 Thereafter..................................................... 103,435 -------- $147,924 ========
7. LEASES The Company is a party to a number of non-cancelable lease agreements for store and warehouse facilities with remaining lease terms ranging from 1 to 25 years and, in certain instances, providing for renewal periods of 5 to 30 years. The Company also subleases store departments, warehouse facilities and properties with remaining lease terms ranging from 1 to 10 years. At July 30, 1995, future minimum lease payments under capital leases and future minimum rental payments under operating leases having initial or remaining non- cancelable terms of more than one year are as follows:
CAPITAL OPERATING SUBLEASE LEASES LEASES RENTALS TOTALS -------- --------- -------- -------- 1996................................ $ 5,014 $ 10,253 $(1,669) $ 13,598 1997................................ 5,051 9,264 (1,108) 13,207 1998................................ 4,922 7,075 (903) 11,094 1999................................ 4,925 5,442 (861) 9,506 2000................................ 5,024 4,965 (828) 9,161 Thereafter.......................... 64,380 68,570 (2,042) 130,908 -------- -------- ------- -------- 89,316 $105,569 $(7,411) $187,474 ======== ======= ======== Less amount representing executory costs.................... (5,658) Less amount representing interest... (51,562) -------- $ 32,096 ========
F-28 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) Effective September, 1992, the Predecessor entered into an agreement to lease its restaurant, snack bar/food court and candy departments to Morrison Incorporated ("Morrison"). The agreement provided for an initial lease term of ten years and three five-year renewal options. Minimum rentals under the lease were $2,525 in the first year, $3,500 in the second year, and $4,000 per year thereafter. In addition, Morrison was obligated to pay electricity and property taxes for the leased premises. In September, 1994, the Company resumed its food service operations and sales and costs attributed to such operations are included in the Company's financial statements for the year ended July 30, 1995. Results of operations prior to the agreement and subsequent to September 24, 1994, for these departments are as follows:
THE COMPANY PREDECESSOR ------------- -------------- YEAR ENDED YEAR ENDED JULY 30, 1995 AUGUST 1, 1993 ------------- -------------- Sales........................................ $17,753 $2,476 Cost of sales................................ 6,329 933 ------- ------ Gross profit................................. 11,424 1,543 Expenses..................................... 10,478 1,351 ------- ------ Operating profit............................. $ 946 $ 192 ======= ======
Rental income from Morrison, determined on the basis of the straight-line amounts of the total rentals during the ten-year lease term, are as follows: THE COMPANY Year ended July 30, 1995......................................... $2,783 Period from June 29, 1994 to July 31, 1994....................... $ 273 PREDECESSOR Period from August 2, 1993 to June 28, 1994...................... $3,068 Year ended August 1, 1993........................................ $3,293
Rent expense for all leases is as follows:
THE COMPANY PREDECESSOR ------------------------------ -------------------------------- PERIOD FROM PERIOD FROM YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 ------------- ---------------- ----------------- -------------- Minimum rentals......... $ 7,913 $ 625 $ 6,518 $ 5,169 Contingent rentals: Capital................ 393 34 318 410 Operating.............. 31 6 34 176 Less sublease.......... (5,229) (471) (5,779) (5,891) ------- ----- ------- ------- $ 3,108 $ 194 $ 1,091 $ (136) ======= ===== ======= =======
Contingent rental payments are principally determined on the basis of store sales volume. F-29 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) 8. PENSION AND PROFIT-SHARING PLANS The Company maintains a profit-sharing/401(k) plan for employees. Contributions are made to the plan at the discretion of the Company's Board of Directors. The Company also contributes to a multi-employer defined benefit union pension plan covering union employees. Contributions to these plans are as follows:
PROFIT MUTLI- SHARING EMPLOYER 401(K) PLAN PENSION PLAN ----------- ------------ THE COMPANY Year ended July 30, 1995........................ $525 $1,402 Period from June 29, 1994 to July 31, 1994...... $ 38 $ 3 PREDECESSOR Period from August 2, 1993 to June 28, 1994..... $386 $ 26 Year ended August 1, 1993....................... $360 $ 268
At September 30, 1993, the date of the most recent actuarial valuation, the assets of the union pension fund exceeded the liability for vested benefits. The Company's relative position with the union plan is not determinable. 9. SEVERANCE AND EMPLOYMENT CONTRACT TERMINATION COSTS During 1993, the Predecessor underwent a reorganization which resulted in the elimination of various office, store and warehouse positions. The 1993 results of operations include charges of $329 for severance payments and related benefits for employees whose positions were eliminated. In February, 1994, the Predecessor and the Predecessor's chairman entered into an amendment to the chairman's employment contract. Results of operations for the period from August 2, 1993 to June 28, 1994 include a $2 million charge for a payment to the chairman under the terms of the amendment. 10. LITIGATION SETTLEMENTS In November, 1993, the Predecessor agreed to a settlement of a lawsuit in which an adverse jury verdict had been rendered. Under the terms of the settlement agreement, the Predecessor agreed to pay $4.75 million cash and issue a $6.25 million two-year mortgage note. Fiscal 1993 results of operations include an $11 million charge for the settlement, plus a $1.8 million charge for the Predecessor's litigation costs incurred in fiscal 1993 and expected to be incurred in fiscal 1994. The Predecessor used the proceeds from a four-year term loan payable to bank to finance the cash payment. Also in November, 1993, the Predecessor reached a settlement of a lawsuit filed by a former supplier providing for a $500 cash payment and a $500 one-year mortgage note. Fiscal 1993 results of operations include a $1 million charge for this settlement. Both mortgage notes were repaid on June 29, 1994. In October, 1993, the Predecessor was served with proceedings in Maricopa County, Arizona Superior Court instituted by Morrison seeking rescission of the 1992 lease agreement and damages of not less than $3,000. In August, 1994, the Company settled its litigation with Morrison. The settlement provided for the cancellation of the lease agreement on September 25, 1994, in consideration for which Morrison paid the Company $2.6 million and transferred title to all of its inventories and fixtures and equipment in the restaurant, snack bar/food court and candy departments. F-30 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) 11. STEINBERG REORGANIZATION In May, 1992, International's sole shareholder Steinberg, Inc. ("Steinberg") filed for protection under Section C-36 of the CCAA. During the period from June 29, 1994 to July 31, 1994, the period from August 2, 1993 to June 28, 1994 and fiscal 1993, the Predecessor incurred $50, $635 and $631, respectively, of costs arising from the filing by Steinberg for protection under Section C-36 of the CCAA and the subsequent reorganization of Steinberg. In connection with the Acquisition, on April 28, 1994, the Predecessor paid $585 and transferred property and equipment and property held for sale with a net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly- owned subsidiary of the Predecessor's former sole shareholder, Steinberg International, Inc. ("International"), in exchange for Holdings' preferred stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased certain shares of its common stock from International in consideration of a $27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior to the Acquisition, the Predecessor transferred Holdings preferred stock to International in consideration of the repayment of the promissory note. 12. LOSS ON PARTNERSHIP LIQUIDATION A real estate development partnership in which the Predecessor was a partner was liquidated in July, 1993. In connection with this liquidation, the Predecessor obtained ownership of an operating shopping center property and an undeveloped shopping center property in exchange for the forgiveness of notes and accrued interest receivable from the partnership and its managing partner. Fiscal 1993 results of operations include a $8,900 charge representing the difference between the current value of the properties and the carrying value of the notes and accrued interest receivable. The properties were transferred to Holdings on April 28, 1994. 13. INCOME TAXES In February, 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"), which supersedes Statement of Financial Accounting Standards No. 96 with the same title ("SFAS 96"). SFAS 96 was never adopted by the Predecessor. The Predecessor adopted the provisions of SFAS 109 on August 2, 1993 and elected not to restate prior year financial statements. The effect from prior years of adopting SFAS 109 as of August 2, 1993 was not material. The provision (benefit) for income taxes is as follows:
THE COMPANY PREDECESSOR ------------------------------ -------------------------------- PERIOD FROM PERIOD FROM YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 ------------- ---------------- ----------------- -------------- Current........ $281 $(24) $(1,093) $ 2,003 Deferred....... 374 26 3,172 (6,825) ---- ---- ------- ------- $655 $ 2 $ 2,079 $(4,822) ==== ==== ======= =======
The provision for income taxes for the period from August 2, 1993 to June 28, 1994 is net of $413 income tax benefit relating to the loss on extinguishment of debt. F-31 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) A reconciliation of the provision (benefit) for income taxes and the amount that would be computed using statutory federal income tax rates on income before income taxes is as follows:
THE COMPANY PREDECESSOR ------------------------------ -------------------------------- PERIOD FROM PERIOD FROM YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 ------------- ---------------- ----------------- -------------- Income taxes computed at statutory federal income tax rates....... $ 340 $(121) $1,774 $(4,426) State income taxes...... 56 (9) 293 (684) Amortization of intangible assets...... 298 16 (104) 259 Deduction of tax goodwill............... (425) Amortization of discount on capital lease obligations............ 77 70 Increase in valuation allowance.............. 336 Other................... 50 116 39 (41) ----- ----- ------ ------- $ 655 $ 2 $2,079 $(4,822) ===== ===== ====== =======
At July 30, 1995 the Company had minimum tax credit and general business credit carryovers for tax purposes of $2,956 and $488, respectively. Upon recognition, the minimum tax credit carryover will be credited to the valuation allowance. The income tax effects of loss carryforwards, tax credit carryforwards and temporary differences between financial and income tax reporting that give rise to the deferred income tax assets and liabilities under the provisions of SFAS 109 are as follows:
JULY 30, 1995 JULY 31, 1994 ------------- ------------- Deferred tax assets: Accounts receivable................................ $ 649 $ 547 Inventories........................................ 298 332 Other assets....................................... 59 59 Accrued liabilities................................ 15,145 9,425 Capital Leases..................................... 2,313 Net operating loss carryovers and credits.......... 11,515 12,587 -------- -------- Gross deferred tax assets......................... 29,979 22,950 Valuation allowance............................... (29,979) (19,998) -------- -------- Net deferred tax assets........................... 2,952 -------- -------- Deferred tax liabilities: Inventories........................................ (4,642) (4,686) Property and equipment............................. (13,767) (16,922) Other assets....................................... (358) -------- -------- Gross deferred tax liability...................... (18,409) (21,966) -------- -------- Net deferred tax liability........................ $(18,409) $(19,014) ======== ========
The changes in deferred tax assets and liabilities during 1995 primarily resulted from the Company's finalization of the allocation of the Acquisition purchase price. See Note 2. F-32 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) 14. FAIR VALUE OF INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short Term Investments The carrying amount approximates fair value because of the short maturity of these instruments. Accounts and Notes Receivable The carrying amount approximates fair value as a result of the short maturity of these instruments. Long-term Debt The fair value of the Company's long-term debt is estimated based on quoted market prices or if market prices are not available, the present value of the underlying cash flows discounted at the Company's incremental borrowing rates. The carrying amounts and fair values of the Company's significant financial instruments at July 30, 1995 are as follows:
CARRYING AMOUNT FAIR VALUE --------------- ---------- Cash and short-term investments................ $25,653 $25,653 Accounts and Notes receivable.................. 7,700 7,700 Long-term debt................................. 147,924 143,888
15. CONTINGENCIES The Company or its subsidiaries are defendants in a number of cases currently in litigation or potential claims encountered in the ordinary course of business which are being vigorously defended. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on the financial position of the Company. 16. RELATED PARTY TRANSACTIONS The Company has a five-year consulting agreement with an affiliated company, effective June 29, 1994 for management services. The agreement is automatically renewed on January 1 of each year for a five-year term unless ninety (90) days' notice is given by either party. The contract provides for annual management fees in an amount equal to one-tenth of one percent of consolidated sales of the Company and advisory fees for acquisition and financing transactions. Fees paid for management services were $600 and $50 for fiscal years ended July 30, 1995 and the period from June 29, 1994 to July 31, 1994, respectively. Advisory fees paid or accrued for financing transactions are capitalized and amortized over the term of the related financing. In connection with the Acquisition, capitalized fees of $3 million were paid to this affiliated company in fiscal 1994 for acquisition services. F-33 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) (THOUSANDS OF DOLLARS) 17. OTHER INCOME (EXPENSE)--NET The components of other income (expense) included in operating, selling, general and administration expense are as follows:
THE COMPANY THE PREDECESSOR ------------------------------ -------------------------------- PERIOD FROM PERIOD FROM YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 ------------- ---------------- ----------------- -------------- Gain (loss) on real estate disposals....... $(2,173) $ 41 Steinberg reorganization costs.................. $(50) (635) (631) Loss on partnership liquidation............ (8,900) Litigation settlements.. $1,866 (13,805) Other................... 387 ------ ---- ------- -------- $1,866 $(50) $(2,808) $(22,908) ====== ==== ======= ========
18. SUBSEQUENT EVENT On January 29, 1996, the Company entered into a definitive Recapitalization Agreement and Plan of Merger (the "Recapitalization Agreement") by and among Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's"), Cactus Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of Smith's ("Acquisition"), the Company and The Yucaipa Companies, a California general partnership, pursuant to which Acquisition will be merged with and into the Company (the "Merger"), subject to the satisfaction or waiver of various conditions. The Company, as the surviving corporation in the Merger, will become a wholly owned subsidiary of Smith's. Consummation of the Merger is subject to various conditions, including the receipt of regulatory approvals and other necessary consents, receipt of financing and consummation of the Recapitalization described below. Upon effectiveness of the Merger, each share of common stock of the Company, without distinction as to class, will be exchanged for 3.011803 shares of Smith's Class B Common Stock, par value $.01 per share, subject to adjustment under certain circumstances. This represents an aggregate of 3,038,888 shares of Smith's Class B Common Stock issuable as consideration in the Merger. Pursuant to the Recapitalization Agreement, on the closing date of the Merger, Smith's shall assume, repay, or cause to be repaid, all outstanding principal and interest, and other amounts payable, under the 12 3/4% Senior Subordinated Notes due 2004 of Smitty's Super Valu, Inc., a wholly owned subsidiary of the Company, the 13 3/4% Senior Discount Debentures due 2006 of the Company, and the Company's existing credit facility with The Chase Manhattan Bank, N.A. Pursuant to the Recapitalization Agreement, Smith's will, subject to various conditions, commence a tender offer to purchase 50% of its outstanding Class A and Class B Common Stock; issue an aggregate of approximately $575 million of new senior subordinated notes; borrow approximately $805 million under a new $995 million bank credit facility; repay certain existing indebtedness and engage in certain other recapitalization transactions (collectively, the "Recapitalization") concurrently with the Merger. Smith's will also use its reasonable efforts to cause Ronald W. Burkle, the Chairman of the Board of the Company, to be elected Chief Executive Officer of Smith's upon the consummation of the Merger and the Recapitalization. F-34 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... i Incorporation of Certain Documents by Reference........................... i Summary................................................................... 1 Risk Factors.............................................................. 12 Pro Forma Capitalization.................................................. 17 Unaudited Pro Forma Combined Financial Statements......................... 18 Selected Historical Financial Data of Smith's............................. 26 Selected Historical Financial Data of Smitty's............................ 27 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 29 Business.................................................................. 39 Management................................................................ 50 Principal Stockholders.................................................... 53 Certain Relationships and Related Transactions............................ 55 Description of Notes...................................................... 60 Description of Capital Stock.............................................. 87 Description of New Credit Facility........................................ 89 Underwriting.............................................................. 92 Legal Matters............................................................. 93 Experts................................................................... 93 Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ------------------ PROSPECTUS ------------------ [LOGO OF SMITH'S FOOD & DRUG CENTERS(R)] $575,000,000 SMITH'S FOOD & DRUG CENTERS, INC. % SENIOR SUBORDINATED NOTES DUE 2007 BT SECURITIES CORPORATION CS FIRST BOSTON DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. CHASE SECURITIES INC. , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses in connection with the issuance and distribution of the Notes. SEC registration fee........................................... $250,000 NASD filing fee................................................ 30,500 Blue Sky fees and expenses..................................... Accounting fees and expenses................................... Legal fees and expenses........................................ Printing and engraving expenses................................ Trustee fees................................................... Miscellaneous.................................................. -------- Total...................................................... $ ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Smith's, Smitty's, and SSV are Delaware corporations and their Certificates of Incorporation and Bylaws provide for indemnification of their officers and directors to the fullest extent permitted by law. Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL") the certificates of incorporation of Smith's, Smitty's and SSV eliminate the personal liability of a corporation's directors to a corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liabilities related to breach of duty of loyalty, actions not in good faith, and certain other liabilities. Section 145 of the DGCL permits the indemnification by a Delaware corporation of its directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against liabilities and expenses incurred in any such action, suit or proceeding. The Underwriting Agreement provides for indemnification by the Underwriters of Smith's and its directors, officers and controlling persons for certain liabilities arising under the Securities Act. The directors and officers of Smith's, Smitty's and SSV are insured against certain liabilities under directors' and officers' liability insurance. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits A list of exhibits filed with this Registration Statement on Form S-3 is set forth in the Index to Exhibits on page E-1, and is incorporated herein by reference. (b) Financial Statement Schedules Not Applicable. ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that II-1 a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Salt Lake City, State of Utah, on May 6, 1996. Smith's Food & Drug Centers, Inc. /s/ MATTHEW G. TEZAK By___________________________________ MATTHEW G. TEZAK SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURES TITLE DATE * Chairman of the - ------------------------------------- Board and Chief May 6, 1996 JEFFREY P. SMITH Executive Officer * President and Chief - ------------------------------------- Operating Officer May 6, 1996 ALLEN R. ROWLAND /s/ MATTHEW G. TEZAK Senior Vice - ------------------------------------- President and Chief May 6, 1996 MATTHEW G. TEZAK Financial Officer (Principal Financial and Accounting Officer) * Director - ------------------------------------- May 6, 1996 DELONNE ANDERSON * Director - ------------------------------------- May 6, 1996 ROBERT D. BOLINDER II-3 SIGNATURES TITLE DATE * Director - ------------------------------------- May 6, 1996 ALLEN P. MARTINDALE * Director - ------------------------------------- May 6, 1996 NICOLE MILLER * Director - ------------------------------------- May 6, 1996 DUANE PETERS * Director - ------------------------------------- May 6, 1996 RAY V. ROSE * Director - ------------------------------------- May 6, 1996 FRED L. SMITH * Director - ------------------------------------- May 6, 1996 RICHARD D. SMITH * Director - ------------------------------------- May 6, 1996 SEAN D. SMITH * Director - ------------------------------------- May 6, 1996 DOUGLAS JOHN TIGERT * Director - ------------------------------------- May 6, 1996 KENNETH A. WHITE *By: /s/ MATTHEW G. TEZAK ---------------------------------- MATTHEW G. TEZAK ATTORNEY-IN-FACT II-4 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 1.1 Form of Underwriting Agreement by and among Smith's Food & Drug Centers, Inc. ("Smith's") and BT Securities Corporation, CS First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co. and Chase Securities Inc. (the "Underwriters") with respect to the % Senior Subordinated Notes due 2007 (the "Notes"). +2.1 Recapitalization Agreement and Plan of Merger dated as of January 29, 1996 by and among Smith's Food & Drug Centers, Inc., Cactus Acquisition, Inc., Smitty's Supermarkets, Inc. and The Yucaipa Companies (incorporated by reference to Exhibit 2.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995). *3.1 Form of Amended and Restated Certificate of Incorporation of Smith's. *3.2 Form of Amended and Restated Bylaws of Smith's. 4.1 Form of Indenture by and between Smith's and , as Trustee, with respect to the Notes. *5.1 Opinion of Latham & Watkins regarding the legality of the Notes, including consent. *8.1 Opinion of Latham & Watkins regarding certain federal income tax matters, including consent. *10.1 Credit Agreement dated as of , 1996 by and among Smith's, Bankers Trust Company and The Chase Manhattan Bank, as Arrangers, the lenders named therein and Bankers Trust Company, as Administrative Agent. +10.2 Standstill Agreement dated as of January 29, 1996 by and among the Company, The Yucaipa Companies, Yucaipa SSV Partners, L.P., Yucaipa Smitty's Partners, L.P., Yucaipa Smitty's Partners II, L.P., Yucaipa Arizona Partners, L.P., Jeffrey P. Smith, Richard D. Smith, Fred L. Smith, Ida Smith and the other shareholders of the Company named therein. +10.3 Smith's Shareholder Agreement dated as of January 29, 1996 by and among Smitty's Supermarkets, Inc., The Yucaipa Companies and the shareholders of the Company named therein. +10.4 Smitty's Stockholder Agreement dated as of January 29, 1996 by and among the Company, Cactus Acquisition, Inc. and the stockholders of Smitty's Supermarkets, Inc. named therein. +10.5 Form of Registration Rights Agreement by and among the Company and the holders of the Company's Common Stock named therein. +10.6 Form of Management Services Agreement by and between the Company and The Yucaipa Companies.
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- +10.7 Form of Warrant Agreement by and between the Company and The Yucaipa Companies. 12.1 Statement regarding computation of ratio of earnings to fixed charges. +21.1 Subsidiaries of the Company. *23.1 Consent of Latham & Watkins (included in the opinions filed as Exhibits 5 and 8 to the Registration Statement). 23.2 Consent of Coopers & Lybrand L.L.P., independent accountants. 23.3 Consent of Ernst & Young LLP, independent auditors. +23.4 Consent of Houlihan, Lokey, Howard & Zukin, Inc. +24.1 Power of Attorney (included on signature page to the Registration Statement). *25.1 Statement of Eligibility and Qualification on Form T-1 of , as Trustee with respect to the Notes (No. 22- ). +27 Financial Data Schedule. +99.1 Consent of Linda McLoughlin Figel to be named as a proposed Director. +99.2 Consent of Ronald W. Burkle to be named as a proposed Director. +99.3 Consent of Bruce Karatz to be named as a proposed Director. +99.4 Consent of Bertram R. Zweig to be named as a proposed Director.
- -------- * To be filed by amendment + Previously filed EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 SMITH'S FOOD & DRUG CENTERS, INC. $575,000,000 [ ]% Senior Subordinated Notes due 2007 UNDERWRITING AGREEMENT ---------------------- , 1996 BT Securities Corporation CS First Boston Corporation Donaldson, Lufkin & Jenrette Securities Corporation Goldman, Sachs & Co. Chase Securities Inc. c/o BT Securities Corporation One Bankers Trust Plaza New York, New York 10005 Ladies and Gentlemen: Smith's Food & Drug Centers, Inc., a Delaware corpo- ration (the "Company"), hereby confirms its agreement with each ------- of you (the "Underwriters"), as set forth below. ------------ 1. The Securities. Subject to the terms and condi- -------------- tions herein contained, the Company proposes to issue and sell to the Underwriters $575,000,000 aggregate principal amount of its [ ]% Senior Subordinated Notes due 2007 (the "Securities"). ---------- The Securities will be issued pursuant to an Inden- ture to be entered into by the Company, as issuer, and , as trustee (the "Trustee"). ------- Pursuant to a 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 a wholly owned subsidiary of the Com- pany ("Acquisition"), Smitty's Supermarkets, Inc., a Delaware ----------- corporation ("Smitty's"), and The Yucaipa Companies, a Califor- -------- nia general partnership ("Yucaipa"), Acquisition will merge ------- (the "Merger") with and into Smitty's. Upon consummation of ------ the Merger, Smitty's will become a wholly owned subsidiary of the Company. -2- In connection with the Merger, the Company is offering (the "Tender Offer") to purchase 50% of the outstanding shares (excluding shares ------------ issuable in the Merger) of its common stock, par value $.01 per share (the "Common Stock"), from the holders thereof for $36.00 in cash per share. ------------ Concurrently with the Tender Offer, the Company intends to redeem certain shares of its Series I Preferred Stock, to repay certain indebtedness and repurchase certain outstanding employee stock options (such redemption, repayments and repurchases, the "Repayments"). ---------- At the time the Merger is consummated, Smitty's and its wholly owned subsidiary Smitty's Super Valu, Inc. ("SSV") will repay certain --- indebtedness, including, through offers to purchase (the "Smitty's Offers --------------- to Purchase") from the holders thereof, the 13.75% Senior Discount - ----------- Debentures due 2006 of Smitty's and the 12.75% Senior Subordinated Notes due 2004 of SSV (collectively, the "Smitty's Securities"). Consents will ------------------- be solicited (the "Consent Solicitations") from the holders of the Smitty's --------------------- Securities to certain amendments to the respective indentures under which the Smitty's Securities were issued. The repayment of Smitty's indebtedness, including through the Smitty's Offers to Purchase, and the Consent Solicitations are referred to herein collectively as the "Smitty's -------- Refinancing." - ----------- The Tender Offer, the Repayments and the Smitty's Refinancing will be funded with the proceeds from the offering of the Securities (the "Offering"), together with the initial borrowings under a new senior credit -------- facility (the "New Credit Facility") to be entered into among the Company, ------------------- Bankers Trust Company, as administrative agent, and the other financial institutions party thereto (the "Lenders") and certain proceeds of the ------- divestiture of the Company's Southern California operations (the "California Divestiture"). ---------------------- The Offering, the Tender Offer, the Repayments and the closing under the New Credit Facility are collectively referred to herein as the "Recapitalization." The Recapitalization, the Merger, the Smitty's ---------------- Refinancing, the California Divestiture and the disposition of the Company's closed stores and excess real estate in California pursuant to the California Asset Disposition (as defined in the Registration Statement) are collectively referred to herein as the "Transactions." The Securities, ------------ the Indenture, the New Credit Facility and the related credit documents (including the guarantees and collateral documents relating thereto), the Recapitalization Agreement and each of the agreements annexed as an exhibit thereto, the Equity Dealer Manager Agreement (as defined), the Debt -3- Dealer Manager Agreement (as defined) and this Agreement are collectively referred to herein as the "Transaction Documents". --------------------- 2. Representations and Warranties. The Company represents ------------------------------ and warrants to the Underwriters that (it being understood that references in this Section 2 (other than in subsection (a) or (b) hereof) to the Prospectus, if not in existence, shall be deemed to be to the most recent Preliminary Prospectus (as defined)): (a) A registration statement on Form S-3 (File No. 333-01601) with respect to the Securities, including a prospectus subject to completion with respect to the Securities, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (together ---------- with the rules and regulations of the Commission promulgated thereunder, the "Act"); and one or more amendments to such registra- --- tion statement also have been so filed. After the execution of this Agreement, the Company will file with the Commission either (x) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement) with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Underwriters prior to the execution of this Agreement, or (y) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Underwriters prior to the execution of this Agreement. As used in this Agreement, the term "Registration ------------ Statement" means such registration statement, as amended at the time --------- when it was or is declared effective, including all documents incorporated by reference therein and all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means ---------------------- each prospectus subject to completion, filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration -4- Statement); and the term "Prospectus" means the prospectus relating to the ---------- Securities, as first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be filed pursuant to said Rule 424(b) such term means the prospectus relating to the Securities included in the Registration Statement. Any reference herein to any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto shall be deemed to refer to and include the documents incorporated therein by reference as of the date of such Preliminary Prospectus or the Prospectus pursuant to Item 12 of Form S-3 under the Act, as the case may be, and any reference herein to the terms "amend," "amendment" or ----- --------- "supplement" with respect to any Preliminary Prospectus or the Prospectus ---------- shall be deemed to refer to and include any documents filed with the Commission after such date under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder (collectively, the "Exchange Act"), and so incorporated by ------------ reference (all such incorporated documents being herein called the "Incorporated Documents"). ---------------------- (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (x) complied in all material respects with the requirements of the Act and the Exchange Act and (y) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement was or is declared effective, it (1) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respect with the requirements of, the Act and (2) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus is not required to be so filed, when the Registration Statement was or is declared effective) and on the Closing Date (as defined in Section 3), the Prospectus (i) complied or will comply in all material respects with the requirements of the Act and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in -5- the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company by the Underwriters specifically for use therein or to the Statement of Eligibility and Qualification (the "Forms T-1") under the Trust Indenture Act of 1939, as --------- amended (the "Trust Indenture Act"), of the Trustee filed as an exhibit to ------------------- the Registration Statement. (c) The Company has prepared and filed with the Commission in accordance with the Exchange Act (x) a proxy statement and form of proxy relating to the 1996 annual meeting of the Company's stockholders (the "Stockholders Meeting") at which the Company's -------------------- stockholders approved the Recapitalization Agreement and the transactions contemplated thereby, including the Tender Offer, (ii) an Issuer Tender Offer Statement on Schedule 13E-4 under the Exchange Act with respect to the Tender Offer. As used in this Agreement, the term "Proxy Statement" means the definitive proxy --------------- statement and form of proxy, including any annexes, financial statements and schedules, and any amendments or supplements thereto in the form filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act; and the term "Offer to Purchase" means the offer to ----------------- purchase, the related form of letter of transmittal, summary advertisement and exhibits thereto, in the form filed as part of the Issuer Tender Offer Statement on Schedule 13E-4 under the Exchange Act. (d) On the date that the Proxy Statement was mailed to the Company's stockholders and on the date of the Stockholders' Meeting, the Proxy Statement complied in all material respects with the provisions of the Exchange Act, and the Proxy Statement at such times and on the Closing Date did not and will not, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein, in light of the circumstances under which they were made, or necessary in order to make the statements therein not misleading. On the date that the Offer to Purchase was mailed to the Company's stockholders, it complied in all material respects with the provisions of the Exchange Act, and the Offer to Purchase at such times and on the Closing Date did not and will not, as the case may be, contain an -6- untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstance under which they were made, not misleading. (e) Annex B hereto lists all of the direct and indirect ------- subsidiaries of the Company after giving effect to the Transactions (the "Subsidiaries"). Neither the Company nor any of the ------------ Subsidiaries owns, or after giving effect to the Transactions will own, directly or indirectly, any shares of capital stock or other equity securities of any person not listed on such Annex. The Company and each of the Subsidiaries have been duly incorporated and are validly existing in good standing as corporations under the laws of their respective jurisdictions of incorporation, with all requisite corporate power and authority to own or lease their respective properties and conduct their respective businesses as described in the Prospectus. The Company and each of the Subsidiaries are, and will be after giving effect to the Transactions, duly qualified to do business as foreign corporations in good standing in all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified, individually or in the aggregate, would not have (x) a material adverse effect on the business, condition (financial or other), results of operations or prospects of the Com- pany and the Subsidiaries taken as a whole or (y) an adverse effect on the ability of the Company or any Subsidiary to perform any of its material obligations under any of the Transaction Documents to which it is or will be a party or to consummate any of the Transactions (collectively, a "Material Adverse Effect"). The Company has, and ----------------------- upon consummation of the Transactions, will have (based upon the assumptions described or referred to in the first paragraph under the caption "Pro Forma Capitalization" in the Prospectus), in all material respects, the authorized, issued and outstanding capitalization set forth in the Prospectus. The outstanding shares of capital stock of the Company and each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and were not issued in violation of any preemptive or similar rights granted by the Company or any Subsidiary. Except as described in the Prospectus and except as to any indebtedness to be repaid on the Closing Date, all of the outstanding shares of capital stock of each of -7- the Subsidiaries are, or will be upon consummation of the Transactions, owned beneficially by the Company, directly or indirectly, free and clear of all liens, encumbrances, security interests, mortgages, pledges, charges or claims. No holder of securities of the Company or any of the Subsidiaries is entitled to have such securities registered under the Registration Statement. (f) The Company and each of the Subsidiaries have all necessary corporate power and authority to execute and deliver each of the Transaction Documents, to perform their respective obligations thereunder (including the issuance of the Securities) and to consummate the Transactions (in each case, to the extent each is a party thereto). (g) The Securities have been duly and validly authorized by the Company for issuance and, when executed by the Company and authenticated by the Trustee in accordance with the provisions of the Indenture, and delivered to and paid for by the Underwriters in accordance with the terms hereof, will have been duly executed, issued and delivered and will constitute legally valid and binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except that the enforcement thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought (regardless of whether such enforcement is considered in a proceeding in equity or at law), (iii) the unenforceability, under certain circumstances, of provisions imposing penalties, forfeitures, late payment charges or an increase in interest rate upon delinquency in payment or the occurrence of a default, and (iv) the unenforceability of any provision requiring the payment of attorneys' fees, except to the extent that a court determines such fees to be reasonable (each of clauses (i), (ii), (iii) and (iv), an "Enforceability Limitation"). ------------------------- The Indenture has been duly authorized by the Company and, when executed and delivered by the Company (assuming the due authorization, execution and delivery thereof by the Trustee), will constitute a legally valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except that the enforcement thereof may be -8- subject to (x) the Enforceability Limitations and (y) the unenforceability of the provisions contained in the Indenture relating to the waiver of stay, extension or usury laws. The Indenture has been qualified under the Trust Indenture Act and complies as to form in all material respects with the requirements of the Trust Indenture Act. (h) This Agreement has been duly authorized, executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by the Underwriters, constitutes the legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that the enforcement hereof may be subject to (x) the Enforceability Limita- tions and (y) the unenforceability under certain circumstances under law or court decisions of provisions for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy. (i) Each of the Transactions and Transaction Documents conforms in all material respects to the descriptions thereof in the Prospectus. (j) Except as described in the Prospectus, no consent, approval, authorization or order of any court or governmental agency or body is required for the performance of any of the Transaction Documents by the Company or any of the Subsidiaries (to the extent each such person is a party thereto) or the consummation by the Company or any of the Subsidiaries of any of the Transactions, except such as have been obtained and such as may be required under the Act, the Trust Indenture Act or state securities or "Blue Sky" laws, or where the failure to obtain such consent, approval, authorization or order, individually or in the aggregate, would not have a Material Adverse Effect. Neither the Company nor any of the Subsidiaries is, or upon consummation of the Transactions will be, (i) in violation of its certificate of incorporation or bylaws, (ii) in violation of any statute, judgment, decree, order, rule or regulation applicable to it, which violation, individually or in the aggregate, would have a Material Adverse Effect, or (iii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or other -9- agreement or instrument to which it or any of its properties is subject (collectively, "Contracts"), which default, individually or in the --------- aggregate, would have a Material Adverse Effect. (k) Neither the execution, delivery and performance by the Company or any of the Subsidiaries of any of the Transaction Documents (to the extent each such person is a party thereto), nor the consummation by the Company or any of the Subsidiaries of any of the Transactions will (after giving effect to all amendments and waivers obtained on or prior to the Closing Date) conflict with or constitute or result in a breach or violation by the Company or any of the Subsidiaries of any of (i) the terms or provisions of, or constitute a default by the Company or any of the Subsidiaries under, any of the Contracts, which conflict, breach, violation or default, individually or in the aggregate, would have a Material Adverse Effect, (ii) the certificate of incorporation or bylaws of any such person, or (iii) any statute, judgment, decree, order, rule or regulation (excluding state securities and "Blue Sky" laws) of any court or governmental agency or other body applicable to any such person or any of their respective properties, which conflict, breach, violation or default, individually or in the aggregate, would have a Material Adverse Effect. (l) (x) Immediately after the consummation of the Transactions, the fair value and present fair saleable value of the assets of the Company will exceed the sum of its stated liabilities and identified contingent liabilities; and (y) after giving effect to the execution, delivery and performance of the Transaction Documents and the consummation of the Transactions, neither the Company nor any of the Subsidiaries is, or will be, (i) left with unreasonably small capital with which to carry on its business as it is proposed to be conducted as described in the Prospectus, (ii) unable to pay its debts (contingent or otherwise) as they mature or (iii) insolvent. (m) As of the Closing Date, each of the Transaction Documents (other than the Indenture, the Securities or this Agreement) will have been duly and validly authorized by the Company and each of the Subsidiaries (to the extent each is a party thereto); and, when executed and delivered by the Company and the Subsidiaries (to the extent each is a party thereto), assuming the due authorization, -10- execution and delivery thereof by all other parties thereto, each such Transaction Document will constitute a legally valid and binding obligation of the Company and each of the Subsidiaries, to the extent each is a party thereto, enforceable against each such person in accordance with its terms, except that the enforcement thereof may be subject to (x) the Enforceability Limitations and (y) the unenforceability under certain circumstances under law or court decisions of provisions for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy. (n) Except as disclosed in the Prospectus, and except as would not, individually or in the aggregate, have a Material Adverse Effect, (i) the Company and each of the Subsidiaries are in compliance with all applicable Environmental Laws (as defined below), (x) the Company and each of the Subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are in compliance with their requirements, (ii) there are no pending or, to the best knowledge of the Company, threatened Environmental Claims (as defined below) against the Company or any of the Subsidiaries and (iii) the Company has no knowledge of any circumstances that could reasonably be anticipated to form the basis of an Environmental Claim against the Company or any of the Subsidiaries or any of their respective properties or operations and the business operations relating thereto which Environmental Claim, individually or in the aggregate, would have a Material Adverse Effect. For purposes of this Agreement, the following terms shall have the following meanings: "Environmental Law" means, with respect to any person, ----------------- any federal, state, local or municipal statute, law, rule, regulation, ordinance, code and any published judicial or administrative interpretation thereof including any judicial or administrative order, consent decree or judgment binding on or applicable to such person or any of its subsidiaries, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any such governmental authority. "Environmental Claims" -------------------- means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. -11- (o) The audited consolidated financial statements and schedules of the Company and of Smitty's in the Registration Statement and Prospectus present fairly the consolidated financial position, results of operations and cash flows of the Company and of Smitty's, respectively, at the dates and for the periods to which they relate, and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, except as otherwise stated therein, and the unaudited consolidated financial statements of Smitty's and the related notes included in the Prospectus present fairly the consolidated financial position, results of operations and cash flows of Smitty's at the dates and for the periods to which they relate, subject to year-end audit adjustments, and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, except as otherwise stated therein. (p) The pro forma financial statements and other pro forma financial information (including the notes thereto) included in the Prospectus and the Registration Statement have been prepared in accordance with applicable requirements of Regulation S-X promulgated under the Exchange Act and have been properly computed on the bases described therein. The assumptions used in the preparation of the pro forma financial statements and other pro forma financial information in the Registration Statement and Prospectus are set forth therein and are reasonable, and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (q) Ernst & Young LLP, which has audited certain financial statements and schedules as set forth in its reports included in the Registration Statement and the Prospectus, is an independent public accounting firm with respect to the Company as required by the Act. Coopers & Lybrand L.L.P., which has audited certain financial state- ments and schedules as set forth in its reports included in the Registration Statement and the Prospectus, is an independent public accounting firm with respect to Smitty's as required by the Act. (r) The forward-looking statements relating to cost savings in the Prospectus are based on assumptions that the Company believes to be reasonable. The other statistical and market-related data in the Prospectus are based -12- on or derived from sources that the Company believes to be reliable and accurate. (s) Except as described in the Prospectus, there is not pending or, to the best of the Company's knowledge, threatened any action, suit, proceeding, inquiry or investigation to which the Company or any of the Subsidiaries or to which the property of the Company or any of the Subsidiaries is subject, before or brought by any court or governmental agency or body, which, individually or in the aggregate, would if determined adversely to the Company have a Material Adverse Effect. (t) The Company and each of the Subsidiaries have (a) good and marketable title to all the real properties and other material assets (personal, tangible, intangible or mixed) owned or purported to be owned by them respectively, and, as of the Closing Date (after giving effect to the Transactions), such title will be free and clear of all liens, except for liens which would be permitted under the Indenture and (b) peaceful and undisturbed possession under all leases to which they are party as lessee or sublessee, except for such defects in title or lack of possession that, individually or in the aggregate, would not have a Material Adverse Effect. The Company and each of the Subsidiaries operate all material real and personal property leased by them under valid and enforceable leases and have performed in all material respects the obligations required to be performed by them with respect to each such lease, except for such leases and obligations which, individually or in the aggregate, would not have a Material Adverse Effect. As to leases with respect to which the Company or any Subsidiary is the lessor, the lessees and other parties under such leases are in compliance with all terms and conditions thereunder and such leases are in full force and effect except for any failures to comply or remain in full force and effect which, individually or in the aggregate, would not have a Material Adverse Effect. All tangible assets and properties of the Company and each of the Subsidiaries are in good working order (subject to ordinary wear and tear) and are adequate for the uses to which they are being put or would be put in the ordinary course of business except for such assets and properties as in the aggregate will not, after giving effect to the Transactions, be material to the business, condition (financial or otherwise), results of -13- operations or prospects of the Company and the Subsidiaries taken as a whole. (u) The Company and the Subsidiaries own, or possess licenses with respect to, and have the rights to use, all trademarks and trade names (collectively, "Intellectual Property") used in, or necessary --------------------- for the conduct of, their respective businesses as described in the Prospectus, and the consummation of the Transactions will not alter or impair any such rights, except for such alterations or impairments as would not, individually or in the aggregate, have a Material Adverse Effect. To the best of the Company's knowledge, no claims have been asserted by any person to the use of any such Intellectual Property or challenging or questioning the validity or effectiveness of any license or agreement related thereto, except for such claims as would not, individually or in the aggregate, have a Material Adverse Effect. To the best of the Company's knowledge, there is no valid basis for any such claim and the use of such Intellectual Property by the Company and the Subsidiaries does not infringe on the rights of any person. The Company and each of the Subsidiaries have obtained all licenses, permits, franchises and other governmental authorizations the lack of which, individually or in the aggregate, would have a Material Adverse Effect. (v) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described therein, (x) neither the Company nor any of the Subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, not in the ordinary course of business and (y) neither the Company nor any of the Subsidiaries has purchased any of its respective outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on their respective capital stock or otherwise. (w) All taxes, assessments, fees and other charges (including, without limitation, withholding taxes, penalties, and interest) due or claimed to be due from the Company or any of the Subsidiaries that are due and payable have been paid, other than those being contested in good faith or those currently payable without penalty or interest and for which an adequate reserve or accrual has been established in accordance with generally accepted -14- accounting principles, and except where the failure so to pay would not, individually or in the aggregate, have a Material Adverse Effect. The Company knows of no actual or proposed additional tax assessments for any fiscal period against the Company and the Subsidiaries that, individually or in the aggregate, would have a Material Adverse Effect. (x) Neither the Company nor any of the Subsidiaries is now, or after giving effect to the Transactions will be, an "investment company" or a company "controlled by" an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (y) Except as stated in the Prospectus, the Company knows of no outstanding claims for services, either in the nature of a finder's fee, financial advisory fee, origination fee or similar fee, with respect to any of the Transactions. (z) Each of the representations and warranties set forth in the Recapitalization Agreement was true and correct in all materials respects at the time as of which such representations and warranties were made and will be true and correct at and as of the Closing Date as if made at and as of such date (other than to the extent any such representation or warranty is expressly made as to only a certain other date). (aa) As of the Closing Date, each of the representations and warranties of the Company and the Subsidiaries set forth in the Credit Agreement will be true and correct as if made at and as of such date (other than to the extent any such representation or warranty is expressly made as to only a certain other date). (ab) Each of the representations and warranties set forth in the Dealer Manager Agreement dated , 1996 between the Company and Goldman, Sachs & Co. (the "Equity Dealer Manager Agreement") ------------------------------- was true and correct in all material respects at the time as of which such representations and warranties were made and will be true and correct at and as of the Closing Date as if made at and as of such date (other than to the extent any such representation or warranty is expressly made as to only a certain other date). -15- (ac) Except as stated in the Prospectus, neither the Company nor any of the Subsidiaries nor, to the best of the Company's knowledge, any of their respective directors, officers or controlling persons has taken, directly or indirectly, any action designed, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company or any of the Subsidiaries to facilitate the sale of the Securities or the Smitty's Offers to Purchase or the Tender Offer. (ad) As of the Closing Date, the Company will have delivered to the Underwriters a true and correct copy of each of the Transaction Documents, together with all related agreements and all schedules and exhibits thereto, and there shall have been no material amendments, alterations, modifications and waivers as to which the Underwriters have not been advised in writing and which would be required to be disclosed in the Prospectus; and there exists as of the Closing Date (after giving effect to the Transactions) no event or condition which would constitute a default or an event of default (in each case as defined in each of the Transaction Documents) under any of the Transaction Documents which, individually or in the aggre- gate, would have a Material Adverse Effect. Any certificate signed by any officer of the Company or any Subsidiary and delivered pursuant to this Agreement or in connection with the payment of the purchase price and delivery of the Securities shall be deemed a representation and warranty by the Company or such Subsidiary, as the case may be, to each Underwriter as to the matters covered thereby, and shall not be deemed a representation by such officer as an individual. 3. Purchase, Sale and Delivery of the Securities. On the --------------------------------------------- basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriters, and each of the Underwriters severally agrees to purchase from the Company, at % of their principal amount, the respective principal amounts of the Securities set forth opposite their respective names on Annex A hereto. The obligations of the ------- Underwriters under this Agreement are several and not joint. Certificates in definitive form for the Securities that the Underwriters have agreed to purchase -16- hereunder, and in such denominations and registered in such name or names as each Underwriter requests upon notice to the Company at least 48 hours prior to the Closing Date, shall be delivered by or on behalf of the Company, against payment by or on behalf of the Underwriters of the purchase price therefor by wire transfer or check of immediately available funds to the account of the Company. Such delivery of and payment for the Securities shall be made at the offices of Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, at 10:00 A.M., New York time, on May , 1996, or at such other place, time or date as the Underwriters and the Company may agree upon or as the Underwriters may determine pursuant to Section 7(a) hereof, such time and date of delivery against payment being herein referred to as the "Closing Date." The Company will ------------ make such certificates for the Securities available for checking and packaging by the Underwriters at the offices in New York, New York of BT Securities Corporation at least 24 hours prior to the Closing Date. 4. Offering by the Underwriters. After the Registration ---------------------------- Statement becomes effective, the Underwriters propose to offer for sale to the public the Securities at the price and upon the terms set forth in the Prospectus. 5. Certain Covenants. The Company covenants and agrees with ----------------- the Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective promptly. If, at the time that the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A of the rules and regulations of the Commis- sion under the Act, then immediately following the execution of this Agreement, the Company will prepare, and thereafter the Company will file or transmit for filing with the Commission in accordance with such Rule 430A and Rule 424(b) of the rules and regulations of the Commission under the Act, copies of the Prospectus, or, if required by such Rule 430A, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted. The Company will give each Underwriter notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised -17- prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the rules any regulations of the Commission under the Act), will furnish the Underwriters with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which the Underwriters shall reasonably object or which is not in compliance with the Act or the Exchange Act. The Company will advise the Underwriters, promptly after it receives notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or when the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Underwriters of each such filing or effectiveness. (b) The Company will advise the Underwriters, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, (ii) the suspension of the qualification of any of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose or (iv) any request made by the Commission for amending the Registration Statement, for amending or supplementing the Prospectus or for addi- tional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Company will cooperate with the Underwriters in arranging for the qualification of the Securities for offering and sale under the securities or "Blue Sky" laws of such jurisdictions as the Underwriters may designate and will continue such qualifications in effect for as long as may be necessary to complete the initial distribution of the Securities by the Underwriters; provided, how- -------- ---- ever, that in connection therewith the Company shall not ---- -18- be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or, except at the expense of the Underwriters, to keep any state qualification effective after one year. (d) If any event shall occur as a result of which it is necessary, in the judgment of counsel for the Underwriters, to amend or supplement the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is, or is to be, delivered to a purchaser of Securities, or if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Act and the Exchange Act, the Company shall (subject to Section 5(a)) forthwith amend or supplement the Prospectus (in form and substance reasonably satisfactory to the Underwriters and in compliance with the Act) so that, as so amended or supplemented, the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is, or is to be, delivered to a purchaser of Securities, not misleading and will comply with the Act and the Exchange Act, and the Company will furnish to the Underwriters a reasonable number of copies of such amendment or supplement. (e) The Company will, without charge, provide (i) to each Underwriter and to counsel for the Underwriters a signed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) and (ii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Underwriters may reasonably request. (f) Subject to Section 5(a), the Company will timely complete all required filings and otherwise comply fully in a timely manner with all provisions of the Exchange Act and promptly file all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus -19- is required in connection with the offer or sale of any of the Securities. (g) The Company, as soon as practicable, will make generally available to its security holders a consolidated earnings statement of the Company that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (h) The Company will apply the net proceeds from the sale of the Securities, along with borrowings under the New Credit Facility, as set forth under "Summary -- The Transactions -- Sources and Uses" in the Prospectus. (i) The Company will not voluntarily claim, and will actively resist any attempts to claim, the benefit of any usury laws against holders of the Securities. (j) The Company will not take at any time, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of any of the Securities to facilitate the sale or resale of any of the Securities. 6. Expenses. The Company agrees to pay all costs and -------- expenses incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 10 hereof, including all costs and expenses incident to (i) the printing, word processing or other production of documents with respect to such transactions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendment thereto, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, and any "Blue Sky" memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company or any Subsidiary, (iv) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, (v) the qualification of the Securities under state securities and "Blue Sky" laws, including filing fees and reasonable fees and disbursements of counsel for the Underwriters relating thereto, (vi) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities, (vii) expenses -20- of the Company and the Subsidiaries in connection with any meetings with prospective investors in the Securities, (viii) fees and expenses of the Trustee, including fees and expenses of its counsel, (ix) advertising relating to the offering of the Securities (other than as shall have been specifically approved by the Underwriters to be paid for by the Underwriters), and (x) any fees charged by investment rating agencies for the rating of the Securities. 7. Conditions of the Underwriters' Obligations. The ------------------------------------------- obligation of the Underwriters to purchase and pay for the Securities are subject to the accuracy of the representations and warranties contained herein, to the performance by the Company of its covenants and agreements hereunder and to the following additional conditions: (a) If the registration statement originally filed with respect to the Securities or any amendment thereto filed prior to the Closing Date has not been declared effective as of the time of execution hereof, the Registration Statement or such amendment shall have been declared effective not later than 12:00 noon, New York City time, on the date on which the amendments to the registration statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission, or such later time and date as shall have been consented to by the Underwriters; if required, the Prospectus and any amendment or supplement thereto shall have been filed in accordance with Rule 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto or the qualification of the Indenture under the Trust Indenture Act shall have been issued and no proceedings for that purpose shall have been instituted or threatened or, to the best of the Company's knowledge, any Subsidiary or the Underwriters, shall be contemplated by the Commission; and the Underwriters shall have received a certificate, with respect to the Company, dated the Closing Date and signed by the Chairman, President, a Senior Vice President or a Vice President of the Company (who may rely upon the best of his information and belief), to that effect. (b) The Underwriters shall have received opinions in form and substance satisfactory to the Underwriters, dated the Closing Date, of (i) Latham & Watkins, special counsel -21- for the Company, substantially in the form of Exhibit A hereto, (ii) --------- Simpson, Thacher & Bartlett, special counsel for the Company, substantially in the form of Exhibit B hereto, (iii) the General Counsel --------- of the Company, substantially in the form of Exhibit C hereto and (iv) the --------- General Counsel of the Smitty's, substantially in the form of Exhibit D --------- hereto. (c) The Underwriters shall have received an opinion, dated the Closing Date, of Cahill Gordon & Reindel, counsel for the Underwriters, with respect to the sufficiency of certain corporate proceedings and other legal matters relating to this Agreement, and such other related matters as the Underwriters may require. In rendering such opinion, Cahill Gordon & Reindel shall have received and may rely upon such certificates and other documents and infor- mation as they may reasonably request to pass upon such matters. (d) The Underwriters shall have received from Ernst & Young LLP, letters dated the date hereof and the Closing Date, in form and substance satisfactory to the Underwriters. (e) The Underwriters shall have received from Coopers & Lybrand L.L.P. letters dated the date hereof and the Closing Date, in form and substance satisfactory to the Underwriters. (f) The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date (other than to the extent any such representation or warranty is expressly made as to a certain other date); the Company shall have complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date; and subsequent to December 30, 1995 (except as specifically disclosed in the Prospectus), there shall have been no material adverse change in the business, condition (financial or other), results of operations or prospects of the Com- pany and the Subsidiaries taken as a whole (a "Material Adverse ---------------- Change"), or any development involving a prospective Material Adverse ------ Change, except as set forth in, or contemplated by, the Prospectus. -22- (g) None of the Transactions shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued or any action, suit or proceeding shall have been commenced with respect to any Transaction Document, any Transaction before any court or governmental authority. (h) The Underwriters shall have received a certificate, dated the Closing Date, of the Chairman, President or any Vice President (and with respect to (iii) below, the Chief Financial Officer) of the Company to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct in all material respects as if made on and as of the Closing Date, and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) No stop order suspending the effectiveness of the Registration Statement or any amendment thereto or the qualification of the Indenture under the Trust Indenture Act has been issued, and no proceedings for those purposes have been instituted or threatened or, to the best of the Company's knowledge, are contemplated by the Commission; (iii) Subsequent to December 30, 1995 (except as specifically disclosed in the Prospectus), there has not been a Material Adverse Change; (iv) Neither the sale of the Securities by the Company hereunder nor any of the Transactions has been enjoined (temporarily or permanently); (v) There have been no material amendments, alterations, modifications, or waivers of any provisions of any of the Transaction Documents since the date of the execution and delivery thereof by the parties thereto; and (vi) The Company and the Subsidiaries, to the extent each is a party thereto, have complied in all material respects with all agreements and covenants in the Transaction Documents and performed in all -23- material respects all conditions specified therein contemplated by the Prospectus to be complied with or performed by them at or prior to the Closing Date. (i) The Underwriters shall have received a certificate, dated the Closing Date, of the Chairman, President or any Vice President (and with respect to (ii) below the Chief Financial Officer) of Smitty's to the effect that: (i) The representations and warranties of Smitty's in the Recapitalization Agreement are true and correct in all material respects as if made on and as of the Closing Date (other than to the extent any such representation or warranty is expressly made as to only a certain other date), and Smitty's and its subsidiaries have performed all covenants and agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Date after giving effect to the Transactions; (ii) Subsequent to July 30, 1995 (except as specifically disclosed in the Prospectus), there has not been any material adverse change, or any developments involving a prospective material adverse change, in the business, condition (financial or other), results of operations or prospects of Smitty's and its subsidiaries taken as a whole; and (iii) Smitty's and its subsidiaries have complied in all material respects with all agreements and covenants in the Transaction Documents, to the extent each is a party thereto, and performed in all material respects all conditions specified therein contemplated by the Prospectus to be complied with or performed by them at or prior to the Closing Date. (j) On the Closing Date, the Underwriters shall have received (i) a letter, dated the Closing Date, from Houlihan, Lokey, Howard & Zukin, Inc. with respect to the solvency of the Company and the Subsidiaries in form, scope and substance satisfactory to the Underwriters and (ii) environmental audit reports in form, scope and substance satisfactory to the Underwriters. (k) On the Closing Date, the Company and the Subsidiaries shall have, to the extent each is a party thereto, complied in all material respects with all agreements and -24- covenants in the Transaction Documents and performed all conditions specified therein (other than agreements or covenants which have been waived but only if such waivers are not required to be set forth in the Prospectus) to be complied with or performed at or prior to the Closing Date, and each of the Transaction Documents shall be in full force and effect. (l) On the Closing Date, the Underwriters shall have received copies of all certificates, documents and opinions, reasonably requested by the Underwriters, delivered by the Company or any of the Subsidiaries or any of their counsels and such other certificates, documents and opinions reasonably obtainable by the Company or any of the Subsidiaries under the Transaction Documents in connection with any of the Transactions, together with letters addressed to the Underwriters, stating that the Underwriters may rely on such certificates and opinions as if they had been addressed to the Underwriters. (m) Each of the Transactions (other than the Offerings) shall have been consummated, or shall be consummated simultaneously with the Offerings, on the terms and conditions set forth in the Transaction Documents. (n) On the Closing Date, the Certificate of Merger with respect to the Merger shall be in form and substance satisfactory to the Underwriters and shall have been filed with the Secretary of State of the State of Delaware. On or before the Closing Date, the Underwriters shall have received such further documents, opinions, certificates and schedules or instruments relating to the business, corporate, legal and financial affairs of the Company and the Subsidiaries as they shall have heretofore reasonably requested from the Company and the Subsidiaries. All such opinions, certificates, letters, schedules, documents or instruments delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Underwriters. The Company and the Subsidiaries shall furnish to the Underwriters such conformed copies of such opinions, certificates, letters, schedules, documents and instruments in such quanti- ties as the Underwriters shall reasonably request. -25- 8. Indemnification and Contribution. (a) The Company -------------------------------- agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls either of the Underwriters within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and each of their respective officers, directors, employees, representatives and agents (collectively, the "Underwriter Indemnitees"), against any losses, claims, ----------------------- damages or liabilities, joint or several, to which such Underwriter Indemnitee may become subject under the Act, the Exchange Act or otherwise, insofar as any such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of any material fact contained in (A) the registration statement originally filed with respect to the Securities or any amendment thereto or any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or any Subsidiary or based upon written information furnished by or on behalf of the Company or any Subsidiary filed in any jurisdiction in order to qualify the Securities under the securities or "Blue Sky" laws thereof or filed with the Commission or any securities association or securities exchange (each, an "Application") or ----------- (ii) the omission or alleged omission to state, in such registration statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse, as incurred, each Underwriter Indemnitee, for any legal or other expenses reasonably incurred by such Underwriter Indemnitee in connection with investigating, defending against or appearing as a third- party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such -------- ------- case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application in reliance upon and in conformity with written information furnished to the Company by -26- any of the Underwriters specifically for use therein; and provided, further, -------- ------- that the Company will not be liable to any Underwriter Indemnitee with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto if the Company shall have furnished such Underwriter with such amendment or supplement on a timely basis) if the person asserting any such loss, claim, damage or liability purchased Securities from the related Underwriter in reliance upon such Preliminary Prospectus but was not sent or given a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished such Underwriter with such amendment or supplement on a timely basis) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as so amended or supplemented if the Company shall have furnished such Underwriter with such amendment or supplement on a timely basis) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented if the Company shall have furnished such Underwriter with such amendment or supplement on a timely basis) was a result of noncompliance by the Company with Section 5(e)(ii) of this Agreement. Notwithstanding anything to the contrary herein, no Underwriter shall be obligated to send or give any supplement or amendment to any document incorporated by reference in any Preliminary Prospectus or the Prospectus to any person in order to benefit from the indemnification provisions herein or otherwise. This indemnity agreement will be in addition to any liability that the Company may otherwise have to the Underwriter Indemnitees, including under the indemnity letter agreement dated January 25, 1996 between Smith's and Smitty's on the one hand and the Underwriters on the other hand. The Company will not, without the prior written consent of the Underwriters, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification from the Company may be sought hereunder (whether or not any Underwriter Indemnitee is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Underwriter Indemnitees from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company and its directors, officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act -27- (collectively, the "Company Indemnitees") against any losses, claims, ------------------- damages or liabilities to which such Company Indemnitee may become subject under the Act, the Exchange Act, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application, or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by such Company Indemnitee in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action in respect thereof. The Company agrees and acknowledges that, for all purposes of this Agreement, the only information provided by the Underwriters to the Company are the paragraph immediately above "Available Information" and the table and the third paragraph under "Underwriting" in the Prospectus. This indemnity agreement will be in addition to any liability that the Underwriters may otherwise have to the Company Indemnitees. The Underwriters will not, without the prior written consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification from the Underwriters may be sought hereunder (whether or not any Company Indemnitee is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company Indemnitees from all liability arising out of such claim, action, suit or proceeding. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement -28- thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8 except to the extent the failure to provide such notice materially prejudices the indemnifying parties. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the -------- ------- defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, then the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and, subject to the next sentence, such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the immediately preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Underwriters in the case of paragraph (a) of this Section 8 or the Company in the case of paragraph (b) of this Section 8, representing the indemnified parties under such paragraph (a) or paragraph (b), as the case may be, who are parties to such action or actions) or (ii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by -29- such indemnified party without the consent of the indemnifying party, unless such indemnified party waived its rights under this Section 8, in which case the indemnified party may effect such a settlement without such consent. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabili- ties (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the Offerings (before deducting expenses other than underwriting discounts and commissions) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Company on the one hand and the Under-writers on the other hand were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). Notwithstanding any other provision of this paragraph (d), the Underwriters shall -30- not be obligated to make contributions hereunder that in the aggregate exceed the total underwriting discounts and commis-sions received by the Underwriters under this Agreement, less the aggregate amount of any damages that the Underwriters have otherwise been required to pay by reason of untrue or alleged untrue statements or omissions or alleged omissions to state a material fact, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each Underwriter Indemnitee (other than any Underwriter) shall have the same rights to contribution as the Underwriters, and each Company Indemnitee (other than the Company) shall have the same rights to contribution as the Company. 9. Survival Clause. The respective representations, --------------- warranties, agreements, covenants, indemnities and other statements of the Company, Smitty's, their respective officers and the Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, Smitty's, any Company Indemnitee or any Underwriter Indemnitee and (ii) delivery of and payment for the Securities, and shall be binding upon and shall inure to the benefit of any successors, assigns, heirs, personal representatives of the Company Indemnitees and the Underwriter Indemnitees. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 10. Termination. (a) This Agreement may be terminated in ----------- the sole discretion of the Underwriters by notice to the Company given prior to the Closing Date in the event that the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Closing Date: (i) the Company or any Subsidiary shall have sustained any loss or interference with respect to its businesses or properties from fire, flood, hurricane, earthquake, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, which loss or interference, -31- individually or in the aggregate, has had or has a Material Adverse Effect, or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of the Company or any Subsidiary), in the business, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries taken as a whole, except as described in the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in securities generally on the New York or American Stock Exchange shall have been suspended or minimum or maximum prices shall have been established on any such exchange; (iii) a banking moratorium shall have been declared by New York or United States authorities; or (iv) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (c) any material change in the financial markets of the United States which, in the sole judgment of the Underwriters, makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. (b) Termination of this Agreement pursuant to this Section 10 shall be without liability of any party to any other party except as provided in Section 9 hereof. 11. Defaulting Underwriters. If, on the Closing Date, any ----------------------- one or more of the Underwriters shall fail or refuse to purchase Securities that it or they have agreed to purchase hereunder and the aggregate principal amount of Securities with respect to which such default occurs (the "Defaulted Securities") is not more than one-tenth of the aggregate -------------------- principal amount of Securities to be purchased by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the principal amount of Securities set forth opposite its name on Annex A bears to the total principal amount of Defaulted Securities, to - ------- purchase Defaulted Securities. If, on the Closing Date, any one or more Underwriters shall fail or refuse to purchase Securities which it or they -32- have agreed to purchase hereunder and the aggregate principal amount of Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Securities to be purchased by all Underwriters and arrangements satisfactory to you and the Company for the purchase of such Defaulted Securities are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or of the Company, except as provided in Section 13. In any such case which does not result in termination of this Agreement, you shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. No action taken under this paragraph shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 12. Notices. All communications hereunder shall be in ------- writing and, if sent to the Underwriters, shall be mailed or delivered or telecopied and confirmed in writing to the Underwriters c/o BT Securities Corporation, One Bankers Trust Plaza, New York, New York 10005, Attention: [Gerry McConnell], with a copy to Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, Attention: Michael A. Becker, Esq., and if sent to the Company, shall be mailed, delivered or telegraphed and confirmed in writing to Attention: [ ], with a copy to Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California 90071, Attention: Thomas C. Sadler, Esq. 13. Successors. This Agreement shall inure to the benefit of ---------- and be binding upon the Underwriters, the Company, and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained; this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; provided, however, that (i) the indemnities of the Company -------- ------- contained in Section 8 of this Agreement shall also be for the benefit of the other Underwriter Indemnitees and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the other Company Indemnitees. No purchaser -33- of any of the Securities from the Underwriters will be deemed a successor because of such purchase. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND -------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAW. 15. Counterparts. This Agreement may be executed in two or ------------ more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -34- If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between the Company and the Underwriters. Very truly yours, SMITH'S FOOD & DRUG CENTERS, INC. By: ______________________________________ Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. BT SECURITIES CORPORATION CS FIRST BOSTON CORPORATION DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. CHASE SECURITIES INC. By: BT SECURITIES CORPORATION By: _____________________________ Name: Title: Annex A -------
Principal Amount Underwriter of Securities - ----------- ---------------- BT Securities Corporation CS First Boston Corporation Donaldson, Lufkin & Jenrette Securities Corporation Goldman, Sachs & Co. Chase Securities Inc. ---------------- $575,000,000
Annex B ------- Subsidiaries ------------ EX-4.1 3 INDENTURE DATED MAY 23, 1996 EXHIBIT 4.1 - -------------------------------------------------------------------------------- SMITH'S FOOD & DRUG CENTERS, INC. AND [ ], as Trustee _________________ INDENTURE Dated as of May 23, 1996 _________________ $575,000,000 % Senior Subordinated Notes due 2007 - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- --------- 310(a)(1).......................................... 8.10 (a)(2).......................................... 8.10 (a)(3).......................................... N.A. (a)(4).......................................... N.A. (a)(5).......................................... 8.10; 8.11 (b)............................................. 8.08; 8.10; 13.02 (c)............................................. N.A. 311(a)............................................. 8.11 (b)............................................. 8.11 (c)............................................. N.A. 312(a)............................................. 2.05 (b)............................................. 13.03 (c)............................................. 13.03 313(a)............................................. 8.06 (b)(1).......................................... N.A. (b)(2).......................................... 8.06 (c)............................................. 8.06; 13.02 (d)............................................. 8.06 314(a)............................................. 5.07; 5.09; 13.02 (b)............................................. N.A. (c)(1).......................................... 8.02; 13.04 (c)(2).......................................... 8.02; 13.04 (c)(3).......................................... N.A. (d)............................................. N.A. (e)............................................. 13.05 (f)............................................. N.A. 315(a)............................................. 8.01(b) (b)............................................. 8.05; 13.02 (c)............................................. 8.01(a) (d)............................................. 8.01(c) (e)............................................. 7.11 316(a)(last sentence).............................. 2.09 (a)(1)(A)....................................... 7.05 (a)(1)(B)....................................... 7.04 (a)(2).......................................... N.A. (b)............................................. 7.07 (c)............................................. 317(a)(1).......................................... 7.08 (a)(2).......................................... 7.09 (b)............................................. 2.04 318(a)............................................. 13.01 (c)............................................. 13.01
______________________ N.A. means Not Applicable NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. -i- TABLE OF CONTENTS ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE
Page ---- Section 1.01 Definitions..................................... 1 Section 1.02 Incorporation by Reference of TIA............... 32 Section 1.03 Rules of Construction........................... 33 ARTICLE TWO THE SECURITIES Section 2.01 Form and Dating................................. 33 Section 2.02 Execution and Authentication.................... 34 Section 2.03 Registrar and Paying Agent...................... 35 Section 2.04 Paying Agent To Hold Assets in Trust......................................... 36 Section 2.05 Holder Lists.................................... 36 Section 2.06 Transfer and Exchange........................... 36 Section 2.07 Replacement Securities.......................... 37 Section 2.08 Outstanding Securities.......................... 37 Section 2.09 Treasury Securities............................. 38 Section 2.10 Temporary Securities............................ 38 Section 2.11 Cancellation.................................... 38 Section 2.12 Defaulted Interest.............................. 39 Section 2.13 CUSIP Number.................................... 39 ARTICLE THREE REDEMPTION Section 3.01 Notices to Trustee.............................. 40 Section 3.02 Selection of Securities To Be Redeemed...................................... 40 Section 3.03 Notice of Redemption............................ 41 Section 3.04 Effect of Notice of Redemption.................. 42 Section 3.05 Deposit of Redemption Price..................... 42 Section 3.06 Securities Redeemed in Part..................... 42
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Page ---- ARTICLE FOUR SUBORDINATION Section 4.01 Securities Subordinated to Senior Indebtedness.................................. 43 Section 4.02 Suspension of Payment When Senior Indebtedness in Default....................... 43 Section 4.03 Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization of Company....................................... 45 Section 4.04 Holders To Be Subrogated to Rights of Holders of Senior Indebtedness.................................. 47 Section 4.05 Obligations of the Company Unconditional................................. 48 Section 4.06 Trustee Entitled To Assume Payments Not Prohibited in Absence of Notice............................. 48 Section 4.07 Application by Trustee of Assets Deposited with It............................. 49 Section 4.08 No Waiver of Subordination Provisions.................................... 49 Section 4.09 Holders Authorize Trustee To Effectuate Subordination of Securities.................................... 50 Section 4.10 Right of Trustee To Hold Senior Indebtedness.................................. 51 Section 4.11 No Suspension of Remedies....................... 51 Section 4.12 No Fiduciary Duty of Trustee to Holders of Senior Indebtedness................ 52 ARTICLE FIVE COVENANTS Section 5.01 Payment of Securities........................... 52 Section 5.02 Maintenance of Office or Agency................. 52 Section 5.03 Limitation on Restricted Payments............... 53 Section 5.04 Corporate Existence............................. 54 Section 5.05 Payment of Taxes and Other Claims............... 55 Section 5.06 Maintenance of Properties and Insurance..................................... 55 Section 5.07 Compliance Certificate; Notice of Default....................................... 56
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Page ---- Section 5.08 Compliance with Laws............................ 57 Section 5.09 SEC Reports..................................... 57 Section 5.10 Waiver of Stay, Extension or Usury Laws.......................................... 58 Section 5.11 Limitation on Transactions with Affiliates.................................... 58 Section 5.12 Limitation on Incurrences of Additional Indebtedness....................... 60 Section 5.13 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries.................................. 61 Section 5.14 Limitation on Liens............................. 62 Section 5.15 Limitation on Change of Control................. 62 Section 5.16 Limitation on Asset Sales....................... 65 Section 5.17 Limitation on Subsidiary Assets and Indebtedness.............................. 68 Section 5.18 Limitation on Preferred Stock of Restricted Subsidiaries....................... 68 Section 5.19 Limitation on Other Senior Subordinated Indebtedness..................... 70 Section 5.20 Limitation on Restricted and Unrestricted Subsidiaries..................... 70 ARTICLE SIX SUCCESSOR CORPORATION Section 6.01 Limitation on Mergers and Certain Other Transactions............................ 71 Section 6.02 Successor Corporation Substituted............... 72 ARTICLE SEVEN DEFAULT AND REMEDIES Section 7.01 Events of Default............................... 73 Section 7.02 Acceleration.................................... 74 Section 7.03 Other Remedies.................................. 75 Section 7.04 Waiver of Past Defaults......................... 76 Section 7.05 Control by Majority............................. 76 Section 7.06 Limitation on Suits............................. 76 Section 7.07 Rights of Holders To Receive Payment....................................... 77 Section 7.08 Collection Suit by Trustee...................... 77 Section 7.09 Trustee May File Proofs of Claim................ 78
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Page ---- Section 7.10 Priorities...................................... 78 Section 7.11 Rights and Remedies Cumulative.................. 79 Section 7.12 Delay or Omission Not Waiver.................... 79 Section 7.13 Undertaking for Costs........................... 79 ARTICLE EIGHT TRUSTEE Section 8.01 Duties of Trustee............................... 80 Section 8.02 Rights of Trustee............................... 81 Section 8.03 Individual Rights of Trustee.................... 82 Section 8.04 Trustee's Disclaimer............................ 82 Section 8.05 Notice of Default............................... 82 Section 8.06 Reports by Trustee to Holders................... 83 Section 8.07 Compensation and Indemnity...................... 83 Section 8.08 Replacement of Trustee.......................... 84 Section 8.09 Successor Trustee by Merger, Etc................ 85 Section 8.10 Eligibility; Disqualification................... 85 Section 8.11 Preferential Collection of Claims Against Company............................... 86 ARTICLE NINE SATISFACTION AND DISCHARGE OF INDENTURE Section 9.01 Termination of the Company's Obligations................................... 86 Section 9.02 Legal Defeasance and Covenant Defeasance.................................... 88 Section 9.03 Application of Trust Money...................... 92 Section 9.04 Repayment to the Company or the Guarantors.................................... 93 Section 9.05 Reinstatement................................... 93 ARTICLE TEN AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 10.01 Without Consent of Holders...................... 94 Section 10.02 With Consent of Holders......................... 94 Section 10.03 Compliance with TIA............................. 96 Section 10.04 Revocation and Effect of Consents............... 97
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Page ---- Section 10.05 Notation on or Exchange of Securities.................................... 97 Section 10.06 Trustee To Sign Amendments, Etc................. 98 ARTICLE ELEVEN GUARANTEE Section 11.01 Unconditional Guarantee......................... 98 Section 11.02 Subordination of Guarantee...................... 99 Section 11.03 Severability.................................... 100 Section 11.04 Release of a Guarantor.......................... 100 Section 11.05 Limitation of Guarantor's Liability..................................... 100 Section 11.06 Guarantors May Consolidate, etc., on Certain Terms.............................. 101 Section 11.07 Contribution.................................... 102 Section 11.08 Waiver of Subrogation........................... 103 Section 11.09 Execution of Guarantee.......................... 103 Section 11.10 Waiver of Stay, Extension or Usury Laws.......................................... 104 ARTICLE TWELVE SUBORDINATION OF GUARANTEE OBLIGATIONS Section 12.01 Guarantee Obligations Subordinated to Guarantor Senior Indebtedness.............. 105 Section 12.02 Suspension of Guarantee Obligations When Guarantor Senior Indebtedness in Default................ 105 Section 12.03 Guarantee Obligations Subordinated to Prior Payment of All Guarantor Senior Indebtedness on Dissolution, Liquidation or Reorganization of Such Guarantor.............. 107 Section 12.04 Holders of Guarantee Obligations To Be Subrogated to Rights of Holders of Guarantor Senior Indebtedness.................................. 109 Section 12.05 Obligations of the Guarantors Unconditional................................. 110 Section 12.06 Trustee Entitled To Assume Payments Not Prohibited in Absence of Notice............................. 111
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Page ---- Section 12.07 Application by Trustee of Assets Deposited with It............................. 111 Section 12.08 No Waiver of Subordination Provisions.................................... 112 Section 12.09 Holders Authorize Trustee To Effectuate Subordination of Guarantee Obligations......................... 113 Section 12.10 Right of Trustee To Hold Guarantor Senior Indebtedness........................... 113 Section 12.11 No Suspension of Remedies....................... 114 Section 12.12 No Fiduciary Duty of Trustee to Holders of Guarantor Senior Indebtedness.................................. 114 ARTICLE THIRTEEN MISCELLANEOUS Section 13.01 TIA Controls.................................... 114 Section 13.02 Notices......................................... 115 Section 13.03 Communications by Holders with Other Holders................................. 116 Section 13.04 Certificate and Opinion as to Conditions Precedent.......................... 116 Section 13.05 Statements Required in Certificate or Opinion.................................... 117 Section 13.06 Rules by Trustee, Paying Agent, Registrar..................................... 117 Section 13.07 Legal Holidays.................................. 117 Section 13.08 Governing Law................................... 118 Section 13.09 No Adverse Interpretation of Other Agreements.................................... 118 Section 13.10 No Recourse Against Others...................... 118 Section 13.11 Successors...................................... 118 Section 13.12 Duplicate Originals............................. 118 Section 13.13 Severability.................................... 118 Section 13.14 No Violation.................................... 119 Signatures........................................................ S-1 Exhibit A - Form of Note
Note: This Table of Contents shall not, for any purpose, be deemed to be part of the Indenture. -vii- INDENTURE dated as of May 23, 1996, between SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation, and , a corporation, as Trustee. Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the Company's % Senior Subordinated Notes due 2007 (the "Securities"): ---------- ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. ----------- "Acquisition" means Cactus Acquisition, Inc., a ----------- Delaware corporation and a wholly owned subsidiary of the Company. "Adjusted Net Assets" shall have the meaning provided ------------------- in Section 11.07. "Affiliate" means, with respect to any Person, any --------- other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power ------- to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings ---------- ----------- ---------- correlative to the foregoing. So long as the Management Services Agreement is in effect or Yucaipa (together with its Affiliates) owns voting securities representing more than 10% of the total voting power of the then outstanding voting securities entitled to vote on a regular basis for the Board of Directors of the Company, Yucaipa and its Affiliates shall be deemed Affiliates of the Company. "Affiliate Transaction" shall have the meaning --------------------- provided in Section 5.11(a). "Agent" means any Registrar, Paying Agent or co- ----- Registrar. -2- "Alternate Offer" shall have the meaning provided in --------------- Section 5.15(f). "Asset Sale" means any sale, transfer or other ---------- disposition or series of sales, transfers or other dispositions by the Company or any Restricted Subsidiary (including, without limitation, any merger or consolidation of any Restricted Subsidiary with or into another Person (other than the Company or any wholly owned Restricted Subsidiary) whereby such Restricted Subsidiary shall cease to be a Restricted Subsidiary) to any Person (other than to the Company or a wholly owned Restricted Subsidiary) of any assets of the Company or any Restricted Subsidiary, including, without limitation, assets consisting of any Capital Stock or other securities held by the Company or any Restricted Subsidiary, and any Capital Stock issued by any Restricted Subsidiary, in each case, outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions (i) resulting in Net Proceeds to the Company and the Restricted Subsidiaries of $500,000 or less, (ii) pursuant to any foreclosure of assets or other remedy provided by applicable law to a creditor of the Company or any Subsidiary with a Lien on such assets, which Lien is permitted under the Indenture; provided that such foreclosure or other remedy is conducted in a commercially reasonable manner or in accordance with any Bankruptcy Law, (iii) involving only Cash Equivalents or inventory in the ordinary course of business or obsolete equipment in the ordinary course of business consistent with past practices of the Company, (iv) involving only the lease or sublease of any real or personal property in the ordinary course of business, (v) pursuant to the California Disposition or involving the assets described in Schedule 1.01 hereto or ------------- (vi) resulting from (a) the designation of any Restricted Subsidiary as an Unrestricted Subsidiary, or contribution to the capital of any Unrestricted Subsidiary, in accordance with the applicable provisions hereof or (b) the sale of the Capital Stock of any Unrestricted Subsidiary or the sale of all or substantially all of the assets of any Unrestricted Subsidiary. "Average Life" means, as of any date of ------------ determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principal payments of such debt security multiplied by the amount of each such principal payment by (ii) the sum of all such principal payments. -3- "Bankruptcy Law" means Title 11, U.S. Code or any -------------- similar Federal, state or foreign law for the relief of debtors. "Board of Directors" means, with respect to any ------------------ Person, the Board of Directors of such Person or of a subsidiary of such Person or any duly authorized committee of that Board. "Board Resolution" means, with respect to any Person, ---------------- a duly adopted resolution of the Board of Directors of such Person. "Business Day" means a day that is not a Legal ------------ Holiday. "California Asset Disposition" means the disposition ---------------------------- by the Company of its real estate assets remaining in California following the California Divestiture, as described in the Prospectus. "California Disposition" means the California ---------------------- Divestiture and the California Asset Disposition. "California Divestiture" means the divestiture by the ---------------------- Company of its Southern California operations as described in the Prospectus. "Capital Stock" means, with respect to any Person, ------------- any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such Person. "Capitalized Lease Obligation" means obligations ---------------------------- under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Equivalents" means (i) obligations issued or ---------------- unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group and maturing not more than one year from the date of creation thereof, (iii) time deposits with, -4- and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500 million and maturing not more than one year from the date of creation thereof, (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any bank described in clause (iii), (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500 million, and (c) has the highest rating obtainable from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc. and (vi) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group. "Change of Control" means the acquisition after the ----------------- Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) by (i) any Person (other than any Permitted Holder) or (ii) any group (within the meaning of Section 13(d)(3) of the Exchange Act) of Persons (excluding any Permitted Holders), in either case, of any securities of the Company such that, as a result of such acquisition, such Person or group beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, voting securities representing 40% or more of the total voting power of the then outstanding voting securities entitled to vote on a regular basis for the Board of Directors of the Company (but only to the extent that such beneficial ownership is not shared with any Permitted Holder who has the power to direct the vote thereof); provided, -------- however, that no such Change of Control shall be deemed to have - ------- occurred if (A) the Permitted Holders beneficially own, in the aggregate, at such time, voting securities representing a greater percentage of such voting power than such other Person or group or (B) at the time of such acquisition, the Permitted Holders (or any of them) possess the ability (by contract or otherwise) to elect, or cause the election, of a majority of the members of the Company's Board of Directors. "Change of Control Date" shall have the meaning ---------------------- provided in Section 5.15. "Change of Control Offer" shall have the meaning ----------------------- provided in Section 5.15. -5- "Change of Control Offer Price" shall have the ----------------------------- meaning provided in Section 5.15. "Change of Control Payment Date" shall have the ------------------------------ meaning provided in Section 5.15. "Commission" means the Securities and Exchange ---------- Commission. "Common Stock" means, with respect to any Person, any ------------ and all shares, interests or other participations in, and other equivalents (however designated and whether voting or nonvoting) of, such Person's common stock, whether outstanding at the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Company" means Smith's Food & Drug Centers, Inc., a ------- Delaware corporation. "Consent Solicitations" means the consents solicited --------------------- from holders of the Smitty's Securities to certain amendments to the respective indentures under which the Smitty's Securities were issued. "Consolidated Interest Expense" means for any period, ----------------------------- the aggregate amount of interest, whether expensed or capitalized, paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) in respect of all Indebtedness of the Company and the Restricted Subsidiaries (including (a) original issue discount on any Indebtedness (including (without duplication), in the case of the Company, any original issue discount on the Securities but excluding amortization of debt issuance costs) and (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, in each case to the extent attributable to such period but excluding the amortization of debt issuance costs). For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Company to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest of such Indebtedness in effect on the date Consolidated Interest Expense is being calculated, (c) interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime -6- or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as the Company may designate, and (d) Consolidated Interest Expense shall be increased or reduced by the net cost (including amortization of discount) or benefit associated with Interest Swap Obligations attributable to such period. "Consolidated Net Income" means for any period, the ----------------------- aggregate of the net income (or loss) of the Company and the Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any other Person in which the Company or any Restricted Subsidiary has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of the Company and the Restricted Subsidiaries in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions actually paid to the Company or such Restricted Subsidiary by such other Person in such period; (b) the net income of any Restricted Subsidiary that is subject to any Payment Restriction shall be excluded to the extent such Payment Restriction would actually prevent the payment of an amount that otherwise could have been paid to, or received by, the Company or a Restricted Subsidiary not subject to any Payment Restriction; and (c)(i) the net income (or loss) of any other Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale or any other sale of assets that would constitute an "Asset Sale" but for the exceptions set forth in clauses (i), (ii), (v), or (vi) of the definition thereof; (iii) all gains realized upon or in connection with or as a consequence of the issuance of the Capital Stock of the Company or any Restricted Subsidiary and any gains on pension reversions received by the Company or any Restricted Subsidiary, (iv) all gains and losses realized on the purchase or other acquisition by the Company or any Restricted Subsidiary of any securities of the Company or any Restricted Subsidiary, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as amended, or Statement of Financial Accounting Standards No. 121, (vi) all other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) all severance, deferred compensation or other employee termination costs, (C) up to $20 million of compensation expenses resulting from the repurchase or amendment of certain management stock options, (D) all debt refinancing premiums and (E) any other reserves or charges -7- (provided, however, that any net cash payments actually made -------- ------- (after-tax) with respect to the liabilities for which such reserves or charges were created shall be deducted from Consolidated Net Income in the period when made), in each case under this clause (vii), recorded by the Company or any Restricted Subsidiary in connection with the Transactions and the California Disposition, including, without limitation, the integration of operations in the State of Arizona, (viii) losses incurred by the Company and the Restricted Subsidiaries resulting from earthquakes and (ix) with respect to the Company and the Restricted Subsidiaries, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. "Consolidated Net Worth" means, with respect to any ---------------------- Person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such Person and its Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP. "Credit Agent" means, at any time, the then-acting ------------ Administrative Agent as defined in and under the Credit Agreement, which initially shall be Bankers Trust Company. The Company shall promptly notify the Trustee of any change in the Credit Agent. "Credit Agreement" means the Credit Agreement, dated ---------------- as of the Issue Date, by and among Smith's as borrower, its subsidiaries as guarantors, the Lenders referred to therein, Bankers Trust Company and The Chase Manhattan Bank, as arrangers, and Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness Incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or any such prior agreement as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all ---------------- related or ancillary documents, including, without limitation, any guarantee agreements and security documents. The Company shall promptly notify the Trustee of any such refunding or refinancing of the Credit Agreement. -8- "Custodian" means any receiver, trustee, assignee, --------- liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event or condition that is, or ------- after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (i) in the ------------------------------ event any Indebtedness is outstanding under the Credit Agreement, all Senior Indebtedness under the Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement, any other issue of Senior Indebtedness which (a) at the time of the determination is equal to or greater than $50 million in aggregate principal amount and (b) is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For purposes of this definition, the term "Credit ------ Agreement" shall not include any agreement governing - --------- Indebtedness Incurred to refund, replace or refinance borrowings or commitments under the Credit Agreement other than any such agreements governing Indebtedness Incurred to refund, replace or refinance the entirety of the borrowings and commitments then outstanding or permitted to be outstanding thereunder. "Disqualified Capital Stock" means, with respect to -------------------------- any Person, any Capital Stock of such Person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security into which it is convertible, puttable or exchangeable, is, or upon the happening of any event or the passage of time would be, required to be redeemed or repurchased by such Person or its subsidiaries, including at the option of the holder thereof, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due on or prior to the Maturity Date, or any other Capital Stock of such Person or its subsidiaries designated as Disqualified Capital Stock by such Person at the time of issuance; provided, -------- however, that if such Capital Stock is either (i) redeemable or - ------- repurchasable solely at the option of such Person or (ii) issued to employees of the Company or the Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated. "EBITDA" means, for any period, the Consolidated Net ------ Income for such period, plus, in each case to the extent ---- -9- deducted in computing Consolidated Net Income for such period (without duplication) (i) provisions for income taxes or similar charges recognized by the Company and the Restricted Subsidiaries accrued during such period, (ii) depreciation and amortization expense of the Company and the Restricted Subsidiaries accrued during such period (but only to the extent not included in Consolidated Interest Expense), (iii) Consolidated Interest Expense of the Company and the Restricted Subsidiaries for such period, (iv) LIFO charges (credits) of the Company and the Restricted Subsidiaries for such period, (v) the amount of any restructuring reserve or charge recorded during such period in accordance with GAAP, including any such reserve or charge related to the Transactions or the California Disposition, less, without duplication, the amount of all net ---- cash payments made by the Company and the Restricted Subsidiaries during such period to the extent that such cash payments have been provided for in a restructuring reserve or charge referred to in clause (v) above (and were not otherwise deducted in the computation of EBITDA for such period). "Event of Default" shall have the meaning provided in ---------------- Section 7.01. "Exchange Act" means the Securities Exchange Act of ------------ 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. "Exchange Debentures" means the Company's [ ]% ------------------- Subordinated Exchange Debentures due 2008 issuable at the option of the Company in exchange for all of the outstanding shares of New Preferred Stock and any such debentures paid in lieu of cash interest thereon in accordance with the terms thereof. "Existing Indebtedness" means all indebtedness of the --------------------- Company and the Restricted Subsidiaries to the extent outstanding on the Issue Date after giving effect to the Transactions (other than Indebtedness under the Credit Agreement and the Indenture), including operating leases outstanding on the Issue Date that are, or may be, required under GAAP to be reported or reclassified after the Issue Date as Capitalized Lease Obligations. "Foreign Exchange Agreement" means any foreign -------------------------- exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. -10- "GAAP" means generally accepted accounting principles ---- in effect in the United States of America as of the date of this Indenture. "Guarantee" shall have the meaning set forth in --------- Section 5.17. "Guarantee Obligations" shall have the meaning --------------------- provided in Section 12.01. "Guarantor" means each Person that becomes a --------- guarantor of the Securities in compliance with the provisions set forth in Section 5.17. "Guarantor Payment Blockage Period" shall have the --------------------------------- meaning provided in Section 12.02. "Guarantor Senior Indebtedness" means, with respect ----------------------------- to any Guarantor, the principal of, premium, if any, and interest on, and all other Obligations with respect to, any Indebtedness of such Guarantor, whether outstanding on the Issue Date or thereafter Incurred, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Guarantee of such Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior ---------------- Indebtedness" shall include (x) the principal of, premium, if - ------------ any, and interest on all Obligations of every nature of such Guarantor from time to time owed to the lenders under the Credit Agreement, including, without limitation, the Letter of Credit Obligations and principal of and interest on, and all fees, indemnities and expenses payable under the Credit Agreement, and (y) interest accruing thereon subsequent to the occurrence of any Event of Default specified in clause (vi) or (vii) in Section 7.01 relating to such Guarantor, whether or not the claim for such interest is allowed under any applicable Bankruptcy Law. Notwithstanding the foregoing, "Guarantor --------- Senior Indebtedness" shall not include (a) Indebtedness - ------------------- evidenced by the Guarantee of such Guarantor, (b) Indebtedness that is expressly subordinate or junior in right of payment to any Indebtedness of such Guarantor, (c) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Guarantor (other than Capitalized Lease Obligations), (d) Indebtedness which is represented by Disqualified Capital Stock, (e) obligations for goods, materials or services purchased in the -11- ordinary course of business or obligations consisting of trade payables, (f) Indebtedness of or amounts owed by such Guarantors for compensation to employees or for services rendered to such Guarantors, (g) any liability for federal, state, local or other taxes owed or owing by such Guarantor, (h) Indebtedness of such Guarantor representing a guarantee of Subordinated Indebtedness or Pari Passu Indebtedness (in each case, with respect to the Securities or any Guarantee) of the Company or any other Guarantor, (i) Indebtedness of such Guarantor to a Subsidiary of the Company and (j) that portion of any Indebtedness which is incurred by such Guarantor in violation of this Indenture. "Holder" means the Person in whose name a Security is ------ registered on the Registrar's books. "Incur" means, with respect to any Indebtedness or ----- other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligations or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence," ---------- "Incurred" and "Incurring" shall have meanings correlative to -------- --------- the foregoing). "Indebtedness" means with respect to any Person, ------------ without duplication, (i) all liabilities, contingent or otherwise, of such Person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) Incurred by such Person in the ordinary course of business of such Person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the Incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such Person; (iii) reimbursement obligations of such Person with respect to letters of credit; (iv) obligations of such Person with respect to -12- Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such Person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such Person are subject, whether or not the obligations secured thereby shall have been assumed by such Person or shall otherwise be such Person's legal liability (provided that if the obligations so secured have not been assumed by such Person or are not otherwise such Person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such Person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed ------------- repurchase price" of any Disqualified Capital Stock that does - ---------------- not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such Person, which determination shall be evidenced by a Board Resolution. "Indenture" means this Indenture, as amended or --------- supplemented from time to time in accordance with the terms hereof. "Independent Financial Advisor" means a reputable ----------------------------- accounting, appraisal or nationally recognized investment banking or consulting firm that is, in the reasonable judgment of the Board of Directors of the Company, qualified to perform the tasks for which such firm has been engaged and independent with respect to the Company and its Affiliates. "Interest Payment Date" means the stated maturity of --------------------- an installment of interest on the Securities. "Interest Swap Obligation" means any obligation of ------------------------ any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by -13- applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or floating rate of interest on the same notional amount; provided that the term -------- "Interest Swap Obligation" shall also include interest rate ------------------------ exchange, collar, cap, swap option or similar agreements providing interest rate protection. "Investment" by any Person in any other Person means ---------- any investment by such Person in such other Person, whether by share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances or to permit the purchase of Qualified Capital Stock of the Company and other similar customary expenses incurred, in each case in the ordinary course of business consistent with past practice) or similar credit extension constituting Indebtedness of such other Person, and any guarantee of Indebtedness of any other Person. In addition, for purposes of the covenant described in Section 5.03, (i) an "Investment" shall be deemed to have been made at ---------- the time any Restricted Subsidiary is designated as an Unrestricted Subsidiary in an amount (proportionate to the Company's equity interest in such Subsidiary) equal to the net worth of such Restricted Subsidiary at the time that such Restricted Subsidiary is designated as an Unrestricted Subsidiary; and (ii) at any date the aggregate of all Restricted Payments made as Investments since the Issue Date shall exclude and be reduced by an amount (proportionate to the Company's equity interest in such Subsidiary) equal to the net worth of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary (in each case "net worth" to be calculated based upon the fair --------- market value of the assets and liabilities of such Subsidiary as of any such date of designation, as determined by the Company's Board of Directors). "Issue Date" means May 23, 1996, the date of original ---------- issuance of the Securities under the Indenture. "Legal Holiday" shall have the meaning provided in ------------- Section 13.07. "Letter of Credit Obligations" means Indebtedness of ---------------------------- the Company or any of the Subsidiaries with respect to letters of credit issued pursuant to the Credit Agreement, and for purposes of determining the aggregate amount of Indebtedness at any time, shall be deemed to consist of (a) the aggregate -14- maximum amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "Lien" means, with respect to any asset or property, ---- any mortgage, pledge, lien, encumbrance, charge or security interest of any kind in respect of such asset or property, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest, and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction); provided, however, that in no event shall an -------- ------- operating lease be deemed to constitute a Lien. "Management Services Agreement" means that certain ----------------------------- Management Services Agreement dated as of the Issue Date, between the Company and Yucaipa (as such Management Services Agreement may be amended or replaced, so long as such amendment or replacement has been approved by a majority of the Independent Directors (as defined in the Standstill Agreement) and is not disadvantageous to the Holders in any material respect). "Maturity Date" means May 15, 2007. ------------- "Merger" means the merger of Acquisition with and ------ into Smitty's pursuant to the Recapitalization Agreement. "Net Cash Proceeds" means Net Proceeds received in ----------------- the form of cash or Cash Equivalents. "Net Proceeds" means (a) in the case of any Asset ------------ Sale or any issuance and sale by any Person of Qualified Capital Stock, the aggregate net proceeds received by such Person after payment of expenses, taxes, commissions and the like incurred in connection therewith (and, in the case of any Asset Sale, net of the amount of cash applied to repay Indebtedness secured by the asset involved in such Asset Sale), whether such proceeds are in cash or in property (valued at the fair market value thereof at the time of receipt as determined with respect to any Asset Sale resulting in Net Proceeds in excess of $10 million in good faith by the Board of Directors of such Person, which determination shall be evidenced by a Board Resolution) and (b) in the case of any conversion or exchange of any -15- outstanding Indebtedness or Disqualified Capital Stock of such Person for or into shares of Qualified Capital Stock of the Company, the sum of (i) the fair market value of the proceeds received by the Company in connection with the issuance of such Indebtedness or Disqualified Capital Stock on the date of such issuance and (ii) any additional amount paid by the holder thereof to the Company upon such conversion or exchange. "Net Proceeds Offer" shall have the meaning provided ------------------ in Section 5.16(a). "Obligations" means all obligations of every nature ----------- whether for principal, reimbursements, interest, fees, expenses, indemnities or otherwise, and whether primary, secondary, direct, indirect, contingent, fixed or otherwise (including obligations of performance) under the documentation governing any Indebtedness. "Offering" means the offerings of the Securities. -------- "Officer" means, with respect to any Person, the ------- Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Controller, or the Secretary of such Person. "Officers' Certificate" means, with respect to any --------------------- Person, a certificate signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of such Person and otherwise complying with the requirements of Sections 13.04 and 13.05. "Operating Coverage Ratio" means the ratio of ------------------------ (1) EBITDA for the period (the "Pro Forma Period") consisting ---------------- of the most recent four full fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Operating Coverage Ratio (the "Transaction Date") to (2) the Consolidated Interest Expense ---------------- for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter (the "Forward Period") reasonably anticipated by the -------------- Board of Directors of the Company to become due from time to time during such period. For purposes of this definition, if the Transaction Date occurs prior to the first anniversary of the Transactions, "EBITDA" for the Pro Forma Period shall be calculated after giving effect on a pro forma basis to the Transactions and the California Disposition as if they had occurred on the first day -16- of the Pro Forma Period. In addition to, but without duplication of, the foregoing, for purposes of this definition, "EBITDA" shall be calculated after giving effect (without duplication), on a pro forma basis for the Pro Forma Period (but no longer), to (a) any Investment, during the period commencing on the first day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other Person that, as a result ---------------- of such Investment, becomes a Restricted Subsidiary, (b) the acquisition, during the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, which acquisition is not prohibited by this Indenture, and (c) any sales or other dispositions of any Restricted Subsidiary or any line of business (or geographical area thereof) of the Company or any Restricted Subsidiary occurring during the Reference Period, in each case as if such incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, "Consolidated Interest Expense" shall be calculated after giving effect (without duplication), on a pro forma basis for the Forward Period, to any Indebtedness Incurred or repaid on or after the first day of the Forward Period and prior to the Transaction Date. If the Company or any Restricted Subsidiary directly or indirectly guarantees any Indebtedness of a third Person, the Operating Coverage Ratio shall give effect to the Incurrence of such Indebtedness as if the Company or such Restricted Subsidiary had directly Incurred such guaranteed Indebtedness. "operating lease" means any lease the obligations --------------- under which do not constitute Capitalized Lease Obligations. "Opinion of Counsel" means a written opinion from ------------------ legal counsel who is reasonably acceptable to the Trustee complying with the requirements of Sections 13.04 and 13.05. Unless otherwise required by the Trustee, the legal counsel may be an employee of or counsel to the Company or the Trustee. "Pari Passu Indebtedness" means the Securities and ----------------------- any Indebtedness of the Company which ranks pari passu in right of payment with the Securities. "Paying Agent" shall have the meaning provided in ------------ Section 2.03. "Payment Restriction" means, with respect to a ------------------- subsidiary of any Person, any encumbrance, restriction or -17- limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) such subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to such Person or any other subsidiary of such Person, (b) make loans or advances to such Person or any other subsidiary of such Person or (c) transfer any of its properties or assets to such Person or any other subsidiary of such Person, or (ii) such Person or any other subsidiary of such Person to receive or retain any such (a) dividends, distributions or payments, (b) loans or advances or (c) transfer of properties or assets. "Permitted Holder" means (i) Yucaipa, or any entity ---------------- controlled thereby or any of the partners thereof, (ii) Jeffrey P. Smith, Richard D. Smith, Fred L. Smith, Ida Smith, the Dee Glen Smith Marital Trust I, Trust for the Children of Jeffrey Paul Smith, Trust for the Children of Richard Dee Smith, and Trust for the Children of Fred Lorenzo Smith, (iii) an employee benefit plan of the Company, or any of its subsidiaries or any participant therein, (iv) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or (v) any Permitted Transferee of any of the foregoing Persons. "Permitted Indebtedness" means: ---------------------- a. Indebtedness of the Company and the Restricted Subsidiaries (and the Company and each Restricted Subsidiary (to the extent it is not the primary obligor thereof) may guarantee such Indebtedness) (i) under the Credit Agreement (including the Letter of Credit Obligations) in an aggregate principal amount at any time outstanding not to exceed $1,025.0 million, less all principal repayments of Term Loans and all permanent commitment reductions under the revolving credit facility, in each case, pursuant to and in accordance with Section 5.16 hereof or (ii) Incurred under the Credit Agreement pursuant to and in compliance with (x) clause (n) of this definition and (y) the proviso of Section 5.12 hereof; b. Indebtedness of a Restricted Subsidiary owed to and held by the Company or a Restricted Subsidiary; or Indebtedness of the Company owed to and held by a Restricted Subsidiary; -18- c. Indebtedness Incurred by the Company or any Restricted Subsidiary in connection with the purchase or improvement of property (real or personal) or equipment or other capital expenditures in the ordinary course of business (including for the purchase of assets or stock of any retail grocery store or business) or consisting of Capitalized Lease Obligations, provided that (i) at the time of the Incurrence -------- thereof, such Indebtedness, together with any other Indebtedness Incurred during the most recently completed four fiscal quarter period in reliance upon this clause (c) does not exceed, in the aggregate, 3% of net sales of the Company and the Restricted Subsidiaries during the most recently completed four fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of Incurrence is prior to the end of the fourth fiscal quarter following the Issue Date) and (ii) such Indebtedness, together with all then outstanding Indebtedness Incurred in reliance upon this clause (c) does not exceed, in the aggregate, 3% of the aggregate net sales of the Company and the Restricted Subsidiaries during the most recently completed twelve fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of Incurrence is prior to the end of the twelfth fiscal quarter following the Issue Date); d. Indebtedness Incurred by the Company or any Restricted Subsidiary in connection with expenditures in an aggregate principal amount not to exceed $25.0 million; provided that such expenditures relate solely to the - -------- integration of the operations of Smith's, Smitty's and their respective subsidiaries as described in the Prospectus; e. Indebtedness of the Company Incurred under Foreign Exchange Agreements and Interest Swap Obligations entered into with respect to Indebtedness otherwise permitted to be Incurred under Section 5.12 hereof, including this definition of "Permitted Indebtedness" (other than this clause (e)), in a notional amount not exceeding the aggregate principal amount of such Indebtedness; f. guarantees Incurred in the ordinary course of business by the Company or a Restricted Subsidiary of Indebtedness of any other Person in aggregate not to exceed $20.0 million at any time outstanding; g. Refinancing Indebtedness; -19- h. Indebtedness of the Company or any Restricted Subsidiary for letters of credit relating to workers' compensation claims and self-insurance or similar requirements in the ordinary course of business; i. Existing Indebtedness; j. Indebtedness arising from guarantees of Indebtedness of the Company or any Restricted Subsidiary or other agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred in connection with the disposition of any business, assets or Restricted Subsidiary, other than guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition; provided, however, that the maximum aggregate -------- ------- liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and the Restricted Subsidiary in connection with such disposition; k. obligations in respect of performance bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; l. guarantees by the Company or a Restricted Subsidiary of Indebtedness Incurred by the Company or a Restricted Subsidiary so long as the Incurrence of such Indebtedness by the Company or any such Restricted Subsidiary is otherwise permitted by the terms of this Indenture; m. Indebtedness Incurred by the Company in connection with the transfer to the Company or a third party of the California assets leased by the Company from certain trusts and securing such trusts' obligations to the Smith's Food & Drug Centers Inc. 1994-A Pass Through Trusts (the "Related ------- Assets"); provided, however, that (i) if the Related Assets are - ------ -------- ------- transferred to the Company, the Company shall consummate an Asset Sale with respect to such Related Assets within 90 days after the Incurrence of such Indebtedness and shall apply the Net Proceeds of such Asset Sale to permanently reduce Pari Passu Indebtedness, Indebtedness of any Restricted Subsidiary or Senior Indebtedness, and (ii) if the Related Assets are transferred to any Person other than the Company or any Subsidiary, the Company shall, within 90 days after the Incurrence of such Indebtedness, apply any proceeds received from the owner trust in respect of such transfer of the Related Assets to -20- permanently reduce Pari Passu Indebtedness, Indebtedness of any Restricted Subsidiary or Senior Indebtedness; provided, further, -------- ------- however, that up to $5.0 million in aggregate amount of Net - ------- Proceeds under clause (i) or proceeds under clause (ii) may be applied to repay outstanding borrowings under the revolving credit facility pursuant to the Credit Agreement without a corresponding reduction in commitments; and n. additional Indebtedness of the Company or any Restricted Subsidiary (together with the Indebtedness Incurred pursuant to clause (a)(ii) above) in an aggregate amount not to exceed $140.0 million at any time outstanding. "Permitted Investment" by any Person means (i) any -------------------- Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale made pursuant to Section 5.16 hereof or any other disposition of assets not constituting an Asset Sale by reason of the exceptions contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with Section 5.11(b), (vi) Investments in the Company or the wholly owned Restricted Subsidiaries and (vii) additional Investments in an aggregate amount not exceeding $15.0 million. "Permitted Liens" shall mean (i) Liens for taxes, --------------- assessments and governmental charges or claims not yet due or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other like Liens arising in the ordinary course of business, deposits made to obtain the release of such Liens, and with respect to amounts not yet delinquent for a period of more than 60 days or being contested in good faith by an appropriate process of law, and for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (iii) Liens incurred or pledges or deposits made in the ordinary course of business to secure obligations under workers' compensation, unemployment insurance and other types of social security or similar legislation; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of -21- a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, zoning or other restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of the Restricted Subsidiaries incurred in the ordinary course of business; (vi) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods in the ordinary course of business; (vii) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of nondelinquent customs duties in connection with the importation of goods; (ix) judgment and attachment Liens not giving rise to a Default or Event of Default; (x) leases or subleases granted to others not interfering in any material respect with the business of the Company or any Restricted Subsidiary; (xi) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business that are within the general parameters customary in the industry, in each case securing Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements and forward contracts, option futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any Restricted Subsidiary from fluctuations in the price of commodities; (xii) Liens encumbering deposits made in the ordinary course of business to secure nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or the Restricted Subsidiaries for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (xiii) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any Restricted Subsidiary in the ordinary course of business in accordance with past practices; (xiv) any interest or title of a lessor in the property subject to any lease, whether characterized as capitalized or operating other than any such interest or title resulting from or arising out of a default by the Company or any Restricted Subsidiary of its obligations under such lease; (xv) Liens arising from filing UCC financing statements for precautionary purposes in connection with true leases of personal property that are otherwise permitted under the -22- applicable Indenture and under which the Company or any Restricted Subsidiary is lessee; (xvi) Liens in favor of the Senior Note Trustee under the Senior Note Indenture and any substantially equivalent Lien granted to any trustee or similar institution under any indenture governing Indebtedness permitted to be Incurred or outstanding under the Senior Note Indenture; (xvii) Liens securing Indebtedness permitted to be Incurred pursuant to clause (m) of the definition of Permitted Indebtedness above. "Permitted Payments" means ------------------ (i) the consummation of the Transactions as described in the Prospectus; (ii) payments by the Company to effect the mandatory redemption of its Series I Preferred Stock; provided, however, -------- ------- that such payments shall not be made on any date earlier, or in any amount greater, than the dates and amounts provided for in the Company's Certificate of Incorporation as in effect on the Issue Date; (iii) any payment by the Company or any Subsidiary to Yucaipa or the principals or any Affiliates thereof for consulting, management, investment banking or similar services, or for reimbursement of costs and expenses (x) pursuant to the Management Services Agreement or (y) as approved by a majority of the Independent Directors (as defined in the Standstill Agreement); (iv) any payment to pay for the purchase, retirement or other acquisition for value of any Capital Stock of the Company held by any future, present or former employee or director of the Company or any Subsidiary pursuant to any management equity plan or stock option plan or any other agreement, provided that the aggregate amount of Restricted -------- Payments made under this clause does not exceed $5 million in any fiscal year (provided that any unused amounts may be -------- carried over to any subsequent fiscal year subject to a maximum amount of $10 million in any fiscal year); (v) pro rata dividends paid by any Restricted Subsidiary that is not wholly owned by the Company or another wholly owned Restricted Subsidiary; (vi) Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed $10.0 million; and -23- (vii) other Restricted Payments in an aggregate amount not to exceed $25.0 million. "Permitted Subordinated Reorganization Securities" ------------------------------------------------ means securities of the Company issued in a plan of reorganization in a case under Bankruptcy Law relating to the Company which constitutes either (x) Capital Stock (other than Disqualified Capital Stock with the reference to "Maturity Date" in the definition of such term modified to relate to the final stated maturity of any debt securities issued in such plan of reorganization to the holders of Designated Senior Indebtedness ("Senior Reorganization Securities")) or (y) debt -------------------------------- securities of the Company which (i) are unsecured, (ii) have no scheduled mandatory amortization thereon prior to the final stated maturity of the Senior Reorganization Securities and (iii) are subordinated in right of payment to the Senior Reorganization Securities to at least the same extent as the Securities are subordinated to Designated Senior Indebtedness. "Permitted Transferees" means, with respect to any --------------------- Person, (i) any Affiliate of such Person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such Person, (iii) a trust the beneficiaries of which, or a corporation or partnership the stockholders or general or limited partners of which, include only such Person or his or her parents, spouse or lineal descendants, in each case to whom such Person has transferred the beneficial ownership of any securities of the Company, (iv) any investment account whose investment managers and investment advisors consist solely of such Person and/or Permitted Transferees of such Person and (v) any investment fund or investment entity that is a subsidiary of such Person or a Permitted Transferee of such Person. "Person" means any individual, corporation, limited ------ or general partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any ------------------- Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of -24- all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Preferred Stock" means, with respect to any Person, --------------- Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "pro forma" means, with respect to any calculation --------- made or required to be made pursuant to the terms of this Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act, as interpreted by the Company's chief financial officer or Board of Directors in consultation with its independent certified public accountants. "Prospectus" means the prospectus of the Company ---------- dated May 17, 1996 relating to the Securities. "Public Equity Offering" means an underwritten public ---------------------- offering of Common Stock of the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act. "Qualified Capital Stock" means, with respect to any ----------------------- Person, any Capital Stock of such Person that is not Disqualified Capital Stock. "Recapitalization" means the Offering, the Tender ---------------- Offer, the Repayments and the closing under the Credit Agreement. "Recapitalization Agreement" means the -------------------------- Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996, among the Company, Acquisition, Smitty's and Yucaipa. "Record Date" means the Record Dates specified in the ----------- Securities; provided, however, that if any such date is a Legal -------- ------- Holiday, the Record Date shall be the first day immediately preceding such specified day that is not a Legal Holiday. "Redemption Date," when used with respect to any --------------- Security to be redeemed, means the date fixed for such -25- redemption pursuant to this Indenture and Paragraph 5 of the Securities. "Redemption Price," when used with respect to any ---------------- Security to be redeemed, means the price fixed for such redemption pursuant to this Indenture and Paragraph 5 of the Securities. "Refinancing Indebtedness" means, with respect to any ------------------------ Person, Indebtedness of such Person issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an ----- amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of --------- such Person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness Incurred pursuant to clauses (c), (d), (g), (i) and (m) of the definition thereof) Incurred in accordance with the applicable Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such Person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date and (y) shall contain subordination and default provisions no less favorable in any material respect to the Holders than those contained in such repaid or amended Subordinated Indebtedness. -26- "Registrar" shall have the meaning provided in --------- Section 2.03. "Related Business Investment" means (i) any --------------------------- Investment by a Person in any other Person a majority of whose revenues are derived from the operation of one or more retail grocery stores or supermarkets or any other line of business engaged in by the Company or any of the Subsidiaries as of the Issue Date; (ii) any Investment by such Person in any cooperative or other supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of the Company and the Restricted Subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment, in each case reasonably related to the business of the Company and the Restricted Subsidiaries as it is conducted as of the Issue Date and as such business may thereafter evolve or change. "Repayments" means the Company's purchase of $1.0 ---------- million of its Series I Preferred Stock, repayment of $735.1 million of its outstanding indebtedness and purchase of $13.7 million of employee stock options, all as described in the Prospectus. "Representative" means the indenture trustee or other -------------- trustee, agent or representative for any Senior indebtedness; provided, however, that in no event shall , - -------- ------- in its capacity as Trustee, Registrar, co-Registrar or Paying Agent, serve as Representative. "Restricted Payment" means (i) any Stock Payment or ------------------ (ii) Investment (other than a Permitted Investment). "Restricted Subsidiary" means any Subsidiary that, as --------------------- of the date of determination, is not an Unrestricted Subsidiary. "Securities Act" means the Securities Act of 1933, as -------------- amended, and the rules and regulations of the Commission promulgated thereunder. "Senior Indebtedness" means the principal of, ------------------- premium, if any, and interest on, and all other Obligations with respect to, any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter Incurred, unless, in the case of any particular Indebtedness, the instrument creating or -27- evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Securities. Without limiting the generality of the foregoing, "Senior Indebtedness" shall include ------------------- (x) the principal of, premium, if any, and interest on all obligations of every nature of the Company from time to time owed to the lenders under the Credit Agreement, including, without limitation, the Letter of Credit Obligations and principal of and interest on, all fees and expenses payable under the Credit Agreement and (y) interest accruing thereon subsequent to the occurrence of any Event of Default specified in clause (vi) or (vii) in Section 7.01 relating to the Company, whether or not the claim for such interest is allowed under any applicable Bankruptcy Law. Notwithstanding the foregoing, "Senior ------ Indebtedness" shall not include (a) Indebtedness evidenced by the - ------------ Securities, (b) Indebtedness that is expressly subordinate or junior in right of payment to any Indebtedness of the Company, (c) Indebtedness which, when Incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company (other than Capitalized Lease Obligations), (d) Indebtedness which is represented by Disqualified Capital Stock, (e) obligations for goods, materials or services purchased in the ordinary course of business or obligations consisting of trade payables, (f) Indebtedness of or amounts owed by the Company for compensation to employees or for services rendered to the Company, (g) any liability for federal, state, local or other taxes owed or owing by the Company, (h) Indebtedness of the Company to a Subsidiary of the Company, and (i) that portion of any Indebtedness which is Incurred by the Company in violation of this Indenture. "Series I Preferred Stock" means the Series I ------------------------ Preferred Stock of the Company, par value $.01 per share. "Significant Senior Indebtedness" shall have the ------------------------------- meaning provided in Section 4.02(a). "Significant Stockholder" means, with respect to any Person, any other Person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such Person that are entitled to vote on a regular basis for the election of directors of such Person. "Significant Subsidiary" means each Restricted ---------------------- Subsidiary that is either (a) a "significant subsidiary" as -28- defined in Rule 1-02(v) of Regulation S-X under the Securities Act and the Exchange Act (as such regulation is in effect on the Issue Date) or (b) material to the financial condition or results of operations of the Company and the Restricted Subsidiaries taken as a whole. "Smitty's" means Smitty's Supermarkets, Inc., a -------- Delaware corporation. "Smitty's Offers to Purchase" means the offers to --------------------------- purchase the Smitty's Securities from the holders thereof. "Smitty's Refinancing" means the repayment of -------------------- Smitty's indebtedness, including pursuant to the Smitty's Offers to Purchase. "Smitty's Securities" means the 13.75% Senior Discount Debentures due 2006 of Smitty's and the 12.75% Senior Subordinated Notes due 2004 of SSV. "SSV" means Smitty's Super Valu, Inc., a Delaware --- corporation and a wholly owned subsidiary of Smitty's. "Standstill Agreement" means the Standstill Agreement -------------------- dated as of January 29, 1996 among the Company, Yucaipa and each of the limited partnerships that owns shares in Smitty's for which Yucaipa acts as the general partner (as such Standstill Agreement may be amended or replaced, so long as such amendment or replacement has been approved by a majority of the Independent Directors (as defined in the Standstill Agreement as in effect prior to such amendment or replacement) and is not disadvantageous to the Holders of the Securities in any material respect). "Stock Payment" means, with respect to any Person, ------------- (a) the declaration or payment by such Person, either in cash or in property, of any dividend on (except, in the case of the Company, dividends payable solely in Qualified Capital Stock of the Company), or the making by such Person or any of its subsidiaries of any other distribution in respect of, such Person's Qualified Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such Person), or (b) the redemption, repurchase, retirement or other acquisition for value by such Person or any of its subsidiaries, directly or indirectly, of such Person's Qualified Capital Stock (and, in the case of a Subsidiary, Qualified -29- Capital Stock of the Company) or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such Person), other than, in the case of the Company, through the issuance in exchange therefor solely of Qualified Capital Stock of the Company; provided, however, that in the case of a -------- ------- Restricted Subsidiary, the term "Stock Payment" shall not include ------------- any such payment with respect to its Capital Stock or warrants, rights or options to purchase or acquire shares of any class of its Capital Stock that are owned solely by the Company or a wholly owned Restricted Subsidiary. "Subordinated Indebtedness" means Indebtedness of the ------------------------- Company which is subordinated in right of payment to the Securities. "subsidiary" of any Person means (i) a corporation a ---------- majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly, owned by such Person, by one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person or (ii) a partnership in which such Person or a subsidiary of such Person is, at the date of determination, a general partner of such partnership, but only if such Person or its subsidiary is entitled to receive more than fifty percent of the assets of such partnership upon its dissolution, or (iii) any other Person (other than a corporation or a partnership) in which such Person, a subsidiary of such Person or such Person and one or more subsidiaries of such Person, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such Person. "Subsidiary" means any subsidiary of the Company. ---------- "Surviving Person" shall have the meaning provided in ---------------- Section 6.01(a)(1). "Tender Offer" means the Company's offer to purchase ------------ 50% of the outstanding shares (excluding shares issuable in the Merger) of Common Stock from the holders thereof for $36.00 in cash per share. "Term Loans" means the term loan facility under the ---------- Credit Agreement and any agreement governing Indebtedness -30- Incurred to refund, replace or refinance any borrowings outstanding under such facility or under any prior refunding, replacement or refinancing thereof (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). "TIA" means the Trust Indenture Act of 1939 (15 U.S. --- Code (SS) 77aaa-77bbbb), as amended, as in effect on the date this Indenture is qualified under the TIA, except as otherwise provided in Section 10.03. "Transactions" means the Recapitalization, the Merger ------------ and the Smitty's Refinancing. "Trust Officer" means any officer of the Trustee ------------- assigned by the Trustee to administer its corporate trust matters. "Trustee" means the party named as such in this ------- Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "Unrestricted Subsidiary" means any Subsidiary ----------------------- (including its subsidiaries) so designated by a Board Resolution adopted by the Board of Directors of the Company in accordance with Section 5.20 hereof. Notwithstanding the foregoing, an Unrestricted Subsidiary shall be deemed to be redesignated a Restricted Subsidiary at any time if (a) the Company or any other Restricted Subsidiary (i) provides credit support for, or a guarantee of, any Indebtedness of such Unrestricted Subsidiary or any of its subsidiaries (including any undertaking, agreement or instrument evidencing such Indebtedness) or (ii) is directly or indirectly liable for any Indebtedness of such Unrestricted Subsidiary or any of its subsidiaries, (b) a default with respect to any Indebtedness of such Unrestricted Subsidiary or any of its subsidiaries (including any right which the holders thereof may have to take enforcement action against any of them) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity or (c) such Unrestricted Subsidiary or any of its subsidiaries Incurs Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any Restricted Subsidiary. -31- "U.S. Government Obligations" shall have the meaning --------------------------- provided in Section 9.02. "U.S. Legal Tender" means such coin or currency of ----------------- the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. "Yucaipa" means The Yucaipa Companies, a California ------- general partnership, or any successor thereto which is an affiliate of Ronald W. Burkle or his Permitted Transferees. SECTION 1.02. Incorporation by Reference of TIA. --------------------------------- Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities. -------------------- "indenture security holder" means a Holder. ------------------------- "indenture to be qualified" means this Indenture. ------------------------- "indenture trustee" or "institutional trustee" means ----------------- --------------------- the Trustee. "obligor" on the indenture securities means the ------- Company, any Guarantor or any other obligor on the Securities or Guarantees. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03. Rules of Construction. --------------------- Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; -- -32- (4) words in the singular include the plural, and words in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "herein," "hereof" and other words of similar ------ ------ import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. ARTICLE TWO THE SECURITIES SECTION 2.01. Form and Dating. --------------- The Securities, the notation thereon relating to the Guarantees (if and when delivered) and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company and the Trustee shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities and the Guarantees (if and when delivered) shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.02. Execution and Authentication. ---------------------------- Two Officers, or an Officer and an Assistant Secretary, shall sign, or one Officer shall sign and one Officer or an Assistant Secretary (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to, the Securities for the Company by manual or facsimile signature. Each Guarantor shall execute the Guarantee in the manner set forth in Section 11.09. If an Officer whose signature is on a Security was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. -33- A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities for original issue in the aggregate principal amount of $575,000,000 upon a written order of the Company in the form of an Officers' Certificate. The Officers' Certificate shall specify the amount of Securities to be authenticated and the date on which the Securities are to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed $575,000,000 (or such lesser amount as is requested authenticated by the Trustee and issued by the Company on the Issue Date), except as provided in Section 2.07. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Securities. Unless otherwise provided in the appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company and Affiliates of the Company. The Securities shall be issuable only in registered form without coupons in denominations of $1,000 and integral multiples thereof. SECTION 2.03. Registrar and Paying Agent. -------------------------- The Company shall maintain an office or agency in the Borough of Manhattan, The City of New York, where (a) Secu- rities may be presented or surrendered for registration of transfer or for exchange ("Registrar"), (b) Securities may be --------- presented or surrendered for payment ("Paying Agent") and ------------ (c) notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such -------- ------- designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company may act as its own Registrar or Paying Agent except -34- that for the purposes of Articles Three and Nine and Sections 5.15 and 5.16, neither the Company nor any Affiliate of the Company shall act as Paying Agent. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company, upon notice to the Trustee, may have one or more co- Registrars and one or more additional paying agents reasonably acceptable to the Trustee. The term "Paying Agent" includes any ------------ additional paying agent. The Company initially appoints the Trustee as Registrar and Paying Agent until such time as the Trustee has resigned or a successor has been appointed. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee, in advance, of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such. SECTION 2.04. Paying Agent To Hold Assets in Trust. ------------------------------------ The Company shall require each Paying Agent other than the Trustee to agree in writing that, subject to Article Four and Article Twelve, each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, or interest on, the Securities (whether such assets have been distributed to it by the Company or any other obligor on the Securities), and shall notify the Trustee of any Default by the Company (or any other obligor on the Securities) in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate such assets and hold them as a separate trust fund, subject to Article Four and Article Twelve. The Company at any time may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Company to the Paying Agent, the Paying Agent shall have no further liability for such assets. -35- SECTION 2.05. Holder Lists. ------------ The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, which list may be conclusively relied upon by the Trustee. SECTION 2.06. Transfer and Exchange. --------------------- When Securities are presented to the Registrar or a co-Registrar with a request to register the transfer of such Securities or to exchange such Securities for an equal principal amount of Securities of other authorized denominations, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided, however, that the -------- ------- Securities surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar's or co-Registrar's request. No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchanges or transfers pursuant to Sections 2.02, 2.07, 2.10, 3.06, 5.15, 5.16 or 10.05). The Registrar or co-Registrar shall not be required to register the transfer of or exchange of any Security (i) during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Securities and ending at the close of business on the day of such mailing and (ii) selected for redemption in whole or in part pursuant to Article Three, except the unredeemed portion of any Security being redeemed in part. SECTION 2.07. Replacement Securities. ---------------------- If a mutilated Security is surrendered to the Trustee or if the Holder of a Security claims that the Security has -36- been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements are met. If required by the Trustee or the Company, such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both the Company and the Trustee, to protect the Company, the Trustee or any Agent from any loss which any of them may suffer if a Security is replaced. The Company may charge such Holder for its reasonable out-of-pocket expenses in replacing a Security pursuant to this Section 2.07, including reasonable fees and expenses of counsel. Every replacement Security is an additional obligation of the Company. SECTION 2.08. Outstanding Securities. ---------------------- Securities outstanding at any time are all the Securities that have been authenticated by the Trustee except those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company, the Guarantors or any of their respective Affiliates holds the Security. If a Security is replaced pursuant to Section 2.07 (other than a mutilated Security surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona ---- fide purchaser. A mutilated Security ceases to be outstanding - ---- upon surrender of such Security and replacement thereof pursuant to Section 2.07. If on a Redemption Date or the Maturity Date the Paying Agent (other than the Company or a Subsidiary) holds U.S. Legal Tender or U.S. Government obligations sufficient to pay all of the principal and interest due on the Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue unless, pursuant to the provisions of Article Four and Article Twelve, the Paying Agent is unable to make payments on the Securities to the Holders thereof. SECTION 2.09. Treasury Securities. ------------------- In determining whether the Holders of the required principal amount of Securities have concurred in any direction, -37- waiver or consent, Securities owned by the Company, the Guarantors or any of their respective Affiliates shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that the Trustee knows or has reason to know are so owned shall be disregarded. SECTION 2.10. Temporary Securities. -------------------- Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. SECTION 2.11. Cancellation. ------------ The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than the Company or a Subsidiary), and no one else, shall cancel and, at the written direction of the Company, shall dispose of all Securities surrendered for transfer, exchange, payment or cancellation. Subject to Section 2.07, the Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation. If the Company or any Guarantor shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11. SECTION 2.12. Defaulted Interest. ------------------ If the Company defaults in a payment of interest on the Securities, it shall, unless the Trustee fixes another record date pursuant to Section 7.10, pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the persons who are Holders on a subsequent special record date, which date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day -38- if such date is not a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. SECTION 2.13. CUSIP Number. ------------ The Company in issuing the Securities may use a "CUSIP" number, and if so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state that -------- ------- no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. ARTICLE THREE REDEMPTION SECTION 3.01. Notices to Trustee. ------------------ If the Company elects to redeem Securities pursuant to Paragraph 5 of the Securities, it shall notify the Trustee, with a copy to the Credit Agent, of the Redemption Date and the principal amount of Securities to be redeemed and whether it wants the Trustee to give notice of redemption to the Holders at least 30 days (unless a shorter notice shall be satisfactory to the Trustee) but not more than 60 days before the Redemption Date. In order to effect a redemption pursuant to Paragraph 5 of the Securities with the proceeds of a Public Equity Offering, the Company shall send the redemption notice not later than 60 days after the consummation of such Public Equity Offering. Any such notice may be cancelled at any time prior to notice of such redemption being mailed to any Holder and shall thereby be void and of no effect. SECTION 3.02. Selection of Securities To Be Redeemed. -------------------------------------- If fewer than all of the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata by lot or by any other method that the Trustee considers fair and appropriate and, if such Securities are -39- listed on any securities exchange, by a method that complies with the requirements of such exchange; provided, however, that any -------- ------- redemption pursuant to Paragraph 5 of the Securities with the proceeds of a Public Equity Offering shall be made on a pro rata basis unless such method is otherwise prohibited. The Trustee shall make the selection from the Securities outstanding and not previously called for redemption and shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the principal amount thereof to be redeemed. Securities in denominations of $1,000 may be redeemed only in whole. The Trustee may select for redemption portions (equal to $1,000 or integral multiples thereof) of the principal amount of Securities that have denominations larger than $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. SECTION 3.03. Notice of Redemption. -------------------- At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first class mail to each Holder whose Securities are to be redeemed at such Holder's registered address, with a copy to the Trustee and the Credit Agent. In order to effect a redemption pursuant to Paragraph 5 of the Securities with the proceeds of a Public Equity Offering, the Company shall send the redemption notice not later than 60 days after the consummation of such Public Equity Offering. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. Each notice for redemption shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (5) that, unless (a) the Company defaults in making the redemption payment on the Redemption Date or (b) such redemption payment is prohibited pursuant to Article Four -40- or Article Twelve hereof or otherwise, interest on Securities called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Securities is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Securities redeemed; (6) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the Redemption Date, and upon surrender of such Security, a new Security or Securities in aggregate principal amount equal to the unredeemed portion thereof will be issued; and (7) if fewer than all the Securities are to be redeemed, the identification of the particular Securities (or portion thereof) to be redeemed, as well as the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of Securities to be outstanding after such partial redemption. SECTION 3.04. Effect of Notice of Redemption. ------------------------------ Once notice of redemption is mailed in accordance with Section 3.03, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender to the Trustee or Paying Agent, such Securities called for redemption shall be paid at the Redemption Price unless prohibited pursuant to Article Four or Article Twelve or otherwise pursuant to this Indenture. Securities that are redeemed by the Company or that are purchased by the Company pursuant to a Net Proceeds Offer as described in Section 5.16 or pursuant to a Change of Control Offer as described in Section 5.15 or that are otherwise acquired by the Company will be surrendered to the Trustee for cancellation. SECTION 3.05. Deposit of Redemption Price. --------------------------- On or before the Redemption Date, the Company shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Redemption Price of all Securities to be redeemed on that date (other than Securities or portions thereof called for redemption on that date which have been delivered by the Company to the Trustee for cancellation). The Paying Agent shall promptly return to the Company any U.S. Legal Tender so deposited which is not required for that purpose upon the written -41- request of the Company, except with respect to monies owed as obligations to the Trustee pursuant to Article Eight hereof. If the Company complies with the preceding paragraph and payment of the Securities called for redemption is not prohibited under Article Four or Article Twelve or otherwise, then, unless the Company defaults in the payment of such Redemption Price, interest on the Securities or portions thereof to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Securities are presented for payment. SECTION 3.06. Securities Redeemed in Part. --------------------------- Upon surrender of a Security that is to be redeemed in part, the Trustee shall authenticate for the Holder a new Security or Securities equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE FOUR SUBORDINATION SECTION 4.01. Securities Subordinated to Senior Indebtedness. ---------------------------------------------- Anything herein to the contrary notwithstanding, the Company, for itself and its successors, and each Holder, by his acceptance of Securities, agrees that the payment of the Obligations on the Securities is subordinated, to the extent and in the manner provided in this Article Four, to the prior payment in full in cash or Cash Equivalents of all Senior Indebtedness, whether outstanding on the Issue Date or thereafter Incurred, including with respect to Designated Senior Indebtedness, any interest accruing subsequent to a bankruptcy or other similar proceeding whether or not such interest is an allowed claim enforceable against the Company in a bankruptcy case under Bankruptcy Law. This Article Four shall constitute a continuing offer to all persons who become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness and such holders are made obligees hereunder and any one or more of them may enforce such provisions. -42- The obligations of the Company to the Trustee under Section 8.07 shall not be subject to the provisions of this Article Four. SECTION 4.02. Suspension of Payment When Senior Indebtedness in Default. --------------------------------- (a) Unless Section 4.03 shall be applicable, no direct or indirect payment (other than payments by a trust previously established pursuant to Article Nine hereof) by or on behalf of the Company of Obligations on the Securities whether pursuant to the terms of the Securities or upon acceleration or otherwise shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of principal of, premium, if any, or interest on (i) any Designated Senior Indebtedness or (ii) any other Senior Indebtedness which, at the time of determination, is equal to or greater than $50 million in aggregate principal amount ("Significant Senior Indebtedness") (and the Trustee has ------------------------------- received written notice thereof), and such default shall not have been cured or waived by or on behalf of the holders of such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, or shall have ceased to exist, until such default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, shall have been discharged or paid in full in cash or Cash Equivalents, after which the Company shall resume making any and all required payments in respect of the Securities, including any missed payments. (b) Unless Section 4.03 shall be applicable, during the continuance of any other event of default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated, upon the earliest to occur of (a) receipt by the Trustee of written notice from the holders of a majority of the outstanding principal amount of the Designated Senior Indebtedness or their Representative, or (b) if such event of default results from the acceleration of the Securities, the date of such acceleration, no such payment (other than payments by a trust previously established pursuant to Article Nine hereof) may be made by the Company upon or in respect of the Securities for a period ("Payment Blockage ---------------- Period") commencing on the earlier of the date of receipt of - ------ such notice or the date of such acceleration and ending 179 days thereafter (unless (x) such Payment Blockage Period shall be terminated by written notice to the Trustee from the holders of a majority of the outstanding principal amount of such -43- Designated Senior Indebtedness or their representative who delivered such notice or (y) such default is cured or waived, or ceases to exist or such Designated Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents), after which the Company shall resume making any and all required payments in respect of the Securities, including any missed payments. Notwithstanding anything herein to the contrary, in no event will a Payment Blockage Period extend beyond 179 days from the date on which such Payment Blockage Period was commenced. Not more than one Payment Blockage Period may be commenced with respect to the Securities during any period of 365 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the holders of such Designated Senior Indebtedness or their representative whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. (c) In the event that, notwithstanding the foregoing, the Trustee or the Holder of any Security shall have received any payment prohibited by the foregoing provisions of this Section 4.02, then and in such event such payment shall be paid over and delivered forthwith to the Representative or as a court of competent jurisdiction shall direct. SECTION 4.03. Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization of Company. ------------------------------------------- Upon any distribution of assets of the Company of any kind or character, whether in cash, property or securities, upon any dissolution, winding-up, total or partial liquidation or reorganization of the Company (including, without limitation, in bankruptcy, insolvency or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of the Company's assets and liabilities): (a) the holders of Senior Indebtedness shall first be entitled to receive payments in full in cash or Cash Equivalents of all amounts payable under Senior Indebtedness (including, with respect to Designated Senior Indebtedness, any interest accruing after the commencement of any such proceeding at the rate specified in the -44- applicable Designated Senior Indebtedness whether or not interest is an allowed claim enforceable against the Company in any such proceeding) before the Holders will be entitled to receive any payment with respect to the Securities (excluding Permitted Subordinated Reorganization Securities), and until all Obligations with respect to Senior Indebtedness are paid in full in cash or Cash Equivalents, any distribution to which the Holders would be entitled (excluding Permitted Subordinated Reorganization Securities) shall be made to the holders of Senior Indebtedness; provided, however, that no payment of -------- ------- any Guarantee shall constitute payment on behalf of the Company for purposes of this Section 4.03(a); (b) any distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee on behalf of the Holders would be entitled (excluding Permitted Subordinated Reorganization Securities) except for the provisions of this Article Four, shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Senior Indebtedness or their Representative, ratably according to the respective amounts of Senior Indebtedness remaining unpaid held or represented by each, until all Senior Indebtedness remaining unpaid shall have been paid in full in cash or Cash Equivalents after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing, any distribution of assets of the Company of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders or any Paying Agent on account of principal of, premium, if any, or interest on the Securities (excluding Permitted Subordinated Reorganization Securities) before all Senior Indebtedness is paid in full in cash or Cash Equivalents, such payment or distribution (subject to the provisions of Sections 4.06 and 4.07) shall be received, segregated from other funds, and held in trust by the Trustee or such Holder or Paying Agent for the benefit of, and shall immediately be paid over to, the holders of Senior Indebtedness or their Representative, ratably according to the respective amounts of Senior Indebtedness held or represented by each, until all Senior Indebtedness remaining unpaid shall have been paid in full in cash or Cash -45- Equivalents, after giving effect to any concurrent distribution to or for the holders of Senior Indebtedness. Notwithstanding anything to the contrary contained herein, in the absence of its gross negligence or wilful misconduct, the Trustee shall have no duty to collect or retrieve monies previously paid by it in good faith; provided, however, that this sentence shall not affect the -------- ------- obligation of any other party receiving such payment to hold such payment for the benefit of, and to pay over such payment over to, the holders of Senior Indebtedness or their Representative. The consolidation of the Company with, or the merger of the Company with or into, another person or the liquidation or dissolution of the Company following the conveyance, transfer or lease of its properties and assets substantially as an entirety to another person upon the terms and conditions set forth in Article Six hereof shall not be deemed a dissolution, winding-up, liquidation, reorganization, assignment for the benefit of creditors or marshaling of assets and liabilities of the Company for the purposes of this Article Four if the person formed by such consolidation or the surviving entity of such merger or the person which acquires by conveyance, transfer or lease such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance, transfer or lease, comply with the conditions set forth in such Article Six. The Company shall give prompt notice to the Trustee prior to any dissolution, winding-up, total or partial liquidation or reorganization (including, without limitation, in bankruptcy, insolvency, or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of the Company's assets and liabilities). SECTION 4.04. Holders To Be Subrogated to Rights of Holders of Senior Indebtedness. ---------------------------------- Subject to the payment in full in cash or Cash Equivalents of all Senior Indebtedness, the Holders of Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness until all amounts owing on the Securities shall be paid in full in cash, and for the purpose of such subrogation no payments or distributions to the holders of Senior Indebtedness by or on behalf of the Company, or by or on behalf of the Holders by virtue of -46- this Article Four, which otherwise would have been made to the Holders, shall, as between the Company and the Holders, be deemed to be payment by the Company to or on account of the Senior Indebtedness, it being understood that the provisions of this Article Four are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Senior Indebtedness, on the other hand. If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article Four shall have been applied, pursuant to the provisions of this Article Four, to the payment of all amounts payable under the Senior Indebtedness, then the Holders shall be entitled to receive from the holders of such Senior Indebtedness any payments or distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable under or in respect of the Senior Indebtedness in full in cash or Cash Equivalents. SECTION 4.05. Obligations of the Company Unconditional. ---------------------------------------- Nothing contained in this Article Four or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company and the Holders, the obligation of the Company, which is absolute and unconditional, to pay to the Holders the principal of and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Four, of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any payment or distribution of assets or securities of the Company referred to in this Article Four, the Trustee, subject to the provisions of Sections 8.01 and 8.02, and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee or agent or other person making any payment or distribution to the Trustee or to the Holders for the purpose of ascertaining the persons entitled to participate in such -47- payment or distribution, the holders of Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Four. Nothing in this Section 4.05 shall apply to the claims of, or payments to, the Trustee under or pursuant to Section 8.07. SECTION 4.06. Trustee Entitled To Assume Payments Not Prohibited in Absence of Notice. --------------------------------------- The Trustee shall not at any time be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee unless and until the Trustee or any Paying Agent shall have received written notice thereof from the Company or from one or more holders of Senior Indebtedness or from any Representative therefor and, prior to the receipt of any such notice, the Trustee, subject to the provisions of Sections 8.01 and 8.02, shall be entitled in all respects conclusively to assume that no such fact exists. SECTION 4.07. Application by Trustee of Assets Deposited with It. ------------------------------------------ U.S. Legal Tender or U.S. Government Obligations deposited in trust with the Trustee pursuant to and in accordance with Section 9.02 shall be for the sole benefit of Holders and, to the extent allocated for the payment of Securities, shall not be subject to the subordination provisions of this Article Four. Otherwise, any deposit of assets or securities by or on behalf of the Company with the Trustee or any Paying Agent (whether or not in trust) for the payment of principal of or interest on any Securities shall be subject to the provisions of this Article Four; provided, -------- however, that if prior to the second Business Day preceding the - ------- date on which by the terms of this Indenture any such assets may become distributable for any purpose (including, without limitation, the payment of either principal of or interest on any Security) the Trustee or such Paying Agent shall not have received with respect to such assets the notice provided for in Section 4.06, then the Trustee or such Paying Agent shall have full power and authority to receive such assets and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary received by it on or after such date; provided, further, however, that no payment -------- ------- ------- on any Guarantee shall constitute payment on behalf of the Company for purposes of this Section 4.07. The foregoing shall not apply to the Paying Agent if the Company or any Subsidiary or -48- Affiliate of the Company is acting as Paying Agent. Nothing contained in this Section 4.07 shall limit the right of the holders of Senior Indebtedness to recover payments as contemplated by this Article Four. SECTION 4.08. No Waiver of Subordinated Provisions. ------------------------------------ (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without limiting the generality of subsection (a) of this Section 4.08, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders without incurring responsibility to the Holders and without impairing or releasing the subordination provided in this Article Four or the obligations hereunder of the Holders to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any person liable in any manner for the collection or payment of Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other person; provided, -------- however, that in no event shall any such actions limit the - ------- right of the Holders to take any action to accelerate the maturity of the Securities pursuant to Article Seven hereof or to pursue any rights or remedies hereunder or under applicable laws if the taking of such action does not otherwise violate the terms of this Indenture. (c) Each Holder by accepting a Security agrees that the Representative of any Senior Indebtedness, in its discretion, without notice or demand and without affecting any rights of any holder of Senior Indebtedness under this Article Four, may foreclose any mortgage or deed of trust covering interests in real property secured thereby, by judicial or nonjudicial sale; and such Holder hereby waives any defense to the -49- enforcement by the Representative of any Senior Indebtedness or by any holder of any Senior Indebtedness against such Holder of this Article Four after a judicial or nonjudicial sale or other disposition of its interests in real property secured by such mortgage or deed of trust. SECTION 4.09. Holders Authorize Trustee To Effectuate Subordination of Securities. --------------------------------------- Each Holder of the Securities by his acceptance thereof authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effect the subordination provisions contained in this Article Four, and appoints the Trustee his attorney-in-fact for such purpose, including, in the event of any dissolution, winding-up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company) tending towards liquidation or reorganization of the business and assets of the Company, the immediate filing of a claim for the unpaid balance of such Holder's Securities in the form required in said proceedings and cause said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Senior Indebtedness or their Representative is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Securities. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Senior Indebtedness or their Representative to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee or the holders of Senior Indebtedness or their Representative to vote in respect of the claim of any Holder in any such proceeding. SECTION 4.10. Right of Trustee To Hold Senior Indebtedness. -------------------------------------------- The Trustee shall be entitled to all of the rights set forth in this Article Four in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. -50- SECTION 4.11. No Suspension of Remedies. ------------------------- The failure to make a payment on account of principal of or interest on the Securities by reason of any provision of this Article Four shall not be construed as preventing the occurrence of a Default or an Event of Default under Section 7.01. Nothing contained in this Article Four shall limit the right of the Trustee or the Holders to take any action to accelerate the maturity of the Securities pursuant to Article Seven or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, under this Article Four of the holders, from time to time, of Senior Indebtedness. SECTION 4.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness. ------------------------------------------ The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be liable to any such holders (other than for its willful misconduct or gross negligence) if it shall in good faith mistakenly pay over or deliver to the Holders or the Company or any other person, money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article Four or otherwise. Nothing in this Section 4.12 shall affect the obligation of any person other than the Trustee to hold such payment for the benefit of, and to pay such payment over to, the holders of Senior Indebtedness or their Representative. ARTICLE FIVE COVENANTS SECTION 5.01. Payment of Securities. --------------------- The Company shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. An installment of principal of or interest on the Securities shall be considered paid on the date it is due if the Trustee or Paying Agent (other than the Company or a Subsidiary) holds on that date U.S. Legal Tender designated for and sufficient to pay the installment; provided, however, that -------- ------- U.S. Legal Tender held by the Trustee for the benefit of -51- holders of Senior Indebtedness or Guarantor Senior Indebtedness or the payment of which to the Holders is prohibited pursuant to the provisions of Article Four or Article Twelve hereof or otherwise shall not be considered to be designated for the payment of any installment of principal or interest on the Securities within the meaning of this Section 5.01. The Company shall pay interest on overdue principal at the rate borne by the Securities and it shall pay interest on overdue installments of interest at the same rate, to the extent lawful. SECTION 5.02. Maintenance of Office or Agency. ------------------------------- The Company shall maintain in the Borough of Manhattan, The City of New York, the office or agency required under Section 2.03 hereof. The Company shall give prior notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 13.02. SECTION 5.03. Limitation on Restricted Payments. --------------------------------- (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment if, at the time of such proposed Restricted Payment, or after giving effect thereto, (1) a Default or an Event of Default shall have occurred and be continuing, (2) the Company could not Incur $1.00 of additional Indebtedness pursuant to the proviso in Section 5.12 hereof or (3) the aggregate amount expended for all Restricted Payments, including such proposed Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment as determined in good faith by the Board of Directors of the Company as evidenced by a Board Resolution), subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such aggregate Consolidated Net Income is a loss, minus 100% of such loss) earned during the period beginning on the Issue Date and ending on the date of the proposed Restricted Payment (the "Reference Date") plus (ii) 100% of the aggregate Net -------------- Proceeds received by the Company from any Person (other than a Subsidiary) from the issuance and sale (including upon exchange or conversion for other securities of the Company) subsequent to -52- the Issue Date and on or prior to the Reference Date of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from issuances and sales financed directly or indirectly using funds borrowed from the Company or any Subsidiary, until and to the extent such borrowing is repaid), plus (iii) 100% of the Net Proceeds from (x) the sale or other disposition of Investments (other than Permitted Investments described in clauses (i)-(vi) inclusive of the definition thereof) made by the Company or any Restricted Subsidiary or (y) the sale of the Capital Stock of any Unrestricted Subsidiary by the Company or any Restricted Subsidiary or the sale of all or substantially all of the assets of any Unrestricted Subsidiary to the extent that a liquidating dividend or similar distribution is paid to the Company or any Restricted Subsidiary from the proceeds of such asset sale. (b) The provisions set forth in the immediately preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of declaration, (2) the acquisition of any shares of Capital Stock of the Company or the repurchase, redemption or other repayment of any Subordinated Indebtedness, in each case, in exchange for or solely out of the Net Cash Proceeds of the substantially concurrent sale (other than to a Subsidiary) of shares of Qualified Capital Stock of the Company; provided, however, that -------- ------- no proceeds of such sale of Qualified Capital Stock shall be included in clause (ii) of the preceding paragraph, (3) the repurchase, redemption or other repayment of any Subordinated Indebtedness in exchange for or solely out of the Net Cash Proceeds of the substantially concurrent sale (other than to a Subsidiary) of Subordinated Indebtedness of the Company with an Average Life equal to or greater than the then remaining Average Life of the Subordinated Indebtedness repurchased, redeemed or repaid, and (4) Permitted Payments; provided, -------- however, that, at the time of, and after giving effect to, any - ------- Restricted Payment made under clause (3) or (4), no Default or Event of Default shall have occurred and be continuing; provided, further, however, that the declaration of each - -------- ------- dividend paid in accordance with clause (1) above and each payment under clause (iv) of the definition of "Permitted Payments" shall each be counted for purposes of computing amounts expended pursuant to subclause (3) in the immediately preceding paragraph, and no amounts expended pursuant to clause (2) or (3) above or clause -53- (i), (ii), (iii), (v), (vi) or (vii) of the definition of "Permitted Payments" shall be so counted. SECTION 5.04. Corporate Existence. ------------------- Except as otherwise permitted by Article Six, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate or other existence of each of its Significant Subsidiaries in accordance with the respective organizational documents of each such Significant Subsidiary and the rights (charter and statutory) and franchises of the Company and each such Significant Subsidiary; provided, -------- however, that the Company shall not be required to preserve, - ------- with respect to itself, any right or franchise, and with respect to any of its Significant Subsidiaries, any such existence, right or franchise, if the Board of Directors of the Company or such Significant Subsidiary, as the case may be, shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company or any such Significant Subsidiary. SECTION 5.05. Payment of Taxes and Other Claims. --------------------------------- The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon it or any of the Subsidiaries or properties of it or any of the Subsidiaries and (ii) all lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of it or any of the Subsidiaries; provided, however, that the Company shall not be -------- ------- required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim if either (a) the amount, applicability or validity thereof is being contested in good faith by appropriate proceedings and an adequate reserve has been established therefor to the extent required by GAAP or (b) the failure to make such payment or effect such discharge (together with all other such failures) would not have a material adverse effect on the financial condition or results or operations of the Company and the Subsidiaries taken as a whole. -54- SECTION 5.06. Maintenance of Properties and Insurance. --------------------------------------- (a) The Company shall cause all properties used or useful to the conduct of its business or the business of any of the Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in its judgment may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times unless the failure to so maintain such properties (together with all other such failures) would not have a material adverse effect on the financial condition or results of operations of the Company and the Subsidiaries taken as a whole; provided, however, that -------- ------- nothing in this Section 5.06 shall prevent the Company or any Subsidiary from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is either (i) in the ordinary course of business, (ii) in the good faith judgment of the Board of Directors of the Company or the Subsidiary concerned, or of the senior officers of the Company or such Subsidiary, as the case may be, desirable in the conduct of the business of the Company or such Subsidiary, as the case may be, or (iii) is otherwise permitted by this Indenture. (b) The Company shall provide or cause to be provided, for itself and each of the Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the reasonable, good faith opinion of the Company are adequate and appropriate for the conduct of the business of the Company and the Subsidiaries in a prudent manner, with reputable insurers or with the government of the United States of America or an agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be either (i) consistent with past practices of the Company or the applicable Subsidiary or (ii) customary, in the reasonable, good faith opinion of the Company, for corporations similarly situated in the industry, unless the failure to provide such insurance (together with all other such failures) would not have a material adverse effect on the financial condition or results of operations of the Company and the Subsidiaries, taken as a whole. -55- SECTION 5.07. Compliance Certificate; Notice of Default. ----------------------------------------- (a) The Company shall deliver to the Trustee within 120 days after the end of the Company's fiscal year an Officers' Certificate stating that a review of its activities and the activities of the Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether it has kept, observed, performed and fulfilled its obligations under this Indenture and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company during such preceding fiscal year has kept, observed, performed and fulfilled each and every such covenant and no event of default in respect of any payment obligation under the Credit Agreement and no Default or Event of Default occurred during such year or, if such signers do know of such an event of default, Default or Event of Default, the certificate shall describe the event of default, Default or Event of Default and its status with particularity. The Officers' Certificate shall also notify the Trustee should the Company elect to change the manner in which it fixes its fiscal year end. (b) So long as, and to the extent, not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the Company shall deliver to the Trustee within 120 days after the end of each fiscal year a written statement by the Company's independent certified public accountants stating (A) that their audit examination has included a review of the terms of this Indenture and the Securities as they relate to accounting matters, and (B) whether, in connection with their audit examination, any Default has come to their attention and if such a Default has come to their attention, specifying the nature and period of existence thereof. (c) The Company shall deliver to the Trustee, forthwith upon becoming aware, and in any event within 5 days after the occurrence, of (i) any Default or Event of Default; (ii) any event of default in respect of any payment obligation under the Credit Agreement or any event of default under any bond, debenture, note, or other evidence of Indebtedness of the Company or any of the Subsidiaries, or under any mortgage, indenture or other instrument if such event of default related to Indebtedness at any time in an aggregate principal amount exceeding $20 million, an Officers' Certificate specifying with particularity such event. -56- SECTION 5.08. Compliance with Laws. -------------------- The Company shall comply, and shall cause each of the Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except such as are being contested in good faith and by appropriate proceedings and except for such noncompliances as would not in the aggregate have a material adverse effect on the financial condition or results of operations of the Company and the Subsidiaries taken as a whole. SECTION 5.09. SEC Reports. ----------- The Company will deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the Trustee and the Holder with such quarterly and annual reports and other reports specified in Section 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA Section 314(a). SECTION 5.10. Waiver of Stay, Extension or Usury Laws. --------------------------------------- The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the -57- execution of every such power as though no such law had been enacted. SECTION 5.11. Limitation on Transactions with Affiliates. ------------------------------------------ (a) The Company shall not, and shall not permit any Restricted Subsidiary to, in a single transaction or series of related transactions, (i) sell, lease, transfer or otherwise dispose of any of its properties or assets or issue securities (other than equity securities which do not constitute Disqualified Capital Stock) to, (ii) purchase any property, assets or securities from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, an Affiliate or Significant Stockholder (or any Affiliate of such Significant Stockholder) of the Company or any Subsidiary (any of the foregoing, an "Affiliate Transaction"), unless (I) (A) such Affiliate --------------------- Transaction is in the ordinary course of business or otherwise on terms that are at least as favorable to the Company or such Restricted Subsidiary, as the case may be, as might reasonably have been obtainable at such time from an unaffiliated party; (B) in the case of an Affiliate Transaction involving aggregate payments in excess of $2.0 million and less than or equal to $5.0 million, the Company or such Restricted Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the Trustee certifying that such Affiliate Transaction is on terms that are at least as favorable to the Company or such Restricted Subsidiary, as the case may be, as might reasonably have been obtainable at such time from an unaffiliated party; (C) in the case of an Affiliate Transaction involving aggregate payments in excess of $5.0 million and less than or equal to $15.0 million, the Company or such Restricted Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the Trustee certifying to the same effect as specified in clause (B) above and also that such Affiliate Transaction has received the approval of a majority of the disinterested members of the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, or, in the absence of any such approval, that an Independent Financial Advisor has provided the Board of Directors with written confirmation to the effect specified in clause (II) below; and (D) in the case of an Affiliate Transaction involving aggregate payments in excess of $15.0 million, the Company or such Restricted Subsidiary, as the case may be, shall have delivered to the Trustee a written opinion of an Independent Financial Advisor to the effect specified in clause (II) below or (II) the Company or such Restricted Subsidiary, as the case may be, shall have delivered -58- to the Trustee a written opinion of an Independent Financial Advisor to the effect that such transaction is fair to the Company or such Restricted Subsidiary, as the case may be, from a financial point of view or that the terms of such Affiliate Transaction are at least as favorable to the Company or such Restricted Subsidiary, as the case may be, as those that might reasonably have been obtainable at such time from a Person that is not an Affiliate of the Company or such Restricted Subsidiary, as the case may be. (b) The provisions of the foregoing paragraph shall not apply to (i) any Permitted Payment, (ii) any Restricted Payment that is made in compliance with Section 5.03 hereof, (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors, consultants or employees of the Company or any Restricted Subsidiary, as determined in good faith by the Board of Directors of the Company or such Restricted Subsidiary or the senior management thereof, (iv) transactions exclusively between or among the Company and any of its wholly owned Restricted Subsidiaries or exclusively between or among such wholly owned Restricted Subsidiaries; provided such transactions are not otherwise prohibited by the applicable Indenture, (v) the Standstill Agreement and any other agreement in effect on the Issue Date as in effect on such date (or any transaction contemplated thereby) or as amended thereafter (including transactions contemplated pursuant to such amendment) so long as any such amendment is not disadvantageous to the Holders of the Securities in any material respect, (vi) the existence of, or the performance by the Company or any of the Restricted Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Issue Date and any similar agreements which it may enter into thereafter; provided, -------- however, that the existence of, or the performance by the - ------- Company or any Restricted Subsidiary of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders of the Securities in any material respect, (vii) transactions permitted by, and complying with, Article Six hereof and (viii) transactions with suppliers or other purchases or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of this Indenture which are fair to -59- the Company, in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. SECTION 5.12. Limitation on Incurrences of Additional Indebtedness. ---------------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness other than Permitted Indebtedness; provided, -------- however, that if no Default with respect to payment of - ------- principal of, or interest on, the Securities or Event of Default shall have occurred and be continuing at the time or as a consequence of the Incurrence of any such Indebtedness, the Company or any Restricted Subsidiary may Incur Indebtedness if immediately after giving effect to the Incurrence of such Indebtedness the Operating Coverage Ratio would be greater than 2.0 to 1.0. SECTION 5.13. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. ----------------------------------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or suffer to exist, or allow to become effective any consensual Payment Restriction with respect to any of the Restricted Subsidiaries, except for (a) any such restrictions contained in (i) the Credit Agreement and related documents as any such Payment Restriction may apply to any present or future Subsidiary, (ii) the Senior Note Indenture and this Indenture, (iii) any agreement in effect at or entered into on the Issue Date, as each of the agreements referred to in the foregoing clauses (i), (ii) or (iii) is in effect on the Issue Date or as thereafter amended, supplemented or amended and restated in a manner, as it relates to such restrictions, not materially adverse to the Holders and (iv) Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary (provided that (x) such Indebtedness is not Incurred -------- in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary, (y) such restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person so acquired and (z) such Indebtedness is otherwise permitted to be Incurred pursuant to Section 5.12 hereof); (b) limitations contained in agreements governing secured Indebtedness otherwise permitted to be Incurred pursuant to Sections 5.12 and 5.14 hereof on the right of the debtor to dispose of the assets securing such Indebtedness; (c) customary non-assignment -60- provisions restricting subletting or assignment of any lease or other agreement entered into by a Restricted Subsidiary; (d) customary net worth or similar provisions contained in leases and other agreements entered into by a Restricted Subsidiary in the ordinary course of business; (e) customary restrictions with respect to a Restricted Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary; (f) customary provisions in joint venture agreements and other similar agreements; (g) restrictions contained in Indebtedness Incurred to refinance, refund, extend or renew Indebtedness referred to in clauses (a) and (b) above; provided that the restrictions contained therein are not - -------- materially more restrictive taken as a whole than those provided for in such Indebtedness being refinanced, refunded, extended or renewed; and (h) Payment Restrictions contained in any other Indebtedness permitted to be Incurred subsequent to the Issue Date pursuant to Section 5.12 hereof; provided that any such -------- Payment Restrictions are ordinary and customary with respect to the type of Indebtedness being Incurred (under the relevant circumstances). SECTION 5.14. Limitation on Liens. ------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien (other than Permitted Liens pursuant to clauses (i) through (xv) of the definition thereof) that secures any Indebtedness of the Company which is expressly by its terms subordinated in right of payment to any other Indebtedness of the Company on any asset or property of the Company or any Restricted Subsidiary, unless the Securities are secured by a Lien on such asset or property that is (x) pari passu with such other Indebtedness if such other Indebtedness is pari passu with the Securities or (y) if such other Indebtedness is subordinated to the Securities, senior in priority to the Lien securing such other Indebtedness, in each case, until such time as such obligations are no longer secured by a Lien. SECTION 5.15. Limitation on Change of Control. ------------------------------- (a) Upon the occurrence of a Change of Control, each Holder will have the right to require the repurchase of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% ----------------------- of the principal amount thereof plus accrued and unpaid -61- interest to the date of repurchase (the "Change of Control ----------------- Offer Price"). - ----------- (b) No later than 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Notice of an event giving rise to a Change of Control shall be given on the same date and in the same manner to all Holders. Such notice shall state: (1) that the Change of Control Offer is being made pursuant to this Section 5.15 and that all Securities tendered will be accepted for payment; (2) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law) (the "Change of Control Payment Date"); ------------------------------ (3) that any Security not tendered will continue to accrue interest if interest is then accruing; (4) that, unless (i) the Company defaults in making payment therefor or (ii) such payment is prohibited pursuant to Article Four, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have a Security purchased pursuant to a Change of Control Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than two Business Days prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; -62- (7) that Holders whose Securities are purchased only in part will be issued new Securities equal in principal amount to the unpurchased portions of the Securities surrendered; provided that each Security purchased and -------- each Security issued shall be in an original principal amount of $1,000 or integral multiples thereof; (8) that each Change of Control Offer is required to remain open for at least 20 Business Days or such longer period as may be required by law and until 12:00 Midnight New York City time on the applicable Change of Control Payment Date; and (9) the circumstances and relevant facts regarding such Change of Control. (c) On or before the Change of Control Payment Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price of all Securities so tendered and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price (and the Trustee shall promptly authenticate and mail to such Holders new Securities equal in principal amount to any unpurchased portion of the Securities surrendered provided that each such new Security shall be in the principal amount of $1,000 or integral multiples thereof) unless such payment is prohibited pursuant to Article Four or otherwise. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 5.15, the Trustee shall act as the Paying Agent. (d) Notwithstanding the foregoing, prior to the mailing of the notice of a Change of Control Offer referred to above, within 30 days following a Change of Control, the Company shall either (i) repay in full all Indebtedness, and terminate all commitments, under the Credit Agreement to the extent required upon a change of control pursuant to the terms thereof (or offer to repay in full all such Indebtedness and terminate all such commitments and repay all such Indebtedness owed to each lender which has accepted such offer and terminate all such commitments of each such lender), or (ii) obtain the -63- requisite consents under the Credit Agreement, the terms of which require repayment upon a change of control, to permit the repurchase of the Securities as provided above. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Securities pursuant to the provisions described above. The Company's failure to comply with the covenants described in this paragraph shall constitute an Event of Default hereunder. (e) Notwithstanding the foregoing, the Company shall not be required to make a Change of Control Offer, as provided above, if, in connection with any Change of Control, it has made an offer to purchase (an "Alternate Offer") any and all --------------- Securities validly tendered at a cash price equal to or higher than the Change of Control Offer Price and has purchased all Securities properly tendered in accordance with the terms of such Alternate Offer. (f) The Company must comply with Rule 14e-1 under the Exchange Act and other provisions of state and federal securities laws to the extent applicable in connection with a Change of Control Offer or an Alternate Offer. SECTION 5.16. Limitation on Asset Sales. ------------------------- (a) The Company shall not, and shall not permit any Restricted Subsidiary to, consummate an Asset Sale unless (a) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company) and (b) upon consummation of such Asset Sale, the Company will within 365 days of the receipt of the proceeds therefrom: (i) apply or cause such Restricted Subsidiary to apply the Net Cash Proceeds of such Asset Sale to (A) a Related Business Investment, (B) an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale or (C) an investment in properties and assets that will be used in the business of the Company and the Restricted Subsidiaries existing on the Issue Date or in businesses reasonably related thereto; (ii) in the case of a sale of a store or stores, deem such Net Cash Proceeds to have been applied to the extent of any capital expenditures made to acquire or construct a replacement store in the general vicinity of the store sold within 365 days preceding the date of such Asset Sale; (iii) apply such Net Cash Proceeds (or cause such Net Cash Proceeds to be applied) to the permanent repayment of Pari Passu -64- Indebtedness, any Indebtedness of any Restricted Subsidiary or any Senior Indebtedness; provided, however, that the repayment of -------- ------- any revolving loan (under the Credit Agreement or otherwise) shall result in a permanent reduction in the commitment thereunder; (iv) use such Net Cash Proceeds to secure Letter of Credit Obligations to the extent the related letters of credit have not been drawn upon or returned undrawn; or (v) after such time as the accumulated Net Cash Proceeds not applied pursuant to the foregoing clauses (i) through (iv) equals or exceeds $20.0 million, apply such Net Cash Proceeds (or cause such Net Cash Proceeds to be applied) to the purchase of Securities issued hereunder tendered to the Company for purchase at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase pursuant to an offer to purchase made by the Company as set forth below (a "Net Proceeds ------------ Offer"); provided, however, that the Company shall have the right - ----- -------- ------- to exclude from the foregoing provisions Asset Sales subsequent to the Issue Date, the proceeds of which are derived from the sale and substantially concurrent lease-back of a supermarket and/or related assets or equipment which are acquired or constructed by the Company or a Restricted Subsidiary subsequent to the date that is six months prior to the Issue Date, provided -------- that such sale and substantially concurrent lease-back occurs within 365 days following such acquisition or the completion of such construction, as the case may be. Pending the utilization of any Net Cash Proceeds in the manner (and within the time period) described above, the Company may use any such Net Cash Proceeds to repay revolving loans (under the Credit Agreement or otherwise) without a permanent reduction of the commitment thereunder. (b) Each Net Proceeds Offer will be mailed to the record Holders of the Securities as shown on the register of Holders of such Securities not less than 325 nor more than 365 days after the relevant Asset Sale, with a copy to the applicable Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Net Proceeds Offer and shall state the following terms: (1) that the Net Proceeds Offer is being made pursuant to Section 5.16 hereof and that all Securities tendered will be accepted for payment, provided, however, -------- ------- that if the aggregate principal amount of Securities tendered in a Net Proceeds Offer plus accrued interest at the expiration of such offer exceeds the aggregate amount of the Net Proceeds Offer, the Company shall select the -65- Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000 or multiples thereof shall be purchased); (2) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law) (the "Proceeds Purchase Date"); ---------------------- (3) that any Security not tendered will continue to accrue interest if interest is then accruing; (4) that, unless (i) the Company defaults in making payment therefor or (ii) such payment is prohibited pursuant to Article Four hereof or otherwise, any Security accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Proceeds Purchase Date; (5) that Holders electing to have a Security purchased pursuant to a Net Proceeds Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Proceeds Purchase Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than two Business Days prior to the Proceeds Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; (7) that Holders whose Securities were purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; provided, however, that each -------- ------- Security purchased and each new Security issued shall be in an original principal amount of $1,000 or integral multiples thereof; and -66- (8) that the Net Proceeds Offer shall remain open for a period of 20 Business Days or such longer period as may be required by law. (c) On or before the Proceeds Purchase Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Net Proceeds Offer which are to be purchased in accordance with item (b)(1) above, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price of all Securities to be purchased and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price (and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered provided that each such new Security shall be in the principal amount of $1,000 or integral multiples thereof) unless such payment is prohibited pursuant to Article Four hereof or otherwise. The Company will publicly announce the results of the Net Proceeds Offer on or as soon as practicable after the Proceeds Purchase Date. For purposes of this Section 5.16, the Trustee shall act as the Paying Agent. (d) Any amounts remaining after the purchase of Securities pursuant to a Net Proceeds Offer shall be returned by the Trustee to the Company. (e) The Company must comply with Rule 14e-1 under the Exchange Act and other provisions of State and federal securities laws to the extent applicable in connection with a Net Proceeds Offer. SECTION 5.17. Limitation on Subsidiary Assets and Indebtedness. ------------------------ (a) If at any time subsequent to the Issue Date (i)(a) the Company transfers any of its property, plant or equipment to one or more of the Restricted Subsidiaries (other than Guarantors) and (b) as a result of such transfer or transfers, the book value of all such transferred property, plant and equipment of the Company and the Guarantors, as reflected on a balance sheet prepared in accordance with GAAP in any filing made with the Commission, is greater than 35% of the then book value of the total property, plant and equipment of the -67- Company and the Restricted Subsidiaries, on a consolidated basis; or (ii) any Restricted Subsidiary (other than a Guarantor) incurs Indebtedness (other than Permitted Indebtedness pursuant to clause (a) (to the extent such Indebtedness represents a guarantee of obligations under the Credit Agreement or a revolving loan thereunder), (b), (c), (d), (g), (h), (i), (j), (k) or (l) of the definition thereof) that, together with any other Indebtedness (including Permitted Indebtedness) Incurred subsequent to the Issue Date by all Restricted Subsidiaries (other than those that are then Guarantors) then outstanding, would represent more than 35% of the consolidated total long-term Indebtedness of the Company and the Restricted Subsidiaries as reflected on a balance sheet prepared in accordance with GAAP in any filing made with the Commission (each of the foregoing clauses (i) and (ii) being referred to herein as a "Guarantee --------- Condition"), then the Company shall, promptly following any such - --------- filing with the Commission, cause one or more of the Restricted Subsidiaries to unconditionally guarantee, jointly and severally, the Company's obligations hereunder on a senior subordinated unsecured basis (each such guarantee, a "Guarantee"), pursuant to --------- a supplemental indenture satisfactory in form to the Trustee, so that following the issuance of such Guarantee, neither of the Guarantee Conditions shall exist. The Indebtedness represented by each Guarantee (including the payment of Obligations on the Securities) will be subordinated on the same basis to senior indebtedness of the Guarantors as the Securities are subordinated to Senior Indebtedness. So long as no Default or Event of Default shall have occurred and be continuing, one or more Guarantors may be released within 10 Business Days following any filing with the Commission from their Guarantees pursuant to a supplemental indenture or such other instrument satisfactory in form to the Trustee if after giving effect to such release neither of the Guarantee Conditions shall exist. Notwithstanding the foregoing, neither of the Guarantee Conditions shall be deemed to exist during any period when the Company's Operating Coverage Ratio is greater than 3.0 to 1.0. (b) Upon the sale or disposition (whether by merger, stock sale, asset sale or otherwise) to any Person which is not a Restricted Subsidiary of all of the Company's or any Subsidiary's Capital Stock in, or all or substantially all of the assets of, any Guarantor, which sale or disposition is otherwise in compliance with this Indenture, such Guarantor shall be deemed released from all its obligations under its Guarantee. -68- (c) The obligations of each Guarantor under its Guarantee would be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee, or pursuant to its contribution obligations under this Indenture, result in the obligations of such Guarantor under such Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in a pro rata amount based on the relative net assets of each Guarantor. SECTION 5.18. Limitation on Preferred Stock of Restricted Subsidiaries. ----------------------------- The Company shall not permit any of the Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a wholly owned Restricted Subsidiary) or permit any Person (other than the Company or a wholly owned Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. SECTION 5.19. Limitation on Other Senior Subordinated Indebtedness. --------------------------------------- The Company shall not, directly or indirectly, incur any Indebtedness that by its terms (or by the terms of the agreement governing such Indebtedness) is subordinate in right of payment to any other Indebtedness of the Company unless such Indebtedness is also by its terms (or the terms of the agreement governing such Indebtedness) made expressly either (a) pari passu in right of payment with the Securities or (b) subordinate in right of payment to the Securities in the same manner and at least to the same extent as the Securities are subordinate to Senior Indebtedness. SECTION 5.20. Limitation on Restricted and Unrestricted Subsidiaries. ---------------------------- (a) The Board of Directors of the Company may, if no Default or Event of Default shall have occurred and be continuing or would result therefrom, designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation is at that time permitted under Section 5.03 hereof. The Board of -69- Directors of the Company may, if no Default or Event of Default shall have occurred and be continuing or would result therefrom, designate an Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that (i) any such redesignation -------- ------- shall be deemed to be an Incurrence as of the date of such redesignation by the Company and the Restricted Subsidiaries of the Indebtedness (if any) of such redesignated Subsidiary for purposes of Section 5.12 hereof; and (ii) unless such redesignated Subsidiary shall not have any Indebtedness outstanding (other than Indebtedness which would be Permitted Indebtedness), no such designation shall be permitted if immediately after giving effect to such redesignation and the Incurrence of any such Indebtedness, the Company could not incur $1.00 of additional Indebtedness pursuant to the proviso of Section 5.12 hereof. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by the filing with the Trustee of a certified copy of the Board Resolution of the Company's Board of Directors giving effect to such designation or redesignation and an Officers' Certificate certifying that such designation or redesignation complied with the foregoing conditions and setting forth in reasonable detail the underlying calculations. (b) Subsidiaries that are not designated by the Board of Directors as Restricted or Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries. The designation of a Restricted Subsidiary as an Unrestricted Subsidiary shall be deemed to include a designation of all of the subsidiaries of such Unrestricted Subsidiary as Unrestricted Subsidiaries. ARTICLE SIX SUCCESSOR CORPORATION SECTION 6.01. Limitations on Mergers and Certain Other Transactions. ---------------------------------------- (a) The Company, in a single transaction or through a series of related transactions, shall not (i) consolidate with or merge with or into any other Person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another Person or group of affiliated Persons or (ii) adopt a Plan of Liquidation, unless, in either case: -70- (1) either the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a ---------------- corporation organized and validly existing under the laws of the United States, any state thereof or the District of Columbia, and shall expressly assume, by supplemental indenture, all the obligations of the Company hereunder and the Securities issued hereunder; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in connection therewith, the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; and (3) immediately before and immediately after giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing. (b) For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. SECTION 6.02. Successor Corporation Substituted. --------------------------------- Upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company or any adoption of a Plan of Liquidation by the Company in accordance with Section 6.01 hereof, the Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if the Surviving Person had been named as the Company -71- herein; provided, however, that solely for purposes of -------- ------- computing amounts described in subclause (3) of Section 5.03(a), the Surviving Person shall be deemed to have succeeded to and be substituted for the Company only with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets. ARTICLE SEVEN DEFAULT AND REMEDIES SECTION 7.01. Events of Default. ----------------- Each of the following events constitutes an "Event of Default": (i) failure to make any interest payment on the Securities when due and the continuance of such default for a period of 30 days (whether or not prohibited by Article Four); (ii) failure to pay principal of, or premium, if any, on the Securities when due, whether at maturity, upon acceleration, redemption, required repurchase or otherwise (whether or not prohibited by Article Four); (iii) failure to comply with any other agreement contained in the Securities or this Indenture, if such failure continues unremedied for 30 days after written notice given by the Trustee or the Holders of at least 25% in principal amount of the Securities then outstanding (except in the case of a failure to comply with Section 5.03, Section 5.15, Section 5.16 or Section 6.01, which shall constitute Events of Default with notice but without passage of time); (iv) a default under any Indebtedness of the Company or any Restricted Subsidiary, whether such Indebtedness now exists or shall hereinafter be created, if both (A) such default either (1) results from the failure to pay any such Indebtedness at its stated final maturity or (2) relates to an obligation other than the obligation to pay such Indebtedness at its stated final maturity and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated maturity -72- and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at stated final maturity or the maturity of which has been so accelerated, aggregates $20 million or more at any one time outstanding; (v) any final judgment or order for payment of money in excess of $20 million shall be entered against the Company or any Significant Subsidiary and shall not be discharged for a period of 60 days after such judgment becomes final and nonappealable; (vi) either the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case or proceeding; (b) consents to the entry of an order for relief against it in an involuntary case or proceeding; (c) consents to the appointment of a Custodian of it or for all or substantially all of its property; or (d) makes a general assignment for the benefit of its creditors; (vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any Significant Subsidiary in an involuntary case or proceeding; (b) appoints a Custodian of the Company or any Significant Subsidiary, or for all or any substantial part of their respective properties; or (c) orders the liquidation of the Company or any Significant Subsidiary, and in each case the order or decree remains unstayed and in effect for 60 days; or (viii) the lenders under the Credit Agreement shall commence judicial proceedings to foreclose upon any material portion of the assets of the Company and the Subsidiaries. SECTION 7.02. Acceleration. ------------ (a) If an Event of Default (other than an Event of Default under clause (vi) or (vii) above with respect to the Company or a Significant Subsidiary) occurs and is continuing hereunder, the Trustee hereunder or the Holders of at least 25% in principal amount of the then outstanding Securities may declare due and payable all unpaid principal and interest accrued and unpaid on the then outstanding Securities issued hereunder by notice in writing to the Company, the -73- administrative agent under the Credit Agreement and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the ------------------- same (i) shall become immediately due and payable or (ii) if there is any Indebtedness outstanding under the Credit Agreement, shall become due and payable upon the first to occur of an acceleration under the Credit Agreement, or five business days after receipt by the Company and the administrative agent under the Credit Agreement of such Acceleration Notice. If an Event of Default under clause (vi) or (vii) above with respect to the Company or a Significant Subsidiary shall occur hereunder, all unpaid principal of and accrued interest on all then outstanding Securities issued hereunder shall be immediately due and payable without any declaration or other act on the part of the Trustee or any of the Holders of the Securities. After a declaration of acceleration hereunder, subject to certain conditions, the Holders of a majority in principal amount of the then outstanding Securities, by notice to the Trustee, may rescind such declaration if all existing Events of Default hereunder are remedied. In certain cases the Holders of a majority in principal amount of outstanding Securities may waive a past Default hereunder and its consequences, except a Default in the payment of or interest on any of the Securities. (b) In the event of a declaration of acceleration because an Event of Default set forth in clause (iv) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if either (x) the holders of the Indebtedness which is the subject of such Event of Default have waived such failure to pay at maturity or have rescinded the acceleration in respect of such Indebtedness within 90 days of such maturity or declaration of acceleration, as the case may be, and no other Event of Default has occurred during such 90-day period which has not been cured or waived, or (y) such Indebtedness shall have been discharged or the maturity thereof shall have been extended such that it is not then due and payable, or the underlying default has been cured (and any acceleration based thereon of such other Indebtedness has been rescinded), within 90 days of such maturity or declaration of acceleration, as the case may be. SECTION 7.03. Other Remedies. -------------- If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on -74- the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. SECTION 7.04. Waiver of Past Defaults. ----------------------- Subject to Sections 7.07 and 10.02, the Holders of a majority in principal amount of the outstanding Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of or interest on any Security as specified in clauses (i) and (ii) of Section 7.01. When a Default or Event of Default is waived, it is cured and ceases. SECTION 7.05. Control by Majority. ------------------- Subject to Section 2.09, the Holders of a majority in principal amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it, including, without limitation, any remedies provided for in Section 7.03. Subject to Section 8.01, however, the Trustee may refuse to follow any direction that conflicts with any law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of another Holder, or that may involve the Trustee in personal liability; provided, however, that the Trustee may take any -------- ------- other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 7.06. Limitation on Suits. ------------------- A Holder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; -75- (2) the Holder or Holders of at least 25% in principal amount of the outstanding Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense to be incurred in compliance with such request; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holder or Holders of a majority in principal amount of the outstanding Securities do not give the Trustee a direction which, in the opinion of the Trustee, is inconsistent with the request; provided, however, that this Section 7.06 shall not affect the - -------- ------- right of any Holder to sue for enforcement of any overdue payment of principal of, premium, if any, or interest on, the Securities. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. SECTION 7.07. Rights of Holders To Receive Payment. ------------------------------------ Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. SECTION 7.08. Collection Suit by Trustee. -------------------------- If an Event of Default in payment of principal or interest specified in clause (i) or (ii) of Section 7.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor on the Securities for the whole amount of principal and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of -76- interest, in each case at the rate per annum borne by the Securities and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 7.09. Trustee May File Proofs of Claim. -------------------------------- The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relating to the Company or any other obligor upon the Securities, any of their respective creditors or any of their respective property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 8.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 7.10. Priorities. ---------- If the Trustee collects any money pursuant to this Article Seven, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 8.07; Second: subject to Article Four and Article Twelve, to Holders for interest accrued on the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for interest; -77- Third: subject to Article Four and Article Twelve, to Holders for principal amounts due and unpaid on the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal; and Fourth: subject to Article Four and Article Twelve, to the Company or the Guarantors, as their respective interests may appear. The Trustee, upon prior notice to the Company, may fix a record date and payment date for any payment to Holders pursuant to this Section 7.10. SECTION 7.11. Rights and Remedies Cumulative. ------------------------------ No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 7.12. Delay or Omission Not Waiver. ---------------------------- No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Seven or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 7.13. Undertaking for Costs. --------------------- In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the -78- claims or defenses made by the party litigant. This Section 7.13 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 7.07, or a suit by a Holder or Holders of more than 10% in principal amount of the outstanding Securities. ARTICLE EIGHT TRUSTEE The Trustee hereby accepts the trust imposed upon it by this Indenture and covenants and agrees to perform the same, as herein expressed. SECTION 8.01. Duties of Trustee. ----------------- (a) If a Default or an Event of Default of which the Trustee is aware has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of a Default or an Event of Default: (1) The Trustee need undertake to perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture against the Trustee. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee shall have no liability except for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: -79- (1) This paragraph does not limit the effect of paragraph (b) of this Section 8.01. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 7.05. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 8.01. (f) The Trustee shall not be liable for interest on any assets received by it. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. SECTION 8.02. Rights of Trustee. ----------------- Subject to Section 8.01: (a) The Trustee may rely on and shall be protected in acting or refraining from acting upon any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may consult with counsel and may require in addition to written direction from the Company an Officers' Certificate or an Opinion of Counsel, which shall conform to Sections 13.04 and 13.05. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. -80- (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any attorney or agent appointed with due care. (d) The Trustee shall not be liable for any action that it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. SECTION 8.03. Individual Rights of Trustee. ---------------------------- The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company, its Subsidiaries, or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 8.10 and 8.11. SECTION 8.04. Trustee's Disclaimer. -------------------- The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities other than the Trustee's certificate of authentication. SECTION 8.05. Notice of Default. ----------------- If a Default or an Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder of Securities notice of the Default or -81- Event of Default within 90 days after such Default or Event of Default occurs or if such Default or Event of Default is known to the Trustee during such 90-day period, promptly after such Default or Event of Default becomes known to the Trustee; provided, however, that, except in the case of a Default or - -------- ------- Event of Default in the payment of the principal of or interest on any Security, including the failure to make payment on a Change of Control Payment Date pursuant to a Change of Control Offer or payment when due pursuant to a Net Proceeds Offer, the Trustee may withhold such notice if it in good faith determines that withholding such notice is in the interest of the Holders. SECTION 8.06. Reports by Trustee to Holders. ----------------------------- Within 60 days after each May 15 beginning with the first May 15 following the date of this Indenture, the Trustee shall, to the extent that any of the events described in TIA (S) 313(a) occurred within the previous twelve months, but not otherwise, mail to each Holder a brief report dated as of such May 15 that complies with TIA (S) 313(a). The Trustee also shall comply with TIA (SS) 313(b) and 313(c). A copy of each report at the time of its mailing to Holders shall be mailed to the Company and filed with the Commission and each stock exchange, if any, on which the Securities are listed. The Company shall notify the Trustee if the Securities become listed on any stock exchange. SECTION 8.07. Compensation and Indemnity. -------------------------- The Company shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee for, and hold it harmless against, any loss or liability incurred by it except for such actions to the extent caused by any negligence or bad faith on its part, arising out of or in connection with the administration of this trust and its rights or duties hereunder. The Trustee shall notify the Company promptly of any -82- claim asserted against the Trustee for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel; provided, however, that the Company -------- ------- will not be required to pay such fees and expenses if it assumes the Trustee's defense and there is no conflict of interest between the Company and the Trustee in connection with such defense as reasonably determined by the Trustee. The Company need not pay for any settlement made without its written consent. The Company need not reimburse any expense or indemnify against any loss or liability to the extent incurred by the Trustee through its negligence, bad faith or willful misconduct. To secure the Company's payment obligations in this Section 8.07, the Trustee shall have a lien prior to the Securities on all assets held or collected by the Trustee, in its capacity as Trustee, except assets held in trust to pay principal of or interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 7.01(vi) or (vii) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 8.08. Replacement of Trustee. ---------------------- The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the outstanding Securities may remove the Trustee and appoint a successor trustee with the Company's consent, by so notifying the Company and the Trustee. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 8.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall notify each Holder of such event and shall promptly -83- appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided in Section 8.07, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 8.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 8.08, the Company's obligations under Section 8.07 shall continue for the benefit of the retiring Trustee. SECTION 8.09. Successor Trustee by Merger, Etc. -------------------------------- If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee. SECTION 8.10. Eligibility; Disqualification. ----------------------------- This Indenture shall always have a Trustee who satisfies the requirement of TIA (SS) 310(a)(1) and 310(a)(5). The Trustee shall have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual -84- report of condition. The Trustee shall comply with TIA (S) 310(b); provided, however, that there shall be excluded from the - -------- ------- operation of TIA (S) 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if the requirements for such exclusion set forth in TIA (S) 310(b)(1) are met. SECTION 8.11. Preferential Collection of Claims Against Company. ----------------------------------------- The Trustee shall comply with TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated. ARTICLE NINE SATISFACTION AND DISCHARGE OF INDENTURE SECTION 9.01. Termination of the Company's Obligations. ---------------------------- The Company may terminate its obligations under the Securities and this Indenture, and the obligations of any Guarantor shall terminate, except those obligations referred to in the penultimate paragraph of this Section 9.01, if all Securities previously authenticated and delivered (other than lost, stolen or destroyed Securities which have been replaced or paid or Securities for whose payment money has theretofore been deposited with the Trustee or the Paying Agent in trust and thereafter repaid to the Company, as provided in Section 9.04) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder, or if: (1) all Securities not theretofore delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption pursuant to Article Three or otherwise; (2) the Company shall have irrevocably deposited or caused to be deposited with the Trustee, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds in trust solely for the benefit of the Holders for that purpose, -85- money in such amount as is sufficient without consideration of reinvestment of such interest, to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation for principal of, premium, if any, and accrued interest to the date of maturity or redemption; provided, however, that the Trustee shall have -------- ------- been irrevocably instructed to apply such money to the payment of said principal, premium, if any, and interest with respect to the Securities and, provided, further, that -------- ------- from and after the time of deposit, the money deposited shall not be subject to the rights of holders of Senior Indebtedness pursuant to the provisions of Article Four and Article Twelve; (3) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which it is bound; (4) the Company shall have paid all other sums payable by it hereunder; and (5) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent providing for the termination of the Company's and any Guarantor's obligation under the Securities and this Indenture have been complied with. Such Opinion of Counsel shall also state that such satisfaction and discharge does not result in a default under the Credit Agreement (if then in effect) or any other agreement or instrument then known to such counsel that binds or affects the Company. Notwithstanding the foregoing paragraph, the Company's obligations in Sections 2.05, 2.06, 2.07, 2.08, 5.01, 5.02 and 8.07 and any Guarantors's obligations in respect thereof shall survive until the Securities are no longer outstanding pursuant to the last paragraph of Section 2.08. After the Securities are no longer outstanding, the Company's obligations in Sections 8.07, 9.04 and 9.05 and any Guarantor's obligations in respect thereof shall survive. After such delivery or irrevocable deposit the Trustee upon request shall acknowledge in writing the discharge of the Company's and any Guarantor's obligations under the -86- Securities and this Indenture except for those surviving obligations specified above. SECTION 9.02. Legal Defeasance and Covenant Defeasance. ----------------------------- (a) The Company may, at its option by Board Resolution of the Board of Directors of the Company, at any time, with respect to the Securities, elect to have either paragraph (b) or paragraph (c) below be applied to the outstanding Securities upon compliance with the conditions set forth in paragraph (d). (b) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (b), the Company and any Guarantor shall be deemed to have been released and discharged from its obligations with respect to the outstanding Securities on the date the conditions set forth below are satisfied (hereinafter, "legal defeasance"). For this purpose, ---------------- such legal defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be "outstanding" only for the purposes of paragraph (e) below and the other Sections of and matters under this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), and Holders of the Securities and the Guarantees and any amounts deposited under paragraph (d) below shall cease to be subject to any obligations to, or the rights of, any holder of Senior Indebtedness or Guarantor Senior Indebtedness under Article Four or Article Twelve or otherwise, except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Securities to receive solely from the funds held by the Trustee in the trust fund described in paragraph (d) below and as more fully set forth in such paragraph, payments in respect of the principal of, premium, if any, and interest on such Securities when such payments are due, (ii) the Company's obligations with respect to such Securities under Sections 2.06, 2.07 and 5.02, and, with respect to the Trustee, under Section 8.07 and any Guarantor's obligations in respect thereof, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (iv) this Section 9.02 and Section 9.05. Subject to compliance with this Section 9.02, -87- the Company may exercise its option under this paragraph (b) notwithstanding the prior exercise of its option under paragraph (c) below with respect to the Securities. (c) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (c), the Company shall be released and discharged from its obligations under any covenant contained in Article Four and Article Six and in Sections 5.03, 5.05 through 5.09 and 5.11 through 5.20 with respect to the outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Securities shall thereafter be ------------------- deemed to be not "outstanding" for the purpose of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder and Holders of the Securities and the Guarantees and any amounts deposited under paragraph (d) below shall cease to be subject to any obligations to, or the rights of, any holder of Senior Indebtedness or Guarantor Senior Indebtedness under Article Four, Article Twelve or otherwise. For this purpose, such covenant defeasance means that, with respect to the outstanding Securities, the Company and any Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 7.01(iii), but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. (d) The following shall be the conditions to application of either paragraph (b) or paragraph (c) above to the outstanding Securities: (i) the Company must have irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 8.10 who shall agree to comply with the provisions of this Section 9.02 applicable to it) in trust, for the benefit of the Holders, cash in U.S. dollars, U.S. Government Obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if -88- any, and interest on the Securities to redemption or maturity provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities on the Maturity Date or such Redemption Date, as the case may be; (ii) the Company shall have delivered to the Trustee one or more Opinions of independent Counsel to the effect that (A) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance or covenant defeasance, as the case may be, and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance or covenant defeasance, as the case may be, had not occurred (which opinion, in the case of legal defeasance, shall be based upon a change in the applicable federal income tax law since the Issue Date or a ruling received from or published by the Internal Revenue Service), (B) after the 91st day following the deposit the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and will not be subject to any rights of holders of Senior Indebtedness and (C) the deposit will not cause the applicable Trustee or the trust so created to be subject to the Investment Company Act of 1940; (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (vi) and (vii) of Section 7.01 are concerned, at any time in the period ending on the 91st day after the date of deposit; (iv) such legal defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest with respect to the Securities; (v) such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound (and in that connection, the Trustee shall have received a certificate from the Credit Agent to that effect with respect to the Credit Agreement if then in effect); -89- (vi) the Company shall have delivered to the applicable Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (vii) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the legal defeasance or covenant defeasance, have been complied with. (e) All money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this paragraph (e), the "Trustee") pursuant to paragraph (d) above in respect of the outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (other than the Company or any Affiliate of the Company), to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to paragraph (d) above or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Securities. The Company's obligations to pay and indemnify the Trustee as set forth in this paragraph shall survive the termination of this Indenture and the Securities. Anything in this Section 9.02 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request, in writing, by the Company any money or U.S. Government Obligations held by it as provided in paragraph (d) above which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to -90- be deposited to effect an equivalent legal defeasance or covenant defeasance. SECTION 9.03. Application of Trust Money. -------------------------- The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Sections 9.01 and 9.02, and shall apply the deposited money and the money from U.S. Government Obligations in accordance with this Indenture to the payment of principal of, premium, if any, and interest on the Securities. SECTION 9.04. Repayment to the Company or Subsidiary Guarantors. -------------------------------------- Subject to Sections 8.07, 9.01 and 9.02, the Trustee shall promptly pay to the Company, or if deposited with the Trustee by any Guarantor, to each Guarantor, upon receipt by the Trustee of an Officers' Certificate, any excess money, determined in accordance with Section 9.02, held by it at any time. The Trustee and the Paying Agent shall pay to the Company or any Guarantor, as the case may be, upon receipt by the Trustee or the Paying Agent, as the case may be, of an Officers' Certificate, any money held by it for the payment of principal, premium, if any, or interest that remains unclaimed for two years after payment to the Holders is required; provided, however, that the Trustee and the Paying Agent before - -------- ------- being required to make any payment may, but need not, at the expense of the Company cause to be published once in a newspaper of general circulation in The City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed and that after a date specified therein, which shall be at least 30 days from the date of such publication or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company or the Guarantor, as the case may be, Holders entitled to money must look solely to the Company for payment as general creditors unless an applicable abandoned property law designates another person, and all liability of the Trustee or Paying Agent with respect to such money shall thereupon cease. SECTION 9.05. Reinstatement. ------------- If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Indenture by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority -91- enjoining, restraining or otherwise prohibiting such application, then and only then the Company's and each Guarantor's, if any, obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had been made pursuant to this Indenture until such time as the Trustee is permitted to apply all such money or U.S. Government Obligations in accordance with this Indenture; provided, however, that if the -------- ------- Company or the Guarantors, as the case may be, have made any payment of principal of, premium, if any, or interest on any Securities because of the reinstatement of its obligations, the Company or the Guarantors, as the case may be, shall be, subrogated to the rights of the holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE TEN AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 10.01. Without Consent of Holders. -------------------------- The Company, when authorized by a Board Resolution, and the Trustee, together, may amend or supplement this Indenture or the Securities without notice to or consent of any Holder: (1) to cure any ambiguity, defect or inconsistency; provided that such amendment or supplement does not -------- adversely affect the rights of any Holder; (2) to comply with Article Six and Section 11.06; (3) to make any other change that does not adversely affect the rights of any Holder in any material respect; or (4) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; provided that the Company has delivered to the Trustee an - -------- Opinion of Counsel stating that such amendment or supplement complies with the provisions of this Section 10.01. -92- SECTION 10.02. With Consent of Holders. ----------------------- Subject to Section 7.07, the Company, when authorized by a Board Resolution, the Trustee and the Holders of not less than a majority in aggregate principal amount of the Securities then outstanding, may amend or supplement (or waive compliance with any provision of) this Indenture and the Securities, except that (i) without the consent of each Holder of the Securities affected, no such amendment, supplement or waiver may: (1) change the principal amount of the Securities the Holders of which must consent to an amendment, supplement or waiver of any provision of this Indenture or the Securities; (2) reduce the rate or extend the time for payment of interest on any Securities; (3) reduce the principal amount of any Securities; (4) change the Maturity Date of any Securities or alter the redemption provisions in this Indenture or the Securities in a manner adverse to any Holder of the Securities; (5) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders or the rights of Holders to recover the principal of, interest on or redemption payment with respect to any Securities; (6) make the principal of, or interest on, any Securities payable with anything or in any manner other than as provided for in this Indenture and the Securities; or (7) modify the subordination provisions of this Indenture (including certain related definitions) so as to adversely affect the ranking of any Security; provided, however, that it is understood that any amendment the - -------- ------- purpose of which is to permit the Incurrence of additional Indebtedness under this Indenture shall not be construed as adversely affecting the ranking of any Security and (ii) without the consent of Holders of not less than 66 2/3% in aggregate principal amount of the Securities then outstanding, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of such Securities pursuant to Section 5.15 herein in a manner adverse to any Holder of the Securities or -93- waive a Default or Event of Default resulting from a failure to comply with Section 5.15 herein. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. In connection with any amendment, supplement or waiver under this Article Ten, the Company may, but shall not be obligated to, offer to any Holder who consents to such amendment, supplement or waiver, or to all Holders, consideration for such Holder's consent to such amendment, supplement or waiver. SECTION 10.03. Compliance with TIA. ------------------- From the date on which the Indenture is qualified under the TIA, every amendment, waiver or supplement of this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 10.04. Revocation and Effect of Consents. --------------------------------- Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of his Security by notice to the Trustee or the Company received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Securities have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled -94- to consent to any amendment, supplement or waiver, which record date shall be at least 30 days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (1) through (8) of Section 10.02, in which case, the amendment, supplement or waiver shall bind only each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security; provided that any such waiver shall not impair or -------- affect the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. SECTION 10.05. Notation on or Exchange of Securities. ------------------------------------- If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. SECTION 10.06. Trustee To Sign Amendments, Etc. ------------------------------- The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Ten; provided -------- that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver -95- authorized pursuant to this Article Ten is authorized or permitted by this Indenture. ARTICLE ELEVEN GUARANTEE SECTION 11.01. Unconditional Guarantee. ----------------------- Each Guarantor shall guarantee, subject to Article Twelve, to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, the Securities or the obligations of the Company hereunder or thereunder, that: (i) the principal of and interest on the Securities will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration or otherwise and interest on the overdue principal, if any, and interest on any interest, to the extent lawful, of the Securities and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Securities or of any such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration or otherwise, subject, however, in the case of clauses (i) and (ii) above, to the limitations set forth in Section 11.05. Each Guarantor's obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Guarantor shall waive diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Guarantee will not be discharged except by complete performance of the obligations contained in the Securities, this Indenture and in this Guarantee. If any Holder or the Trustee is required by any court or otherwise to return to -96- the Company, any Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Company or any Guarantor, any amount paid by the Company or any Guarantor to the Trustee or such Holder, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor shall further agree that, as between each Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Seven for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article Seven, such obligations (whether or not due and payable) shall forthwith become due and payable by each Guarantor for the purpose of this Guarantee. SECTION 11.02. Subordination of Guarantee. -------------------------- The obligations of each Guarantor to the Holders of Securities pursuant to the Guarantee and this Indenture are expressly subordinate and subject in right of payment to the prior payment in full of all Guarantor Senior Indebtedness of such Guarantor, to the extent and in the manner provided in Article Twelve. SECTION 11.03. Severability. ------------ In case any provision of this Guarantee shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.04. Release of a Guarantor. ---------------------- Upon the sale or disposition (whether by merger, stock purchase, asset sale or otherwise) of a Guarantor (or all or substantially all its assets) to an entity which is not a Subsidiary of the Company and which sale or disposition is otherwise in compliance with the terms of this Indenture, such Guarantor shall be deemed released from all obligations under this Article Eleven without any further action required on the part of the Trustee or any Holder; provided, however, that any -------- ------- such termination shall occur only to the extent that all obligations of such Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests -97- which secure, such Indebtedness of the Company shall also terminate upon such release, sale or transfer. The Trustee shall deliver an appropriate instrument evidencing such release upon receipt of a request by the Company accompanied by an Officers' Certificate certifying as to the compliance with this Section 11.04. Any Guarantor not so released remains liable for the full amount of principal of and interest on, and all other obligations under, the Securities as provided in this Article Eleven. SECTION 11.05. Limitation of Guarantor's Liability. ----------------------------------- Each Guarantor and by its acceptance hereof each Holder shall confirm that it is the intention of all such parties that the guarantee by such Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, the Holders and such Guarantor shall irrevocably agree that the obligations of such Guarantor under the Guarantee shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to Section 11.07, result in the obligations of such Guarantor under the Guarantee not constituting such fraudulent transfer or conveyance. SECTION 11.06. Guarantors May Consolidate, etc., on Certain Terms. --------------------------- Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety, to the Company or another Guarantor. Upon any such consolidation, merger, sale or conveyance, the Guarantee given by such Guarantor shall no longer have any force or effect. SECTION 11.07. Contribution. ------------ In order to provide for just and equitable contribution among the Guarantors, the Guarantors shall agree, inter - ----- -98- se, that in the event any payment or distribution is made by any - -- Guarantor (a "Funding Guarantor") under the Guarantee, such ----------------- Funding Guarantor shall be entitled to a contribution from all other Guarantors in a pro rata amount based on the relative net -------- assets of each Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company's obligations with respect to the Securities or any other Guarantor's obligations with respect to the Guarantee. SECTION 11.08. Waiver of Subrogation. --------------------- Each Guarantor shall irrevocably waive any claim or other rights which it may at any time acquire against the Company that arise from the existence, payment, performance or enforcement of such Guarantor's obligations under the Guarantee and this Indenture, including, without limitation, any right of subrogation, reimbursement, exoneration, indemnification, and any right to participate in any claim or remedy of any Holder of Securities against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and the Securities shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Holders of the Securities, and shall, subject to the provisions of Section 11.02, Article Four and Article Twelve, forthwith be paid to the Trustee for the benefit of such Holders to be credited and applied upon the Securities, whether matured or unmatured, in accordance with the terms of this Indenture. Each Guarantor shall acknowledge that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth in this Section 11.08 is knowingly made in contemplation of such benefits. SECTION 11.09. Execution of Guarantee. ---------------------- To evidence their guarantee to the Holders set forth in this Article Eleven, the Guarantors shall execute the Guarantee in substantially the form included in Exhibit A, which, at any time that a Guarantee Condition shall exist, shall be endorsed on each Security ordered to be authenticated and -99- delivered by the Trustee. Each Guarantee set forth in this Article Eleven shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Guarantee. Each such Guarantee shall be signed on behalf of each Guarantor by two Officers, or an Officer and an Assistant Secretary or one Officer shall sign and one Officer or an Assistant Secretary (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to such Guarantee prior to the authentication of the Security on which it is endorsed, and the delivery of such Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of such Guarantee on behalf of such Guarantor. Such signatures upon the Guarantee may be by manual or facsimile signature of such officers and may be imprinted or otherwise reproduced on the Guarantee, and in case any such officer who shall have signed the Guarantee shall cease to be such officer before the Security on which such Guarantee is endorsed shall have been authenticated and delivered by the Trustee or disposed of by the Company, such Security nevertheless may be authenticated and delivered or disposed of as though the person who signed the Guarantee had not ceased to be such officer of the Guarantor. SECTION 11.10. Waiver of Stay, Extension or Usury Laws. --------------------------------------- Each Guarantor shall covenant (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive each such Guarantor from performing its Guarantee as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) each such Guarantor shall expressly waive all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. -100- ARTICLE TWELVE SUBORDINATION OF GUARANTEE OBLIGATIONS SECTION 12.01. Guarantee Obligations Subordinated to Guarantor Senior Indebtedness. ---------------------------------- Anything herein to the contrary notwithstanding, each of the Guarantors, for itself and its successors, and each Holder, by his acceptance of Guarantees, shall agree, that any payment of Obligations by a Guarantor in respect of its Guarantee (collectively, as to any Guarantor, its "Guarantee --------- Obligations") is subordinated, to the extent and in the manner - ----------- provided in this Article Twelve, to the prior payment in full in cash or Cash Equivalents of all Guarantor Senior Indebtedness of such Guarantor whether outstanding on the Issue Date or thereafter Incurred, including with respect to Guarantor Senior Indebtedness, any interest accruing subsequent to a bankruptcy or other similar proceeding whether or not such interest is an allowed claim enforceable against the Company in a bankruptcy case under Bankruptcy Law. This Article Twelve shall constitute a continuing offer to all persons who become holders of, or continue to hold, Guarantor Senior Indebtedness, and such provisions are made for the benefit of the holders of Guarantor Senior Indebtedness and such holders are made obligees hereunder and any one or more of them may enforce such provisions. The obligations of the Guarantors to the Trustee under Section 8.07 shall not be subject to the provisions of this Article Twelve. SECTION 12.02. Suspension of Guarantee Obligations When Guarantor Senior Indebtedness in Default. ---------------------------------------- (a) Unless Section 12.03 shall be applicable, no direct or indirect payment (other than payments by a trust previously established pursuant to Article Nine hereof) by or on behalf of any Guarantor of Guarantee Obligations on the Securities whether pursuant to the terms of the Securities or upon acceleration or otherwise shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of principal of, premium, if any, or interest on (i) any Designated Senior Indebtedness or (ii) Significant Senior Indebtedness (and the Trustee has received written notice -101- thereof) and such Designated Senior Indebtedness or Significant Senior Indebtedness is guaranteed by a Guarantor (which guarantee constitutes Guarantor Senior Indebtedness of such Guarantor), and such default shall not have been cured or waived by or on behalf of the holders of such Guarantor Senior Indebtedness or shall have ceased to exist, until such default shall have been cured or waived or shall have ceased to exist or such Guarantor Senior Indebtedness shall have been discharged or paid in full in cash or Cash Equivalents, after which the Guarantor shall resume making any and all required payments in respect of the obligations under the Guarantee, including any missed payments. (b) Unless Section 4.03 shall be applicable, during the continuance of any other event of default with respect to any Designated Senior Indebtedness and such Designated Senior Indebtedness is guaranteed by a Guarantor (which guarantee constitutes Guarantor Senior Indebtedness of such Guarantor) pursuant to which the maturity thereof may be accelerated, upon the earliest to occur of (a) receipt by the Trustee of written notice from the holders of a majority of the outstanding principal amount of the Guarantor Senior Indebtedness or their Representative, or (b) if such event of default results from the acceleration of the Securities, the date of such acceleration, no such payment (other than payments by a trust previously established pursuant to Article Nine hereof) may be made by the Guarantor upon or in respect of the Securities for a period ("Guarantor Payment Blockage Period") commencing on --------------------------------- the earlier of the date of receipt of such notice or the date of such acceleration and ending 179 days thereafter (unless (x) such Guarantor Payment Blockage Period shall be terminated by written notice to the Trustee from the holders of a majority of the outstanding principal amount of such Guarantor Senior Indebtedness or their representative who delivered such notice or (y) such default is cured or waived, or ceases to exist or such Guarantor Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents), after which the Guarantor shall resume making any and all required payments in respect of the obligations under the Guarantee, including any missed payments. Notwithstanding anything herein to the contrary, in no event will a Guarantor Payment Blockage Period extend beyond 179 days from the date on which such Guarantor Payment Blockage Period was commenced. Not more than one Guarantor Payment Blockage Period may be commenced with respect to the Securities during any period of 365 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Guarantor Payment Blockage Period with respect to the -102- Guarantor Senior Indebtedness initiating such Guarantor Payment Blockage Period shall be, or be made, the basis for the commencement of a second Guarantor Payment Blockage Period by the holders of such Guarantor Senior Indebtedness or their representative whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. (c) In the event that, notwithstanding the foregoing, the Trustee or the Holder of any Security shall have received any payment prohibited by the foregoing provisions of this Section 12.02, then and in such event such payment shall be paid over and delivered forthwith to the Representatives or as a court of competent jurisdiction shall direct. SECTION 12.03. Guarantee Obligations Subordinated Prior Payment of All Guarantor Senior Indebtedness on Dissolution, Liquidation or Reorganization of Such Guarantor. ---------------------------------------- Upon any payment or distribution of assets of any Guarantor of any kind or character, whether in cash, property or securities upon any dissolution, winding up, total or partial liquidation or reorganization of such Guarantor and whether voluntary or involuntary (including, without limitation, in bankruptcy, insolvency or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of assets and liabilities of such Guarantor and whether voluntary or involuntary): (a) the holders of all Guarantor Senior Indebtedness of such Guarantor shall first be entitled to receive payments in full in cash or Cash Equivalents of all amounts payable under Guarantor Senior Indebtedness (including, with respect to Designated Senior Indebtedness guaranteed by such Guarantor, any interest accruing after the commencement of any such proceeding at the rate specified in the applicable Designated Senior Indebtedness whether or not interest is an allowed claim enforceable against the Company in any such proceeding) before the Holders will be entitled to receive any payment with respect to the Guarantee (excluding Permitted Subordinated Reorganization Securities), and until all Obligations with respect to the Guarantor Senior Indebtedness are paid in full in cash or Cash Equivalents, any distribution to which the Holders would be entitled (excluding Permitted Subordinated Reorganization Securities) shall be made to the holders of -103- Guarantor Senior Indebtedness; provided, however, that no -------- ------- payment by any other Guarantor or the Company shall constitute payment on behalf of such Subsidiary Guaranty for purposes of this Section 12.03(a); (b) any payment or distribution of assets of such Guarantor of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee on behalf of the Holders would be entitled (excluding Permitted Subordinated Indebtedness) except for the provisions of this Article Twelve, shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Guarantor Senior Indebtedness of such Guarantor or their Representative, ratably according to the respective amounts of such Guarantor Senior Indebtedness remaining unpaid held or represented by each, until all such Guarantor Senior Indebtedness remaining unpaid shall have been paid in full in cash or Cash Equivalents after giving effect to any concurrent payment or distribution to the holders of such Guarantor Senior Indebtedness; (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of such Guarantor of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders or any Paying Agent in respect of payment of the Guarantee before all Guarantor Senior Indebtedness of such Guarantor is paid in full in cash or Cash Equivalents, such payment or distribution (subject to the provisions of Sections 12.06 and 12.07) shall be received, segregated from other funds, and held in trust by the Trustee or such Holder or Paying Agent for the benefit of, and shall immediately be paid over to, the holders of such Guarantor Senior Indebtedness or their Representative, ratably according to the respective amounts of such Guarantor Senior Indebtedness held or represented by each, until all such Guarantor Senior Indebtedness remaining unpaid shall have been paid in full in cash or Cash Equivalents, after giving effect to any concurrent payment or distribution to the holders of Guarantor Senior Indebtedness. Notwithstanding anything to the contrary contained herein, in the absence of its gross negligence or wilful misconduct, the Trustee shall have no duty to collect or retrieve monies previously paid by it in good faith; provided that this sentence shall not affect the -------- obligation of any other party receiving such payment to hold such payment for the -104- benefit of, and to pay over such payment over to, the holders of such Guarantor Senior Indebtedness or their Representative. Each Guarantor shall give prompt notice to the Trustee prior to any dissolution, winding up, total or partial liquidation or total or reorganization (including, without limitation, in bankruptcy, insolvency, or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of such Guarantor's assets and liabilities). SECTION 12.04. Holders of Guarantee Obligations To Be Subrogated to Rights of Holders of Guarantor Senior Indebtedness. -------------------------------------- Subject to the payment in full in cash or Cash Equivalents of all Guarantor Senior Indebtedness, the Holders of Guarantee Obligations of a Guarantor shall be subrogated to the rights of the holders of Guarantor Senior Indebtedness of such Guarantor to receive payments or distributions of assets of such Guarantor applicable to such Guarantor Senior Indebtedness until all amounts owing on or in respect of the Guarantee Obligations shall be paid in full in cash, and for the purpose of such subrogation no payments or distributions to the holders of such Guarantor Senior Indebtedness by or on behalf of such Guarantor, or by or on behalf of the Holders by virtue of this Article Twelve, which otherwise would have been made to the Holders, shall, as between such Guarantor and the Holders, be deemed to be payment by such Guarantor to or on account of such Guarantor Senior Indebtedness, it being understood that the provisions of this Article Twelve are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of such Guarantor Senior Indebtedness, on the other hand. If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article Twelve shall have been applied, pursuant to the provisions of this Article Twelve, to the payment of all amounts payable under such Guarantor Senior Indebtedness, then the Holders shall be entitled to receive from the holders of such Guarantor Senior Indebtedness any payments or distributions received by such holders of such Guarantor Senior Indebtedness in excess of the amount sufficient to pay all amounts payable under or in respect of such Guarantor Senior Indebtedness in full in cash or Cash Equivalents. -105- SECTION 12.05. Obligations of the Subsidiary Guarantors Unconditional. ----------------------------- Nothing contained in this Article Twelve or elsewhere in this Indenture or in the Guarantees is intended to or shall impair, as between the Guarantors and the Holders, the obligation of the Guarantors, which is absolute and unconditional, to pay to the Holders all amounts due and payable under the Guarantees as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Guarantors other than the holders of the Guarantor Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Twelve, of the holders of Guarantor Senior Indebtedness in respect of cash, property or securities of the Guarantors received upon the exercise of any such remedy. Upon any payment or distribution of assets of any Guarantor referred to in this Article Twelve, the Trustee, subject to the provisions of Sections 8.01 and 8.02, and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee or agent or other person making any payment or distribution to the Trustee or to the Holders for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Guarantor Senior Indebtedness and other Indebtedness of any Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Twelve. Nothing in this Section 12.05 shall apply to the claims of, or payments to, the Trustee under or pursuant to Section 8.07. SECTION 12.06. Trustee Entitled To Assume Payments Not Prohibited in Absence of Notice. ----------------------------------- The Trustee shall not at any time be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee unless and until the Trustee or any Paying Agent shall have received notice thereof from the Company or any Guarantor or from one or more holders of Guarantor Senior Indebtedness or from any Representative therefor and, prior to the receipt of any such notice, the Trustee, subject to the provisions of Sections 8.01 and 8.02, -106- shall be entitled in all respects conclusively to assume that no such fact exists. SECTION 12.07. Application by Trustee of Assets Deposited with It. ------------------------------------------ U.S. Legal Tender or U.S. Government obligations deposited in trust with the Trustee pursuant to and in accordance with Sections 9.01 and 9.02 shall be for the sole benefit of Holders and, to the extent allocated for the payment of Securities, shall not be subject to the subordination provisions of this Article Twelve. Otherwise, any deposit of assets or securities by or on behalf of a Guarantor with the Trustee or any Paying Agent (whether or not in trust) for payment of the Guarantee shall be subject to the provisions of this Article Twelve; provided that if prior to the second -------- Business Day preceding the date on which by the terms of this Indenture any such assets may become distributable for any purpose (including, without limitation, the payment of either principal of or interest on any Security) the Trustee or such Paying Agent shall not have received with respect to such assets the notice provided for in Section 12.06, then the Trustee or such Paying Agent shall have full power and authority to receive such assets and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary received by it on or after such date. The foregoing shall not apply to the Paying Agent if the Company or any Subsidiary or Affiliate of the Company is acting as Paying Agent. Nothing contained in this Section 12.07 shall limit the right of the holders of Guarantor Senior Indebtedness to recover payments as contemplated by this Article Twelve. SECTION 12.08. No Waiver of Subordination Provisions. ------------------------------------- (a) No right of any present or future holder of any Guarantor Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of any Guarantor or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by any Guarantor with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without limiting the generality of subsection (a) of this Section 12.08, the holders of Guarantor Senior Indebtedness may, at any time and from time to time, without -107- the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article Twelve or the obligations hereunder of the Holders of the Securities to the holders of Guarantor Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Guarantor Senior Indebtedness or any instrument evidencing the same or any agreement under which Guarantor Senior Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Guarantor Senior Indebtedness; (3) release any person liable in any manner for the collection or payment of Guarantor Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other person; provided, -------- however, that in no event shall any such actions limit the - ------- right of the Holders of the Securities to take any action to accelerate the maturity of the Securities pursuant to Article Seven hereof or to pursue any rights or remedies hereunder or under applicable laws if the taking of such action does not otherwise violate the terms of this Indenture. (c) Each Holder by accepting a Security agrees that the Representative of any Guarantor Senior Indebtedness, in its discretion, without notice or demand and without affecting any rights of any holder of Guarantor Senior Indebtedness under this Article Twelve, may foreclose any mortgage or deed of trust covering interests in real property secured thereby, by judicial or nonjudicial sale; and such Holder hereby waives any defense to the enforcement by the Representative of any Guarantor Senior Indebtedness or by any holder of any Guarantor Senior Indebtedness against such Holder of this Article Twelve after a judicial or nonjudicial sale or other disposition of its interests in real property secured by such mortgage or deed of trust. SECTION 12.09. Holders Authorize Trustee To Effectuate Subordination of Guarantee Obligations. --------------------------------------- Each Holder of the Guarantee Obligations by his acceptance thereof authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effect the subordination provisions contained in this Article Twelve, and appoints the Trustee his attorney-in- fact for such purpose, including, in the event of any dissolution, winding up, liquidation or reorganization of any Guarantor -108- (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of assets and liabilities of any Guarantor) tending towards liquidation or reorganization of the business and assets of any Guarantor, the immediate filing of a claim for the unpaid balance under its or his Guarantee Obligations in the form required in said proceedings and cause said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Guarantor Senior Indebtedness or their Representative is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Guarantee Obligations. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Guarantor Senior Indebtedness or their Representative to authorize or consent to or accept or adopt on behalf of any holder of Guarantee Obligations any plan of reorganization, arrangement, adjustment or composition affecting the Guarantee Obligations or the rights of any Holder thereof, or to authorize the Trustee or the holders of Guarantor Senior Indebtedness or their Representative to vote in respect of the claim of any holder of Guarantee Obligations in any such proceeding. SECTION 12.10. Right of Trustee To Hold Guarantor Senior Indebtedness. ---------------------------------- The Trustee shall be entitled to all of the rights set forth in this Article Twelve in respect of any Guarantor Senior Indebtedness at any time held by it to the same extent as any other holder of Guarantor Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. SECTION 12.11. No Suspension of Remedies. ------------------------- The failure to make a payment in respect of the Guarantees by reason of any provision of this Article Twelve shall not be construed as preventing the occurrence of a Default or an Event of Default under Section 7.01. Nothing contained in this Article Twelve shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Article Seven or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, -109- under this Article Twelve of the holders, from time to time, of Guarantor Senior Indebtedness. SECTION 12.12. No Fiduciary Duty of Trustee to Holders of Guarantor Senior Indebtedness. --------------------------------------- The Trustee shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Indebtedness, and shall not be liable to any such holders (other than for its willful misconduct or gross negligence) if it shall in good faith mistakenly pay over or deliver to the holders of Guarantee Obligations or the Company or any other person, money or assets to which any holders of Guarantor Senior Indebtedness shall be entitled by virtue of this Article Twelve or otherwise. Nothing in this Section 12.12 shall affect the obligation of any person other than the Trustee to hold such payment for the benefit of, and to pay such payment over to, the holders of Guarantor Senior Indebtedness or their Representative. ARTICLE THIRTEEN MISCELLANEOUS SECTION 13.01. TIA Controls. ------------ If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of Section 3.18(c) of the TIA, the imposed duties shall control. SECTION 13.02. Notices. ------- Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Company or any Guarantor: Smith's Food & Drug Centers, Inc. 1550 S. Redwood Road Salt Lake City, UT 84104 Attention: w/a copy to: -110- c/o The Yucaipa Companies 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 Attention: if to the Trustee: Attention: Corporate Trust Division if to the Credit Agent: Bankers Trust Company 130 Liberty Street, 14th Floor New York, NY 10006 Attention: w/a copy to: Bankers Trust Company 308 S. Grand Avenue, 41st Floor Los Angeles, CA 90071 Attention: Each of the Company, the Trustee, the Guarantors and the Credit Agent by written notice to each other such person may designate additional or different addresses for notices to such person. Any notice or communication to the Company, the Trustee, the Guarantors and the Credit Agent shall be deemed to have been given or made as of the date so delivered if personally delivered; when answered back, if telexed; when receipt is acknowledged, if telecopied; and five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed. -111- Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 13.03. Communications by Holders with Other Holders. -------------------------------------------- Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Guarantors, the Trustee, the Registrar and any other person shall have the protection of TIA (S) 312(c). SECTION 13.04. Certificate and Opinion as to Conditions Precedent. ---------------------------------------- Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 13.05. Statements Required in Certificate or Opinion. --------------------------------------------- Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officers' Certificate required by Section 5.07, shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is -112- necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; provided, however, that with respect to -------- ------- matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 13.06. Rules by Trustee, Paying Agent, Registrar. ----------------------------------------- The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 13.07. Legal Holidays. -------------- A "Legal Holiday" used with respect to a particular ------------- place of payment is a Saturday, a Sunday or a day on which banking institutions in New York, New York or at such place of payment are not required to be open. If a payment date is a Legal Holiday at such place, payment may be made at such place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 13.08. Governing Law. ------------- THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture. SECTION 13.09. No Adverse Interpretation of Other Agreements. --------------------------------------------- This Indenture may not be used to interpret another indenture, loan or debt agreement of any of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 13.10. No Recourse Against Others. -------------------------- A director, officer, employee, stockholder or incorporator, as such, of the Company shall not have any liability -113- for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creations. Each Holder by accepting a Security waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Securities. SECTION 13.11. Successors. ---------- All agreements of the Company and each Guarantor in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 13.12. Duplicate Originals. ------------------- All parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together shall represent the same agreement. SECTION 13.13. Severability. ------------ In case any one or more of the provisions in this Indenture or in the Securities shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. SECTION 13.14. No Violation. ------------ Notwithstanding the provisions of this Indenture, in no event shall any transaction, agreement, payment or other event to be consummated, entered into or made in connection with the Merger or any financing thereof be considered a violation of any provision of this Indenture or constitute a Change of Control hereunder. S-1 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first written above. SMITH'S FOOD & DRUG CENTERS, INC. By: ______________________________ Name: Title: Attest: ___________________ , as Trustee By: ______________________________ Name: Title: Attest: ____________________ EXHIBIT A --------- [FORM OF NOTE] SMITH'S FOOD & DRUG CENTERS, INC. % Senior Subordinated Note due 2007 No. $ SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation (the "Company", which term includes any successor corporation), for value received promises to pay to or registered assigns, the principal sum of Dollars, on June 15, 2007. Interest Payment Dates: May 15 and November 15 commencing on November 15, 1996. Record Dates: May 1 and November 1. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. A-1 IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers. Dated: SMITH'S FOOD & DRUG CENTERS, INC. By: ______________________________ Name: Title: By: ______________________________ Name: Title: Trustee's Certification of Authentication This is one of the Sections described in the within-mentioned Indenture , as Trustee By:____________________________________ Authorized Signatory A-2 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Securities described in the within-mentioned Indenture. , as Trustee By__________________________________ Authorized Signatory A-3 SMITH'S FOOD & DRUG CENTERS, INC. % Senior Subordinated Note due 2007 1. Interest. -------- SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semi-annually on each May 15 and November 15 of each year (the "Interest Payment Date"), commencing on November 15, 1996, to the Holders of record on the immediately preceding May 1 and November 1. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance of the Securities. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Company shall pay interest on overdue principal and interest on overdue installments of interest, to the extent lawful, at a rate equal to the rate of interest otherwise payable on the Securities. 2. Method of Payment. ----------------- The Company shall pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Securities are cancelled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by wire transfer of Federal funds, or interest by its check payable in such U.S. Legal Tender. The Company may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. Notwithstanding the foregoing, the Company shall pay or cause to be paid all amounts payable with respect to non-DTC eligible Securities by wire transfer of Federal funds to the account of the Holders of such Securities. 3. Paying Agent and Registrar. -------------------------- Initially, (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar A-4 without notice to the Holders. The Company or any of its Subsidiaries may, subject to certain exceptions, act as Paying Agent, Registrar or co-Registrar. 4. Indenture. --------- The Company issued the Securities under an Indenture, dated as of May , 1996 (the "Indenture"), between the Company and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code (SS) 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture until such time as the Indenture is qualified under the TIA, and thereafter as in effect on the date on which the Indenture is qualified under the TIA. Notwithstanding anything to the contrary herein, the Securities are subject to all such terms, and Holders of Securities are referred to the Indenture and said Act for a statement of them. The Securities are general unsecured obligations of the Company limited in aggregate principal amount to $575,000,000. 5. Optional Redemption. ------------------- The Securities will be redeemable, at the option of the Company, in whole at any time or in part from time to time, on and after May 15, 2001, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on May 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
Redemption Year Price ---- ---------- 2001...................................... % 2002...................................... % 2003...................................... % 2004 and thereafter....................... 100.0%
In addition, on or prior to May 15, 1999, the Company may, at its option, use the Net Cash Proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the principal amount of the Securities originally issued, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the 12 months commencing on May 15 of the year set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption (provided that the redemption notice shall have been sent not A-5 later than 60 days after the consummation of such Public Equity Offering):
Redemption Year Price ---- ---------- 1996...................................... % 1997...................................... % 1998...................................... %
The documents evidencing Senior Indebtedness will restrict the Company's ability to optionally redeem the Securities. 6. Notice of Redemption. -------------------- Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at such Holder's registered address. In order to effect a redemption with the proceeds of a Public Equity Offering, the Company shall send the redemption notice not later than 60 days after the consummation of such Public Equity Offering. Securities in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, from and after any Redemption Date, if monies for the redemption of the Securities called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date and payment of the Securities called for redemption is not prohibited under Article Four or Article Twelve of the Indenture, then, unless the Company defaults in the payment of such Redemption Price, the Securities called for redemption will cease to bear interest and the only right of the Holders of such Securities will be to receive payment of the Redemption Price. 7. Change of Control Offer. ----------------------- Upon the occurrence of a Change of Control, each Holder shall have the right to require the repurchase of such Holder's Securities pursuant to a Change of Control Offer at a purchase price equal to 101% of the principal amount thereof plus accrued interest, if any, to the date of purchase. The Company shall not be required to repurchase Securities until it has complied with its covenants to repay in full all Indebtedness of the Company and its Subsidiaries under the Credit Agreement or offer to repay in full all such Indebtedness and repay the Indebtedness of each lender who has accepted its offer to repay such Indebtedness or to obtain the requisite A-6 consent under the Credit Agreement to permit the repurchase of the Securities pursuant to a Change of Control Offer. 8. Limitation on Asset Sales. ------------------------- Under certain circumstances the Company is required to apply the net proceeds from Asset Sales to the repayment of Pari Passu Indebtedness or Senior Indebtedness, to make Related Business Investments, an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale, an investment in properties and assets that will be used in the business of the Company and its Subsidiaries existing on the Issue Date or in a business reasonably related thereto or to purchase in a Net Proceeds Offer (at a price equal to 100% of the aggregate principal amount thereof, plus accrued interest to the date of purchase) such aggregate principal amount of Securities which, when added to the accrued interest thereon, shall be equal to the net proceeds required to be applied thereto. 9. Denominations; Transfer; Exchange. --------------------------------- The Securities are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. A Holder shall register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities or portions thereof selected for redemption. 10. Persons Deemed Owners. --------------------- The registered Holder of a Security shall be treated as the owner of it for all purposes. 11. Unclaimed Money. --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agents will pay the money back to the Company at its request. After that, all liability of the Trustee and such Paying Agents with respect to such money shall cease. 12. Discharge Prior to Redemption or Maturity. ----------------------------------------- If the Company at any time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations sufficient to pay the principal of and interest on the Securities to A-7 redemption or maturity and complies with the other provisions of the Indenture relating thereto, the Company will be discharged from certain provisions of the Indenture and the Securities (including the financial covenants, but excluding its obligation to pay the principal of and interest on the Securities). 13. Amendment; Supplement; Waiver. ----------------------------- Subject to certain exceptions, the Indenture, the Securities and, if applicable, the Guarantees may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Securities in addition to or in place of certificated Securities, comply with Article Six or Section 11.06 of the Indenture, or comply with any requirements of the SEC in connection with the qualification of the Indenture under the TIA, or make any other change that does not adversely affect the rights of any Holder of a Security. 14. Restrictive Covenants. --------------------- The Indenture imposes certain limitations on the ability of the Company and its Subsidiaries to, among other things, incur additional Indebtedness or Liens, make payments in respect of its Capital Stock and merge or consolidate with any other person and sell, lease, transfer or otherwise dispose of substantially all of its properties or assets. The limitations are subject to a number of important qualifications and exceptions. The Company must annually report to the Trustee on compliance with such limitations. 15. Subordination. ------------- The Securities will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) of the Company. The guarantees are subordinated in right to payment, in the manner and to the extent set forth in the Indenture, to the prior payment in full of Guaranteed Senior Indebtedness (as defined in the indenture) To the extent and in the manner provided in the Indenture, Senior Indebtedness, and in the case of payment by a Guarantor, Guarantor Subsidiary Indebtedness, must be paid before any payment may be made to any Holder of this Security. Any Holder by A-8 accepting this Security agrees to the subordination and authorizes the Trustee to give it effect. 16. Successors. ---------- When a successor assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor will be released from those obligations. 17. Defaults and Remedies. --------------------- If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of Securities then outstanding may declare all the Securities to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Securities then outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of any continuing Default or Event of Default (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. 18. Trustee Dealings with Company. ----------------------------- The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 19. No Recourse Against Others. -------------------------- No stockholder, director, officer, employee or incorporator, as such, of the Company shall have any liability for any obligation of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 20. Authentication. -------------- This Security shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on this Security. A-9 21. Abbreviations and Defined Terms. ------------------------------- Customary abbreviations may be used in the name of a Holder of a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 22. CUSIP Numbers. ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company will cause CUSIP numbers to be printed on the Securities immediately prior to the qualification of the Indenture under the TIA as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon. The Company will furnish to any Holder of a Security upon written request and without charge a copy of the Indenture. Requests may be made to: Smith's Food & Drug Centers, Inc. 1550 S. Redwood Road Salt Lake City, UT 84104 Attention: Corporate Secretary A-10 [FORM OF NOTATION ON NOTE RELATING TO GUARANTEE] GUARANTEE The Guarantors (as defined in the Indenture (the "Indenture") referred to in the Security upon which this notation is endorsed and each hereinafter referred to as a "Guarantor," which term includes any successor person under the Indenture) have unconditionally guaranteed on a senior subordinated basis (such guarantee by each Guarantor being referred to herein as the "Guarantee") (i) the due and punctual payment of the principal of and interest on the Securities, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal and interest, if any, on the Securities, to the extent lawful, and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms set forth in Article Eleven and Article Twelve of the Indenture and (ii) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of each Guarantor to the Holders of Securities and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth and are expressly subordinated and subject in right of payment to the prior payment in full of all Guarantor Senior Indebtedness of such Guarantor, to the extent and in the manner provided, in Article Eleven and Article Twelve of the Indenture, and reference is hereby made to such Indenture for the precise terms of the Guarantee therein made. No stockholder, officer, director or incorporator, as such, past, present or future, of any Guarantor shall have any liability under the Guarantee by reason of his or its status as such stockholder, officer, director or incorporator. A-11 The Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Securities upon which the Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. GUARANTORS: A-12 [FORM OF ASSIGNMENT] To assign this Security, fill in the form below: I or we assign and transfer this Security to _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ (Print or type assignee's name, address and zip code) Please insert Social Security or other identifying number of assignee _______________________________________ and irrevocably appoint _______________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Dated:____________________ Signature:_________________________ ______________________________________________________________ (Sign exactly as your name appears on the face of this Security) Signature Guarantee:__________________________________________ A-13 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 5.15 or Section 5.16 of the Indenture, as the case may be, check the appropriate box below: Section 5.15 [ ] Section 5.16 [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 5.15 or Section 5.16 of the Indenture, as the case may be, state the amount you want to be purchased: $ Date:__________ Signature:____________________________ (Sign exactly as your name appears on the face of this Security) Signature Guarantee:______________________________________ A-14 Schedule 1.01 ------------- A-15 EX-12.1 4 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES The formula for the computation is as follows: Ratio of Earnings to Fixed Charges = (net income + income taxes + fixed charges)/(fixed charges) Fixed Charges = (interest expense + 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)) SUPPORTING DATA OF THE CALCULATION (DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA SMITH'S FOR PRO CALIFORNIA FORMA 1991 1992 1993 1994 1995 DIVESTITURE COMBINED -------- -------- -------- -------- -------- ----------- -------- Net income (loss)....... $ 45,097 $ 53,650 $ 45,820 $ 48,781 $(40,512) $ 50,500 $ 3,800 Add: Income taxes.......... 28,300 34,400 34,300 31,300 (29,300) 33,900 5,550 Fixed Charges: Interest expense.... 30,319 36,130 44,627 53,715 60,024 60,000 141,700 Debt financing amortization....... 509 344 344 509 454 400 10,200 1/3 Rental expense.. 5,564 6,372 6,607 13,382 15,565 6,000 8,433 -------- -------- -------- -------- -------- -------- -------- Total fixed charges. 36,392 42,846 51,578 67,606 76,043 66,400 160,333 -------- -------- -------- -------- -------- -------- -------- Earnings plus fixed charges................ $109,789 $130,896 $131,698 $147,687 $ 6,231 $150,800 $169,633 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges.......... 3.02 3.06 2.55 2.18 -- 2.27 1.06 ======== ======== ======== ======== ======== ======== ========
EX-23.2 5 CONSENT OF COOPERS & LYBRAND, LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-3 (File No. 333-01601) of our report dated October 3, 1995, except for Note 18 for which the date is January 29, 1996, on our audits of the financial statements of Smitty's Supermarkets, Inc. and subsidiaries and the Predecessor. We also consent to the reference to our firm under the captions "Selected Historical Financial Data of Smitty's" and "Experts." COOPERS & LYBRAND L.L.P. Phoenix, Arizona May 6, 1996 EX-23.3 6 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.3 CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and in headnotes and to the use of our report dated January 29, 1996, in Amendment No. 3 to the Registration Statement (Form S-3, No. 333-01601) and related Prospectus of Smith's Food & Drug Centers, Inc. dated May 6, 1996. ERNST & YOUNG LLP Salt Lake City, Utah May 3, 1996 -----END PRIVACY-ENHANCED MESSAGE-----