-----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, KPkOvLSadD116CvTF7N5w9PyB56001J+BAEghkb18FYw5dTN5RO5bfJvqVjH6X1x wknC1sQqmr+7FT+Uj3maZg== 0000898430-96-001811.txt : 19960515 0000898430-96-001811.hdr.sgml : 19960515 ACCESSION NUMBER: 0000898430-96-001811 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19960514 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: 96562481 BUSINESS ADDRESS: STREET 1: 1550 S REDWOOD RD CITY: SALT LAKE CITY STATE: UT ZIP: 84104 BUSINESS PHONE: 8019741400 S-3/A 1 AMENDMENT #4 TO FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1996 REGISTRATION NO. 333-01601 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 4 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 JURISDICTION OF SALT LAKE CITY, UTAH 84104 (IRS EMPLOYER INCORPORATION OR ORGANIZATION) (801) 974-1400 IDENTIFICATION NUMBER)
(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 14, 1996 PROSPECTUS [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 March 30, 1996, on a pro forma basis after giving effect to the Transactions (as defined) and the California Disposition (as defined), the aggregate outstanding amount of Senior Indebtedness of the Company would have been approximately $813.2 million, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility (as defined). The Notes will be effectively subordinated to all existing and future liabilities, including indebtedness, of the Company's subsidiaries. At March 30, 1996, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company's subsidiaries would have had indebtedness and other liabilities reflected on the Company's consolidated balance sheet, including trade payables and accrued expenses (but excluding guarantees of Senior Indebtedness), of approximately $143.0 million. The Company does not intend to apply for listing of the Notes on any national securities exchange. See "Underwriting." ---------- SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================= 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 May 23, 1996, at the offices of BT Securities Corporation, One Bankers Trust Plaza, New York, New York. ---------- BT SECURITIES CORPORATION CS FIRST BOSTON DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. CHASE SECURITIES INC. ---------- The date of this Prospectus is , 1996. FOR CALIFORNIA RESIDENTS: WITH RESPECT TO SALES OF THE NOTES OF SMITH'S FOOD & DRUG CENTERS, INC. BEING OFFERED HEREBY TO CALIFORNIA RESIDENTS, AS OF THE DATE OF THIS PROSPECTUS, SUCH NOTES MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND PROFIT-SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3) ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE PURPOSE OF PURCHASING THE NOTES BEING OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE NOTES BEING OFFERED HEREBY, OR (4) ANY PERSON WHO (A) HAS AN INCOME OF $65,000 AND A NET WORTH OF $250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME, HOME FURNISHINGS AND PERSONAL AUTOMOBILES). --------------- IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Notes. Each of the Company and Smitty's is subject to the reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, and in accordance therewith files reports and other information with the Commission. Such reports and other information filed by the Company or Smitty's with the Commission can be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048; 500 West Madison Street, Chicago, Illinois 60601; and 5670 Wilshire Boulevard, Suite 500, Los Angeles, California 90036. Copies of such materials can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The Class B Common Stock of the Company is listed on the New York Stock Exchange and reports, proxy statements and other information concerning the Company can also be inspected at the office of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. This Prospectus summarizes the contents and terms of documents not included herewith. These documents are available upon request from Smith's Food & Drug Centers, Inc. at 1550 South Redwood Road, Salt Lake City, Utah 84104, telephone number (801) 974-1400, Attn: Michael C. Frei, General Counsel and Secretary. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by Smith's with the Commission under the Exchange Act are incorporated herein by reference: (i) Smith's Annual Report on Form 10-K for its fiscal year ended December 30, 1995; (ii) Smith's current report on Form 8-K dated February 20, 1996, (iii) Smith's Quarterly Report on Form 10-Q for its fiscal quarter ended March 30, 1996, and (iv) the sections of Smith's 1996 Proxy Statement for its Annual Meeting of Stockholders entitled "The Recapitalization Agreement," and "Executive Compensation." In addition, all documents filed by Smith's with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the Offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document that also is, or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of documents incorporated herein by reference (excluding exhibits unless such exhibits are specifically incorporated herein by reference) may be obtained without charge upon request from Smith's Food & Drug Centers, Inc. at 1550 South Redwood Road, Salt Lake City, Utah 84104, telephone number (801) 974-1400, Attn: Michael C. Frei, General Counsel and Secretary. i SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the Financial Statements and notes thereto, appearing elsewhere in this Prospectus. Except as otherwise stated, references in this Prospectus to numbers of stores prior to the consummation of the Merger are as of May 1, 1996. References to the "pro forma" number of stores to be operated by the Company following the consummation of the Merger are based on the May 1, 1996 totals for Smith's and Smitty's and give effect to the anticipated sale of two Smitty's stores. Unless otherwise noted, the market share data contained herein has been prepared by management of the Company based upon internal research. THE COMPANY Smith's is a leading supermarket company in the Intermountain and Southwestern regions of the United States, operating 120 stores located in Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and Wyoming (collectively, 14). Substantially all of Smith's stores offer one-stop shopping convenience through a food and drug combination format which features a full- line supermarket with drug and pharmacy departments and some or all of the following specialty departments: delicatessens, hot prepared food sections, in- store bakeries, video rental shops, floral shops, one-hour photo processing labs, full-service banking and frozen yogurt shops. The Company's 114 food and drug combination stores averaged approximately 63,000 square feet and $420,000 per week in sales volume in fiscal 1995. The Company has recently opened four price impact warehouse stores and also operates two conventional supermarkets. Through its 48 years of operations, the Company believes it has developed a valuable and strategically located store base, strong name recognition, customer loyalty and a reputation for quality and service. The Company is pursuing a series of transactions designed to enhance stockholder value and liquidity: . Arizona Merger and Consolidation. The Company has entered into an agreement to acquire Smitty's Supermarkets, Inc. ("Smitty's"), a regional supermarket operator with 28 stores in the Phoenix and Tucson markets, in a stock-for-stock exchange (the "Merger"). The Merger will significantly enhance the Company's market position in Arizona. Smitty's is controlled by affiliates of The Yucaipa Companies ("Yucaipa"), a private investment group specializing in the supermarket industry. Affiliates of Yucaipa will own approximately 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 146 stores and will have the largest or second largest market share in each of its principal markets: Salt Lake City (31%), Phoenix (24%), Las Vegas (24%) and Albuquerque (23%). The Company believes its reputation for offering a broad selection of quality products and low pricing combined with a high level of customer service has created a valuable franchise with strong name recognition and customer loyalty. Attractive Markets. The Company's stores are located predominantly in Utah, Arizona, Nevada and New Mexico, which are among the fastest growing states in terms of population and employment. According to the U.S. Bureau of the Census, the population of those four states has increased at a compound annual growth rate of 3.0% since 1990, compared to the national average of 1.1% over the same period. According to the U.S. Bureau of Labor Statistics, employment in the same four states has increased at a compound annual growth rate of 4.0% since 1990, compared to the national average of 1.3% over the same period. In addition, management believes that operating in distinct markets in several states provides advantages due to their differences in economic cycles, demographics and competitive conditions. New and Recently Remodeled Stores. After giving effect to the Merger and the California Divestiture, approximately 84% of the Company's stores will have been opened or remodeled within the last seven years. During the five fiscal years ended December 30, 1995, Smith's spent approximately $414 million in capital expenditures (excluding capital expenditures associated with California operations), which have been primarily used to build new stores and to expand and remodel existing stores. During the five-year period ended December 30, 1995, Smitty's spent approximately $72 million in capital expenditures, including approximately $42 million since mid-1994 to remodel substantially all of its Phoenix-area stores. Prime Store Locations. The Company's 48 years of operation have allowed it to choose its store locations selectively as new residential areas have been developed. The Company believes that many of its stores are in developed areas where land values and the unavailability of suitable parcels would make it difficult to replicate the Company's existing store base. Advanced Backstage Operations. The Company owns and operates one of the most modern and efficient backstage operations in the industry. During the five fiscal years ended December 30, 1995, the Company spent approximately $163 million (excluding the divested California operations) to build, expand or remodel its warehousing, distribution and processing facilities. Management believes that the Company's approximately 3,000,000 square feet of backstage facilities will be able to accommodate the Smitty's volume following the Merger and support anticipated future growth. Substantial Owned Real Estate. The Company will own 107 of the 146 stores it will operate upon consummation of the Merger. The Company also owns its primary warehousing, distribution and processing facilities. In addition, the Company owns land for development, expansion or sale, as well as other non-operating real estate assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." 2 THE CALIFORNIA DIVESTITURE Smith's has completed the sale, lease or closure of its Southern California regional operations. In December 1995, Smith's entered into an agreement to sublease its Riverside, California distribution center and dairy plant to Ralphs Grocery Company ("Ralphs"), an affiliate of Yucaipa, for the remaining 23-year term of Smith's lease. Ralphs also agreed to purchase certain related equipment and inventory. In January 1996, Smith's entered into agreements to sell or lease 16 stores and related equipment and three non-operating properties to various supermarket companies (including Ralphs) and others. Smith's has closed the remaining 18 stores and it is anticipated that these closed stores will be sold or leased to other retail companies. The Company has received net cash proceeds of approximately $67.2 million from the California Divestiture and expects to receive an additional $10.6 million shortly after the consummation of the Transactions. In connection with the California Divestiture, the Company recorded pre-tax restructuring charges of $140 million (the "California Divestiture Charge") for the year ended December 30, 1995 and classified the assets to be leased or sold as "assets held for sale." The California Divestiture Charge reflected (i) a provision for anticipated future lease obligations, (ii) the anticipated cost to the Company of closing its California stores and distribution center (primarily termination payments and inventory), and (iii) asset valuation adjustments for the equipment in all of the California stores and the distribution center and for the land and buildings associated with the properties being sold or leased. The California Divestiture, including the transactions with Ralphs, was unrelated to the Merger or the Recapitalization. OPERATING STRATEGY Management, in conjunction with Yucaipa, has developed a strategic plan designed to: (i) expand operations in existing and adjacent markets, (ii) realize operating synergies and cost savings resulting from the Merger, (iii) improve working capital management, (iv) grow its recently introduced price impact warehouse stores and (v) dispose of remaining California real estate following the consummation of the Transactions. Expand Operations in Existing and Adjacent Markets. Management believes that there are significant opportunities to increase the Company's sales and gain efficiencies in its existing markets through new store openings and store remodels. From 1991 through 1994, management primarily focused on the Southern California market, opening 32 new stores in Southern California compared to a net of 10 new stores in its other markets. In 1995, the Company opened a net of 17 new stores, only two of which were located in California. In an effort to more fully realize its market potential in its non-California markets, in 1995 the Company began opening smaller combination stores (54,000 to 60,000 square feet) in existing markets as part of a "fill-in" strategy. By pursuing a growth strategy which emphasizes opening new stores within its existing and adjacent markets, the Company believes it can increase its market share and improve its distribution and other efficiencies, while taking advantage of such markets' favorable growth prospects. Realize Operating Synergies and Cost Savings Resulting from the Merger. Management believes that approximately $25 million of net annual cost savings are achievable over a three-year period following the Merger. The majority of such cost savings opportunities relate to its Arizona operations and are believed to be achievable (on an annualized basis) by the end of the first full year of operations following the Merger. The estimates of potential cost savings resulting from the Merger contained in this Prospectus are forward looking statements that involve risks and inherent uncertainties that could cause actual net annual cost savings to differ materially from those projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings." . Advertising Cost Savings. Smith's and Smitty's advertising programs in the Phoenix and Tucson markets substantially overlap and, as a result of the Merger, management expects that the Company will be able to eliminate a substantial portion of the combined advertising expenses. Management estimates that annualized advertising cost savings of approximately $7 million are achievable by the end of the first full year of operations following the Merger. 3 . 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 ($661.6 million at March 30, 1996), including all outstanding borrowings under its existing revolving credit facilities, and will purchase approximately $1.0 million of its outstanding Series I Preferred Stock. Smitty's Debt Refinancing. At the time the Merger is consummated, the Company will cause Smitty's and its subsidiary, Smitty's Super Valu, Inc. ("SSV"), to repay in full certain existing indebtedness (approximately $33.7 million principal amount at March 30, 1996), including all outstanding borrowings under SSV's bank credit facility. In addition, Smitty's is offering to purchase all of the $29.025 million principal amount at maturity (accreted value of $19.0 million at March 30, 1996) of its Senior Discount Debentures due 2006 (the "Smitty's Debentures"), and SSV is offering to purchase all of the $50.0 million principal amount of its Senior Subordinated Notes due 2004 (the "Smitty's Notes"). Smitty's and SSV will concurrently solicit consents from the holders of such securities to certain amendments to the respective indentures under which such securities were issued. The foregoing debt refinancing transactions of Smitty's and SSV are referred to herein collectively as the "Smitty's Refinancing." The Offering, the Tender Offer, the purchase of certain management stock options, the Series I Preferred Stock purchase, the Smith's debt refinancings described above and the closing under a new senior credit facility (the "New Credit Facility") to be provided to the Company are collectively referred to herein as the "Recapitalization." The Recapitalization, the Merger and the Smitty's Refinancing are collectively referred to herein as the "Transactions." 5 The following table illustrates the pro forma sources and uses of funds to consummate the Transactions, assuming the Transactions and the California Disposition had been consummated as of March 30, 1996. Although management believes the pro forma amounts estimated below are reasonable under the circumstances, actual sources and uses may differ from those set forth below. SOURCES AND USES (dollars in millions)
SOURCES USES ------- ---- New Term Loans (a)...... $ 805.0 Purchase Smith's Common Stock............. $ 451.3 New Revolving Facility (a)(b)................. 7.9 Purchase Smith's Management Options....... 13.7 Notes................... 575.0 Purchase Smith's Series I Preferred Stock. 1.0 Repay Smith's Mortgage Notes.............. 251.6 Repay Smith's Unsecured Notes............. 410.0 Repay Smitty's Notes (c).................. 50.0 Repay Smitty's Debentures (c)............. 19.0 Repay Smitty's Bank Credit Facility....... 33.7 Debt Refinancing Premiums................. 56.8 Accrued Interest.......................... 13.5 Fees and Expenses......................... 87.3 -------- -------- Total Sources........... $1,387.9 Total Uses................................ $1,387.9 ======== ========
- -------- (a) The Company has obtained a commitment from Bankers Trust Company ("Bankers Trust") and The Chase Manhattan Bank ("Chase Manhattan") for a new senior credit facility that will provide up to $805 million aggregate principal amount of term loans ("New Term Loans") and a $190 million revolving credit facility (the "New Revolving Facility") which will be available for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit, approximately $28 million of which are anticipated to be issued upon consummation of the Transactions (the "Closing"). The New Credit Facility will be guaranteed by all subsidiaries of the Company, including Smitty's. See "Description of New Credit Facility." (b) The information presented is derived from the Unaudited Pro Forma Combined Financial Statements contained elsewhere herein which reflect (i) the receipt of cash proceeds from the California Divestiture and the assumed receipt of cash proceeds from the sale of the Company's remaining California assets pursuant to the California Asset Disposition, in an amount equal to the net book value of such assets after giving effect to the California Asset Disposition Charge; and (ii) the application of a portion of the cash proceeds therefrom to repay $7.9 million of indebtedness anticipated to be incurred under the New Revolving Facility in connection with the consummation of the Transactions. The Company has received net cash proceeds from the California Divestiture of $67.2 million and expects to receive an additional $10.6 million in proceeds from the California Divestiture shortly after the Closing. The Company intends to use such additional proceeds to reduce revolving loans under the New Revolving Facility. 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 March 30, 1996, on a pro forma basis after giving effect to the Transactions and the California Disposition, the aggregate outstanding amount of Senior Indebtedness of the Company would have been approximately $813.2 million, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. The Notes will be effectively subordinated to all existing and future liabilities, including indebtedness of the Company's subsidiaries. At March 30, 1996, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company's subsidiaries would have had indebtedness and other liabilities reflected on the Company's consolidated balance sheet, including trade payables and accrued expenses (but excluding guarantees of Senior Indebtedness), of approximately $143.0 million. Change of Control....... Upon the occurrence of a Change of Control (as defined), each holder will have the right to require the Company to repurchase such holder's Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. 7 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 and the 13 weeks ended March 30, 1996, after giving effect to the (a) Transactions and the application of the proceeds therefrom and (b) the California Disposition and the retention of the anticipated proceeds therefrom as cash (after reducing pro forma revolving credit balances to zero), in each case as if they had occurred on January 1, 1995 with respect to the pro forma operating and other data for the 52 weeks ended December 30, 1995, as of December 31, 1995 with respect to the pro forma operating and other data for the 13 weeks ended March 30, 1996, and as of March 30, 1996 with respect to the pro forma balance sheet data. Such pro forma information: (i) eliminates the results of operations of the Company's California retail division for the 52 weeks ended December 30, 1995 and for the 13 weeks ended March 30, 1996 from Smith's results of operations for such periods and eliminates the related assets and liabilities from Smith's balance sheet data as of March 30, 1996, and (ii) combines the operating results of Smith's for the 52 weeks ended December 30, 1995 and the operating results and balance sheet data of Smith's as of March 30, 1996, in each case pro forma for the elimination of the Company's California retail division and the related assets and liabilities, with the operating results of Smitty's for the 52 weeks ended January 14, 1996 and the operating results and balance sheet data of Smitty's as of and for the 12 weeks ended April 7, 1996, respectively. The pro forma financial data set forth below is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of the dates indicated, or that may be achieved in the future. The pro forma combined financial data does not reflect (i) any of the net annual cost savings which management believes are achievable by the end of the third full year of operations following the Merger, (ii) the anticipated costs expected to be incurred in connection with the integration of operations in Arizona following the Merger or (iii) a $2 million severance payment to the Chairman and Chief Executive Officer of the Company. In addition, the summary pro forma combined operating data does not reflect the California Divestiture Charge, the California Asset Disposition Charge, an extraordinary loss on extinguishment of debt, an anticipated charge relating to certain costs expected to be incurred by Smith's in connection with the Merger, or compensation expense in connection with the repurchase of certain management stock options as part of the Recapitalization. See Note (g) to the Unaudited Pro Forma Combined 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 13 WEEKS ENDED DECEMBER 30, 1995(A) MARCH 30, 1996(A) -------------------- ----------------- (DOLLARS IN MILLIONS) OPERATING DATA: Net sales.......................... $2,993.4 $ 755.4 Gross profit....................... 703.3 176.5 Operating, selling and administra- tive expenses..................... 452.2 111.2 Depreciation and amortization...... 89.9 23.3 Interest expense................... 141.7 35.2 Net income......................... $ 3.8 $ 2.7 Ratio of earnings to fixed charges(b)........................ 1.06x 1.11x BALANCE SHEET DATA (END OF PERIOD): Total assets............................................ $1,691.2 Total debt(c)........................................... 1,431.4 Redeemable preferred stock.............................. 3.3 Common stockholders' equity (deficit)................... (126.4) OTHER DATA: Capital expenditures............... $ 159.7 $ 19.6 EBITDA (as defined)(d)(e).......... $ 255.4 $ 67.3 EBITDA margin(f)................... 8.53% 8.91% Ratio of EBITDA (as defined) to in- terest expense.................... 1.80x 1.91x Ratio of total debt to 1995 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 March 30, 1996. 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 March 30, 1996 does not reflect anticipated revolving credit facility borrowings upon consummation of the Transactions of $7.9 million. (d) EBITDA (as defined) represents income (loss) before interest expense, income taxes, depreciation and amortization, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt and, with certain variations in definition, is an indicator of compliance with various covenants in the Company's debt agreements. However, EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning the Company's historical cash flows, see "Selected Historical Financial Data of Smith's" and the Consolidated Statements of Cash Flows included elsewhere herein. (e) Pro forma EBITDA (as defined) does not give effect to net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended December 30, 1995) which management believes are achievable by the end of the third full year of combined operations following the Merger. The sum of the components of the estimated annual cost savings exceeds $25 million; however, management's estimate of $25 million in net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. The estimates of potential cost savings resulting from the Merger contained in this Prospectus are forward looking statements that involve risks and inherent uncertainties that could cause actual net annual cost savings to differ materially from those projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings." The sum of the Company's pro forma EBITDA (as defined) ($255.4 million) and the full amount of the estimated net annual cost savings to be realizable by the end of the third full year of operations following the Merger ($25.0 million) is $280.4 million. See "--Operating Strategy--Realize Operating Synergies and Cost Savings Resulting from the Merger." (f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales. 10 SUMMARY HISTORICAL FINANCIAL DATA OF SMITH'S The following table sets forth summary historical financial data of Smith's for the five fiscal years ended December 30, 1995, which have been derived from the financial statements of Smith's audited by Ernst & Young LLP, independent auditors. The summary historical financial data of Smith's for the 13 weeks ended April 1, 1995 and March 30, 1996 have been derived from unaudited interim financial statements of Smith's which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Smith's and related notes thereto included elsewhere in this Prospectus.
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30, 1991 1993 1994 1994 1995 1995 1996 ------------ ---------- ---------- ------------ ------------ -------- --------- (DOLLARS IN MILLIONS) OPERATING DATA: Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7 $ 746.7 $ 693.2 Gross profit........... 498.6 611.6 637.2 669.1 697.0 168.3 146.6 Operating, selling and administrative expenses.............. 344.4 419.7 430.3 440.8 461.4 112.8 111.4 Depreciation and amortization.......... 50.5 67.8 82.2 94.5 105.0 24.7 22.6 Interest expense....... 30.3 36.1 44.6 53.7 60.5 15.1 14.5 Restructuring charges(a)............ -- -- -- -- 140.0 -- -- Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5) $ 9.5 $ (1.2) Ratio of earnings to fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x -- 1.83x -- BALANCE SHEET DATA (END OF PERIOD): Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7 $ 112.6 $ 87.8 Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2 1,661.8 1,486.0 Total debt(c).......... 395.4 612.7 725.5 718.9 746.2 765.0 672.8 Redeemable preferred stock................. 8.5 7.5 6.5 5.4 4.3 5.1 4.3 Common stockholders' equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7 $ 477.6 $ 411.7 OTHER DATA: Stores open at end of period(d)............. 109 119 129 137 154 142 120 Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0 $ 25.2 $ 18.3 EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6 $ 56.6 $ 36.9 EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8% 7.6% 5.3%
- -------- (a) Reflects charges in connection with the California Divestiture. See Note K to Notes to Consolidated Financial Statements of Smith's included elsewhere herein. (b) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). For the 52 weeks ended December 30, 1995, the Company's earnings were inadequate to cover fixed charges by $69.8 million. However, such earnings include non-cash charges of $105.4 million, primarily consisting of depreciation and amortization, and restructuring charges of $140.0 million. For the 13 weeks ended March 30, 1996, the Company's earnings were inadequate to cover fixed charges by $2.0 million. However, such earnings include non-cash charges of $22.7 million, primarily consisting of depreciation and amortization. (c) Total debt includes long-term debt and current maturities of long-term debt. (d) See "Business--Store Development and Expansion." (e) EBITDA (as defined) represents income (loss) before interest expense, income taxes, depreciation and amortization expense, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Smith's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning the Company's historical cash flows, see "Selected Historical Financial Data of Smith's" and the Consolidated Statements of Cash Flows included elsewhere herein. (f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales. 11 RISK FACTORS Prospective investors should carefully consider the following factors, in addition to the other matters described in this Prospectus, before purchasing the securities being sold in the Offerings. LEVERAGE AND DEBT SERVICE Following the consummation of the Transactions, the Company will be highly leveraged. At March 30, 1996, pro forma for the Transactions and the California Disposition, the Company's total debt and stockholders' equity (deficit) would have been $1,431.4 million and $(126.4) million, respectively, compared to actual debt and stockholders' equity of $672.8 million and $411.7 million, respectively, on such date. The Company would also have had additional borrowing availability under the New Revolving Facility on a pro forma basis, subject to the borrowing conditions contained therein. In addition, after giving effect to the Transactions and the California Disposition, scheduled payments under net operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been approximately $38.7 million. The Company's ability to make scheduled payments of the principal of, or interest on, or to refinance its indebtedness (including the Notes) and to make scheduled payments under its operating leases depends on its future performance, which is subject to economic, financial, competitive and other factors beyond its control. Based upon the current level of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with borrowings under the New Revolving Facility and its other sources of liquidity, will be adequate to meet its anticipated requirements for working capital, capital expenditures, lease payments, interest payments and scheduled principal payments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated cost savings or future growth can be achieved. In addition, no assurances can be given as to the timing of, or the net proceeds to be realized upon, the California Asset Disposition and, therefore, as to the timing or amount of receipts thereof as reflected in the Unaudited Pro Forma Combined Financial Statements. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital or other expenditures, or if its future cash flows are insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt following the Transactions and the fact that substantially all of its assets will be pledged to secure borrowings under the New Credit Facility and other secured obligations. The Company's high level of debt and debt service requirements will have several important effects on its future operations, including the following: (a) the Company will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions and competition; (b) the Company's leveraged position will increase its vulnerability to competitive pressures; (c) the financial covenants and other restrictions contained in the New Credit Facility and other agreements relating to the Company's indebtedness and in the Indenture will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends on, or repurchase, preferred or common stock; and (d) funds available for working capital, capital expenditures, acquisitions and general corporate purposes will be limited. The Company's continued growth depends, in part, on its ability to continue its expansion and store conversion efforts, and therefore its inability to finance capital expenditures through borrowed funds or otherwise could have a material adverse effect on the Company's future operations. Moreover, any default under the documents governing the indebtedness of the Company could have a significant adverse effect on the market value of the Notes. The Company's capital structure immediately after the Transactions will include a significant amount of floating rate indebtedness, causing the Company to be significantly more sensitive to prevailing interest rates than has historically been the case. The Company intends to enter into interest rate protection agreements which, for the duration of such agreements, will effectively provide fixed rates of interest or ceiling rates of interest on 12 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. For additional information concerning the California Divestiture, the Company's sale-leaseback financing and certain related claims and other matters, see "Business--California Divestiture" and "--California Sale-Leaseback Financing." FRAUDULENT CONVEYANCE RISKS Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court to subordinate or avoid the Notes in favor of other existing or future creditors of the Company. Proceeds of the Offering are being used, in part, to purchase shares of Smith's Common Stock in the Tender Offer, to redeem options to purchase Common Stock held by Smith's management, and to purchase shares of Smith's Series I Preferred Stock. If a court in a lawsuit on behalf of any unpaid creditor of the Company or a representative of the Company's creditors were to find that, at the time the Company issued the Notes, the Company (x) intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) did not receive fair consideration in good faith or reasonably equivalent value for issuing the Notes and the Company (i) was insolvent, (ii) was rendered insolvent by reason of such stock purchases and redemptions, (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void the Notes and void such transactions. Alternatively, in such event, claims of the holders of Notes could be subordinated to claims of other creditors of the Company. The Company may be viewed as insolvent at the time of or as a result of the Tender Offer, redemption of options and preferred stock, if the fair value of its assets does not exceed its probable liabilities at the time of, or following such transactions. Based upon financial and other information currently available to it, management of the Company believes that the Notes are being incurred for proper purposes and in good faith. Certain courts have held, however, that a company's purchase of its own capital stock does not constitute reasonably equivalent value or fair consideration for incurring indebtedness. By extension, the redemption of options to purchase capital stock of a company may also be viewed as not constituting reasonably equivalent value or fair consideration to the company. The Company believes that it (i) is solvent and will continue to be solvent after issuing the Notes notwithstanding the fact that the Company, after completion of the Tender Offer, redemption of options and redemption of preferred stock, will have a negative net worth under generally accepted accounting principles, because the Company believes that the fair value of the Companys' assets exceeds and will exceed its probable liabilities, (ii) will have sufficient capital for carrying on the business it intends to conduct after such issuance, and (iii) will be able to pay its debts as they mature. See "Management's Discussions and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." There can be no assurance, however, that a court would concur with such beliefs and positions. It is a condition to the consummation of the Tender Offer that the Company shall have received an opinion from an independent valuation firm (i) as to the value of the Company's assets and liabilities, after giving effect to the consummation of the Transactions, and (ii) that the fair value of the Company's assets would exceed its total stated liabilities and identified contingent liabilities both before and after giving effect to the Transactions by at least the aggregate par value of its issued capital stock. Houlihan, Lokey, Howard & Zukin, Inc. has been retained by the Company to deliver such an opinion. 15 SUBORDINATION OF THE NOTES The payment of principal, premium, if any, and interest on, and any other amounts owing in respect of, the Notes will be subordinated to the prior payment in full of all existing and future Senior Indebtedness, including indebtedness under the New Credit Facility. As of March 30, 1996, on a pro forma basis after giving effect to the Transactions and the California Disposition, the aggregate outstanding amount of Senior Indebtedness of the Company would have been approximately $813.2 million, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. In the event of the bankruptcy, liquidation, dissolution, reorganization or other winding up of the Company, the assets of the Company will be available to pay obligations on the Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes. In addition, under certain circumstances, the Company may not pay principal of, premium, if any, or interest on, or any other amounts owing in respect of, the Notes, or purchase, redeem or otherwise retire the Notes, if a payment default or a non- payment default exists with respect to certain Senior Indebtedness and, in the case of a non-payment default, a payment blockage notice has been received by the Trustee (as defined). See "Description of the Notes--Subordination." The New Credit Facility permits the Company to pay interest on the Notes, subject to the subordination provisions of the Indenture, so long as no event of default or potential event of default has occurred under the New Credit Facility. The Notes will be effectively subordinated to all secured indebtedness of the Company and its subsidiaries. The borrowings and obligations under the New Credit Facility are secured by substantially all of the assets of the Company and its subsidiaries. At March 30, 1996, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company would have had approximately $813.2 million aggregate amount of secured indebtedness and other obligations outstanding, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. The Notes will also be effectively subordinated to all existing and future liabilities, including indebtedness, of the Company's subsidiaries. The obligations of the Company under the New Credit Facility will be guaranteed, jointly and severally, by the Company's subsidiaries, including Smitty's. At March 30, 1996, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company's subsidiaries would have had indebtedness and other liabilities reflected on the Company's consolidated balance sheet, including trade payables and accrued expenses (but excluding guarantees of Senior Indebtedness), of approximately $143.0 million. Claims of creditors of the Company's subsidiaries, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of the Company and the holders of the Company's indebtedness, including the Notes. ABSENCE OF ESTABLISHED MARKET FOR THE NOTES There is no established market for the Notes and there can be no assurance as to the liquidity of any markets that may develop for the Notes, the ability of holders of the Notes to sell their Notes, or the price at which holders would be able to sell their Notes. Future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Underwriters have advised the Company that they currently intend to make a market in the Notes. However, the Underwriters are not obligated to do so and any market-making may be discontinued at any time, by any or all of them, without notice. 16 PRO FORMA CAPITALIZATION The following table sets forth the consolidated pro forma capitalization of the Company at March 30, 1996, giving effect to the Transactions and the California Disposition. This table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the historical consolidated financial statements of Smith's and Smitty's, and the related notes thereto, included elsewhere in this Prospectus.
PRO FORMA --------------------- (DOLLARS IN MILLIONS) Current portion of long-term debt: New Term Loans.................................... $ 12.3 Other indebtedness................................ 4.2 -------- Total current portion of long-term debt......... $ 16.5 ======== Long-term debt: New Term Loans(a)................................. $ 792.7 New Revolving Facility(a)(b)...................... -- Senior Subordinated Notes......................... 575.0 Other indebtedness................................ 47.2 -------- Total long-term debt............................ 1,414.9 -------- Redeemable preferred stock, $.01 par value.......... 3.3 Common stockholders' equity: Common Stock, $.01 par value(c)................... 0.2 Additional paid-in capital........................ 164.8 Retained earnings (deficit)....................... (291.4) -------- Total common stockholders' equity (deficit)..... (126.4) -------- Total capitalization.......................... $1,291.8 ========
- -------- (a) The Company has obtained a commitment from Bankers Trust and Chase Manhattan for the New Credit Facility that will provide up to $805 million aggregate principal amount of New Term Loans and a $190 million New Revolving Facility which will be available for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit, approximately $28 million of which are anticipated to be issued at Closing. The New Credit Facility will be guaranteed by all subsidiaries of the Company, including Smitty's. See "Description of New Credit Facility." (b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are tendered and accepted for purchase in connection with the Smitty's Refinancing. If all of the outstanding Smitty's Notes and Smitty's Debentures are not tendered and accepted for purchase, the Company anticipates that it would reduce other borrowings. As a result of the assumed application of a portion of the proceeds of the California Disposition to eliminate pro forma revolving credit balances, pro forma total debt at March 30, 1996 does not reflect anticipated revolving credit facility borrowings upon consummation of the Transactions of $7.9 million. (c) Does not reflect (i) management options to purchase up to an aggregate of 808,250 shares of Class B Common Stock expected to be outstanding upon consummation of the Transactions or (ii) Warrants to purchase shares of Class C Common Stock of the Company (at an initial exercise price of $50.00 per share) to be issued to Yucaipa upon consummation of the Transactions. See "Certain Relationships and Related Transactions." 17 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements of the Company for the 52 weeks ended December 30, 1995 and the 13 weeks ended March 30, 1996 give effect to (a) the Transactions and the application of the proceeds therefrom and (b) the California Disposition and the retention of the anticipated proceeds therefrom as cash (after reducing pro forma revolving credit balances to zero), in each case as if such transactions occurred on January 1, 1995 with respect to the pro forma operating and other data for the 52 weeks ended December 30, 1995, as of December 31, 1995 with respect to the pro forma operating and other data for the 13 weeks ended March 30, 1996, and as of March 30, 1996 with respect to the pro forma balance sheet data. Such pro forma information: (i) eliminates the results of operations of the Company's California retail division for the 52 weeks ended December 30, 1995 and for the 13 weeks ended March 30, 1996 from Smith's results of operations for such periods and eliminates the related assets and liabilities from Smith's balance sheet data as of March 30, 1996 and (ii) combines the operating results of Smith's for the 52 weeks ended December 30, 1995 and the operating results and balance sheet data of Smith's as of and for the 13 weeks ended March 30, 1996, in each case pro forma for the elimination of the Company's California retail division and the related assets and liabilities, with the operating results of Smitty's for the 52 weeks ended January 14, 1996 and the operating results and balance sheet data of Smitty's as of and for the 12 weeks ended April 7, 1996, respectively. As indicated above, the Unaudited Pro Forma Combined Financial Statements give effect to the California Divestiture and the California Asset Disposition and the retention of the anticipated proceeds therefrom as cash. In connection with the California Divestiture, Smith's entered into agreements to sell or lease 16 stores and related equipment and three non-operating properties. These transactions are expected to generate net cash proceeds of $77.8 million, of which $67.2 million has been received to date. The remaining 18 stores in California have been closed. In connection with the California Divestiture, the Company recorded the $140 million (pre-tax) California Divestiture Charge for the year ended December 30, 1995 and classified the assets to be leased or sold as "assets held for sale." The California Divestiture Charge reflected (i) a provision for anticipated future lease obligations, (ii) the anticipated cost to the Company of closing its California stores and distribution center (primarily termination payments and inventory), and (iii) certain asset valuation adjustments. The asset valuation adjustments included in the California Divestiture Charge reflected the reduction in net realizable values for the equipment in all of the Company's California stores and distribution center and for the land and buildings associated with those properties being sold or leased. Pursuant to the California Asset Disposition, following the consummation of the Transactions the Company intends to accelerate the disposition of its 18 non-operating stores and its excess land in California. As a result of the adoption of this strategy, the Company intends to record a pre-tax charge to earnings of approximately $125 million (the California Asset Disposition Charge) to reflect the difference between the anticipated cash proceeds from the accelerated dispositions and the Company's existing book values for such assets. For purposes of the Unaudited Pro Forma Combined Balance Sheet, the Company has given effect to the California Asset Disposition as if each of the relevant properties had been sold for a cash amount equal to its net book value after giving effect to the California Asset Disposition Charge. The proceeds of such assumed sales, together with the proceeds of the California Divestiture, are reflected in the Company's pro forma cash balances (net of pro forma revolving credit borrowings, which have been eliminated) at March 30, 1996. INVESTORS ARE CAUTIONED THAT 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 18 Company as a purchase of Smitty's by Smith's and Smitty's assets and liabilities will be recorded at their estimated fair market values at the date of the Merger. The adjustments included in the Unaudited Pro Forma Combined Financial Statements represent the Company's preliminary determination of these adjustments based upon available information. There can be no assurance that the actual adjustments will not differ significantly from the pro forma adjustments reflected in the pro forma financial information. The Unaudited Pro Forma Combined Financial Statements are not necessarily indicative of either future results of operations or results that might have been achieved if the foregoing transactions had been consummated as of the indicated dates. The Unaudited Pro Forma Combined Financial Statements should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Smith's and Smitty's, together with the related notes thereto, included elsewhere in this Prospectus. The Unaudited Pro Forma Combined Financial Statements do not reflect (i) any of the net annual cost savings which management believes are achievable by the end of the third full year of operations following the Merger, (ii) the anticipated costs to be incurred in connection with the integration of operations in Arizona following the Merger, or (iii) a $2 million severance payment to the Company's Chairman and Chief Executive Officer. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Certain Relationships and Related Transactions-- CEO's Severance Agreement." The Unaudited Pro Forma Combined 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 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 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
12 WEEKS ENDED 13 WEEKS ENDED APRIL 7, ADJUSTMENTS MARCH 30, 1996 1996 FOR PRO FORMA ---------------------------------------------- ------------ CALIFORNIA COMBINED FOR SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA (HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION (UNAUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS ------------ --------------- ----------------- ------------ ------------ ---------------- Net sales............... $ 693.2 $(73.1) $ 620.1 $ 135.3 $ $ 755.4 Cost of goods sold...... 546.6 (62.9) 483.7 95.2 578.9 ---------- ------ ---------- --------- ------ ---------- 146.6 (10.2) 136.4 40.1 176.5 Expenses: Operating, selling and administrative....... 111.4 (32.3) 79.1 32.0 0.1 (b) 111.2 Depreciation and amortization......... 22.6 (2.3) 20.3 3.1 (0.3)(c) 0.2 (d) 23.3 Interest.............. 14.5 14.5 3.9 16.8 (e) 35.2 Amortization of debt issuance costs....... 0.1 0.1 0.2 2.2 (e) 2.5 ---------- ------ ---------- --------- ------ ---------- Income (loss) before income taxes........... (2.0) 24.4 22.4 0.9 (19.0) 4.3 Income tax expense (benefit).............. (0.8) 9.5 8.7 (7.1)(f) 1.6 ---------- ------ ---------- --------- ------ ---------- Net income (loss) (g)... $ (1.2) $ 14.9 $ 13.7 $ 0.9 $(11.9) $ 2.7 ========== ====== ========== ========= ====== ========== Net income (loss) per common share (g)...... $ (0.05) $ 0.54 $ 0.89 $ 0.17 (h) ========== ========== ========= ========== Weighted average common shares outstanding..... 25,072,000 25,500,000 1,009,000 15,575,000 ========== ========== ========= ========== Ratio of earnings to fixed charges (i)(j)... -- 2.40x 1.11x
See Notes to Unaudited Pro Forma Combined Statement of Operations. 21 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 for the 52 weeks ended December 30, 1995 and $0.3 for the 13 weeks ended March 30, 1996) and the elimination of the historical Yucaipa management fees ($0.6 million for the 52 weeks ended December 30, 1995 and $0.2 for the 13 weeks ended March 30, 1996) paid by Smitty's. See "Certain Relationships and Related Transactions--Management Services Agreement." (c) Represents a reduction in depreciation expense associated with the $16.1 million write-off of accumulated depreciation and amortization which adjusts Smitty's property and equipment to estimated fair market value. (d) Reflects the amortization of excess costs over net assets acquired in the Merger ($2.0 million for the 52 weeks ended December 30, 1995 and $0.5 for the 13 weeks ended March 30, 1996) and the elimination of Smitty's historical amortization ($1.1 million for the 52 weeks ended December 30, 1995 and $0.3 for the 13 weeks ended March 30, 1996). Amortization has been allocated on the straight line basis over a period of 40 years. (e) The following table presents a reconciliation of pro forma interest expense and amortization of debt issuance costs:
52 WEEKS 13 WEEKS ENDED ENDED DECEMBER 30, 1995 MARCH 30, 1996 ----------------- -------------- (DOLLARS IN MILLIONS) Interest expense: Smitty's.............................. $ 18.4 $ 3.9 Pro forma Smith's..................... 60.0 14.5 ------ ------ 78.4 18.4 ------ ------ Plus: Interest on: New Term Loans........................ 71.5 18.0 Bank fees............................. 0.3 0.1 Notes................................. 63.3 15.8 Less: Interest on: Old bank term loans: Pro forma Smith's................... (59.5) (14.3) Smitty's............................ (3.1) (0.6) Bank fees............................. (0.4) (0.1) Smitty's Notes........................ (6.5) (1.5) Accretion of Smitty's Debentures...... (2.3) (0.6) ------ ------ Pro forma adjustment................... 63.3 16.8 ------ ------ Pro forma interest expense.............. $141.7 $ 35.2 ====== ====== Historical amortization of debt issuance costs.................................. $ 1.4 $ 0.3 Plus: Financing fees--New Credit Facility... 7.2 1.8 Financing fees--Notes................. 3.0 0.7 Less: Historical financing costs:........... (1.4) (0.3) ------ ------ Pro forma adjustment................... 8.8 2.2 ------ ------ Pro forma amortization of debt issuance costs.................................. $ 10.2 $ 2.5 ====== ======
(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 $2 million severance payment to the Company's Chairman and Chief Executive Officer. See "Business-- Operating Strategy" and "Certain Relationships and Related Transactions-- CEO's Severance Agreement." The Unaudited Pro Forma Statement 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. 22 (h) Net income (loss) per common share has been computed using the weighted average number of shares of Smith's Common Stock outstanding after giving effect to the issuance of 3,038,888 shares of Class B Common Stock of the Company to the stockholders of Smitty's as consideration in the Merger and the purchase of 50% of the outstanding Smith's Common Stock (excluding shares issuable in the Merger) in the Tender Offer. Common stock equivalents in the form of stock options do not have an impact on the weighted average number of common shares. (i) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs, and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). For the 52 weeks ended December 30, 1995 (historical), the Company's earnings were inadequate to cover fixed charges by $69.8 million. For the 13 weeks ended March 30, 1996 (historical), the Company's earnings were inadequate to cover fixed charges by $2.0 million. See "Selected Historical Financial Data of Smith's" and the notes thereto. (j) EBITDA (as defined) represents loss before income taxes, plus interest expense, depreciation and amortization, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt and, with certain variations in definition, is an indicator of compliance with various covenants in the Company's debt agreements. However, EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following table presents a reconciliation of pro forma EBITDA (as defined):
52 WEEKS ENDED 13 WEEKS ENDED DECEMBER 30, 1995 MARCH 30, 1996 ----------------- -------------- (DOLLARS IN MILLIONS) EBITDA (as defined): Pro forma Smith's EBITDA (as defined). $226.8 $59.1 Historical Smitty's EBITDA (as defined)............................. 29.0 8.3 Less: Pro forma adjustments............. (0.4) (0.1) ------ ----- Pro forma EBITDA (as defined)........... $255.4 $67.3 ====== =====
23 UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN MILLIONS)
APRIL 7, ADJUSTMENTS MARCH 30, 1996 1996 FOR PRO FORMA ---------------------------------------------- ------------ CALIFORNIA COMBINED FOR SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA (HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION (UNAUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS ------------ -------------- ----------------- ----------- ------------ ---------------- ASSETS Current Assets: Cash and cash equivalents........... $ 11.0 $ $ 11.0 $ 9.0 $ 98.4 (b)(c) $ 118.4 Rebates and accounts receivable............ 18.6 (0.6) 18.0 10.3 28.3 Inventories............ 298.0 298.0 54.6 1.1 (d) 353.7 Prepaid expenses and deposits.............. 17.0 (0.6) 16.4 3.2 19.6 Refundable income taxes................. 9.4 9.4 0.5 9.9 Deferred tax assets.... 14.5 13.1 27.6 18.0 (e) 45.6 Assets held for sale... 42.8 (42.8) -------- ------ -------- ------ ------- -------- Total current assets. 411.3 (30.9) 380.4 77.6 117.5 575.5 Property and equipment: Land................... 279.6 279.6 18.6 (128.3)(c) 169.9 Building............... 614.7 614.7 51.2 (107.6)(c)(f) 558.3 Leasehold improvements. 54.8 54.8 9.8 (20.4)(c)(f) 44.2 Furniture and equipment............. 498.4 498.4 71.6 (31.1)(c)(f) 538.9 -------- ------ -------- ------ ------- -------- Less allowances for depreciation and amortization......... (392.3) (392.3) (16.1) 27.5 (c)(f) (380.9) -------- ------ -------- ------ ------- -------- Net property and equipment........... 1,055.2 1,055.2 135.1 (259.9) 930.4 Goodwill, net........... 31.4 45.6 (g) 77.0 Other assets............ 19.5 (0.9) 18.6 10.8 78.9 (h)(i) 108.3 -------- ------ -------- ------ ------- -------- $1,486.0 $(31.8) $1,454.2 $254.9 $ (17.9) $1,691.2 ======== ====== ======== ====== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Trade accounts payable............... $ 164.0 $ (0.2) $ 163.8 $ 36.2 $ 0.0 $ 200.0 Accrued sales and other taxes and other liabilities........... 41.4 (4.0) 37.4 11.3 (13.5)(j) 10.0 (k) 45.2 Accrued payroll and related benefits...... 77.9 (14.2) 63.7 18.5 82.2 Current maturities of long-term debt........ 24.1 24.1 9.2 (16.8)(l) 16.5 Current maturities of Redeemable Preferred Stock................. 1.0 1.0 (1.0)(m) Accrued restructuring costs................. 15.1 (15.1) -------- ------ -------- ------ ------- -------- Total current liabilities......... 323.5 (33.5) 290.0 75.2 (21.3) 343.9 Long-term debt, less current maturities..... 648.7 28.6 677.3 135.8 617.5 (n) (28.6)(c) (0.9)(n) 4.5 (i) 16.8 (l) (7.5)(o) 1,414.9 Accrued restructuring costs, less current portion................ 40.0 (40.0) Deferred income taxes... 58.8 13.1 71.9 13.8 (27.0)(p) (30.7)(e) 28.0 Other liabilities....... 20.0 7.5 (o) 27.5 Redeemable Preferred Stock, less current maturities............. 3.3 3.3 3.3 Common Stockholders' Equity: Convertible Class A Common Stock........... 0.1 0.1 0.1 Class B Common Stock.... 0.2 0.2 (0.1)(q) 0.1 Additional paid-in capital................ 285.1 285.1 11.0 (11.0)(r) (165.8)(q) 45.5 (s) 164.8 Retained earnings(t).... 233.1 233.1 (0.9) (35.2)(u) (405.9)(q) (76.3)(e) (7.1)(v) 0.9 (r) (291.4) -------- ------ -------- ------ ------- -------- 518.5 518.5 10.1 (655.0) (126.4) Less cost of common stock in the treasury.. (106.8) (106.8) (464.9)(q) 571.7 (q) -------- ------ -------- ------ ------- -------- 411.7 411.7 10.1 (548.2) (126.4) -------- ------ -------- ------ ------- -------- $1,486.0 $(31.8) $1,454.2 $254.9 $ (17.9) $1,691.2 ======== ====== ======== ====== ======= ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 24 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) Reflects the sale of the California stores and other related assets, excess real estate and distribution center in connection with the California Divestiture. The Company has received $67.2 million in proceeds from the California Divestiture and expects to receive an additional $10.6 million shortly after the consummation of the Transactions. The net proceeds of such sale is reflected as a payment of certain liabilities in the Company's Unaudited Pro Forma Combined Balance Sheet at March 30, 1996. (b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New Revolving Facility, and (iii) the Offering used to finance the Transactions and pay related costs and fees as set forth in the following table:
(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........................... (19.0) Discount on Smitty's Debentures..................... 0.5 Repay Smitty's Bank Credit Facility................. (33.7) Repay Smith's Mortgage Notes and Other Indebtedness. (661.6) Purchase existing Smith's Series I Preferred Stock.. (1.0) Purchase 50% of Smith's Common Stock................ (451.3) Purchase Management Options......................... (13.7) Accrued Interest.................................... (13.5) Fees and Expenses................................... (145.0) ------- Use of California Proceeds (See Note (c)).......... $ 7.9 =======
(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....................... 19.4 ------- 271.3 Depreciation and amortization................. (11.4) ------- Net book value of property and equipment...... 259.9 Write-down of California assets to net real- izable value................................. (125.0) ------- Proceeds from California Asset Disposition.... 134.9 Reduction in Smith's pro forma revolving credit balance............................... (28.6) Reduction of anticipated indebtedness under the New Revolving Facility (See Note (b))............................... (7.9) ------- Cash provided by the California Asset Dispo- sition..................................... $ 98.4 =======
(d) Reflects the elimination of Smitty's historical LIFO reserve which adjusts Smitty's inventory to reflect current estimated selling prices less costs of disposal and a reasonable profit allowance for the acquiring company. (e) Represents the $125 million California Asset Disposition Charge, tax effected at 39% tax rate and the recognition of the related deferred tax asset. The California Asset Disposition Charge reflects the write-down of California assets, other than assets held for sale at March 30, 1995, under the Company's strategy to accelerate the disposition of its 18 non- operating stores and excess land in California following the consummation of the Transactions. (f) Reflects the write-off of accumulated depreciation and amortization which adjusts Smitty's property and equipment to estimated fair market value. 25 (g) Reflects the excess of costs over the fair value of net assets of Smitty's acquired in connection with the Merger ($77.0 million) and the elimination of Smitty's historical goodwill ($31.4 million). The purchase price for Smitty's will be determined by reference to the trading price of the Company's Class B Common Stock following the consummation of the Merger. The purchase price and preliminary calculation of the excess of costs over the fair value of net assets acquired is as follows: 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.................................. 1.5 ------ Total purchase price............................... 47.0 Fair value of assets acquired...................... 224.7 Fair value of liabilities assumed.................. 254.7 ------ (30.0) ------ Goodwill........................................... $ 77.0 ======
(h) Reflects the debt issuance costs associated with the New Credit Facility ($52.5 million) and the Notes ($33.5 million). These amounts have been capitalized as deferred financing costs. (i) Reflects the elimination of deferred financing costs associated with the Smitty's Bank Credit Facility ($1.7 million), the Smitty's Notes ($3.0 million), the Smitty's Debentures ($0.6 million), the Smith's Mortgage Notes and Other Indebtedness ($1.8 million) and the write-off of an interest rate swap agreement ($4.5 million), included in historical long- term debt, to be refinanced in connection with the Merger. (j) Reflects the payment of accrued interest on Smitty's Bank Credit Facility ($0.3 million), Smitty's Notes ($2.0 million) and Smith's Mortgage Notes and Other Indebtedness ($11.2 million) to be repaid in connection with the Merger. (k) Represents severance payments and other costs associated with the integration of Smith's and Smitty's. (l) Reflects the repayment and cancellation of the current maturities of the Smitty's Bank Credit Facility ($7.9 million) and Smith's Mortgage Notes and Other Indebtedness ($21.2 million) and the recording of the current maturities of the New Term Loans ($12.3 million). (m) Reflects the retirement of 3,000,000 shares of Series I Preferred Stock. (n) Reflects the repayment and cancellation of the Smitty's Bank Credit Facility, the Smitty's Notes, the Smitty's Debentures, the Smith's Revolving Credit Facility, the Smith's Mortgage Notes and Other Indebtedness and records borrowings under the New Term Loans and New Revolving Facility and the issuance of the Notes.
(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.......................... (19.0) Discount on Smitty's Debentures ................... 0.5 Repay Smitty's Bank Credit Facility................ (33.7) Repay Smith's Mortgage Notes and Other Indebtedness...................................... (661.6) ------- $ 616.6 =======
(o) Represents a reclassification of $7.5 million of Smith's deferred compensation and other long-term liabilities to conform to the pro forma combined classification. (p) Represents the deferred tax asset associated with the write-off of the deferred debt issuance costs and the premium over book value on Smith's and Smitty's debt to be refinanced. The deferred tax asset recognized in the Unaudited Pro Forma Combined Financial Statements is more likely than not to be realized due to the expected future reversal of taxable temporary differences and the existence of taxable income in each of the prior three carryback years available. (q) Reflects redemption of 50% of Smith's outstanding Common Stock prior to the Merger at $36.00 per share, the retirement of all treasury shares and the purchase of certain outstanding management stock options. (r) Reflects the elimination of Smitty's historical equity. (s) Represents the issuance of 3,038,888 shares of Smith's Common Stock at an assumed market value of $15.00 per share as consideration in the Merger. (t) The Unaudited Pro Forma Combined Balance Sheet does not include (i) certain costs related to the purchase of certain management stock options as part of the Recapitalization which are estimated to be $12.5 million, (ii) the integration of the Company's operations which are estimated to be $15.0 million over a two-year period, and (iii) a $2 million severance payment to the Company's Chairman and Chief Executive Officer. See "Certain Relationships and Related Transactions--CEO's Severance Agreement." (u) Represents the premium over book value attributable to "make whole" payments and other premiums payable in connection with the retirement of Smith's Mortgage Notes and Other Indebtedness and the Smitty's Notes and Debentures, net of 39% tax rate. The actual amount of such payments may vary substantially based on the yields of certain U.S. Treasury debt securities at the time such indebtedness is actually repaid. (v) Represents the write-off of the historical deferred debt issuance costs of Smith's and Smitty's related to its refinanced debt, net of 39% tax rate. 26 SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S The following table sets forth selected historical financial data of Smith's for the five fiscal years ended December 30, 1995 which have been derived from the financial statements of Smith's audited by Ernst & Young LLP, independent auditors. The selected historical financial data of Smith's for the 13 weeks ended April 1, 1995 and March 30, 1996 have been derived from unaudited interim financial statements of Smith's which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Smith's and related notes thereto included elsewhere in this Prospectus.
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30, 1991 1993 1994 1994 1995 1995 1996 ------------ ---------- ---------- ------------ ------------ -------- --------- (DOLLARS IN MILLIONS) OPERATING DATA: Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7 $ 746.7 $ 693.2 Gross profit........... 498.6 611.6 637.2 669.1 697.0 168.3 146.6 Operating, selling and administrative expenses.............. 344.4 419.7 430.3 440.8 461.4 112.8 111.4 Depreciation and amortization.......... 50.5 67.8 82.2 94.5 105.0 24.7 22.6 Interest expense....... 30.3 36.1 44.6 53.7 60.5 15.1 14.5 Restructuring charges(a)............ -- -- -- -- 140.0 -- -- Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5) 9.5 (1.2) Ratio of earnings to fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x -- 1.83x -- BALANCE SHEET DATA (END OF PERIOD): Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7 $ 112.6 $ 87.8 Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2 1,661.8 1,486.0 Total debt(c).......... 395.4 612.7 725.5 718.9 746.2 765.0 672.8 Redeemable preferred stock................. 8.5 7.5 6.5 5.4 4.3 5.1 4.3 Common stockholders' equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7 $ 477.6 $ 411.7 OTHER DATA: Stores open at end of period(d)............. 109 119 129 137 154 142 120 Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0 $ 25.2 $ 18.3 Cash provided by (used in) operating activities............ 61.9 84.6 118.6 203.6 140.6 (15.9) 6.3 Cash provided by (used in) investing activities............ (277.4) (286.6) (164.4) (127.4) (146.3) (23.9) 66.1 Cash provided by (used in) financing activities............ 212.8 203.1 92.3 (123.9) 7.5 38.3 (77.5) EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6 $ 56.6 $ 36.9 EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8% 7.6% 5.3%
- ------- (a) Reflects charges in connection with the California Divestiture. See Note K to Notes to Consolidated Financial Statements of Smith's included elsewhere herein. (b) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs, and one-third of rental expense (the portion of annual rental expense deemed by the Company to be representative of the interest factor). For the 52 weeks ended December 30, 1995, the Company's earnings were inadequate to cover fixed charges by $69.8 million. However, such earnings include non-cash charges of $105.4 million, primarily consisting of depreciation and amortization, and restructuring charges of $140.0 million. For the 13 weeks ended March 30, 1996, the Company's earnings were inadequate to cover fixed charges by $2.0 million. However, such earnings include non-cash charges of $22.7 million, primarily consisting of depreciation and amortization. (c) Total debt includes long-term debt and current maturities of long-term debt. (d) See "Business--Store Development and Expansion." (e) EBITDA (as defined) represents income (loss) before interest expense, income taxes, depreciation and amortization expense, LIFO provision and restructuring charges. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Smith's operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales. 27 SELECTED HISTORICAL FINANCIAL DATA OF SMITTY'S The following table sets forth certain selected consolidated historical financial and operating data of Smitty's and its Predecessor. The operating and balance sheet data of Smitty's as of and for the year ended July 30, 1995 and the period from June 29, 1994 to July 31, 1994, and of the Predecessor as of for the period from August 2, 1993 to June 28, 1994, the 52 weeks ended August 1, 1993, the 53 weeks ended August 2, 1992 and the 52 weeks ended July 28, 1991 set forth in the table below have been derived from the financial statements of Smitty's and its Predecessor audited by Coopers & Lybrand L.L.P., independent accountants. The operating and balance sheet data of Smitty's as of and for the 36 weeks ended April 7, 1996 and the 36 weeks ended April 9, 1995 have been derived from unaudited financial statements of Smitty's which, in the opinion of management, reflect all material adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the historical consolidated financial statements of Smitty's and its predecessor, and related notes thereto, included elsewhere in this Prospectus.
PREDECESSOR SMITTY'S ---------------------------------------- -------------------------------------- PERIOD FROM PERIOD FROM 52 WEEKS 53 WEEKS 52 WEEKS AUGUST 2, JUNE 29, 52 WEEKS 36 WEEKS 36 WEEKS ENDED ENDED ENDED 1993 TO 1994 TO ENDED ENDED ENDED JULY 28, AUGUST 2, AUGUST 1, JUNE 28, JULY 31, JULY 30, APRIL 9, APRIL 7, 1991 1992 1993 1994 1994 1995 1995 1996 -------- --------- --------- ----------- ----------- -------- -------- -------- (DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS) OPERATING DATA: Sales(a)............... $625.3 $599.1 $605.1 $551.7 $ 48.4 $594.0 $423.8 $411.9 Gross profit........... 158.9 160.9 150.5 138.0 12.9 162.0 113.8 116.5 Operating, selling, general and administrative expenses(b)(c)(d)..... 143.9 138.8 147.5 117.4 10.8 131.4 91.5 95.6 Depreciation and amortization.......... 10.2 10.2 9.5 8.0 1.0 10.9 7.1 9.1 Interest expense(e).... 10.1 7.3 6.5 6.4 1.5 18.7 12.4 12.7 Net income (loss)...... $ (3.0) $ 2.3 $ (8.2) $ 3.1 $ (0.4) $ 0.3 $ 0.9 $ (0.9) BALANCE SHEET DATA (END OF PERIOD): Working capital........ $ 0.8 $ 5.0 $ 5.3 $ 31.5 $ 27.9 $ 17.3 $ 23.1 $ 2.5 Total assets(f)........ 245.1 242.8 242.8 204.8 235.3 265.7 260.6 254.9 Total debt(g)(h)....... 72.5 59.9 66.6 140.3 143.9 147.9 153.8 145.1 Total stockholders' equity(h)............. $126.4 $128.7 $120.5 $ 11.2 $ 10.6 $ 10.9 $ 11.5 $ 10.1 OTHER DATA: Stores open at end of period................ 24 24 28 27 27 28 28 28 Capital expenditures... $ 3.1 $ 7.2 $ 16.2 $ 3.7 $ 0.3 $ 22.9 $ 11.0 $ 21.8 Cash provided by operating activities.. 10.7 18.9 16.6 9.0 1.1 18.2 13.7 3.5 Cash provided by (used in) investing activities............ (2.0) (7.2) (4.2) 7.9 (0.3) (9.0) (7.4) (15.6) Cash provided by (used in) financing activities............ (7.3) (13.2) (10.3) (13.4) 4.4 (3.5) (2.8) (4.5) EBITDA (as defined) (i)................... $ 13.6 $ 22.9 $ 26.9 $ 26.1 $ 2.4 $ 29.0 $ 20.9 $ 21.4 EBITDA margin (j)...... 2.2% 3.8% 4.5% 4.7% 5.0% 4.9% 4.9% 5.2%
- ------- (a) In fiscal 1993, Smitty's leased its food service operations to Morrison, Incorporated, thereby increasing operating income but decreasing sales and gross profit. In September 1994, Smitty's resumed its food service operations. As a result, food service sales and attributable costs are included in the consolidated results of operation subsequent to such date. Food service sales were $14.5 million, $11.8 million, $17.8 million, $0, $2.5 million and $24.9 million for the 36 weeks ended April 7, 1996, the 36 weeks ended April 9, 1995, fiscal 1995, fiscal 1994, fiscal 1993 and fiscal 1992, respectively. Food service gross profit was $9.1 million, $7.6 million, $11.4 million, $0, $1.5 million and $16.5 million for the 36 weeks ended April 7, 1996, the 36 weeks ended April 9, 1995, fiscal 1995, fiscal 1994, fiscal 1993 and fiscal 1992, respectively. (b) In November 1993, Smitty's agreed to a settlement of a litigation which required Smitty's to pay $4.75 million in cash and issue a $6.25 million two-year mortgage note. Fiscal 1993 results of operations include an $11.0 million charge for the settlement, plus a $1.8 million charge for Smitty's litigation costs. Smitty's used the proceeds from a four-year term loan to finance the cash payment. Also in November 1993, Smitty's reached a settlement of a litigation filed by a former supplier providing for a $0.5 million cash payment and a $0.5 million one-year mortgage note. Fiscal 1993 results of operations include a $1.0 million charge for this settlement. Both mortgage notes were repaid on June 29, 1994. 28 (c) Included in operating, selling, general and administrative expenses are parent reorganization costs incurred by Smitty's in connection with efforts initiated by its former stockholder, Steinberg International, Inc., to sell its interest in Smitty's. Reorganization costs were $0.7 million and $0.6 million for fiscal 1994 and 1993, respectively. There were no reorganization costs for the 36 weeks ended April 7, 1996, the 36 weeks ended April 9, 1995, fiscal 1995, fiscal 1992 and fiscal 1991. In fiscal 1995, Smitty's had a $1.9 million benefit resulting from the Morrison litigation settlement. (d) A real estate development partnership in which Smitty's was a partner was liquidated in July 1993. In connection with this liquidation, Smitty's obtained ownership of an operating shopping center property and an undeveloped shopping center property in exchange for the forgiveness of notes and accrued interest receivable from the partnership and its managing partner. Fiscal 1993 results of operations include an $8.9 million charge representing the difference between the current value of these two properties and the carrying value of the notes and accrued interest receivable. Such properties were transferred to Steinberg International, Inc. prior to the acquisition of SSV by Smitty's. (e) Includes amortization of deferred financing costs of $0.7 million, $0.6 million, $0.9 million, $0.2 million, $0.2 million, $0.2 million, and $0.2 million for the 36 weeks ended April 7, 1996, the 36 weeks ended April 9, 1995, fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, and fiscal 1991, respectively. Interest expense for the 36 weeks ended April 7, 1996, the 36 weeks ended April 9, 1995, fiscal 1995 and fiscal 1994 includes $1.7 million, $1.5 million, $2.1 million and $0.2 million, respectively, of non-cash interest expense attributable to the Smitty's Debentures. (f) Except at April 7, 1996, April 9, 1995, July 30, 1995 and July 31, 1994, total assets includes certain properties which were not purchased by Smitty's in the acquisition from Steinberg International, Inc. that had a net book value of $27.5 million at August 1, 1993. (g) Total debt includes total long-term debt and current maturities of long- term debt. (h) During fiscal 1991, Smitty's issued 688 shares of common stock to Steinberg International, Inc. in exchange for $1.2 million cash and the cancellation of $65.6 million of indebtedness. (i) EBITDA (as defined) represents income (loss) before income taxes, plus interest expense, depreciation and amortization, severance and employment contract termination costs, loss on store closing, LIFO provision and Non- Operating Expenses. Non-Operating Expenses are defined as parent reorganization costs, gain (loss) on real estate disposals, loss on partnership liquidation, and litigation settlements, all of which are included in operating, selling, general and administrative expenses. EBITDA is a widely accepted financial indicator of a company's ability to service debt and, with certain variations in definition, is an indicator of compliance with various covenants in Smitty's debt agreements. However, EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Smitty's operating performance or as a measure of liquidity. (j) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 29 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 30 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 $661.6 million at March 30, 1996), including all outstanding borrowings under its existing revolving credit facilities. The Company will also refinance approximately $102.7 million of existing indebtedness of Smitty's (pro forma at March 30, 1996 and assuming a 100% tender of the existing Smitty's Notes and Smitty's Debentures). In connection with such debt refinancings, the Company will pay make-whole and other premiums estimated at approximately $56.8 million. These refinancing premiums, together with approximately $12.0 million of debt issuance costs, will be written off upon the consummation of the Transactions and reflected as an extraordinary charge for the quarter in which the Transactions are consummated. It is estimated that this charge, net of taxes, will be approximately $42.5 million. The Company will also record approximately $12.5 million of pre-tax compensation expense in connection with the purchase of certain management stock options as part of the Recapitalization. Integration of Arizona Operations. Following the Merger, management of the Company has estimated that approximately $25 million of net annual cost savings (as compared to costs for the pro forma combined fiscal year ended December 30, 1995) are achievable by the end of the third year of combined operations. See "Risk Factors--Ability to Achieve Anticipated Cost Savings." Management believes that approximately $17 million in Merger-related capital expenditures and approximately $15 million of other expenses will be required to integrate Arizona operations over the next two years and realize such cost savings. Management anticipates that a charge related to such costs will be recorded in the quarter in which the Transactions are consummated. Purchase Accounting. The Merger will be accounted for as a purchase of Smitty's by Smith's. As a result, the assets and liabilities of Smitty's will be recorded at their estimated fair value as of the date the Merger is consummated. The purchase price for Smitty's will be determined by reference to the trading price of the Company's Class B Common Stock following the consummation of the Merger. The purchase price in excess of the fair value of Smitty's assets will be recorded as goodwill and amortized over a 40-year period. The purchase price allocation reflected in the pro forma statements is based on management's preliminary estimates. The actual purchase accounting adjustments will be determined following the Merger and may vary from the amounts reflected in the Unaudited Pro Forma Combined Financial Statements included elsewhere herein. 31 RESULTS OF OPERATIONS OF SMITH'S The Company's fiscal year ends on the Saturday closest to December 31. The following table sets forth the selected historical operating results of Smith's for the three fiscal years ended December 30, 1995 and the 13 weeks ended April 1, 1995 and March 30, 1996:
AS A PERCENTAGE OF SALES ------------------------------------------------------- 52 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30, JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30, 1994 1994 1995 1995 1996 1994 1994 1995 1996 1996 ---------- ------------ ------------ -------- --------- ---------- ------------ ------------ -------- --------- (DOLLARS IN MILLIONS) Net sales....... $2,807.2 $2,981.4 $3,083.7 $746.7 $693.2 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit.... 637.2 669.1 697.0 168.3 146.6 22.7 22.4 22.6 22.5 21.1 Operating, sell- ing and admin- istrative ex- penses......... 430.3 440.8 461.4 112.8 111.4 15.3 14.8 15.0 15.1 16.1 Depreciation and amortization... 82.2 94.5 105.0 24.7 22.6 2.9 3.2 3.4 3.3 3.3 Operating income......... 124.7 133.8 130.7 30.8 12.6 4.4 4.5 4.2 4.1 1.8 Interest expense........ 44.6 53.7 60.5 15.1 14.5 1.6 1.8 2.0 2.0 2.1 Restructuring charges........ -- -- 140.0 -- -- -- -- 4.5 -- -- Income taxes (benefit)...... 34.3 31.3 (29.3) 6.3 (0.8) 1.2 1.1 (1.0) 0.8 (0.1) Net income (loss)......... 45.8 48.8 (40.5) 9.5 (1.2) 1.6 1.6 (1.3) 1.3 (0.2)
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 13 WEEKS ENDED MARCH 30, 1996 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 13 WEEKS ENDED APRIL, 1 1995 Net Sales. Net sales decreased $53.5 million, or 7.2%, from $746.7 million in the 13 weeks ended April 1, 1995 to $693.2 million in the 13 weeks ended March 30, 1996. The sales decrease in 1996 was primarily attributable to the closure of 34 stores in California, offset in part by the addition of 11 net new stores outside of California since the end of the first quarter of 1995. As adjusted to exclude Smith's California stores, net sales increased $35.7 million, or 6.1%, from $584.4 million in the 13 weeks ended April 1, 1995 to $620.1 million in the 13 weeks ended March 30, 1996. As adjusted to exclude Smith's California stores, same store sales for the first quarter of 1996 decreased 2.7%, caused primarily by Smith's discontinuance of its "ad match" program in the Phoenix and Tucson markets. Gross Profit. Gross profit decreased $21.8 million, or 12.9%, from $168.3 million in the 13 weeks ended April 1, 1995 to $146.6 million in the 13 weeks ended March 30, 1996. Gross margins during the 13 weeks ended April 1, 1995 and the 13 weeks ended March 30, 1996 were 22.5% and 21.1%, respectively. Excluding the Company's California operations, gross profit increased $28.0 million, or 6.2%, in the first quarter of 1996 compared to the first quarter of 1995 and the gross margins were relatively flat. The pre-tax LIFO charge was $1.8 million in the 13 weeks ended March 30, 1996 compared to $1.0 million for the same period in 1995. Newly opened stores apply pressure on gross margins until the stores become established in their respective markets. Operating, Selling and Administrative Expenses. Operating, selling and administrative expenses ("OS&A") decreased $1.4 million, or 1.2%, from $112.8 million in the 13 weeks ended April 1, 1995 to $111.4 million in the 13 weeks ended March 30, 1996. As a percent of net sales, OS&A increased from 15.1% in the 13 weeks ended April 1, 1995 to 16.1% in the 13 weeks ended March 30, 1996. The increase in OS&A as a percent of net sales was primarily attributable to the closure of the Company's 34 California stores offset somewhat by the opening of 11 net additional stores over the prior year. As adjusted to exclude Smith's California stores, OS&A as a percent of net sales was flat. Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased by $2.1 million, or 8.5%, from $24.7 million in the 13 weeks ended April 1, 1995 to $22.6 million in the 13 weeks ended March 30, 1996, primarily due to the closure of the Company's California stores in 1996, offset slightly by the addition of new food and drug combination stores elsewhere. 32 Interest Expense. Interest expense decreased $0.6 million from $15.1 million in the 13 weeks ended April 1, 1995 to $14.5 million in the 13 weeks ended March 30, 1996, primarily as a result of net decreases in the average debt amounts for each period. Income Taxes. Smith's recorded a tax benefit of $0.8 million in the 13 weeks ended March 30, 1996 compared to an expense of $6.3 million in the 13 weeks ended April 1, 1995. Net Income (Loss). Smith's incurred a net loss of $1.2 million, or $0.05 per common share, in the 13 weeks ended March 30, 1996, compared to net income of $9.5 million, or $0.37 per common share, in the 13 weeks ended April 1, 1995, due to the costs related to the closure of the Company's California operations. Excluding the California loss of approximately $14.9 million, net income for the first quarter of 1996 was approximately $13.7 million. COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER 30, 1995 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER 31, 1994 Net Sales. Net sales increased $102.3 million, or 3.4%, from $2,981.4 million in 1994 to $3,083.7 million in 1995. The sales increase in 1995 was attributable to a net increase of 17 stores as of the end of 1995, offset in part by a 3.4% decrease in same store sales. As adjusted to exclude the Company's California stores, net sales increased $80.7 million, or 3.5%, from $2,328.5 million in 1994 to $2,409.2 million in 1995. As adjusted to exclude the Company's California stores, same store sales decreased 3.2% in 1995, caused primarily by the Company's discontinuance of its "ad match" program in the Phoenix and Tucson markets and new stores opened by competitors in the Company's markets. Gross Profit. Gross profit increased $27.9 million, or 4.2%, from $669.1 million in 1994 to $697.0 million in 1995. Gross margins during 1995 and 1994 were 22.6% and 22.4%, respectively. The increase in 1995 is due primarily to less aggressive promotional activity in the Phoenix and Tucson markets following the discontinuance of the Company's "ad match" program, reduced charges for inventory shrinkage and improved competitive conditions in Utah, which were partially offset by the increase in the LIFO charge and increased new store openings. The pre-tax LIFO charge was $4.0 million in 1995 compared to $2.5 million in 1994. Newly opened stores apply pressure on gross margins until the stores become established in their respective markets. Smith's opened 19 new stores during 1995 (including two in California) compared to eight stores in 1994 (including six in California). Operating, Selling and Administrative Expenses. OS&A increased $20.6 million, or 4.7%, from $440.8 million in 1994 to $461.4 million in 1995. As a percent of net sales, OS&A increased from 14.8% in 1994 to 15.0% in 1995. The increase was caused principally by the increase in new store opening costs compared to the prior year. The decrease in same store sales also contributed to the increase of OS&A as a percentage of net sales. Depreciation and Amortization Expenses. Depreciation and amortization expenses increased by $10.5 million, or 11.1%, from $94.5 million in 1994 to $105.0 million in 1995, primarily due to the addition of new combination stores and equipment replacements in remodeled stores. Interest Expense. Interest expense increased $6.8 million from $53.7 million in 1994 to $60.5 million in 1995 primarily as a result of net increases in the average debt amounts for each period. Restructuring Charges. As a result of the California Divestiture, the Company recorded $140.0 million of pre-tax restructuring charges to reflect the estimated costs associated with the sale, lease or closure of its Southern California stores and the Riverside distribution center. See Note K of the Notes to Consolidated Financial Statements of the Company included elsewhere herein. 33 Income Taxes. The Company recorded a tax benefit of $29.3 million in 1995 compared to an expense of $31.3 million in 1994. The benefit recorded in 1995 reflects an adjustment (benefit) of $53.4 million of the Company's deferred taxes as a result of losses incurred in connection with the California Divestiture. Net Income (Loss). Net income before restructuring charges decreased by $5.3 million, or 10.9%, from $48.8 million in 1994 to $43.5 million in 1995. Income per common share before restructuring charges decreased 0.6% from $1.73 in 1994 to $1.72 in 1995. Primarily as a result of the restructuring charges, the Company recorded a net loss of $40.5 million for 1995 ($1.62 per share) compared to net income of $48.8 million in 1994 ($1.73 per share). The weighted average number of common shares outstanding was 25,030,882 in 1995 and 28,176,907 in 1994. COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER 31, 1994 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 1, 1994 Net Sales. Net sales increased $174.2 million, or 6.2%, from $2,807.2 million in 1993 to $2,981.4 million in 1994. The sales increase in 1994 was attributable to a net increase of eight stores as of the end of 1994, offset in part by a 2.3% decrease in same store sales. As adjusted to exclude the Company's California stores, net sales decreased $5.9 million, or 0.3%, from $2,334.4 million in 1993 to $2,328.5 million in 1994. As adjusted to exclude the Company's California stores, same store sales decreased 1.3% in 1994. The decrease in same store sales (excluding California) in 1994 was caused primarily by competitive new store openings in the Company's principal market areas and increased overall price competition in Utah. Gross Profit. Gross profit increased $31.9 million, or 5.0%, from $637.2 million in 1993 to $669.1 million in 1994. Gross margins during 1994 and 1993 were 22.4% and 22.7%, respectively. The decrease in gross margin in 1994 was caused primarily by Smith's aggressive Utah pricing program which commenced in the second half of 1993 and continued through most of 1994. To reinforce Smith's everyday low price program, prices in Utah stores were lowered on more than 10,000 grocery, meat and produce items. Smith's opened eight new stores during 1994 (including six in California) compared to ten new stores during 1993 (including eight in California). Operating, Selling and Administrative Expenses. OS&A increased $10.5 million, or 2.4%, from $430.3 million in 1993 to $440.8 million in 1994. As a percent of net sales, OS&A decreased from 15.3% in 1993 to 14.8% in 1994. The decrease in 1994, resulting primarily from Smith's program to reduce operating costs, was somewhat offset by the higher operating and labor costs associated with the expansion into Southern California. Depreciation and Amortization Expenses. Depreciation and amortization expenses increased by $12.3 million, or 15.0%, from $82.2 million in 1993 to $94.5 million in 1994, due to the addition of new food and drug combination stores and distribution and processing facilities. Interest Expense. Interest expense increased $9.1 million from $44.6 million in 1993 to $53.7 million in 1994 as a result of net increases in the average debt amounts for each period. Income Taxes. Income taxes as a percent of income before income taxes were 39.1% in 1994 and 42.8% in 1993. The Omnibus Budget Reconciliation Act of 1993 increased Smith's Federal tax rate from 34% to 35%. As a result of the increased tax rate, net income for 1993 was reduced by $2.75 million, or $0.09 per common share. This reduction consisted of $0.8 million, or $0.03 per common share, for the rate increase on income earned in 1993 and $1.95 million, or $.06 per common share, for the increase in recorded deferred taxes. Net Income. Net income increased 6.6% from $45.8 million in 1993 to $48.8 million in 1994. However, as a result of a reduction in the number of shares outstanding through Smith's buy-back programs, net income per common share increased 14% from $1.52 to $1.73. During 1994, Smith's repurchased 4.9 million shares of Common Stock in the open market. The weighted average number of shares of Common Stock outstanding in 1994 was reduced by approximately 1.9 million shares, which increased net income per common share by $0.11. 34 RESULTS OF OPERATIONS OF SMITTY'S Smitty's is a leading regional supermarket operator based in Phoenix, Arizona with 25 stores in the Phoenix area and three stores in the Tucson area. Smitty's stores offer high quality fresh and prepared foods, groceries and general merchandise, restaurants and ancillary services in a shopping environment which emphasizes service, convenience, quality, selection and customer satisfaction. On June 29, 1994, Smitty's became the sole stockholder of SSV when it acquired all of the outstanding shares of common stock of SSV from Steinberg International, Inc. ("Steinberg"). Smitty's was formed in April 1994 by affiliates of Yucaipa for the purpose of effecting such acquisition. Smitty's currently operates (i) 21 food and general merchandise "super combination" stores which average 105,000 square feet in size, (ii) six food and drug combination stores, which average 52,000 square feet in size, and (iii) one conventional supermarket. The "super combination" stores offer a full line of supermarket items, a broad range of drug store and pharmaceutical items and an expanded selection of general merchandise. These stores offer numerous services and specialty departments, including video and photo departments, pharmacies, food courts, restaurants and full-service bank branches, family style hair salons and airline ticket counters. Smitty's food and drug combination stores offer a full selection of products and services, including full-service fresh meat, delicatessen, seafood and bakery departments, an expanded line of health care and beauty aids, a restaurant, snack bar or food court and full-service banking. Smitty's completed its comprehensive remodel program in November 1995 which included 18 stores and resulted in 93% of its stores being new or remodeled within the last three years. Upon completion of the remodel program, Smitty's launched an extensive marketing program to promote its newly remodeled stores which included an increase of 50% in both broadcast and print media, a billboard campaign estimated to have been seen by 50% of the Phoenix population and a customer service training program that included substantially all of Smitty's employees. Smitty's management believes the extensive marketing program and the newly remodeled stores were significant factors in the reduction of the decline in same store sales from 10.8% in the first quarter to 2.4% in the second quarter and 0.4% in the third quarter of fiscal 1996. In addition, the Easter holiday was included in the third quarter of fiscal 1996 and in the fourth quarter of fiscal 1995. The remodel program includes an increased allocation of floor space to the supermarket section of each store resulting in at least 60% of the square footage in each super combination store being devoted to supermarket items compared to 40% prior to the remodel. The expanded supermarket selling areas provide increased display and shelf space and enlarged self-service bakeries, dairy, frozen food and produce departments. Display cases and related refrigeration in meat, deli, bakery, produce, frozen foods and dairy departments have generally been replaced and upgraded. On September 25, 1994, the lease by which Morrison, Incorporated ("Morrison") leased and operated Smitty's food service operations was rescinded in connection with the litigation between Smitty's and Morrison. In connection with such rescission, Morrison paid Smitty's $2.6 million and transferred title to all of the inventories, fixtures and equipment to Smitty's and Smitty's began operating food service operations. Rental income from Morrison was $2.0 million in the 36 weeks ended April 9, 1995. Food service sales and gross profit were $14.5 million and $9.1 million, respectively, in the 36 weeks ended April 7, 1996. 35 Smitty's fiscal year ends on the Sunday closest to July 31. The following table sets forth the selected historical operating results of Smitty's for the 36 weeks ended April 7, 1996, the 36 weeks ended April 9, 1995, the 52 weeks ended July 30, 1995 ("fiscal 1995"), the 52 weeks ended July 31, 1994 ("fiscal 1994") and the 52 weeks ended August 1, 1993 ("fiscal 1993"):
AS A PERCENTAGE OF SALES --------------------------------------------- 52 WEEKS 52 WEEKS 52 WEEKS 36 WEEKS 36 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 36 WEEKS 36 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED AUGUST 1, JULY 31, JULY 30, APRIL 9, APRIL 7, AUGUST 1, JULY 31, JULY 30, APRIL 9, APRIL 7, 1993 1994(1) 1995 1995 1996 1993 1994 1995 1995 1996 --------- -------- -------- -------- -------- --------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) Sales................... $605.1 $600.1 $594.0 $423.8 $411.9 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit............ 150.5 150.9 162.0 113.8 116.5 24.9 25.1 27.3 26.8 28.3 Operating, selling, general and administrative expenses............... 147.5 128.2 131.4 91.5 95.6 24.4 21.4 22.1 21.6 23.2 Depreciation and amortization........... 9.5 9.0 10.9 7.1 9.1 1.6 1.5 1.8 1.7 2.2 Operating income (loss)................. (6.5) 13.8 19.7 15.1 11.8 (1.1) 2.3 3.3 3.5 2.9
- -------- (1) The operating results for the 52-week period ended July 31, 1994 combines the results of operations of Smitty's for the period from June 29, 1994 to July 31, 1994 with the results of operations of its predecessor for the period from August 2, 1993 to June 28, 1994. COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 36 WEEKS ENDED APRIL 7, 1996 WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 36 WEEKS ENDED APRIL 9, 1995 Sales. Sales decreased $11.9 million, or 2.8%, from $423.8 million in the 36 weeks ended April 9, 1995 to $411.9 million in the 36 weeks ended April 7, 1996. The decrease is primarily the result of a decline in same store sales and the closure of one store in the fourth quarter of fiscal 1995, partially offset by sales from food service operations and sales increases from the opening of two stores in the second quarter of fiscal 1995. Although same store sales decreased 4.6% in the 36 weeks ended April 7, 1996, the decline in same store sales has improved from 10.8% in the 12 weeks ended October 22, 1995 to 2.4% in the 12 weeks ended January 14, 1996 and 0.4% in the 12 weeks ended April 7, 1996 due in part to the completion of the remodel program and increased advertising and promotions associated with the grand re-opening of the remodeled stores. In addition, the Easter holiday was included in the third quarter of fiscal 1996 and the fourth quarter of fiscal 1995. Gross Profit. Gross profit increased $2.7 million from $113.8 million, or 26.8% of sales, in the 36 weeks ended April 9, 1995 to $116.5 million, or 28.3% of sales, in the 36 weeks ended April 7, 1996. The increase in gross profit margin in the 36 weeks ended April 7, 1996, is primarily attributable to increased vendor allowances and rebates arising from improved procurement practices and reduced inventory shortages. Operating, Selling, General and Administrative Expenses. Operating, selling, general and administrative expenses ("OSG&A") were $91.5 million, or 21.6% of sales, in the 36 weeks ended April 9, 1995 and $95.6 million, or 23.2% of sales, in the 36 weeks ended April 7, 1996. This increase was primarily attributable to the fixed cost component of OSG&A being compared to a lower sales base and increased rent expense associated with new and remodeled stores. In addition, Smitty's incurred $1.8 million of advertising and promotional expenses for an extensive marketing program implemented in the second quarter of fiscal 1996. These additional expenses were offset by advertising allowances received in connection with the marketing program. In the 36 weeks ended April 9, 1995, Smitty's had a $1.9 million benefit resulting from the favorable Morrison litigation settlement. Depreciation and Amortization. Depreciation and amortization was $7.1 million in the 36 weeks ended April 9, 1995, and $9.1 million in the 36 weeks ended April 7, 1996. The increase relates primarily to the depreciation of new stores, property and equipment, depreciation on new fixtures and equipment in newly remodeled stores. 36 Operating Income. Operating income decreased $3.3 million from $15.1 million in the 36 weeks ended April 9, 1995 to $11.8 million in the 36 weeks ended April 7, 1996. The decrease in operating income is primarily attributable to the factors described above. COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 30, 1995 (FISCAL 1995) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 31, 1994 (FISCAL 1994). Sales. Sales decreased $6.1 million, or 1.0%, from $600.1 million in fiscal 1994 to $594.0 million in fiscal 1995. The decrease was primarily the result of a 6.7% decline in same store sales and the closure of one store partially offset by sales from food service operations and sales increases from the opening of two new stores in Phoenix and the new store that opened in fiscal 1994. The same store sales decline was attributable to sales lost at stores undergoing remodels and competitive factors, including an increase in new stores opened by competitors and pricing and promotional activities. Gross Profit. Gross profit increased $11.1 million from $150.9 million, or 25.1% of sales, in fiscal 1994 to $162.0 million, or 27.3% of sales, in fiscal 1995. Excluding food service, gross profit as a percentage of sales increased from 25.1% in fiscal 1994 to 26.1% in fiscal 1995. These increases were primarily attributable to reduced cost of goods sold, reduced inventory shortages and additional vendor allowances and rebates arising from improved procurement practices. Operating, Selling, General and Administrative Expenses. OSG&A was $131.4 million and $128.2 million in fiscal 1995 and 1994, respectively. Excluding food service expenses and rental income from Morrison, OSG&A decreased $0.2 million from $127.1 million in fiscal 1994 to $126.9 million in fiscal 1995. On this basis, OSG&A as a percentage of sales increased from 21.2% in fiscal 1994 to 22.0% in fiscal 1995. This increase was primarily attributable to increased advertising and promotional expenditures, new union pension fund contributions and increased rent expense associated with new stores. Additionally, in fiscal 1994, Smitty's incurred severance and employment termination costs consisting of a $2.0 million payment to the former Chief Executive Officer of Smitty's in connection with the termination of certain rights under his employment contract, a $0.5 million loss relating to closing a store which was subleased, and a $2.9 million expense primarily from real estate disposals and reorganization costs. In fiscal 1995 Smitty's had a $1.9 million benefit resulting from the favorable Morrison litigation settlement. Depreciation and Amortization. Depreciation and amortization increased by $1.9 million from $9.0 million in fiscal 1994 to $10.9 million in fiscal 1995. These increases related primarily to depreciation of new stores property and equipment and increased amortization of beneficial leaseholds. Operating Income. Operating income increased $5.9 million from $13.8 million in fiscal 1994 to $19.7 million in fiscal 1995. The increase in operating income was primarily attributable to the factors described above. COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 31, 1994 (FISCAL 1994) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED AUGUST 1, 1993 (FISCAL 1993). Sales. Sales decreased $5.0 million, or 0.8%, from $605.1 million in fiscal 1993 to $600.1 million in fiscal 1994. The decrease was primarily the result of a 5.8% decline in same store sales and the closure of two stores in 1994, partially offset by the opening of one new store in Tucson, and sales increases from four new stores opened in fiscal 1993. The same store sales decline was attributable to competitive factors, including an increase in new stores opened by competitors and pricing and promotional activities. Gross Profit. Gross profit increased $0.4 million from $150.5 million or 24.9% of sales in fiscal 1993 to $150.9 million or 25.1% of sales in fiscal 1994. These increases were primarily attributable to additional vendor allowances and rebates earned during fiscal 1994. 37 Operating, Selling, General and Administrative Expenses. OSG&A was $128.2 million and $147.5 million in fiscal 1994 and 1993, respectively. OSG&A was affected by severance and employment contract termination costs in fiscal 1994 consisting of a $2.0 million payment to the Chief Executive Officer of Smitty's in connection with the termination of certain rights under his employment contract and a charge of $0.5 million relating to the loss on the closing of a store which was subleased during the period. In addition, Smitty's incurred other expense of $23.3 million and $2.9 million in fiscal 1993 and fiscal 1994, respectively. The fiscal 1993 expense consisted primarily of $8.9 million arising from the liquidation of a partnership whose former properties have been transferred to Steinberg and $13.8 million related to litigation settlements. The fiscal 1994 expense consisted primarily of a $2.2 million loss on real estate disposals. Excluding the items noted above, OSG&A decreased by $1.4 million from $124.2 million in fiscal 1993 to $122.8 million in fiscal 1994. On this basis, OSG&A, as a percentage of sales, remained constant at 20.5% for both periods. The decrease in OSG&A primarily reflected reductions in supplies expenses and liability insurance costs and a lower sales base. Depreciation and Amortization. Depreciation and amortization decreased by $0.5 million due to the sale and leaseback in fiscal 1993 of certain fixtures and equipment related to four stores and the completion of the amortization of deferred Shoppers Passport card costs in fiscal 1993. Shoppers Passport is Smitty's "frequent shopper" program. Operating Income. Operating income increased $20.3 million from an operating loss of $6.5 million in fiscal 1993 to operating income of $13.8 million in fiscal 1994. The increase in operating income was primarily attributable to the factors described above. COMPANY LIQUIDITY AND CAPITAL RESOURCES Smith's cash flow from operating activities was $140.6 million for fiscal 1995 and $203.6 million for fiscal 1994. The decrease in cash flow from operating activities was due primarily to balance fluctuations in operating assets and liabilities resulting from the execution of cash management policies based upon cash availability. Trade accounts payable decreased cash provided by operating activities by $21.7 million in 1995 and increased cash provided by operating activities by $50.6 million in 1994. One of the Company's principal uses of cash in its operating activities is inventory purchases. However, supermarket operators typically require small amounts of working capital since inventory is generally sold prior to the time that payments to suppliers are due. This reduces the need for short-term borrowings and allows cash from operations to be used for non-current purposes such as financing capital expenditures and other investing activities. During the first quarter of 1996, Smith's cash provided by operating activities was $6.3 million reflecting balance fluctuations in operating assets and liabilities resulting from the closure of the California region and the execution of cash management policies based upon cash availability. Payment of accrued restructuring charges in the first quarter of 1996 reduced cash provided by operating activities by $42.9 million. The California closure also caused the reduction of inventory, trade accounts payable and accrued expense balances. Smith's cash used in investing activities was $146.3 million during fiscal 1995 and $127.4 million during fiscal 1994. Investing activities consisted primarily of additions to property and equipment for new stores, remodels and equipment purchases. Cash provided by investing activities was $66.1 million for the first quarter of 1996 as a result of proceeds from the sale of assets in the California region offset by the expenditures of the Company's ongoing expansion program. Smith's received approximately $7.5 million of cash from financing activities for fiscal 1995 and used approximately $123.9 million of cash in financing activities in fiscal 1994. The primary difference in financing activities from 1994 to 1995 of $131.4 million was the repurchase of Common Stock in 1994. In 1994, the Company purchased approximately $109.2 million of its Common Stock under its stock buy-back program. Cash used in financing activities totaled $77.5 million for the first quarter of 1996 as a result of payments of long-term debt. 38 In order to consummate the Transactions, Smith's expects to utilize total new financing proceeds in the amount of approximately $1.4 billion. The Company will enter into the New Credit Facility pursuant to which it will borrow up to $805 million of New Term Loans and will have available a $190 million New Revolving Facility, of which approximately $7.9 million is anticipated to be borrowed in connection with the Transactions. The Company will also issue $575 million principal amount of Notes. The proceeds from the New Credit Facility and the Offering will provide the sources of financing required to consummate the Transactions and pay related fees and expenses (including debt refinancing premiums). The Company will also assume certain existing indebtedness of Smitty's. See "Summary--The Transactions--Sources and Uses." The New Revolving Facility will be available, subject to the satisfaction of customary borrowing conditions, for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit, approximately $28 million of which are anticipated to be outstanding upon consummation of the Transactions. The New Revolving Facility will be non-amortizing and will have a six and one-quarter year term. The Company will be required to reduce loans outstanding under the New Revolving Facility to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period following the Closing. At December 30, 1995, on a pro forma basis, giving effect to the Transactions and the California Disposition and letter of credit issuances, the Company's remaining borrowing availability under the New Revolving Facility would have been approximately $162.0 million. Pursuant to the New Credit Facility, the New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of $325 million, will have a six and one-quarter year term; (ii) Tranche B, in the amount of $160 million, will have a seven and one-half year term; (iii) Tranche C, in the amount of $160 million, will have an eight and one-half year term; and (iv) Tranche D, in the amount of $160 million, will have a nine and one-quarter year term. The New Term Loans will require quarterly amortization payments. The New Credit Facility will be guaranteed by each of the Company's subsidiaries and secured by liens on substantially all of the unencumbered assets of the Company and its subsidiaries and by a pledge of the Company's stock in such subsidiaries. The New Credit Facility will contain financial covenants which are expected to require, among other things, the maintenance of specified levels of cash flow and stockholders' equity. See "Description of New Credit Facility." The capital expenditures of the Company (excluding expenditures in California) were $91.0 million for fiscal 1994, $124.3 million for fiscal 1995 and $16.5 million for the first quarter of 1996. The Company currently anticipates that its aggregate capital expenditures for fiscal 1996 will be approximately $100.0 million, excluding the approximately $17 million of capital expenditures which are estimated to be required in connection with the integration of Arizona operations. The Company intends to finance these capital expenditures primarily with cash provided by operations and other sources of liquidity including borrowings and leases. No assurance can be given that sources of financing for capital expenditures will be available or sufficient. However, the capital expenditure program has substantial flexibility and is subject to revision based on various factors. Management believes that if the Company were to substantially reduce or postpone these programs, there would be no substantial impact on short-term operating profitability. In the long term, however, if these programs were substantially reduced, management believes its operating businesses, and ultimately its cash flow, would be adversely affected. The capital expenditures discussed above do not include potential acquisitions which the Company could make to expand within its existing markets or to enter other markets. Future acquisitions may require the Company to seek additional debt or equity financing depending on the size of the transaction. With the exception of the Transactions, the Company is not currently engaged in discussions concerning any material acquisition which it considers probable. Following the consummation of the Transactions, the Company will be highly leveraged. Based upon current levels of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with available borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, lease payments, interest payments and scheduled principal payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that estimated cost savings or growth can be achieved. See "Risk Factors--Leverage and Debt Service." 39 ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long- lived Assets and for Long-lived Assets to be Disposed Of." The Company adopted this standard in the first quarter of 1996. The adoption of SFAS No. 121 did not have a significant impact on the Company's financial condition. EFFECTS OF INFLATION The Company's primary costs, inventory and labor, are affected by a number of factors that are beyond its control, including availability and price of merchandise, the competitive climate and general and regional economic conditions. As is typical of the supermarket industry, the Company has generally been able to maintain gross profit margins by adjusting retail prices, but competitive conditions may from time to time render the Company unable to do so while maintaining its market share. DEFERRED COMPENSATION AGREEMENTS The Company has entered into agreements with certain of its executive officers and other employees to provide certain additional retirement benefits and supplemental compensation (collectively, the "Deferred Compensation Agreements"). See "Executive Compensation--Pension Plan and other Retirement, Death and Disability Arrangements" which is incorporated into this Prospectus from the Company's 1996 Proxy Statement. Pursuant to the Recapitalization Agreement, the Company has agreed to use its best efforts to amend its supplemental compensation agreements with certain of its executive and other officers to provide that if any such officer is terminated without cause during the two-year period following the consummation of the Transactions, all of such officer's unvested benefits under his agreement will become immediately and fully vested. See "Certain Relationships and Related Transactions--Company's Stock Options; Deferred Compensation Plans." It is the Company's policy to accrue its liabilities for future payments under these agreements during the period in which the individual becomes vested in the benefits under the terms of the applicable Deferred Compensation Agreement. The Company does not believe that its liabilities under these Deferred Compensation Agreements will have a material adverse effect on its future financial condition or results of operations. 40 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, 41 (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. 42 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 43 nationwide. All stores carry a full line of supermarket products, including groceries, meat, poultry, produce, dairy products, bakery goods, frozen foods and health and beauty aids. In addition, combination stores carry a wide variety of general merchandise, including drugs, toys, hardware, giftware and small appliances. Within each category of merchandise, the stores offer multiple selections of nationally advertised brand name items. In addition, the stores carry an extensive selection of private label merchandise, which provides comparable quality products priced lower than national brands. The Company also carries a variety of bulk merchandise and generic brand products which enhance the Company's low price image. These stores feature modern layouts with wide aisles and well-lighted spaces to facilitate convenient shopping, a variety of specialty departments along the periphery and centralized checkout facilities. The Company's four price impact warehouse stores operating under the PriceRite Grocery Warehouse name, average 55,000 square feet in size, and are targeted to price-conscious consumers rather than conventional supermarket consumers. The PriceRite stores offer lower prices, fewer SKUs and fewer service departments than the Company's food and drug combination stores and conventional stores. The Company's conventional stores average 26,000 square feet in size and have the appearance of traditional supermarkets. Smitty's, which will become a subsidiary of the Company upon consummation of the Merger, currently operates (i) 21 food and general merchandise "super combination" stores which average 105,000 square feet in size, (ii) six food and drug combination stores, which average 52,000 square feet in size, and (iii) one conventional supermarket. Smitty's has reached agreements relating to the disposition of one of its stores in Phoenix and one of its stores in Tucson. The "super combination" stores offer a full line of supermarket items, a broad range of drug store and pharmaceutical items and an expanded selection of general merchandise. These stores offer numerous services and specialty departments, including fresh produce, full-service fresh meat, delicatessen, seafood, bakery, prepared foods, fresh-cut flowers and video and photo departments, pharmacies, food courts, restaurants and full-service bank branches, family style hair salons and airline ticket counters. Smitty's food and drug combination stores offer a full selection of products and services, including full-service fresh meat, delicatessen, seafood and bakery departments, an expanded line of health care and beauty aids, a restaurant, snack bar or food court and full-service banking. In connection with the Merger, the Company and Smitty's are evaluating the format mix of the combined Arizona store base and are assessing the possibility of converting the format of certain stores. STORE DEVELOPMENT AND EXPANSION The following table sets forth information concerning changes in the store base of the Company and Smitty's over the last five years.
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. 44 The Company's real estate department locates, acquires and develops sites for future stores. The Company's 48 years of operation have allowed it to choose its store locations selectively as new residential areas have been developed. The Company believes that many of its stores are in developed areas where land values and the difficulties in locating suitable parcels would make it difficult to replicate the Company's existing store base. The Company has historically sought to purchase the best potential new store locations available in any target market. If the Company cannot purchase the best potential locations, however, it will consider leasing a location from its owner or a local developer. As a result of this strategy, after giving effect to the Merger, the Company will own 107 of its 146 stores, including the underlying land with respect to 97 of such owned stores. See "Business-- Properties." In order to maximize its future capital expenditure resources, the Company intends to place a greater emphasis on leasing new stores following the consummation of the Transactions. MERCHANDISING The Company's merchandising strategy is to offer customers the ability to fulfill a significant portion of their daily and weekly shopping needs at one convenient location and to establish and promote its reputation as a low price leader in the trade area of each of its stores. The cornerstones of this strategy include: Everyday Low Pricing. The Company offers its products on an everyday low pricing ("EDLP") basis in all markets other than Phoenix and Tucson, where the Company offers a combination of EDLP and promotional pricing. The Company offers an EDLP program in most markets because the Company believes that it generally allows for higher overall profitability than a promotional pricing program. An EDLP program allows for more consistent prices over time than a promotional program, which entails variable pricing and higher levels of demand for sale products. As a result, EDLP simplifies inventory management and lowers operating costs. Quality Customer Service. The Company believes a key to its success is its emphasis on quality customer service. The Company provides courteous and efficient customer service by placing a high degree of emphasis on employee training. Most stores have a customer service counter located near the store entrance to answer questions and to assist customers in locating merchandise. The Company also provides rapid in-store checkout services, aided by the use of computerized scanning devices and the bagging of groceries at checkout. In most locations, stores are open 24 hours each day. Advertising and Promotion. The Company reinforces its low price image through extensive television advertising and through print advertising in newspapers and circulars. The Company divides its advertising budgets in a similar manner across its markets, with approximately 80% committed to print advertising and approximately 20% committed to radio and television advertising. The Company also takes an active interest in the communities in which its stores are located and maintains programs designed to contribute funds, products and manpower to local charities and civic groups. Specialty Departments. Each combination store provides certain specialty departments designed to provide one-stop shopping convenience to customers and to increase the frequency with which customers return to the store. The specialty departments, which vary depending upon store size and location, include delicatessens with prepared foods, full-service fresh fish and meat departments, bakeries, dry cleaning drop-off facilities, U.S. Post Office branches, pharmacies, video rental departments, take-out food counters, camera and photo departments with on-site film processing, floral departments and in- store banking provided by a regional or local bank. Private Label Program. Through its private label program, the Company offers in excess of one thousand items under the "Smith's," "Mountain Dairy," "Creek View" and other brand names. These products provide customers with quality comparable to that of national brands but at lower prices. Management believes that the Company's private label program is one of the most successful programs in the industry. The Company's owned manufacturing and processing facilities, including its milk and beverage plants, cultured dairy products plant, ice cream processing plant and frozen dough plant, supply the Company's stores with private label milk, milk products, fruit punches, sour cream, yogurt, cottage cheese, chip dip products, ice cream and novelty items, baked goods and other products and allow the Company to generate gross margins on such private label items that are generally higher than on national brands. 45 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 46 produces sour cream, yogurt, cottage cheese and chip dip products. The Company's ice cream processing plant supplies all stores with Smith's private label ice cream and novelty items. The Company believes that its central distribution facilities provide several advantages. Management is able to control inventory levels throughout its system in order to maximize the Company's in-stock position, while at the same time optimizing the use of store shelf space. Costs of products are reduced through centralized volume purchases and effective management of per- item transportation costs. Stores are also served more efficiently through central control of delivery schedules. By managing overall inventory levels, the Company seeks to maximize inventory turns and minimize investments in inventory. Management believes the Company's backstage operations will be able to accommodate the increased volume resulting from the integration of the Smitty's operations in Arizona following the Merger and to support anticipated future growth. Smitty's currently makes approximately 60% of its annual purchases from Fleming Companies, Inc. ("Fleming") under a supply agreement which by its original terms expires in June, 1997. Smitty's has been engaged in discussions with Fleming regarding the termination of the existing supply agreement, subject to certain conditions, and the possibility of entering into a new agreement whereby Fleming will no longer be a full-line supplier to Smitty's. It is contemplated that under such a new agreement, Fleming would supply Smitty's and, following the Merger, the Company for a limited period of time. The terms of such a new agreement are subject to ongoing discussions between the parties and no assurances can be given that a new agreement will be signed. In any event, management does not believe that the ultimate resolution of Smitty's ongoing discussions with Fleming will adversely affect the Company's Arizona operations in any material respect. Smitty's is also party to a second supply agreement with Fleming relating to the purchase of general merchandise and health and beauty aids. The Company and Fleming have discussed terminating this agreement for a specified cash payment. INFORMATION SYSTEMS AND TECHNOLOGY The Company is currently supported by a full range of advanced management systems. Smith's has implemented store-level inventory and item management systems developed on UNIX in-store processors using the Informix relational database. This application includes direct store delivery store receiving, which allows goods to be scanned electronically upon arrival at each store receiving dock. This system also includes price verification and order entry using hand-held personal computers. Store checkout is supported by NCR point- of-sale scanning. Smith's stores are supported by pharmacy, video rental, labor scheduling and time and attendance systems which help the Company facilitate customer service while managing labor costs. The Company's buying operations are supported by the AS/400-based E3 forecasting and purchasing system which uses statistical models of seasonality, promotions and buying behavior to optimize inventory levels. The Company's distribution centers operate utilizing leading software of the Dallas Systems Company. The key components are the Distribution Center Management Control System, which is used for all inventory processing, and the Distribution Center Assignment Monitoring System (DCAMS), which is used for labor standards management. To increase operating efficiency and decrease labor costs, the DCAMS system transmits work assignments to lift drivers and order selectors through a radio-frequency terminal. Smith's is currently installing the OMI purchasing and forecasting system which will be used for distribution center replenishment. The installation is expected to be completed during 1996. Smith's computer operations and applications development activities were outsourced to Electronic Data Systems in 1992 under a ten-year outsourcing agreement. COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse- style supermarkets, club stores, deep discount drug stores and "supercenters." In addition, new competitors have entered the Company's markets in the past and could do so in the future. Supermarket chains generally compete on the basis of price, location, quality and variety of products, service and store condition. The Company regularly monitors 47 its competitors' prices and adjusts its prices and marketing strategy in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use those resources to take steps which could adversely affect the Company's competitive position. The Company's principal supermarket competitors in the Salt Lake City market are Albertson's, Ream's Food Stores, Harmons, Fred Meyer, and Dan's Foods. In the Phoenix market, the Company's principal supermarket competitors include Fry's, Bashas Markets, Safeway, ABCO, Albertson's and Mega Foods and, prior to the Merger, Smitty's. In Albuquerque, the Company's principal supermarket competitors are Furr's, Jewel Osco and Albertson's, and in Las Vegas, the Company's main supermarket competitors are Lucky, Vons and Albertson's. The Company also competes with various drug chains and other non-food operators in each of its markets. See "Risk Factors--Competition." EMPLOYEES AND LABOR RELATIONS The Company's policy is to train and develop its employees and promote from within. The Company generally prefers to promote its own employees to store manager positions. Management-level employees, including store department managers, participate in incentive compensation programs tied to profitability, and such compensation programs can represent a significant percentage of such managers' total compensation. The Company believes that its employee retention rate is high within the industry, especially at the store manager level and above. Excluding California operations, as of December 30, 1995, Smith's employed approximately 16,000 persons, approximately 53% of whom were full-time and 47% of whom were part-time. Approximately 42% of the Company's employees are unionized. The Company's unionized employees work under 15 collective bargaining agreements with local labor unions, primarily in Arizona, Nevada and New Mexico, which typically have three-year terms. Management of the Company believes that it will be able to renew existing agreements on terms satisfactory to the Company. If it is unable to do so, however, there could be a material adverse effect on the Company's operations. The wages and benefits provided in the Company's collective bargaining agreements are substantially similar to those of its supermarket competitors. The Company has not experienced a work stoppage in the past ten years and considers its relations with its employees and labor unions to be satisfactory. As of January 14, 1996, Smitty's employed approximately 4,600 people, of whom approximately 36% were full-time and approximately 64% were part-time. Approximately 4,100 employees working in the stores, constituting approximately 89% of Smitty's employees, are covered by a collective bargaining agreement that expires in October 1997. Smitty's has not experienced a work stoppage in the past ten years and considers its relations with its employees and labor unions to be satisfactory. From time to time the Company's unions and other employees have made, and in the future may make, claims concerning various matters pertaining to compensation, terms of employment or other related matters. While such claims could be substantial, such claims have not had, and are not expected to have, a material adverse effect on the Company. See also "--California Divestiture." PROPERTIES As of March 30, 1996, after giving effect to the Merger and the California Divestiture, the Company would have owned 107 of its 146 operating stores, including the underlying land with respect to 97 of such owned stores. The Company's stores are located throughout a seven-state area as follows:
STATE STORES OWNED STORES LEASED TOTAL ----- ------------ ------------- ----- Arizona.................................. 39 17 56 Utah..................................... 30 5 35 Nevada................................... 12 10 22 New Mexico............................... 15 4 19 Idaho.................................... 4 1 5 Wyoming.................................. 3 2 5 Texas.................................... 4 0 4 --- --- --- Total.................................. 107 39 146 === === ===
48 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 49 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. On January 8, 1996, the Company sent 60-day WARN Act notices to its California employees in connection with the California Divestiture. In many circumstances, the Company's stores were closed prior to the expiration of the required 60-day period, making the Company responsible for the pay associated with the number of shortfall days, which the Company duly paid. Certain labor unions in California are asserting a claim for additional compensation to many of the Company's California employees on the theory that the WARN Act notice shortfall payments were not properly calculated by the Company. In addition, as a result of the California Divestiture, such unions have asserted that Smith's is liable for a retroactive payment to the health and welfare benefit trust(s) associated with the unions by virtue of the union contract. The Company does not believe that the unions' claims are meritorious and intends to contest them vigorously. The Company does not believe that these claims will have a material adverse effect on its financial condition or results of operations. CALIFORNIA SALE-LEASEBACK FINANCING In order to finance its Riverside, California distribution center and eight of its California stores the Company completed a sale-leaseback financing (the "Sale-Leaseback Financing") in 1994. Pursuant to such financing, the Company sold a portion of its interest in the properties to an owner trustee and entered into an operating lease for each property. In order to provide the financing for owner trustee's purchase of the properties, the Company filed a registration statement with the Commission pertaining to a public offering of $152.4 million of pass through certificates. Each of the pass through trusts issuing the certificates used the proceeds of the offering to acquire notes from the owner trustee (which in turn used the proceeds to acquire its interest in the properties from the Company). Neither the notes nor the pass through certificates are obligations of, nor are they guaranteed by, the Company and, accordingly, are not reflected as indebtedness or other liabilities of the Company under generally accepted accounting principles. Under the terms of the Sale-Leaseback Financing, the Company may terminate its lease with respect to the various California properties if it deems such properties to be obsolete, uneconomic for use or surplus to the Company's needs. In connection with any such termination, the Company may elect to satisfy all of the rights and obligations of the owner trustee in respect of the related notes by exchanging such notes for (a) if the property is sold to a party other than the Company, unsecured, full recourse securities of the Company or (b) if such property is sold to the Company, secured, full recourse securities of the Company. In addition, the Company may substitute other properties (including properties located outside California) for properties which it deems to be obsolete, uneconomic for use or surplus to its needs. The substitute properties must have a fair market value, utility and useful life equal to or greater than that of the substituted property. The Company would not be required to assume any indebtedness in connection with such a substitution. Any such exchange or substitution may be made by the Company only if certain conditions are satisfied. In April 1996, the Company received a letter from a holder of pass through certificates pointing out an inaccurate statement in the 1994 pass through certificate prospectus. The letter referred to a statement in the prospectus disclosing that holders of the certificates would not receive any covenant protection in the event of a highly leveraged transaction involving the Company, including any transaction resulting in a change of control. The prospectus went on to state that none of the then-outstanding indebtedness of the Company contained 50 provisions affording holders of such indebtedness protection in the event of a change of control, which was characterized in the letter as a material representation. At the date of such prospectus, a substantial amount of the Company's then-existing indebtedness did contain such change of control provisions. The Company has pointed out to the holder that consummation of the Transactions will not result in a change of control of the Company under the terms of such existing debt instruments although the indebtedness under such debt instruments will be repaid in order to remove certain financial and other covenants contained therein that would otherwise hinder the Company's ability to consummate the Transactions. The Company is currently reviewing the relevant facts and circumstances. The letter suggested that all interested parties be made aware of the existence of the alleged misrepresentation, but made no specific claim or demand on the Company. Although no assurances can be given, the Company does not believe that any claims by the holders of the pass through certificates, if made, would have a material adverse effect on the Company or its ability to complete the California Disposition. ENVIRONMENTAL MATTERS The Company is subject to a variety of environmental laws, rules, regulations and investigative or enforcement activities, as are other companies in the same or similar business. The Company believes it is in substantial compliance with such laws, rules and regulations. These laws, rules, regulations and agency activities change from time to time, and such changes may affect the ongoing business and operations of the Company. The Company, from time to time, has or may in the future receive requests from environmental regulatory authorities to provide information or to conduct investigation or remediation activities. None of these requests is expected by management to have a material adverse effect on the Company's business. GOVERNMENTAL REGULATION The Company is subject to regulation by a variety of governmental authorities, including federal, state and local agencies which regulate the distribution and sale of alcoholic beverages, pharmaceuticals, milk and other agricultural products, as well as various other food and drug items and also regulate trade practices, advertising, building standards, labor, health, safety and environmental matters. The Company from time to time receives inquiries from state and federal regulatory authorities with respect to its comparative advertising practices, pricing policies, employment practices and other trade practices. None of these inquiries, individually or in the aggregate, has resulted, or is expected by management to result, in any order, judgment, fine or other action that has, or would have, a material adverse effect on the business or financial position of the Company. TRADE NAMES, SERVICE MARKS AND TRADEMARKS The Company uses a variety of trade names, service marks and trademarks in its business including "Smith's," "Smith's Food & Drug Centers," "Mountain Dairy," "Creek View," "PriceRite," and numerous others. While the Company believes its trademarks are important to its business, except for "Smith's," "Smith's Food & Drug Centers," "PriceRite" and, following the Merger, "Smitty's," "Smitty's Super Valu" and "Shoppers Passport," the Company does not believe any of such trademarks are, or will be, critical to its business. LEGAL PROCEEDINGS The Company, in the ordinary course of its business, is party to various legal actions. Management believes these are routine in nature and incidental to the operations of the Company. Management believes that the outcome of any proceedings to which the Company is currently a party will not, individually or in the aggregate, have a material adverse effect on the operations or financial condition of the Company. 51 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.................... 33 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. 52 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. 53 CLASSIFIED BOARD OF DIRECTORS The Amended and Restated Certificate of Incorporation of the Company will provide that the full Board of Directors will be comprised of seven directors and, without the unanimous approval of the directors then in office, the number of directors may not be altered. The Board of Directors will be divided into three classes as nearly equal in number as possible, with the term of office of one class expiring each year and each director serving for a term ending at the third annual meeting of stockholders of the Company following the annual meeting at which such director was elected, except for the directors to be elected at the Company's 1996 annual meeting of stockholders, who shall have the one, two or three-year term for which such directors are elected at such meeting. Any increase in the number of directors or any vacancy on the Board of Directors may be filled, subject to the rights of any holders of any series of Preferred Stock to elect additional directors, only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or such vacancy occurred. 54 PRINCIPAL STOCKHOLDERS The following table provides certain information regarding ownership of the Company's voting securities as of April 15, 1996, giving effect to the Transactions. The table has been prepared based on the assumptions that (a) 50% of the outstanding Common Stock of each holder is purchased pursuant to the Tender Offer, (b) 3,000,000 shares of Series I Preferred Stock are purchased by the Company from the Dee Glen Smith Marital Trust I (2,100,000 shares) and Ida Smith (900,000 shares), and (c) 2,101,377 shares of Series I Preferred Stock are directly or indirectly conveyed by the Dee Glen Smith Marital Trust I to certain institutions. Based on such assumptions and giving effect to the foregoing events, the following table sets forth the ownership of Common Stock and Series I Preferred Stock of the Company by each person who to the knowledge of Smith's will own 5% or more of any class of the Company's outstanding voting stock, by each person who will be a director or executive officer of the Company, and by all executive officers and directors of the Company as a group. Share amounts and percentage ownership information set forth below are subject to change pending finalization of the Recapitalization and may vary depending on the actual number and class of shares tendered in the Tender Offer. The actual number of shares of Series I Preferred Stock which (x) the Company elects to purchase and/or (y) the Dee Glen Smith Marital Trust I directly or indirectly conveys to other parties in connection with the consummation of the Transactions may be increased or decreased by amounts that are not expected to have a material adverse effect on the Company.
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 * 3,253,623(c) 32.7 29.5 Dee Glen Smith Marital Trust I c/o Ida W. Smith 1066 North East Capital Blvd. Salt Lake City, UT 84103................... 231,210(d) 4.1 -- -- 3,253,623(d) 32.7 20.8 Richard D. Smith 1550 South Redwood Road Salt Lake City, UT 84104................... 1,174,463(e) 20.7 -- -- -- -- 7.0 Fred L. Smith 74285 Quail Lake Dr. Indian Wells, CA 92210.. 957,498(f) 16.8 -- -- -- -- 5.7 Trust for the Children of Jeffrey P. Smith 2551 Brentwood Circle Salt Lake City, UT 84121................... 577,650(d) 10.2 -- -- -- -- 3.5 Trust for the Children of Fred L. Smith 74285 Quail Lake Dr. Indian Wells, CA 92210.. 577,650(g) 10.2 -- -- -- -- 3.5 Trust for the Children of Richard D. Smith 1038 North East Capital Blvd. Salt Lake City, UT 84103................... 557,650(h) 9.8 -- -- -- -- 3.3 Corporation of the President of the Church of Jesus Christ of Latter-day Saints 50 East North Temple Salt Lake City, UT 84150................... -- -- -- -- 2,000,009 20.1 12.0 University of Utah Athletic Department 407 Park Building Salt Lake City, UT 84112................... -- -- -- -- 1,267,731 12.7 7.6 University of Utah Medical School 407 Park Building Salt Lake City, UT 84112................... -- -- -- -- 1,000,000 10.0 6.0 Utah State University Athletic Department Logan, UT 84322......... -- -- -- -- 833,646 8.4 5.0
55
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... -- -- 2,225,406(i) 22.3 -- -- 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 2,274,323 22.8 3,253,623 32.7 37.9
- -------- * Less than one-percent. (a) Each person has sole investment and voting power with respect to the shares indicated, except as otherwise set forth in the footnotes to this table. Each share of Class A Common Stock is convertible at any time at the option of the holder into one share of Class B Common Stock. (b) Includes 771,055 shares which are held of record by four trusts of which Jeffrey P. Smith is the trustee and of which his children and the children of Richard D. Smith are beneficiaries, and 231,210 shares held of record by a trust for benefit of Ida W. Smith and of which Mr. Smith is trustee. (c) Such shares are held of record by a trust for the benefit of Ida W. Smith and of which Jeffrey P. Smith is trustee. (d) Included in the shares shown for Jeffrey P. Smith. (e) Includes 733,501 shares which are held of record by four trusts of which Richard D. Smith is trustee and of which his children and the children of Jeffrey P. Smith are beneficiaries and 5,871 shares held of record by Mr. Smith's wife. (f) Includes 679,389 shares which are held of record by four trusts of which Fred L. Smith is trustee and of which his children are beneficiaries, and 17,600 shares held of record by Mr. Smith's wife. (g) Included in the shares shown for Fred L. Smith. (h) Included in the shares shown for Richard D. Smith. (i) Includes 100,000 shares to be issued to Yucaipa as a prepayment of a portion of the management fees payable to Yucaipa under the Management Services Agreement and 2,125,406 shares held of record by the following four limited partnerships of which Yucaipa is the general partner: Yucaipa SSV Partners, L.P. (1,140,816); Yucaipa Smitty's Partners, L.P. (300,667); Yucaipa Smitty's Partners II, L.P. (136,793); and Yucaipa Arizona Partners, L.P. (547,130). Mr. Burkle is a limited partner in two of those partnerships and is also the controlling general partner of Yucaipa. Linda McLoughlin Figel, a nominee for director of the Company, is a limited partner in Yucaipa SSV Partners, L.P. Mr. Standley, who will be the Senior Vice President, Administration of the Company following the Merger, is a limited partner in Yucaipa Smitty's Partners, L.P. and Yucaipa Smitty's Partners II, L.P. (j) Such shares are held of record by a trust for the benefit of Mr. Martindale and his wife and of which Mr. Martindale is trustee. (k) Includes 3,500 shares held of record by two children of Mr. Martindale and of which Mr. Martindale is custodian. (l) Includes 4,800 shares held of record by two children of Mr. Martindale and of which Mr. Martindale is custodian. (m) Includes 15,000 shares issuable upon exercise of vested options as of April 15, 1996. (n) Such shares are held of record by a trust for the benefit of Mr. Gilbert and his wife and of which Mr. Gilbert is trustee. (o) Includes 500 shares held of record by a child of Mr. Hallsey and of which Mr. Hallsey is custodian. (p) Includes 5,119 shares held of record by a partnership of which Mr. Bylski is a general partner and 600 shares held of record by children of Mr. Bylski and of which Mr. Bylski is custodian. 56 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT SERVICES AGREEMENT Yucaipa will provide certain management services to the Company pursuant to the Management Services Agreement to be executed upon consummation of the Transactions. The Management Services Agreement will have a five-year term and will provide for annual management fees of $1,000,000, plus reimbursement of all of Yucaipa's reasonable out-of-pocket costs and expenses. Under the Management Services Agreement, Yucaipa, through its partners, employees or other designated agents, will provide the Company with management consultation and advice regarding strategic planning and development, budgeting and future financing plans, selection and retention of management personnel, integration strategy, legal and governmental affairs, board presentations and similar management services as may be requested from time to time. In addition, the Company may retain Yucaipa in an advisory capacity in connection with certain acquisitions or sale transactions, debt and equity financings, or any other services not otherwise covered by the Management Services Agreement, for which the Company will pay Yucaipa additional compensation in an amount to be agreed upon by the Company and Yucaipa (and approved by a majority of the Company's disinterested directors). The Company will prepay a portion of the management fees payable to Yucaipa under the Management Services Agreement through the issuance of 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 57 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 58 Stock to be acquired from the Company pursuant to the Warrant Agreement, other than to another member of the Yucaipa Group or their respective affiliates in any transaction or series of transactions that would result in a transfer of greater than 3% of the Combined Voting Power or would result in any person having, or having the right to acquire, beneficial ownership greater than 5% of the Combined Voting Power, (iii) solicit any proxies, or assist any other person in any way in solicitation of proxies, or submit any proposal for the vote of stockholders of the Company, or induce another person to take any such actions with respect to the voting of any of the Company Voting Securities, (iv) directly or indirectly solicit or induce any person to bid for or acquire Company Voting Securities in excess of 5% of the Combined Voting Power of Company Voting Securities, or (v) engage in certain affiliate transactions. Pursuant to the Standstill Agreement, the Company will use its best efforts to cause to be elected to the Company's Board of Directors two designees of the Smith Group, two designees of the Yucaipa Group, one member of the senior management of the Company and two "independent directors" (as required by the rules of the NYSE) who are also Disinterested Directors. Subject to the provisions of the Certificate of Incorporation and By-laws of the Company and the approval of the Company's stockholders, as long as the members of the Smith Group and the Yucaipa Group and their respective affiliates each beneficially own at least 8% of the outstanding shares of Common Stock, each such Group will have the right to designate two directors of the Company, and so long as the members of the Smith Group and the Yucaipa Group and their respective affiliates each beneficially own at least 5% of the outstanding shares of Common Stock, each such Group will have the right to designate one director of the Company. However, no individual who is an officer, director, partner, or principal stockholder of any Significant Competitor (as defined in the Management Services Agreement) of the Company or any of its subsidiaries will serve as director. At any time when the Yucaipa Group and its affiliates or the Smith Group and its affiliates no longer beneficially own at least 5% of the outstanding shares of Common Stock, such Group will not have the right to designate any director of the Company, such Group's rights with regard to the voting of Company securities will terminate and such Group will cause its designees to the Board of Directors to resign. Jeffrey Smith and Fred Smith have been nominated to be directors of the Company as designees of the Smith Group and Ronald Burkle and Linda McLoughlin Figel have been nominated to be directors of the Company as designees of the Yucaipa Group. In addition, each of the Smith Group and the Yucaipa Group has agreed that they each will, at any annual or special meeting of the stockholders at which the directors of the Company are to be elected or in connection with a solicitation of consents through which directors of the Company are to be selected, to vote (or give a written consent with respect to) all of their respective Company Voting Securities in favor of the election to the Company's Board of Directors of the nominees designated by such other Group. The Standstill Agreement will terminate at any time that the Yucaipa Group and its affiliates own less than 2% of the outstanding shares of Common Stock. The Standstill Agreement may be amended or waived if such amendment or waiver is in writing and executed by all parties thereto; provided that any amendment or waiver requires the approval of a majority of the Disinterested Directors of the Company. YUCAIPA WARRANT Upon closing of the Recapitalization, the Company has agreed to issue Yucaipa warrants to purchase shares of Class C Common Stock of the Company (the "Warrants") representing approximately 10% of the outstanding shares of Common Stock on a fully diluted basis upon consummation of the Transactions. The initial exercise price of the Warrants will be $50.00 per share. One-half of the Warrants will be designated "Series A Warrants" and will be exercisable at the election of Yucaipa on or prior to the fourth anniversary of the Closing, and one-half of the Warrants will be designated "Series B Warrants" and will be exercisable at the election of Yucaipa on or prior to the fifth anniversary of the Closing. The foregoing expiration dates will each be extended by five years in the event that, prior to such respective dates, the market price of Class B Common Stock equals or exceeds the exercise price (as adjusted from time to time) for a period of not less than 60 consecutive trading 59 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 60 effective, and the reasonable fees and expenses of any party to the Registration Rights Agreement who participates in any registration effected thereunder. In addition, the Company will provide a customary securities law indemnification to any party who participates in any registration effected under the Registration Rights Agreement. The Registration Rights Agreement will terminate upon the earlier to occur of (i) the mutual agreement by the parties thereto, (ii) with respect to any Holder, such Holder ceasing to own any Registrable Securities, (iii) the fifteenth anniversary of the Closing Date, or (iv) with respect to the Smith Holder Group or the Yucaipa Holder Group, the date on which the aggregate number of shares of outstanding Registrable Securities held by the Smith Holder Group or the Yucaipa Holder Group, as applicable, is less than 20% of the Registrable Shares originally held by the Smith Holder Group or the Yucaipa Holder Group, as applicable, immediately following the consummation of the Transactions (except with respect to any Holder that is an "affiliate" of the Company within the meaning of the Securities Act). OTHER TRANSACTIONS WITH YUCAIPA OR ITS AFFILIATES Pursuant to the Recapitalization Agreement, Yucaipa will receive a success fee of $15 million upon consummation of the Offering and the Recapitalization. In December 1995, the Company entered into an agreement to sublease its Riverside, California distribution center and dairy processing plant to Ralphs, an affiliate of Yucaipa. Pursuant to the sublease, Ralphs will pay the Company annual rent of approximately $8.8 million for the remaining 23-year term of the lease. In connection with such transaction, Ralphs purchased certain inventory, fixtures and equipment from the Company for an aggregate purchase price (net of certain offsetting payments) of approximately $8.7 million. As part of the California Divestiture, in January 1996 the Company entered into agreements to lease or sublease certain of its real property located in California, including eight operating stores and one non-operating store, to Ralphs, an affiliate of Yucaipa. See "Business--California Divestiture." CEO'S SEVERANCE AGREEMENT The Company and Jeffrey Smith, the Chairman and Chief Executive Officer of the Company, have reached an agreement in principle regarding the termination of his employment with the Company. Although Mr. Smith will resign as the Chief Executive Officer of the Company, he will continue as Chairman of the Board after the consummation of the Transactions. Mr. Smith and the Company have tentatively agreed to provide Mr. Smith, as a severance payment, with the ownership of the Company airplane after the consummation of the Transactions. The airplane has an appraised value of approximately $2 million. COMPANY'S STOCK OPTIONS; DEFERRED COMPENSATION PLANS In the Recapitalization Agreement, the Company has agreed to offer employees who hold options under the Company's 1989 Amended Stock Option Plan ("Options") immediately prior to the Closing Date, the opportunity to elect either to: (i) receive on the Closing Date cash payments with respect to half of the shares subject to the Options in an amount equal to (A) the number of shares of Common Stock that would be received by such holder upon exercise of one-half of such Options multiplied by $36.00 per share minus (B) the aggregate exercise price of such Options, and, in consideration of such payments, to execute amendments to each existing option agreement such that the remaining half of the shares subject to the Options will not be exercisable prior to the exercise date stated therein (without regard to the transactions contemplated by the Recapitalization Agreement) and will have the exercise price reduced from $19.00 to $15.00 per share of Common Stock; or (ii) have all such employees' Options continue to vest in accordance with the stated terms of the Options as in effect as of the date of the Recapitalization Agreement. Assuming that all of the Company's employees who hold Options make the election set forth in clause (i) above, the estimated aggregate value of the Company's proposed 61 treatment of the Options will be approximately $16.9 million (comprised of approximately $13.7 million representing the cash payment for half of the Options and $3.2 million representing the exercise price reduction for the remaining Options). Of such estimated aggregate value, approximately $252,000 will be for the account of members of the Smith Group and approximately $5.2 million will be for the account of the Company's other directors and executive officers who are not members of the Smith Group but who have indicated their intention to vote in favor of the Recapitalization Agreement. In addition, the Company has agreed to use all reasonable efforts to amend its deferred compensation agreements in effect as of the date of the Recapitalization Agreement with each of Frederick F. Urbanek, James A. Acton, Richard C. Bylski, Larry R. McNeill, Kenneth A. White, Matthew G. Tezak, Paul D. Tezak, James W. Hallsey, Michael C. Frei and Harry M. Moskal to provide that if within two years after the Closing Date the Company terminates such officer's employment without cause (as such term will be defined in such amendments to the reasonable satisfaction of such officers, the Company and Yucaipa), all of such officer's unvested benefits under his deferred compensation agreement will become immediately and fully vested. OTHER TRANSACTIONS During fiscal 1995, Smith's paid $217,524 in advertising fees to radio and television stations operated by subsidiary companies of Bonneville International Corporation ("Bonneville"). Rodney H. Brady, a former director of Smith's, serves as President and Chief Executive Officer of Bonneville, but has no role in Smith's advertising decisions. Also during fiscal 1995, Smith's paid $15,385 to an automobile dealership owned by Fred Smith, one of Smith's directors, in connection with the purchase of an automobile for use by Smith's. In January 1996, Alan R. Hoefer, a former director of Smith's, received consulting fees from the Company in an aggregate amount equal to $250,000 in connection with certain financial consulting services rendered by him in 1995. Smith's believes that the terms of the foregoing transactions were no less favorable to Smith's than those which could have been obtained from unaffiliated third parties. 62 DESCRIPTION OF NOTES GENERAL The Notes will be issued under an indenture (the "Indenture"), to be dated as of May 23, 1996, by and among the Company and Fleet National Bank of Connecticut, as Trustee (the "Trustee"). The following summary of certain provisions of the Notes and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Notes and the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the TIA. The definitions of certain capitalized terms used in the following summary are set forth below under "--Certain Definitions." A copy of the form of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The Notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders of Notes (the "Holders"). The Company will pay principal (and premium, if any) on the Notes at the Trustee's corporate office located in New York, New York. At the Company's option, interest may be paid at the Trustee's corporate trust office or by check mailed to the registered address of the Holders. As used below in this "Description of Notes," the "Company" means Smith's Food & Drug Centers, Inc., but not any of the Subsidiaries. PRINCIPAL AND MATURITY OF AND INTEREST ON THE NOTES The Notes are limited in aggregate principal amount to $575,000,000 and will mature on May 15, 2007. Interest on the Notes will accrue at the rates per annum set forth on the cover page of this Prospectus. Interest on the Notes will be payable semi-annually on each May 15 and November 15, commencing on November 15, 1996, to the Holders of record on the immediately preceding May 1 and November 1. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. OPTIONAL REDEMPTION The Notes will be redeemable, at the option of the Company, in whole at any time or in part from time to time, on and after May 15, 2001, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on May 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
REDEMPTION YEAR PRICE ---- ---------- 2001.......................................... % 2002.......................................... % 2003.......................................... % 2004 and thereafter........................... 100.0%
63 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 thereon subsequent to the occurrence of any Event of Default specified in clause (v) or (vii) of the first paragraph under "--Event of Default" related to the Company, whether or not such interest is an allowed claim enforceable against the Company under any Bankruptcy Law. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities upon any dissolution, winding up, total or partial liquidation or reorganization of the Company (including, without limitation, in bankruptcy, insolvency, or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of the Company's assets and liabilities and whether voluntary or involuntary), the holders of Senior Indebtedness shall first be entitled to receive payment in full in cash or Cash Equivalents of all amounts payable under Senior Indebtedness (including, with respect to Designated Senior Indebtedness, any interest accruing after the commencement of any such proceeding at the rate specified in the applicable Designated Senior Indebtedness whether or not such interest is an allowed claim enforceable against the Company in any such proceeding) before the Holders will be entitled to receive any payment with respect to the Notes (excluding Permitted Subordinated Reorganization Securities), and until all Obligations with respect to Senior Indebtedness are paid in full in cash or Cash Equivalents, any distribution to which the Holders would be entitled (excluding Permitted Subordinated Reorganization Securities) shall be made to the holders of Senior Indebtedness. 64 No direct or indirect payment (other than payments by a trust previously established pursuant to the provisions described under "--Defeasance of Indenture" below) or distribution of any asset of the Company of any kind or character by or on behalf of the Company of Obligations on the Notes or on account of the purchase or redemption or other acquisition of the Notes whether pursuant to the terms of the Notes or upon acceleration or otherwise shall be made if, at the time of such payment or distribution, there exists a default in the payment of all or any portion of principal of, premium, if any, or interest on (i) any Designated Senior Indebtedness or (ii) any other Senior Indebtedness which, at the time of determination, is equal to or greater than $50 million in aggregate principal amount ("Significant Senior Indebtedness") (and the Trustee has received written notice thereof), and such default shall not have been cured or waived by or on behalf of the holders of such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, or shall have ceased to exist, until such default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness or Significant Senior Indebtedness, as the case may be, shall have been discharged or paid in full in cash or Cash Equivalents, after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. In addition, during the continuance of any other event of default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated, upon the earlier to occur of (a) receipt by the Trustee of written notice from the holders of a majority of the outstanding principal amount of the Designated Senior Indebtedness or their representative, or (b) if such event of default results from the acceleration of the Notes, the date of such acceleration, no such payment (other than payments by a trust previously established pursuant to the provisions described under "--Defeasance of Indenture" below) or distribution of any asset of the Company of any kind or character shall be made by the Company upon or in respect of the Notes (including without limitation on account of any principal of, premium, if any, or interest on the Notes) or on account of the purchase or redemption or other acquisition of Notes for a period ("Payment Blockage Period") commencing on the earlier of the date of receipt of such notice or the date of such acceleration and ending 179 days thereafter (provided such Designated Senior Indebtedness shall theretofore not have been accelerated) (unless (x) such Payment Blockage Period shall be terminated by written notice to the Trustee from the holders of a majority of the outstanding principal amount of such Designated Senior Indebtedness or their representative who delivered such notice or (y) such default is cured or waived, or ceases to exist or such Designated Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents), after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. Notwithstanding anything herein to the contrary, in no event will a Payment Blockage Period extend beyond 179 days from the date on which such Payment Blockage Period was commenced. Not more than one Payment Blockage Period may be commenced with respect to the Notes during any period of 365 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the holders of such Designated Senior Indebtedness or their representative whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provisions referred to above, such failure would constitute an Event of Default under the Indenture and would enable the Holders to accelerate the maturity of the Notes. See "--Events of Default." By reason of such subordination, in the event of the insolvency of the Company, the Holders may recover less, ratably, than holders of Senior Indebtedness. At March 30, 1996, on a pro forma basis after giving effect to the Transactions and the California Disposition, the Company would have had approximately $813.2 million aggregate amount of Senior Indebtedness outstanding, which amount excludes any borrowings or amounts available to be borrowed under the New Revolving Facility. 65 In addition, the Notes will be effectively subordinated to all existing and future liabilities, including Indebtedness, of the Subsidiaries. At March 30, 1996, after giving pro forma effect to the Transactions and the California Disposition, the Subsidiaries would have had Indebtedness and other liabilities reflected on the Company's consolidated balance sheet (other than guarantees of Senior Indebtedness), including trade payables and accrued expenses, of approximately $143.0 million. The New Credit Facility permits the Company to pay interest on the Notes, subject to the subordination provisions of the Indenture, so long as no event of default or potential event of default has occurred under the New Credit Facility. CHANGE OF CONTROL The Indenture will provide that, upon the occurrence of a Change of Control, each Holder will have the right to require the repurchase of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase (the "Change of Control Offer Price"). The Indenture will provide that no later than 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. The Indenture shall require that notice of an event giving rise to a Change of Control shall be given on the same date and in the same manner to all Holders. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Payment Date. Each Change of Control Offer is required to remain open for at least 20 Business Days or such longer period as may be required by law. The Indenture will further provide that, notwithstanding the foregoing, prior to the mailing of the notice of a Change of Control Offer referred to above, within 30 days following a Change of Control, the Company shall either (a) repay in full all Indebtedness, and terminate all commitments, under the Credit Agreement (or offer to repay in full all such Indebtedness and terminate all such commitments and repay all such Indebtedness owed to each lender which has accepted such offer and terminate all such commitments of each such lender), or (b) obtain the requisite consents under the Credit Agreement to permit the repurchase of the Notes as provided above. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Notes pursuant to the provisions described above. The Company's failure to comply with the covenants described in this paragraph shall constitute an Event of Default under the Indenture. Notwithstanding the foregoing, the Company shall not be required to make a Change of Control Offer, as provided above, if, in connection with any Change of Control, it has made an offer to purchase (an "Alternate Offer") any and all Notes validly tendered at a cash price equal to or higher than the Change of Control Offer Price and has purchased all Notes properly tendered in accordance with the terms of such Alternate Offer. The Company must comply with Rule 14e-1 under the Exchange Act and other provisions of state and federal securities laws to the extent applicable in connection with a Change of Control Offer or an Alternate Offer. CERTAIN COVENANTS Except as otherwise specified below, the Indenture will contain, among other things, the following covenants: Limitation on Restricted Payments. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment if, at the time of such proposed Restricted Payment, or after giving effect thereto, (a) a Default or an Event of Default shall have occurred and be continuing, (b) the Company could not Incur $1.00 of additional Indebtedness pursuant to the proviso in the covenant described under "--Limitation on Incurrences of Additional Indebtedness" below or (c) the aggregate amount expended for all Restricted Payments, including such proposed Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment as determined in good faith by the Board of Directors of the Company as evidenced by a Board Resolution), 66 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 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 other than Permitted Indebtedness; provided, however, that if no Default with respect to payment of principal of, or interest on, the Notes or Event of Default shall have occurred and be continuing at the time or as a consequence of the Incurrence of any such Indebtedness, the Company or any Restricted Subsidiary may Incur Indebtedness if immediately after giving effect to the Incurrence of such Indebtedness the Operating Coverage Ratio would be greater than 2.0 to 1.0. Limitation on Liens. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien (other than Permitted Liens) that secures any Indebtedness of the Company which is expressly by its terms subordinated in right of payment to any other Indebtedness of the Company on any asset or property of the Company or any Restricted Subsidiary, unless the Notes are secured by a Lien on such asset or property that is (x) pari passu with such other Indebtedness if such other Indebtedness is pari passu with the Notes or (y) if such other Indebtedness is subordinated to the Notes, senior in priority to the Lien securing such other Indebtedness, in each case, until such time as such obligations are no longer secured by a Lien. Limitation on Asset Sales. The Indenture will provide that the Company shall not, and shall not permit any Restricted Subsidiary to, consummate an Asset Sale unless (a) the Company or such Restricted Subsidiary, as 67 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 68 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 69 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 70 all of the assets of, any Guarantor, which sale or disposition is otherwise in compliance with the Indenture, in each case, such Guarantor shall be deemed released from all its obligations under its Guarantee without any further action required on the part of the Trustee or any Holder. The obligations of each Guarantor under its Guarantee shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Guarantor under such Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in a pro rata amount based on the relative net assets of each Guarantor. Limitation on Preferred Stock of Restricted Subsidiaries. The Indenture will provide that the Company shall not permit any of the Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a wholly owned Restricted Subsidiary) or permit any Person (other than the Company or a wholly owned Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. Limitation on Mergers and Certain Other Transactions. The Indenture will provide that the Company, in a single transaction or through a series of related transactions, shall not (i) consolidate with or merge with or into any other Person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another Person or group of affiliated Persons or (ii) adopt a Plan of Liquidation, unless, in either case, (1) either the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any state thereof or the District of Columbia, and shall expressly assume, by supplemental indenture, all the obligations of the Company under the Indenture and the Notes; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in connection therewith, the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction; and (3) immediately before and immediately after giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing. The Indenture will provide that upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company or any adoption of a Plan of Liquidation by the Company in accordance with the foregoing, the surviving Person formed by such consolidation or into which the Company is merged or to which such transfer is made (or, in the case of a Plan of Liquidation, to which assets are transferred) shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such surviving Person had been named as the Company therein; provided, however, that solely for purposes of computing amounts described in subclause (c) of the first paragraph of the covenant described under "--Limitation on Restricted Payments" above, any such surviving Person shall be deemed to have succeeded to and be substituted for the Company only with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. 71 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 72 of Control," "--Certain Covenants--Limitation on Restricted Payments," "-- Limitation on Asset Sales" and "--Limitation on Mergers and Certain Other Transactions," which shall constitute Events of Default with notice but without passage of time); (iv) there shall be a default under any Indebtedness of the Company or any Restricted Subsidiary, whether such Indebtedness now exists or shall hereinafter be created, if both (A) such default either (1) results from the failure to pay any such Indebtedness at its stated final maturity or (2) relates to an obligation other than the obligation to pay such Indebtedness at its stated final maturity and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated final maturity and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at stated final maturity or the maturity of which has been so accelerated, aggregates $20 million or more at any one time outstanding; (v) any final judgment or order of any court, regulatory agency, administrative agency, or other body of competent jurisdiction 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 will provide that if a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder notice of the Default or Event of Default within 90 days 73 after such Default or Event of Default occurs; provided, however, that, except in the case of a Default or Event of Default in the payment of the principal of or interest on any Notes, including the failure to make payment on a Change of Control Payment Date pursuant to a Change of Control Offer or payment when due pursuant to a Net Proceeds Offer, the Trustee may withhold such notice if it in good faith determines that withholding such notice is in the interest of the Holders. The Indenture provides that no Holder may pursue any remedy thereunder unless the Trustee (i) shall have failed to act for a period of 60 days after receiving written notice of a continuing Event of Default by such Holder and a request to act by Holders of at least 25% in principal amount of Notes and (ii) has received indemnification satisfactory to it; provided, however, that such provision does not affect the right of any Holder to sue for enforcement of any overdue payment of principal of, premium, if any, or interest on, Notes. The Indenture provides that two officers of the Company are required to certify to the Trustee within 120 days after the end of each fiscal year of the Company whether or not they know of any Default that occurred during such fiscal year and, if applicable, describe such Default and the status thereof. DEFEASANCE OF INDENTURE The Company may, at its option and at any time, elect to have the obligations of the Company discharged with respect to the outstanding Notes ("Legal Defeasance"). Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the Notes except for (i) the rights of Holders of Notes to receive payments in respect of the principal of, premium, if any, and interest on Notes when such payments are due solely from the funds held by the Trustee in the trust referred to below; (ii) the Company's obligations to issue temporary Notes, register the transfer or exchange of Notes, replace mutilated, destroyed, lost or stolen Notes and maintain an office or agency for payments in respect of Notes and money for security payments held in trust in respect of Notes; (iii) the rights, powers, trusts, duties and immunities of the Trustee and the Company's obligations in connection therewith; and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time elect to have the obligations of the Company released with respect to certain covenants described above under "--Certain Covenants" ("Covenant Defeasance"), and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must have irrevocably deposited with the Trustee, in trust, for the benefit of the Holders, cash in U.S. dollars, U.S. Government Obligations (as defined in the Indenture), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding Notes to redemption or maturity provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes on the maturity date or such redemption date, as the case may be; (ii) the Company shall have delivered to the Trustee one or more opinions of independent counsel to the effect that (A) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance or Covenant Defeasance, as the case may be, and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance or Covenant Defeasance, as the case may be, had not occurred (which opinion, in the case of Legal Defeasance, shall be based upon a change in the applicable federal income tax law since the Issue Date or a ruling received from or published by the Internal Revenue Service), (B) after the 91st day following the deposit the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and will not be subject to any rights of holders of Senior Indebtedness and (C) the deposit will not cause the Trustee or the trust so created to be subject to the Investment Company Act of 1940; (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (vi) and (vii) under the first paragraph under "--Events of Default" above are concerned, at any time in the period ending on the 91st day after the date of deposit; (iv) such Legal Defeasance or Covenant Defeasance shall not cause the 74 Trustee to have a conflicting interest with respect to the Notes; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, the Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound (and in that connection, the Trustee shall have received a certificate from the administrative agent under the Credit Agreement to that effect with respect to such Credit Agreement if then in effect); (vi) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or Covenant Defeasance, have been complied with. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect as to all outstanding Notes, when either (a) all Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust and thereafter repaid to the Company) have been delivered to the Trustee for cancellation; or (b)(i) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise and the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on Notes not theretofore delivered to the Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption; (ii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which it is bound; (iii) the Company has paid all sums payable by it under the Indenture; and (iv) the Company has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of Notes at maturity or the redemption date, as the case may be. In addition, the Company must deliver an officers' certificate and an opinion of counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been complied with. MODIFICATION OF THE INDENTURE The Indenture, the Notes or any Guarantee (if any), may be amended or supplemented (and compliance with any provision thereof may be waived) by the Company, the Guarantors (if any), the Trustee and the Holders of not less than a majority in aggregate principal amount of Notes then outstanding, without any notice to any other Holder, except that (i) without the consent of each Holder of Notes affected, no such amendment, supplement or waiver may (1) change the principal amount of the Notes the Holders of which must consent to an amendment, supplement or waiver of any provision of the Indenture, the Notes or any Guarantee (if any), (2) reduce the rate or extend the time for payment of interest on any Notes, (3) reduce the principal amount of any Notes, (4) change the Maturity Date or alter the redemption provisions in the Indenture or the Notes in a manner adverse to any Holder, (5) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders or the rights of Holders to recover the principal of, interest on or redemption payment with respect to any Notes, (6) make the principal of, or interest on, any Notes payable with anything or in any manner other than as provided for in the Indenture and the Notes or any Guarantee (if any), or (7) modify the subordination provisions of the Indenture (including certain related definitions) so as to adversely affect the ranking of any Note or any Guarantee (if any); provided, however, that it is understood that any amendment the purpose of which is to permit the Incurrence of additional Indebtedness under the Indenture shall not be construed as adversely affecting the ranking of any Note or any Guarantee (if any) and (ii) without the consent of Holders of not less than 66 2/3% in aggregate principal amount of Notes then outstanding, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of Notes pursuant to the covenant described under "--Change of Control" above in a manner adverse to any Holder or waive a Default or Event of Default resulting from a failure to comply with the covenant described under "--Change of Control" above. 75 In addition, the Indenture and the Notes may be amended by the Company, the Guarantors (if any) and the Trustee, together, (a) to cure any ambiguity, defect or inconsistency therein; provided that such amendment or supplement does not adversely affect the rights of any Holder or (b) to make any other change that does not adversely affect the rights of any Holder in any material respect. THE TRUSTEE The Indenture will provide that the Holders of a majority in principal amount of the outstanding Notes may remove the Trustee and appoint a successor trustee with the Company's consent, by so notifying the trustee to be so removed and the Company. In addition, the Holders of a majority in principal amount of the outstanding Notes have the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Indenture will provide that, if a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in the exercise thereof, as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. Subject to the latter provision, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless they shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred thereby. If the Company fails to pay such amounts of principal of, premium, if any, or interest on, the Notes as shall have become due and payable upon demand as specified in the Indenture, the Trustee, at the request of the Holders of a majority in aggregate principal amount of Notes at the time outstanding, and upon being offered such reasonable indemnity as it may be required against the costs, expenses and liabilities incurred by it, except as a result of its negligence or bad faith, shall institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and collect in the manner provided by law the monies adjudged or decreed to be payable. The Indenture will contain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases or to be realized on certain property received by it in respect of any such claims, securities or otherwise. The Trustee is permitted to engage in other transactions; however, if the Trustee acquires any "conflicting interest," it must eliminate such conflict or resign. CERTAIN DEFINITIONS "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing; provided that Bankers Trust New York Corporation and The Chase Manhattan Bank, N.A. and their respective Affiliates shall not be considered to be Affiliates of the Company or any of its Subsidiaries. So long as the Management Services Agreement is in effect or Yucaipa (together with its Affiliates) owns voting securities representing more than 10% of the total voting power of the then outstanding voting securities entitled to vote on a regular basis for the Board of Directors of the Company, Yucaipa and its Affiliates shall be deemed Affiliates of the Company. "Asset Sale" means any sale, transfer or other disposition or series of sales, transfers or other dispositions by the Company or any Restricted Subsidiary (including, without limitation, any merger or consolidation of any Restricted Subsidiary with or into another Person (other than the Company or any wholly owned Restricted Subsidiary) whereby such Restricted Subsidiary shall cease to be a Restricted Subsidiary) to any Person (other than to the Company or a wholly owned Restricted Subsidiary) of any assets of the Company or any Restricted Subsidiary, including, without limitation, assets consisting of any Capital Stock or other securities held by the Company or any Restricted Subsidiary, and any Capital Stock issued by any Restricted Subsidiary, in each case, outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions (i) resulting in Net Proceeds to the Company and the Restricted 76 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 77 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 78 amended, or Statement of Financial Accounting Standards No. 121, (vi) all other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) all severance, deferred compensation or other employee termination costs, (C) up to $20 million of compensation expenses resulting from the repurchase or amendment of certain management stock options, (D) all debt refinancing premiums and (E) any other reserves or charges (provided, however, that any net cash payments actually made (after-tax) with respect to the liabilities for which such reserves or charges were created shall be deducted from Consolidated Net Income in the period when made), in each case under this clause (vii), recorded by the Company or any Restricted Subsidiary in connection with the Transactions and the California Disposition, including, without limitation, the integration of operations in the State of Arizona, (viii) losses incurred by the Company and the Restricted Subsidiaries resulting from earthquakes and (ix) with respect to the Company and the Restricted Subsidiaries, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. "Consolidated Net Worth" means, with respect to any Person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such Person and its Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP. "Credit Agreement" means the Credit Agreement, dated as of the Issue Date, by and among the Company as borrower, its subsidiaries as guarantors, the Lenders referred to therein, Bankers Trust Company and The Chase Manhattan Bank, as arrangers, and Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness Incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or any such prior agreement as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all related or ancillary documents, including, without limitation, any guarantee agreements and security documents. The Company shall promptly notify the Trustee of any such refunding or refinancing of the Credit Agreement. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event or condition that is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (i) in the event any Indebtedness is outstanding under the Credit Agreement, all Senior Indebtedness under the Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit Agreement, any other issue of Senior Indebtedness which (a) at the time of the determination is equal to or greater than $50 million in aggregate principal amount and (b) is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For purposes of this definition, the term "Credit Agreement" shall not include any agreement governing Indebtedness Incurred to refund, replace or refinance borrowings or commitments under the Credit Agreement other than any such agreements governing Indebtedness Incurred to refund, replace or refinance the entirety of the borrowings and commitments then outstanding or permitted to be outstanding thereunder. "Disqualified Capital Stock" means, with respect to any Person, any Capital Stock of such Person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security into which it is convertible, puttable or exchangeable, is, or upon the happening of any event or the passage of time would be, required to be redeemed or repurchased by such Person or its subsidiaries, including at the option of the holder thereof, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date, or any other Capital Stock of such Person or its subsidiaries designated as Disqualified Capital Stock by such Person at the time of issuance; provided, however, that if such Capital Stock is either (i) redeemable or repurchasable solely at the option of such Person 79 or (ii) issued to employees of the Company or the Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated. "EBITDA" means, for any period, the Consolidated Net Income for such period, plus, in each case to the extent deducted in computing Consolidated Net Income for such period (without duplication) (i) provisions for income taxes or similar charges recognized by the Company and the Restricted Subsidiaries accrued during such period, (ii) depreciation and amortization expense of the Company and the Restricted Subsidiaries accrued during such period (but only to the extent not included in Consolidated Interest Expense), (iii) Consolidated Interest Expense of the Company and the Restricted Subsidiaries for such period, (iv) LIFO charges (credits) of the Company and the Restricted Subsidiaries for such period, (v) the amount of any restructuring reserve or charge recorded during such period in accordance with GAAP, including any such reserve or charge related to the Transactions or the California Disposition, less, without duplication, the amount of all net cash payments made by the Company and the Restricted Subsidiaries during such period to the extent that such cash payments have been provided for in a restructuring reserve or charge referred to in clause (v) above (and were not otherwise deducted in the computation of EBITDA for such period). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. "Existing Indebtedness" means all indebtedness of the Company and the Restricted Subsidiaries to the extent outstanding on the Issue Date after giving effect to the Transactions (other than Indebtedness under the Credit Agreement and the Indenture), including operating leases outstanding on the Issue Date that are, or may be, required under GAAP to be reported or reclassified after the Issue Date as Capitalized Lease Obligations. "Foreign Exchange Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. "Guarantor" means each Restricted Subsidiary, if any, which becomes a guarantor of the Notes in compliance with the provisions set forth under "-- Certain Covenants--Limitation on Subsidiary Assets and Indebtedness." "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligations or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings correlative to the foregoing). "Indebtedness" means with respect to any Person, without duplication, (i) all liabilities, contingent or otherwise, of such Person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) Incurred by such Person in the ordinary course of business of such Person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the Incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such Person; (iii) reimbursement obligations of such Person with respect to letters of credit; (iv) obligations of such Person with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such Person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such Person are subject, 80 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 81 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, 82 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); 83 d. Indebtedness Incurred by the Company or any Restricted Subsidiary in connection with expenditures in an aggregate principal amount not to exceed $25.0 million; provided that such expenditures relate solely to the integration of the operations of the Company, Smitty's and their respective subsidiaries as described in this Prospectus; e. Indebtedness of the Company Incurred under Foreign Exchange Agreements and Interest Swap Obligations entered into with respect to Indebtedness otherwise permitted to be Incurred under the covenant described under "-- Certain Covenants--Limitation on Incurrences of Additional Indebtedness" above, including this definition of "Permitted Indebtedness" (other than this clause (e)), in a notional amount not exceeding the aggregate principal amount of such Indebtedness; f. guarantees Incurred in the ordinary course of business by the Company or a Restricted Subsidiary of Indebtedness of any other Person in aggregate not to exceed $20.0 million at any time outstanding; g. Refinancing Indebtedness; h. Indebtedness of the Company or any Restricted Subsidiary for letters of credit relating to workers' compensation claims and self-insurance or similar requirements in the ordinary course of business; i. Existing Indebtedness; j. Indebtedness arising from guarantees of Indebtedness of the Company or any Restricted Subsidiary or other agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred in connection with the disposition of any business, assets or Restricted Subsidiary, other than guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition; provided that the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and the Restricted Subsidiary in connection with such disposition; k. obligations in respect of performance bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; l. guarantees by the Company or a Restricted Subsidiary of Indebtedness Incurred by the Company or a Restricted Subsidiary so long as the Incurrence of such Indebtedness by the Company or any such Restricted Subsidiary is otherwise permitted by the terms of the Indenture; m. Indebtedness Incurred by the Company in connection with the termination of a lease of, or the transfer to the Company or a third party of, the California assets leased by the Company from certain trusts and securing such trusts' obligations to the Smith's Food & Drug Centers, Inc. 1994-A Pass Through Trusts (the "Related Assets"); provided, however, that (i) if the Related Assets are transferred to the Company, the Company shall consummate an Asset Sale with respect to such Related Assets within 90 days after the Incurrence of such Indebtedness and shall apply the Net Proceeds of such Asset Sale to permanently reduce Pari Passu Indebtedness, Indebtedness of any Restricted Subsidiary or Senior Indebtedness, and (ii) if the Related Assets are transferred to any Person other than the Company or any Subsidiary, the Company shall, within 90 days after the Incurrence of such Indebtedness, apply any proceeds received from the owner trust in respect of such transfer of the Related Assets to permanently reduce Pari Passu Indebtedness, Indebtedness of any Restricted Subsidiary or Senior Indebtedness; provided, further, however, that up to $5.0 million in aggregate amount of Net Proceeds under clause (i) or proceeds under clause (ii) may be applied to repay outstanding borrowings under the revolving credit facility pursuant to the Credit Agreement without a corresponding reduction in commitments; and n. additional Indebtedness of the Company or any Restricted Subsidiary (together with the Indebtedness Incurred pursuant to clause (a)(ii) above) in an aggregate amount not to exceed $140.0 million at any time outstanding. 84 "Permitted Investment" by any Person means (i) any Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale made pursuant to the provisions of the covenant described under "--Certain Covenants--Limitation on Asset Sales" above or any other disposition of assets not constituting an Asset Sale by reason of the exceptions contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with the second paragraph of the covenant described under "--Certain Covenants-- Limitation on Transactions with Affiliates," (vi) Investments in the Company or the wholly owned Restricted Subsidiaries, (vii) guarantees by the Company or any Restricted Subsidiary of Indebtedness under the Credit Agreement and (viii) additional Investments in an aggregate amount not exceeding $15.0 million. "Permitted Liens" shall mean (i) Liens for taxes, assessments and governmental charges or claims not yet due or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other like Liens arising in the ordinary course of business, deposits made to obtain the release of such Liens, and with respect to amounts not yet delinquent for a period of more than 60 days or being contested in good faith by an appropriate process of law, and for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (iii) Liens incurred or pledges or deposits made in the ordinary course of business to secure obligations under workers' compensation, unemployment insurance and other types of social security or similar legislation; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, zoning or other restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of the Restricted Subsidiaries incurred in the ordinary course of business; (vi) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods in the ordinary course of business; (vii) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of nondelinquent customs duties in connection with the importation of goods; (ix) judgment and attachment Liens not giving rise to a Default or Event of Default; (x) leases or subleases granted to others not interfering in any material respect with the business of the Company or any Restricted Subsidiary; (xi) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business that are within the general parameters customary in the industry, in each case securing Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements and forward contracts, option futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any Restricted Subsidiary from fluctuations in the price of commodities; (xii) Liens encumbering deposits made in the ordinary course of business to secure nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or the Restricted Subsidiaries for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (xiii) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any Restricted Subsidiary in the ordinary course of business in accordance with past practices; (xiv) any interest or title of a lessor in the property subject to any lease, whether characterized as capitalized or operating other than any such interest or title resulting from or arising out of a default by the Company or any Restricted Subsidiary of its obligations under such lease; (xv) Liens arising from filing UCC financing statements for precautionary purposes in connection with true leases of personal property that are otherwise permitted under the applicable Indenture and under which the Company or any Restricted Subsidiary is lessee; (xvi) Liens in favor of the Trustee and any substantially equivalent Lien granted to any trustee or similar institution under any indenture governing Indebtedness permitted to be Incurred or outstanding under the Indenture; and (xvii) Liens securing Indebtedness permitted to be Incurred pursuant to clause (m) of the definition of Permitted Indebtedness above, provided that such Liens extend only to the Related Assets (as defined in such clause (m)). 85 "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 (x) Capital Stock (other than Disqualified Capital Stock with the reference to "Maturity Date" in the definition of such term modified to relate to the final stated maturity of any debt securities issued in such plan of reorganization to the holders of Designated Senior Indebtedness ("Senior Reorganization Securities")) or (y) debt securities of the Company which are (i) unsecured, (ii) have no scheduled mandatory amortization thereon prior to the final stated maturity of the Senior Reorganization Securities and (iii) are subordinated in right of payment to the Senior Reorganization Securities to at least the same extent as the Notes are subordinated to Designated Senior Indebtedness. "Permitted Transferees" means, with respect to any Person, (i) any Affiliate of such Person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such Person, (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such Person or his or her parents, spouse or lineal descendants, in each case to whom such Person has transferred the beneficial ownership of any securities of the Company, (iv) any investment account whose investment managers and investment advisors consist solely of such Person and/or Permitted Transferees of such Person and (v) any investment fund or investment entity that is a subsidiary of such Person or a Permitted Transferee of such Person. "Person" means any individual, corporation, limited or general partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially 86 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). 87 "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 88 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. 89 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. 90 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. 91 DESCRIPTION OF NEW CREDIT FACILITY In connection with the Transactions, Smith's will enter into the New Credit Facility with a syndicate of financial institutions for whom Bankers Trust will act as administrative agent. Smith's has accepted a commitment letter (the "Commitment Letter") from Bankers Trust and Chase Manhattan pursuant to which Bankers Trust and Chase Manhattan, as Arrangers (the "Arrangers"), have agreed, subject to certain conditions, to provide the Company $995 million of financing under the New Credit Facility. The following is a summary of the anticipated material terms and conditions of the New Credit Facility. This summary does not purport to be a complete description of the New Credit Facility and is subject to the detailed provisions of the loan agreement (the "Loan Agreement") and various related documents to be entered into in connection with the New Credit Facility. GENERAL The New Credit Facility will provide for (i) term loans in the aggregate amount of $805 million, comprised of the $325 million Tranche A Loans, the $160 million Tranche B Loans, the $160 million Tranche C Loans and the $160 million Tranche D Loans; and (ii) the $190 million New Revolving Facility under which working capital loans may be made and commercial or standby letters of credit in the maximum aggregate amount to be agreed upon among the Company and the Arrangers, under which approximately $28 million of letters of credit are expected to be issued upon consummation of the Transactions. Proceeds of the New Term Loans and loans under the Revolving Credit Facility on the Closing, together with proceeds from the Offering and the California Divestiture will be used to fund the cash requirements for the Tender Offer and the Smitty's Refinancing, refinance certain other existing indebtedness of Smith's, redeem a portion of Smith's Series I Preferred Stock, redeem Smith's management options and pay various refinancing premiums fees, expenses and other costs associated with the Transactions. The New Revolving Facility will be available to provide for the working capital requirements and general corporate purposes of the Company and to issue commercial and standby letters of credit. INTEREST RATE; FEES Borrowings under (i) the New Revolving Facility and the Tranche A Loans will bear interest at a rate equal to the Base Rate (as defined in the Loan Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loans will bear interest at the Base Rate plus 2.00% per annum or the reserve adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loans will bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loans will bear interest at the Base Rate plus 2.75% per annum or the reserve adjusted Euro- Dollar Rate plus 4.00% per annum, in each case as selected by the Company. Applicable interest rates on Tranche A Loans and the New Revolving Facility and the fees payable under the New Revolving Facility on letters of credit, will be reduced in increments of 0.25% per annum, up to an aggregate of 0.50% per annum, after the New Term Loans have been reduced by such amounts and if the Company meets certain financial tests to be agreed upon among the Company and the Arrangers. Up to $30 million of the New Revolving Facility will be available as a swingline facility and loans outstanding under the swingline facility shall bear interest at the Base Rate plus 1.00% per annum (subject to adjustment as described in the preceding sentence). After the occurrence of a default under the New Credit Facility, interest will accrue at the rate equal to the rate on loans bearing interest at the rate determined by reference to the Base Rate plus an additional 2.00% per annum. The Company will pay the issuing bank a fee of 0.25% per annum on each standby letter of credit and each commercial letter of credit and will pay the lenders under the New Credit Facility a fee equal to the margin on Eurodollar Rate loans under the Revolving Credit Facility (the "Eurodollar Margin") for standby letters of credit and a fee equal to the Eurodollar Margin minus 1.00% per annum for commercial letters of credit. Each of these fees will be calculated based on the amount available to be drawn under a letter of credit. In addition, the Company will pay a commitment fee of 0.50% per annum on the unused portions of the New Revolving Facility and for purposes of calculating this fee, loans under the swingline facility shall not be deemed 92 to be outstanding. The New Credit Facility will require the Company to enter into hedging agreements to limit its exposure to increases in interest rates for a period of not less than two years after the Closing. The New Credit Facility may be prepaid in whole or in part without premium or penalty. AMORTIZATION; PREPAYMENTS The Tranche A Loans will mature six and one-quarter years after the Closing and will be subject to amortization, commencing on the nine month anniversary of the Closing in the amount of $7.5 million, and thereafter commencing on the first anniversary of the Closing on a quarterly basis in aggregate annual amounts of $45 million in the second year, $55 million in the third year, $65 million in the fourth year, $65 million in the fifth year, $60 million in the sixth year, and $13.75 million on the sixth anniversary of the Closing and in the first quarter of the seventh year. The Tranche B Loan will mature seven and one-half years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.6 million for the first six years and in the seventh year payable in installments of $4.0 million in the first quarter and $18 million in each of the last three quarters and in the eighth year payable in installments of $22.7 million in the first quarter and $69.7 million in the second quarter. The Tranche C Loans will mature eight and one-half years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.6 million for the first seven years and in the eighth year payable in installments of $0.4 million in each of the first two quarters and $25 million in each of the last two quarters and in the ninth year payable in installments of $25 million in the first quarter and $73 million in the second quarter. The Tranche D Loans will mature nine and one-quarter years after the Closing and will be subject to amortization on a quarterly basis in aggregate annual amounts of$1.6 million for the first eight years and in the ninth year payable in installments of $0.4 million in each of the first two quarters, $29 million in the third quarter and $32 million in the last quarter and in the tenth year in an installment of $85.4 million in the first quarter. The New Revolving Facility will mature on the same date as the Tranche A Loans. The Company will be required to reduce loans outstanding under the New Revolving Facility to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period following the Closing. The Company will be required to make certain prepayments, subject to certain exceptions, on the New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in the Loan Agreement) and with the proceeds from certain asset sales, issuances of debt and equity securities and any pension plan reversion. Such prepayments will be allocated pro rata between the Tranche A Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans and to scheduled amortization payments of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche D Loans pro rata, provided that at the election of the Company mandatory prepayments of Tranche A Loans made with Excess Land Proceeds (as defined in the Loan Agreement) may be applied to the Tranche A Loans in forward order of maturity up to $50 million. At the option of the Company, mandatory prepayments on the Tranche B Loans, the Tranche C Loans and the Tranche D Loans will be used to make an offer to repay such Loans and to the extent not accepted by the holders of such loans (x) in the event such mandatory prepayments are to be made from Excess Land Proceeds, such mandatory prepayments not so accepted will be applied to the prepayment of the Tranche A Loans and (y) in the event of all other mandatory prepayments, 50% of such amount will be applied to reduce Tranche A Loans on a pro rata basis and the remaining 50% may be retained by the Company. GUARANTEES AND COLLATERAL All subsidiaries of the Company will guarantee the Company's obligations under the New Credit Facility. The Company's obligations and the guarantees of its subsidiaries will be secured by a first priority lien on all existing and after-acquired personal property of the Company and its subsidiaries, including a pledge of the stock of all subsidiaries of the Company and by first priority liens on all unencumbered real property fee interests of the Company and its subsidiaries and the Company and its subsidiaries will use their reasonable economic efforts to provide the lenders with a first priority lien on all unencumbered leasehold interests of the Company and its subsidiaries. 93 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. 94 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. 95 An affiliate of Chase is a limited partner in a partnership controlled by Yucaipa which owns shares of Smitty's Class A Common Stock. The partnership will receive shares of Smith's Class B Common Stock in the Merger in exchange for such shares. Goldman Sachs is serving as financial advisor to the Company in connection with the Transactions and has delivered a written opinion to the Company's Board of Directors that, as of January 29, 1996, the exchange ratio pursuant to the Recapitalization Agreement is fair to the Company. Goldman Sachs has been engaged by the Company to act as dealer manager in connection with the Tender Offer. Goldman Sachs has received, and will receive, customary fees in connection with such services. Affiliates of CS First Boston own shares of Smitty's Class B Common Stock and will receive shares of Smith's Common Stock in the Merger in exchange for such shares of Smitty's Class B Common Stock. CS First Boston has been engaged by Smitty's to provide financial advisory services in connection with the Merger and will receive customary fees in connection with such services. Each of the Underwriters has from time to time provided investment banking and financial advisory services to one or more of Smith's, Smitty's, Yucaipa and/or their respective affiliates and may continue to do so in the future. The Underwriters have received customary fees for such services. LEGAL MATTERS The validity of the Notes offered hereby will be passed upon for the Company by Latham & Watkins, Los Angeles, California. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Cahill Gordon and Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated financial statements of Smith's Food & Drug Centers, Inc. at December 30, 1995 and December 31, 1994 and for each of three years in the period ended December 30, 1995 included in this Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated balance sheet of Smitty's Supermarkets, Inc. as of July 30, 1995 and July 31, 1994 and the related consolidated statements of operations, stockholder's equity, and cash flows for year ended July 31, 1995, and for the period from June 29, 1994 (date of inception) to July 31, 1994 (Smitty's), and for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 (Predecessor), included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 96 INDEX TO FINANCIAL STATEMENTS PAGE ---- SMITH'S FOOD & DRUG CENTERS, INC.: Report of Independent Auditors (Ernst & Young LLP)....................... F-2 Consolidated balance sheets at March 30, 1996 (unaudited), December 30, 1995 and December 31, 1994.............................................. F-3 Consolidated statements of income for the 13 weeks ended March 30, 1996 (unaudited) and the 13 weeks ended April 1, 1995 (unaudited) and the years ended January 1, 1994, December 31, 1994 and December 30, 1995.... F-4 Consolidated statements of common stockholders' equity for the 13 weeks ended March 30, 1996 (unaudited) and the years ended January 1, 1994, December 31, 1994 and December 30, 1995................................. F-5 Consolidated statements of cash flows for the 13 weeks ended March 30, 1996 (unaudited) and the 13 weeks ended April 1, 1995 (unaudited) and the years ended January 1, 1994, December 31, 1994 and December 30, 1995.................................................................... F-6 Notes to consolidated financial statements............................... F-7 SMITTY'S SUPERMARKETS, INC.: Report of Independent Auditors (Coopers & Lybrand L.L.P.)................ F-18 Consolidated balance sheets as of July 31, 1994 and July 30, 1995 and April 7, 1996 (unaudited)............................................... F-19 Consolidated statements of operations for the 52 weeks ended July 30, 1995 and for the period from June 29, 1994 (date of inception) to July 31, 1994; for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 (Predecessor); for the 36 weeks ended April 7, 1996 (unaudited) and the 36 weeks ended April 9, 1995 (unaudited)....... F-20 Consolidated statements of stockholders' equity for the 52 weeks ended July 30, 1995 and for the period from June 29, 1994 (date of inception) to July 31, 1994; for the period from August 2, 1992 to June 29, 1994 and the year ended August 1, 1993 (Predecessor); for the 36 weeks ended April 7, 1996 (unaudited)............................................... F-21 Consolidated statements of cash flows for the 52 weeks ended July 30, 1995 and for the period from June 29, 1994 (date of inception) to July 31, 1994; for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 (Predecessor); for the 36 weeks ended April 7, 1996 (unaudited) and the 36 weeks ended April 9, 1995 (unaudited)....... F-22 Notes to consolidated financial statements............................... F-24
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)
MARCH 30, DECEMBER 30, DECEMBER 31, ASSETS 1996 1995 1994 ------ ----------- ------------ ------------ (UNAUDITED) Current Assets Cash and cash equivalents.............. $ 11,022 $ 16,079 $ 14,188 Rebates and accounts receivable........ 28,008 23,802 25,596 Inventories............................ 297,974 394,982 389,564 Prepaid expenses and deposits.......... 17,045 21,255 15,858 Deferred tax assets.................... 14,500 23,900 1,400 Assets held for sale................... 42,800 125,000 ---------- ---------- ---------- Total Current Assets................. 411,349 605,018 446,606 Property and Equipment Land................................... 279,573 276,626 303,701 Buildings.............................. 614,700 610,049 619,056 Leasehold improvements................. 54,795 55,830 42,369 Fixtures and equipment................. 498,367 509,524 589,480 ---------- ---------- ---------- 1,447,435 1,452,029 1,554,606 Less allowances for depreciation and amortization.......................... 392,282 390,933 364,741 ---------- ---------- ---------- 1,055,153 1,061,096 1,189,865 Other Assets............................. 19,484 20,066 16,996 ---------- ---------- ---------- $1,485,986 $1,686,180 $1,653,467 ========== ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY ---------------------- Current Liabilities Trade accounts payable................. $ 163,998 $ 214,152 $ 235,843 Accrued sales and other taxes.......... 41,447 50,749 44,379 Accrued payroll and related benefits... 77,924 97,455 84,083 Current maturities of long-term debt... 24,093 20,932 19,011 Current maturities of Redeemable Preferred Stock....................... 1,008 1,008 1,017 Accrued restructuring costs............ 15,060 58,000 ---------- ---------- ---------- Total Current Liabilities............ 323,530 442,296 384,333 Long-term debt, less current maturities.. 648,681 725,253 699,882 Accrued restructuring costs, less current portion................................. 40,000 40,000 Deferred income taxes.................... 58,800 58,600 89,500 Redeemable Preferred Stock, less current maturities.............................. 3,311 3,311 4,410 Common Stockholders' Equity Convertible Class A Common Stock (shares issued and outstanding, 11,366,532 in 1996, 11,613,043 in 1995 and 12,140,317 in 1994).......... 114 116 121 Class B Common Stock (shares issued 18,595,479 in 1996, 18,348,968 in 1995 and 17,821,694 in 1994).......... 185 183 178 Additional paid-in capital............. 285,119 285,236 285,592 Retained earnings...................... 233,088 238,027 293,456 ---------- ---------- ---------- 518,506 523,562 579,347 Less cost of Common Stock in the treasury (4,890,288 shares in 1996, 4,890,302 shares in 1995 and 4,772,822 shares in 1994)....................... 106,842 106,842 104,005 ---------- ---------- ---------- 411,664 416,720 475,342 ---------- ---------- ---------- $1,485,986 $1,686,180 $1,653,467 ========== ========== ==========
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)
13 WEEKS ENDED 52 WEEKS ENDED ------------------- ------------------------------------ MARCH 30, APRIL 1, DECEMBER 30, DECEMBER 31, JANUARY 1, 1996 1995 1995 1994 1994 --------- -------- ------------ ------------ ---------- (UNAUDITED) Net sales............... $693,165 $746,673 $3,083,737 $2,981,359 $2,807,165 Cost of goods sold...... 546,606 578,351 2,386,707 2,312,228 2,169,987 -------- -------- ---------- ---------- ---------- 146,559 168,322 697,030 669,131 637,178 Expenses: Operating, selling and administrative....... 111,353 112,770 461,401 440,844 430,258 Depreciation and amortization......... 22,639 24,696 104,963 94,491 82,173 Interest.............. 14,545 15,077 60,478 53,715 44,627 Restructuring charges. 140,000 -------- -------- ---------- ---------- ---------- 148,537 152,543 766,842 589,050 557,058 -------- -------- ---------- ---------- ---------- Income (loss) before in- come taxes............. (1,978) 15,779 (69,812) 80,081 80,120 Income taxes............ (800) 6,300 (29,300) 31,300 34,300 -------- -------- ---------- ---------- ---------- Net income (loss)....... $ (1,178) $ 9,479 $ (40,512) $ 48,781 $ 45,820 ======== ======== ========== ========== ========== Net income (loss) per share of Common Stock.. $ (0.05) $ 0.37 $ (1.62) $ 1.73 $ 1.52 ======== ======== ========== ========== ==========
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) (INFORMATION WITH RESPECT TO THE END OF THE FIRST QUARTER OF 1996 AND THE PERIOD THEN ENDED IS UNAUDITED.)
CLASS A CLASS B COMMON STOCK COMMON STOCK ----------------- ---------------- ADDITIONAL NUMBER OF PAR NUMBER OF PAR PAID-IN RETAINED TREASURY SHARES VALUE SHARES VALUE CAPITAL EARNINGS STOCK TOTAL ---------- ----- ---------- ----- ---------- -------- --------- -------- Balance at January 3, 1993................... 13,403,132 $134 16,558,879 $165 $285,980 $229,110 $515,389 Net income for 1993.... 45,820 45,820 Conversion of shares from Class A to Class B............... (785,687) (8) 785,687 8 Purchase of Class B Common Stock for the treasury.............. $ (11,074) (11,074) Shares sold to the Employee Stock Profit Sharing Plan.......... (212) 3,237 3,025 Shares sold under the Employee Stock Purchase Plan......... (771) 4,853 4,082 Cash dividends--$.52 per share............. (15,530) (15,530) Other.................. 485 485 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at January 1, 1994................... 12,617,445 126 17,344,566 173 285,482 259,400 (2,984) 542,197 Net income for 1994.... 48,781 48,781 Conversion of shares from Class A to Class B............... (477,128) (5) 477,128 5 Purchase of Class B Common Stock for the treasury.............. (109,239) (109,239) Shares sold to the Employee Stock Profit Sharing Plan.......... 143 1,505 1,648 Shares sold under the Employee Stock Purchase Plan......... (668) 6,713 6,045 Cash dividends--$.52 per share............. (14,725) (14,725) Other.................. 635 635 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at December 31, 1994................... 12,140,317 121 17,821,694 178 285,592 293,456 (104,005) 475,342 Net loss for 1995...... (40,512) (40,512) Conversion of shares from Class A to Class B............... (527,274) (5) 527,274 5 Purchase of Class B Common Stock for the treasury.............. (9,039) (9,039) Shares sold to the Employee Stock Profit Sharing Plan.......... 2 108 110 Shares sold under the Employee Stock Purchase Plan......... (926) 6,094 5,168 Cash dividends--$.60 per share............. (14,917) (14,917) Other.................. 568 568 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at December 30, 1995................... 11,613,043 $116 18,348,968 $183 $285,236 $238,027 $(106,842) $416,720 Net loss for the first quarter 1996.......... (1,178) (1,178) Conversion of shares from Class A to Class B............... (246,511) (2) 246,511 2 Purchase of Class B Common Stock for the treasury.............. (1,114) (1,114) Shares sold under the Employee Stock Purchase Plan......... (294) 1,114 820 Cash dividends--$.15 per share............. (3,761) (3,761) Other.................. 177 177 ---------- ---- ---------- ---- -------- -------- --------- -------- Balance at March 30, 1996................... 11,366,532 $114 18,595,479 $185 $285,119 $233,088 $(106,842) $411,664 ========== ==== ========== ==== ======== ======== ========= ========
See notes to consolidated financial statements. F-5 SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
13 WEEKS ENDED 52 WEEKS ENDED ------------------ ------------------------------------ MARCH APRIL 1, DECEMBER 30, DECEMBER 31, JANUARY 1, 30, 1996 1995 1995 1994 1994 -------- -------- ------------ ------------ ---------- (UNAUDITED) Operating Activities Net income (loss)...... $ (1,178) $ 9,479 $ (40,512) $ 48,781 $ 45,820 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization........ 22,639 24,696 104,963 94,491 82,173 Deferred income taxes............... 9,600 2,150 (53,400) 10,500 15,400 Restructuring charges............. 140,000 Other................ 177 196 568 635 485 Changes in operating assets and liabilities: Rebates and accounts receivable......... (4,206) 1,307 1,794 (4,758) (4,038) Inventories......... 97,008 14,049 (5,418) (11,625) (36,523) Prepaid expenses and deposits........... 4,210 (26,417) (5,397) (1,324) (518) Trade accounts payable............ (50,154) (39,319) (21,691) 50,618 1,119 Accrued sales and other taxes........ (9,302) 4,369 6,370 5,616 6,625 Accrued payroll and related benefits... (19,531) (6,442) 13,372 10,616 8,007 Accrued restructuring costs.............. (42,940) -------- -------- --------- --------- --------- Cash provided by (used in) operating activities............. 6,323 (15,932) 140,649 203,550 118,550 Investing Activities Additions to property and equipment......... (18,271) (25,220) (149,035) (146,676) (322,301) Sale/leaseback arrangements and other property and equipment sales................. 83,775 1,221 5,841 20,949 159,137 Other.................. 582 92 (3,070) (1,649) (1,258) -------- -------- --------- --------- --------- Cash provided by (used in) investing activities............. 66,086 (23,907) (146,264) (127,376) (164,422) Financing Activities Additions to long-term debt.................. 51,000 45,978 27,000 262,000 Payments on long-term debt.................. (73,411) (4,880) (18,686) (33,594) (149,197) Redemptions of Redeemable Preferred Stock................. (350) (1,108) (1,042) (1,039) Purchases of Treasury Stock................. (1,114) (4,709) (9,039) (109,239) (11,074) Proceeds from sales of Treasury Stock........ 820 1,031 5,278 7,693 7,107 Payment of dividends... (3,761) (3,747) (14,917) (14,725) (15,530) -------- -------- --------- --------- --------- Cash provided by (used in) financing activities............. (77,466) 38,345 7,506 (123,907) 92,267 -------- -------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents............ (5,057) (1,494) 1,891 (47,733) 46,395 Cash and cash equiva- lents at beginning of period................. 16,079 14,188 14,188 61,921 15,526 -------- -------- --------- --------- --------- Cash and cash equiva- lents at end of period. $ 11,022 $ 12,694 $ 16,079 $ 14,188 $ 61,921 ======== ======== ========= ========= =========
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. Interim Financial Statements The consolidated balance sheet of the Company as of March 30, 1996 and the consolidated statements of income, common stockholders' equity and cash flows for the interim periods ended March 30, 1996 and April 1, 1995 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated financial position, results of operations and cash flows for these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles, and, therefore, should be read in conjunction with the Company's financial statements and notes thereto included herein. Results of operations for interim periods are not necessarily indicative of the results for a full fiscal year. Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with maturities less than three months. The amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Inventories Inventories are valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. Approximately 95% of inventories in 1995 and 1994 were valued using the LIFO method. Other inventories were valued using the first-in, first-out (FIFO) method. The FIFO cost exceeded the LIFO value of inventories by $8.1 million in 1995 and $4.1 million in 1994. The pretax LIFO charge was $4.0 million in 1995, $2.5 million in 1994, and $1.6 million in 1993. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided by the straight-line method based upon estimated useful lives. Improvements to leased property are amortized over their estimated useful lives or the remaining terms of the leases, whichever is shorter. Accrued Insurance Claims The Company is self-insured, with certain stop loss insurance coverage, for workers' compensation, non-union employee health care and general liability claims. Claims expense is recorded through the accrual of claims reserves based on estimates of ultimate claim costs, including claims incurred but not reported. The liabilities for accrued insurance claims were $31.8 million and $25.3 million at the end of 1995 and 1994, respectively. These liabilities are not discounted. F-7 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 ========== ======== ========== ========
F-9 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE C--LONG-TERM DEBT Long-term debt consists of the following (dollar amounts in thousands):
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 prop- erty and equipment with a cost of $11.7 million in 1995 and $11.6 million in 1994 due in 2000 through 2010 plus interest at an average rate of 7.44% in 1995 and 7.47% in 1994....................... 6,308 6,597 Other............................................ 7,492 5,214 -------- -------- 746,185 718,893 Less current maturities.......................... 20,932 19,011 -------- -------- $725,253 $699,882 ======== ========
Interest rates on the revolving credit bank loans averaged 6.06% in 1995 and 5.89% in 1994. The agreements are reviewed annually with the banks, at which time the date each installment is due is generally extended one year. At December 30, 1995, the Company had unused lines of credit related to unsecured revolving credit bank loans of $60.0 million. The Company's loan agreements contain provisions which require the Company to maintain a specified level of consolidated net worth, fixed charge coverage and ratio of debt to net worth. Maturities of the Company's long-term debt for the five fiscal years succeeding December 30, 1995 are approximately $20.9 million in 1996, $22.1 million in 1997, $23.7 million in 1998, $45.4 million in 1999 and $28.9 million in 2000. The amounts classified as revolving credit bank loans approximate their fair value. The fair value of the Company's long-term debt was estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of debt arrangements. NOTE D--REDEEMABLE PREFERRED STOCK The Company has 85,000,000 shares of $.01 per share par value Preferred Stock authorized. The Company has designated 34,524,579 of these shares as Series I Preferred Stock, of which 12,956,747 shares and 16,281,777 shares were issued and outstanding in 1995 and 1994, respectively. The Series I Preferred Stock has no dividend requirement. F-10 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) All shares of the Company's Series I Preferred Stock are subject to redemption at any time at the option of the Board of Directors, in such numbers as the Board may determine, and at a redemption price of $.33 1/3 per share. The scheduled redemptions of the Company's Series I Preferred Stock are approximately $1.0 million each year until all outstanding shares are redeemed. Upon liquidation of the Company, each share of Series I Preferred Stock is entitled to a liquidation preference of $.33 1/3, on a pro rata basis with any other series of Preferred Stock, before any distribution to the holders of Class A Common Stock or Class B Common Stock. Each share of Series I Preferred Stock is entitled to ten votes. Series I Preferred Stock is stated at redemption value in the balance sheet. The amount included in the balance sheet for Series I Preferred Stock approximates its fair value. NOTE E--COMMON STOCKHOLDERS' EQUITY The voting powers, preferences and relative rights of Class A Common Stock and Class B Common Stock are identical in all respects, except that the holders of Class A Common Stock have ten votes per share and the holders of Class B Common Stock have one vote per share. Each share of Class A Common Stock is convertible at any time at the option of the holder into one share of Class B Common Stock. The Company's Certificate of Incorporation also provides that each share of Class A Common Stock will be converted automatically into one share of Class B Common Stock if at any time the number of shares of Class A Common Stock issued and outstanding shall be less than 2,910,885. Future sales or transfers of the Company's Class A Common Stock are restricted to the Company or immediate family members of the original Class A Common Stockholders unless first presented to the Company for conversion into an equal number of Class B Common Stock shares. The Class B Common Stock has no conversion rights. At December 30, 1995 there were 20,000,000 shares of $.01 per share par value Class A Common Stock and 100,000,000 shares of $.01 per share par value Class B Common Stock authorized. NOTE F--INCOME TAXES Income tax expense (benefit) consists of the following (dollar amounts in thousands):
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. F-11 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The difference between income tax expense (benefit) and the tax computed by applying the statutory income tax rate to income before income taxes is as follows:
52 WEEKS ENDED ------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- Statutory federal income tax rate...... (35.0)% 35.0 % 35.0% State income tax rate, net of federal income tax effect..................... (4.3) 4.7 5.2 Effect of income tax rate changes on deferred taxes........................ (3.6) 2.4 Other.................................. .9 (.6) .2 ----- ---- ---- (42.0)% 39.1 % 42.8% ===== ==== ====
The effect of temporary differences that give rise to deferred tax balances are as follows (dollar amounts in thousands):
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ Deferred tax liabilities: Depreciation and amortization.................... $ 81,008 $ 98,186 Other............................................ 13,572 11,935 -------- -------- 94,580 110,121 Deferred tax assets: Accrued restructuring costs...................... (33,305) Accrued insurance claims......................... (12,271) (10,126) Rent............................................. (8,138) (6,006) Other............................................ (6,166) (5,889) -------- -------- (59,880) (22,021) -------- -------- 34,700 88,100 Net current deferred tax assets.................... 23,900 1,400 -------- -------- Net non-current deferred tax liabilities........... $ 58,600 $ 89,500 ======== ========
NOTE G--FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and related fair values of the Company's financial instruments are as follows (dollar amounts in thousands):
DECEMBER 30, 1995 DECEMBER 31, 1994 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Cash and cash equivalents............... $ 16,079 $ 16,079 $ 14,188 $ 14,188 Long-term debt.......................... 746,185 803,613 718,893 680,460 Redeemable Preferred Stock.............. 4,319 4,319 5,427 5,427
The methods of determining the fair value of the Company's financial instruments are disclosed in the respective notes to the consolidated financial statements. F-12 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE H--LEASE AND COMMITMENTS The Company leases property and equipment under terms which include, in some cases, renewal options, escalation clauses or contingent rentals which are based on sales. Total rental expense for such leases amounted to the following (dollar amounts in thousands):
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. In 1993 the Company established a stock purchase plan which permits employees to purchase shares of the Company's Class B Common Stock through payroll deductions at 85% of fair market value at the time of purchase. Employees purchased 282,485 shares, 309,553 shares and 180,950 shares from the Treasury during 1995, 1994 and 1993, respectively. F-13 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has a Stock Option Plan which authorizes the Compensation Committee of the Board of Directors to grant options to key employees for the purchase of Class B Common Stock. The aggregate number of shares available for grant under the plan is equal to 10% of the number of shares of Class B Common Stock authorized. However, the number of outstanding and unexercised options shall not exceed 10% of the number of shares of Class A and Class B Common Stock outstanding. The number of unoptioned shares of Class B Common Stock available for grant was 890,671 shares and 973,419 shares at the end of 1995 and 1994, respectively. The options may be either incentive stock options or non-qualified stock options. Stock options granted to key employees and options outstanding are as follows:
OPTION PRICE NUMBER OF PER SHARE SHARES ------------ --------- Balance at January 3, 1993........................ $19.00 1,107,500 Granted......................................... 19.00 622,000 Forfeited....................................... 19.00 (232,000) --------- Balance at January 1, 1994........................ 19.00 1,497,500 Granted......................................... 19.00 81,000 Forfeited....................................... 19.00 (33,000) --------- Balance at December 31, 1994...................... 19.00 1,545,500 Granted......................................... 19.00 317,000 Forfeited....................................... 19.00 (246,000) --------- Balance at December 30, 1995...................... 19.00 1,616,500 =========
NUMBER OF SHARES --------- The options are exercisable as follows: 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-14 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. F-15 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company provides a 401(k) plan for virtually all employees. The plan is entirely funded by employee contributions which are based on employee compensation not to exceed certain limits. NOTE K--RESTRUCTURING CHARGES In December 1995, the Company recorded restructuring charges amounting to $140 million related to its decision to sell, lease or close all 34 stores and the distribution center comprising its Southern California Region. The Southern California Region contributed sales of approximately $675 million, $653 million and $473 million in 1995, 1994 and 1993, respectively, and recognized operating losses of $14.2 million, $18.8 million and $12.9 million in 1995, 1994 and 1993, respectively. These losses do not include allocations for interest expense and corporate overhead. The restructuring charges include the following components:
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 F-16 SMITH'S FOOD & DRUG CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) values. However, should the Company complete the subsequent event (see Note L), management may decide to pursue the sale of these assets. The amounts the Company may realize on disposal could differ significantly in the near term from the carrying values. NOTE L--SUBSEQUENT EVENT On January 29, 1996, the Company announced it had entered into a definitive merger agreement with Smitty's Supermarkets, Inc. ("Smitty's") in which Smitty's will become a wholly owned subsidiary of the Company. The merger will be completed by issuing 3,038,888 shares of the Company's Class B Common Stock for all of Smitty's outstanding common stock, subject to adjustment under certain circumstances. The Company will assume or refinance approximately $148 million of Smitty's debt. The Company also announced it will commence a self tender offer to purchase 50% of its outstanding Class A and Class B Common Stock for $36 per share, excluding shares to be issued in connection with the Smitty's merger. Debt of approximately $1.4 billion is expected to be issued at various interest rates to finance the stock purchase, repay certain existing indebtedness, and pay premiums related to early repayment. Completion of the tender offer will be subject to the tender of at least 50% of the Company's outstanding Common Stock, the receipt of adequate financing and various other conditions. Completion of the merger with Smitty's will be conditioned on the Company's purchase of shares pursuant to the self tender offer, receipt of adequate financing, regulatory approvals, approval by the Company's stockholders and various other conditions. The tender offer is expected to commence in April 1996 and is expected to be consummated May 1996. The merger with Smitty's is expected to be consummated concurrently with the closing of the tender offer. F-17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Smitty's Supermarkets, Inc. We have audited the accompanying consolidated balance sheets of Smitty's Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended July 30, 1995 and the period from June 29, 1994 (date of inception) to July 31, 1994. We have also audited the consolidated statements of operations, stockholders' equity and cash flows of the Company's predecessor (the "Predecessor") for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smitty's Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and the consolidated results of their operations and their cash flows for the year ended July 30, 1995 and the period from June 28, 1994 (date of inception) to July 31, 1994 and the consolidated results of the Predecessor's operations and cash flows for the period from August 2, 1993 to June 28, 1994 and the year ended August 1, 1993 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Phoenix, Arizona October 3, 1995, except for Note 18 as to which the date is January 29, 1996 F-18 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS)
APRIL 7, JULY 30, JULY 31, ASSETS 1996 1995 1994 ------ ---------- -------- -------- (UNAUDITED) Current Assets Cash and short-term investments............... $ 9,029 $ 25,653 $ 19,969 Accounts and notes receivable, net of allow- ances of $458, $506 and $683................. 10,318 7,700 7,994 Inventories................................... 54,551 55,475 51,013 Prepaid expenses.............................. 3,223 3,767 2,177 Refundable income taxes....................... 492 2,471 546 -------- -------- -------- Total current assets......................... 77,613 95,066 81,699 Property and equipment, net.................... 135,124 128,289 119,218 Goodwill, net of accumulated amortization of $1,471, $917 and $40.......................... 31,345 31,899 17,500 Property held for sale......................... 2,985 2,360 2,154 Other assets................................... 7,839 8,108 14,741 -------- -------- -------- $254,906 $265,722 $235,312 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities Accounts payable.............................. $ 36,206 $ 35,247 $ 25,396 Accrued compensation.......................... 5,600 6,514 4,876 Taxes, other than income taxes................ 6,686 5,482 4,781 Deferred income taxes......................... 4,642 4,642 3,356 Other accrued expenses........................ 12,810 19,764 12,805 Current portion of long-term debt............. 9,220 6,089 2,560 -------- -------- -------- Total current liabilities.................... 75,164 77,738 53,774 Long-term debt................................. 135,845 141,835 141,356 Deferred income taxes.......................... 13,767 13,767 15,658 Other liabilities.............................. 19,968 21,449 13,937 -------- -------- -------- Total liabilities............................ 244,744 254,789 224,725 Stockholders' Equity Preferred stock, $.01 par value; 10,000 shares authorized Class A common stock, $.01 par value; 1,000,000 shares authorized; 696,700 shares issued and outstanding at July 30, 1995 and July 31, 1994; 705,697 shares issued and outstanding at April 7, 1996................. 7 7 7 Class B common stock, $.01 par value; 500,000 shares authorized; 303,300 shares issued and outstanding.................................. 3 3 3 Additional paid-in capital.................... 11,036 10,936 10,936 Retained earnings (deficit)................... (884) (13) (359) -------- -------- -------- Total stockholders' equity................... 10,162 10,933 10,587 -------- -------- -------- $254,906 $265,722 $235,312 ======== ======== ========
See accompanying notes. F-19 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THE COMPANY THE PREDECESSOR --------------------------------------------------- ----------------------------- 36 WEEKS 36 WEEKS PERIOD FROM PERIOD FROM ENDED ENDED JUNE 29, 1994 AUGUST 2, 1993 APRIL 7, APRIL 9, YEAR ENDED TO TO YEAR ENDED 1996 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 ----------- ----------- ------------- ------------- -------------- -------------- (UNAUDITED) (UNAUDITED) Sales................... $ 411,866 $ 423,848 $ 594,019 $ 48,411 $551,681 $605,132 Cost of sales........... 295,322 310,059 432,067 35,476 413,696 454,672 --------- --------- --------- --------- -------- -------- Gross profit............ 116,544 113,789 161,952 12,935 137,985 150,460 Operating, selling, general, and administrative expenses............... 95,641 93,416 133,242 10,828 117,350 147,472 Litigation settlement... (1,866) (1,866) Depreciation and amortization........... 9,089 7,106 10,855 959 8,022 9,461 --------- --------- --------- --------- -------- -------- Operating income (loss). 11,814 15,133 19,721 1,148 12,613 (6,473) Interest expense: Interest expense, excluding amortization of deferred financing costs................. 12,019 11,755 17,797 1,422 6,219 6,364 Amortization of deferred financing costs................. 666 625 923 83 134 182 --------- --------- --------- --------- -------- -------- 12,685 12,380 18,720 1,505 6,353 6,546 --------- --------- --------- --------- -------- -------- Income (loss) before income taxes and extraordinary item..... (871) 2,753 1,001 (357) 6,260 (13,019) Income taxes (benefit).. 1,826 655 2 2,492 (4,822) --------- --------- --------- --------- -------- -------- Income (loss) before extraordinary item..... (871) 927 346 (359) 3,768 (8,197) Extraordinary item: Loss on extinguishment of debt, net of $413 income tax benefit.... (628) --------- --------- --------- --------- -------- -------- Net income (loss)....... $ (871) $ 927 $ 346 $ (359) $ 3,140 $ (8,197) ========= ========= ========= ========= ======== ======== Income (loss) per share: Income (loss) before extraordinary item.... $ (0.87) $ 0.93 $ 0.35 $ (0.36) $ 3,716 $ (8,084) Extraordinary item..... (619) --------- --------- --------- --------- -------- -------- Income (loss).......... $ (0.87) $ 0.93 $ 0.35 $ (0.36) $ 3,097 $ (8,084) ========= ========= ========= ========= ======== ======== Weighted average common shares outstanding..... 1,004,000 1,000,000 1,000,000 1,000,000 1,014 1,014 ========= ========= ========= ========= ======== ========
See accompanying notes. F-20 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)... (871) (871) ------- --- ------- --- ------- ----- ------- BALANCE AT APRIL 7, 1996 (UNAUDITED)............ 705,697 $ 7 303,300 $ 3 $11,036 $(884) $10,162 ======= === ======= === ======= ===== =======
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-21 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
THE COMPANY PREDECESSOR ------------------------------------------------------------ ------------------------------- PERIOD FROM PERIOD FROM 36 WEEKS ENDED 36 WEEKS ENDED YEAR ENDED JUNE 29, 1994 AUGUST 2, 1993 YEAR ENDED APRIL 7, 1996 APRIL 9, 1995 JULY 30, 1995 TO JULY 31, 1994 TO JUNE 28, 1994 AUGUST 1, 1993 -------------- -------------- ------------- ---------------- ---------------- -------------- (UNAUDITED) (UNAUDITED) Cash provided (used) by operating activities: Net income (loss)....... $ (871) $ 927 $ 346 $ (359) $ 3,140 $(8,197) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amor- tization............. 9,089 7,106 10,855 959 8,286 9,461 Amortization of de- ferred financing costs and discount on long-term debt.... 739 696 1,025 92 1,236 587 LIFO provision........ 538 538 325 270 228 708 Deferred income taxes. 8 374 26 3,172 (6,825) Accreted interest on debentures........... 1,659 1,482 2,136 195 Loss (gain) on disposals of assets.. (344) (69) 590 (88) Loss on partnership liquidation.......... 8,900 Litigation settle- ments................ (1,866) (1,866) 13,805 Adjust rentals to straight-line........ 97 (198) (169) 75 51 (904) Changes in operating assets and liabilities, net of acquisition adjustments: Accounts and notes receivable......... (2,614) (267) 184 (340) (225) (413) Inventories, net of LIFO............... 386 (8,677) (4,514) 4,147 (5,953) (504) Prepaid expenses.... (987) (989) (2,067) 400 (354) (919) Refundable income taxes.............. 1,979 546 (1,925) (24) (157) (410) Other assets........ 62 2 54 165 Accounts payable.... 959 7,464 9,851 (4,261) (1,340) 2,315 Accrued expenses and other liabilities.. (7,579) 6,337 3,938 (33) 285 (299) Income taxes pay- able............... 609 (775) ------- ------- ------- ------- ------- ------- Net cash provided by operating activities... $ 3,457 $13,716 $18,151 $ 1,078 $ 9,013 $16,607 ======= ======= ======= ======= ======= =======
See accompanying notes. F-22 SMITTY'S SUPERMARKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
THE COMPANY PREDECESSOR ------------------------------------------------------------- -------------------------------- PERIOD FROM PERIOD FROM 36 WEEKS ENDED 36 WEEKS ENDED YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED APRIL 7, 1996 APRIL 9, 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993 -------------- -------------- ------------- ----------------- ----------------- -------------- (UNAUDITED) (UNAUDITED) Cash provided (used) by investing activities: Purchase of property and equipment........ $(21,842) $(11,042) $(22,855) $ (271) $ (3,729) $(16,233) Proceeds from sale of assets............... 7,880 3,260 8,464 4 6,074 13,745 Deferred gain on sale of real estate....... 1,877 Payments for other assets............... (1,671) (1,242) (392) (35) (375) Repayment of notes receivable........... 41 1,625 5,811 3,871 538 Advances to partnerships......... (169) (1,901) -------- -------- -------- ------- -------- -------- Net cash provided (used) by investing activities (15,592) (7,399) (8,972) (267) 7,889 (4,226) -------- -------- -------- ------- -------- -------- Cash provided (used) by financing activities: Proceeds from borrowings........... 6,500 10,601 Principal payments on borrowings........... (4,589) (2,514) (3,178) (108) (19,303) (20,712) Payments of debt issuance costs....... (317) (317) (915) (226) Proceeds from sale of stock................ 100 Proceeds from acquisition financing, net....... 8,401 Payment of acquisition costs................ (2,947) Purchase of preferred stock from affiliate. (585) -------- -------- -------- ------- -------- -------- Net cash provided (used) by financing activities (4,489) (2,831) (3,495) 4,431 (13,388) (10,337) -------- -------- -------- ------- -------- -------- Increase (decrease) in cash and short-term investments............ (16,624) 3,486 5,684 5,242 3,514 2,044 Cash and short-term investments, beginning of period.............. 25,653 19,969 19,969 14,727 11,213 9,169 -------- -------- -------- ------- -------- -------- Cash and short-term investments, end of period................. $ 9,029 $ 23,455 $ 25,653 $19,969 $ 14,727 $ 11,213 ======== ======== ======== ======= ======== ======== Supplemental cash flow disclosures: Interest paid.......... $ 9,658 $ 8,703 $ 14,299 $ 1,025 $ 7,232 $ 5,959 Income taxes paid...... 663 2,643 573 3,198 Income tax refunds received.............. 1,979 1,958 1,578 11 Non-cash investing and financing activities: Capital lease obligations entered into................. $ 10,889 $ 4,948 $ 10,933 $ 4,929 Notes receivable obtained through sales of property and equipment............ 11,126 Assets transferred to affiliate in exchange for preferred stock.. 27,238 Notes receivable obtained in exchange for preferred stock.. 27,823 Common stock acquired from cancellation of note receivable...... 27,823
See accompanying notes. F-23 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 1. SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Smitty's Supermarkets, Inc. (the "Company") and its wholly-owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation. The Company is a partner in a real estate development partnership which is being accounted for under the equity method. Statement Presentation On June 29, 1994, the Company acquired Smitty's Super Valu, Inc. (the "Predecessor"). The financial statements for both the Company and the Predecessor are included herein. Fiscal Year The Company's fiscal year ends on the Sunday nearest the last day of July. The 1995, 1994 and 1993 fiscal years consisted of 52 weeks each. Interim Financial Statements The consolidated balance sheet of the Company as of April 7, 1996 and the consolidated statements of operations and cash flows for the interim periods ended April 7, 1996 and April 9, 1995 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated financial position, results of operations and cash flows for these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles, and, therefore, should be read in conjunction with the Company's financial statements and notes thereto included herein. Results of operations for interim periods are not necessarily indicative of the results for a full fiscal year. Short-Term Investments Short-term investments consist of highly liquid investments with original maturities of three months or less. The Company considers such investments to be cash equivalents for purposes of determining cash flow. Inventories Merchandise inventories are valued at LIFO (last-in, first-out) cost, which is lower than market, for about 95% of the total inventory, and at the lower of FIFO (first-in, first-out) cost or market for the balance of the inventory. Property and Equipment Owned property and equipment are stated at cost and capital lease assets are stated at the present value of future rentals, less accumulated depreciation and amortization. Maintenance and repairs are charged against operations in the year incurred and major additions to property and equipment are capitalized. Depreciation and amortization are computed by the straight-line method based upon the following lives: 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-24 SMITTY'S SUPERMARKETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (THOUSANDS OF DOLLARS) Goodwill Goodwill represents the excess of the purchase price over the fair value of acquired assets, less accumulated amortization. Goodwill is amortized on the straight-line method over forty years. It is the Company's policy to periodically review and evaluate the recoverability of the acquired intangibles by assessing current and future profitability and cash flows and to determine whether the amortization of the balance over its remaining life can be recovered through expected future results and cash flows. Deferred Charges Deferred debt issuance costs are amortized using the interest method. Property Held for Sale Property held for sale is comprised of several undeveloped properties and is valued at the lower of cost or estimated net realizable value. Self-Insurance The Company self-insures, with certain stop loss insurance coverage, for workers' compensation, non-union employee health care and general liability claims. Claims expense is recorded in the year of occurrence through the accrual of claim reserves based on estimates of ultimate claims costs and settlement expenses discounted at a rate of 8%. Pre-opening and Remodel Costs All costs associated with store openings and promotional costs associated with major store remodels are charged to operations ratably over the twelve months following store openings and remodel completion dates, respectively. Income Taxes Effective August 2, 1993, the Predecessor adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under the provisions of SFAS 109, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Reclassifications Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the presentation in the 1995 financial statements. 2. BUSINESS ACQUISITION On June 29, 1994, the Company acquired the Predecessor for $24,768 net of transaction costs and the repayment or assumption of certain liabilities (the "Acquisition"). The Acquisition has been accounted for by the purchase method. Accordingly, the costs of the Acquisition were allocated to the assets acquired and liabilities assumed based upon their respective fair values. The F-25 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, 1994 to July 31, 1994...................................... $(4,695) $270 PREDECESSOR June 28, 1994 and the period from August 2, 1993 to June 28, 1994...................................... $ 4,776 $228 August 1, 1993 and the year then ended.............. $ 4,548 $708
F-26 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-27 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-28 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-29 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-30 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-31 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-32 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-33 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-34 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-35 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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............................. 27 Selected Historical Financial Data of Smitty's............................ 28 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 30 Business.................................................................. 41 Management................................................................ 52 Principal Stockholders.................................................... 55 Certain Relationships and Related Transactions............................ 57 Description of Notes...................................................... 63 Description of Capital Stock.............................................. 90 Description of New Credit Facility........................................ 92 Underwriting.............................................................. 95 Legal Matters............................................................. 96 Experts................................................................... 96 Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ------------------ 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................................ 30,000 Accounting fees and expenses.............................. 410,000 Legal fees and expenses................................... 500,000 Printing and engraving expenses........................... 240,000 Trustee fees.............................................. 9,000 Miscellaneous............................................. 25,000 ---------- Total................................................. $1,494,500 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Smith's is a Delaware corporation and its Certificate of Incorporation and Bylaws provide for indemnification of its 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 Certificate of Incorporation of Smith's eliminates the personal liability of its directors to Smith's 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 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 13, 1996. Smith's Food & Drug Centers, Inc. By /s/ MATTHEW G. TEZAK ----------------------------------- 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 13, 1996 JEFFREY P. SMITH Executive Officer * President and Chief - ------------------------------------- Operating Officer May 13, 1996 ALLEN R. ROWLAND /s/ MATTHEW G. TEZAK Senior Vice - ------------------------------------- President and Chief May 13, 1996 MATTHEW G. TEZAK Financial Officer (Principal Financial and Accounting Officer) * Director - ------------------------------------- May 13, 1996 DELONNE ANDERSON * Director - ------------------------------------- May 13, 1996 ROBERT D. BOLINDER II-3 SIGNATURES TITLE DATE ---------- ----- ---- * Director - ------------------------------------- May 13, 1996 ALLEN P. MARTINDALE * Director - ------------------------------------- May 13, 1996 NICOLE MILLER * Director - ------------------------------------- May 13, 1996 DUANE PETERS * Director - ------------------------------------- May 13, 1996 RAY V. ROSE * Director - ------------------------------------- May 13, 1996 FRED L. SMITH * Director - ------------------------------------- May 13, 1996 RICHARD D. SMITH * Director - ------------------------------------- May 13, 1996 SEAN D. SMITH * Director - ------------------------------------- May 13, 1996 DOUGLAS JOHN TIGERT * Director - ------------------------------------- May 13, 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 Fleet National Bank of Connecticut, as Trustee, with respect to the Notes. 5.1 Opinion of Latham & Watkins regarding the legality of the Notes, including consent. 10.1 Form of Credit Agreement dated as of May 23, 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, as amended. +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, as amended. +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 opinion filed as Exhibit 5.1 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 Fleet National Bank of Connecticut, 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-3.1 2 AMENDED/RESTATED CERTIFICATE INCORPORATION SMITHS Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SMITH'S FOOD & DRUG CENTERS, INC. We, the President and Secretary of Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Corporation"), do hereby certify as follows: First: That the name of the Corporation is Smith's Food & Drug Centers, Inc. Second: That its certificate of incorporation was originally filed with the Secretary of State of the State of Delaware on January 18, 1989. Third: That the amendment and the restatement of the certificate of incorporation have been duly adopted in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law by the Corporation. Fourth: That the text of the certificate of incorporation of the Corporation, as amended, is hereby restated as further amended by this certificate, to read in full, as follows: ARTICLE I --------- Name ---- The name of the Corporation is Smith's Food & Drug Centers, Inc. ARTICLE II ---------- Registered Office ----------------- The registered office of the Corporation in the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent in the State of Delaware at such address is The Corporation Trust Company. ARTICLE III ----------- Purpose ------- The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 1 ARTICLE IV ---------- Capital Stock ------------- Section 4.1. Number of Shares Authorized; Par Value. The Corporation -------------------------------------- shall be authorized to issue two classes of shares of stock to be designated, respectively, "Common Stock" and "Preferred Stock"; the total number of shares which the Corporation shall have authority to issue is Two Hundred and Twenty- Five Million (225,000,000), divided as follows: (a) Common Stock. The total number of shares of Common Stock shall ------------ be One Hundred and Forty Million (140,000,000), divided into three classes designated as Class A Common Stock, Class B Common Stock and Class C Common Stock, as follows: the total number of authorized shares of Class A Common Stock shall be Twenty Million (20,000,000), and each share of Class A Common Stock shall have a par value of one cent ($0.01); the total number of authorized shares of Class B Common Stock shall be One Hundred Million (100,000,000), and each share of Class B Common Stock shall have a par value of one cent ($0.01) and the total number of authorized shares of Class C Common Stock shall be Twenty Million (20,000,000), and each share of Class C Common Stock shall have a par value of one cent ($0.01). (b) Preferred Stock. The total number of shares of Preferred Stock --------------- shall be Eighty-Five Million (85,000,000), and each share of Preferred Stock shall have a par value of one cent ($0.01). Section 4.2. Voting Rights. ------------- (a) Class A Common Stock. Each share of Class A Common Stock shall -------------------- carry the right to ten (10) votes for the election of directors of the Corporation and to ten (10) votes upon any matter presented to the stockholders for their vote or approval, subject to conversion upon transfer as provided for below. (b) Class B Common Stock. Each share of Class B Common Stock shall -------------------- carry the right to one (1) vote for the election of directors of the Corporation and to one (1) vote upon any matter presented to the stockholders for their vote or approval. (c) Class C Common Stock. Each share of Class C Common Stock shall -------------------- carry the right to no votes for the election of directors of the Corporation and to no votes upon any matter presented to the stockholders for their vote or approval, subject to conversion upon transfer as provided for below. (d) Preferred Stock. Shares of Preferred Stock shall have such --------------- voting rights as shall be fixed by the Corporation's Board of Directors from time to time as provided in Section 4.5(b) below; provided that no share of Preferred Stock other than shares designated as Series I Preferred Stock under Section 4.5(c) below shall be entitled to more than one (1) vote for the election of directors of the Corporation and one (1) vote upon any other matter presented to the stockholders for their vote or approval. Section 4.3. Sales or Transfer of Shares of Class A Common Stock; ---------------------------------------------------- Conversion of Shares of Class A Common Stock. - -------------------------------------------- (a) "Original Class A Stockholder" Defined. For purposes of this -------------------------------------- Section 4.3, an "Original Class A Stockholder" shall mean, with respect to any given share of Class A Common Stock, 2 the person to whom such share was originally issued; provided that in the event that a share of Class A Common Stock is issued to a person that is a corporation, partnership, association or trust (hereafter an "Entity Holder") in a merger from which the Corporation is the surviving corporation, and if such Entity Holder obtained the securities which were in such merger converted into Class A Common Stock (for purposes of this subsection, the "Securities") from a natural person, the Original Class A Stockholder with respect to such share of Class A Common Stock shall be deemed to be the natural person from whom such Entity Holder obtained the Securities, as shown on the records of the merged corporation. (b) Restrictions Upon Sale or Transfer of Shares of Class A Common -------------------------------------------------------------- Stock. No share of Class A Common Stock may be sold, assigned, pledged (subject - ----- to the provisions of Section 4.3(f), below), hypothecated, transferred (by gift, will, laws of intestacy or otherwise) or exchanged or otherwise disposed of (herein all these actions are referred to as a "transfer" or to be "transferred") by the holder thereof except only to the following persons (each a "Permitted Transferee"): (1) a spouse, child, grandchild, sibling, parent or other lineal descendant of such share's Original Class A Stockholder (a "Family Member"); and (2) an Entity Holder, all of the equity and/or beneficial interests in which are owned beneficially and of record by such share's Original Class A Stockholder and/or such Original Class A Stockholder's Family Members (a "Family Entity"). (c) Requirement to Convert to Class B Common Stock. Upon the ---------------------------------------------- occurrence of any of the events listed below in this Section 4.3(c) with respect to any share of Class A Common Stock, the holder and, if applicable, the transferee of such Class A Common Stock shall promptly present such share(s) to the Corporation for conversion into an equal number of shares of Class B Common Stock: (1) the transfer of Class A Common Stock by the holder thereof to other than a Permitted Transferee of such shares; (2) the transfer of any equity or beneficial interest in a Family Entity which is a holder of Class A Common Stock to other than a Permitted Transferee of the Original Class A Shareholder of the shares of Class A Common Stock held by the Family Entity, as determined under Section 4.3(a), above; (3) foreclosure upon Class A Common Stock by a bona fide pledgee thereof; or (4) the agreement to transfer Class A Common Stock by a trustee in the bankruptcy of the estate of the holder thereof. (d) Enforcement of Requirement to Convert. The Corporation shall be ------------------------------------- entitled to seek specific enforcement of the requirements of Section 4.3(c) upon the failure of any holder and/or transferee of shares of Class A Common Stock to comply with the requirements thereof. In such event the Corporation shall be entitled to recover from the holder and the transferee who failed to comply with Section 4.3(c), jointly and severally, the court costs, reasonable attorneys' fees and other costs and expenses incurred by it in connection with the obtaining of such specific enforcement. The Corporation shall further be entitled to actual and consequential damages incurred as a result of a willful violation of the requirements of Section 4.3(c), including without limitation court costs and reasonable attorneys' fees. 3 (e) Annual Report to Corporation by Entity Holders. In order to ---------------------------------------------- enable the Corporation to enforce the provisions of Section 4.3(c), each Entity Holder shall report in writing to the Corporation no later than the last day of December each year the names and addresses of every person who, during the year then concluded, owned a beneficial or equity interest in such Entity Holder, as well as a list of the officers, trustees, general partners, etc. of such Entity Holder who held office during the year. (f) Pledge of Shares of Class A Common Stock. Shares of Class A ---------------------------------------- Common Stock may be pledged or otherwise encumbered to secure a bona fide loan or other obligation without violating the restrictions set forth in Section 4.3(b) or invoking the requirements of Section 4.3(c); provided that a foreclosure upon any pledged shares by the pledgee for the purpose of selling such pledged shares other than to a Permitted Transferee of the Original Class A Stockholder of such pledged or encumbered shares shall invoke upon the pledgee the requirements of Section 4.3(c) to present such shares to the Corporation for conversion to shares of Class B Common Stock prior to any transfer by the pledgee. (g) Optional Conversion into Shares of Class B Common Stock. Any ------------------------------------------------------- Class A Stockholder shall have the right at any time to convert any share of Class A Common Stock into one (1) share of Class B Common Stock, by presenting the necessary certificates to the Corporation for transfer. (h) Mandatory Conversion of Class A Common Stock into shares of Class ----------------------------------------------------------------- B Common Stock. If at any time the total number of shares of Class A Common - -------------- Stock issued and outstanding shall be less than 2,910,885, as reflected upon the stock records of the Corporation, then each share of Class A Common Stock issued and outstanding at such time shall automatically convert into one (1) share of Class B Common Stock, each outstanding warrant, option or other right to receive or purchase shares of Class A Common Stock outstanding at such time shall automatically convert to a right to receive or purchase an equal number of shares of Class B Common Stock, all without the need for the Corporation or any stockholder to take any action, and no further shares of Class A Common Stock may thereafter be issued by the Corporation. After such automatic conversion, each owner of an outstanding certificate or certificates theretofore representing shares of Class A Common Stock shall be entitled, upon surrendering such certificate or certificates to the Corporation, to receive in exchange therefor a certificate or certificates representing the number of shares of Class B Common Stock into which the shares of Class A Common Stock theretofore represented by the surrendered certificate or certificates shall have been converted as herein provided. Until so surrendered, each outstanding certificate which, prior to such automatic conversion represented shares of Class A Common Stock, shall be deemed, for all corporate purposes, to represent the ownership of the shares of Class B Common Stock into which such shares of Class A Common Stock were converted on the basis herein provided. Section 4.4. Sales or Transfer of Shares of Class C Common Stock; ---------------------------------------------------- Conversion of Shares of Class C Common Stock. - -------------------------------------------- (a) "Original Class C Stockholder" Defined. For purposes of this -------------------------------------- Section 4.4, an "Original Class C Stockholder" shall mean, with respect to any given share of Class C Common Stock, any person or entity deemed to be a member of the "Investor Group" pursuant to that certain Standstill Agreement dated as of January 29, 1996 (as amended, the "Standstill Agreement"), among the Corporation, The Yucaipa Companies, Yucaipa SSV Partners, L.P., Yucaipa Smitty's Partners, L.P., Yucaipa Smitty's Partners II, L.P., Yucaipa Arizona Partners, L.P., and the stockholders of the Corporation named therein, as it may be amended from time to time. (b) Permitted Conversion to Class B Common Stock. Upon the transfer -------------------------------------------- of Class C Common Stock by an Original Class C Stockholder to a third party other than another Original Class C 4 Stockholder, the transferee of such Class C Common Stock may present such share(s) to the Corporation for conversion into an equal number of shares of Class B Common Stock. No conversion of Class C Common Stock into Class B Common Stock shall be permitted for shares of Class C Common Stock held by an Original Class C Stockholder or any party bound by the terms of the Standstill Agreement as a member of the Investor Group, as in effect from time to time. Section 4.5. Other Rights and Preferences. ---------------------------- (a) Common Stock. Except as otherwise specifically set forth herein ------------ as to voting powers, all shares of Common Stock shall have the same rights and preferences. (b) Preferred Stock. Except as set forth below in Section 4.5(c), --------------- the rights and privileges of the Preferred Stock shall be fixed by the Corporation's Board of Directors from time to time by resolution. By such resolution the Board of Directors may establish a series of such Preferred Stock and fix and determine the relative voting powers, preferences, rights and qualifications, limitations and restrictions of the shares of any series so determined in respect to the Common Stock and in respect to the other series of Preferred Stock; provided that no series so designated shall have rights or preferences superior to the rights and preferences of Series I Preferred Stock, as set forth in Section 4.5(c) below; and provided further that no share of Preferred Stock other than shares designated as Series I under Section 4.5(c) shall be entitled to more than one (1) vote for the election of directors of the Corporation and one (1) vote upon any other matter presented to the stockholders for their vote or approval. (c) Series I Preferred Stock. Thirty-Four Million Five Hundred ------------------------ Twenty-Four Thousand Five Hundred Seventy-Nine (34,524,579) shares of Preferred Stock are hereby designated as Series I Preferred Stock, which shall have the following rights and preferences: (1) Preference. If the Corporation shall be dissolved or liquidated; ---------- if it shall sell all or substantially all of its assets, whether voluntary or involuntary, or whether required or ordered by any federal or state authority, agency, court, or body; if it shall become insolvent; or distribute its capital in a winding-up of the Corporation, the holders of the issued and outstanding shares of Series I Preferred Stock shall be entitled to receive the amount of Thirty-Three and One-Third Cents ($0.33- 1/3) per share on a pro-rata basis with the holders of other series of Preferred Stock before any sum shall be paid or any assets distributed to the holders of shares of Common Stock. (2) Redemption ---------- (i) Redemption Price. The redemption price for all ---------------- redemptions of Series I Preferred Stock made in accordance with this Section 4.5(c)(2) shall be Thirty-Three and One-Third Cents ($0.33- 1/3) per share. (ii) Optional Redemption. All shares of Series I ------------------- Preferred Stock shall be subject to redemption by the Corporation at any time after May 1, 1998 by order of the Board of Directors. If less than the whole amount of the outstanding Series I Preferred Stock shall be redeemed, each holder of Series I Preferred Stock shall be entitled to have a portion of his, her or its shares redeemed on a pro rata basis. In the case of such a redemption, the Corporation shall send written notice thereof to each of the registered holders of Series I Preferred Stock at least sixty (60) days prior to the date designated in such notice for such redemption. Such notice shall set forth the manner in which the 5 certificates shall be surrendered in order to receive payments of the redemption price. Upon presentation of any certificate representing the shares to be redeemed, properly endorsed, the Corporation shall deliver its check to the holder thereof in payment of the redemption price for those shares. In the event all of the Series I Preferred Stock represented by the surrendered certificate are not redeemed, the Corporation shall promptly deliver to the holder of such certificate a new certificate representing the shares of the Series I Preferred Stock represented by such surrendered certificate which are not being redeemed. (iii) Mandatory Redemption. Shares of Series I Preferred -------------------- Stock shall be redeemed as follows: (A) On the 1st day of each December, beginning December 1, 1989, the Corporation shall, to the extent permitted by the laws of the State of Delaware, redeem from the holder or the holder's successor, one-eleventh (1/11th) of the number of authorized shares of Series I Preferred Stock; provided that for the five -------- year period between December 1, 1996 through December 1, 2001 the Company shall not redeem any portion of its Series I Preferred Stock. (B) The redemption price of Thirty-Three and One-Third Cents ($0.33-1/3) per share of Series I Preferred Stock shall be paid by check upon presentation by the holders of such shares to the Secretary of the Corporation of a certificate or certificates for the appropriate number of shares then to be redeemed, properly endorsed by such holders. In the event that such certificate or certificates represent a greater number of shares than the number of shares to be redeemed pursuant to this Section 4.5(c)(2)(iii), the Corporation shall promptly deliver to the holders of such certificate or certificates a new certificate representing the shares of Series I Preferred Stock represented by such surrendered certificate or certificates which are not being so redeemed. (iv) Remedy upon Failure to Redeem. In the event of the ----------------------------- failure of the Corporation to redeem any of the shares of Series I Preferred Stock as required by Section 4.5(c)(2)(iii) above, each holder of Series I Preferred Stock shall be entitled, at his, her or its option, to require the Corporation to redeem all of the then outstanding shares of Series I Preferred Stock held by such holder, provided that the Corporation's default has not been cured within thirty (30) days after a delivery to the Corporation of written notice of default by such holder. In the event of the exercise of such option by any holder of Series I Preferred Stock, the Corporation shall, to the extent permitted by the laws of the State of Delaware, pay a redemption price of Thirty-Three and One-Third Cents ($0.33-1/3) per each share of Series I Preferred Stock by check upon presentation by such holder of the certificate or certificates representing all shares of Series I Preferred Stock to be redeemed, properly endorsed by such holder. (v) Retirement and Cancellation. All shares of Series I --------------------------- Preferred Stock which shall have been redeemed as herein provided shall be cancelled and shall not be reissued as Series I Preferred Stock, and the Corporation shall from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of Series I Preferred Stock accordingly. 6 (3) Voting Rights. ------------- (i) General Voting Rights. Except as otherwise set forth --------------------- in Section 4.5(b)(3)(ii) below, each share of Series I Preferred Stock shall be entitled to ten (10) votes for the election of directors of the Corporation and to ten (10) votes upon any matter that comes to a vote before the stockholders of the Corporation on which the holders of any series of Common Stock are entitled to vote; provided that the holders of shares of Series I Preferred Stock shall be entitled to vote as a class upon any amendment to the Corporation's Certificate of Incorporation adversely affecting the rights of the holders of Series I Preferred Stock. The affirmative vote of the holders of a majority of the issued and outstanding shares of Series I Preferred Stock shall be required to approve any such amendment. (ii) Reduction of Voting Rights Following Certain -------------------------------------------- Transfers. --------- (A) If, on or after June 1, 1996, any share of Series I Preferred Stock is sold, assigned, pledged, hypothecated, transferred (by gift, will, laws of intestacy or otherwise) or exchanged or otherwise disposed of, other than to a Permitted Series I Transferee (as defined below), then, without any action required by the Corporation or the transferor or the transferee of such share, such share of Series I Preferred Stock shall automatically have the number of votes allocated to such share reduced from ten (10) votes per share to one (1) vote per share. (B) For purposes of this Section 4.5(b), a "Permitted Series I Transferee" shall mean, with respect to any given share of Series I Preferred Stock, (1) a spouse, child, grandchild, sibling, parent or other lineal descendant of (or, with respect to any shares held by a person that is not a natural person, any affiliate (as defined in Rule 12b-2 under the rules and regulations of the Securities Exchange Act of 1934, as amended) of) such share's Original Series I Preferred Stockholder (as defined below), (2) any other Original Series I Preferred Stockholder or (3) any person which is a party to the Standstill Agreement referred to in Section 4.4(a). An "Original Series I Preferred Stockholder" shall mean, with respect to any given share of Series I Preferred Stock, the person to whom such share was originally issued. ARTICLE V --------- Bylaws ------ In furtherance and not in limitation of the power conferred upon the Board of Directors by law, the Board of Directors shall have power to make, adopt, alter, amend and repeal, from time to time, the Bylaws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to alter and repeal Bylaws made by the Directors. 7 ARTICLE VI ---------- Directors --------- Section 6.1. The number of directors which shall constitute the full ------------ Board of Directors shall be determined by resolution of the Board of Directors from time to time, provided that such resolution shall not designate a number of directors other than seven (7) without the unanimous approval of the directors then in office. Section 6.2. The board of directors, other than those directors ------------ elected by the holders of any series of Preferred Stock as may be entitled to the election of directors, shall be divided into three classes, as nearly equal in number as possible, with the term of office of one class expiring each year and with each director serving for a term ending at the third annual meeting of stockholders of the Corporation following the annual meeting at which such director was elected. Section 6.3. Except as otherwise provided for or fixed pursuant to ------------ this Restated Certificate of Incorporation relating to the rights of the holders of any series of Preferred Stock to elect additional directors, and subject to the provisions hereof, newly created directorships resulting from any increase in the authorized number of directors, and any vacancies on the Board resulting from death, resignation, disqualification, removal, or other cause, may be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or in which the vacancy occurred, and until such director's successor shall have been duly elected and qualified, subject to his earlier death, disqualification, resignation or removal. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. Section 6.4. Notwithstanding the provisions of Sections 6.2 and 6.3 ------------ of this Article VI, each director shall serve until his successor is elected and qualified or until his or her death, retirement, resignation or removal. ARTICLE VII ----------- Written Ballot -------------- Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide. ARTICLE VIII ------------ Personal Liability of Directors ------------------------------- Section 8.1. To the fullest extent that the laws of the State of ------------ Delaware, as the same exist or may hereafter be amended, permit elimination of the personal liability of directors, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. 8 Section 8.2. Any amendment or repeal of this Article VIII or adoption ------------ of any Bylaw of the Corporation or other provision of the Certificate of Incorporation of the Corporation which has the effect of increasing director liability shall operate prospectively only and shall not affect any action taken, or any failure to act, by a director of the Corporation prior to such amendment, repeal, Bylaw or other provision becoming effective. ARTICLE IX ---------- Indemnification of, and Advancement of -------------------------------------- Expenses to, Directors, Officers and Other ------------------------------------------ The Corporation shall indemnify its officers, directors, employees and agents as provided in its Bylaws. 9 IN WITNESS WHEREOF, Smith's Food & Drug Centers, Inc. has caused this certificate to be signed by Jeffrey P. Smith, its President, and Michael C. Frei, its Secretary, this _____ day of ___________, 1996. SMITH'S FOOD & DRUG CENTERS, INC. By:________________________________ Jeffrey P. Smith President Attest: _________________________ Michael C. Frei Secretary STATE OF UTAH ) : ss. COUNTY OF SALT LAKE ) On this ____th day of ________ 1996, personally appeared before me Jeffrey P. Smith and Michael C. Frei, who being duly sworn did say that they are the President and Secretary, respectively, of Smith's Food & Drug Centers, Inc., and that they signed the foregoing Restated Certificate of Incorporation on behalf of such corporation by authority of its bylaws and a resolution adopted by its board of directors, and they acknowledged to me that such corporation executed the same, and verified that the information contained therein is true and correct. ___________________________________ Notary Public Residing at:_______________________ My Commission Expires: ______________________ 10 EX-3.2 3 AMENDED/RESTATED BYLAWS OF SMITH'S EXHIBIT 3.2 SMITH'S FOOD & DRUG CENTERS, INC. (a Delaware corporation) BY-LAWS ARTICLE I OFFICES ------- Section 1.01. Registered Office. The registered office of Smith's ------------ ----------------- Food & Drug Centers, Inc. (the "Corporation") in the State of Delaware shall be at 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent in charge thereof shall be The Corporation Trust Company. Section 1.02. Other Offices. The Corporation may also have an office ------------ ------------- or offices at such other place or places, either within or without the State of Delaware, as the Board of Directors (the "Board") may from time to time determine or as the business of the Corporation may require. ARTICLE II STOCKHOLDERS ------------ Section 2.01. Annual Meetings. Annual meetings of the stockholders ------------ --------------- of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings may be held at such time, date and place as the Board shall determine by resolution. Section 2.02. Special Meetings. Special meetings of the stockholders ------------ ---------------- may be called at any time, for the purpose or purposes set forth in the call, by the Chief Executive Officer, President or the Board of Directors by delivering a written request to the Secretary. At any time, upon the written request of any person or persons who have duly called a special meeting, it shall be the duty of the Secretary to give due notice thereof. Special meetings shall be held at such place, either within or without the State of Delaware, and at such time and date as may from time to time be designated by the person or persons calling the meeting and as specified in the notice of the meeting. Section 2.03. Notice of Annual and Special Meetings. Except as ------------ ------------------------------------- otherwise expressly required by law, notice of each meeting of stockholders, whether annual or special, shall be given at least ten (10) and not more than sixty (60) days prior to the date on which the meeting is to be held to each 1 stockholder of record entitled to vote thereat by delivery of a notice thereof to him personally or by sending a copy thereof through the United States mail or by telegram, charges prepaid, to his address appearing on the records of the Corporation. Each such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting, shall briefly state the purpose or purposes for which the meeting is called. A written waiver of notice, signed by the person or persons entitled to such notice, whether before or after the date and time fixed for the meeting shall be deemed the equivalent of such notice. Neither the business to be transacted at nor the purpose of the meeting need be specified in a waiver of notice of such meeting. Section 2.04. Quorum. A stockholders' meeting duly called shall not ------------ ------ be organized for the transaction of business unless a quorum is present. At any meeting the presence in person or by proxy of stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to be cast on the particular matter shall constitute a quorum for the purpose of considering such matter, except as otherwise expressly provided by law or by the Certificate of Incorporation or By-Laws of the Corporation. The stockholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, those present may adjourn the meeting from time to time to such time (not more than thirty (30) days after the next previous adjourned meeting) and place as they may determine, without notice other than by announcement at the meeting of the time and place of the adjourned meeting. Section 2.05. Voting. ------------ ------ (a) At every meeting of stockholders, each holder of record of issued and outstanding stock of the Corporation entitled to vote at such meeting shall be entitled to vote in person or by proxy and, except where a date has been fixed as the record of date for the determination of stockholders entitled to notice of or to vote at such meeting, no holder of record of a share of stock which has been transferred on the books of the Corporation within ten (10) days next preceding the date of such meeting shall be entitled to notice of or to vote at such meeting in respect of such share so transferred. (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be 2 counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants in common, tenants by entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the General Corporation Law of the State of Delaware. (c) Any such voting rights may be exercised by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized and delivered to the secretary of the meetings; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy shall provide for a longer period. The attendance at any meeting of a stockholder who may therefore have given a proxy shall not have the effect of revoking the same unless he shall in writing so notify the secretary of the meeting prior to the voting of the proxy. (d) Except with respect to the election of directors, resolutions of the stockholders shall be adopted, and any action of the stockholders at a meeting upon any matter shall be taken and be valid, only if at least a majority of the votes cast with respect to such resolutions or matter are cast in favor thereof, except as otherwise expressly provided by law or by the Certificate of Incorporation or By-Laws of the Corporation. The vote at any meeting of the stockholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and it shall state the number of shares voted. (e) The Chairman of the Board (if one has been elected and is present) shall be chairman, and the Secretary (if present) shall act as secretary, at all meetings of the stockholders. In the absence of the Chairman of the Board, the Chief Executive Officer shall be chairman; in the absence of the Chief Executive Officer, the President shall be chairman; and in the absence of all of them, the chairman shall be designated by the Board of Directors or if not so designated shall be elected by the stockholders present; and in the absence of the Secretary, an Assistant Secretary shall act as secretary of the meeting. 3 Section 2.06. List of Stockholders. The Secretary of the ------------ -------------------- Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at a meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.07. Judges. If at any meeting of the stockholders a vote ------------ ------ by written ballot shall be taken on any question, the chairman of such meeting may appoint a judge or judges to act with respect to such vote. Each judge so appointed shall first subscribe an oath faithfully to execute the duties of a judge at such meeting with strict impartiality and according to the best of his ability. Such judges shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question, shall conduct and accept the votes, and, when the voting is completed, shall ascertain and report the number of shares voted respectively for and against the question. Reports of judges shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The judges need not be stockholders of the Corporation, and any officer of the Corporation may be a judge on any question other than a vote for or against a proposal in which he shall have a material interest. Section 2.08. Procedure at Stockholders' Meetings. The organization ------------ ----------------------------------- of each meeting of the stockholders, the order of the business thereat and all matters relating to the manner of conducting the meetings shall be determined by the chairman of the meeting, whose decisions may be overruled only by majority vote (which shall not be by ballot) of the stockholders present and entitled to vote at the meeting in person or by proxy. Meetings shall be conducted in a manner designated to accomplish the business of the meeting in a prompt and orderly fashion and to be fair and equitable to all stockholders, but it shall not be necessary to follow Roberts Rules of Order or any other manual of parliamentary procedure. 4 Section 2.09. Action Without Meeting. Unless otherwise provided by ------------ ---------------------- the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote therein were present and voted, and such written consent is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. ARTICLE III DIRECTORS --------- Section 3.01. General Powers. The property, business and affairs of ------------ -------------- the Corporation shall be managed by, or under the direction of, the Board. Section 3.02. Number, Election and Term of Office. The number of ------------ ----------------------------------- directors which shall constitute the full Board of Directors shall be determined by resolution of the Board or by the stockholders at the annual meeting. Each director shall hold office for the term for which he is elected and thereafter until his successor is duly elected or until his prior death, resignation or removal in the manner hereinafter provided. Directors need not be stockholders. Section 3.03. Annual Meetings. Annual meetings of the Board of ------------ --------------- Directors shall be held each year at the same place as and immediately after the annual meeting of stockholders, or at such other place and time as shall theretofore have been determined by the Board. At its regular annual meeting, the Board of Directors shall organize itself and elect the officers of the Corporation for the ensuing year, and may transact any other business. Section 3.04. Regular Meetings. Regular meetings of the Board of ------------ ---------------- Directors may be held at such intervals and at such time and place as shall from time to time be determined by the Board. After there has been such determination and notice thereof has been once given to each person then a member of the Board of Directors, regular meetings may be held at such intervals and time and place without further notice being given. 5 Section 3.05. Special Meetings. Special meetings of the Board of ------------ ---------------- Directors may be called at any time by the Board, by the Chairman of the Board, by the Chief Executive Officer, by the President or by any two directors to be held on such day and at such time and place as shall be specified by the person or persons calling the meeting. Section 3.06. Notice of Annual and Special Meetings. Except as ------------ ------------------------------------- otherwise expressly required by law, notice of the annual meeting of the Board of Directors need not be given. Except as otherwise expressly required by law, notice of every special meeting of the Board of Directors specifying the place, date and time thereof shall be given to each director in writing either by being mailed on at lest the fifth day prior to the date of the meeting or by being delivered by telegraph, confirmed air courier or personally at least 48 hours prior to the time of the meeting. A written waiver of notice of a special meeting, signed by the person or persons entitled to such notice, whether before or after the date and time stated therein fixed for the meeting, shall be deemed the equivalent of such notice, and attendance of a director at a meeting shall constitute a waiver of notice of such meeting except when the director attends the meeting for the express purpose of objecting, when he enters the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 3.07. Quorum and Manner of Acting. At all meetings of the ------------ --------------------------- Board of Directors, except as otherwise expressly provided by law or by the Certificate of Incorporation or By-Laws of the Corporation, the presence of a majority of the full Board shall be necessary and sufficient to constitute a quorum for the transaction of business. If a quorum is not present at any meeting, the meeting may be adjourned from time to time by a majority of the directors present until a quorum as aforesaid shall be present, but notice of the time and place to which such a meeting is adjourned shall be given to any directors not present until a quorum as aforesaid shall be present, but notice of the time and place to which such a meeting is adjourned shall be given to any directors not present either by being by telegraph or given personally or by telephone at least eight hours prior to the date of reconvening. Resolutions of the Board of Directors shall be adopted, and any action of the Board at a meeting upon any matter shall be taken and be valid, only with the affirmative vote of at least a majority of the directors present at the meeting, except as otherwise provided herein. The Chairman of the Board (if one has been elected and is present) shall be chairman, and the Secretary (if present ) shall act as secretary, at all meetings of the Board. In the absence of the Chairman of the Board, the Chief Executive Officer shall be chairman; in the absence of the Chief Executive Officer, the President shall be chairman; and in the absence of all of them, the directors present shall select a member of the Board of Directors to be 6 chairman; and in the absence of the Secretary, the chairman of the meeting shall designate any person to act as secretary of the meeting. Section 3.08. Action Without Meeting. Any action required or ------------ ---------------------- permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a consent in writing, setting forth the actions so taken, shall be signed by all members of the Board or such committee, as they case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. Section 3.9. Participation by Conference Telephone. Members of the ----------- ------------------------------------- Board of Directors of the Corporation, or any committee designated by the Board, may participate in a meeting of the Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. Section 3.10. Resignations. A director may resign by submitting his ------------ ------------ written resignation to the Chairman of the Board (if one has been elected) or the Secretary. Unless otherwise specified therein, the resignation of a director need not be accepted to make it effective and shall be effective immediately upon its receipt by such officer or as otherwise specified therein. If the resignation of a director specifies that it shall be effective at some time later than receipt, until that time the resignation director shall be competent to act on all matters before the Board of Directors, including filling the vacancy caused by such resignation. Section 3.11. Removal of Directors. The entire Board of Directors or ------------ -------------------- any individual director may be removed at any time for cause by the holders of a majority of the shares then entitled to vote at an election of directors. The vacancy or vacancies caused in the Board of Directors by such removal may only be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board. Section 3.12. Vacancies. Any vacancy that shall occur in the Board ------------ --------- of Directors by reason of death, resignation, removal, increase in the number of directors or any other cause whatever shall be filled by a majority of the then members of the Board, whether or not a quorum, and each person 7 so elected shall be a director until he or his successor is elected by the stockholders at a meeting called for the purpose of electing directors, or until his prior death, resignation or removal. Section 3.13. Compensation of Directors. The Corporation may allow ------------ ------------------------- compensation to its directors for their services, as determined from time to time by resolution adopted by the Board of Directors. The Board may also provide that the Corporation shall reimburse each such director for any expense incurred by him on account of his attendance at any meetings of the Board or Committees of the Board. Neither the payment of such compensation nor the reimbursement of such expenses shall be construed to preclude any director from serving the Corporation or its subsidiaries in any other capacity and receiving compensation therefor. Section 3.14. Committees. The Board of Directors may, by resolution, ------------ ---------- designate one or more committees consisting of directors to have and exercise such authority of the Board in the management of the business and affairs of the Corporation as the resolution of the Board creating such committee may specify and as is otherwise permitted by law. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of such absent or disqualified member. Section 3.15. Personal Liability of Directors. ------------ ------------------------------- (a) To the fullest extent that the laws of the State of Delaware, as the same exist or may hereafter be amended, permit elimination of the personal liability of directors, no director of this Corporation shall be personally liable to this Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (b) Any amendment or repeal of this Section 3.15 or adoption of any By-Law of this Corporation or other provision of the Certificate of Incorporation of this Corporation which has the effect of increasing director liability shall operate prospectively only and shall not affect any action taken, or any failure to act, by a director of this Corporation prior to such amendment, repeal, By-Law or other provision becoming effective. 8 ARTICLE IV OFFICERS AND EMPLOYEES ---------------------- Section 4.01. Executive Officers. The Executive Officers of the ------------ ------------------ Corporation shall be the Chief Executive Officer, the President, a Secretary and a Treasurer, and may include a Chairman of the Board, one or more Vice Presidents, and one or more Assistant Secretaries as the Board of Directors may from time to time determine, all of whom shall be elected by the Board of Directors. Any two or more offices may be held by the same person. Each Executive Officer shall hold office until the next succeeding annual meeting of the Board of Directors and thereafter until his successor is duly elected and qualifies, or until his earlier death, resignation or removal. Section 4.02. Additional Officers: Other Agents and Employees. The ------------ ------------------------------------------------ Board of Directors may from time to time appoint or hire such additional officers, assistant officers, agents, employees and independent contractors as the Board deems advisable; and the Board or the Chief Executive Officer shall prescribe their duties, conditions of employment and compensation. Subject to the power of the Board of Directors, the Chief Executive Officer may employ from time to time such other agents, employees, and independent contractors as he may deem advisable for the prompt and orderly transaction of the business of the Corporation, and he may prescribe their duties and the conditions of their employment, fix their compensation and dismiss them, without prejudice to their contract rights, if any. The Board may delegate to any officer of the Corporation or any committee of the Board the power to appoint, remove and prescribe the duties of any assistant officers, agents or employees. Section 4.03. Removal. Any officer, assistant, agent or employee of ------------ ------- the Corporation may be removed, with or without cause, at any time: (i) in the case of an officer, assistant, agent or employee appointed by the Board, only by resolution of the Board; and (ii) in the case of an officer, assistant, agent or employee, by any officer of the Corporation or committee of the Board upon whom or which such power of removal may be conferred by the Board. Section 4.04. The Chairman. If there shall be a Chairman of the ------------ ------------ Board, he shall be elected from among the directors, and shall preside at all meetings of the stockholders and of the Board at which he shall be present. He shall have such other powers and duties as from time to time may be prescribed by the Board or these By-Laws. 9 Section 4.04. The Chief Executive Officer. The Chief Executive ------------ --------------------------- Officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. He shall have such other powers and duties as from time to time may be prescribed by the Board or these By-Laws. Section 4.05. The President. The President shall be the chief ------------ ------------- operating officer of the Corporation, unless otherwise specified by the Board by resolution. Subject to the control of the Board of Directors and the Chief Executive Officer, the President shall have general policy supervision of and general management and executive powers over all the property, business, operations and affairs of the Corporation, and shall see that the policies and programs adopted or approved by the Board are carried out. The President shall exercise such further powers and duties as from time to time may be prescribed by the Board of Directors, the Chief Executive Officer or these By-Laws. Section 4.06. The Vice Presidents. The Vice Presidents may be given ------------ ------------------- by resolution of the Board of Directors general executive powers, subject to the control of the President, concerning one or more or all segments of the operations of the Corporation. The Vice Presidents shall exercise such further powers and duties as from time to time may be prescribed in these By-Laws or by the Board of Directors, by the Chief Executive Officer or by the President. At the request of the President or in his absence or disability, the senior Vice President shall exercise all the powers and duties of the President. Section 4.07. The Secretary and Assistant Secretaries. It shall be ------------ --------------------------------------- the duty of the Secretary (a) to keep or cause to be kept an original or duplicate record of the proceedings of the stockholders and the Board of Directors, and a copy of the Certificate of Incorporation and of the By-Laws; (b) to attend to the giving of notices of the Corporation as may be required by law or these By-Laws; (c) to be custodian of the corporate records and of the seal of the Corporation and see that the seal is affixed to such documents as may be necessary or advisable; (d) to have charge of the stock books of the Corporation, and a share register, giving the names of the stockholders in alphabetical order, and showing their respective addresses, the number and classes of shares held by each, the number and date of certificates issued for the shares, and the date of cancellation of every certificated surrendered for cancellation; and (e) to exercise all powers and duties incident to the office of Secretary, and such other powers and duties as may be prescribed by the Board of Directors, the Chief Executive Officer or the President from time to time. The Secretary by virtue of his office shall be an Assistant Treasurer. The 10 Assistant Secretaries shall assist the Secretary in the performance of his duties and shall also exercise such further powers and duties as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, the President or the Secretary. At the direction of the Secretary or in his absence or disability, an Assistant Secretary shall perform the duties of the Secretary. Section 4.08. The Treasurer and Assistant Treasurers. The Treasurer ------------ -------------------------------------- shall have custody of all the funds and securities of the Corporation. He shall collect all moneys due the Corporation. He shall collect all moneys due the Corporation and deposit such moneys to the credit of the Corporation in such banks, trust companies, or other depositories as may have been duly designated by the Board of Directors. He shall endorse for collection on behalf of the Corporation, checks, notes, drafts and other documents, and may sign and deliver receipts, vouchers and releases of liens evidencing payments made to the Corporation. Subject to Section 5.01 of these By-Laws, he shall cause to be disbursed the funds of the Corporation by payment in cash or by checks or drafts upon the authorized depositories of the Corporation. He shall have charge of the books and accounts of the Corporation. He shall perform all acts incident to the office of Treasurer and such other duties as may be assigned to him by the Board of Directors or the Chief Executive Officer. The Treasurer by virtue of his office shall be an Assistant Secretary. The Assistant Treasurers shall assist the Treasurer in the performance of his duties and shall also exercise such further powers and duties as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, the President or the Treasurer. At the direction of the Treasurer or in his absence or disability, an Assistant Treasurer shall perform the duties of the Treasurer. Section 4.09. Vacancies. Vacancy in any office or position by reason ------------ --------- of death, resignation, removal, disqualification, disability or other cause, shall be filled in the manner provided in this Article IV for regular election or appointment to such office. Section 4.10. Delegation of Duties. The Board of Directors may in ------------ -------------------- its discretion delegate for the time being the powers and duties, or any of them, of any officer to any other person whom it may select. 11 ARTICLE V SHARES OF CAPITAL STOCK ----------------------- Section 5.01. Share Certificates. Every holder of stock in the ------------ ------------------ Corporation shall be entitled to a certificate or certificates, to be in such form as the Board of Directors may from time to time prescribe, signed by the Chairman of the Board, the Chief Executive Officer, the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary. The signatures of such officers may be facsimiles. Each such certificate shall set forth the name of the registered holder thereof, the number and class of shares and the designation of the series, if any, which the certificate represents. The Board of Directors may, if it so determines, direct that certificates for shares of stock of the Corporation be signed by a transfer agent or registered by a registrar or both, in which case such certificates shall not be valid until so signed or registered. In case any officer of the Corporation who shall have signed, or whose facsimile signature shall have been used on, any certificate for shares of stock of the Corporation shall cease to be such officer, whether because of death, resignation, removal or otherwise, before such certificate shall have been delivered by the Corporation, such certificate shall nevertheless be deemed to have been adopted by the Corporation and may be issued and delivered as though the person who signed such certificate or whose facsimile signature shall have been used thereon had not ceased to be such officer. Section 5.02. Transfer of Shares. Transfers of shares of stock of ------------ ------------------ the Corporation shall be made only on the books of the Corporation by the registered holder thereof or by his attorney thereunto authorized by an instrument duly executed and filed with the Corporation, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by properly executed stock powers and evidence of the payment of all taxes imposed upon such transfer. Except as provided in Section 5.04 of this Article V, every certificate surrendered for transfer shall be cancelled and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled. Section 5.03. Transfer Agents and Registrars. The Board of Directors ------------ ------------------------------ may appoint any one or more qualified banks, trust companies or other corporations organized under any law of any state of the United States or under the laws of the United States as agent or agents for the Corporation in the transfer of the stock of the Corporation and likewise may appoint any one or more such qualified banks, trust companies or other corporations as registrar or registrars of the stock of the Corporation. 12 Section 5.04. Lost, Stolen, Destroyed or Mutilated Certificates. New ------------ ------------------------------------------------- certificates for shares of stock may be issued to replace certificates lost, stolen, destroyed or mutilated upon such terms and conditions, which may but need not include the giving of a satisfactory bond or other indemnity, as the Board of Directors may from time to time determine. Section 5.05. Regulations Relating to Shares. The Board of Directors ------------ ------------------------------ shall have power and authority to make such rules and regulations not inconsistent with these By-Laws or with law as it may deem expedient concerning the issue, transfer and registration of certificates representing shares of stock of the Corporation. Section 5.06. Holders of Record. The Corporation shall be entitled ------------ ----------------- to treat the holder of record of any share or shares of stock as the holder and owner in fact thereof and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the laws of the State of Delaware. Section 5.07. Fixing of Record Date. The Board of Directors may fix ------------ --------------------- a record date which does not precede the date on which the resolution fixing such record date is adopted, (a) in order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders, provided such record date is not less than ten (10) or more than sixty (60) days prior to the date of any such meeting; (b) in order to determine the stockholders entitled to consent to corporate action in writing without a meeting, provided such record date is not more than ten (10) days after the date on which the resolution fixing such record date is adopted; and (c) in order to determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, provided such record date is not more than sixty (60) days prior to such action. 13 In such case, only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date fixed as aforesaid. ARTICLE VI LOANS, NOTES, CHECKS, CONTRACTS AND OTHER INSTRUMENTS ------------------------------- Section 6.01. Notes, Checks, etc. All notes, drafts, acceptances, ------------ ------------------- checks, endorsements (other than for deposit) and all evidences of indebtedness of the Corporation whatsoever shall be signed by such officers or agents and shall be subject to such requirements as to countersignature or other conditions as the Board of Directors from time to time may designate. Facsimile signatures on checks may be used unless prohibited by the Board of Directors. Section 6.02. Execution of Instruments Generally. Except as provided ------------ ---------------------------------- in Section 6.01 of this Article VI, all contracts and other instruments requiring execution by the Corporation may be executed and delivered by the Chief Executive Officer, the President or any Vice President, and authority to sign any such contracts or instruments, which may be general or confined to specific instances, may be conferred by the Board of Directors upon any other person or persons. Any person having authority to sign on behalf of the Corporation may delegate, from time to time, by instrument in writing, all or any part of such authority to any person or persons if authorized so to do by the Board of Directors. Section 6.03. Proxies in Respect of Stock or Other Securities of ------------ -------------------------------------------------- Other Corporations. Unless otherwise provided by the Board of Directors, the - ------------------ President may from time to time appoint an attorney or attorneys or an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation to vote or consent in respect of such stock or other securities, may instruct the person or persons so appointed as to the manner of exercising such powers and rights and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise all such written proxies or other instruments as he may deem necessary or proper in order that the Corporation may exercise its said powers and rights. 14 ARTICLE VII GENERAL PROVISIONS ------------------ Section 7.01. Corporate Seal. The Board of directors may prescribe ------------ -------------- the form of a suitable corporate seal, which shall contain the full name of the Corporation and the year and state of incorporation. Such seal may be used by causing it or a facsimile or reproduction thereof to be affixed to or placed upon the document to be sealed. Section 7.02. Fiscal Year. Unless otherwise determined by the Board ------------ ----------- of Directors, the Corporation shall have a 52/53 week fiscal year ending on the Saturday closest to December 31 each year. ARTICLE VIII VALIDATION OF CERTAIN CONTRACTS ------------------------------- Section 8.01. Validation of Certain Contracts. No contract or other ------------ ------------------------------- transaction between the Corporation and another person shall be invalidated or otherwise adversely affected by the fact that any one or more stockholders, directors or officers of the Corporation (i) is pecuniarily or otherwise interested in, or is a stockholder, director, officer, or member of, such other person, or (ii) is a party to, or is in any other way pecuniarily or otherwise interested in, the contract or other transaction, or (iii) is in any way connected with any person pecuniarily or otherwise interested in such contract or other transaction, provided the fact of such interest shall be disclosed or known to the Board of Directors or the stockholders, as the case may be, and in any action of the stockholders or of the Board authorizing or approving any such contract or other transaction, any and every stockholder or director may be counted in determining the existence of a quorum with like force and effect as through he were not so interested, or were not such a stockholder, director, member or officer, or were not such a party, or were not so connected As used herein, the term "person" includes a corporation, partnership, firm, association or other legal entity. 15 ARTICLE IX AMENDMENTS ---------- Section 9.01. Amendments. These By-Laws, or any of them, may be ------------ ---------- altered, amended or repealed, and new By-Laws may be made, (i) by the Board, by vote of a majority of the number of directors then in office as directors, acting at any meeting of the Board, or (ii) by the stockholders, at any meeting of the Board, or (ii) by the stockholders, at any annual meeting of stockholders, provided that notice of such proposed amendment, modification, repeal or adoption is given in the notice of special meeting. Any By-Laws made or altered by the stockholders may be altered or repealed by either the Board or the stockholders. ARTICLE X INDEMNIFICATION OF, AND ADVANCEMENT OF EXPENSES TO, DIRECTORS, OFFICERS AND OTHERS ------------------------------------------- Section 10.01. Rights Indemnification. Except as prohibited by law, ------------- ---------------------- every director and officer of the Corporation shall be entitled as of right to be indemnified by the Corporation against all expenses and liability (as those terms are defined below in this Section 10.01) incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, whether civil, criminal, administrative, investigative or other, or whether brought by or against such persons or by or in the right of the Corporation or otherwise, by reason of such person being or having been a director or officer of the Corporation or a subsidiary of the Corporation or by reason of the fact that such person is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as an "Action"); provided, however, that no such right to indemnification shall exist with respect to an Action brought by an Indemnitee (as defined below) against the Corporation (an "Indemnitee Action") except as provided in the last sentence of this Section 10.01. Persons who are not directors or officers of the Corporation may be similarly indemnified in respect of service to the Corporation or a subsidiary of the Corporation or to another such entity at the request for the corporation to the extent the Board of Directors of the Corporation at any time designates any of such persons as entitled to the benefits of this Article X. As used in this Article X, "Indemnitee" includes each director and officer of the Corporation and each other person designated by the Board of Directors of the Corporation as entitled to the benefits of this Article X; "expenses" means 16 all expenses actually and reasonably incurred, including fees and expenses of counsel selected by an Indemnitee; and "liability" means all liability incurred, including the amounts of any judgments, excise taxes, fines or penalties and any amounts paid in settlement. An Indemnitee shall be entitled to be indemnified pursuant to this Article X against expenses incurred in connection with an Indemnitee Action if (i) the Indemnitee Action is instituted under Section 10.03 of this Article X and the indemnitee is successful in whole or in part in such Indemnitee Action, (ii) the Indemnitee is successful in whole or in part in another Indemnitee Action for which expenses are claimed or (iii) the indemnification for expenses is included in a settlement of, or is awarded by a court in, such other Indemnitee Action. Section 10.02. Right to Advancement of Expenses. Every Indemnitee ------------- -------------------------------- shall be entitled as of right to have the expenses of the Indemnitee in defending any Action or in bringing and pursuing any Indemnitee Action under Section 10.03 of this Article X paid in advance by the Corporation prior to final disposition of the Action or Indemnitee Action, provided that the Corporation receives a written undertaking by or on behalf of the Indemnitee to repay the amount advanced if it should ultimately be determined that the Indemnitee is not entitled to be indemnified for the expenses. Section 10.03. Right of Indemnitee to Bring Action. If a written ------------- ----------------------------------- claim for indemnification under Section 10.01 of this Article X or for advancement of expenses under Section 10.02 of this Article X is not paid in full by the Corporation within thirty (30) days after the claim has been received by the Corporation, the Indemnitee may at any time thereafter bring an Indemnitee Action to recover the unpaid amount of the claim and, if successful in whole or in part, the Indemnitee shall also be entitled to be paid the expense of bringing and pursuing such Indemnitee Action. The only defense to an Indemnitee Action to recover on a claim for indemnification under Section 10.01 of this Article X shall be that the conduct of the Indemnitee was such that under Delaware law the Corporation is prohibited from indemnifying the Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel and stockholders) to have made a determination prior to the commencement of such Indemnitee Action that indemnification of the Indemnitee is proper in the circumstances, not an actual determination by the Corporation (including its board of Directors, independent legal counsel or stockholders) that the conduct of the Indemnitee was such that indemnification is prohibited by Delaware law, shall be a defense to such Indemnitee Action or create a presumption that the conduct of the Indemnitee was such that indemnification is prohibited by Delaware law. The only defense to an Indemnitee Action to recover on a claim for advancement of expenses under 17 Section 10.02 of this Article X shall be failure by the Indemnitee to provide the undertaking required by Section 10.02 of this Article X. Section 10.04. Funding and Insurance. The Corporation may create a ------------- --------------------- trust fund, grant a security interest, cause a letter of credit to be issued or use other means (whether or not similar to the foregoing) to ensure the payment of all sums required to be paid by the Corporation to effect indemnification as provided in this Article X. The Corporation may purchase and maintain insurance to protect itself and any Indemnitee against any expenses or liability incurred by the Indemnitee in connection with any Action, whether or not the Corporation would have the power to indemnify the Indemnitee against the expenses or liability by law or under the provisions of this Article X. Section 10.05. Non-Exclusivity; Nature and Extent of Rights. The ------------- -------------------------------------------- rights to indemnification and advancement of expenses provided for in this Article X shall (i) not be deemed exclusive of any other rights, whether now existing or hereafter created, to which any Indemnitee may be entitled under any agreement, provision in the Certificate of Incorporation or By-Laws of the Corporation, vote of stockholders or disinterested directors or otherwise; (ii) be deemed to create contractual rights in favor of each Indemnitee who serves at any time while this Article X is in effect (and each such Indemnitee shall be deemed to be serving in reliance on the provisions of this Article X); (iii) continue as to each Indemnitee who has ceased to have the status pursuant to which the Indemnitee was entitled or was designated as entitled to indemnification under this Article X and inure to the benefit of the heirs and legal representatives of each Indemnitee; and (iv) be applicable to Actions commenced after this Article X becomes effective, whether arising from acts or omissions occurring before or after this Article X becomes effective. Any amendment or repeal of this Article X or adoption of any By-Law of the Corporation or other provision of the Certificate of Incorporation of the Corporation which has the effect of limiting in any way the rights to indemnification or advancement of expenses provided for in this Article X shall operate prospectively only and shall not affect any action take, or any failure to act, by an Indemnitee prior to such amendment, repeal, By-Law or other provision becoming effective. Section 10.06. Partial Indemnity. If an Indemnitee is entitled under ------------- ----------------- any provision of this Article X to indemnification by the Corporation for some or a portion of the expenses or liability incurred by the Indemnitee in the preparation, investigation, defense, appeal or settlement of any Action or Indemnitee Action but not, however, for the total amount thereof, the Corporation shall indemnify the Indemnitee for the portion of such expenses or liability to which the Indemnitee is entitled. 18 CERTIFICATE OF ADOPTION OF BY-LAWS By Resolution dated the ____ day of May, 1996, all Directors of Smith's Food & Drug Centers, Inc., unanimously approved and adopted the foregoing By-Laws as the By-Laws of said Corporation effective as of May 23, 1996. This Certificate is dated May 23, 1996. SMITH'S FOOD & DRUG CENTERS, INC. By________________________________ Michael C. Frei Secretary 19 EX-5.1 4 OPINION OF LATHAM & WATKINS Exhibit 5.1 [LETTERHEAD OF LATHAM & WATKINS] May 13, 1996 Smith's Food & Drug Centers, Inc. 1550 South Redwood Road Salt Lake City, Utah 84104 Re: Smith's Food & Drug Centers, Inc. Registration Statement on Form S-3 (File No. 333-01601) ------------------------------------------------------- Ladies and Gentlemen: In connection with the Registration Statement on Form S-3 (File No. 333-01601) originally filed with the Securities and Exchange Commission on March 11, 1996 (as amended or supplemented, the "Registration Statement") by Smith's Food & Drug Centers, Inc., a Delaware corporation (the "Company"), with respect to $575,000,000 aggregate principal amount of its Senior Subordinated Notes due 2007 (the "Notes"), you have requested our opinion with respect to the matters set forth below. In our capacity as special counsel to you in connection with such registration, we are familiar with the proceedings taken and proposed to be taken by the Company in connection with the authorization, issuance and sale of the Notes, and for purposes of this opinion, have assumed such proceedings will be timely completed in the manner presently proposed. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to our satisfaction of such documents, corporate records and instruments, as we have determined necessary or appropriate for purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies. We are opining herein as to the effect on the subject transaction only of the federal laws of the United States and the internal laws of the State of New York and the General Corporation Law of the State of Delaware. We express no opinion with respect to the applicability thereto, or the effect thereon, of any other laws. [LATHAM & WATKINS LETTERHEAD] Smith's Food & Drug Centers, Inc. May 13, 1996 Page 2 Subject to the foregoing, it is our opinion that the Notes have been duly authorized, and upon issuance, delivery and payment therefor in the manner contemplated by the Registration Statement, will be validly issued. We consent to you filing this opinion as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters." Very truly yours, /s/ LATHAM & WATKINS EX-10.1 5 FORM OF CREDIT AGREEMENT DATED 5/23/96 ================================================================================ EXHIBIT 10.1 $995,000,000 CREDIT AGREEMENT DATED AS OF MAY 23, 1996 AMONG SMITH'S FOOD & DRUG CENTERS, INC., AS BORROWER, THE LENDERS LISTED HEREIN, AS LENDERS, BANKERS TRUST COMPANY AND THE CHASE MANHATTAN BANK, N.A., AS ARRANGERS, CHASE SECURITIES, INC., AS SYNDICATION AGENT, AND BANKERS TRUST COMPANY, AS ADMINISTRATIVE AGENT ================================================================================ SMITH'S FOOD & DRUG CENTERS, INC. CREDIT AGREEMENT TABLE OF CONTENTS -----------------
PAGE ---- SECTION 1. DEFINITIONS.......................................................... 4 1.1 Certain Defined Terms................................................ 4 --------------------- 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations ------------------------------------------------------------------ Under Agreement...................................................... 45 --------------- 1.3 Other Definitional Provisions and Rules of Construction.............. 46 ------------------------------------------------------- SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS........................... 47 2.1 Commitments; Making of Loans; the Register; Notes.................... 47 ------------------------------------------------- 2.2 Interest on the Loans................................................ 56 --------------------- 2.3 Fees................................................................. 62 ---- 2.4 Repayments, Prepayments and Reductions in Revolving Loan -------------------------------------------------------- Commitments; General Provisions Regarding Payments................... 62 -------------------------------------------------- 2.5 Use of Proceeds...................................................... 75 --------------- 2.6 Special Provisions Governing Eurodollar Rate Loans................... 76 -------------------------------------------------- 2.7 Increased Costs; Taxes; Capital Adequacy............................. 79 ---------------------------------------- 2.8 Obligation of Lenders and Issuing Lenders to Mitigate................ 83 ----------------------------------------------------- 2.9 Replacement of Lender................................................ 84 --------------------- SECTION 3. LETTERS OF CREDIT.................................................... 85 3.1 Issuance of Letters of Credit and Revolving Lenders' Purchase of ---------------------------------------------------------------- Participations Therein............................................... 85 ---------------------- 3.2 Letter of Credit Fees................................................ 89 --------------------- 3.3 Drawings and Reimbursement of Amounts Paid Under Letters of ----------------------------------------------------------- Credit............................................................... 90 ------ 3.4 Obligations Absolute................................................. 92 -------------------- 3.5 Indemnification; Nature of Issuing Lenders' Duties................... 94 -------------------------------------------------- 3.6 Increased Costs and Taxes Relating to Letters of Credit.............. 95 ------------------------------------------------------- SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT............................ 96 4.1 Conditions to Term Loans and Initial Revolving Loans and Swing -------------------------------------------------------------- Line Loans........................................................... 96 ---------- 4.2 Conditions to All Loans.............................................. 108 ----------------------- 4.3 Conditions to Letters of Credit...................................... 109 ------------------------------- SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES............................. 110 5.1 Organization, Powers, Qualification, Good Standing, Business and ---------------------------------------------------------------- Subsidiaries......................................................... 110 ------------
(i)
PAGE ---- 5.2 Authorization of Borrowing, etc...................................... 111 ------------------------------- 5.3 Financial Condition.................................................. 112 ------------------- 5.4 No Material Adverse Change; No Restricted Junior Payments............ 113 --------------------------------------------------------- 5.5 Title to Properties; Liens........................................... 113 -------------------------- 5.6 Litigation; Adverse Facts............................................ 114 ------------------------- 5.7 Payment of Taxes..................................................... 114 ---------------- 5.8 Performance of Agreements; Materially Adverse Agreements; --------------------------------------------------------- Material Contracts................................................... 115 ------------------ 5.9 Governmental Regulation.............................................. 115 ----------------------- 5.10 Securities Activities................................................ 115 --------------------- 5.11 Employee Benefit Plans............................................... 115 ---------------------- 5.12 Certain Fees......................................................... 116 ------------ 5.13 Environmental Protection............................................. 117 ------------------------ 5.14 Employee Matters..................................................... 118 ---------------- 5.15 Solvency............................................................. 119 -------- 5.16 Matters Relating to Collateral....................................... 119 ------------------------------ 5.17 Related Agreements................................................... 120 ------------------ 5.18 Permits.............................................................. 120 ------- 5.19 Disclosure........................................................... 120 ---------- 5.20 Real Property Assets................................................. 121 -------------------- SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS...................................... 121 6.1 Financial Statements and Other Reports............................... 121 -------------------------------------- 6.2 Corporate Existence, etc............................................. 127 ------------------------ 6.3 Payment of Taxes and Claims; Tax Consolidation....................... 128 ---------------------------------------------- 6.4 Maintenance of Properties; Insurance................................. 128 ------------------------------------ 6.5 Inspection; Lender Meeting........................................... 129 -------------------------- 6.6 Compliance with Laws, etc............................................ 130 ------------------------- 6.7 Environmental Disclosure and Inspection; Remedial Action Regarding ------------------------------------------------------------------ Hazardous Materials.................................................. 130 ------------------- 6.8 Execution of Subsidiary Guaranty and Personal Property Collateral ----------------------------------------------------------------- Documents by Future Subsidiaries..................................... 132 -------------------------------- 6.9 Additional Real Property............................................. 133 ------------------------ 6.10 Interest Rate Protection............................................. 138 ------------------------ SECTION 7. COMPANY'S NEGATIVE COVENANTS......................................... 138 7.1 Indebtedness......................................................... 138 ------------ 7.2 Liens and Related Matters............................................ 141 ------------------------- 7.3 Investments; Joint Ventures.......................................... 143 --------------------------- 7.4 Contingent Obligations............................................... 145 ---------------------- 7.5 Restricted Junior Payments; Other Restricted Payments................ 147 ----------------------------------------------------- 7.6 Financial Covenants.................................................. 148 ------------------- 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions..... 154 ----------------------------------------------------------------
(ii)
PAGE ---- 7.8 Consolidated Capital Expenditures.................................... 156 --------------------------------- 7.9 Restriction on Leases................................................ 157 --------------------- 7.10 Sales and Lease-Backs................................................ 158 --------------------- 7.11 Sale or Discount of Receivables...................................... 159 ------------------------------- 7.12 Transactions with Shareholders and Affiliates........................ 159 --------------------------------------------- 7.13 Disposal of Subsidiary Stock; Restrictions on Subsidiaries........... 159 ---------------------------------------------------------- 7.14 Conduct of Business.................................................. 160 ------------------- 7.15 Amendments or Waivers of Certain Related Agreements; --------------------------------------------------- Amendments of Documents Relating to Subordinated Indebtedness; -------------------------------------------------------------- Designation of "Designated Senior Indebtedness" ..................... 160 ----------------------------------------------- 7.16 Fiscal Year.......................................................... 161 ----------- SECTION 8. EVENTS OF DEFAULT.................................................... 161 8.1 Failure to Make Payments When Due.................................... 161 --------------------------------- 8.2 Default in Other Agreements.......................................... 161 --------------------------- 8.3 Breach of Certain Covenants.......................................... 162 --------------------------- 8.4 Breach of Warranty................................................... 162 ------------------ 8.5 Other Defaults Under Loan Documents.................................. 162 --------------------------------------------------- 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc................. 162 ---------------------------------------------------- 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc................... 163 --------------------------------------------------- 8.8 Judgments and Attachments............................................ 163 ------------------------- 8.9 Dissolution.......................................................... 163 ----------- 8.10 Employee Benefit Plans............................................... 164 ---------------------- 8.11 Change in Control.................................................... 164 ----------------- 8.12 Invalidity of Subsidiary Guaranty.................................... 164 --------------------------------- 8.13 Failure of Security.................................................. 164 ------------------- 8.14 Failure to Consummate the Transactions............................... 164 -------------------------------------- 8.15 Action Under Related Financing Documents............................. 165 ---------------------------------------- SECTION 9. AGENT................................................................ 166 9.1 Appointment ----------- 9.2 Powers and Duties; General Immunity.................................. 167 ----------------------------------- 9.3 Representations and Warranties; No Responsibility For Appraisal --------------------------------------------------------------- of Creditworthiness.................................................. 169 ------------------- 9.4 Right to Indemnity................................................... 169 ------------------ 9.5 Successor Agent and Swing Line Lender................................ 170 ------------------------------------- 9.6 Collateral Documents and Subsidiary Guaranty......................... 170 -------------------------------------------- SECTION 10. MISCELLANEOUS........................................................ 171 10.1 Assignments and Participations in Loans and Letters of Credit........ 171 ------------------------------------------------------------- 10.2 Expenses............................................................. 174 -------- 10.3 Indemnity............................................................ 175 --------- 10.4 Set-Off.............................................................. 177 -------
(iii)
PAGE ---- 10.5 Ratable Sharing...................................................... 177 --------------- 10.6 Amendments and Waivers............................................... 178 ---------------------- 10.7 Independence of Covenants............................................ 180 ------------------------- 10.8 Notices.............................................................. 180 ------- 10.9 Survival of Representations, Warranties and Agreements............... 180 ------------------------------------------------------ 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative................ 181 ----------------------------------------------------- 10.11 Marshalling; Payments Set Aside...................................... 181 ------------------------------- 10.12 Severability......................................................... 181 ------------ 10.13 Obligations Several; Independent Nature of Lenders' Rights........... 181 ---------------------------------------------------------- 10.14 Headings............................................................. 182 -------- 10.15 Applicable Law....................................................... 182 -------------- 10.16 Successors and Assigns............................................... 182 ---------------------- 10.17 Consent to Jurisdiction and Service of Process....................... 182 ---------------------------------------------- 10.18 Waiver of Jury Trial................................................. 183 -------------------- 10.19 Confidentiality...................................................... 184 --------------- 10.20 Counterparts; Effectiveness.......................................... 184 --------------------------- Signature pages............................................................ S-1
(iv) EXHIBITS I FORM OF NOTICE OF BORROWING II FORM OF NOTICE OF CONVERSION/CONTINUATION III FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT IV-A FORM OF TRANCHE A TERM NOTE IV-B FORM OF TRANCHE B TERM NOTE IV-C FORM OF TRANCHE C TERM NOTE IV-D FORM OF TRANCHE D TERM NOTE V FORM OF REVOLVING NOTE VI FORM OF SWING LINE NOTE VII FORM OF COMPLIANCE CERTIFICATE VIII FORM OF OPINION OF LATHAM & WATKINS IX FORM OF OPINION OF O'MELVENY & MYERS X FORM OF ASSIGNMENT AGREEMENT XI FORM OF AUDITOR'S LETTER XII FORM OF FINANCIAL CONDITION CERTIFICATE XIII FORM OF COLLATERAL ACCOUNT AGREEMENT XIV FORM OF PLEDGE AGREEMENT XV FORM OF SECURITY AGREEMENT XVI FORM OF TRADEMARK SECURITY AGREEMENT XVII FORM OF SUBSIDIARY GUARANTY XVIII FORM OF MORTGAGE XIX FORM OF LANDLORD'S ACKNOWLEDGEMENT AND CONSENT AGREEMENT (v) SCHEDULES 2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES 2.4B STORES UNDER DEVELOPMENT 3.1C EXISTING LETTERS OF CREDIT 4.1B CERTAIN RECENT DEVELOPMENTS 4.1I REAL PROPERTY ASSETS 5.1 SUBSIDIARIES OF COMPANY 5.2C REGISTRATION STATEMENTS, CONSENTS AND APPROVALS 5.11 EMPLOYEE BENEFIT PLANS 5.12 CERTAIN FEES 5.13 ENVIRONMENTAL MATTERS 5.18 CERTAIN PERMITS 5.20 SURPLUS LEASED PROPERTIES; SURPLUS OWNED PROPERTIES; EXCESS CALIFORNIA LAND; CALIFORNIA STORES 7.1 CERTAIN EXISTING INDEBTEDNESS 7.2 CERTAIN EXISTING LIENS 7.3 CERTAIN EXISTING INVESTMENTS 7.4 CERTAIN EXISTING CONTINGENT OBLIGATIONS 7.7 NON-CALIFORNIA PROPERTIES TO BE SOLD AFTER CLOSING (vi) SMITH'S FOOD & DRUG CENTERS, INC. CREDIT AGREEMENT This CREDIT AGREEMENT is dated as of May 23, 1996 and entered into by and among SMITH'S FOOD & DRUG CENTERS, INC., a Delaware corporation ("COMPANY"), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred to herein as a "LENDER" and collectively as "LENDERS"), BANKERS TRUST COMPANY ("BANKERS") and THE CHASE MANHATTAN BANK, N.A. ("CHASE"), as arrangers for Lenders (in such capacity, each individually referred to herein as an "ARRANGER" and collectively as "ARRANGERS"), CHASE SECURITIES, INC. ("CHASE SECURITIES"), as syndication agent (in such capacity, "SYNDICATION AGENT"), and BANKERS, as administrative agent for Lenders (in such capacity, "AGENT"). R E C I T A L S - - - - - - - - WHEREAS, Merger Sub (this and other capitalized terms used in these recitals without definition being used as defined in subsection 1.1) has been formed by Company for the purpose of acquiring Smitty's by merging Merger Sub with and into Smitty's, with Smitty's being the surviving corporation (the "MERGER"); WHEREAS, each share of Smitty's common stock outstanding immediately prior to the Merger will be converted in the Merger into 3.011803 shares of Company's Class B Common Stock, for an aggregate consideration payable to the Smitty's shareholders of 3,038,888 shares of Company's Class B Common Stock; WHEREAS, each share of Merger Sub's common stock outstanding immediately prior to the Merger will be converted in the Merger into one share of common stock of the surviving corporation in the Merger, and all of such surviving corporation's shares will be owned by Company; WHEREAS, concurrently with the consummation of the Merger, Company intends to (i) purchase approximately 13,400,000 shares in the aggregate of Company's Class A Common Stock and Class B Common Stock (excluding shares of Class B Common Stock issued or issuable in connection with the Merger but including certain Existing Management Stock Options) representing 50% in the aggregate of all shares of Class A Common Stock and Class B Common Stock outstanding on a fully diluted basis, at a cash price not to exceed $36.00 per share for an aggregate payment of approximately $465,000,000, (ii) authorize a 1 new Class C Common Stock and issue a warrant to Yucaipa to purchase shares of such Class C Common Stock representing approximately 10% of the aggregate shares of Company's Common Stock on a fully-diluted basis (the "YUCAIPA WARRANT") and (iii) redeem approximately 3,000,000 shares of Company's Redeemable Preferred Stock for an aggregate redemption payment not exceeding $1,000,000; WHEREAS, concurrently with the consummation of the Merger, Company intends to (i) prepay and obtain the release of any collateral securing all of its outstanding Indebtedness under the Existing Company Credit Lines in the aggregate principal amount of $10,000,000 and terminate any commitments to extend credit thereunder and (ii) prepay and obtain the release of any collateral securing approximately $248,600,000 in aggregate principal amount of existing mortgage Indebtedness and approximately $410,000,000 in aggregate principal amount of existing unsecured senior Indebtedness (collectively, the "COMPANY EXISTING DEBT PREPAYMENTS"); WHEREAS, concurrently with the consummation of the Merger, Company intends to cause Smitty's to (i) prepay and obtain the release of any collateral securing all of its outstanding Indebtedness under the Existing Smitty's Credit Agreement in the aggregate principal amount of $33,600,000 and terminate any commitments to extend credit thereunder and (ii) prepay in full approximately $50,000,000 in principal amount of Existing Smitty's Subordinated Notes and approximately [$19,300,000] in accreted value of Existing Smitty's Discount Debentures (collectively, the "SMITTY'S EXISTING DEBT PREPAYMENTS"); WHEREAS, to effect the Smitty's Existing Debt Prepayments, Smitty's is soliciting consents from the holders of Existing Smitty's Discount Debentures to certain amendments to the Existing Smitty's Discount Debenture Indenture and offering to purchase all of the Existing Smitty's Discount Debentures for [$19,300,000] in cash, plus accrued interest thereon, plus for each Existing Smitty's Discount Debenture accepted for purchase, a premium and a consent payment as described in the Smitty's Debt Purchase Offers; WHEREAS, to effect the Smitty's Existing Debt Prepayments, Smitty's is also soliciting consents from the holders of the Existing Smitty's Subordinated Notes to certain amendments to the Existing Smitty's Subordinated Note Indenture and offering to purchase all of the Existing Smitty's Subordinated Notes for $50,000,000 in cash, plus accrued interest thereon, plus for each Existing Smitty's Subordinated Note accepted for purchase, a premium and a consent payment as described in the Smitty's Debt Purchase Offers (together with the offer and solicitation with respect to the Existing Smitty's Discount Debentures, the "SMITTY'S DEBT PURCHASE OFFERS"); WHEREAS, Company has received aggregate net cash proceeds of not less than $67,200,000 from the disposition of certain of its California properties; WHEREAS, in order to finance (i) its purchase of approximately 13,400,000 shares of its Class A Common Stock and Class B Common Stock pursuant to the Equity 2 Tender Offer (including certain Existing Management Stock Options) for an aggregate purchase price not exceeding $465,000,000, (ii) its payment of Company Existing Debt Prepayments of up to $668,600,000, (iii) its payment of Smitty's Existing Debt Prepayments of up to $102,900,000, (iv) its redemption of approximately 3,000,000 shares of its Redeemable Preferred Stock for an aggregate redemption payment not exceeding $1,000,000 and (v) its payment of up to [$160,700,000] in fees, expenses, premiums, accrued interest and other costs in connection therewith and other transactions contemplated by the Loan Documents and the Related Agreements (such fees, costs, expenses and premiums being referred to herein as the "TRANSACTION COSTS"), Company will (a) issue the Senior Subordinated Notes for aggregate gross proceeds of not less than $575,000,000, (b) utilize not less than $67,200,000 in net cash proceeds from the disposition of certain of its California properties; and (c) utilize the proceeds of up to $805,000,000 in Term Loans and the proceeds of up to $13,200,000 in Revolving Loans; WHEREAS, in addition to the Revolving Loans made to Company on the Closing Date, Company has requested that Revolving Lenders provide a revolving credit facility which shall allow for the making of Revolving Loans and the issuance of Letters of Credit to meet the working capital requirements and general corporate purposes of Company and its Subsidiaries; WHEREAS, Company desires to secure all of the Obligations hereunder and under the other Loan Documents by granting to Agent, on behalf of Lenders, a first priority Lien on certain of its real, personal and mixed property, including without limitation a pledge of all of the capital stock of each of its Subsidiaries (other than any Inactive Subsidiaries); and WHEREAS, all of the Subsidiaries (other than any Inactive Subsidiaries) of Company have agreed to guarantee the Obligations hereunder and under the other Loan Documents and to secure their guaranties by granting to Agent, on behalf of Lenders, a first priority Lien on certain of their respective real, personal and mixed property, including without limitation a pledge of all of the capital stock of each of their respective Subsidiaries; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders, Arrangers, Syndication Agent, Co-Agents and Agent agree as follows: 3 SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. --------------------- The following terms used in this Agreement shall have the following meanings: "ACQUISITION" means the consummation of the Merger in accordance with the terms of the Recapitalization and Merger Agreement, which shall result in Company owning all of the outstanding capital stock of Smitty's. "ADJUSTED EURODOLLAR RATE" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate Loan, the rate per annum obtained by dividing (i) the arithmetic average -------- (rounded upward to the nearest 1/16 of one percent) of the offered quotations, if any, to first class banks in the interbank Eurodollar market by Reference Lenders for U.S. dollar deposits of amounts in same day funds comparable to the respective principal amounts of the Eurodollar Rate Loans of Reference Lenders for which the Adjusted Eurodollar Rate is then being determined with maturities comparable to such Interest Period as of approximately 10:00 A.M. (New York time) on such Interest Rate Determination Date by (ii) a percentage equal to -- 100% minus the stated maximum rate of all reserve requirements (including, ----- without limitation, any marginal, emergency, supplemental, special or other reserves) applicable on such Interest Rate Determination Date to any member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" as defined in Regulation D (or any successor category of liabilities under Regulation D); provided that if any Reference Lender fails to provide Agent with -------- its aforementioned quotation then the Adjusted Eurodollar Rate shall be determined based on the quotation(s) provided to Agent by the other Reference Lender(s). "AFFECTED LENDER" has the meaning assigned to that term in subsection 2.6C. "AFFILIATE", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means (i) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise, or (ii) the ownership of more than 10% of the voting securities of that Person; provided that Bankers Trust New York Corporation, -------- Chase and each of their respective Affiliates (as defined above) shall not be considered to be an "Affiliate" of Company or any of its Subsidiaries; and provided further that Yucaipa shall be deemed an Affiliate of Company so long as - -------- ------- (a) the Management Agreement is in effect or (b) Yucaipa, together with its Affiliates (as defined above), is permitted to designate one or more members of Company's Board of Directors pursuant to the terms of the Standstill Agreement or any successor agreement. 4 "AGENT" has the meaning assigned to that term in the introduction to this Agreement and also means and includes any successor administrative Agent appointed pursuant to subsection 9.5A. "AGREEMENT" means this Credit Agreement dated as of May 23, 1996, as it may be amended, supplemented or otherwise modified from time to time. "AMOUNT OF UNFUNDED BENEFIT LIABILITY" means, with respect to any Pension Plan, (i) if set forth on the most recent actuarial valuation report with respect to such Pension Plan, the amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA) and (ii) otherwise, the excess of (a) the greater of the current liability (as defined in Section 412(l)(7) of the Internal Revenue Code) or the actuarial present value of the accrued benefits with respect to such Pension Plan over (b) the market value of the assets of such Pension Plan. "APPLICABLE BASE RATE MARGIN" means, as of any date of determination, (i) 1.25% per annum in the event that (a) the Interest Coverage Ratio is equal to or greater than 2.00:1.00 and (b) the aggregate outstanding principal amount of Term Loans is less than $755,000,000; (ii) notwithstanding clause (i), 1.00% per annum in the event that (a) the Interest Coverage Ratio is equal to or greater than 2.50:1.00 and (b) the aggregate outstanding principal amount of Term Loans is less than $680,000,000; and (iii) 1.50% per annum in the event that neither of the foregoing clauses (i) nor (ii) is applicable, including for the period from the Closing Date until a Margin Determination Certificate is delivered pursuant to subsection 6.1(xviii) establishing that either of clause (i) or clause (ii) is applicable. "APPLICABLE EURODOLLAR MARGIN" means, as of any date of determination, (i) 2.50% per annum in the event that (a) the Interest Coverage Ratio is equal to or greater than 2.00:1.00 and (b) the aggregate outstanding principal amount of Term Loans is less than $755,000,000; (ii) notwithstanding clause (i), 2.25% per annum in the event that (a) the Interest Coverage Ratio is equal to or greater than 2.50:1.00 and (b) the aggregate outstanding principal amount of Term Loans is less than $680,000,000; and (iii) 2.75% per annum in the event that neither of the foregoing clauses (i) nor (ii) is applicable, including for the period from the Closing Date until a Margin Determination Certificate is delivered pursuant to subsection 6.1(xviii) establishing that either of clause (i) or clause (ii) is applicable. "ARRANGERS" has the meaning assigned to that term in the introductions to this Agreement. "ASSET SALE" means (i) the sale, assignment or other transfer (whether voluntary or involuntary) for value (collectively, a "transfer") by Company or any of its Subsidiaries to any Person other than Company or any of its wholly-owned Subsidiaries of (a) any of the stock of any of Company's Subsidiaries, (b) substantially all of the assets of any division or line of business of Company or any of its Subsidiaries, or (c) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries, excluding (1) any --------- 5 Cash Equivalents or inventory sold in the ordinary course of business, (2) any such transfer to the extent that the aggregate value of the stock or assets transferred in any single transaction or related series of transactions is equal to $50,000 or less, or $1,000,000 or less in the aggregate in any Fiscal Year for all such excluded transfers and all excluded occurrences described in the succeeding clause (ii), and (3) any transfer in an arm's-length transaction by Company or a Subsidiary of Company to a Developer of a Development Site constituting a Development Investment permitted under subsection 7.3(vi) or constituting a California Development Investment permitted under subsection 7.3(x); or (ii) the occurrence of any complete or partial loss, damage or destruction of any assets of Company or any of its Subsidiaries giving rise to insurance proceeds, excluding any such occurrence to the extent that the --------- aggregate value of the assets lost, destroyed or damaged in any single occurrence or related series of occurrences is equal to $50,000 or less, or $1,000,000 or less in the aggregate in any Fiscal Year for all such excluded occurrences and all excluded transfers described in clause (i)(2) above. "ASSIGNMENT AGREEMENT" means an Assignment Agreement in substantially the form of Exhibit X annexed hereto. --------- "AUDITOR'S LETTER" means a letter, substantially in the form of Exhibit XI annexed hereto, executed by Company and delivered to Company's - ---------- independent certified public accountants pursuant to subsection 4.1R. "BANKERS" has the meaning assigned to that term in the introductions to this Agreement. "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "BASE RATE" means, at any time, the higher of (x) the Prime Rate or (y) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate. "BASE RATE LOANS" means Loans bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A. "BUSINESS DAY" means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or the State of Utah or is a day on which banking institutions located in such states are authorized or required by law or other governmental action to close. "CALIFORNIA ASSET SALE" means any Asset Sale of California Development Investments, Excess California Land and/or California Stores. "CALIFORNIA DEVELOPMENT INVESTMENTS" means (a) a loan by Company or a Subsidiary of Company to a Developer, the proceeds of which are to be used to finance the 6 development of Excess California Land and/or California Stores; (b) a cash contribution by Company or a Subsidiary of Company to the capital of a Developer, the proceeds of which are used to finance the development of Excess California Land and/or California Stores; (c) a contribution by Company or a Subsidiary of Company to the capital of a Developer of any interest of Company or such Subsidiary in one or more parcels of Excess California Land and/or California Stores; or (d) Consolidated Capital Expenditures incurred in connection with Excess California Land and California Stores; provided that in -------- each case Company reasonably believes, taking into account the amount of such loan, contribution or expenditure, that such loan, contribution or expenditure will improve its ability to sell or lease such property on economic terms more favorable to Company. The amount of any California Development Investment (i) referred to in clauses (a), (b) and (c) above shall be the amount of cash so loaned or so contributed or the fair market value of the parcel or parcels of real property so contributed, which fair market value shall be determined, without regard to the proposed investment, at the time of such contribution, in good faith by Company, in each case minus the amount of cash received by Company ----- or any of its Subsidiaries with respect to such loan or contribution, whether by repayment or purchase of such loan or contribution, and (ii) referred to in clause (d) above shall be the amount of Consolidated Capital Expenditures incurred minus the amount of Net Asset Sale Proceeds received by Company or any ----- of its Subsidiaries from the sale of such Excess California Land or California Stores but in any event not in excess of the Consolidated Capital Expenditures incurred with respect to such property. "CALIFORNIA STORES" means Company's existing Southern California store operations which Company anticipates selling after the Closing Date in connection with Company's discontinuance of its California operations, which stores are identified as such on Schedule 5.20C annexed hereto. -------------- "CAPITAL LEASE", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "CASH" means money, currency or a credit balance in a Deposit Account. "CASH EQUIVALENTS" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("MOODY'S"); (iii) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from 7 Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; (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 $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's; and (vi) repurchase agreements with respect to, and which are fully secured by a security interest in, obligations of the type described in clause (i) or clause (ii) above and are with any commercial bank described in clause (iv) above. "CERCLA" has the meaning assigned to that term in the definition of "Environmental Laws". "CERTIFICATE RE NON-BANK STATUS" means a certificate in form and substance satisfactory to Agent delivered by a Lender to Agent pursuant to subsection 2.7B(iii) pursuant to which such Lender certifies that it is not (i) a "bank" as such term is defined in subsection 881(c)(3) of the Internal Revenue Code; (ii) a 10 percent shareholder of Company within the meaning of Section 871(h)(3)(B) or Section 881(c)(3)(B) of the Internal Revenue Code; or (iii) a "controlled" foreign corporation related to Company within the meaning of Section 864(d)(4) of the Internal Revenue Code. "CHANGE OF CONTROL" means (i) any Person (other than a Permitted Holder) or any group (within the meaning of Section 13(d)(3) of the Exchange Act) of Persons (other than any Permitted Holders), shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, in one or more transactions, of Securities of Company (or other Securities convertible into such Securities) representing 25% or more of the combined voting power of all Securities of Company entitled to vote in the election of directors, other than Securities having such power only by reason of the happening of a contingency, or (ii) a change in the composition of the Board of Directors of Company has occurred such that a majority of the members of the Board of Directors are not Continuing Directors. "CHASE" has the meaning assigned to that term in the introductions to this Agreement. "CHASE SECURITIES" has the meaning assigned to that term in the introductions to this Agreement. "CLASS" means, with respect to Lenders, each class of Lenders under this Agreement, with there being two separate classes of Lenders, i.e., (i) ---- Lenders having Tranche A Term Loan Exposure and/or Revolving Loan Exposure (taken together as a single class) and (ii) Lenders having Tranche B Term Loan Exposure, Lenders having Tranche C Term 8 Loan Exposure and/or Lenders having Tranche D Term Loan Exposure (taken together as a single class). "CLASS A COMMON STOCK" means the Class A Common Stock of Company, par value $.01 per share. "CLASS B COMMON STOCK" means the Class B Common Stock of Company, par value $.01 per share. "CLASS C COMMON STOCK" means the Non-Voting Convertible Class C Common Stock of Company, par value $.01 per share. "CLOSING DATE" means the date on or before June 30, 1996, on which the initial Loans are made. "CO-AGENTS" means those Lenders designated as "Co-Agents" by Arrangers. "COLLATERAL" means all of the real, personal and mixed property (including capital stock) in which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations. "COLLATERAL ACCOUNT" has the meaning assigned to that term in the Collateral Account Agreement. "COLLATERAL ACCOUNT AGREEMENT" means the Collateral Account Agreement executed and delivered by Company and Agent on the Closing Date, substantially in the form of Exhibit XIII annexed hereto, as such Collateral ------------ Account Agreement may hereafter be amended, supplemented or otherwise modified from time to time. "COLLATERAL DOCUMENTS" means the Pledge Agreements, the Security Agreements, the Trademark Security Agreements, the Collateral Account Agreement, the Mortgages and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Agent, on behalf of Lenders, a Lien on any real, personal or mixed property of that Loan Party as security for the Obligations. "COMMERCIAL LETTER OF CREDIT" means any letter of credit or similar instrument issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services by Company or any of its Subsidiaries in the ordinary course of business of Company or such Subsidiary. "COMMITMENT FEE PERCENTAGE" means .50% per annum. 9 "COMMITMENTS" means the commitments of Lenders to make Loans as set forth in subsection 2.1A. "COMMON STOCK" means the Class A Common Stock, Class B Common Stock and Class C Common Stock of Company. "COMPANY" has the meaning assigned to that term in the introductions to this Agreement. "COMPANY EXISTING DEBT PREPAYMENTS" has the meaning assigned to that term in the recitals to this Agreement. "COMPLIANCE CERTIFICATE" means a certificate substantially in the form of Exhibit VII annexed hereto delivered to Agent and Lenders by Company ----------- pursuant to subsection 6.1(iv). "CONSOLIDATED ADJUSTED EBITDA" means, for any period, without duplication, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Cash Interest Expense, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense, and (vi) other non-cash items reducing Consolidated Net Income less ---- other non-cash items increasing Consolidated Net Income, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, an amount equal to (i) the sum of (a) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of Company and its Subsidiaries) by Company and its Subsidiaries during that period that, in conformity with GAAP, are included in "additions to property, plant or equipment" or comparable items reflected in the consolidated balance sheets of Company and its Subsidiaries plus (b) to the extent not covered by clause (i)(a) ---- of this definition, the aggregate of all expenditures by Company and its Subsidiaries during that period to acquire (by purchase or otherwise) the business, property or fixed assets (other than current assets consisting of inventory or accounts receivable) of any Person, or the stock or other evidence of beneficial ownership of any Person that, as a result of such acquisition, becomes a Subsidiary of Company minus (ii) the sum of (a) Consolidated Capital ----- Expenditures (as defined in clause (i) above) constituting Development Investments permitted under subsection 7.3(vi) or Capital Leases required to be recorded in connection with a Development Investment and permitted under subsection 7.9; (b) the principal amount of Indebtedness permitted under subsections 7.1(iii) and 7.1(vii) to the extent relating to equipment, fixtures and other similar property acquired after the Closing Date; (c) an amount equal to the proceeds received by Company or any of its Subsidiaries from a sale- leaseback transaction of a store or equipment permitted under subsection 7.10 so long as such transaction occurs after the Closing Date and within 180 days or, to the extent permitted by 10 subsection 2.4B(iii)(a)(ii), one year of the completion of such store or acquisition of such equipment and to the extent prior expenditures, up to an equivalent amount for the asset so sold and leased back, constituted Consolidated Capital Expenditures (as defined above) in such period or in any prior period; (d) an amount equal to the increase in "property, plant or equipment" which results from any required reclassification under GAAP of Operating Leases of Company and its Subsidiaries existing as of the Closing Date to Capital Leases (other than a reclassification that results from an amendment to such Operating Leases); (e) expenditures in an amount not to exceed the proceeds of insurance, condemnation awards (or payments in lieu thereof) or indemnity payments received from third parties, so long as such expenditures were made for purposes of replacing or repairing the assets in respect of which such proceeds, awards or payments were received and so long as such expenditures are made not later than 24 months of the occurrence of the damage to or loss of the assets being replaced or repaired; (f) Consolidated Capital Expenditures (as defined in clause (i) above) constituting California Development Investments under clause (d) of the definition thereof permitted under subsection 7.3(x); and (g) an amount equal to the increase in "property, plant or equipment" which results from the transfer to Company of Related Assets in connection with Company becoming liable with respect to Indebtedness permitted under subsection 7.1(viii); provided that, solely for purposes of the calculations made under -------- subsection 7.8 for the period commencing on the Closing Date and ending on December 28, 1996, the exclusions set forth in clauses (b) and (c) of clause (ii) above shall not be applicable in determining "Consolidated Capital Expenditures." "CONSOLIDATED CASH INTEREST EXPENSE" means, for any period, (i) total inter est expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) net of any interest income received in Cash by Company or any of its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, plus all dividends on the Redeemable Preferred Stock paid or payable in Cash but excluding, however, (i) any amounts referred to in subsection 2.3 payable to Agent and Lenders on or before the Closing Date, (ii) any interest expenses not payable in Cash (including amortization of discounts and of debt issuance costs), and (iii) the fees, costs and expenses payable by Company relating to the issuance of or consent to modifications of Indebtedness of Company or Smitty's in connection with the Transactions. "CONSOLIDATED EXCESS CASH FLOW" means, for any Fiscal Year, an amount equal to (i) the sum (without duplication) of the amounts for such Fiscal Year of (a) Consolidated Net Income; (b) any after-tax gains attributable to returned surplus assets of any Pension Plan; (c) the amount of Net Asset Sale Proceeds received in such Fiscal Year that are not otherwise included in Consolidated Net Income and that are required to be used to prepay the Term Loans and/or permanently reduce the Revolving Loan Commitments pursuant to subsection 2.4B(iii)(a), but excluding amounts returned to Company pursuant to the last sentence of subsection 2.4B(iv)(c) which are not used by Company to prepay the Term Loans and/or permanently reduce the Revolving Loan Commitments; (d) the aggregate 11 amount of Cash proceeds (net of underwriting discounts, similar placement fees and commissions and other reasonable costs and expenses associated therewith) from the issuance after the Closing Date of any debt or equity Securities of Company or any of its Subsidiaries that are required to be used to prepay the Loans pursuant to subsections 2.4B(iii)(c) or 2.4B(iii)(d), as the case may be, but excluding amounts returned to Company pursuant to the last sentence of subsection 2.4B(iv)(c) which are not used by Company to prepay the Terms Loans and/or permanently reduce the Revolving Loan Commitments; (e) consolidated depreciation and amortization expense for such Fiscal Year; (f) the net decrease (if any) in deferred tax assets and the net increase (if any) in deferred tax liabilities of Company and its Subsidiaries; (g) other non-cash charges reducing Consolidated Net Income; (h) (to the extent not included in Consolidated Net Income) any cash extraordinary gains; (i) an amount equal to the Net Asset Sale Proceeds excluded from mandatory prepayments required to be made under subsection 2.4B(iii)(a) pursuant to clauses (i) and (iii) of the first proviso thereof; provided that such Net Asset Sale Proceeds which meet the following -------- requirements ("Excluded Proceeds") shall not be added pursuant to this clause (i): (x) they have not been reinvested as permitted pursuant to such clauses (i) and (iii) and (y) the period for permitted reinvestment pursuant to such clauses (i) and (iii) extends beyond the last date of the Fiscal Year; (j) all Cash proceeds received by Company or any of its Subsidiaries in payment or repayment of any Development Investment or California Development Investment previously made by Company or such Subsidiary; (k) an amount equal to the Excluded Proceeds from the previous Fiscal Year; and (l) cash proceeds which result in reductions in long-term assets minus (ii) the sum (without duplication) of the amounts for ----- such Fiscal Year of (a) Consolidated Capital Expenditures permitted under subsection 7.8 made during such Fiscal Year; (b) payments of principal made in respect of any outstanding Indebtedness of Company or any of its Subsidiaries to the extent such payments are permanent reductions in Funded Debt and not prohibited under subsection 7.5; (c) the net increase (if any) in deferred tax assets and the net decrease (if any) in deferred tax liabilities; (d) the amount of all Development Investments permitted under subsection 7.3(vi) or California Development Investments permitted under subsection 7.3(x) which are paid or payable in cash and are made during such Fiscal Year; (e) other non-cash charges increasing Consolidated Net Income; (f) cash payments which result in reductions in reserves and/or long term liabilities in such Fiscal Year; (g) cash payments made by Company after the Closing Date to redeem the Redeemable Preferred Stock in accordance with subsection 7.5; and (h) for Fiscal Year 1996, $10,000,000, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum (without duplication) of the amounts for such period of (i) Consolidated Cash Interest Expense, (ii) Consolidated Rental Payments, (iii) scheduled principal payments attributable to any Indebtedness of Company and its Subsidiaries and (iv) cash payments made by Company after the Closing Date to redeem the Redeemable Preferred Stock, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. 12 "CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; provided -------- that there shall be excluded (without duplication) (i) the income (or loss) of any Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries, (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) any after- tax gains or losses attributable to Asset Sales or returned surplus assets of any Pension Plan, (v) Restructuring Charges incurred during such period, and (vi) (to the extent not included in clauses (i) through (v) above) any net extraordinary gains or net non-cash extraordinary losses; provided further there -------- ------- shall be included as a reduction to net income the aggregate amount of cash payments made by Company during such period in connection with the matters referenced in clauses (ii), (iii) and (iv) of the definition of Restructuring Charges to the extent that such cash payments reduce the reserves or other noncash charges established in connection with the matters referenced in such clauses (ii), (iii) and (iv). "CONSOLIDATED NET WORTH" means, as at any date of determination, (i) the capital stock and additional paid-in capital plus (ii) retained earnings (or ---- minus accumulated deficits) of Company and its Subsidiaries on a consolidated basis determined in conformity with GAAP plus (iii) Restructuring Charges for ---- the period from and including the Closing Date to such date of determination. "CONSOLIDATED RENTAL PAYMENTS" means, for any period, the aggregate amount of all rents paid or payable by Company and its Subsidiaries on a consolidated basis during that period under all Operating Leases to which Company or any of its Subsidiaries is a party as lessee (net of sublease income). "CONSOLIDATED TOTAL DEBT" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of Company and its Subsidiaries plus the Redeemable Preferred Stock, determined on a consolidated ---- basis in accordance with GAAP. "CONTINGENT OBLIGATION", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebted ness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any 13 agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Hedge Agreements. Contingent Obligations shall include, without limitation, (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (X) to purchase, repurchase or other wise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (Y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (X) or (Y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. "CONTINUING DIRECTORS" means, as of any date of determination, any member of the Board of Directors of Company who (i) was a member of such Board of Directors on the Closing Date (after the consummation of the Transactions including without limitation the Merger) or (ii) was nominated for election or elected to such Board of Directors either with the affirmative vote of a majority of the directors who were either members of such Board of Directors on the Closing Date or whose nomination or election was previously so approved. "CONTRACTUAL OBLIGATION", as applied to any Person, means any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "COVERED PERIOD" means the period from the date hereof to and including the Transfer Date, but excluding the period, if any, prior to the Transfer Date, during which (A) Indemnitee or its Affiliate has obtained and then remains in possession and control of the Mortgaged Property or Covered Real Property, as the case may be, and (B) neither Company nor any of its Affiliates is in possession or control of such property or engaging in any Hazardous Materials Activity on or at such property. "COVERED REAL PROPERTY" has the meaning assigned to that term in subsection 6.9. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. 14 "DEFERRED COMPENSATION AGREEMENTS" means those certain deferred compensation agreements entered into by and between the Company and certain of its current and former employees as in effect on the Closing Date (or as amended in a form acceptable to Arrangers), including those certain deferred compensation agreements entered into by and between Company and James A. Acton, Robert D. Bolinder, Richard C. Bylski, Michael C. Frei, James W. Hallsey, Larry R. McNeill, Harry M. Moskal, Matthew G. Tezak, Paul D. Tezak, Frederick F. Urbanek and Kenneth A. White. "DEFERRED TRADE PAYABLES" means promissory notes (whether interest bearing or non-interest bearing) executed by Company or any of its Subsidiaries in favor of such entity's suppliers to finance the purchase price and delivery costs of inventory in connection with such entity's opening or acquisition of new stores or remodeling of existing stores. "DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "DEVELOPER" means any Person which owns, leases or otherwise controls or intends to acquire an interest in a Development Site. "DEVELOPMENT INVESTMENT" means (a) a loan by Company or a Subsidiary of Company to a Developer, the proceeds of which are to be used to finance a Development Project of such Developer, (b) a cash contribution by Company or a Subsidiary of Company to the capital of a Developer, the proceeds of which are to be used to finance a Development Project of such Developer, or (c) a contribution by Company or a Subsidiary of Company to the capital of a Developer of an interest of Company or such Subsidiary in a Development Site, but in any event excluding any California Development Investments. The amount of any Development Investment shall be the amount of cash so loaned or contributed or the fair market value of the interest of a Development Site so contributed, which fair market value shall be determined, without regard to the proposed investment, at the time of such contribution in good faith by resolution of the Board of Directors of Company, in each case minus the amount of cash received by ----- Company or any of its Subsidiaries in repayment of such Development Investment. "DEVELOPMENT PROJECT" means a project for the development by or at the direction of a Developer of a Development Site, including the construction, remodeling, expansion or renovation of a store thereon, which store is to be leased to and operated by Company or one of its Subsidiaries. "DEVELOPMENT SITE" means, with respect to a Development Investment, real property which is identified by Company or one of its Subsidiaries as the intended location for a store or a shopping center and related improvements to be constructed, remodeled, expanded or renovated by or at the direction of the Developer thereof, which in each case shall include a store intended to be leased to and operated by Company or one of its 15 Subsidiaries, and with respect to a California Development Investment, any Excess California Land or California Store. "DOLLARS" and the sign "$" mean the lawful money of the United States of America. "ELIGIBLE ASSIGNEE" means (A) (i) a commercial bank organized under the laws of the United States or any state thereof; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof; provided that (x) such bank is -------- acting through a branch or agency located in the United States or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; and (iv) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses including, but not limited to, insurance companies, mutual funds and lease financing companies; and (B) any Lender and any Affiliate of any Lender; provided that no Affiliate of Company shall be an Eligible Assignee. -------- "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined in Section 3(3) of ERISA (i) which is, or, at any time within the five calendar years immediately preceding the date hereof, was at any time, maintained or contributed to by the Loan Parties or any of their respective ERISA Affiliates or (ii) with respect to which any Loan Party retains any liability, including any potential joint and several liability as a result of an affiliation with an ERISA Affiliate or a party that would be an ERISA Affiliate except for the fact the affiliation ceased more than five calendar years prior to the date hereof. "ENVIRONMENTAL CLAIM" means any accusation, allegation, notice of violation, notice of potential liability, claim, demand, abatement order or other order or direction (conditional or otherwise) by any governmental authority or any Person for any damage, including, without limitation, personal injury (including sickness, disease or death), tangible or intangible property damage, contribution, indemnity, indirect or consequential damages, damage to the environment, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, in each case relating to, resulting from or in connection with Hazardous Materials and relating to Company, any of its Subsidiaries, any of their respective Affiliates or any Facility. "ENVIRONMENTAL LAWS" means all present or future statutes, ordinances, orders, rules, regulations, plans, policies or decrees and the like relating to (i) environmental matters, including, without limitation, those relating to fines, injunctions, penalties, damages, contribution, cost recovery compensation, losses or injuries resulting from the Release or threatened Release of Hazardous Materials, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner 16 applicable to Company or any of its Subsidiaries or any of their respective properties, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act "CERCLA" (42 U.S.C. (S) 9601 et seq.), -- --- the Hazardous Materials Transportation Act (49 U.S.C. (S) 1801 et seq.), the -- --- Resource Conservation and Recovery Act (42 U.S.C. (S) 6901 et seq.), the Federal -- --- Water Pollution Control Act (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 -- --- U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. (S) 2601 -- --- et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. - -- --- (S)136 et seq.), the Occupational Safety and Health Act (29 U.S.C. (S) 651 et -- --- -- seq.) and the Emergency Planning and Community Right-to-Know Act (42 U.S.C. (S) - --- 11001 et seq.), each as amended or supplemented, and any analogous future or -- --- present local, state and federal statutes and regulations promulgated pursuant thereto, each as in effect as of the date of determination. "ENVIRONMENTAL LOSSES" means any and all losses, liabilities, damages (whether actual, consequential, punitive, or otherwise denominated), demands, claims, actions, judgements, causes of action, assessments, penalties, costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements), of any and every kind or character, foreseeable and unforeseeable, liquidated and contingent, proximate and remote. suffered or incurred by any Indemnitee, arising out of or as a result of: (I) any Hazardous Materials Activity that occurs or is alleged to have occurred on or prior to the date hereof or during the Covered Period; (II) any violation on or prior to the date hereof or during the Covered Period of any applicable Environmental Laws relating to the Mortgaged Property or Covered Real Property or to the ownership, use, occupancy or operation thereof; (III) any investigation, inquiry, order, hearing, action, or other proceeding by or before any governmental agency in connection with any Hazardous Materials Activity that occurs or is alleged to have occurred on or prior to the date hereof or during the Covered Period; or (IV) any claim, demand or cause of action, or any action or other proceeding, whether meritorious or not, brought or asserted against any Indemnitee which directly or indirectly relates to, arises from or is based on any of the matters described in clauses (i), (ii), or (iii), or any allegation of any such matters. --------------------------- "EQUITY TENDER OFFER" means Company's purchase pursuant to the Equity Tender Offer Materials of approximately 13,400,000 shares in the aggregate of Company's Class A Common Stock and Class B Common Stock (excluding shares of Class B Common Stock issued or issuable in connection with the Merger), representing 50% in the aggregate of all shares of Class A Common Stock and Class B Common Stock outstanding on a fully diluted basis, at a cash price not to exceed $36.00 per share for an aggregate payment, for all such shares and for the Existing Management Stock Options, of approximately $465,000,000. "EQUITY TENDER OFFER MATERIALS" means the Proxy Statement and Offer to Purchase for Cash 50% of the Outstanding Shares of Class A Common Stock and Class B Common Stock at $36 per share dated April 25, 1996 and other materials enclosed therewith. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. 17 "ERISA AFFILIATE" as applied to any Person, means (i) any corporation which is, or was at any time within the five calendar years immediately preceding the date hereof, a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is, or was at any time within the five calendar years immediately preceding the date hereof, a member; (ii) any trade or business (whether or not incorporated) which is, or was at any time within the five calendar years immediately preceding the date hereof, a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is, or was at any time within the five calendar years immediately preceding the date hereof, a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is, or was at any time within the five calendar years immediately preceding the date hereof, a member. "ERISA EVENT" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by any of the Loan Parties or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on any of the Loan Parties or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of any of the Loan Parties or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by any of the Loan Parties or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could reasonably be expected to give rise to the imposition on any of the Loan Parties or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409 or 502(c), (i) or (l), or 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than (a) routine claims for 18 benefits, (b) any claims in an aggregate amount not exceeding $3,500,000 made by the United Food and Commercial Workers Union Employees Benefit Fund for Southern California, or any affected union, with respect to contributions allegedly owed by Company to such fund as a result of Company's sale and closure in 1996 of certain of its operations in California, and (c) solely for the purpose of subsection 8.10, claims (and any resulting liabilities) under or with respect to the Deferred Compensation Agreements to the extent not in excess of $30,000,000 and then only to the extent of such excess) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against any of the Loan Parties or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "EURODOLLAR RATE LOANS" means Loans bearing interest at rates determined by reference to the Adjusted Eurodollar Rate as provided in subsection 2.2A. "EVENT OF DEFAULT" means each of the events set forth in Section 8. "EXCESS CALIFORNIA LAND" means Company's existing real property holdings in the State of California which were being held by Company for future development, and which sites are identified as such on Schedule 5.20C annexed -------------- hereto. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXCLUDED SITE" means, as of any date, provided that there shall not then exist a Potential Event of Default or an Event of Default, all of the following, excluding any fee interest in Real Property Assets on which Agent shall have been granted a Lien in accordance with the terms hereof: (a) any fee interest in undeveloped land acquired by Company or any of its Subsidiaries for the development of a grocery store, so long as less than one year has elapsed since the date such fee interest was first acquired by Company or any of its Subsidiaries (the "Acquisition Date"), (b) any fee interest in Real Property Assets owned by Company or any of its Subsidiaries consisting of a grocery store under construction, so long as less than one year has elapsed since the date such construction commenced, and (c) any fee interest in a grocery store, the construction of which is complete, which fee interest was not previously a Covered Real Property, so long as not more than 180 days has elapsed since the date of completion of such construction; provided that the maximum length of -------- time that a property may be characterized as an Excluded Site is two years from its Acquisition Date; provided further that if on any date there are more than -------- ------- five (5) properties that meet the foregoing definition of "Excluded Site", only the five (5) such properties with the earliest 19 Acquisition Dates (and on which Agent shall not have been granted a Lien in accordance with the terms hereof) shall constitute "Excluded Sites". "Excluded Site" shall also include as of the Closing Date any Real Property Asset identified as such on Schedule 4.1I annexed hereto which Company or any of its ------------- Subsidiaries are in the process of selling, subleasing or otherwise disposing of such Real Property Asset; provided that any such Real Property Asset shall cease -------- to be an "Excluded Site" if not so sold or leased within [120] days of the Closing Date. "EXISTING COMPANY CREDIT LINES" means those certain unsecured credit lines between Company and certain financial institutions, in the maximum aggregate committed amount of $100,000,000. "EXISTING COMPANY IRB'S" means Company's (i) $2,850,000 in initial aggregate principal amount of 8.85% Industrial Development Revenue Bonds (Smith's Food King Properties, Inc. Project) due 2000 (the "BRIGHAM CITY BONDS"), (ii) $2,470,000 in initial aggregate principal amount of Industrial Development Revenue Bonds, Series 1985 due 2010 (the "NORTH OGDEN BONDS") and (iii) $3,800,000 in initial aggregate principal amount of Industrial Development Revenue Bonds, Series 1985 (Provo-Smith's Associates Project) due 2010 (the "PROVO BONDS"), in each case issued pursuant to the applicable Existing Company IRB Indenture. "EXISTING COMPANY IRB INDENTURES" means (i) the Indenture of Trust dated September 1, 1980 between Brigham City, Utah, and First Security Bank of Utah, N.A., as trustee, pursuant to which the Brigham City Bonds were issued, (ii) the Indenture of Trust dated as of December 1, 1985 between North Ogden City, Utah, and Zions First National Bank, as trustee, pursuant to which the North Ogden Bonds were issued, and (iii) the Indenture of Trust dated as of December 1, 1985 between Provo City, Utah, and Zions First National Bank, as trustee, pursuant to which the Provo Bonds were issued, in each case as amended prior to the Closing Date. "EXISTING LETTERS OF CREDIT" means the Letters of Credit listed in Schedule 3.1C annexed hereto. - ------------- "EXISTING MANAGEMENT STOCK OPTIONS" means the outstanding stock options granted to certain employees of Company under Company's 1989 Stock Option Plan prior to the Closing Date, as set forth on Schedule 4.2 to the ------------ Recapitalization and Merger Agreement, which, upon payment of an exercise price of $19 per share, are exercisable into an aggregate of approximately 1,700,000 shares of Company's Class B Common Stock. "EXISTING SMITTY'S SUBORDINATED NOTES" means the $50,000,000 in initial aggregate principal amount of 12.75% Senior Subordinated Notes due 2004 issued by Smitty's Super Valu, Inc. pursuant to the Existing Smitty's Subordinated Note Indenture. 20 "EXISTING SMITTY'S SUBORDINATED NOTE INDENTURE" means the indenture dated as of June 15, 1994, among Smitty's Super Valu, Inc., Saint Lawrence Holding Company, as subsidiary guarantor, and United States Trust Company of New York, as trustee, pursuant to which the Existing Smitty's Subordinated Notes were issued, as amended prior to the Closing Date. "EXISTING SMITTY'S DISCOUNT DEBENTURES" means Smitty's $29,025,000 in initial aggregate face amount ($19,300,000 in estimated accreted value on the Closing Date) of 13.75% Senior Discount Debentures due 2006 issued pursuant to the Existing Smitty's Discount Debenture Indenture. "EXISTING SMITTY'S DISCOUNT DEBENTURE INDENTURE" means the indenture dated as of June 15, 1994, between Smitty's and United States Trust Company of New York, as trustee, pursuant to which the Existing Smitty's Discount Debentures were issued, as amended prior to the Closing Date. "EXISTING SMITTY'S CREDIT AGREEMENT" means that certain Credit Agreement dated as of June 29, 1994 among Smitty's, SSV Acquisition Sub, Inc., Smitty's Super Valu, Inc., Chase, as agent, and other financial institutions named therein, as amended prior to the Closing Date. "EXISTING SMITTY'S SINKING FUND BONDS" means $13,000,000 in initial aggregate principal amount of 10.50% First Mortgage Sinking Fund Bonds, Series 1986 due July 31, 2016 issued by Saint Lawrence Holding Company pursuant to the Existing Smitty's Sinking Fund Bond Indenture, as such bonds may be amended from time to time to the extent permitted under subsection 7.15B. "EXISTING SMITTY'S SINKING FUND BOND INDENTURE" means the indenture dated as of July 16, 1986 between Saint Lawrence Holding Company and First Interstate Bank of Arizona, N.A., as trustee, as supplemented by that certain First Supplemental Indenture dated as of July 16, 1986 by and between Saint Lawrence Holding Company and First Interstate Bank of Arizona, N.A., as trustee, pursuant to which the Existing Smitty's Sinking Fund Bonds were issued, as amended prior to the Closing Date and as such indenture may be amended from time to time to the extent permitted under subsection 7.15B. "FACILITIES" means any and all real property (including, without limitation, all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by Company or any of its Subsidiaries or any of their respective predecessors or Affiliates. "FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next 21 preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Agent from three Federal funds brokers of recognized standing selected by Agent. "FINANCIAL PLAN" has the meaning assigned to that term in subsection 6.1(xiii). "FISCAL PERIOD" means a fiscal period of Company and its Subsidiaries, consisting of a four-week period or five-week period, as the case may be. "FISCAL QUARTER" means a fiscal quarter of Company and its Subsidiaries, consisting of a 13-week period or, in the case of the first Fiscal Quarter of any Fiscal Year which has 53 weeks, a 14-week period. "FISCAL YEAR" means the fiscal year of Company and its Subsidiaries, consisting of a 52- or 53-week period, ending on the date which is the Saturday closest to December 31. "FLOOD HAZARD PROPERTY" means a Mortgaged Property located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards. "FUNDED DEBT", as applied to any Person, means all Indebtedness of that Person which by its terms or by the terms of any instrument or agreement relating thereto matures more than one year from, or is directly renewable or extendable at the option of the debtor to a date more than one year from (including an option of the debtor under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of one year or more from), the date of the creation thereof. "FUNDING AND PAYMENT OFFICE" means (i) the office of Agent and Swing Line Lender located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006 or (ii) such other office of Agent and Swing Line Lender as may from time to time hereafter be designated as such in a written notice delivered by Agent and Swing Line Lender to Company and each Lender. "FUNDING DATE" means the date of the funding of a Loan. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment 22 of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination. "GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "HAZARDOUS MATERIALS" means (i) any chemical, material or substance at any time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste", "infectious waste", "toxic substances", "pollutant", "contaminant" or any formulations intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws or publications promulgated pursuant thereto; (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials; (vi) asbestos in any form; (vii) urea formaldehyde foam insulation; (viii) electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls; (ix) pesticides; and (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons in the vicinity of the Facilities. "HAZARDOUS MATERIALS ACTIVITY" means any use, storage, holding, existence, release (including any spilling, leaking, pumping, pouring, emitting, emptying, dumping, disposing into the environment, and the continuing migration into or through soil, surface water, or groundwater), emission, discharge, generation, processing, abatement, removal, disposition, handling or transportation to or from the Mortgaged Property or Covered Real Property, as the case may be, of any Hazardous Materials from, under, in, into or on such property or surrounding property, including, without limitation, the movement or migration of any Hazardous Materials from surrounding property or groundwater in, into or onto such property and any residual Hazardous Materials contamination on or under such property. "HEDGE AGREEMENT" means an Interest Rate Agreement or a Currency Agreement designed to hedge against fluctuations in interest rates or currency values, respectively. "INDEBTEDNESS", as applied to any Person, means (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA), which 23 purchase price is (a) due more than twelve months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. Obligations under Interest Rate Agreements and Currency Agreements constitute (X) in the case of Hedge Agreements, Contingent Obligations, and (Y) in all other cases, Investments, and in neither case constitute Indebtedness. "INDEMNITEE" has the meaning assigned to that term in subsection 10.3. "INACTIVE SUBSIDIARY" means any Subsidiary of Company that does not engage in any significant business activity and is designated as such on Schedule 5.1 annexed hereto; provided, however, that all Inactive Subsidiaries - ------------ -------- ------- in the aggregate shall not own assets with an aggregate fair market value in excess of $3,000,000 and shall not generate aggregate annual revenues in excess of $3,000,000; and provided further that no Inactive Subsidiary shall have any -------- ------- Subsidiary other than an Inactive Subsidiary. "INTELLECTUAL PROPERTY" means all patents, trademarks, tradenames, copyrights, technology, know-how and processes used in or necessary for the conduct of the business of Company and its Subsidiaries as currently conducted that are material to the condition (financial or otherwise), business or operations of Company or any of its Subsidiaries. "INTEREST COVERAGE RATIO" means, as at any date of determination, the ratio of (i) Consolidated Adjusted EBITDA to (ii) Consolidated Cash Interest Expense for the four Fiscal Quarters ending as of the last day of the Fiscal Quarter immediately preceding the Fiscal Quarter during which such date of determination occurs except that if the date of determination is the last day of a Fiscal Quarter, the four Fiscal Quarters tested shall include the preceding three Fiscal Quarters and the Fiscal Quarter then ending; provided that the Interest Coverage Ratio shall be calculated, for any date of determination (i) on or prior to December 28, 1996, for the one-Fiscal Quarter Period ending on September 28, 1996; (ii) on or prior to April 5, , 1997, for the two-Fiscal Quarter Period ending on December 28, 1996; and (iii) on or prior to July 5, 1997, for the three-Fiscal Quarter Period ending on April 5, 1997. "INTEREST PAYMENT DATE" means (i) with respect to any Base Rate Loan, each February 1, May 1, August 1 and November 1 of each year, commencing on the first such date to occur after the Closing Date, and (ii) with respect to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan; provided that in the case of each Interest Period of longer than -------- three months "Interest Payment Date" shall also include each date that is three months after the commencement of such Interest Period. "INTEREST PERIOD" has the meaning assigned to that term in subsection 2.2B. 24 "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "INTEREST RATE DETERMINATION DATE" means, with respect to any Interest Period, the second Business Day prior to the first day of such Interest Period. "INTEREST RATE EXCHANGERS" means Lenders or Affiliates of Lenders parties to the Interest Rate Agreements permitted under subsection 7.4(iii). "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. "INVENTORY" means, with respect to any Person as of any date of determination, all goods, merchandise and other personal property which are then held by such Person for sale or lease, including raw materials and work in process. "INVESTMENT" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any Securities of any other Person (other than a Person that prior to such purchase or acquisition was a wholly-owned Subsidiary of Company) or (ii) any direct or indirect loan, advance (other than (x) advances to employees for moving, entertainment and travel expenses, (y) loans to employees in connection with purchase of a home upon relocation, (z) drawing accounts and similar expenditures, in each case in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person (other than a wholly-owned Subsidiary of Company), including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "IP COLLATERAL" means, collectively, the Collateral under the Trademark Security Agreements. "ISSUING LENDER" means, with respect to any Letter of Credit, the Lender which agrees or is otherwise obligated to issue such Letter of Credit, determined as provided in subsection 3.1B(ii). "JOINT VENTURE" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided -------- that in no event shall any corporate Subsidiary of any Person be considered to be a Joint Venture to which such Person is a party. 25 "LENDER" and "LENDERS" means the persons identified as "Lenders" and listed on the signature pages of this Agreement, together with their successors and permitted assigns pursuant to subsection 10.1, and the term "Lenders" shall include Swing Line Lender unless the context otherwise requires; provided that -------- the term "Lenders", when used in the context of a particular Commitment, shall mean Lenders having that Commitment. "LETTER OF CREDIT" or "LETTERS OF CREDIT" means Commercial Letters of Credit and Standby Letters of Credit issued or to be issued by Issuing Lenders for the account of Company or any wholly-owned Subsidiary of Company pursuant to subsection 3.1 and the Existing Letters of Credit. "LETTER OF CREDIT USAGE" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding plus ---- (ii) the aggregate amount of all drawings under Letters of Credit honored by Issuing Lenders and not theretofore reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B). "LIEN" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title reten tion agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "LOAN" or "LOANS" means one or more of the Term Loans, Revolving Loans or Swing Line Loans or any combination thereof. "LOAN DOCUMENTS" means this Agreement, the Notes, the Subsidiary Guaranty, the Collateral Documents, the Letters of Credit (and any applications for, or reimbursement agreements or other documents or certificates executed by Company in favor of an Issuing Lender relating to, the Letters of Credit) and the Collateral Account Agreement. "LOAN PARTY" means each of Company and any of Company's Subsidiaries from time to time executing a Loan Document, and "LOAN PARTIES" means all such Persons, collectively. "MANAGEMENT AGREEMENT" means that certain Management Services Agreement dated as of May 23, 1996 between Company and Yucaipa in the form delivered to Agent prior to the execution of this Agreement and as it may be amended from time to time thereafter to the extent permitted under subsection 7.15A. "MARGIN DETERMINATION CERTIFICATE" means an Officers' Certificate of Company delivered with the financial statements required pursuant to subsections 6.1(ii) or 6.1(iii) setting forth in reasonable detail the Interest Coverage Ratio which is applicable as of 26 the date on which such Officers' Certificate is delivered and the aggregate principal amount of outstanding Term Loans as of the date which corresponds to the date of determination of such Interest Coverage Ratio. "MARGIN STOCK" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "MATERIAL ADVERSE EFFECT" means (i) a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company and its Subsidiaries, taken as a whole, or (ii) the material impairment of the ability of any Loan Party to perform, or the impairment of the ability of Agent or Lenders to enforce, the Obligations or any of the Loan Documents. "MERGER" means the merger of Merger Sub with and into Smitty's in accordance with the terms of the Recapitalization and Merger Agreement, with Smitty's being the surviving corporation in such Merger. "MERGER SUB" means Cactus Acquisition, Inc., a Delaware corporation and a wholly-owned Subsidiary of Company existing prior to the Merger. "MORTGAGE" means any deed of trust, mortgage, security agreement and fixture filing relating to any fee or leasehold interest of any Loan Party in real property, which shall be substantially in the form of Exhibit XVIII annexed ------------- hereto, in each case (i) with appropriate insertions and deletions based upon the nature of the real property interest (i.e., fee or leasehold) to be encumbered thereby and (ii) containing such schedules and including such additional provisions and other deviations from such Exhibit as are satisfactory to Agent and not inconsistent with the provisions of subsection 6.9 or as are necessary to conform such Exhibit to applicable local law, and which shall be dated the date of delivery thereof and made by such Loan Party as trustor or mortgagor, as the case may be, in favor of Agent, as beneficiary or mortgagee, delivered for the purpose of securing all Obligations hereunder, as the same may be amended, supplemented or otherwise modified from time to time. "MORTGAGED PROPERTY" has the meaning assigned to that term in subsection 4.1I. "MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "NET ASSET SALE PROCEEDS" means, with respect to any Asset Sale, Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale, net of any bona fide direct costs incurred in connection with such Asset Sale, including without limitation (i) income taxes reasonably estimated to be actually payable within two years of the date of such Asset Sale as a result of any gain recognized in 27 connection with such Asset Sale and (ii) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid under the terms thereof as a result of such Asset Sale. "NON-RECOURSE INDEBTEDNESS" means, as applied to any Person, all Indebtedness of that Person secured by Liens on specified assets of that Person under the terms of which (i) no recourse may be had against that or any other Person for the payment of the principal of or interest or premium on such Indebtedness or for any claim based thereon; provided that if such Person is an -------- entity formed for the sole purpose of owning and/or developing one or more store sites or other real property and owns no assets other than those subject to the Lien by the lender of such Indebtedness and conducts no business other than owning such asset, recourse may be had against such Person; and (ii) the enforcement of all obligations relating to such Indebtedness is limited to foreclosure or other actions with respect to such specified assets, in each case other than customary exceptions for fraud, waste or environmental indemnification. "NOTE OFFERING MATERIALS" means the Registration Statement of Company on Form S-3 (Registration No. 33-333-01601) filed with the Securities and Exchange Commission on March 8, 1996, with exhibits thereto, as amended by Amendment No. 1 thereto filed with the Securities and Exchange Commission on April 17, 1996, with exhibits thereto; as amended by Amendment No. 2 thereto filed with the Securities and Exchange Commission on April 26, 1996, with exhibits thereto and as amended by Amendment No. 3 thereto filed with the Securities and Exchange Commission on May 6, 1996, with exhibits thereto. "NOTES" means one or more of the Tranche A Term Notes, Tranche B Term Notes, Tranche C Term Notes, Tranche D Term Notes, Revolving Notes or Swing Line Note or any combination thereof. "NOTICE OF BORROWING" means a notice substantially in the form of Exhibit I annexed hereto delivered by Company to Agent pursuant to subsection - --------- 2.1B with respect to a proposed borrowing. "NOTICE OF CONVERSION/CONTINUATION" means a notice substantially in the form of Exhibit II annexed hereto delivered by Company to Agent pursuant to ---------- subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the Loans specified therein. "NOTICE OF ISSUANCE OF LETTER OF CREDIT" means a notice substantially in the form of Exhibit III annexed hereto delivered by Company to ----------- Agent pursuant to subsection 3.1B(i) with respect to the proposed issuance of a Letter of Credit. 28 "OBLIGATIONS" means all obligations of every nature of each Loan Party from time to time owed to Agent, Lenders or any of them under the Loan Documents, whether for principal, interest, reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnification or otherwise. "OFFICERS' CERTIFICATE" means, as applied to any corporation, a certificate executed on behalf of such corporation by its chairman of the board (if an officer) or its president or one of its executive or senior vice presidents and by its chief financial officer or its treasurer; provided that -------- every Officers' Certificate with respect to the compliance with a condition precedent to the making of any Loans hereunder shall include (i) a statement that the officer or officers making or giving such Officers' Certificate have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signers, they have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signers, such condition has been complied with; and provided further that any Officers' Certificate required pursuant to -------- ------- subsection 2.4B(iii) may be executed by any one of the officers referred to in this definition. "OPERATING LEASE" means, as applied to any Person, any lease (including, without limitation, leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is not a Capital Lease other than any such lease under which that Person is the lessor. "OWNER TRUSTEE" means State Street Bank & Trust Company, as owner trustee under the Smith's Food & Drug Centers, Inc. 1994-A Pass Through Trusts. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "PENSION PLAN" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "PERMITTED ENCUMBRANCES" means the following types of Liens (excluding any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA): (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 6.3; (ii) statutory Liens of landlords, statutory Liens of banks and rights of set-off, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen, materialmen and of growers on Inventory consisting of agricultural products, and other Liens imposed by law, in each case incurred in the ordinary course of business (a) for 29 amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of 5 days) are being contested in good faith by appropriate proceedings, so long as (1) such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts, and (2) in the case of a Lien with respect to any portion of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral on account of such Lien; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of the Collateral on account thereof; (iv) any attachment or judgment Lien not constituting an Event of Default under subsection 8.8; (v) licenses, concession agreements, leases or subleases entered into with or granted to third parties in accordance with any applicable terms of the Collateral Documents and not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or resulting in a material diminution in the value of any Collateral as security for the Obligations; (vi) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, in each case which do not and will not interfere in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or result in a material diminution in the value of any Collateral as security for the Obligations; (vii) any (a) interest or title of a lessor or sublessor (other than any Loan Party) under any lease permitted by subsection 7.9, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to (including without limitation ground leases or other prior leases of the demised premises, mortgages, mechanics liens, tax liens and easements), or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b); (viii) Liens arising from filing UCC financing statements relating solely to leases permitted by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; 30 (x) any zoning or similar law or right reserved to or vested in any governmental office or agency (including, without limitation, rights granted under redevelopment or financial assistance agreements with redevelopment agencies) to control or regulate the use of any real property; (xi) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of Company and its Subsidiaries; and (xii) licenses of patents, trademarks and other intellectual property rights granted by Company or any of its Subsidiaries in the ordinary course of business and not interfering in any material respect with the ordinary conduct of the business of Company or such Subsidiary. "PERMITTED HOLDERS" means (i) Yucaipa or any entity controlled thereby or any of the partners thereof, (ii) the Smith's Group or (iii) any of the Permitted Transferees. "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 or (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 spouse or lineal descendants, in each case to whom such Person has transferred the beneficial ownership of any Securities of Company. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "PLEDGE AGREEMENT" means each Pledge Agreement executed and delivered by Company and Subsidiaries of Company (other than the Inactive Subsidiaries) on the Closing Date and to be executed and delivered by Subsidiaries of Company from time to time in accordance with subsection 6.8, each substantially in the form of Exhibit XIV annexed hereto, as such Pledge ----------- Agreement may thereafter be amended, supplemented or otherwise modified from time to time and "Pledge Agreements" means all such Pledge Agreements, collectively. "PLEDGED COLLATERAL" means, collectively, the "Pledged Collateral" as defined in the Pledge Agreements. "POTENTIAL EVENT OF DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. 31 "PREFERRED STOCK" means the Redeemable Preferred Stock of Company. "PRIME RATE" means the rate that Bankers announces from time to time as its prime lending rate, as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Bankers or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "PRO RATA SHARE" means, on any date of determination, (i) with respect to all payments, computations and other matters relating to a Type of Term Loan Commitment or a Type of Term Loan of any Lender, the percentage obtained by dividing (x) the Term Loan Exposure of such Type of that Lender on -------- such date by (y) the aggregate Term Loan Exposure of such Type of all Lenders on -- such date, (ii) with respect to all payments, computations and other matters relating to the Revolving Loan Commitment or the Revolving Loans of any Lender or any Letters of Credit issued or participations therein purchased by any Lender or any participations in any Swing Line Loans purchased by any Lender, the percentage obtained by dividing (x) the Revolving Loan Exposure of that -------- Lender on such date by (y) the aggregate Revolving Loan Exposure of all Lenders -- on such date, and (iii) for all other purposes with respect to each Lender, the percentage obtained by dividing (x) the sum of the Term Loan Exposure of all -------- Types of that Lender on such date plus the Revolving Loan Exposure of that ---- Lender on such date by (y) the sum of the aggregate Term Loan Exposure of all -- Types of all Lenders on such date plus the aggregate Revolving Loan Exposure of ---- all Lenders on such date, in any such case as the applicable percentage may be adjusted by assignments permitted pursuant to subsection 10.1. The initial Pro Rata Share of each Lender for purposes of the preceding sentence is set forth opposite the name of that Lender in Schedule 2.1 annexed hereto. ------------ "PROXY STATEMENT" means a proxy statement and form of proxy in connection with the votes of the stockholders of Company with respect to (i) the Recapitalization and Merger Agreement and the transactions contemplated thereby, including the issuance of its Class B Common Stock to the existing shareholders of Smitty's in connection with the Acquisition and the Equity Tender Offer, (ii) Company's Amended and Restated Certificate of Incorporation, (iii) election of the Board of Directors of Company and (iv) ratification of selection of Company's independent auditors for 1996, together with any amendments thereof or supplements thereto, in the form or forms mailed to Company's stockholders. "PTO" means the United States Patent and Trademark Office or any successor or substitute office in which filings are necessary or, in the opinion of Agent, desirable in order to create or perfect Liens on any IP Collateral. "PUBLIC OFFERING" means the issuance of up to $575,000,000 in initial aggregate principal amount of Senior Subordinated Notes in a public offering registered under the Securities Act and as described in the Prospectus dated May __, 1996. 32 "REAL PROPERTY ASSET" means, at any time of determination, any interest in land, buildings, improvements and fixtures attached thereto or used in the operation thereof, then owned or leased (as lessee) by any Loan Party. "RECAPITALIZATION AND MERGER AGREEMENT" means that certain Recapitalization Agreement and Plan of Merger dated as of January 29, 1996 by and among Company, Merger Sub, Smitty's and Yucaipa, as amended prior to the Closing Date and in the form delivered to Agent and Lenders prior to their execution of this Agreement. "REDEEMABLE PREFERRED STOCK" means Series I Preferred Stock of Company, par value $.01 per share, with the terms set forth in Company's Articles of Incorporation in effect prior to the Closing Date. "REFERENCE LENDERS" means Bankers and Chase. "REFUNDED SWING LINE LOANS" has the meaning assigned to that term in subsection 2.1A(vi). "REGIONAL DIVISION" means each of the regional divisions designated by the management of Company for internal reporting purposes consistent with past practices of Company, and which in any event shall be captioned as (i) Utah-Idaho, (ii) Phoenix, (iii) Tucson, (iv) Albuquerque and (v) Las Vegas. "REGISTER" has the meaning assigned to that term in subsection 2.1D. "REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights Agreement dated as of May 23, 1996 by and among Company and holders of Company's Common Stock named therein in the form delivered to Agent prior to the execution of this Agreement and as it may be amended from time to time thereafter to the extent permitted under subsection 7.15A. "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT DATE" has the meaning assigned to that term in subsection 3.3B. "RELATED AGREEMENTS" means, collectively, the Recapitalization and Merger Agreement, the Equity Tender Offer Materials, the Note Offering Materials, the Proxy Statement, the Restated Certificate of Incorporation of Company as filed with the Secretary of State of the State of Delaware on the Closing Date, the Company Certificate of Designations, the Senior Subordinated Note Indenture, the Registration Rights Agreement, the Smitty's Stockholders' Agreement, the Standstill Agreement, the Management Agreement, the Yucaipa 33 Warrant and Smith's Shareholder Agreement and all other agreements or instruments delivered pursuant to or in connection with any of the foregoing. "RELATED ASSETS" means any of the properties located in California and leased by Company from Owner Trustee which properties are designated as obsolete, uneconomic for use or surplus to Company's needs by Company and are transferred to Company or a third party to effect the sale of such properties pursuant to subsection 7.1(viii) or subsection 7.7(xi). "RELATED FINANCING DOCUMENTS" means the Senior Subordinated Note Indenture and all other agreements or instruments delivered pursuant to or in connection with any of the foregoing, including any purchase agreements or registration rights agreements. "RELEASE" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including, without limitation, the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), or into or out of any Facility, including the movement of any Hazardous Material through the air, soil, surface water, groundwater or property. "REPLACED LENDER" has the meaning assigned to such term in subsection 2.9. "REPLACEMENT LENDER" has the meaning assigned to such term in subsection 2.9. "REQUISITE CLASS LENDERS" means, at any time, (i) for the Class of Lenders having Tranche A Term Loan Exposure and/or Revolving Loan Exposure, Lenders having or holding at least 66 and 2/3% of the sum of the aggregate Tranche A Term Loan Exposure of all Lenders plus the aggregate Revolving Loan ---- Exposure of all Lenders, and, (ii) for the Class of Lenders having Tranche B Term Loan Exposure, Tranche C Term Loan Exposure and/or Tranche D Term Loan Exposure, Lenders having or holding at least 66 and 2/3% of the sum of the aggregate Tranche B Term Loan Exposure of all Lenders plus the aggregate Tranche ---- C Term Loan Exposure of all Lenders plus the aggregate Tranche D Term Loan ---- Exposure of all Lenders. "REQUISITE LENDERS" means Lenders having or holding a majority of the sum of the aggregate Tranche A Term Loan Exposure of all Tranche A Term Lenders plus the aggregate Tranche B Term Loan Exposure of all Tranche B Term ---- Lenders plus the aggregate Tranche C Term Loan Exposure of all Tranche C Term ---- Lenders plus the aggregate Tranche D Term Loan Exposure of all Tranche D Term ---- Lenders plus the aggregate Revolving Loan Exposure of all Revolving Lenders. ---- "RESTRICTED JUNIOR PAYMENT" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the 34 holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Company now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Subordinated Indebtedness. "RESTRUCTURING CHARGES" means, for any period which ends subsequent to the Closing Date, the sum (without duplication) of (i) costs incurred by Company and its Subsidiaries with respect to the integration of the operations of Company and its Subsidiaries with the operations of Smitty's and its Subsidiaries; provided that the aggregate amount of such cash and non-cash -------- charges and costs that are excluded from Consolidated Net Income under clause (v) of the definition thereof and that are included in Consolidated Net Worth under clause (iii) of the definition thereof for all periods shall not exceed $15,000,000; (ii) non-cash charges and costs reserved for as a result of adjustments to recognize expenses incurred in connection with the Deferred Compensation Agreements; provided that the aggregate amount of all such non-cash -------- charges and costs that are excluded from Consolidated Net Income under clause (v) of the definition thereof and that are included in Consolidated Net Worth under clause (iii) of the definition thereof for all periods shall not exceed $30,000,000; (iii) cash and non-cash severance charges relating to the termination of employment of certain senior members of the management of Company in connection with the Transactions; provided that the aggregate amount of all -------- such cash severance charges that are excluded from Consolidated Net Income under clause (v) of the definition thereof and that are included in Consolidated Net Worth under clause (iii) of the definition thereof for all periods shall not exceed $5,000,000 and the aggregate amount of all such cash and non-cash severance charges that are so excluded from Consolidated Net Income or included in Consolidated Net Worth shall not exceed $10,000,000; (iv) non-cash charges representing additions to reserves for insurance liabilities required to be made as a result of an actuarial review of Company's insurance liabilities in connection with the Transactions; provided that the aggregate amount of such -------- non-cash charges that are excluded from Consolidated Net Income under clause (v) of the definition thereof and that are included in Consolidated Net Worth under clause (iii) of the definition thereof for all periods shall not exceed $5,000,000; and (v) cash and non-cash restructuring charges and/or non-cash FAS 121 charges incurred by Company and its Subsidiaries with respect to the write- down or write-off of Excess California Land or California Stores subsequent to the Closing Date, including the write-down or write-off of prior tax benefits associated therewith; provided that the aggregate amount of cash charges that -------- are excluded from Consolidated Net Income under clause (v) of the definition thereof and that are included in Consolidated Net Worth under clause (iii) of the definition thereof for all periods shall not exceed $65,000,000 and that such cash charges relate to payments to be made during the twenty-year period following the Closing Date. 35 "SECURITY AGREEMENT" means each Security Agreement executed and deivered by Company and Subsidiaries of Company (other than the Inactive Subsidiaries) on the Closing Date and to be executed and delivered by Subsidiaries of Company from time to time. "REVOLVING LOAN COMMITMENT" means the commitment of a Lender to make Revolving Loans to Company pursuant to subsection 2.1A(v), to issue and/or purchase participations in Letters of Credit pursuant to Section 3 and to purchase participations in Swing Line Loans pursuant to subsection 2.1A(vi), and "REVOLVING LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "REVOLVING LOAN COMMITMENT TERMINATION DATE" means August 31, 2002. "REVOLVING LOAN EXPOSURE" means, with respect to any Lender as of any date of determination (i) prior to the termination of the Revolving Loan Commitments, that Lender's Revolving Loan Commitment and (ii) after the termination of the Revolving Loan Commitments, the sum of (a) the aggregate outstanding principal amount of the Revolving Loans of that Lender plus (b) in ---- the event that Lender is an Issuing Lender, the aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Lender (in each case net of any funded participations purchased by other Lenders in such Letters of Credit or any unreimbursed drawings thereunder) plus (c) the aggregate amount of all ---- funded participations purchased by that Lender in any outstanding Letters of Credit or any unreimbursed drawings under any Letters of Credit plus (d) in the ---- case of Swing Line Lender, the aggregate outstanding principal amount of all Swing Line Loans (net of any funded participations therein purchased by other Lenders) plus (e) the aggregate amount of all funded participations purchased by ---- that Lender in any outstanding Swing Line Loans. "REVOLVING LOANS" means the Loans made by Lenders to Company pursuant to subsection 2.1A(v). "REVOLVING NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1E(v) on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Revolving Loan Commitments and Revolving Loans of any Lenders, in each case substantially in the form of Exhibit V --------- annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "SECURITIES" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit- sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. 36 "SECURITY AGREEMENT" means each Security Agreement executed and delivered by Company and Subsidiaries of Company (other than the Inactive Subsidiaries) on the Closing Date and to be executed and delivered by Subsidiaries of Company from time to time in accordance with subsection 6.8, each substantially in the form of Exhibit XV annexed hereto, as each such ---------- Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time and "Security Agreements" means all such Security Agreements, collectively. "SENIOR DEBT INDENTURES" means any or all of (i) the Existing Smitty's Sinking Fund Bond Indenture and (ii) indentures pursuant to which the mortgage notes listed on Schedule 7.1 annexed hereto were issued, as amended ------------ prior to the Closing Date and as such may be amended from time to time to the extent permitted under subsection 7.15B. "SENIOR INDEBTEDNESS" means any or all of the Existing Smitty's Sinking Fund Bonds, the mortgage notes listed on Schedule 7.1 annexed hereto and ------------ Indebtedness permitted pursuant to subsection 7.1(viii). "SENIOR SUBORDINATED NOTES" means up to $575,000,000 in initial aggregate principal amount of ___% Senior Subordinated Notes due 2007 of Company issued pursuant to the Senior Subordinated Note Indenture, as such notes may be amended from time to time to the extent permitted under subsection 7.15B. "SENIOR SUBORDINATED NOTE INDENTURE" means the indenture dated as of May 23, 1996 between Company and ___________, pursuant to which the Senior Subordinated Notes were issued, as such indenture may be amended from time to time to the extent permitted under subsection 7.15B. "SMITH'S GROUP" means 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. "SMITH'S SHAREHOLDER AGREEMENT" means that certain Stockholders' Agreement dated as of May 23, 1996 by and among Smitty's, Jeffrey P. Smith, Richard D. Smith, Fred L. Smith, Ida Smith, the Dee Glenn Smith Marital Trust, Trust for the Children of Jeffrey Paul Smith, Trust for the Children of Richard Dee Smith, and Trust for the Children of Fred Lorenzo Smith, in the form delivered to Agent prior to the execution of this Agreement and as it may be amended from time to time thereafter to the extent permitted under subsection 7.15A. "SMITTY'S" means Smitty's Supermarkets, Inc., a Delaware corporation. "SMITTY'S DEBT PURCHASE OFFERS" has the meaning assigned to such term in the recitals to this Agreement. 37 "SMITTY'S EXISTING DEBT PREPAYMENTS" has the meaning assigned to that term in the recitals to this Agreement. "SMITTY'S PRINCIPAL STOCKHOLDERS" means, collectively, the investment partnerships which own shares in Smitty's for which Yucaipa acts as the general partner. "SMITTY'S STOCKHOLDERS' AGREEMENT" means that certain Stockholders' Agreement dated as of January 29, 1996 by and among Company, Smitty's Principal Stockholders and other stockholders of Smitty's named therein, as amended prior to the Closing Date, in the form delivered to Agent prior to the execution of this Agreement and as it may thereafter be amended from time to time thereafter to the extent permitted under subsection 7.15A. "SOLVENT" means, with respect to any Person, that as of the date of determination both (A) (i) the then fair saleable value of the property of such Person is (y) greater than the total amount of liabilities (including contingent liabilities) of such Person and (z) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (ii) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (iii) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (B) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "STANDBY LETTER OF CREDIT" means any standby letter of credit or similar instrument issued for the purpose of supporting (i) Indebtedness of Company or any of its Subsidiaries in respect of industrial revenue or development bonds or financings, (ii) workers' compensation liabilities of Company or any of its Subsidiaries, (iii) the obligations of third party insurers of Company or any of its Subsidiaries arising by virtue of the laws of any jurisdiction requiring third party insurers, (iv) obligations with respect to Capital Leases or Operating Leases of Company or any of its Subsidiaries, and (v) performance, payment, deposit or surety obligations of Company or any of its Subsidiaries, in any case if required by law or governmental rule or regulation or in accordance with custom and practice in the industry; provided that Standby -------- Letters of Credit may not be issued for the purpose of supporting trade payables or any Indebtedness constituting "antecedent debt" (as that term is used in Section 547 of the Bankruptcy Code). "STANDSTILL AGREEMENT" means that certain Standstill Agreement dated as of January 29, 1996 by and among Company, Yucaipa, the Smitty's Principal Stockholders and certain stockholders of Company named therein, as amended prior to the Closing Date in the 38 form delivered to Agent prior to the execution of this Agreement and as it may be amended from time to time thereafter to the extent permitted under subsection 7.15A. "SUBORDINATED INDEBTEDNESS" means the Indebtedness of Company evidenced by the Senior Subordinated Notes and any other Indebtedness of Company subordinated in right of payment to the Obligations pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance satisfactory to Agent and Requisite Lenders. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. "SUBSIDIARY GUARANTOR" means any Subsidiary of Company that executes and delivers a counterpart of the Subsidiary Guaranty on the Closing Date or from time to time thereafter pursuant to subsection 6.8. "SUBSIDIARY GUARANTY" means the Subsidiary Guaranty executed and delivered by existing Subsidiaries of Company (other than the Inactive Subsidiaries) on the Closing Date and to be executed and delivered by additional Subsidiaries of Company from time to time thereafter in accordance with subsection 6.8, substantially in the form of Exhibit XVII annexed hereto, as ------------ such Subsidiary Guaranty may hereafter be amended, supplemented or otherwise modified from time to time. "SUPPLEMENTAL COLLATERAL AGENT" has the meaning assigned to that term in subsection 9.1D. "SURPLUS LEASED PROPERTIES" means all of (i) the California Stores in which Company owns a leasehold interest and (ii) the other Real Property Assets in which Company or any of its Subsidiaries owns a leasehold interest and in which Company and any of its Subsidiaries are not operating and are identified as such on Schedule 5.20 annexed hereto. ------------- "SURPLUS OWNED PROPERTIES" means all of (i) the California Stores owned by Company, and (ii) the Real Property Assets owned by Company or any of its Subsidiaries in which Company and any of its Subsidiaries are not operating which are identified as such on Schedule 5.20 annexed hereto. ------------- "SWING LINE LENDER" means Bankers, or any Person serving as a successor Agent hereunder, in its capacity as Swing Line Lender hereunder. 39 "SWING LINE LOAN COMMITMENT" means the commitment of Swing Line Lender to make Swing Line Loans to Company pursuant to subsection 2.1A(vi). "SWING LINE LOANS" means the Loans made by Swing Line Lender to Company pursuant to subsection 2.1A(vi). "SWING LINE NOTE" means (i) the promissory note of Company issued pursuant to subsection 2.1E(vi) on the Closing Date and (ii) any promissory note issued by Company to any successor Agent and Swing Line Lender pursuant to the last sentence of subsection 9.5B, in each case substantially in the form of Exhibit VI annexed hereto, as it may be amended, supplemented or otherwise - ---------- modified from time to time. "SYNDICATION AGENT" has the meaning assigned to that term in the introductions to this Agreement. "TAX" or "TAXES" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "TAX ON THE OVERALL NET INCOME" of a Person shall be -------- construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its lending office). "TERM LOAN COMMITMENT" or "TERM LOAN COMMITMENTS" means such commitments of Lenders in the aggregate to make the Term Loans pursuant to subsection 2.1A in the aggregate. "TERM LOAN EXPOSURE" means, with respect to a Lender of a Type of Term Loan as of any date of determination, (i) prior to the termination of all of a Lender's Commitment with respect to the Term Loans of such Type, that Lender's Term Loan Commitment of such Type (or any portion thereof that has not been terminated) plus the outstanding principal amount of the Term Loan of such ---- Type of that Lender, and (ii) after the termination of all of a Lender's Commitment with respect to the Term Loans of such Type, the outstanding principal amount of the Term Loan of such Type of that Lender. "TERM LOANS" means one or more of the Tranche A Term Loans, the Tranche B Term Loans, the Tranche C Term Loans or the Tranche D Term Loans. "TERM NOTES" means (i) the promissory notes of Company evidencing the Term Loans of a Type of Term Loan issued pursuant to subsection 2.1E on the Closing Date, and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 40 10.1B(i) in connection with assignments of the Term Loan Commitments of such Type or of the Term Loans of such Type, in each case substantially in the form of Exhibit IV-A annexed hereto in the case of Tranche A Term Loans (the ------------ "Tranche A Term Note"), Exhibit IV-B annexed hereto in the case of Tranche B ------------ Term Loans (the "Tranche B Term Note"), Exhibit IV-C annexed hereto in the case ------------ of Tranche C Term Loans (the "Tranche C Term Note") and Exhibit IV-D annexed ------------ hereto in the case of Tranche D Term Loans (the "Tranche D Term Note"), as they may be amended, supplemented or otherwise modified from time to time. "TITLE INSURANCE POLICIES" means (i) ALTA loan title insurance policies with respect to the Real Property Assets subject to a Mortgage identified as "major facilities" on Part IV of Schedule 4.1I annexed hereto; and ------------- (ii) CLTA loan title insurance policies with respect to the other Real Property Assets identified on Part IV of the Schedule 4.1I annexed hereto, in each case issued by a title insurance company reasonably satisfactory to Agent, in the amounts reasonably satisfactory to Agent with respect to each particular Real Property Asset subject to a Mortgage, in each case, assuring Agent that the applicable Mortgage creates a valid and enforceable first priority lien on the respective Real Property Asset subject to such Mortgage, free and clear of all defects and encumbrances except Permitted Encumbrances, which Title Insurance Policies shall be in form and substance reasonably satisfactory to Agent and shall include an endorsement for any matters that Agent may reasonably request and for future advances under this Agreement, the Notes and the other Loan Documents, and shall provide for affirmative insurance and such reinsurance as Agent may request, all of the foregoing in form and substance reasonably satisfactory to Agent. "TOTAL UTILIZATION OF REVOLVING LOAN COMMITMENTS" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Revolving Loans plus (ii) the aggregate principal amount of all ---- outstanding Swing Line Loans plus (iii) the Letter of Credit Usage. ---- "TRADEMARK SECURITY AGREEMENT" means each Trademark Security Agreement executed and delivered by Company and Subsidiaries of Company (other than the Inactive Subsidiaries) on the Closing Date and to be executed and delivered by Subsidiaries of Company from time to time in accordance with subsection 6.8, each substantially in the form of Exhibit XVI annexed hereto, as ----------- such Trademark Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time and "Trademark Security Agreements" means all such Trademark Security Agreements, collectively. "TRANCHE A TERM LENDER" or "TRANCHE A TERM LENDERS" means the Lender or Lenders having a Tranche A Term Loan Commitment or having a Tranche A Term Loan outstanding. "TRANCHE A TERM LOAN COMMITMENT" means the commitment of a Tranche A Term Lender to make a Tranche A Term Loan to Company pursuant to subsection 2.1A(i), and "TRANCHE A TERM LOAN COMMITMENTS" means such commitments of all Tranche A Term Lenders in the aggregate. 41 "TRANCHE A TERM LOANS" means the Loans made by Tranche A Term Lenders to Company pursuant to subsection 2.1A(i). "TRANCHE B TERM LENDER" or "TRANCHE B TERM LENDERS" means the Lender or Lenders having a Tranche B Term Loan Commitment or having a Tranche B Term Loan outstanding. "TRANCHE B TERM LOAN COMMITMENT" means the commitment of a Tranche B Term Lender to make a Tranche B Term Loan to Company pursuant to subsection 2.1A(ii), and "TRANCHE B TERM LOAN COMMITMENTS" means such commitments of all Tranche B Term Lenders in the aggregate. "TRANCHE B TERM LOANS" means the Loans made by Tranche B Term Lenders to Company pursuant to subsection 2.1A(ii). "TRANCHE C TERM LENDER" or "TRANCHE C TERM LENDERS" means the Lender or Lenders having a Tranche C Term Loan Commitment or having a Tranche C Term Loan outstanding. "TRANCHE C TERM LOAN COMMITMENT" means the commitment of a Tranche C Term Lender to make a Tranche C Term Loan to Company pursuant to subsection 2.1A(iii), and "TRANCHE C TERM LOAN COMMITMENTS" means such commitments of all Tranche C Term Lenders in the aggregate. "TRANCHE C TERM LOANS" means the Loans made by Tranche C Term Lenders to Company pursuant to subsection 2.1A(iii). "TRANCHE D TERM LENDER" or "TRANCHE D TERM LENDERS" means the Lender or Lenders having a Tranche D Term Loan Commitment or having a Tranche D Term Loan outstanding. "TRANCHE D TERM LOAN COMMITMENT" means the commitment of a Tranche D Term Lender to make a Tranche D Term Loan to Company pursuant to subsection 2.1A(iv), and "TRANCHE D TERM LOAN COMMITMENTS" means such commitments of all Tranche D Term Lenders in the aggregate. "TRANCHE D TERM LOANS" means the Loans made by Tranche D Term Lenders to Company pursuant to subsection 2.1A(iv). "TRANSACTIONS" means the Acquisition, the Merger, the Equity Tender Offer, the Company Existing Debt Prepayments, the Smitty's Existing Debt Prepayments, the Public Offering and the transactions contemplated by the Loan Documents and the Related Agreements. 42 "TRANSACTION COSTS" has the meaning assigned to that term in the recitals to this Agreement. "TRANSFER DATE" means the date on which Agent (or its Affiliate) acquires that title previously held by Company (or its Affiliate) to any Mortgaged Property or Covered Real Property, as the case may be, pursuant to power of sale or judicial foreclosure of the lien of the Mortgage, or by receipt of a deed in lieu of such foreclosure, and any and all redemption rights of Company (or its Affiliate) have expired, unless within a period of ninety-one (91) days after the date on which such title vests in Agent (or its Affiliate) a bankruptcy or other insolvency proceeding is filed by or against Company (or its Affiliate). If Company (or its Affiliate) should remain in or reacquire possession of such Mortgaged Property or Covered Real Property, as the case may be, after the Transfer Date, or if Company (or its Affiliate) should engage in any Hazardous Materials Activity on or at such property after the Transfer Date, the Transfer Date shall be deemed to be the date after which neither Company nor any of its Affiliates is any longer in possession of such property and Company and its Affiliates have ceased to engage in any Hazardous Materials Activity on or at such property. "TYPE" means a Term Loan, a Revolving Loan or a Swing Line Loan (each of which is a "Type" of Loan) and with respect to a Term Loan, a Tranche A Term Loan, a Tranche B Term Loan, a Tranche C Term Loan or a Tranche D Term Loan (each of which is a "Type" of Term Loan). "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. "YUCAIPA" means The Yucaipa Companies, a California general partnership, or any successor thereto (i) which is an Affiliate of Ronald W. Burkle, (ii) which has been established for the sole purpose of changing the form of The Yucaipa Companies from that of a partnership to that of a limited liability company or such other form acceptable to Arrangers in their sole discretion and (iii) the form and structure of which has been approved by Arrangers in their sole discretion. "YUCAIPA INVESTORS" means Ronald W. Burkle, Yucaipa SSV Partners, L.P., Yucaipa Smitty's Partners, L.P., Yucaipa Smitty's Partners II, L.P., Yucaipa Arizona Partners, L.P., The Yucaipa Companies and any other entity formed after the Closing Date which is an Affiliate of Ronald W. Burkle. "YUCAIPA WARRANT" has the meaning assigned to that term in the recitals to this Agreement. 43 1.2 ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS UNDER ------------------------------------------------------------------------ AGREEMENT. --------- Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to clauses (i), (ii) and (iii) of subsection 6.1 shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in subsection 6.1(v)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall (i) utilize accounting principles and policies in conformity with those used to prepare the financial statements referred to in subsection 5.3, or (ii) if any amendments to the provisions set forth in Sections 1, 6 or 7 are made pursuant to negotiations conducted by operation of the following sentence, accounting principles and policies in effect at the time of the effectiveness of such amendments. Notwithstanding the foregoing, if any changes in accounting principles from those used in the preparation of the financial statements referred to in subsection 5.3 hereafter occasioned by the promulgation of rules, regulations, pronouncements or opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) result in a change in the method of calculation of financial covenants, standards or terms found in Sections 1, 6 and 7 hereof, the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating Company's financial condition shall be the same after such changes as if such changes had not been made. During the period of such negotiations, but in no event for a period longer than 60 days, Company shall not be required to deliver the additional financial statements required pursuant to subsection 6.1(v). After the parties agree on amendments to the provisions of Sections 1, 6 and 7 necessitated by such changes, Company shall not be required to deliver the additional financial statements required pursuant to subsection 6.1(v) with respect to such changes. 1.3 OTHER DEFINITIONAL PROVISIONS AND RULES OF CONSTRUCTION. ------------------------------------------------------- A. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. B. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. C. The use herein of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be 44 deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 COMMITMENTS; MAKING OF LOANS; THE REGISTER; NOTES. ------------------------------------------------- A. COMMITMENTS. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Lender hereby severally agrees to make the Loans described in subsections 2.1A(i), 2.1A(ii), 2.1A(iii), 2.1A(iv) and 2.1A(v), as applicable, and Swing Line Lender hereby agrees to make the Loans described in subsection 2.1A(vi). (i) Tranche A Term Loans. Each Tranche A Term Lender severally -------------------- agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche A Term Loan Commitments to be used for the purposes identified in the first sentence of subsection 2.5A. The amount of each Tranche A Term Lender's Tranche A Term Loan Commit ment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate amount of the Tranche A Term Loan Commitments is $325,000,000; provided that the Tranche A Term Loan Commitments of Tranche A Term Lenders be adjusted to give effect to any assignments of the Tranche A Term Loan Commitments pursuant to subsection 10.1B. Each Tranche A Term Lender's Tranche A Term Loan Commitment shall expire immediately and without further action on the earlier of (x) the date on which the Recapitalization and Merger Agreement is terminated in accordance with Article 10 thereof and (y) June 30, 1996 if the initial Term Loans are not made on or before that date. Company may make only one borrowing on the Closing Date under the Tranche A Term Loan Commitments. Amounts borrowed under this subsection 2.1A(i) and subsequently repaid or prepaid may not be reborrowed. (ii) Tranche B Term Loans. Each Tranche B Term Lender severally -------------------- agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche B Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Tranche B Term Lender's Tranche B Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the ------------ aggregate amount of the B Term Loan Commitments is $160,000,000; provided -------- that the Tranche B Term Loan Commitments of Tranche B Term Lenders shall be adjusted to give effect to any assignments of the Tranche B Term Loan Commitments pursuant to subsection 10.1B. Each Tranche B Term Lender's Tranche B Term Loan Commitment shall expire immediately and without further action on the earlier of (x) the date on which the Recapitalization and Merger Agreement is terminated in accordance with Article 10 thereof and (y) June 30, 1996 if the initial Term Loans are not made on or before that date. Company may make only 45 one borrowing on the Closing Date under the Tranche B Term Loan Commitments. Amounts borrowed under this subsection 2.1A(ii) and subsequently repaid or prepaid may not be reborrowed. (iii) Tranche C Term Loans. Each Tranche C Term Lender severally -------------------- agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche C Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Tranche C Term Lender's Tranche C Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the ------------ aggregate amount of the Tranche C Term Loan Commitments is $160,000,000; provided that the Tranche C Term Loan Commitments of Tranche C Term Lenders -------- shall be adjusted to give effect to any assignments of the Tranche C Term Loan Commitments pursuant to subsection 10.1B. Each Tranche C Term Lender's Tranche C Term Loan Commitment shall expire immediately and without further action on the earlier of (x) the date on which the Recapitalization and Merger Agreement is terminated in accordance with Article 10 thereof and (y) June 30, 1996 if the initial Term Loans are not made on or before that date. Company may make only one borrowing on the Closing Date under the Tranche C Term Loan Commitments. Amounts borrowed under this subsection 2.1A(iii) and subsequently repaid or prepaid may not be reborrowed. (iv) Tranche D Term Loans. Each Tranche D Term Lender severally -------------------- agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche D Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Tranche D Term Lender's Tranche D Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the ------------ aggregate amount of the Tranche D Term Loan Commitments is $160,000,000; provided that the Tranche D Term Loan Commitments of Tranche D Term Lenders -------- shall be adjusted to give effect to any assignments of the Tranche D Term Loan Commitments pursuant to subsection 10.1B. Each Tranche D Term Lender's Tranche D Term Loan Commitment shall expire immediately and without further action on the earlier of (x) the date on which the Recapitalization and Merger Agreement is terminated in accordance with Article 10 thereof and (y) June 30, 1996 if the initial Term Loans are not made on or before that date. Company may make only one borrowing on the Closing Date under the Tranche D Term Loan Commitments. Amounts borrowed under this subsection 2.1A(iv) and subsequently repaid or prepaid may not be reborrowed. (v) Revolving Loans. Each Revolving Lender severally agrees, --------------- subject to the limitations set forth below with respect to the maximum amount of Revolving Loans permitted to be outstanding from time to time, to lend to Company from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Revolving Loan Commitments to be used for the pur- 46 poses identified in subsection 2.5B. The original amount of each Revolving Lender's Revolving Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate original amount of the ------------ Revolving Loan Commitments is $190,000,000; provided that the Revolving -------- Loan Commitments of Revolving Lenders shall be adjusted to give effect to any assignments of the Revolving Loan Commitments pursuant to subsection 10.1B; and provided further that the amount of the Revolving Loan -------- ------- Commitments shall be reduced from time to time by the amount of any reductions thereto made pursuant to subsections 2.4B(ii) and 2.4B(iii). Each Revolving Lender's Revolving Loan Commitment shall expire on the Revolving Loan Commitment Termination Date and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Loan Commitments shall be paid in full no later than that date; provided that each Revolving Lender's Revolving Loan Commitment shall -------- expire immediately and without further action on the earlier of (x) the date on which the Recapitalization and Merger Agreement is terminated in accordance with Article 10 thereof and (y) June 30, 1996 if the initial Term Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(v) may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date. Anything contained in this Agreement to the contrary notwithstanding, the Revolving Loans and the Revolving Loan Commitments shall be subject to the following limitations in the amounts and during the periods indicated: (a) in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect; and (b) for 30 consecutive days during the twelve-month period immediately following the Closing Date and thereafter during each twelve-month period that immediately follows Company's most recent compliance with this subparagraph (b), the sum of (1) the aggregate outstanding principal amount of all Revolving Loans plus (2) the aggregate outstanding principal amount of all Swing Line Loans shall not exceed $75,000,000. (vi) Swing Line Loans. Swing Line Lender hereby agrees, subject ---------------- to the limitations set forth below with respect to the maximum amount of Swing Line Loans permitted to be outstanding from time to time, to make a portion of the Revolving Loan Commitments available to Company from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date by making Swing Line Loans to Company in an aggregate amount not exceeding the amount of the Swing Line Loan Commitment to be used for the purposes identified in subsection 2.5B, notwithstanding the fact that such Swing Line Loans, when aggregated with Swing Line Lender's outstanding Revolving Loans and Swing Line Lender's Pro Rata Share of the Letter of Credit Usage then in effect, may exceed 47 Swing Line Lender's Revolving Loan Commitment. The original amount of the Swing Line Loan Commitment is $30,000,000; provided that any reduction of -------- the Revolving Loan Commitments made pursuant to subsection 2.4B(ii) or 2.4B(iii) which reduces the aggregate Revolving Loan Commitments to an amount less than the then current amount of the Swing Line Loan Commitment shall result in an automatic corresponding reduction of the Swing Line Loan Commitment to the amount of the Revolving Loan Commitments, as so reduced, without any further action on the part of Company, Agent or Swing Line Lender. The Swing Line Loan Commitment shall expire on the Revolving Loan Commitment Termination Date and all Swing Line Loans and all other amounts owed hereunder with respect to the Swing Line Loans shall be paid in full no later than that date; provided that the Swing Line Loan Commitment shall -------- expire immediately and without further action on the earlier of (x) the date on which the Recapitalization and Merger Agreement is terminated in accordance with Article 10 thereof and (y) June 30, 1996 if the initial Term Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(vi) may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date. Anything contained in this Agreement to the contrary notwithstanding, the Swing Line Loans and the Swing Line Loan Commitment shall be subject to the following limitations in the amounts and during the periods indicated: (a) in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect; and (b) for 30 consecutive days during the twelve-month period immediately following the Closing Date and thereafter during each twelve-month period that immediately follows Company's most recent compliance with this subparagraph (b), the sum of (1) the aggregate outstanding principal amount of all Revolving Loans plus (2) the ---- aggregate outstanding principal amount of all Swing Line Loans shall not exceed $75,000,000. With respect to any Swing Line Loans which have not been voluntarily prepaid by Company pursuant to subsection 2.4B(i)(a), Swing Line Lender (i) may, at any time in its sole and absolute discretion, and (ii) shall, at least once every seven days, deliver to Agent (with a copy to Company), no later than 1:00 P.M. (New York City time) on the first Business Day in advance of the proposed Funding Date, a notice requesting Revolving Lenders to make Revolving Loans that are Base Rate Loans on such Funding Date in an amount equal to the amount of such Swing Line Loans (the "REFUNDED SWING LINE LOANS") outstanding on the date such notice is given which Swing Line Lender requests Revolving Lenders to prepay. Anything contained in this Agreement to the contrary notwithstanding, (i) the proceeds of such Revolving Loans made by Revolving Lenders other than Swing Line Lender shall be immediately 48 delivered by Agent to Swing Line Lender (and not to Company) and applied to repay a corresponding portion of the Refunded Swing Line Loans and (ii) on the day such Revolving Loans are made, Swing Line Lender's Pro Rata Share of the Refunded Swing Line Loans shall be deemed to be paid with the proceeds of a Revolving Loan made by Swing Line Lender, and such portion of the Swing Line Loans deemed to be so paid shall no longer be outstanding as Swing Line Loans and shall no longer be due under the Swing Line Note of Swing Line Lender but shall instead constitute part of Swing Line Lender's outstanding Revolving Loans and shall be due under the Revolving Note of Swing Line Lender. Company hereby authorizes Agent and Swing Line Lender to charge Company's accounts with Agent and Swing Line Lender (up to the amount available in each such account) in order to immediately pay Swing Line Lender the amount of the Refunded Swing Line Loans to the extent the proceeds of such Revolving Loans made by Revolving Lenders, including the Revolving Loan deemed to be made by Swing Line Lender, are not sufficient to repay in full the Refunded Swing Line Loans. If any portion of any such amount paid (or deemed to be paid) to Swing Line Lender should be recovered by or on behalf of Company from Swing Line Lender in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared among all Revolving Lenders in the manner con templated by subsection 10.5. Immediately upon funding of the Swing Line Loans by the Swing Line Lender, each Revolving Lender shall be deemed to, and hereby agrees to, have purchased a participation in such outstanding Swing Line Loans in an amount equal to its Pro Rata Share of the unpaid amount of such Swing Line Loans together with accrued interest thereon. Upon one Business Day's notice from Swing Line Lender, each Revolving Lender shall deliver to Swing Line Lender an amount equal to its respective participation in same day funds at the Funding and Payment Office. In the event any Revolving Lender fails to make available to Swing Line Lender the amount of such Revolving Lender's participation as provided in this paragraph, Swing Line Lender shall be entitled to recover such amount on demand from such Revolving Lender together with interest thereon at the rate customarily used by Swing Line Lender for the correction of errors among banks for three Business Days and thereafter at the Base Rate. In the event Swing Line Lender receives a payment of any amount in which other Revolving Lenders have funded their purchase of a participation as provided in this paragraph, Swing Line Lender shall promptly distribute to each such other Revolving Lender its Pro Rata Share of such payment. Anything contained herein to the contrary notwithstanding, each Revolving Lender's obligation to make Revolving Loans for the purpose of repaying any Refunded Swing Line Loans pursuant to the second preceding paragraph and each Revolving Lender's obligation to fund a purchase of a participation in any unpaid Swing Line Loans pursuant to the immediately preceding paragraph shall be absolute and unconditional and shall not be affected by any circumstance, includ ing without limitation (a) any set- off, counterclaim, recoupment, defense or other right which such 49 Revolving Lender may have against Swing Line Lender, Company or any other Person for any reason whatsoever; (b) the occurrence or continuation of an Event of Default or a Potential Event of Default; (c) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (d) any breach of this Agreement or any other Loan Document by any party thereto; or (e) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided that such obligations of each -------- Revolving Lender are subject to the satisfaction of one of the following (X) Swing Line Lender believed in good faith that all conditions under Section 4 to the making of the applicable Swing Line Loans to be refunded were satisfied at the time Swing Line Loans were made, (Y) the satisfaction of any such condition not satisfied had been waived in accordance with subsection 10.6 or (Z) such Revolving Lender had actual knowledge, by receipt of any notices required to be delivered to Revolving Lenders pursuant to subsection 6.1(ix) or otherwise, that any such condition had not been satisfied and such Revolving Lender failed to notify Swing Line Lender and Agent in writing that it had no obligation to make Revolving Loans until such condition was satisfied (any such notice to be effective as of the date of receipt thereof by Swing Line Lender and Agent). B. BORROWING MECHANICS. Term Loans or Revolving Loans made on any Funding Date (other than Revolving Loans made pursuant to a request by Swing Line Lender pursuant to subsection 2.1A(vi) for the purpose of repaying any Swing Line Loans or Revolving Loans made pursuant to subsection 3.3B for the purpose of reimbursing any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it) that are made as (i) Eurodollar Rate Loans shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount or (ii) Base Rate Loans shall be in an aggregate minimum amount of $2,000,000 and integral multiples of $500,000 in excess of that amount. Swing Line Loans made on any Funding Date shall be in an aggregate minimum amount of $500,000 and integral multiples of $250,000 in excess of that amount. Whenever Company desires that Lenders make Term Loans or Revolving Loans it shall deliver to Agent a Notice of Borrowing no later than 1:00 P.M. (New York City time) at least three Business Days in advance of the proposed Funding Date (in the case of a Eurodollar Rate Loan) or at least one Business Day in advance of the proposed Funding Date (in the case of a Base Rate Loan). Whenever Company desires that Swing Line Lender make a Swing Line Loan, it shall deliver to Agent a Notice of Borrowing no later than 1:00 P.M. (New York City time) on the proposed Funding Date. The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount and Type of Loans requested, (iii) in the case of Swing Line Loans and any Loans made on the Closing Date, that such Loans shall be Base Rate Loans, (iv) in the case of Term Loans and Revolving Loans, whether such Loans shall be Base Rate Loans or Eurodollar Rate Loans, and (v) in the case of any Loans requested to be made as Eurodollar Rate Loans, the initial Interest Period requested therefor. Term Loans and Revolving Loans may be continued as or converted into Base Rate Loans and Eurodollar Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Agent telephonic notice by the 50 required time of any proposed borrowing under this subsection 2.1B; provided -------- that such notice shall be promptly confirmed in writing by delivery of a Notice of Borrowing to Agent on or before the applicable Funding Date. Notwithstanding anything contained herein to the contrary, during the period commencing on (and including) the Closing Date and ending on the earlier of (i) the one-month anniversary of the date on which the first Eurodollar Rate Loan is made under this Agreement and (ii) the date Agent sends notice to Company indicating that Lenders' primary syndication has been concluded, (a) Company may only request Base Rate Loans and Eurodollar Rate Loans with an Interest Period of one month and (b) the last day of the Interest Period applicable to any Eurodollar Rate Loan shall be the one-month anniversary of the date on which the first Eurodollar Rate Loan is made under this Agreement. Neither Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of Loans by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected Loans hereunder. Company shall notify Agent prior to the funding of any Loans in the event that any of the matters to which Company is required to certify in the applicable Notice of Borrowing is no longer true and correct as of the applicable Funding Date, and the acceptance by Company of the proceeds of any Loans shall constitute a re-certification by Company, as of the applicable Funding Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing as modified pursuant to the notice provided for in the first clause of this sentence (it being understood that the making of such Loans by Lenders shall not in any way be construed as a waiver by Lenders of any matter set forth in such notice). Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to make a borrowing in accordance therewith. C. DISBURSEMENT OF FUNDS. All Term Loans and Revolving Loans under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares of the Commitments for the particular Type of Loans requested, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender to make the particular Type of Loan requested be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make a Loan requested hereunder. Promptly after receipt by Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Agent shall notify each Lender or Swing Line Lender, as the case may be, of the proposed borrowing. Each Lender shall make 51 the amount of its Loan available to Agent not later than 12:00 Noon (New York City time) on the applicable Funding Date, and Swing Line Lender shall make the amount of its Swing Line Loan available to Agent not later than 2:00 P.M.(New York City time) on the applicable Funding Date, in each case in same day funds in Dollars, at the Funding and Payment Office. Except as provided in subsection 2.1A(vi) or subsection 3.3B with respect to Revolving Loans used to repay Refunded Swing Line Loans or to reimburse any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it, upon satisfaction or waiver of the conditions precedent specified in subsections 4.1 (in the case of Loans made on the Closing Date) and 4.2 (in the case of all Loans), Agent shall make the proceeds of such Loans available to Company on the applicable Funding Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Agent from Lenders or Swing Line Lender, as the case may be, to be credited to the account of Company at the Funding and Payment Office. Unless Agent shall have been notified by any Lender prior to the Funding Date for any Loans that such Lender does not intend to make available to Agent the amount of such Lender's Loan requested on such Funding Date, Agent may assume that such Lender has made such amount available to Agent on such Funding Date and Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to Agent by such Lender, Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Funding Date until the date such amount is paid to Agent, at the customary rate set by Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Agent's demand therefor, Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Agent together with interest thereon, for each day from such Funding Date until the date such amount is paid to Agent, at the rate payable under this Agreement for Base Rate Loans of the applicable Type of Loans. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. D. THE REGISTER. (i) Agent shall maintain, at its address referred to in subsection 10.8, a register for the recordation of the names and addresses of Lenders and the Commitments and Loans of each Lender from time to time (the "REGISTER"). The Register shall be available for inspection by Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (ii) Agent shall record in the Register the Tranche A Term Loan Commitment, the Tranche B Term Loan Commitment, the Tranche C Term Loan Commitment, the Tranche D Term Loan Commitment and the Revolving Loan 52 Commitment and the Term Loans and Revolving Loans from time to time of each Lender, the Swing Line Loan Commitment and the Swing Line Loans from time to time of Swing Line Lender, and each repayment or prepayment in respect of the principal amount of the Term Loans or Revolving Loans of each Lender or the Swing Line Loans of Swing Line Lender. Any such recordation shall be conclusive and binding on Company and each Lender, absent manifest error; provided that failure to make any such -------- recordation, or any error in such recordation, shall not affect any Lender's Commitments or Company's Obligations in respect of the applicable Loans. (iii) Each Lender shall record on its internal records (including, without limitation, the Notes held by such Lender) the amount of the Term Loan and each Revolving Loan made by it and each payment in respect thereof. Any such recordation shall be conclusive and binding on Company, absent manifest error; provided that failure to make any such -------- recordation, or any error in such recordation, shall not affect any Lender's Commitments or Company's Obligations in respect of any applicable Loans; and provided, further that in the event of any -------- ------- inconsistency between the Register and any Lender's records, the recordations in the Register shall govern, absent manifest error. (iv) Company, Agent and Lenders shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the corresponding Commitments and Loans listed therein for all purposes hereof, and no assignment or transfer of any such Commitment or Loan shall be effective, in each case unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Agent and recorded in the Register as provided in subsection 10.1B(ii). Prior to such recordation, all amounts owed with respect to the applicable Commitment or Loan shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding Commitments or Loans. (v) Company hereby designates Bankers to serve as Company's agent solely for purposes of maintaining the Register as provided in this subsection 2.1D, and Company hereby agrees that, to the extent Bankers serves in such capacity, Bankers and its officers, directors, employees, agents and affiliates shall constitute Indemnitees for all purposes under subsection 10.3. E. NOTES. Company shall execute and deliver on the Closing Date (i) to each Tranche A Term Lender (or to Agent for that Lender) a Tranche A Term Note substan tially in the form of Exhibit IV-A annexed hereto to evidence that ------------ Lender's Tranche A Term Loan Commitment, in the principal amount of that Lender's Tranche A Term Loan and that Lender's Tranche A Term Loan Commitment and with other appropriate insertions, (ii) to each Tranche B Term Lender (or Agent for that Lender) a Tranche B Term Note substantially 53 in the form of Exhibit IV-B annexed hereto to evidence that Lender's Tranche B ------------ Term Loan, in the principal amount of that Lender's Tranche B Term Loan and with other appropriate insertions, (iii) to each Tranche C Term Lender (or to Agent for that Lender) a Tranche C Term Note substantially in the form of Exhibit IV-C ------------ annexed hereto to evidence that Lender's Tranche C Term Loan, in the principal amount of that Lender's Tranche C Term Loan and with other appropriate insertions, (iv) to each Tranche D Term Lender (or to Agent for that Lender) a Tranche D Term Note substantially in the form of Exhibit IV-D annexed hereto to ------------ evidence that Lender's Tranche D Term Loan, in the principal amount of that Lender's Tranche D Term Loan and with other appropriate insertions, (v) to each Revolving Lender (or to Agent for that Lender) a Revolving Note substantially in the form of Exhibit V annexed hereto to evidence that Lender's Revolving Loans, --------- in the principal amount of that Lender's Revolving Loan Commitment and with other appropriate insertions, and (vi) to Swing Line Lender a Swing Line Note substantially in the form of Exhibit VI annexed hereto to evidence Swing Line ---------- Lender's Swing Line Loans, in the principal amount of the Swing Line Loan Commitment and with other appropriate insertions. 2.2 INTEREST ON THE LOANS. --------------------- A. RATE OF INTEREST. Subject to the provisions of subsections 2.6 and 2.7, each Term Loan and each Revolving Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted Eurodollar Rate. Subject to the provisions of subsection 2.7, each Swing Line Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate. The applicable basis for determining the rate of interest with respect to any Term Loan or any Revolving Loan shall be selected by Company initially at the time a Notice of Borrowing is given with respect to such Loan pursuant to subsection 2.1B, and the basis for determining the interest rate with respect to any Term Loan or any Revolving Loan may be changed from time to time pursuant to subsection 2.2D. If on any day a Term Loan or Revolving Loan is outstanding with respect to which notice has not been delivered to Agent in accordance with the terms of this Agreement specifying the applicable basis for determining the rate of interest, then for that day that Loan shall bear interest determined by reference to the Base Rate. (i) Subject to the provisions of subsections 2.2E and 2.7, the Tranche A Term Loans and the Revolving Loans shall bear interest through maturity as follows: (A) if a Base Rate Loan, then at the sum of the Base Rate plus the Applicable Base Rate Margin; or ---- (B) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus the Applicable Eurodollar Margin. ---- 54 Upon delivery of the Margin Determination Certificate by Company to Agent pursuant to subsection 6.1(xix), the Applicable Base Rate Margin and the Applicable Eurodollar Margin shall automatically be adjusted in accordance with such Margin Determination Certificate, such adjustment to become effective on the next succeeding Business Day following the receipt by Agent of such Margin Determination Certificate; provided that if -------- a Margin Determination Certificate is not delivered at the time required pursuant to subsection 6.1(xviii), clause (iii) of the definitions of "Applicable Base Rate Margin" and "Applicable Eurodollar Rate Margin", as the case may be, shall be applicable from such time until delivery of a succeeding Margin Determination Certificate; provided further that if a -------- ------- Margin Determination Certificate erroneously indicates an applicable margin more favorable to Company than should be afforded by the actual calculation of the Interest Coverage Ratio, Company shall promptly pay additional interest and letter of credit fees to correct for such error. (ii) Subject to the provisions of subsections 2.2E and 2.7, the Tranche B Term Loans shall bear interest through maturity as follows: (A) if a Base Rate Loan, then at the sum of the Base Rate plus 2.00% per annum; or ---- (B) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus 3.25% per annum. ---- (iii) Subject to the provisions of subsections 2.2E and 2.7, the Tranche C Term Loans shall bear interest through maturity as follows: (A) if a Base Rate Loan, then at the sum of the Base Rate plus 2.50% per annum; or ---- (B) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus 3.75% per annum. ---- (iv) Subject to the provisions of subsections 2.2E and 2.7, the Tranche D Term Loans shall bear interest through maturity as follows: (A) if a Base Rate Loan, then at the sum of the Base Rate plus 2.75% per annum; or ---- (B) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus 4.00% per annum. ---- (v) Subject to the provisions of subsections 2.2E and 2.7, the Swing Line Loans shall bear interest through maturity at the sum of the Base Rate plus the Applicable Base Rate Margin minus the Commitment Fee ---- ----- Percentage. 55 B. INTEREST PERIODS. In connection with each Eurodollar Rate Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, select an interest period (each an "INTEREST PERIOD") to be applicable to such Loan, which Interest Period shall be, at Company's option, either a one, two, three or six month period; provided -------- that: (i) the initial Interest Period for any Eurodollar Rate Loan shall commence on the Funding Date in respect of such Loan, in the case of a Loan initially made as a Eurodollar Rate Loan, or on the date specified in the applicable Notice of Conversion/Continuation, in the case of a Loan converted to a Eurodollar Rate Loan; (ii) in the case of immediately successive Interest Periods applicable to a Eurodollar Rate Loan continued as such pursuant to a Notice of Conversion/Continuation, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; (iii) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that, if any Interest Period would -------- otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month; (v) no Interest Period with respect to any portion of the Tranche A Term Loans shall extend beyond August 31, 2002, no Interest Period with respect to any portion of the Tranche B Term Loans shall extend beyond November 30, 2003, no Interest Period with respect to any portion of the Tranche C Term Loans shall extend beyond November 30, 2004, no Interest Period with respect to any portion of the Tranche D Term Loans shall extend beyond August 31, 2005, and no Interest Period with respect to any portion of the Revolving Loans shall extend beyond the Revolving Loan Commitment Termination Date; (vi) no Interest Period with respect to any portion of any Type of Term Loan shall extend beyond a date on which Company is required to make a scheduled payment of principal of Term Loans of such Type unless the sum of (a) the aggregate principal amount of Term Loans of such Type that are Base Rate Loans plus (b) the aggregate principal amount of Term Loans ---- of such Type that are Eurodollar Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on Term Loans of such Type on such date; 56 (vii) there shall be no more than 20 Interest Periods outstanding at any time (it being understood that Interest Periods for different Types of Loans, whether or not such Interest Periods are for the same period and end on the same day, constitute separate Interest Periods); and (viii) in the event Company fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month. C. INTEREST PAYMENTS. Subject to the provisions of subsection 2.2E, interest on each Loan shall be payable in arrears on and to each Interest Payment Date applicable to that Loan, upon any prepayment of that Loan (to the extent accrued on the amount being prepaid) and at maturity (including final maturity); provided that in the event any Swing Line Loans or any Revolving -------- Loans that are Base Rate Loans are prepaid pursuant to subsection 2.4B(i), interest accrued on such Swing Line Loans or Revolving Loans through the date of such prepayment shall be payable on the next succeeding Interest Payment Date applicable to Base Rate Loans (or, if earlier, at final maturity). D. CONVERSION OR CONTINUATION. Subject to the provisions of subsection 2.6, Company shall have the option (i) to convert at any time all or any part of its out standing Term Loans or Revolving Loans equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount from Loans bearing interest at a rate determined by reference to one basis to Loans bearing interest at a rate determined by reference to an alternative basis or (ii) upon the expiration of any Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Loan equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount as a Eurodollar Rate Loan; provided, however, that a --------- ------- Eurodollar Rate Loan may only be converted into a Base Rate Loan on the expiration date of an Interest Period applicable thereto; provided further that -------- ------- during the period commencing on (and including) the Closing Date and ending on the earlier of (i) the one-month anniversary of the date on which the first Eurodollar Rate Loan is made under this Agreement and (ii) the date Agent sends a notice to Company indicating that Lenders' primary syndication has been concluded, (a) no Loan may be made or continued as or converted into a Eurodollar Rate Loan having an Interest Period of longer than one month and (b) the last day of the Interest Period applicable to any Eurodollar Rate Loan shall be the one-month anniversary of the date on which the first Eurodollar Rate Loan is made under this Agreement; and provided still further that no Loan may be -------- ----- ------- made as or converted into a Base Rate Loan during the period from December 24 of any year to and including January 7 of the immediately succeeding year for the purpose of investing in securities bearing interest at a rate determined by reference to any other basis for the purpose of arbitrage or speculation. Company shall deliver a Notice of Conversion/Continuation to Agent no later than 1:00 P.M. (New York City time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Business 57 Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount and Type of the Loan to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has occurred and is continuing. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; provided that such notice shall be promptly -------- confirmed in writing by delivery of a Notice of Conversion/Continuation to Agent on or before the proposed conversion/continuation date. Upon receipt of written or telephonic notice of any proposed conversion/continuation under this subsection 2.2D, Agent shall promptly transmit such notice by telefacsimile or telephone to each Lender. Neither Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of Company or for otherwise acting in good faith under this subsection 2.2D, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any Loans in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith. E. DEFAULT RATE. Upon the occurrence and during the continuation of any Event of Default, the outstanding principal amount of all Loans and, to the extent permitted by applicable law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable upon demand at a rate that is 2% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans); provided that, in the case of Eurodollar Rate Loans, upon the expiration -------- of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a 58 waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Agent or any Lender. F. COMPUTATION OF INTEREST. Interest on the Loans shall be computed on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded; provided that if a Loan is repaid -------- on the same day on which it is made, one day's interest shall be paid on that Loan. 2.3 FEES. ---- A. COMMITMENT FEES. Company agrees to pay to Agent, for distribution to each Revolving Lender in proportion to that Revolving Lender's Pro Rata Share, commitment fees for the period from and including the Closing Date to and excluding the Revolving Loan Commitment Termination Date equal to the average of the daily excess of the Revolving Loan Commitments over the aggregate principal amount of outstanding Revolving Loans (but not any outstanding Swing Line Loans or the Letter of Credit Usage) multiplied by the Commitment Fee Percentage, such ------------- commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, commencing on the first such date to occur after the Closing Date, and on the Revolving Loan Commitment Termination Date. B. OTHER FEES. Company agrees to pay to Agent such other fees in the amounts and at the times separately agreed upon between Company and Agent. After receipt of such other fees from Company, Agent and Arrangers agree to pay to each Lender such portion of such other fees in the amounts and at the times as have been separately agreed upon in writing between Agent and such Lender. 2.4 REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN REVOLVING LOAN COMMITMENTS; --------------------------------------------------------------------- GENERAL PROVISIONS REGARDING PAYMENTS. ------------------------------------- A. SCHEDULED PAYMENTS OF TERM LOANS. (i) Scheduled Payments of Tranche A Term Loans. Company shall make ------------------------------------------ principal payments on the Tranche A Term Loans in installments on the dates and in the amounts set forth below: 59
Scheduled Repayment Date of Tranche A Term Loans ----- ----------------------- February 1, 1997 $7,500,000 May 1, 1997 11,250,000 August 1, 1997 11,250,000 November 1, 1997 11,250,000 February 1, 1998 11,250,000 May 1, 1998 13,750,000 August 1, 1998 13,750,000 November 1, 1998 13,750,000 February 1, 1999 13,750,000 May 1, 1999 16,250,000 August 1, 1999 16,250,000 November 1, 1999 16,250,000 February 1, 2000 16,250,000 May 1, 2000 16,250,000 August 1, 2000 16,250,000 November 1, 2000 16,250,000 February 1, 2001 16,250,000 May 1, 2001 15,000,000 August 1, 2001 15,000,000 November 1, 2001 15,000,000 February 1, 2002 15,000,000 May 1, 2002 13,750,000 August 31, 2002 13,750,000 ========== $325,000,000
; provided that the scheduled installments of principal of the Tranche A -------- Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Term Loans in accordance with subsection 2.4B(iv); and provided still further that the Tranche A Term -------- ----- ------- Loans and all other amounts owed hereunder with respect to the Tranche A Term Loans shall be paid in full no later than August 31, 2002, and the final installment payable by Company in respect of the Tranche A Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche A Term Loans. 60 (ii) Scheduled Payments of Tranche B Term Loans. Company shall ------------------------------------------ make principal payments on the Tranche B Term Loans in installments in the amount of $400,000 on each August 1, November 1, February 1 and May 1, commencing on August 1, 1996 through and including May 1, 2002, and thereafter on the dates and in the amounts set forth below:
Scheduled Repayment Date of Tranche B Term Loans ---- ----------------------- August 1, 2002 $ 4,000,000 November 1, 2002 18,000,000 February 1, 2003 18,000,000 May 1, 2003 18,000,000 August 1, 2003 22,700,000 November 30, 2003 69,700,000 =========== $160,000,000
; provided that the scheduled installments of principal of the Tranche B -------- Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Term Loans in accordance with subsection 2.4B(iv); and provided still further that the Tranche B Term -------- ----- ------- Loans and all other amounts owed hereunder with respect to the Tranche B Term Loans shall be paid in full no later than November 30, 2003, and the final installment payable by Company in respect of the Tranche B Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche B Term Loans. (iii) Scheduled Payments of Tranche C Term Loans. Company shall ------------------------------------------ make principal payments on the Tranche C Term Loans in installments in the amount of $400,000 on each August 1, November 1, February 1 and May 1, commencing on August 1, 1996 through and including November 1, 2003, and thereafter on the dates and in the amounts set forth below:
Scheduled Repayment Date of Tranche C Term Loans ---- ----------------------- February 1, 2004 $25,000,000 May 1, 2004 25,000,000 August 1, 2004 25,000,000 November 30, 2004 73,000,000 =========== $160,000,000
61 ; provided that the scheduled installments of principal of the Tranche C -------- Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Term Loans in accordance with subsection 2.4B(iv); and provided still further that the Tranche C Term -------- ----- ------- Loans and all other amounts owed hereunder with respect to the Tranche C Term Loans shall be paid in full no later than November 30, 2004 and the final installment payable by Company in respect of the Tranche C Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche C Term Loans. (iv) Scheduled Payments of Tranche D Term Loans. Company shall ------------------------------------------ make principal payments on the Tranche D Term Loans in the installments in the amount of $400,000 on each August 1, November 1, February 1 and May 1, commencing on August 1, 1996 through and including November 1, 2004, and thereafter on the dates and in the amounts set forth below:
Scheduled Repayment Date of Tranche D Term Loans ---- ----------------------- February 1, 2005 $29,000,000 May 1, 2005 32,000,000 August 31, 2005 85,400,000 =========== $160,000,000
; provided that the scheduled installments of principal of the Tranche D -------- Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Term Loans in accordance with subsection 2.4B(iv); and provided still further that the Tranche D Term -------- ----- ------- Loans and all other amounts owed hereunder with respect to the Tranche D Term Loans shall be paid in full no later than August 31, 2005, and the final installment payable by Company in respect of the Tranche D Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche D Term Loans. B. PREPAYMENTS AND UNSCHEDULED REDUCTIONS IN REVOLVING LOAN COMMITMENTS. (i) Voluntary Prepayments. --------------------- (a) Company may, upon written or telephonic notice to Agent on or prior to 12:00 Noon (New York City time) on the date of prepayment, which notice, if telephonic, shall be promptly confirmed in writing, at any time and from time to time prepay any Swing Line Loan on any Business Day in whole or in part in an aggregate 62 minimum amount of $500,000 and integral multiples of $250,000 in excess of that amount. Company may, upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate Loans, and three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans, in each case given to Agent by 12:00 Noon (New York City time) on the date required and, if given by telephone, promptly confirmed in writing to Agent (which original written or telephonic notice Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay any Term Loans or Revolving Loans on any Business Day in whole or in part in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount for Eurodollar Rate Loans or an aggregate minimum amount of $2,000,000 and integral multiples of $500,000 in excess of that amount for Base Rate Loans; provided, however, that a Eurodollar Rate -------- ------- Loan may only be prepaid on the expiration of the Interest Period applicable thereto. Notice of prepayment having been given as aforesaid, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. Any such voluntary prepayment shall be applied as specified in subsection 2.4B(iv). (b) In the event Company is entitled to replace a non- consenting Lender pursuant to subsection 10.6B, Company shall have the right, upon five Business Days' written notice to Agent (which notice Agent shall promptly transmit to each of the Lenders), to prepay all Loans, together with accrued and unpaid interest, fees and other amounts owing to such Lender in accordance with subsection 10.6B so long as (1) in the case of the prepayment of the Revolving Loans of any Lender pursuant to this subsection 2.4B(i)(b), the Revolving Loan Commitment of such Lender is terminated concurrently with such prepayment pursuant to subsection 2.4B(ii)(b) (at which time Schedule 2.1 shall be deemed ------------ modified to reflect the changed Revolving Loan Commitments), and (2) in the case of the prepayment of the Loans of any Lender, the consents required by subsection 10.6B in connection with the prepayment pursuant to this subsection 2.4B(i)(b) shall have been obtained, and at such time, such Lender shall no longer constitute a "Lender" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, subsections 2.6D, 2.7, 3.6, 10.2, 10.3 and 10.5), which shall survive as to such Lender (ii) Voluntary Reductions of Commitments. ----------------------------------- (a) Company may, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to Agent (which original written or telephonic notice Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Loan Commitments in an amount up to the amount by which the Revolving Loan Commitments exceed the Total Utilization of Revolving Loan Commitments at the time of such proposed termination or reduction; provided that any such partial reduction of the Revolving Loan -------- 63 Commitments shall be in an aggregate minimum amount of $2,000,000 and integral multiples of $500,000 in excess of that amount. Company's notice to Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Loan Commitments shall be effective on the date specified in Company's notice and shall reduce the Revolving Loan Commitment of each Lender proportionately to its Pro Rata Share of such reduction. (b) In the event Company is entitled to replace a non- consenting Lender pursuant to subsection 10.6B, Company shall have the right, upon five Business Days' written notice to Agent (which notice Agent shall promptly transmit to each of the Lenders), to terminate the entire Revolving Loan Commitment of such Lender, so long as (1) all Loans, together with accrued and unpaid interest, fees and other amounts owing to such Lender are repaid pursuant to subsection 2.4B(i)(b) concurrently with the effectiveness of such termination (at which time Schedule 2.1 shall be deemed modified to reflect such changed amounts) ------------ and (2) the consents required by subsection 10.6B in connection with the prepayment pursuant to subsection 2.4B(i)(b) shall have been obtained, and at such time, such Lender shall no longer constitute a "Lender" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, subsections 2.6D, 2.7, 3.6, 10.2, 10.3 and 10.5), which shall survive as to such Lender. (iii) Mandatory Prepayments and Mandatory Reductions of Revolving ----------------------------------------------------------- Loan Commitments. The Loans shall be prepaid and/or the Revolving Loan ---------------- Commitments shall be permanently reduced in the amounts and under the circumstances set forth below, all such prepayments and/or reductions to be applied as set forth below or as more specifically provided in subsection 2.4B(iv): (a) Prepayments and Reductions from Net Asset Sale ---------------------------------------------- Proceeds. No later than the earliest to occur of (1) the third -------- Business Day following the date of receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds in respect of any California Asset Sale in an aggregate cumulative amount equal to or exceeding $5,000,000; (2) the 180th day following the date of any California Asset Sale the Net Asset Sale Proceeds of which have not been applied to the prepayment of the Loans pursuant to the preceding clause (1) or this clause (2); (3) the third Business Day following the date of receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds in respect of any Asset Sale other than a California Asset Sale in an aggregate cumulative amount equal to or exceeding $5,000,000; (4) the 180th day following the date of any Asset Sale other than a California Asset Sale the Net Asset Sale Proceeds of which have not been applied to the prepayment of the Loans pursuant to the preceding clause (3) or this clause (4); and (5) the date of the occurrence of any Event of Default or Potential Event of Default, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be 64 permanently reduced in an amount equal to such Net Asset Sale Proceeds; provided, however that so long as no Event of Default or -------- ------- Potential Event of Default shall have occurred and be continuing, the following Net Asset Sale Proceeds received by Company and its Subsidiaries from and after the Closing Date need not be applied to the mandatory prepayment of the Loans pursuant to this subsection 2.4B(iii)(a): (i) other than (1) Net Asset Sale Proceeds from the sale of a Related Asset, (2) Net Asset Sale Proceeds from California Asset Sales not permitted to be retained by Company pursuant to subsection 2.4B(iii)(a)(vi) and (3) the first $33,800,000 in Net Asset Sale Proceeds from California Asset Sales referred to in subsection 2.4B(iii)(a)(v), (A) Net Asset Sale Proceeds (including Net Asset Sale Proceeds from California Asset Sales entitled to be retained by Company pursuant to subsection 2.4B(iii)(a)(vi)) from the sale of a store to the extent that such Net Asset Sale Proceeds are reinvested in new stores or the construction or remodeling of stores within 270 days of such sale and (B) Net Asset Sale Proceeds from the sale of a store to the extent that such Net Asset Sale Proceeds do not exceed the Consolidated Capital Expenditures made to acquire or build a replacement store in the general vicinity of the store sold within 270 days preceding the date of such sale, and, so long as the aggregate amount of such Net Asset Sale Proceeds so excluded from the mandatory prepayment provisions pursuant to subclauses (A) and (B) of this clause (i) does not exceed $25,000,000 in any Fiscal Year; provided -------- that for purposes of sub-clause (A) of this clause (i) any of the assets listed on Schedule 2.4B annexed hereto shall be deemed to be ------------- stores; (ii) Net Asset Sale Proceeds from the sale and concurrent lease-back of any store opened or acquired after the Closing Date or any equipment acquired after the Closing Date, in each case within 180 days of the completion of such store or the acquisition of such equipment, in each case to the extent and only to the extent of Consolidated Capital Expenditures made with respect to such store or such equipment; provided that such 180-day period shall be extended to -------- a one-year period if during such 180-day period, Company gives written notice to Agent that Company is planning to include such store or such equipment in a sale leaseback transaction involving (x) such store and one or more additional stores and such additional stores are not yet opened or acquired and/or (y) such equipment and additional equipment which has not yet been acquired; provided, further, that in no event -------- shall there be more than 5 stores subject to a one-year period as a result of their inclusion in such sale leaseback transaction at any time; 65 (iii) Net Asset Sale Proceeds from the sale of worn-out or obsolete equipment, to the extent that such Net Asset Sale Proceeds are reinvested in the same or similar equipment within 90 days of such sale; (iv) Net Asset Sale Proceeds from the occurrence of any loss, damage or destruction of any stores or any other facilities of Company or any of its Subsidiaries (including any assets located therein) giving rise to insurance proceeds, to the extent that (A) such Net Asset Sale Proceeds are required to be paid to a landlord and cannot be paid to a mortgagee or other lender to Company or its Subsidiaries in preference to payments to a landlord under leases existing as of the Closing Date and which proceeds are in fact paid to such landlord in accordance with the terms of such leases; (B) such Net Asset Sale Proceeds are reinvested to repair or rebuild the assets so lost, damaged or destroyed within the earlier of (1) 270 days of receipt of such Net Asset Sale Proceeds and (2) 24 months of the occurrence of such loss, damage or destruction; or (C) such Net Asset Sale Proceeds do not exceed the expenditures made by Company or any of its Subsidiaries within the earlier of (1) 270 days of receipt of such Net Asset Sale Proceeds and (2) 24 months of the occurrence of such loss, damage or destruction, to repair or rebuild the applicable assets so lost, damaged or destroyed; (v) Company shall apply the first $33,800,000 in Net Asset Sale Proceeds from California Asset Sales other than Asset Sales of Related Assets to the prepayment of the Loans pursuant to subsection 2.4B(iv)(b), or if at the time of receipt of such Net Asset Sale Proceeds, no Revolving Loans or Swing Line Loans are outstanding, Company may retain such Net Asset Sale Proceeds; and (vi) after the application of the first $33,800,000 in Net Asset Sale proceeds from California Asset Sales in accordance with clause (v) above, at Company's option, Company may retain up to 50% of the Net Asset Sale Proceeds from California Asset Sales other than Asset Sales of Related Assets up to a maximum aggregate retained amount of $25,000,000. If, following the receipt by Company or any of its Subsidiaries of Net Asset Sale Proceeds, Company is required to apply or cause to be applied any portion of such Net Asset Sale Proceeds to prepay any Indebtedness evidenced by any of the Related Financing Documents pursuant to the applicable Related Financing Document, then, notwithstanding anything contained in this subsection 2.4B(iii)(a), Company shall prepay the Loans and/or reduce the Revolving Loan Commitments in the order set forth in this 66 subsection 2.4B(iii)(a) so as to eliminate any obligation to prepay such Indebtedness. (b) Prepayments and Reductions Due to Reversion of Surplus Assets ------------------------------------------------------------- of Pension Plans. On the date of return to Company or any of its ---------------- Subsidiaries of any surplus assets of any pension plan of Company or any of its Subsidiaries, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an amount (such amount being the "NET PENSION PROCEEDS") equal to 100% of such returned surplus assets net of transaction costs and expenses incurred in obtaining such return, including incremental taxes payable as a result thereof. (c) Prepayments and Reductions Due to Issuance of Debt Securities. ------------------------------------------------------------- No later than the first Business Day following the date of receipt by Company or any of its Subsidiaries of the Cash proceeds (any such proceeds, net of underwriting discounts, similar placement fees and commissions and other reasonable costs and expenses associated therewith, being the "NET DEBT PROCEEDS") from the issuance of any debt Securities of Company or any such Subsidiary (other than the issuance of Indebtedness permitted pursuant to subsection 7.1 as in effect on the Closing Date), Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an amount equal to such Net Debt Proceeds. (d) Prepayments and Reductions Due to Issuance of Equity ---------------------------------------------------- Securities. No later than the first Business Day following the date of ---------- receipt by Company of the Cash proceeds (any such proceeds, net of under writing discounts, similar placement fees and commissions and other reasonable costs associated therewith, being the "NET EQUITY PROCEEDS") from the issuance of any equity Securities of Company (other than the issuance of Company's Class B Common Stock and the Yucaipa Warrant on the Closing Date and other than issuances of equity to management employees pursuant to agreements or stock option plans permitted under subsection 7.12) (without duplication), Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an amount equal to 50% of such Net Equity Proceeds. (e) Prepayments and Reductions from Consolidated Excess Cash -------------------------------------------------------- Flow. In the event that there shall be Consolidated Excess Cash Flow ---- for any Fiscal Year (or in the case of Fiscal Year 1996, during the period commencing on the Closing Date and ending on (and including) December 28, 1996), within 100 days after the last day of such Fiscal Year, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an amount equal to 75% of such Consolidated Excess Cash Flow. 67 (f) Calculations of Net Proceeds Amounts; Additional ---------------------------------------------------- Prepayments and Reductions Based on Subsequent Calculations. ----------------------------------------------------------- Concurrently with any prepayment of the Loans and/or reduction of the Revolving Loan Commitments pursuant to subsections 2.4B(iii)(a)- (e) or within three Business Days of the receipt of any Net Asset Sale Proceeds under subsection 2.4B(iii)(a), Company shall deliver to Agent an Officers' Certificate demonstrating (1) the calculation of the amount (the "NET PROCEEDS AMOUNT") of the applicable Net Asset Sale Proceeds, Net Pension Proceeds, Net Debt Proceeds or Net Equity Proceeds (as such terms are defined in subsections 2.4B(iii)(b), (c) and (d), or the applicable Consolidated Excess Cash Flow, as the case may be, that gave rise to such prepayment and/or reduction; (2) with respect to the receipt of Net Asset Sale Proceeds referred to in clauses (i)(A), (iii) and (iv) of subsection 2.4B(iii)(a), in reasonable detail, the intended application of such Net Asset Sale Proceeds and the estimated costs of the reinvestment referred to in such clauses; and (3) with respect to the receipt of Net Asset Sale Proceeds referred to in clauses (i)(B), (ii) and (iv) of subsection 2.4B(iii)(a), in reasonable detail the Consolidated Capital Expenditures made by Company which accounts for the exclusion of any such Net Asset Sale Proceeds from the mandatory prepayment requirements of subsection 2.4B(iii)(a), such Officers' Certificate, in the case of clauses (i) and (iii), may be amended at any time and from time to time by Company during the 270-day or 90- day period, as applicable, following receipt of such Net Asset Sale Proceeds. In the event that Company shall subsequently determine that the actual Net Proceeds Amount was greater than the amount set forth in such Officers' Certificate or that, with respect to clauses (i), (iii) and (iv) of subsection 2.4B(iii)(a), such Net Proceeds Amount was not expended for the purposes specified in such Officers' Certificate, as amended, within the time periods specified in such clauses, Company shall promptly make an additional prepayment of the Loans (and/or, if applicable, the Revolving Loan Commitments shall be permanently reduced) in an amount equal to the amount of such excess or unexpended portion, but only to the extent such amount has not been previously applied as a mandatory prepayment under subsection 2.4B(iii)(e), and Company shall concurrently therewith deliver to Agent an Officers' Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess or unexpended portion. (g) Prepayments Due to Reductions or Restrictions of ------------------------------------------------ Revolving Loan Commitments. Company shall from time to time prepay -------------------------- first the Swing Line Loans and second the Revolving Loans to the ----- extent necessary (1) so that the Total Utilization of Revolving Loan Commitments shall not at any time exceed the Revolving Loan Commitments then in effect and (2) to give effect to the limitations set forth in clause (b) of the second paragraph of subsection 2.1A(v) and clause (b) of the second paragraph of subsection 2.1A(vi). Any such mandatory prepayments shall be applied as specified in subsection 2.4B(iv) 68 and shall not reduce the amount of the Revolving Loan Commitments then in effect. (iv) Application of Prepayments. -------------------------- (a) Application of Voluntary Prepayments by Type of Loans ----------------------------------------------------- and Order of Maturity. Subject to the immediately succeeding --------------------- sentence of this subsection 2.4B(iv)(a), any voluntary prepayments pursuant to subsection 2.4B(i)(a) shall be applied to Term Loans, Revolving Loans or Swing Line Loans as specified by Company in the applicable notice of prepayment; provided that in the event Company -------- fails to specify the Loans to which any such prepayment shall be applied, such prepayment shall be applied first to repay outstanding ----- Swing Line Loans to the full extent thereof, second to repay ------ outstanding Revolving Loans to the full extent thereof, and third to ----- repay outstanding Term Loans to the full extent thereof. Any voluntary prepayments of the Term Loans pursuant to subsection 2.4B(i)(a) shall be applied (x) to the Tranche A Term Loans, the Tranche B Term Loans, the Tranche C Term Loans and the Tranche D Loans on a pro rata basis and (y) to reduce the unpaid scheduled --- ---- installments of principal of the Term Loans set forth in subsections 2.4A(i), 2.4A(ii), 2.4A(iii) and 2.4A(iv) on a pro rata basis or, --- ---- at Company's option, in forward order of maturity for scheduled installments of principal occurring within the six-month period following the month in which such voluntary prepayments occur. (b) Application of Mandatory Prepayments by Type of Loans. ----------------------------------------------------- Any amount (the "APPLIED AMOUNT") required to be applied as a mandatory prepayment of the Loans and/or a reduction of the Revolving Loan Commitments pursuant to subsections 2.4B(iii)(a)-(f) shall be applied first to prepay the Term Loans to the full extent ----- thereof, second, to the extent of any remaining portion of the ------ Applied Amount, to prepay the Swing Line Loans to the full extent thereof and to permanently reduce the Revolving Loan Commitments by the amount of such prepayment, third, to the extent of any remaining ----- portion of the Applied Amount, to prepay the Revolving Loans to the full extent thereof and to further permanently reduce the Revolving Loan Commitments by the amount of such prepayment, and fourth, to the extent of any remaining portion of the Applied Amount, to further permanently reduce the Revolving Loan Commitments to the full extent thereof; provided however that the first $33,800,000 in -------- ------- Net Asset Sale Proceeds from California Asset Sales referenced in subsection 2.4B(iii)(a)(v) and the Net Asset Sale Proceeds from California Asset Sales referenced in subsection 2.4B(iii)(a)(vi) and so retained by Company shall be applied first to prepay Swing Line ----- Loans to the full extent thereof without any permanent reduction of the Revolving Loan Commitments, second to the extent of any ------ remaining portion of the Applied Amount, to prepay the Revolving Loans to the full extent thereof without any 69 permanent reduction of the Revolving Loan Commitments and third retained ----- by Company if no Revolving Loans or Swing Line Loans are then outstanding. (c) Application of Mandatory Prepayments of Term Loans by Order of -------------------------------------------------------------- Maturity. Any mandatory prepayments of the Term Loans pursuant to -------- subsection 2.4B(iii) shall be applied (x) to the Tranche A Term Loans, the Tranche B Term Loans, the Tranche C Term Loans and the Tranche D Term Loans on a pro rata basis and (y) to reduce the unpaid scheduled --- ---- installments of principal of the Term Loans set forth in subsections 2.4A(i), 2.4A(ii), 2.4A(iii) and 2.4A(iv) on a pro rata basis; provided --- ---- -------- that, at Company's election, mandatory prepayments of the Tranche A Term Loans made with Net Asset Sale Proceeds from California Asset Sales other than Asset Sales of Related Assets in excess of the first $33,800,000 received may be applied to reduce the unpaid scheduled installments of principal of the Tranche A Term Loans in forward order of maturity up to a maximum aggregate reduction for all such future scheduled installments of $50,000,000 at any time; provided, further -------- ------- that, in the case of Tranche B Term Loans, Tranche C Term Loans and Tranche D Term Loans, upon receipt of any mandatory prepayments pursuant to subsection 2.4B(iii) with respect to which Company has given Agent written notification prior to such receipt that Company has elected to give the Tranche B Term Lenders, the Tranche C Term Lenders and the Tranche D Term Lenders the right to waive such Lenders' right to receive such prepayment (the "WAIVABLE MANDATORY PREPAYMENT"), Agent shall notify the Tranche B Term Lenders, the Tranche C Term Lenders and the Tranche D Term Lenders of such receipt and the amount of the prepayment to be applied to each such Lender's Term Loans; provided, -------- still further that Company shall use its reasonable efforts to notify ----- ------- the Tranche B Term Lenders, the Tranche C Term Lenders and the Tranche D Term Lenders of such Waivable Mandatory Prepayment three (3) Business Days prior to the payment to Agent of such Waivable Mandatory Prepayments (it being understood that Company shall have no liabilities for failing to so notify such Lenders). In the event any such Tranche B Term Lender, Tranche C Term Lender or Tranche D Term Lender desires to waive such Lender's right to receive any such Waivable Mandatory Prepayment, such Lender shall so advise Agent no later than the close of business on the date of such notice from Agent. In the event that any such Lender waives such Lender's right to any such Waivable Mandatory Prepayment, Agent shall apply (i) 100% of amount so waived constituting Net Asset Sale Proceeds received from the sale of any Excess California Land or California Stores and (ii) 50% of any other amount so waived, to prepay the Tranche A Term Loans. Agent shall return the remainder of the amount so waived, if any, by such Lender to Company. (d) Application of Prepayments to Base Rate Loans and Eurodollar ------------------------------------------------------------ Rate Loans. Considering Tranche A Term Loans, Tranche B Term Loans, ---------- Tranche C Term Loans, Tranche D Term Loans and Revolving Loans being 70 prepaid separately, any prepayment thereof shall be applied first to Base Rate Loans to the full extent thereof before applica tion to Eurodollar Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D. C. GENERAL PROVISIONS REGARDING PAYMENTS. (i) Manner and Time of Payment. All payments by Company of -------------------------- principal, interest, fees and other Obligations hereunder, under the Notes and under the other Loan Documents shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Agent not later than 1:00 P.M. (New York City time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. Company hereby authorizes Agent to charge its accounts with Agent in order to cause timely payment to be made to Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). (ii) Application of Payments to Principal and Interest. Except as provided in subsection 2.2C, all payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments shall be applied to the payment of interest before application to principal. (iii) Apportionment of Payments. Aggregate principal and interest ------------------------- payments in respect of Term Loans and Revolving Loans shall be apportioned among all outstanding Loans to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Agent shall promptly distribute to each Lender, at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Agent and the commitment fees of such Lender when received by Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Agent shall give effect thereto in apportioning payments received thereafter. (iv) Payments on Business Days. Whenever any payment to be made ------------------------- hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be; provided, however, that if the day on which payment relating to a -------- ------- Eurodollar Rate Loan is due is not a Business Day but is 71 a day of the month after which no further Business Day occurs in that month, then the due date thereof shall be the next preceding Business Day. (v) Notation of Payment. Each Lender agrees that before disposing ------------------- of any Note held by it, or any part thereof (other than by granting participations therein), that Lender will make a notation thereon of all Loans evidenced by that Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; provided -------- that the failure to make (or any error in the making of) a notation of any Loan made under such Note shall not limit or otherwise affect the obligations of Company hereunder or under such Note with respect to any Loan or any payments of principal or interest on such Note. 2.5 USE OF PROCEEDS. --------------- A. TERM LOANS. The proceeds of the Term Loans, together with (i) the proceeds of up to $13,200,000 of the initial Revolving Loans, (ii) not less than $575,000,000 in aggregate gross proceeds from the issuance of the Senior Subordinated Notes, and (iii) not less than $67,200,000 in net proceeds from the sale of California Stores (as such amount may be reduced by application of such proceeds to the permanent reduction of Company's existing Indebtedness), shall be applied by Company to (i) purchase approximately 13,400,000 shares of its Class A Common Stock and Class B Common Stock, representing 50% of shares of all Class A Common Stock and Class B Common Stock outstanding (excluding shares of Class B Common Stock issued or issuable in connection with the Acquisition but including certain Existing Management Stock Options) pursuant to the Equity Tender Offer for an aggregate purchase payment not exceeding $465,000,000, (ii) to permanently repay Company's existing Indebtedness in an amount not exceeding $668,600,000, (iii) to permanently repay Smitty's existing Indebtedness in an amount not exceeding $102,900,000, (iv) redeem not less than approximately 3,000,000 shares of its Redeemable Preferred Stock for an aggregate redemption payment not exceeding $1,000,000 and (v) to pay Transaction Costs not exceeding $160,700,000. B. REVOLVING LOANS; SWING LINE LOANS. The proceeds of the Revolving Loans on the Closing Date shall be applied by Company as provided in subsection 2.5A. The proceeds of any other Revolving Loans and any Swing Line Loans shall be applied by Company for working capital and general corporate purposes. C. MARGIN REGULATIONS. No portion of the proceeds of any borrowing under this Agreement shall be used by Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation G, Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. 72 2.6 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS. -------------------------------------------------- Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: A. DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable after 10:00 A.M. (New York City time) on each Interest Rate Determination Date, Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. B. INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that by reason of circumstances affecting the interbank Eurodollar market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by Company. C. ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful) or (ii) has become impracticable, or would cause such Lender material hardship, as a result of contingencies occurring after the date of this Agreement which materially and adversely affect the interbank Eurodollar market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "AFFECTED LENDER" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Agent of such determination (which notice Agent shall promptly transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to make Loans as, or to convert Loans to, Eurodollar Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (b) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Company 73 pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan, (c) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "AFFECTED LOANS") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (d) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, to rescind such Notice of Borrowing or Notice of Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in accordance with the terms of this Agreement. D. COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth in reasonable detail the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including, without limitation, any interest paid by that Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any loss, expense or liability sustained by that Lender in connection with the liquidation or re- employment of such funds) which that Lender will sustain or has sustained: (i) if for any reason (other than a default by that Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment or other principal payment or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan, (iii) if any prepayment of any of its Eurodollar Rate Loans is not made on any date specified in a notice of prepayment given by Company, or (iv) as a consequence of any other default by Company in the repayment of its Eurodollar Rate Loans when required by the terms of this Agreement. E. BOOKING OF EURODOLLAR RATE LOANS. Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender. F. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to 74 clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each -------- ------- of its Eurodollar Rate Loans in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this subsection 2.6 and under subsection 2.7A. G. EURODOLLAR RATE LOANS AFTER DEFAULT. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, (i) Company may not elect to have a Loan be made or maintained as, or converted to, a Eurodollar Rate Loan after the expiration of any Interest Period then in effect for that Loan and (ii) subject to the provisions of subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to a requested borrowing or conversion/continuation that has not yet occurred shall be deemed to be rescinded by Company. 2.7 INCREASED COSTS; TAXES; CAPITAL ADEQUACY. ---------------------------------------- A. COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the provisions of subsection 2.7B, in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective (other than any change in such law, treaty or governmental rule, regulation or order which was promulgated prior to the date hereof and which becomes effective in accordance with its terms after the date hereof) after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank, the National Association of Insurance Commissioners ("NAIC") or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including without limitation any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such 75 Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the interbank Eurodollar market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder; provided that a Lender shall not be entitled to avail itself of the -------- benefit of this subsection 2.7A to the extent that any such increased cost or reduction in amounts was incurred more than one year prior to the time it gives notice to Company (as provided in the next sentence) of the relevant circumstance, unless such circumstance arose or became applicable retrospectively, in which case such Lender shall not be limited to such one year period so long as such Lender has given such notice to Company no later than one year from the time such circumstance became applicable to such Lender. Such Lender shall deliver to Company (with a copy to Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which statement shall be conclusive and binding upon all parties hereto absent manifest error. B. WITHHOLDING OF TAXES. (i) Payments to Be Free and Clear. Except as specifically ----------------------------- provided to the contrary in paragraphs (ii) and (iii) below, all sums payable by Company under this Agreement and the other Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of Company or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment. (ii) Grossing-up of Payments. If Company or any other Person is ----------------------- required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by Company to Agent or any Lender under any of the Loan Documents: 76 (a) Company shall notify Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it; (b) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on Company) for its own account or (if that liability is imposed on Agent or such Lender, as the case may be) on behalf of and in the name of Agent or such Lender; (c) the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Agent or such Lender, as the case may be, receives on the due date and retains (free from any liability in respect of any such deduction, withholding or payment) a net sum equal to what it would have received and so retained had no such deduction, withholding or payment been required or made; and (d) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, Company shall deliver to Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided that no such additional amount shall be required to be paid to -------- any Lender under clause (c) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender. (iii) Evidence of Exemption from U.S. Withholding Tax. ----------------------------------------------- (a) Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (for purposes of this subsection 2.7B(iii), a "NON-US LENDER") shall deliver to Agent for transmission to Company, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the 77 determination of Company or Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Loan Documents. (b) Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly (1) deliver to Agent for transmission to Company two new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non- Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Loan Documents or (2) promptly notify Agent and Company of its inability to deliver any such forms, certificates or other evidence. (c) Company shall not be required to pay any additional amount to any Non-US Lender under clause (c) of subsection 2.7B(ii) if such Lender shall have failed to satisfy the requirements of subsection 2.7B(iii) (a); provided that if such Lender shall have -------- satisfied such requirements on the Closing Date (in the case of each Lender listed on the signature pages hereof) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection 2.7B(iii)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to clause (c) 78 of subsection 2.7B(ii) in the event that, as a result of any change after the date of such satisfaction in any applicable law, treaty or governmental rule, regulation or order, or any change after the date of such satisfaction in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iii)(a). C. CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or after the date hereof, any change therein or in the interpretation or administration thereof by any governmental authority, central bank, the NAIC or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, the NAIC or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Loans or Commitments or Letters of Credit or participations therein or other obligations hereunder with respect to the Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction; provided that -------- a Lender shall not be entitled to avail itself of the benefit of this subsection 2.7C to the extent that any such reduction in return was incurred more than one year prior to the time it gives notice to Company (as provided in the next sentence) of the relevant circumstance, unless such circumstance arose or became applicable retrospectively, in which case such Lender shall not be limited to such one year period so long as such Lender has given such notice to Company no later than one year from the time such circumstance became applicable to such Lender. Such Lender shall deliver to Company (with a copy to Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 2.8 OBLIGATION OF LENDERS AND ISSUING LENDERS TO MITIGATE. ----------------------------------------------------- Each Lender and Issuing Lender agrees that, as promptly as practicable after the officer of such Lender or Issuing Lender responsible for administering the Loans or Letters of Credit of such Lender or Issuing Lender, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender or Issuing Lender to receive 79 payments under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal policies of such Lender or Issuing Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, issue, fund or maintain the Commitments of such Lender or the affected Loans or Letters of Credit of such Lender or Issuing Lender through another lending or letter of credit office of such Lender or Issuing Lender, or (ii) take such other measures as such Lender or Issuing Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be materially reduced and if, asdetermined by such Lender or Issuing Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans or Letters of Credit through such other lending or letter of credit office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or Letters of Credit or the interests of such Lender or Issuing Lender; provided that such Lender or Issuing Lender will not be -------- obligated to utilize such other lending or letter of credit office pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender or Issuing Lender as a result of utilizing such other lending or letter of credit office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender or Issuing Lender to Company (with a copy to Agent) shall be conclusive absent manifest error. 2.9 REPLACEMENT OF LENDER. --------------------- In the event that Company receives a notice pursuant to subsection 2.7A, 2.7C or 3.6 or in the event of a refusal by a Lender to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Requisite Lenders as provided in subsection 10.6, Company shall have the right, if no Potential Event of Default or Event of Default then exists, to replace such Lender (a "REPLACED LENDER") with one or more Eligible Assignees (collectively, the "REPLACEMENT LENDER") acceptable to Agent, provided that (i) at the time of any replacement pursuant to this -------- subsection 2.9 the Replacement Lender shall enter into one or more Assignment Agreements pursuant to subsection 10.1B (and with all fees payable pursuant to such subsection 10.1B to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the outstanding Loans and Commitments of, and in each case participations in Letters of Credit by, the Replaced Lender and, in connection therewith, shall pay to (x) the Replaced Lender in respect thereof an amount equal to the sum of (A) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender, (B) an amount equal to all unpaid drawings with respect to Letters of Credit that have been funded by (and not reimbursed to) such Replaced Lender, together with all then unpaid interest with respect thereto at such time and (C) an amount equal to all accrued, but theretofore unpaid, fees owing to the Replaced Lender with respect thereto, (y) the appropriate Issuing Lender an amount equal to such Replaced Lender's Pro Rata Share of any unpaid drawings with respect to Letters of Credit (which at such time remains an unpaid 80 drawing) issued by it to the extent such amount was not theretofore funded by such Replaced Lender, and (z) Swing Line Lender an amount equal to such Replaced Lender's Pro Rata Share of any Refunded Swing Line Loans to the extent such amount was not theretofore funded by such Replaced Lender, and (ii) all obligations (including without limitation all such amounts, if any, owing under subsection 2.6D) of Company owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid), shall be paid in full to such Replaced Lender concurrently with such replacement. Upon the execution of the respective Assignment Agreements, recordation of such assignment in the Register by Agent pursuant to subsection 2.1D, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Lender, delivery to the Replacement Lender of the appropriate Note or Notes executed by Company, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder except with respect to indemnification provisions under this Agreement which by the terms of this Agreement survive the termination of this Agreement, which indemnification provisions shall survive as to such Replaced Lender. Notwithstanding anything to the contrary contained above, no Issuing Lender may be replaced hereunder at any time while it has Letters of Credit outstanding hereunder unless arrangements satisfactory to such Issuing Lender (including the furnishing of a Standby Letter of Credit in form and substance, and issued by an issuer satisfactory to such Issuing Lender or the furnishing of cash collateral in amounts and pursuant to arrangements satisfactory to such Issuing Lender) have been made with respect to such outstanding Letters of Credit. SECTION 3. LETTERS OF CREDIT 3.1 ISSUANCE OF LETTERS OF CREDIT AND REVOLVING LENDERS' PURCHASE OF ---------------------------------------------------------------- PARTICIPATIONS THEREIN. ---------------------- A. LETTERS OF CREDIT. In addition to Company requesting that Revolving Lenders make Revolving Loans pursuant to subsection 2.1A(v) and that Swing Line Lender make Swing Line Loans pursuant to subsection 2.1A(vi), Company may request, in accordance with the provisions of this subsection 3.1, from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date, that one or more Revolving Lenders issue Letters of Credit for the account of Company or any wholly-owned Subsidiary of Company for the purposes specified in the definitions of Commercial Letters of Credit and Standby Letters of Credit; provided, that if any such Letter of Credit is issued -------- for the account of any such Subsidiary, Company shall execute jointly with such Subsidiary all letter of credit documentation (including, without limitation, letter of credit application) as may be required by the applicable Issuing Lender. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, any one or more Revolving Lenders may, but (except as provided in subsection 3.1B(ii)) shall not be obligated to, issue such Letters of Credit in accordance with the provisions of this subsection 3.1; provided that Company shall not request that -------- any Revolving Lender issue (and no Revolving Lender shall issue): 81 (i) any Letter of Credit if, after giving effect to such issuance, the Total Utilization of Revolving Loan Commitments would exceed the Revolving Loan Commitments then in effect; (ii) any Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage would exceed $75,000,000; (iii) any Standby Letter of Credit having an expiration date later than the earlier of (a) the date which is 30 days prior to the Revolving Loan Commitment Termination Date and (b) the date which is one year from the date of issuance of such Standby Letter of Credit; provided that the -------- immediately preceding clause (b) shall not prevent any Issuing Lender from agreeing that a Standby Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each unless such Issuing Lender elects not to extend for any such additional period; provided, further that such Issuing Lender shall -------- ------- deliver a written notice to Agent setting forth the last day on which such Issuing Lender may give notice that it will not extend such Standby Letter of Credit (the "NOTIFICATION DATE" with respect to such Standby Letter of Credit) at least ten Business Days prior to such Notification Date; and provided, further that such Issuing Lender shall give notice -------- ------- that it will not extend such Standby Letter of Credit if it has knowledge that an Event of Default has occurred and is continuing on such Notification Date, unless such Event of Default has been waived in accordance with subsection 10.6; (iv) any Commercial Letter of Credit having an expiration date (a) later than the earlier of (X) the date which is 30 days prior to the Revolving Loan Commitment Termination Date and (Y) the date which is 180 days from the date of issuance of such Commercial Letter of Credit or (b) that is otherwise unacceptable to the applicable Issuing Lender in its reasonable discretion; or (v) any Letter of Credit denominated in a currency other than Dollars. B. MECHANICS OF ISSUANCE. (i) Notice of Issuance. Whenever Company desires the issuance of ------------------ a Letter of Credit, it shall deliver to the proposed Issuing Lender (with copy to Agent if Agent is not the proposed Issuing Lender) a Notice of Issuance of Letter of Credit substantially in the form of Exhibit III ----------- annexed hereto no later than 1:00 P.M. (New York City time) at least five Business Days (or such shorter period as may be agreed to by the Issuing Lender in any particular instance), in advance of the proposed date of issuance. The Notice of Issuance of Letter of Credit shall specify (a) the Revolving Lender requested to issue the Letter of Credit, (b) the proposed date of issuance (which shall be a Business Day), (c) the face amount of the Letter of Credit, (d) the expiration date of the Letter of Credit, (e) the name and address of the beneficiary, (f) if such Letter of Credit is proposed to be issued for the account of a wholly-owned Subsidiary 82 of Company, the name of such Subsidiary, and (g) the verbatim text of the proposed Letter of Credit or the proposed terms and conditions thereof, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of the Letter of Credit, would require the Issuing Lender to make payment under the Letter of Credit; provided that the Issuing -------- Lender, in its reasonable discretion, may require changes in the text of the proposed Letter of Credit or any such documents; and provided, -------- further that no Letter of Credit shall require payment against ------- a conforming draft to be made thereunder on the same business day (under the laws of the jurisdiction in which the office of the Issuing Lender to which such draft is required to be presented is located) that such draft is presented if such presentation is made after 10:00 A.M. (in the time zone of such office of the Issuing Lender) on such business day. Company shall notify the applicable Issuing Lender (and Agent, if Agent is not such Issuing Lender) prior to the issuance of any Letter of Credit in the event that any of the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit is no longer true and correct as of the proposed date of issuance of such Letter of Credit, and upon the issuance of any Letter of Credit Company shall be deemed to have re-certified, as of the date of such issuance, as to the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit. (ii) Determination of Issuing Lender. Upon receipt by a proposed Issuing Lender of a Notice of Issuance of Letter of Credit pursuant to subsection 3.1B(i) requesting the issuance of a Letter of Credit, (a) in the event Agent is the proposed Issuing Lender, (1) if Agent elects to issue such Letter of Credit, Agent shall promptly so notify Company, and Agent shall be the Issuing Lender with respect thereto and (2) if Agent, in its sole discretion, elects not to issue such Letter of Credit, Agent shall promptly so notify Company, whereupon Company may request any Arranger or Co-Agent to issue such Letter of Credit by delivering to such Arranger or such Co-Agent a copy of the applicable Notice of Issuance of Letter of Credit and the Arranger or Co-Agent so requested to issue such Letter of Credit shall promptly notify Company and Agent whether or not, in its sole discretion, it has elected to issue such Letter of Credit, and any such Arranger or Co-Agent which so elects to issue such Letter of Credit shall be the Issuing Lender with respect thereto; provided that in -------- the event that all Arrangers and all Co-Agents shall have declined to issue such Letter of Credit, notwithstanding the prior election of Agent not to issue such Letter of Credit, Agent shall be obligated to issue such Letter of Credit and shall be the Issuing Lender with respect thereto, notwithstanding the fact that the Letter of Credit Usage with respect to such Letter of Credit and with respect to all other Letters of Credit issued by Agent, when aggregated with Agent's outstanding Revolving Loans and Swing Line Loans, may exceed Agent's Revolving Loan Commitment then in effect; and (b) in the event any other Revolving Lender is the proposed Issuing Lender, such Revolving Lender shall promptly notify Company and Agent whether or not, in its sole discretion, it has 83 elected to issue such Letter of Credit, and (1) if such Revolving Lender so elects to issue such Letter of Credit, it shall be the Issuing Lender with respect thereto and (2) if such Revolving Lender fails to so promptly notify Company and Agent or declines to issue such Letter of Credit, Company may request Agent or another Revolving Lender to be the Issuing Lender with respect to such Letter of Credit in accordance with the provisions of this subsection 3.1B. (iii) Issuance of Letter of Credit. Upon satisfaction or waiver ---------------------------- (in accordance with subsection 10.6) of the conditions set forth in subsection 4.3, the Issuing Lender shall issue the requested Letter of Credit in accordance with the Issuing Lender's standard operating procedures. (iv) Notification to Revolving Lenders. Upon the issuance of any --------------------------------- Letter of Credit the applicable Issuing Lender shall promptly notify Agent and each other Revolving Lender of such issuance, which notice shall be accompanied by a copy of such Letter of Credit. Promptly after receipt of such notice (or, if Agent is the Issuing Lender, together with such notice), Agent shall notify each Revolving Lender of the amount of such Revolving Lender's respective participation in such Letter of Credit, determined in accordance with subsection 3.1C. (v) Reports to Revolving Lenders. Within 15 days after the end ---------------------------- of each calendar quarter ending after the Closing Date, so long as any Letter of Credit shall have been outstanding during such calendar quarter, each Issuing Lender shall deliver to Agent, for distribution to each other Revolving Lender, a report setting forth the daily maximum amount available to be drawn under the Letters of Credit issued by such Issuing Lender that were outstanding during such calendar quarter. C. REVOLVING LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT. Immediately upon the issuance of each Letter of Credit, each Revolving Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from the Issuing Lender a participation in such Letter of Credit and any drawings thereunder in an amount equal to such Revolving Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. Upon satisfaction of the conditions set forth in subsection 4.1, the Existing Letters of Credit shall, effective as of the Closing Date, become Letters of Credit under this Agreement to the same extent as if initially issued hereunder and each Revolving Lender shall be deemed to have irrevocably purchased from the Issuing Lender of such Existing Letters of Credit a participation in such Letters of Credit and drawings thereunder in an amount equal to such Revolving Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. All such Existing Letters of Credit which become Letters of Credit under this Agreement shall be fully secured by the Collateral commencing on the Closing Date to the same extent as if initially issued hereunder on such date. 84 3.2 LETTER OF CREDIT FEES. --------------------- Company agrees to pay the following amounts with respect to Letters of Credit: (i) with respect to each Standby Letter of Credit, (a) to the applicable Issuing Lender, a fronting fee equal to 0.25% per annum of the daily maximum amount available to be drawn under such Standby Letter of Credit, but in any event not less than $500 per year per Standby Letter of Credit and (b) to Agent, a letter of credit fee equal to (x) the Applicable Eurodollar Margin minus the Commitment Fee Percentage ----- multiplied by (y) the daily maximum amount available to be drawn under ---------- -- such Standby Letter of Credit, in each case payable in arrears on and to (but excluding) each February 1, May 1, August 1 and November 1 of each year and computed on the basis of a 360-day year for the actual number of days elapsed; (ii) with respect to each Commercial Letter of Credit, (a) to the applicable Issuing Lender, a fronting fee equal to 0.25% per annum of the daily maximum amount available to be drawn under such Commercial Letter of Credit, but in any event not less than $500 per year per Commercial Letter of Credit and (b) to Agent, a letter of credit fee equal to (x) the Applicable Eurodollar Margin minus the sum of (A) 1.0% per annum and ----- (B) the Commitment Fee Percentage multiplied by (y) the daily maximum ---------- -- amount available to be drawn under such Commercial Letter of Credit, in each case payable in arrears on and to (but excluding) each February 1, May 1, August 1 and November 1 of each year and computed on the basis of a 360-day year for the actual number of days elapsed; and (iii) to the applicable Issuing Lender, with respect to the issuance, amendment, assignment or transfer of each Letter of Credit and each drawing made thereunder (without duplication of the fees payable under clauses (i) and (ii) above), documentary and processing charges in accordance with such Issuing Lender's standard schedule for such charges in effect at the time of such issuance, amendment, assignment, transfer or payment, as the case may be. Promptly upon receipt by Agent of any amount described in clause (i)(b) or (ii)(b) of this subsection 3.2, Agent shall distribute to each Revolving Lender its Pro Rata Share of such amount. With respect to Existing Letters of Credit, the fees described in clauses (i) and (ii) above shall accrue from and including the Closing Date. 3.3 DRAWINGS AND REIMBURSEMENT OF AMOUNTS PAID UNDER LETTERS OF CREDIT. ------------------------------------------------------------------ A. RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the Issuing Lender shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit. 85 B. REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF CREDIT. In the event an Issuing Lender has determined to honor a drawing under a Letter of Credit issued by it, such Issuing Lender shall immediately notify Company and Agent, and Company shall reimburse such Issuing Lender on or before the date on which such drawing is honored (the "REIMBURSEMENT DATE") in an amount in Dollars and in same day funds equal to the amount of such drawing (whether or not Company is the account party under such Letter of Credit); provided that, -------- anything contained in this Agreement to the contrary notwithstanding, (i) unless Company shall have notified Agent and such Issuing Lender prior to 12:00 Noon (New York City time) on the date of such drawing that Company intends to reimburse such Issuing Lender for the amount of such drawing with funds other than the proceeds of Revolving Loans, Company shall be deemed to have given a timely Notice of Borrowing (it being understood, however, that such deemed Notice of Borrowing shall not be deemed to be a representation of Company that the representations and warranties contained in the Loan Documents are true, correct and complete in all material respects on and as of the date of such deemed Notice of Borrowing) to Agent requesting Revolving Lenders to make Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars equal to the amount of such drawing and (ii) subject to satisfaction or waiver of the conditions specified in subsection 4.2B, Revolving Lenders shall, on the Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount of such drawing, the proceeds of which shall be applied directly by Agent to reimburse such Issuing Lender for the amount of such drawing; and provided, further that if for any reason proceeds of Revolving Loans are not - -------- ------- received by such Issuing Lender on the Reimbursement Date in an amount equal to the amount of such drawing, Company shall reimburse such Issuing Lender, on demand, in an amount in same day funds equal to the excess of the amount of such drawing over the aggregate amount of such Revolving Loans, if any, which are so received. Nothing in this subsection 3.3B shall be deemed to relieve any Revolving Lender from its obligation to make Revolving Loans on the terms and conditions set forth in this Agreement, and Company shall retain any and all rights it may have against any Revolving Lender resulting from the failure of such Revolving Lender to make such Revolving Loans under this subsection 3.3B. C. PAYMENT BY REVOLVING LENDERS OF UNREIMBURSED DRAWINGS UNDER LETTERS OF CREDIT. (i) Payment by Revolving Lenders. In the event that Company ---------------------------- shall fail for any reason to reimburse any Issuing Lender as provided in subsection 3.3B in an amount equal to the amount of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall promptly notify each other Revolving Lender of the unreimbursed amount of such drawing and of such other Revolving Lender's respective participation therein based on such Revolving Lender's Pro Rata Share. Each Revolving Lender shall make available to such Issuing 86 Lender an amount equal to its respective participation, in Dollars and in same day funds, at the office of such Issuing Lender specified in such notice, not later than 1:00 P.M. (New York City time) on the first business day (under the laws of the jurisdiction in which such office of such Issuing Lender is located) after the date notified by such Issuing Lender. In the event that any Revolving Lender fails to make available to such Issuing Lender on such business day the amount of such Revolving Lender's participation in such Letter of Credit as provided in this subsection 3.3C, such Issuing Lender shall be entitled to recover such amount on demand from such Revolving Lender together with interest thereon at the rate customarily used by such Issuing Lender for the correction of errors among banks for three Business Days and thereafter at the Base Rate. Nothing in this subsection 3.3C shall be deemed to prejudice the right of any Revolving Lender to recover from any Issuing Lender any amounts made available by such Revolving Lender to such Issuing Lender pursuant to this subsection 3.3C in the event that it is determined by the final judgment of a court of competent jurisdiction that the payment with respect to a Letter of Credit by such Issuing Lender in respect of which payment was made by such Revolving Lender constituted gross negligence or willful misconduct on the part of such Issuing Lender. (ii) Distribution to Revolving Lenders of Reimbursements Received ------------------------------------------------------------ From Company. In the event any Issuing Lender shall have been reimbursed ------------ by other Revolving Lenders pursuant to subsection 3.3C(i) for all or any portion of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall distribute to each other Revolving Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such drawing such other Revolving Lender's Pro Rata Share of all payments subsequently received by such Issuing Lender from Company in reimbursement of such drawing when such payments are received. Any such distribution shall be made to a Revolving Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Revolving Lender may request. D. INTEREST ON AMOUNTS DRAWN UNDER LETTERS OF CREDIT. (i) Payment of Interest by Company. Company agrees to pay to ------------------------------ each Issuing Lender, with respect to drawings made under any Letters of Credit issued by it (whether or not Company is the account party thereunder), interest on the amount paid by such Issuing Lender in respect of each such drawing from the date of such drawing to but excluding the date such amount is reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B) at a rate equal to (a) for the period from the date of such drawing to but excluding the Reimbursement Date, the rate then in effect under this Agreement with respect to Revolving Loans that are Base Rate Loans and (b) thereafter, a rate which is 2% per annum in excess of the rate of interest otherwise payable under this Agreement with respect to Revolving Loans that are Base Rate Loans. Interest payable pursuant to this subsection 3.3D(i) shall be computed on the basis of a 360-day year for the actual number of days elapsed in the period during which it accrues and shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full. 87 (ii) Distribution of Interest Payments by Issuing Lender. --------------------------------------------------- Promptly upon receipt by any Issuing Lender of any payment of interest pursuant to subsection 3.3D(i) with respect to a drawing under a Letter of Credit issued by it, (a) such Issuing Lender shall distribute to each other Revolving Lender, out of the interest received by such Issuing Lender in respect of the period from the date of such drawing to but excluding the date on which such Issuing Lender is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B), the amount that such other Revolving Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period pursuant to subsection 3.2 if no drawing had been made under such Letter of Credit, and (b) in the event such Issuing Lender shall have been reimbursed by other Revolving Lenders pursuant to subsection 3.3C(i) for all or any portion of such drawing, such Issuing Lender shall distribute to each other Revolving Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such drawing such other Revolving Lender's Pro Rata Share of any interest received by such Issuing Lender in respect of that portion of such drawing so reimbursed by other Revolving Lenders for the period from the date on which such Issuing Lender was so reimbursed by other Revolving Lenders to but excluding the date on which such portion of such drawing is reimbursed by Company. Any such distribution shall be made to a Revolving Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Revolving Lender may request. 3.4 OBLIGATIONS ABSOLUTE. -------------------- The obligation of Company to reimburse each Issuing Lender for drawings made under the Letters of Credit issued by it (whether or not Company is the account party thereunder) and to repay any Revolving Loans made by Revolving Lenders pursuant to subsection 3.3B and the obligations of Revolving Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, set-off, defense or other right which Company, any Subsidiary that is an account party thereunder or any Revolving Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Issuing Lender or other Revolving Lender or any other Person or, in the case of a Revolving Lender, against Company or any Subsidiary that is an account party under a Letter of Credit, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of 88 its Subsidiaries and the beneficiary for which any Letter of Credit was procured) other than the defense of payment in accordance with the terms of this Agreement; (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment to the beneficiary of such Letter of Credit by the applicable Issuing Lender under any Letter of Credit against presentation of a draft, demand, certificate or other document which does not comply with the terms of such Letter of Credit; (v) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (vi) any breach of this Agreement or any other Loan Document by any party thereto (other than a breach by the applicable Issuing Lender relating to the Letter of Credit in question); (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or (viii) the fact that an Event of Default or a Potential Event of Default shall have occurred and be continuing; provided, in each case, that payment by the applicable Issuing Lender under the - -------- applicable Letter of Credit shall not have constituted gross negligence or willful misconduct of such Issuing Lender under the circumstances in question (as determined by a final judgment of a court of competent jurisdiction). 3.5 INDEMNIFICATION; NATURE OF ISSUING LENDERS' DUTIES. -------------------------------------------------- A. INDEMNIFICATION. In addition to amounts payable as provided in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save harmless each Issuing Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and of internal counsel) which such Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by such Issuing Lender, other than as a result of (a) the gross negligence or willful misconduct of such Issuing Lender as determined by a final judgment of a court of competent jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor by such Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it or (ii) the failure of such Issuing Lender to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or 89 wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "GOVERNMENTAL ACTS"). B. NATURE OF ISSUING LENDERS' DUTIES. As between Company and any Issuing Lender, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by such Issuing Lender, by the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, such Issuing Lender shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they are in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of such Issuing Lender, including without limitation any Govern mental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of such Issuing Lender's rights or powers hereunder. In furtherance and extension and not in limitation of the specific provisions set forth in the first paragraph of this subsection 3.5B, any action taken or omitted by any Issuing Lender under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to Company. Notwithstanding anything to the contrary contained in this subsection 3.5, Company shall retain any and all rights it may have against any Issuing Lender for any liability directly attributable to the gross negligence or willful misconduct of such Issuing Lender or to the wrongful dishonor by any Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it, in each case, as determined by a final judgment of a court of competent jurisdiction. 3.6 INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT. ------------------------------------------------------- In the event that any Issuing Lender or any Revolving Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction 90 of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof (other than any change in such law, treaty or governmental rule, regulation or order which was promulgated prior to the date hereof and which becomes effective in accordance with its terms after the date hereof), or compliance by any Issuing Lender or any Revolving Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Issuing Lender or such Revolving Lender (or its applicable lending or letter of credit office) to any additional Tax (other than any Tax on the overall net income of such Issuing Lender or Revolving Lender) with respect to the issuing or maintaining of any Letters of Credit or the purchasing or maintaining of any participations therein or any other obligations under this Section 3, whether directly or by such being imposed on or suffered by any particular Issuing Lender; (ii) imposes, modifies or holds applicable any reserve (including without limitation any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement in respect of any Letters of Credit issued by any Issuing Lender or participations therein purchased by any Revolving Lender; or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Issuing Lender or such Revolving Lender (or its applicable lending or letter of credit office) regarding this Section 3 or any Letter of Credit or any participation therein; and the result of any of the foregoing is to increase the cost to such Issuing Lender or such Revolving Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to purchase, purchasing or maintaining any participation therein or to reduce any amount received or receivable by such Issuing Lender or Revolving Lender (or its applicable lending or letter of credit office) with respect thereto; then, in any case, Company shall promptly pay to such Issuing Lender or Revolving Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate such Issuing Lender or Revolving Lender for any such increased cost or reduction in amounts received or receivable hereunder; provided that a Revolving Lender shall not be entitled to avail itself of the - -------- benefit of this subsection 3.6 to the extent that any such increased cost or reduction in amounts was incurred more than one year prior to the time it gives notice to Company (as provided in the next sentence) of the relevant circumstance, unless such circumstance arose or became applicable retrospectively, in which case such Revolving Lender shall not be limited to such one year period so long as such Revolving Lender has given such notice to Company no later than one year from the time such circumstance became applicable to such Revolving Lender. Such Issuing Lender or Revolving Lender shall deliver to Company a written statement, setting forth in reasonable detail the basis for calculating the 91 additional amounts owed to such Issuing Lender or Revolving Lender under this subsection 3.6, which statement shall be conclusive and binding upon all parties hereto absent manifest error. SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT The obligations of Lenders to make Loans and the issuance of Letters of Credit hereunder are subject to the satisfaction of the following conditions. 4.1 CONDITIONS TO TERM LOANS AND INITIAL REVOLVING LOANS AND SWING LINE ------------------------------------------------------------------- LOANS. - ----- The obligations of Lenders to make the Term Loans and any Revolving Loans and Swing Line Loans to be made on the Closing Date are, in addition to the conditions precedent specified in subsection 4.2, subject to prior or concurrent satisfaction of the following conditions: A. LOAN PARTY DOCUMENTS. On or before the Closing Date, Company shall, and shall cause each other Loan Party to, deliver to Lenders (or to Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Closing Date: (i) Certified copies of the Certificate or Articles of Incorporation of such Person, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Closing Date; (ii) Copies of the Bylaws of such Person, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary; (iii) Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance of the Loan Documents and Related Agreements to which it is a party, and to the extent applicable, approving and authorizing the Transactions and all transactions related thereto, including without limitation the retirement of Company's Class A Common Stock and Class B Common Stock repurchased in the Equity Tender Offer, in each case certified as of the Closing Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment; 92 (iv) Signature and incumbency certificates of the officers of such Person executing the Loan Documents to which it is a party; (v) Executed originals of the Loan Documents to which such Person is a party; and (vi) Such other documents as Agent may reasonably request. B. NO MATERIAL ADVERSE EFFECT. Except as set forth in Schedule 4.1B ------------- annexed hereto, since December 30, 1995, no Material Adverse Effect (in the sole opinion of Agent) shall have occurred; and since July 30, 1995, no event or change shall have occurred that has caused or evidences, either in any case or in the aggregate, a material adverse effect (in the sole opinion of Agent) upon the business, operations, properties, assets, conditions (financial or otherwise) or prospects of Smitty's and its Subsidiaries, taken as a whole. C. CORPORATE AND CAPITAL STRUCTURE, OWNERSHIP, MANAGEMENT, ETC. (i) Corporate Structure. The organizational structure of its ------------------- Subsidiaries, both before and after giving effect to the Acquisition and the Merger, shall be as set forth on Schedule 5.1 annexed hereto and be ------------ satisfactory to Agent, Arrangers and Lenders. (ii) Capital Structure and Ownership. The capital structure and ------------------------------- ownership of Company, both before and after giving effect to the Acquisition and the Merger, shall be as described in the Note Offering Materials and be satisfactory to Agent, Arrangers and Lenders. (iii) Management; Employment Contracts. The management structure -------------------------------- of Company after giving effect to the Acquisition and the Merger, shall be as described in the Note Offering Materials and be satisfactory to Agent, Arrangers and Requisite Lenders, and Agent shall have received copies of, and shall be satisfied with the form and substance of, any and all written employment contracts with senior management of Company. D. DEBT AND EQUITY CAPITALIZATION OF COMPANY. (i) Class A Common Stock, Class B Common Stock and Class C ------------------------------------------------------ Common Stock. On or prior to the Closing Date, Company shall have ------------ authorized the Class C Common Stock, and such amendments to its Class A Common Stock, Class B Common Stock and Redeemable Preferred Stock as are necessary or desirable to permit the consummation of the Transactions, shall have obtained the requisite approval of its shareholders thereto, and shall have filed its Restated Articles of Incorporation with the Secretary of State of the State of Delaware effecting such authorizations and amendments, in each case as more particularly described in the 93 Proxy Statement. The terms of such Company's Class A Common Stock, Class B Common Stock, Class C Common Stock and Redeemable Preferred Stock, as amended on or prior to the Closing Date, shall be satisfactory to Agent and Arrangers and its Restated Articles of Incorporation, as filed with the Secretary of the State of Delaware, shall have been delivered to Agent. (ii) Equity Holdings by Yucaipa. Upon the consummation of the -------------------------- Transactions, (1) the shareholders of Smitty's prior to the Acquisition, including Yucaipa, shall collectively own and control, directly or indirectly, not less than 3,038,888 shares of Company's Class B Common Stock, and (2) Company shall have issued, and The Yucaipa Companies shall have received, the Yucaipa Warrant. On or prior to the Closing Date, Company shall have delivered to Agent an Officers' Certificate in form and substance satisfactory to Agent setting forth in reasonable detail the percentage of the issued and outstanding shares of each series of Company's Common Stock beneficially owned and controlled, directly or indirectly, by Yucaipa and the Yucaipa Investors collectively on the Closing Date. (iii) Redemption of Redeemable Preferred Stock. On or prior to the ---------------------------------------- Closing Date, Company shall have redeemed approximately 3,000,000 shares of its Redeemable Preferred Stock for an aggregate redemption payment not exceeding $1,000,000 in accordance with the provisions of Company's Restated Articles of Incorporation. Company shall have delivered an Officer's Certificate setting forth the aggregate amount paid therefor. (iv) Issuance of Class B Common Stock to Yucaipa; Consummation --------------------------------------------------------- of the Equity Tender Offer; Amendments to Options. On or prior to the ------------------------------------------------- Closing Date, (1) Company shall have obtained the requisite approval of the holders of its Class A Common Stock and Class B Common Stock regarding (A) the Recapitalization and Merger Agreement and the transactions contemplated thereby, including the issuance of 3,038,888 shares of its Class B Common Stock to the existing shareholders of Smitty's as consideration for all of the outstanding stock of Smitty's in connection with the Acquisition, and (B) the Amended and Restated Certification of Incorporation of Company, and (2) Company shall have purchased approximately 13,400,000 shares of Class A Common Stock and Class B Common Stock, which shall represent approximately 50% of shares of all Class A Common Stock and Class B Common Stock outstanding (excluding shares of Class B Common Stock issued or issuable in connection with the Acquisition but including certain Existing Management Stock Options) pursuant to the Equity Tender Offer for an aggregate purchase amount not exceeding $465,000,000. (v) Senior Subordinated Notes. On or prior to the Closing Date, ------------------------- Company shall have issued the Senior Subordinated Notes and shall have received $575,000,000 in gross proceeds therefrom. The terms and conditions of the Senior Subordinated Notes shall be substantially as described in the Note Offering Materials and shall be 94 satisfactory to Agent, Arrangers and Requisite Lenders; provided that the -------- Senior Subordinated Notes shall be unsecured and shall not mature or provide for any scheduled principal payments prior to the tenth anniversary of the Closing Date; provided, further that the negative -------- ------- covenants and default provisions shall be less restrictive than those contained in this Agreement. Company shall have delivered to Agent a fully executed or conformed copy of the Senior Subordinated Note Indenture. E. RELATED AGREEMENTS. (i) Approval of Related Agreements. Each of the Related ------------------------------ Agreements shall be satisfactory in form and substance to Agent and Arrangers. (ii) Related Agreements in Full Force and Effect. Agent shall ------------------------------------------- have received a fully executed or conformed copy of each Related Agreement and any documents executed in connection therewith, and each Related Agreement shall be in full force and effect and no provision thereof shall have been modified or waived in any respect determined by Agent to be material, in each case without the consent of Agent. F. MATTERS RELATING TO EXISTING INDEBTEDNESS OF COMPANY, SMITTY'S AND THEIR RESPECTIVE SUBSIDIARIES. (i) Termination of Existing Company Credit Lines and Related -------------------------------------------------------- Liens; Existing Letters of Credit. On the Closing Date, Company and its --------------------------------- Subsidiaries shall have (a) repaid in full all Indebtedness outstanding under the Existing Company Credit Lines (the aggregate principal amount of such Indebtedness not to exceed $10,000,000), (b) terminated any commitments to lend or make other extensions of credit thereunder, (c) delivered to Agent all documents or instruments necessary to release all Liens securing Indebtedness or other obligations of Company and its Subsidiaries thereunder, and (d) other than with respect to any Existing Letters of Credit, made arrangements satisfactory to Agent with respect to the cancellation of any letters of credit outstanding thereunder or the issuance of Letters of Credit to support the obligations of Company and its Subsidiaries with respect thereto. (ii) Redemption or Repayment of Existing Mortgage Indebtedness --------------------------------------------------------- and Existing Unsecured Senior Indebtedness. Company shall have (a) other ------------------------------------------ than with respect to up to approximately $2,700,000 in mortgage notes listed on Schedule 7.1 annexed hereto, repaid in full all Indebtedness ------------ outstanding with respect to its existing mortgage Indebtedness (the aggregate principal amount of such Indebtedness not to exceed $248,600,000) and its existing unsecured senior Indebtedness (the aggregate principal amount of such Indebtedness not to exceed $410,000,000), in each case in accordance with the applicable indenture or agreement and (b) made arrangements with the holders of such mortgage Indebtedness and a title insurance company regarding the subsequent delivery and recording of all such documents or instruments as are necessary to release all Liens securing the Indebtedness or other obligations of 95 Company and its Subsidiaries thereunder, such arrangements to be satisfactory in form and substance to Agent. (iii) Termination of Existing Smitty's Credit Agreement and ----------------------------------------------------- Related Liens; Existing Letters of Credit. On the Closing Date, Smitty's ----------------------------------------- and its Subsidiaries shall have (a) repaid in full all Indebtedness outstanding under the Existing Smitty's Credit Agreement (the aggregate principal amount of such Indebtedness not to exceed $33,600,000), (b) terminated any commitments to lend or make other extensions of credit thereunder, (c) delivered to Agent all documents or instruments necessary to release all Liens securing Indebtedness or other obligations of Smitty's and its Subsidiaries thereunder, and (d) other than with respect to any Existing Letters of Credit, made arrangements satisfactory to Agent with respect to the cancellation of any letters of credit outstanding thereunder or the issuance of Letters of Credit to support the obligations of Smitty's and its Subsidiaries with respect thereto. (iv) Redemption or Repayment of Existing Smitty's Subordinated --------------------------------------------------------- Notes and Existing Smitty's Discount Debentures. Pursuant to the ----------------------------------------------- Smitty's DebtPurchase Offers, (i) not less than [100%] of the Existing Smitty's Subordinated Notes and the Existing Smitty's Discount Debentures shall have been purchased (the aggregate principal or accreted amount of which Indebtedness not to exceed approximately $50,000,000 and $19,300,000, respectively) for an aggregate purchase price of $50,000,000 and $19,300,000, respectively, plus accrued and unpaid interest thereon, and a premium and a consent payment as described in the Smitty's Debt Purchase Offers, and (ii) Smitty's shall have obtained all such consents and amendments to the Existing Smitty's Subordinated Note Indenture and Existing Smitty's Discount Debenture Indenture as may be required to permit the transactions described herein. The terms and conditions of such purchases, consents and amendments shall be substantially as described in the Smitty's Debt Purchase Offers and shall be satisfactory to Agent, Arrangers and Requisite Lenders. (v) Existing Indebtedness to Remain Outstanding. Agent shall ------------------------------------------- have received an Officers' Certificate of Company stating that, after giving effect to the transactions described in this subsection 4.1F, the Indebtedness of Loan Parties (other than Indebtedness under the Loan Documents and the Senior Subordinated Notes) shall consist of (a) approximately $5,400,000 in aggregate principal amount of Existing Company IRB's, (b) approximately $11,900,000 in aggregate principal amount of Existing Smitty's Sinking Fund Bonds, (c) approximately $2,700,000 in aggregate principal amount of mortgage notes set forth on Schedule 7.1 annexed hereto and (d) Indebtedness in an aggregate amount ------------ not to exceed $31,600,000 in respect of Capital Leases described in Part B of Schedule 7.1 annexed hereto. Company shall be in compliance with ------------ its obligations under the Existing Company IRB Indentures, the Existing Smitty's Sinking Fund Bond Indenture, such mortgage notes and Capital Leases and Company shall have delivered to Agent a fully executed or conformed copy of each of the Existing Company IRB Indenture, the Existing Smitty's Sinking 96 Fund Indenture and the agreements or documents setting forth the terms and conditions of such mortgage notes. The terms and conditions of all such Indebtedness shall be in form and in substance satisfactory to Arrangers. G. NECESSARY GOVERNMENTAL AUTHORIZATIONS AND CONSENTS; EXPIRATION OF WAITING PERIODS, ETC. Company shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with the Transactions or the other transactions contemplated by the Loan Documents and the Related Agreements, and the continued operation of the business conducted by Company's and its Subsidiaries in substantially the same manner as conducted prior to the consummation of the Transactions, and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on any of the Transactions or the financing thereof. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. H. CONSUMMATION OF ACQUISITION AND MERGER. (i) The Recapitalization and Merger Agreement shall be in full force and effect and shall not have been modified or waived in any material respect without the consent of Agent, Arrangers and Requisite Lenders. All conditions to the Acquisition and the Merger set forth in Article 9 of the Recapitalization and Merger Agreement shall have been satisfied in all material respects or the fulfillment of any such conditions shall have been waived with the consent of Agent and Arrangers; (ii) the Merger shall have become effective in accordance with the terms of the Recapitalization and Merger Agreement and the laws of the State of Delaware; the Certificate of Merger shall have been filed with the Secretary of State of the State of Delaware on the Closing Date, shall be in form and in substance satisfactory to Agent, shall be in full force and effect and shall have been delivered to Agent; (iii) The sole consideration paid to the holders of equity interests in Smitty's in respect of such equity interests in connection with the Acquisition shall be 3,038,888 shares of Company's Class B Common Stock or such other consideration as shall be consented to by Agent, Arrangers and Requisite Lenders; (iv) Transaction Costs shall not exceed $160,700,000; and (v) Agent shall have received an Officers' Certificate of Company to the effect set forth in clauses (i)-(iv) above and stating that Company will proceed to 97 consummate the Acquisition and the Merger immediately upon the making of the initial Loans. I. DELIVERY OF MORTGAGES; TITLE INSURANCE POLICIES; APPRAISALS. Schedule 4.1I annexed hereto shall set forth all Real Property Assets of Company - ------------- or any of its Subsidiaries as of the Closing Date after giving effect to the Mergers. Agent shall have received from Company and each of its Subsidiaries having Real Property Assets (i) fully executed counterparts of Mortgages, which Mortgage shall cover the fee interest and/or leasehold interest of Company or such Subsidiary in each Real Property Asset designated as a "MORTGAGED PROPERTY" on Schedule 4.1I annexed hereto (each a "MORTGAGED PROPERTY" and collectively ------------- the "MORTGAGED PROPERTIES") (Mortgaged Properties shall include all Real Property Assets except (1) Surplus Leased Properties (other than subleased properties with annual net rental income to Company or its Subsidiaries in excess of $100,000), (2) Real Property Assets subject to an existing mortgage which is not required to be prepaid prior to the Closing Date pursuant to this Agreement, (3) other leased properties where the consent of the lessor to mortgage the same is required and such consent has not been obtained and (4) Excluded Sites), together with evidence (which may be in the form of recording instructions accepted by title insurers, which instructions may authorize the title insurer to remove from the counterpart of the Mortgage being recorded any exhibit pages rejected by the county recorder which, if not removed, would prevent the recordation of such Mortgage counterpart) that counterparts of the Mortgages have been or promptly will be recorded in all places to the extent necessary or desirable, in the reasonable judgment of Agent, so as to effectively create a valid and enforceable first priority lien (subject only to Liens permitted pursuant to this Agreement, and subject, where applicable, to the effect, if any, on lien priority of the absence of a recorded memorandum of lease) on each Mortgaged Property in favor of Agent (or such other trustee as may be required or desired under local law) for the benefit of Lenders; (ii) a preliminary title report, title commitment or lot book guaranty obtained by Company or such Subsidiary in respect of each Mortgaged Property as may be required by Agent; (iii) an opinion of counsel (which counsel shall be reasonably satisfactory to Agent) in such states as may be required by Agent and in which each Mortgaged Property is located other than Wyoming and Idaho with respect to the enforceability of the Mortgages recorded in such state and such other matters as Agent may request, in form and substance satisfactory to Agent; (iv) in the case of each real property leasehold interest of Company or such Subsidiary constituting Mortgaged Property, such estoppel letters, consents and waivers from the landlords on such real property as may be required by Agent, which letters, consents, waivers and agreements shall be substantially in the form of Exhibit XIX annexed hereto and in any event in form and substance ----------- reasonably satisfactory to Agent; (v) Title Insurance Policies with respect to the Mortgaged Properties designated on such Schedule 4.1I annexed hereto, in ------------- amounts not less than the respective amounts designated on such Schedule 4.1I ------------- with respect to any particular Mortgaged Property; (vi) information sufficient for Agent to determine whether (1) any Mortgaged Property is in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards (any Real Property Asset located within such an area being a "FLOOD HAZARD PROPERTY") and (2) the community in which each Flood Hazard Property is located is participating in the National 98 Flood Insurance Program; (vii) if any Mortgaged Properties are Flood Hazard Properties, Company's or such Subsidiary's written acknowledgment of receipt of written notification from Agent (1) as to the existence of each such Flood Hazard Property and (2) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program; (viii) appraisals of the Real Property Assets so designated on Schedule -------- 4.1I annexed hereto performed by certified real estate appraisers approved by - ---- Agent, which appraisals shall be in form, scope and substance satisfactory to Agent; and (ix) the evidence of insurance with respect to the Mortgaged Properties required to be provided to Agent pursuant to the Mortgages, including flood insurance with respect to each Mortgaged Property that is a Flood Hazard Property located in a community which is participating in the National Flood Insurance Program. J. SECURITY INTERESTS IN PERSONAL AND MIXED PROPERTY. To the extent not otherwise satisfied pursuant to subsection 4.1I, Agent shall have received evidence satisfactory to it that Company and Subsidiary Guarantors shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing or recording of items described in clauses (iii), (iv) and (v) below) that may be necessary or, in the opinion of Agent, desirable in order to create in favor of Agent, for the benefit of Lenders, a valid and (upon such filing and recording) perfected first priority security interest in the entire personal and mixed property Collateral except for the prior security interest, if any, granted to the holders of secured Indebtedness referred to in Section 7.1 with respect to the personal property secured thereby. Such actions shall include, without limitation, the following: (i) Schedules to Collateral Documents. Delivery to Agent of --------------------------------- accurate and complete schedules to all of the applicable Collateral Documents. (ii) Stock Certificates and Instruments. Delivery to Agent of (a) ---------------------------------- certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Agent) representing all capital stock pledged pursuant to the Pledge Agreements and (b) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner satisfactory to Agent) evidencing any Collateral; (iii) Lien Searches and UCC Termination Statements. Delivery to -------------------------------------------- Agent of (a) the results of a recent search, by a Person satisfactory to Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of any Loan Party, together with copies of all such filings disclosed by such search, and (b) UCC termination statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing 99 statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement). (iv) UCC Financing Statements and Fixture Filings. Delivery to -------------------------------------------- Agent of UCC financing statements and, where appropriate, fixture filings, duly executed by each applicable Loan Party with respect to all personal and mixed property Collateral of such Loan Party, for filing in all jurisdictions as may be necessary or, in the opinion of Agent, desirable to perfect the security interests created in such Collateral pursuant to the Collateral Documents; (v) PTO Cover Sheets, Etc. Delivery to Agent of all cover --------------------- sheets or other documents or instruments required to be filed with the PTO in order to create or perfect Liens in respect of any IP Collateral; and (vi) Opinions of Local Counsel. Delivery to Agent of an opinion ------------------------- of counsel (which counsel shall be reasonably satisfactory to Agent) under the laws of each jurisdiction other than Wyoming, Idaho and Texas in which any Loan Party or any personal or mixed property Collateral is located with respect to the creation and perfection of the security interests in favor of Agent in such Collateral and such other matters governed by the laws of such jurisdiction regarding such security interests as Agent may reasonably request, in each case in form and substance reasonably satisfactory to Agent. K. ENVIRONMENTAL REPORTS. (i) Agent shall have received reports, opinions and other information in form, scope and substance satisfactory to Agent and (ii) Lenders shall have received summaries thereof in form, scope and substance satisfactory to Requisite Lenders, in each case concerning the Hazardous Materials liabilities of Company and Smitty's and their respective Subsidiaries. L. FINANCIAL STATEMENTS; PRO FORMA BALANCE SHEET. On or before the Closing Date, Lenders shall have received from Company (i) audited financial statements of Company and its Subsidiaries for Fiscal Years 1994 and 1995, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Years, (ii) unaudited financial statements of Company and its Subsidiaries as at March 30, 1996, consisting of a balance sheet and the related consolidated statements of income, stockholders' equity and cash flows for the three-month period ending on such date, all in reasonable detail and certified by the chief financial officer of Company that they fairly present the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, and (iii) pro forma consolidated balance sheets of Company and its Subsidiaries as March 30, 1996, prepared in accordance with GAAP and giving effect to the consummation of the Transactions, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, which pro forma financial statements shall be in form and substance satisfactory 100 to Lenders. On or before the Closing Date, Lenders shall have received from Company (i) audited financial statements of Smitty's and its Subsidiaries for Fiscal Years 1994 and 1995, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Years, and (ii) unaudited financial statements of Smitty's and its Subsidiaries as at March 10, 1996, consisting of a balance sheet and the related consolidated statements of income, stockholders' equity and cash flows for the eight-month period ending on such date, all in reasonable detail and certified by the chief financial officer of Smitty's prior to the Merger that they fairly present the financial condition of Smitty's and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments. Agent and Lenders shall have had an opportunity to discuss such unaudited financial statements with the independent certified public accountants for Company with the cost of such review being for the account of Company. M. SOLVENCY ASSURANCES. On the Closing Date, Agent, Arrangers, and Lenders shall have received (i) a letter from Houlihan Lokey Howard & Zukin, dated the Closing Date and addressed to Agent, Arrangers and Lenders, in form and substance satisfactory to Agent, Arrangers and Lenders and with appropriate attachments, and (ii) a Financial Condition Certificate dated the Closing Date, substantially in the form of Exhibit XII annexed hereto and with appropriate ----------- attachments, in each case demonstrating that, after giving effect to the consummation of the Transactions, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, Company will be Solvent and that the consummation of the Equity Tender Offer will not violate Section 160 of the Delaware General Corporations Law. N. EVIDENCE OF INSURANCE. Agent shall have received a certificate from Company's insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to subsection 6.4 is in full force and effect and that Agent on behalf of Lenders has been named as additional insured and/or loss payee thereunder to the extent required under subsection 6.4. O. OPINIONS OF COUNSEL TO LOAN PARTIES. Lenders and their respective counsel shall have received (i) originally executed copies of one or more favorable written opinions of Latham & Watkins, counsel for Loan Parties, in form and substance reasonably satisfactory to Agent and its counsel, dated as of the Closing Date and setting forth substantially the matters in the opinions designated in Exhibit VIII annexed hereto and as to such other matters as Agent ------------ acting on behalf of Lenders may reasonably request and (ii) evidence satisfactory to Agent that Company has requested such counsel to deliver such opinions to Lenders. P. OPINIONS OF AGENT'S COUNSEL. Lenders shall have received originally executed copies of one or more favorable written opinions of O'Melveny & Myers, counsel to Agent, dated as of the Closing Date, substantially in the form of Exhibit IX annexed hereto and as to such other matters as Agent acting on behalf - ---------- of Lenders may reasonably request. 101 Q. OPINIONS OF COUNSEL DELIVERED UNDER RELATED AGREEMENTS. Agent and its counsel shall have received copies of each of the opinions of counsel delivered to any Loan Party under the Related Agreements, together with a letter from each such counsel authorizing Lenders to rely upon such opinion to the same extent as though it were addressed to Lenders. R. AUDITOR'S LETTER. Agent shall have received an executed copy of the Auditor's Letter as delivered by Company to its independent certified public accountants. S. FAIRNESS OPINION. Agent shall have received a copy of an executed fairness opinion from Goldman, Sachs & Co. regarding the issuance by Company of its Class B Common Stock in connection with the Acquisition, which letter shall be in form and in substance satisfactory to Agent. T. SCHEDULED CALIFORNIA DISPOSITIONS. On or prior to the Closing Date, Company shall have received not less than $67,200,000 from the sale of its California facilities other than the California Stores and the Excess California Land. Company shall have delivered to Agent an Officers' Certificate, in form and substance satisfactory to Agent, setting forth in reasonable detail the aggregate amount of proceeds received by it with respect to each facility disposed of on or prior to the Closing Date and the breakdown of such amounts for each such facility. U. FEES. Company shall have paid to Agent, for distribution (as appropriate) to Agent and Lenders, the fees payable on the Closing Date referred to in subsection 2.3. V. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company shall have delivered to Agent an Officers' Certificate, in form and substance satisfactory to Agent, to the effect that the representations and warranties in Section 5 hereof are true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before the Closing Date except as otherwise disclosed to and agreed to in writing by Agent and Requisite Lenders. W. COMPLETION OF PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and by other Related Agreements and all documents incidental thereto not previously found acceptable by Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Agent and such counsel, and Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Agent may reasonably request. X. TRANSACTION COSTS. The Transaction Costs shall not exceed $160,700,000. 102 Each Lender hereby agrees that by its execution and delivery of its signature page hereto and by the funding of its Loans to be made on the Closing Date, such Lender approves of and consents to each of the matters set forth in this subsection 4.1 which must be approved by, or which must be satisfactory to, all or Requisite Lenders; provided that in the case of any agreement or document -------- which must be approved by, or which must be satisfactory to, all or Requisite Lenders, Agent or Company shall have delivered a copy of such agreement or document in substantially the form in which executed or delivered to such Lender on or prior to the Closing Date. 4.2 CONDITIONS TO ALL LOANS. ----------------------- The obligations of each Lender to make Loans on each Funding Date (other than any Funding Date relating to any Refunded Swing Line Loans) are subject to the following further conditions precedent: A. Agent shall have received before that Funding Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by the chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Agent. B. As of that Funding Date: (i) The representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; (ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of Default; (iii) Each Loan Party shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before that Funding Date; (iv) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making the Loans to be made by it on that Funding Date; (v) The making of the Loans requested on such Funding Date shall not violate any law including, without limitation, Regulation G, Regulation T, 103 Regulation U or Regulation X of the Board of Governors of the Federal Reserve System; and (vi) There shall not be pending or, to the knowledge of Company, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries that has not been disclosed by Company in writing pursuant to subsection 5.6 or 6.1(x) prior to the making of the last preceding Loans (or, in the case of the initial Loans, prior to the execution of this Agreement), and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, that, in either event, in the opinion of Agent or of Requisite Lenders, could reasonably be expected to have a Material Adverse Effect ; and no injunc tion or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of Loans hereunder. 4.3 CONDITIONS TO LETTERS OF CREDIT. ------------------------------- The issuance of any Letter of Credit hereunder (whether or not the applicable Issuing Lender is obligated to issue such Letter of Credit) is subject to the following conditions precedent: A. On or before the date of issuance of the initial Letter of Credit pursuant to this Agreement, the initial Loans shall have been made. B. On or before the date of issuance of such Letter of Credit, Agent shall have received, in accordance with the provisions of subsection 3.1B(i), an originally executed Notice of Issuance of Letter of Credit, in each case signed by the chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above- described officers on behalf of Company in a writing delivered to Agent, together with all other information specified in subsection 3.1B(i) and such other documents or information as the applicable Issuing Lender may reasonably require in connection with the issuance of such Letter of Credit. C. On the date of issuance of such Letter of Credit, all conditions precedent described in subsection 4.2B shall be satisfied to the same extent as if the issuance of such Letter of Credit were the making of a Loan and the date of issuance of such Letter of Credit were a Funding Date. 104 SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Agreement and to make the Loans, to induce Issuing Lenders to issue Letters of Credit and to induce other Lenders to purchase participations therein, Company represents and warrants to each Lender, on the date of this Agreement, on each Funding Date and on the date of issuance of each Letter of Credit, that, prior to and after giving effect to the Merger, the following statements are true, correct and complete: 5.1 ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS AND ---------------------------------------------------------------- SUBSIDIARIES. ------------ A. ORGANIZATION AND POWERS. Each Loan Party is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation as specified in Schedule 5.1 annexed hereto. Each ------------ Loan Party has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Loan Documents and Related Agreements to which it is a party and to carry out the transactions contemplated thereby. B. QUALIFICATION AND GOOD STANDING. Each Loan Party is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and will not have, either individually or in the aggregate for all such jurisdictions, a Material Adverse Effect. C. CONDUCT OF BUSINESS. Company and its Subsidiaries are engaged only in the businesses permitted to be engaged in pursuant to subsection 7.14. D. SUBSIDIARIES. All of the Subsidiaries of Company, prior to and after the Merger, are identified in Schedule 5.1 annexed hereto, as said ------------ Schedule 5.1 may be supplemented from time to time pursuant to the provisions of - ------------ subsection 6.1(xvii). The capital stock of each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto is duly authorized, validly issued, ------------ fully paid and nonassessable and none of such capital stock constitutes Margin Stock. Each of the Subsidiaries of Company identified in Schedule 5.1 annexed ------------ hereto is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation set forth therein, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or to have such corporate power and authority has not had and will not have, either individually or in the aggregate for all such failures, a Material Adverse Effect. Schedule 5.1 annexed hereto correctly sets ------------ forth the ownership interest of Company and each of its Subsidiaries in each of the Subsidiaries of Company identified therein and whether any such Subsidiary is an Inactive Subsidiary. The aggregate assets and annual revenues of all 105 Inactive Subsidiaries identified on Schedule 5.1 annexed hereto does not and ------------ will not exceed $3,000,000 and $3,000,000, respectively. 5.2 AUTHORIZATION OF BORROWING, ETC. -------------------------------- A. AUTHORIZATION OF BORROWING. The execution, delivery and performance of the Loan Documents and the Related Agreements have been duly authorized by all necessary corporate action on the part of each Loan Party that is a party thereto. B. NO CONFLICT. The execution, delivery and performance by Loan Parties of the Loan Documents and the Related Agreements to which they are parties and the consummation of the transactions contemplated by the Loan Documents and such Related Agreements do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Company or any of its Subsidiaries or any material order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material Con tractual Obligation of Company or any of its Subsidiaries which could reasonably be expected to result in a Material Adverse Effect, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries, except for such approvals or consents which will be obtained on or before the Closing Date and disclosed in writing to Lenders or such approvals or consents the failure to obtain could not reasonably be expected to result in a Material Adverse Effect. C. GOVERNMENTAL CONSENTS. The execution, delivery and performance by Loan Parties of the Loan Documents and the Related Agreements to which they are parties and the consummation of the transactions contemplated by the Loan Documents and such Related Agreements do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body, except for (i) filings and recordings required in connection with the ------ perfection of the security interests granted pursuant to the Loan Documents, (ii) such registrations, consents, approvals, notices or other actions which have been obtained on or before the Closing Date and are described on Schedule -------- 5.2C annexed hereto and (iii) notices or other actions required to be taken - ---- after the Closing Date relating to operating licenses, which notices or other actions will be given or taken as required in due course (or, in the case of any Loan Document or other Related Agreement executed and delivered after the Closing Date, on or before such date of execution and delivery) except for such filings, recording, registrations, consents, approvals, notices or other actions the failure to obtain or take could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 106 D. BINDING OBLIGATION. Each of the Loan Documents and Related Agreements has been duly executed and delivered by each Loan Party that is a party thereto and is the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. E. VALID ISSUANCE OF COMMON STOCK, PREFERRED STOCK, SENIOR SUBORDINATED NOTES AND YUCAIPA WARRANT. (i) Common Stock and Preferred Stock. The Preferred Stock is, -------------------------------- and each class of Common Stock is, or when issued and delivered will be, duly and validly issued, fully paid and nonassessable. No stockholder of Company has or will have any preemptive rights to subscribe for any additional equity Securities of Company. The issuance and sale of Company's Common Stock and Preferred Stock, upon such issuance and sale, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. (ii) Senior Subordinated Notes. Company has the corporate power -------------------------- and authority to issue the Senior Subordinated Notes. The Senior Subordinated Notes, when issued and paid for, will be the legally valid and binding obligations of Company, enforceable against Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The subordination provisions of the Senior Subordinated Notes will be enforceable against the holders thereof and the Loans and all other monetary Obligations hereunder are and will be within the definition of "Senior Indebtedness" included in such provisions. Senior Subordinated Notes, when issued and sold, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. 5.3 FINANCIAL CONDITION. ------------------- Company has heretofore delivered to Lenders, at Lenders' request, the following financial statements and information: (i) the audited consolidated balance sheets of Company and its Subsidiaries as at December 31, 1994 and December 30, 1995 and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the Fiscal Years then ended, (ii) the unaudited consolidated balance sheets of Company and its Subsidiaries as at March 30, 1996 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the three months then ended, (iii) the audited consolidated balance sheets of Smitty's and its Subsidiaries as at July 30, 1994 and July 30, 1995 and the related consolidated statements of income, stockholders' equity and cash flows of Smitty's and its Subsidiaries for the Fiscal Years then ended, and (iv) the unaudited consolidated balance sheets of Smitty's and its 107 Subsidiaries as at March 10, 1996 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the eight months then ended. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year- end adjustments. None of the Loan Parties (and will not following the funding of the initial Loans) has any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the foregoing financial statements or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Loan Parties taken as a whole, other than (i) the incurrence of the Obligations and obligations under other Related Agreements, (ii) contingent obligations or liabilities for taxes, long term leases or forward or long term commitments and (iii) other items disclosed on Schedule 4.1B annexed hereto. ------------- 5.4 NO MATERIAL ADVERSE CHANGE; NO RESTRICTED JUNIOR PAYMENTS. --------------------------------------------------------- As of the Closing Date, since July 30, 1995, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of Smitty's and its Subsidiaries, taken as a whole. Since December 30, 1995 and except as disclosed on Schedule 4.1B annexed hereto, no event or change has occurred that has caused ------------- or evidences, either in any case or in the aggre gate, a Material Adverse Effect. Neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Junior Payment or agreed to do so except as permitted by subsection 7.5. 5.5 TITLE TO PROPERTIES; LIENS. -------------------------- Each Loan Party has (i) good, sufficient and legal title, subject only to Liens permitted under this Agreement and, with respect to Real Property Assets acquired after the Closing Date by such Loan Party from a Person other than a Loan Party, such defects in title as existed prior to such acquisition, to (in the case of fee interests in real property), (ii) valid leasehold interests, subject only to Liens permitted under this Agreement and, with respect to Real Property Assets acquired after the Closing Date by such Loan Party from a Person other than a Loan Party, such defects in title as existed prior to such acquisition, in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of its properties and assets reflected in the financial statements referred to in subsection 5.3 or in the most recent financial statements delivered pursuant to subsection 6.1, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 7.7. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. 108 5.6 LITIGATION; ADVERSE FACTS. ------------------------- There are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign that are pending or, to the knowledge of Company, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries and that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. Neither Company nor any of its Subsidiaries (i) is in violation of any applicable laws that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect, or (ii) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. 5.7 PAYMENT OF TAXES. ---------------- Except to the extent permitted by subsection 6.3, all material tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all material taxes, assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable. Company knows of no proposed tax assessment against Company or any of its Subsidiaries which is not being actively contested by Company or such Subsidiary in good faith and by appropriate proceedings; provided that such reserves or other appropriate -------- provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. 5.8 PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS; MATERIAL ------------------------------------------------------------------ CONTRACTS. --------- A. Neither Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the material obligations, covenants or conditions contained in any of its material Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. B. Neither Company nor any of its Subsidaries is a party to or is otherwise subject to any agreements or instruments the performance of which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect, or any charter or other internal restrictions which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. 109 5.9 GOVERNMENTAL REGULATION. ----------------------- Neither Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness for borrowed money or which may otherwise render all or any portion of the Obligations unenforceable. 5.10 SECURITIES ACTIVITIES. --------------------- A. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. B. Following application of the proceeds of each Loan, not more than 25% of the value of the assets (either of Company only or of Company and its Subsidiaries on a consolidated basis) subject to the provisions of subsection 7.2 or 7.7 or subject to any restriction contained in any agreement or instrument, between Company and any Lender or any Affiliate of any Lender, relating to Indebtedness and within the scope of subsection 8.2, will be Margin Stock. 5.11 EMPLOYEE BENEFIT PLANS. ---------------------- A. Except with respect to the Deferred Compensation Agreements, each of the Loan Parties and each of their respective ERISA Affiliates are in material compliance with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their material obligations under each Employee Benefit Plan. B. Except with respect to the Deferred Compensation Agreements, no ERISA Events have occurred or are reasonably expected to occur which individually or in the aggregate resulted in or might reasonably be expected to result in a liability of any of the Loan Parties or any of their respective ERISA Affiliates (unless no Loan Parties shall be jointly and severally liable therefor) in excess of $3,000,000 during the term of this Agreement. C. Except as disclosed on Schedule 5.11 annexed hereto and ------------- except to the extent required under Section 4980B of the Internal Revenue Code, no Employee Benefit Plan provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employees of any of the Loan Parties or any of their respective ERISA Affiliates (unless no Loan Parties shall be jointly and severally liable therefor). Except with respect to the Deferred Compensation Agreements, there are no material liabilities of any Loan Party under any of the plans listed on Schedule 5.11 annexed hereto that ------------- are not reflected in the consolidated financial statements of Company. 110 D. As of the most recent valuation date for any Pension Plan, the Amount of Unfunded Benefit Liabilities, individually or in the aggregate for all Pension Plans (excluding for purposes of such computation (1) any Pension Plan which has a negative Amount of Unfunded Benefit Liabilities and (2) any Pension Plan for which neither Company nor any other Loan Party would have any liability if the Pension Plan then terminated) does not exceed $6,000,000. E. With respect to the Deferred Compensation Agreements, (i) each of the Loan Parties and each of their respective ERISA Affiliates are in compliance with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder and have performed all obligations where the failure to do so would have a Material Adverse Effect, (ii) no ERISA Events have occurred or are reasonably expected to occur which individually or in the aggregate resulted in or might reasonably be expected to result in a liability of any of the Loan Parties or any of their respective ERISA Affiliates (unless no Loan Parties shall be jointly and severally liable therefor) which would have a Material Adverse Effect and (iii) there are no liabilities of any Loan Party that are not reflected in the consolidated financial statements of Company which would have a Material Adverse Effect. 5.12 CERTAIN FEES. ------------ Except as disclosed in Schedule 5.12 annexed hereto, no material ------------- broker's or finder's fee or commission will be payable with respect to this Agreement or any of the transactions contemplated hereby, and Company hereby indemnifies Lenders against, and agrees that it will hold Lenders harmless from, any claim, demand or liability for any such broker's or finder's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability. 5.13 ENVIRONMENTAL PROTECTION. ------------------------ A. Except as set forth in Schedule 5.13 annexed hereto: ------------- (i) the operations of the Loan Parties (including, without limitation, all operations and conditions at or in the Facilities) comply in all material respects with all Environmental Laws; (ii) each of the Loan Parties has obtained all Governmental Authorizations under Environmental Laws necessary to their respective operations, and all such Governmental Authorizations are in good standing, and each of the Loan Parties is in compliance with all material terms and conditions of such Governmental Authorizations; 111 (iii) no Loan Party has received (a) any notice or claim to the effect that it is or may be liable to any Person as a result of or in connection with any Hazardous Materials except as would not reasonably be expected to have a Material Adverse Effect or (b) any letter or request for information under Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. (S) 9604) or comparable state laws regarding any matter which could reasonably be expected to result in a Material Adverse Effect, and, to the best of Company's knowledge, none of the operations of any of the Loan Parties is the subject of any federal or state investigation relating to or in connection with any Hazardous Materials at any Facility or at any other location; (iv) none of the operations of any of the Loan Parties is subject to any judicial or administrative proceeding alleging the violation of or liability under any Environmental Laws which if adversely determined could reasonably be expected to have a Material Adverse Effect; (v) none of the Loan Parties or, to the best knowledge of Company, any predecessor of the Loan Parties has filed any notice under any Environmental Law indicating past or present treatment or Release of Hazardous Materials at any Facility except as would not reasonably be expected to have a Material Adverse Effect, and none of Loan Parties' operations involves the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent other than in compliance in all material respects with all applicable Environmental Laws; (vi) no Hazardous Materials exist on, under or about any Facility in a manner that has a reasonable possibility of giving rise to an Environmental Claim having a Material Adverse Effect, and no Loan Party has filed any notice or report of a Release of any Hazardous Materials that has a reasonable possibility of giving rise to an Environmental Claim having a Material Adverse Effect; (vii) none of the Loan Parties or, to the best knowledge of Company, any of its predecessors has disposed of any Hazardous Materials in a manner that has a reasonable possibility of giving rise to an Environmental Claim having a Material Adverse Effect; (viii) to the best knowledge of Company, no unpermitted underground storage tanks or surface impoundments are on or at any Facility; and (ix) no Lien in favor of any Person relating to or in connection with any Environmental Claim has been filed or has been attached to any Facility that has a reasonable possibility of having a Material Adverse Effect. 112 B. None of the Loan Parties or any of their respective Facilities or operations are subject to any outstanding written order or agreement with any governmental authority or private party relating to (a) any Environmental Laws or (b) any Environmental Claims which could reasonably be expected to result in a liability to Company or any of its Subsidiaries, after giving effect to indemnification provisions upon which Company is reasonably relying, in excess of $12,000,000 individually or in the aggregate. C. None of the Loan Parties has any contingent liability in connection with any Release of any Hazardous Materials by the Loan Parties which could reasonably be expected to result in a liability to Company or any of its Subsidiaries, after giving effect to indemnification provisions upon which Company is reasonably relying, in excess of $12,000,000 individually or in the aggregate. D. Except as set forth in Schedule 5.13 annexed hereto, no ------------- event or condition has occurred with respect to the Loan Parties relating to any Environmental Laws or any Release of Hazardous Materials at any Facility or any other location, which, individually, or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect. 5.14 EMPLOYEE MATTERS. ---------------- There is no strike or work stoppage in existence or threatened involving Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. 5.15 SOLVENCY. -------- Each Loan Party is and, upon the incurrence of any Obligations by such Loan Party on any date on which this representation is made, will be, Solvent. 5.16 MATTERS RELATING TO COLLATERAL. ------------------------------ A. CREATION, PERFECTION AND PRIORITY OF LIENS. The execution and delivery of the Collateral Documents by Loan Parties, together with (i) the actions taken on or prior to the date hereof pursuant to subsections 4.1I, 4.1J, 6.8 and 6.9 and (ii) the delivery to Agent of any Pledged Collateral not delivered to Agent at the time of execution and delivery of the applicable Collateral Document (all of which Pledged Collateral has been so delivered) are effective to create in favor of Agent for the benefit of Lenders, as security for the respective Secured Obligations (as defined in the applicable Collateral Document in respect of any Collateral), a valid and perfected first priority Lien on all of the Collateral, and all filings and other actions necessary or desirable to perfect and maintain the perfection and first priority status of such Liens have been duly made or taken and remain in full force and effect, other than the filing of any UCC financing statements delivered to Agent for filing (but not yet 113 filed) and the periodic filing of UCC continuation statements in respect of UCC financing statements filed by or on behalf of Agent. B. GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge or grant by any Loan Party of the Liens purported to be created in favor of Agent pursuant to any of the Collateral Documents or (ii) the exercise by Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by subsection 5.16A except as may be required, in connection with the disposition of any Pledged Collateral, by laws generally affecting the offering and sale of securities and except for such authorizations, approvals, other actions, notices or filings, the failure to have which could not reasonably be expected to result in a Material Adverse Effect. C. MARGIN REGULATIONS. The pledge of the Pledged Collateral pursuant to the Collateral Documents does not violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. D. INFORMATION REGARDING COLLATERAL. All information supplied to Agent by or on behalf of any Loan Party with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects. 5.17 RELATED AGREEMENTS. ------------------ A. DELIVERY OF RELATED AGREEMENTS. Company has delivered to Lenders complete and correct copies of each Related Agreement and of all exhibits and schedules thereto. B. WARRANTIES IN RECAPITALIZATION AND MERGER AGREEMENT. Except to the extent otherwise set forth herein or in the schedules hereto, each of the representations and warranties given by Yucaipa, Company or Smitty's in the Recapitalization and Merger Agreement is true and correct in all material respects as of the date hereof (or as of any earlier date to which such representation and warranty specifically relates) and will be true and correct in all material respects as of the Closing Date (or as of such earlier date, as the case may be), in each case subject to the qualifications set forth in the schedules to the Recapitalization and Merger Agreement. C. SURVIVAL. Notwithstanding anything in the Recapitalization and Merger Agreement to the contrary, the representations and warranties of Company set forth in subsections 5.17B shall, solely for purposes of this Agreement, survive the Closing Date for the benefit of Lenders. 114 5.18 PERMITS. ------- Except as disclosed in Schedule 5.18 annexed hereto, each of Company ------------- and its Subsidiaries, prior to and after giving effect to the Acquisition and Merger, has such certificates permits, licenses, franchises, consents, approvals, authorizations and clearances that are material to the condition (financial or otherwise), business or operations of any of Company and its Subsidiaries ("Permits") and is (and will be immediately after the consummation of the Acquisition and the Merger) in compliance in all material respects with all applicable laws as are necessary to own, lease or operate its properties and to conduct its businesses in substantially the manner as presently conducted and to be conducted immediately after the consummation of the Acquisition and Merger, and all such Permits are valid and in full force and effect and will be valid and in full force and effect immediately upon consummation of the Acquisition and Merger. Each of Company and its Subsidiaries, prior to and after giving effect to the Acquisition and Merger, is and will be in compliance in all material respects with its obligations under such Permits and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination of such Permits, except for any such revocation or termination which could not reasonably be expected to individually or in the aggregate have a Material Adverse Effect. 5.19 DISCLOSURE. ---------- No representation or warranty of Company, Smitty's or any of its Subsidiaries contained in any Loan Document or Related Agreement or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contem plated by this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. 5.20 REAL PROPERTY ASSETS. -------------------- Schedule 4.1I sets forth all of the Real Property Assets of Company ------------- or any of its Subsidiaries; Schedule 5.20A sets forth all of the Surplus Leased -------------- Properties of Company or any of its Subsidiaries; Schedule 5.20B sets forth all -------------- of the Surplus Owned Properties of 115 Company or any of its Subsidiaries; Schedule 5.20C sets forth all of the Excess -------------- California Land and the California Stores of Company or any of its Subsidiaries, in each case as of the Closing Date after giving effect to the Merger. SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. 6.1 FINANCIAL STATEMENTS AND OTHER REPORTS. -------------------------------------- Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Company will deliver to Agent and Lenders: (i) Fiscal Period Financials: as soon as available and in any ------------------------ event within 30 days (or, in the case of the first Fiscal Period ending after the Closing Date, 30 days after the end of the subsequent Fiscal Period, or in the case of the last Fiscal Period in any Fiscal Quarter (other than the last Fiscal Quarter in any Fiscal Year), 45 days, or in the case of the last Fiscal Period in any Fiscal Year, 90 days) after the end of each Fiscal Period ending after the Closing Date (a) the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Period and the related consolidated statements of income and cash flows of Company and its Subsidiaries for such Fiscal Period and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Period, setting forth in comparative form (1) other than for the first 12 months after the Closing Date, the corresponding figures for the consolidated balance sheet and the related consolidated statement of income for the corresponding periods of the previous Fiscal Year and (2) the corresponding figures for the consolidated balance sheet and the related consolidated statement of income from the Financial Plan for the current Fiscal Year, and (b) sales growth on a comparable store basis for each Regional Division for such Fiscal Period and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Period, setting forth in comparative form the corresponding figures from the Financial Plan for the current Fiscal Year, all in reasonable detail and certified by the chief financial officer of Company that they fairly present the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations for the periods indicated, subject to changes resulting from audit and normal year-end adjustments; 116 (ii) Quarterly Financials: as soon as available and in any event -------------------- within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year and within 90 days after the end of the fourth Fiscal Quarter of each Fiscal Year, (a) the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of income and cash flows of Company and its Subsidiaries for such Fiscal Quarter and for the period form the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in comparative form (1) other than for the first 12 months after the Closing Date, the corresponding figures for the corresponding periods of the previous Fiscal Year and (2) the corresponding figures from the Financial Plan for the current Fiscal Year, and (b) net sales and sales growth on a comparable store basis for each Regional Division for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in comparative form the corresponding figures from the Financial Plan for the current Fiscal Year, all in reasonable detail and certified by the chief financial officer of Company that they fairly present the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments; (iii) Year-End Financials: as soon as available and in any event ------------------- within 90 days after the end of each Fiscal Year (or, if an extension has been obtained from the Securities and Exchange Commission for filing such report after such 90th day, then on the date of delivery of such report to the Securities and Exchange Commission and in any event within 105 days after the end of such Fiscal Year), (a) the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Year, setting forth in each case except for the first Fiscal Year ended after the Closing Date in comparative form the corresponding figures for the previous Fiscal Year, and the corresponding figures from the Financial Plan for the Fiscal Year covered by such financial statements, all in reasonable detail and certified by the chief financial officer of Company that they fairly present the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, and (b) in the case of such consolidated financial statements, a report thereon of Ernst & Young LLP or other independent certified public accountants of recognized national standing selected by Company and satisfactory to Agent, which report shall be unqualified, shall express no doubts about the ability of Company and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present the consolidated financial position of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated 117 financial statements has been made in accordance with generally accepted auditing standards; (iv) Officers' and Compliance Certificates: (a) together with ------------------------------------- each delivery of financial statements of Company and its Subsidiaries pursuant to subdivisions (ii) and (iii) above, (1) an Officers' Certificate of Company stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such Officers' Certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Company has taken, is taking and proposes to take with respect thereto; and (2) a Compliance Certificate duly executed and duly completed in all respects; and (b) within 100 days after the beginning of each Fiscal Year and in any event on or prior to the date of any mandatory prepayments made pursuant to subsection 2.4B(iii)(e) during such Fiscal Year, an Officers' Certificate of Company setting forth the Consolidated Excess Cash Flow for the Fiscal Year covered by such financial statements and demonstrating in reasonable detail the derivation of such Consolidated Excess Cash Flow; (v) Reconciliation Statements: if, as a result of any change in ------------------------- accounting principles and policies from those used in the preparation of the audited financial statements referred to in subsection 5.3, the financial statements of Company and its Subsidiaries on a consolidated basis or any Regional Division delivered pursuant to subdivisions (i), (ii), (iii) or (xiii) of this subsection 6.1 will differ in any material respect from the financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made, then, subject to subsection 1.2, (a) together with the first delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 6.1 following such change, financial statements of Company and its Subsidiaries on a consolidated basis or, to the extent applicable, any Regional Division for the current Fiscal Year to the effective date of such change, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 6.1 following such change, such financial statements prepared on a basis consistent with the accounting principles and policies used in the preparation of the financial statements delivered immediately prior to such change; (vi) Accountants' Certification: together with each delivery of -------------------------- consolidated financial statements of Company and its Subsidiaries pursuant to subdivision (iii) above, a written statement by the independent certified public accountants giving the 118 report thereon (a) stating whether, in connection with their audit examination, any condition or event that constitutes an Event of Default or Potential Event of Default that relates to accounting matters has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; provided that such accountants shall not be liable by reason of any -------- failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examination, and (b) stating that based on their audit examination nothing has come to their attention that causes them to believe either or both that the information contained in the certificates delivered therewith pursuant to subdivision (iv) above is not correct; (vii) Accountants' Reports: promptly upon receipt thereof (unless -------------------- restricted by applicable professional standards), copies of all reports (other than reports of a routine or ministerial nature which are not material) submitted to Company by independent certified public accountants in connection with each annual, interim or special audit of the financial statements of Company and its Subsidiaries made by such accountants, including, without limitation, any comment letter submitted by such accountants to management in connection with their annual audit; (viii) SEC Filings and Press Releases: promptly upon the sending or ------------------------------ filing thereof, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Company to its security holders, (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority (other than reports of a routine or ministerial nature which are not material), and (c) all press releases and other statements made available generally by Company or any of its Subsidiaries to the public concerning material developments in the business of Company or any of its Subsidiaries; (ix) Events of Default, etc.: promptly upon any officer of ----------------------- Company obtaining knowledge (a) that a condition or event that constitutes an Event of Default or Potential Event of Default has occurred and is continuing, or becoming aware that any Lender has given any notice (other than to Agent) or taken any other action with respect to a claimed Event of Default or Potential Event of Default, (b) that any Person has given any notice to Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 8.2, (c) of any condition or event that would be required to be disclosed in a current report filed by Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) or (d) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, an Officers' Certificate specifying the nature and period of existence of such condition, event or change, or 119 specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Potential Event of Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; (x) Litigation or Other Proceedings: promptly upon any officer ------------------------------- of Company obtaining knowledge of (X) the institution of, or non- frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries (collectively, "PROCEEDINGS") not previously disclosed in writing by Company to Lenders or (Y) any material development in any Proceeding that, in any case: (1) if adversely determined, has a reasonable possibility of giving rise to a Material Adverse Effect; or (2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions to occur or which have occurred pursuant to the Loan Documents or the Related Agreements; written notice thereof together with such other information as may be reasonably available to Company to enable Lenders and their counsel to evaluate such matters; (xi) ERISA Events: promptly upon becoming aware of the ------------ occurrence of or forthcoming occurrence of any ERISA Event, a written notice specifying the nature thereof, what action Company, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (xii) ERISA Notices: with reasonable promptness, copies of (a) ------------- each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Company, any of its Subsidiaries or any of their respective ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; (b) all notices received by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (c) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan as Agent shall reasonably request; (xiii) Financial Plans: as soon as practicable and in any event no --------------- later than 30 days after the beginning of each Fiscal Year, a consolidated plan and financial forecast for such Fiscal Year (the "FINANCIAL PLAN" for such Fiscal Year) as customarily prepared by Company, including without limitation (a) forecasted balance sheets and forecasted statements of income and cash flows of Company and its Subsidiaries on a 120 consolidated basis and net sales growth on a comparable store basis for each Regional Division for such Fiscal Year, together with an explanation of the assumptions on which such forecasts are based, (b) forecasted statements of income and cash flows of Company and its Subsidiaies on aconsolidated basis for each Fiscal Period of such Fiscal Year, together with an explanation of the assumptions on which such forecasts are based, and (c) such other information and projections as any Lender may reasonably request; (xiv) Insurance: as soon as practicable and in any event by the ---------- last day of each Fiscal Year, an Officers' Certificate or other report, in each case in form and substance satisfactory to Agent, outlining all material insurance coverage maintained as of the date of such Officers' Certificate or report by Company and its Subsidiaries and all material insurance coverage planned to be maintained by Company and its Subsidiaries in the immediately succeeding Fiscal Year; (xv) Environmental Audits and Reports: as soon as practicable -------------------------------- following receipt thereof, copies of all environmental audits and reports (other than routine follow-up reports to matters previously disclosed to Lenders), whether prepared by personnel of Company or any of its Subsidiaries or by independent consultants, with respect to significant environmental matters at any Facility or which relate to an Environmental Claim which could reasonably be expected to result in a Material Adverse Effect; (xvi) Board of Directors: with reasonable promptness, written ------------------ notice of any change in the Board of Directors of Company; (xvii) New Subsidiaries: promptly upon any Person becoming a ---------------- Subsidiary of Company, a written notice setting forth with respect to such Person (a) the date on which such Person became a Subsidiary of Company and (b) all of the data required to be set forth in Schedule 5.1 ------------ annexed hereto with respect to all Subsidiaries of Company (it being understood that such written notice shall be deemed to supplement Schedule 5.1 annexed hereto for all purposes of this Agreement); ------------ (xviii) Margin Determination Certificate: concurrently with the -------------------------------- delivery of the financial statements required under subsections 6.1(ii) and 6.1(iii), Company shall deliver a Margin Determination Certificate; (xix) Schedules to the Security Agreement: as soon as available ----------------------------------- and in any event within 5 days after the end of each Fiscal Quarter, Company and the Subsidiary Guarantors shall deliver to Agent a supplement, if any, to Schedule 1(a), Schedule 1(b) and Schedule 1(h) to ------------- ------------- ------------- the Security Agreement and other statements and schedules required to be furnished pursuant to the Security Agreement; and 121 (xx) Other Information: with reasonable promptness, such other ----------------- information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender. 6.2 CORPORATE EXISTENCE, ETC. ------------------------- Except as permitted under subsection 7.7, Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business; provided, however that neither Company nor any of its Subsidiaries -------- ------- shall be required to preserve any such right or franchise if the Board of Directors of Company or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of Company or such Subsidiary, as the case may be, and if the loss thereof is not disadvantageous in any material respect to Company and its Subsidiaries, taken as a whole, or Lenders. 6.3 PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION. ---------------------------------------------- A. Company will, and will cause each of its Subsidiaries to, pay all material taxes, assessments and other governmental charges imposed upon it or any of its material properties or assets or in respect of any of its income, businesses or franchises before any material penalty accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any material penalty or fine shall be incurred with respect thereto; provided that -------- no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. B. Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Company or any of its Subsidiaries). 6.4 MAINTENANCE OF PROPERTIES; INSURANCE. ------------------------------------ A. Company will, and will cause its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material Collateral (without limiting any obligations under the Collateral Documents) and all other material properties used or useful in the business of Company and its Subsidiaries (including, without limitation, Intellectual Property) and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. Company will maintain or cause to be maintained, with financially sound and reputable insurance companies or associations or with self-insurance programs, in each case to the extent consistent with prudent business practices and customary in its industry, insurance with respect to its 122 properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds (including, in any event, business interruption insurance and, to the extent commercially reasonable, earthquake insurance) and in the amounts customarily carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses and owning similar properties in the same general geographic areas in which Company or any of its Subsidiaries operates. In addition, Company will maintain or cause to be maintained flood insurance with respect to each Flood Hazard Property (as defined in subsection 4.1I) included in the Collateral and located in a community that participates in the National Flood Insurance Program. All insurance relating to the Collateral shall comply with the insurance provisions of the Collateral Documents. B. In the event that Company or any of its Subsidiaries, in connection with any casualty or casualties involving assets of Company or any of its Subsidiaries, receives (a) proceeds of insurance (other than proceeds which are required to be paid to a landlord and which cannot be paid to a mortgagee or other lender to Company or its Subsidiaries in preference to payments to a landlord under leases existing as of the Closing Date and which proceeds are in fact paid to such landlord in accordance with the terms of such leases) in excess of $5,000,000 in connection with any one casualty, or (b) aggregate proceeds of insurance in excess of $15,000,000 from all such casualties (on a cumulative basis, net of any proceeds already used to restore the assets affected by such casualty or casualties or to make prepayments in accordance with subsection 2.4B(iii)(a)), Company shall immediately pay all such insurance proceeds (and not just such excess) over to Agent, and Agent shall hold such proceeds in an interest bearing account. Agent shall (i) so long as no Event of Default has occurred and is continuing, disburse all such insurance proceeds (and any earnings on amounts held in such interest bearing account) held by it to Company, in accordance with and subject to such customary terms, conditions and procedures as Agent shall require, for the sole purpose of restoring or replacing (or reimbursing Company or any of its Subsidiaries for restoration or replacement costs previously expended and for costs expended in obtaining such proceeds with respect to) the affected assets, or, (ii) at Company's option (or if otherwise required by subsection 2.4B(iii)(a)), apply such proceeds and such earnings for the purpose of making a prepayment in accordance with subsection 2.4. Company hereby authorizes Agent to make such prepayments with such proceeds and such earnings. If an Event of Default has occurred and is continuing, Agent may elect, in its sole and absolute discretion, (i) to apply all or any portion of such insurance proceeds and such earnings to the restoration of any of the Collateral, subject to conditions determined by Agent, (ii) to disburse any such insurance proceeds and such earnings to Company for the purposes set forth in the immediately preceding sentence, (iii) to hold such insurance proceeds and such earnings as additional Collateral under the Collateral Documents or (iv) to apply such insurance proceeds and such earnings as provided for in the Loan Documents. 6.5 INSPECTION; LENDER MEETING. -------------------------- Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties 123 of Company or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that representatives of Company or any of its Subsidiaries may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may be reasonably requested. Without in any way limiting the foregoing, Company will, upon the request of Agent or Requisite Lenders, participate in a meeting of Agent and Lenders once during each Fiscal Year to be held at Company's corporate offices (or such other location as may be agreed to by Company and Agent) at such time as may be agreed to by Company and Agent. 6.6 COMPLIANCE WITH LAWS, ETC. -------------------------- Company shall comply, and shall cause each of its Subsidiaries to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which could reasonably be expected to cause, individually or in the aggregate, a Material Adverse Effect. 6.7 ENVIRONMENTAL DISCLOSURE AND INSPECTION; REMEDIAL ACTION REGARDING ------------------------------------------------------------------ HAZARDOUS MATERIALS. - ------------------- A. Company shall, and shall cause its Subsidiaries to, exercise all due diligence in order to comply and cause (i) all tenants under any leases or occupancy agreements affecting any portion of the Facilities and (ii) all other Persons on or occupying such property, to comply with all Environmental Laws. B. Company agrees that Agent may, from time to time as Agent deems reasonably necessary, retain, at Company's expense, an independent professional consultant reasonably acceptable to Company to review any report relating to Hazardous Materials prepared by or for Company or any of its Subsidiaries and to conduct its own investigation of any Facility currently owned, leased, operated or used by Company or any of its Subsidiaries, and Company agrees to use its reasonable best efforts to obtain permission for Agent's professional consultant to conduct its own investigation of any Facility previously owned, leased, operated or used by Company or any of its Subsidiaries. Company hereby grants (to the extent it is authorized to do so) to Agent and its agents, employees, consultants and contractors the right to enter into or on to the Facilities currently owned, leased, operated or used by Company or any of its Subsidiaries to perform such tests on such property as are reasonably necessary to conduct such a review and/or investigation. Any such investigation of any Facility shall only be conducted, unless otherwise agreed to by such Person and Agent, during normal business hours and, to the extent reasonably practicable, shall be conducted so as not to interfere with the ongoing operations at any such Facility or to cause any damage or loss to any property at such Facility. Company and Agent hereby acknowledge and agree that any report of any investigation conducted at the request of Agent pursuant to this subsection 6.7B will be obtained and shall only be used by Agent and Lenders for the purposes of 124 Lenders' internal credit decisions, to monitor and police the Loans and to protect Lenders' security interests, if any, created by the Loan Documents. Agent agrees to deliver a copy of any such report to Company with the understanding that Company acknowledges and agrees that (i) it will indemnify and hold harmless Agent and each Lender from any costs, losses or liabilities relating to Company's or any of its Subsidiary's use of or reliance on such report, (ii) neither Agent nor any Lender makes any representation or warranty with respect to such report, and (iii) by delivering such report to Company, neither Agent nor any Lender is requiring or recommending the implementation of any suggestions or recommendations contained in such report. C. Company shall promptly advise Lenders in writing and in reasonable detail of (i) any Release of any Hazardous Materials at any Facility required to be reported to any federal, state or local governmental or regulatory agency under any applicable Environmental Laws, (ii) any and all written communications with any governmental authority or any adverse party with respect to any Environmental Claims that have a reasonable possibility of giving rise to a Material Adverse Effect or with respect to any Release of Hazardous Materials at any Facility required to be reported to any federal, state or local governmental or regulatory agency, (iii) any remedial action taken by Company or any of its Subsidiaries or any other Person in response to (x) any Hazardous Materials on, under or about any Facility, the existence of which has a reasonable possibility of resulting in an Environmental Claim having a Material Adverse Effect, or (y) any Environmental Claim that could reasonably be expected to result in a Material Adverse Effect, (iv) Company's or any of its Subsidiaries' discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Facility that could cause such Facility or any part thereof to be subject to any material restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws, and (v) any request for information from any governmental agency that suggests such agency is investigating whether Company or any of its Subsidiaries may be potentially responsible for a Release of Hazardous Materials. D. Company shall promptly notify Lenders of (i) any proposed acquisition of stock, assets, or property by Company or any of its Subsidiaries that could reasonably be expected to expose Company or any of its Subsidiaries to, or result in, Environmental Claims that could reasonably be expected to have a Material Adverse Effect or that could reasonably be expected to have a material adverse effect on any Governmental Authorization then held by Company or any of its Subsidiaries and (ii) any proposed action to be taken by Company or any of its Subsidiaries to commence manufacturing, industrial or other operations that could reasonably be expected to subject Company or any of its Subsidiaries to additional laws, rules or regulations which could reasonably be expected to have a Material Adverse Effect, including, without limitation, laws, rules and regulations requiring additional environmental permits or licenses. E. Company shall, at its own expense, provide copies of such documents or information as Agent may reasonably request in relation to any matters disclosed pursuant to this subsection 6.7. 125 F. Company shall promptly take, and shall cause its Subsidiaries promptly to take, the appropriate remedial action as requested or approved by the Governmental Authority having jurisdiction over the Facility at issue in connection with the presence, storage, use, disposal, transportation or Release of any Hazardous Materials on, under or about any Facility in order to comply with all applicable Environmental Laws and Governmental Authorizations. In the event Company or any of its Subsidiaries undertakes any remedial action with respect to any Hazardous Materials on, under or about any Facility, Company or such Subsidiary shall conduct and complete such remedial action in material compliance with all applicable Environmental Laws, and in accordance with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, Company's or such Subsidiary's liability for such presence, storage, use, disposal, transportation or discharge of any Hazardous Materials is being contested in good faith by Company or such Subsidiary. 6.8 EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL ----------------------------------------------------------------- DOCUMENTS BY FUTURE SUBSIDIARIES. -------------------------------- A. EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL DOCUMENTS. In the event that any Person becomes a Subsidiary (other than an Inactive Subsidiary) of Company after the date hereof, Company will promptly notify Agent of that fact and cause such Subsidiary to execute and deliver to Agent a counterpart of the Subsidiary Guaranty, a Pledge Agreement, a Security Agreement, Mortgages and a Trademark Security Agreement and to take all such further actions and execute all such further documents and instruments (including without limitation actions, documents and instruments comparable to those described in subsection 4.1J) as may be necessary or, in the opinion of Agent, desirable to create in favor of Agent, for the benefit of Lenders, a first-priority security interest (subject only to Liens permitted under this Agreement) in all of the real, personal and mixed property assets of such Subsidiary (other than with respect to Excluded Sites and other than any such assets which are subject to Liens permitted under subsection 7.2A(iv) and other Real Property Assets that such Subsidiary would not be obligated to pledge to Agent pursuant to subsection 6.9 (it being understood and agreed that all of the requirements of subsection 6.9 are applicable to the Real Property Assets of such Subsidiary, with the date such Subsidiary became a Subsidiary of Company being treated for purposes of subsection 6.9 as the date on which such Subsidiary acquired all of its Real Property Assets)) and (ii) the parent of such Subsidiary to execute and deliver to Agent a counterpart of the Pledge Agreement or a Pledge Amendment to the Pledge Agreement previously executed by such parent effecting the pledge by such parent to Agent of all of the capital stock of, or any other equity interest in, such Subsidiary. B. SUBSIDIARY CHARTER DOCUMENTS, LEGAL OPINIONS, ETC. Company shall deliver to Agent, together with such Loan Documents, (i) certified copies of such Subsidiary's Certificate or Articles of Incorporation, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation, each to be dated a recent date prior to their delivery to Agent, (ii) a copy of such Subsidiary's Bylaws, certified by its corporate 126 secretary or an assistant secretary as of a recent date prior to their delivery to Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the fact that the attached resolutions of the Board of Directors of such Subsidiary approving and authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Subsidiary executing such Loan Documents, (iv) the certificate or certificates evidencing all of the capital stock of (or, if certificated, any other equity interest in) such Subsidiary, and (v) if requested by Agent, a favorable opinion of counsel to such Subsidiary, in form and substance satisfactory to Agent and its counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such Loan Documents, (c) the enforceability of such Loan Documents against such Subsidiary, (d) such other matters (including without limitation matters relating to the creation and perfection of Liens in any Collateral pursuant to such Loan Documents) as Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to Agent and its counsel. 6.9 ADDITIONAL REAL PROPERTY. ------------------------ A. After the Closing Date, Company shall, and shall cause its Subsidiaries to, (I) with respect to each leasehold interest in Real Property Assets hereafter acquired by Company or any of its Subsidiaries (in either case, the "Lessee"), use its best efforts (which shall not be deemed to include the payment of monetary consideration other than nominal monetary consideration and out-of-pocket expenses incurred by any lessor in connection with obtaining the items listed below, but shall include efforts to include each of the items listed below in the terms of the lease itself) to obtain and deliver to Agent as soon as practicable, and if possible within four months after such acquisition, an agreement by the landlord substantially in the form of Exhibit XIX annexed hereto and ----------- in any event including the following: (A) the agreement of the lessor (if required under the lease) to the encumbrancing of such Lessee's leasehold interest under the lease pursuant to a Mortgage and to the assignment of such leasehold interest to Agent or its Affiliate following a default hereunder, and if the lease allows the lessor to unreasonably withhold consent to an assignment of the leasehold interest by Agent or its Affiliate to a subsequent third party assignee, the agreement of the lessor not to unreasonably withhold such consent, (B) the lessor's waiver of all right, title and interest in the Lessee's personal property and fixtures located on the leased premises, (C) a license from the lessor for Agent to enter upon the leased premises to take possession of or sell such personal property and fixtures or to exercise other remedies, whether or not the lease has been terminated, 127 (D) the lessor's agreement to give Agent written notice of any default by the Lessee under the lease, and not to terminate the lease unless Agent fails to cure the default within 30 days after receiving written notice from such lessor, or within any longer cure period set forth in the lease, and (E) an original memorandum of the lease executed and acknowledged by the lessor thereunder (or, in the case of an existing leasehold interest which is of record and which is acquired by the Lessee by assignment, a memorandum of or a recordable duplicate original of such assignment, executed and acknowledged by the assigning Lessee), in form sufficient to give constructive notice (when recorded) of the Lessee's leasehold interest under the lease to third-party purchasers and encumbrancers of the affected real property and otherwise in form reasonably satisfactory to Agent, together with evidence of its recordation in all places necessary or desirable, in the reasonable judgment of Agent, to give constructive notice of the Lessee's leasehold interest to third parties, and (II) with respect to each Real Property Asset in which Company or such Subsidiary acquires fee title or a leasehold interest after the Closing Date (in each case excluding any Real Property Asset which is, but only so long as it remains, (A) an Excluded Site, or (B) a leasehold interest as to which encumbrancing requires the consent of the lessor, where Company and its Subsidiaries have been unable to obtain the applicable lessor's consent thereto, or (C) an asset subject to a Lien permitted under subsection 7.2A(iv), (such non-excluded Real Property Assets being collectively referred to herein as the "COVERED REAL PROPERTY"), as soon as practicable and in any event within one month after the applicable Real Property Asset becomes Covered Real Property, deliver: (A) fully executed counterparts of a Mortgage, or an amendment to a Mortgage, in form satisfactory to Agent, which Mortgage or amendment shall encumber such Covered Real Property, together with evidence that counterparts of such Mortgage or amendment have been recorded in all places to the extent necessary or desirable, in the reasonable judgment of Agent, so as to effectively create a valid and enforceable first priority Lien (subject only to Permitted Encumbrances) on such Covered Real Property in favor of Agent (or such other trustee as may be required or desired under local law) for the benefit of Lenders, (B) if requested by Agent, a title report, title commitment or other title search satisfactory to Agent obtained by such Person in respect of such Covered Real Property, (C) if requested by Agent, an opinion of counsel (which counsel shall be reasonably satisfactory to Agent) in the state in which such Covered Real 128 Property is located with respect to the enforceability of the Mortgages recorded in such state and such other matters as Agent may request, in form and substance satisfactory to Agent, (D) in the case of each such Covered Real Property consisting of a leasehold interest, a copy of the lease (including all amendments thereto), together with such estoppel letters, consents, waivers and agreements from the lessor on such real property as were obtained pursuant to clause (i) above, (E) environmental audits prepared by professional consultants mutually acceptable to Company and Agent, in form, scope and substance satisfactory to Agent in its reasonable discretion, (F) if Company or any of its Subsidiaries obtains an owner's or lessee's policy of title insurance with respect to such Covered Real Property, or if requested by Agent with respect to any other Covered Real Property having an acquisition cost or value (as estimated by Agent) in excess of $2,000,000, a Title Insurance Policy, in an amount reasonably satisfactory to Agent, with respect to Agent's lien thereon, (G) information sufficient for Agent to determine whether (1) any such Real Property Asset is Flood Hazard Property and (2) the community in which each Flood Hazard Property is located is participating in the National Flood Insurance Program, (H) upon Company's or such Subsidiary's receipt of written notification from Agent (1) as to the existence of each such Flood Hazard Property and (2) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program, written acknowledgment of the receipt of such notification, and (I) the evidence of insurance with respect to such Real Property Asset required to be provided to Agent pursuant to the terms of the Mortgages, including flood insurance with respect to each Flood Hazard Property located in a community that is participating in the National Flood Insurance Program. Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by Agent to visit and inspect any Real Property Asset for the purpose of obtaining an appraisal of value, conducted by consultants retained by Agent in compliance with all applicable banking regulations. B. Upon the first anniversary of the Closing Date, Company shall, and shall cause its Subsidiaries to, 129 with respect to (x) each Surplus Leased Property then leased by Company or any of its Subsidiaries (in either case, the "Lessee") with a fair market value of $1,000,000 or greater, and (y) if the aggregate fair market value of all Surplus Leased Properties with a positive fair market value of less than $1,000,000 exceeds $5,000,000, all such Surplus Leased Properties with a positive fair market value, (i) use its best efforts (which shall not be deemed to include the payment of monetary consideration other than nominal monetary consideration and out-of-pocket expenses incurred by any lessor in connection with obtaining the items listed below) to obtain and deliver to Agent as soon as practicable, an agreement by the landlord substantially in the form of Exhibit ------- XIX annexed hereto and in any event including the following: - --- (A) the agreement of the lessor (if required under the lease) to the encumbrancing of such Lessee's leasehold interest under the lease pursuant to a Mortgage and to the assignment of such leasehold interest to Agent or its Affiliate following a default hereunder, and if the lease allows the lessor to unreasonably withhold consent to an assignment of the leasehold interest by Agent or its Affiliate to a subsequent third party assignee, the agreement of the lessor not to unreasonably withhold such consent, (B) the lessor's waiver of all right, title and interest in the Lessee's personal property and fixtures located on the leased premises, (C) a license from the lessor for Agent to enter upon the leased premises to take possession of or sell such personal property and fixtures or to exercise other remedies, whether or not the lease has been terminated, (D) the lessor's agreement to give Agent written notice of any default by the Lessee under the lease, and not to terminate the lease unless Agent fails to cure the default within 30 days after receiving written notice from such lessor, or within any longer cure period set forth in the lease, and (E) an original memorandum of the lease executed and acknowledged by the lessor thereunder (or, in the case of an existing leasehold interest which is of record and which is acquired by the Lessee by assignment, a memorandum of or a recordable duplicate original of such assignment, executed and acknowledged by the assigning Lessee), in form sufficient to give constructive notice (when recorded) of the Lessee's leasehold interest under the lease to third-party purchasers and encumbrancers of the affected real property and otherwise in form reasonably satisfactory to Agent, together with evidence of its recordation in all places necessary or desirable, in the reasonable judgment of Agent, to give constructive notice of the Lessee's leasehold interest to third parties, and 130 (II) except with respect to a leasehold interest as to which the consent of a lesser is required, where Company and the Subsidiaries have been unable to deliver the applicable consent thereto, deliver: (A) fully executed counterparts of a Mortgage, or an amendment to a Mortgage, in form satisfactory to Agent, which Mortgage or amendment shall encumber such Surplus Leased Property, together with evidence that counterparts of such Mortgage or amendment have been recorded in all places to the extent necessary or desirable, in the reasonable judgment of Agent, so as to effectively create a valid and enforceable first priority Lien (subject only to Permitted Encumbrances) on such Surplus Leased Property in favor of Agent (or such other trustee as may be required or desired under local law) for the benefit of Lenders, (B) if requested by Agent and if then in the possession or control of Company, environmental audits prepared by professional consultants, (C) information sufficient for Agent to determine whether (1) any such Surplus Leased Property is Flood Hazard Property and (2) the community in which each Flood Hazard Property is located is participating in the National Flood Insurance Program, (D) upon Company's or such Subsidiary's receipt of written notification from Agent (1) as to the existence of each such Flood Hazard Property and (2) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program, written acknowledgment of the receipt of such notification, and (E) the evidence of insurance with respect to such Real Property Asset required to be provided to Agent pursuant to the terms of the Mortgages, including flood insurance with respect to each Flood Hazard Property located in a community that is participating in the National Flood Insurance Program. Upon the written request of Agent, Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by Agent to visit and inspect any Real Property Asset for the purpose of obtaining an appraisal of value, conducted by consultants retained by Agent in compliance with all applicable banking regulations. 6.10 INTEREST RATE PROTECTION. ------------------------ Within 90 days of the Closing Date, Company shall obtain, and shall thereafter cause to be maintained for a period of not less than two years after the date Company first obtained such agreements, one or more Interest Rate Agreements with respect to the Loans in 131 an aggregate notional principal amount of not less than $260,000,000, each such Interest Rate Agreement to be in form and substance satisfactory to Agent and Arrangers. SECTION 7. COMPANY'S NEGATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 7. 7.1 INDEBTEDNESS. ------------ Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (i) Company may become and remain liable with respect to the Obligations; (ii) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations permitted by subsection 7.4 and, upon any matured obligations actually arising pursuant thereto, the Indebtedness corresponding to the Contingent Obligations so extinguished; (iii) Company and its Subsidiaries may become and remain liable with respect to Indebtedness in respect of Capital Leases; provided that -------- such Capital Leases are permitted under the terms of subsection 7.9; (iv) Company may become and remain liable with respect to Indebtedness to any of its wholly-owned Subsidiaries, and any wholly- owned Subsidiary of Company may become and remain liable with respect to Indebtedness to Company or any other wholly-owned Subsidiary of Company; provided that (a) all such intercompany Indebtedness shall be evidenced -------- by promissory notes that are pledged to Agent pursuant to the terms of the applicable Collateral Documents, (b) all such intercompany Indebtedness owed by Company to any of its Subsidiaries or by any Subsidiary to Company shall be subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes or an intercompany subordination agreement, in each case approved by Agent, and (c) any payment by any Subsidiary of Company under any guaranty of the Obligations shall result in a pro tanto --- ----- reduction of the amount of any intercompany Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made; 132 (v) Company and its Subsidiaries, as applicable, may remain liable with respect to each of the items of existing Indebtedness described in Schedule 7.1 annexed hereto and any Indebtedness incurred to ------------ refinance such existing Indebtedness; provided that after giving effect -------- to such refinancing Indebtedness and the repayment of the corresponding existing Indebtedness with the proceeds thereof, (a) the aggregate principal amount of the refinancing Indebtedness and the corresponding existing Indebtedness so refinanced shall not be greater than the outstanding principal amount of such existing Indebtedness immediately prior to such refinancing, (b) the weighted average life to maturity of such refinancing Indebtedness shall be no shorter than the existing Indebtedness being refinanced and (c) such refinancing Indebtedness shall not be secured by any additional property than that which secures the existing Indebtedness being refinanced; (vi) Company may become and remain liable with respect to Indebtedness evidenced by the Senior Subordinated Notes in an aggregate principal amount not to exceed $575,000,000; (vii) Company and its Subsidiaries may become and remain liable with respect to Indebtedness incurred to finance (or may assume Indebtedness originally incurred to finance) (a) the purchase price of equipment, fixtures and any other similar property or the remodeling or other improvement costs of any facility of Company or any of its Subsidiaries or (b) the purchase price of any Real Property Assets consisting of fee interests in stores; provided that the aggregate -------- principal amount of such Indebtedness when incurred (and, in the case of assumed Indebtedness, when originally incurred) shall not be less than 80% or more than 100% of the fair market value of (i) the equipment, fixtures and any other similar property acquired plus the reasonable installation and delivery charges associated therewith or the remodeling or other improvement costs relating to such facility or (ii) such Real Property Assets, as applicable; provided further that (1) the aggregate -------- ------- principal amount of all such Indebtedness incurred or assumed during any Fiscal Year for purposes described in the first clause (a) of this subsection 7.1(vii) shall not exceed $20,000,000 and (2) the aggregate principal amount of all Indebtedness incurred to finance the purchase price of any such Real Property Assets (together with assumed Indebtedness originally incurred to finance the purchase price of any such Real Property Assets) shall not exceed $10,000,000 at any time; (viii) Company may become and remain liable with respect to unsecured Indebtedness so long as each of the following conditions is satisfied: (A) Company becomes liable with respect to such Indebtedness concurrently with the termination of a lease of a Related Asset or the transfer to Company of either (i) an unencumbered fee interest in a Related Asset by the Owner Trustee or (ii) the proceeds realized by the Owner Trustee or Company from the sale of a Related Asset (such proceeds, the "Related Asset Proceeds"); (B) the principal amount of such Indebtedness does not exceed the then outstanding amount of indebtedness incurred by the Owner Trustee to 133 acquire such Related Asset (the "Related Asset Notes"), the interest rate on such Indebtedness does not exceed the interest rate on the Related Asset Notes, the final stated maturity of, and interim amortization of, such Indebtedness are on the dates and in the amounts required with respect to the Related Asset Notes and the other terms and conditions governing such Indebtedness are substantially the same as the terms and conditions governing the Related Asset Notes, in each case as such rate, final maturity date, amortization schedule and other terms and conditions are in effect on the Closing Date; (C) if the Related Assets are transferred to Company, Company closes an Asset Sale selling the Related Assets so transferred not later than 90 days after such Related Assets are transferred to Company; (D) the Net Asset Sale Proceeds of the Asset Sale of the Related Assets or the Related Asset Proceeds, as the case may be, are applied by Company to permanently reduce the outstanding principal amount of Indebtedness of Company under this Agreement pursuant to subsection 2.4B(iii)(a) within the third Business Day following the date of receipt by Company of such Net Asset Sale Proceeds or Related Asset Proceeds and without regard to any exclusions permitted pursuant to clauses (i)-(vi) of the proviso therein contained; and (E) the outstanding principal amount of the Indebtedness permitted pursuant to this clause (viii) minus the sum of the Net Asset Sales Proceeds of all ----- Asset Sales of Related Assets and all Related Asset Proceeds which have been applied pursuant to the foregoing clause (D) shall not at any time exceed $25,000,000; (ix) Company and its Subsidiaries may become and remain liable with respect to Indebtedness represented by Deferred Trade Payables in an aggregate amount for all such Indebtedness not to exceed $5,000,000 at any time outstanding; (x) Subsidiaries of Company acquired after the Closing Date, the acquisition of which is permitted under this Agreement, may remain liable with respect to Indebtedness existing immediately prior to the time any such entity became a Subsidiary of Company in an aggregate amount for all such Subsidiaries not to exceed $4,000,000 at any time outstanding; provided that such Indebtedness is not incurred in contemplation of such -------- acquisition; and (xi) Company and its Subsidiaries may become and remain liable with respect to other Indebtedness in an aggregate principal amount not to exceed $10,000,000 at any time outstanding. 7.2 LIENS AND RELATED MATTERS. ------------------------- A. PROHIBITION ON LIENS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien 134 with respect to any such property, asset, income or profits under the Uniform Commercial Code of any State or under any similar recording or notice statute, except: (i) Permitted Encumbrances; (ii) Liens granted pursuant to the Collateral Documents, including Liens securing its obligations to one or more Interest Rate Exchangers; (iii) existing Liens described in Schedule 7.2 annexed hereto; ------------ (iv) Liens on (a) Real Property Assets consisting of fee interests in stores or (b) equipment, fixtures and other similar property of Company or any of its Subsidiaries, in each case securing Indebtedness described in subsections 7.1(iii) and 7.1(vii); provided that such Liens -------- shall extend only to the equipment, fixtures and other similar property so financed and the proceeds thereof; provided, further, that with -------- ------- respect to any such Lien described in clause (a) above, (1) no Event of Default or Potential Event of Default shall have occurred and be continuing at the time of incurrence or assumption of such Lien, (2) such Lien is limited to such Real Property Assets (and equipment located in or on such Real Property Assets), (3) the Indebtedness secured by such Lien is Non-Recourse Indebtedness, and (4) the aggregate principal amount of all Indebtedness secured by all such Liens shall not at any time exceed $10,000,000; (v) other Liens securing Indebtedness in an aggregate amount not to exceed $5,000,000 at any time outstanding; provided that (a) any such -------- Indebtedness shall be permitted under subsection 7.1 and (b) such Liens shall not attach to any Collateral; (vi) Liens securing Indebtedness permitted under subsection 7.1(x), which Liens are existing prior to the time the entity which incurred such Indebtedness became a Subsidiary of Company; provided that -------- such Liens were not incurred in connection with, or in contemplation of, the acquisition of such Subsidiary and such Liens extend to or cover only the property and assets of such entity which were covered by such Liens and which were owned by such entity, in each case at the time such entity became a Subsidiary of Company; (vii) Liens in favor of third parties as consignors (or as creditors of such consignors) in goods which are delivered to Company or any of its Subsidiaries by such third parties on consignment in the ordinary course of business, the value of which goods so held on consignment shall at no time exceed $8,000,000 in the aggregate for Company and its Subsidiaries; and (viii) the replacement, extension or renewal of any Lien permitted by this subsection 7.2A upon or in the same property subject to such Lien and as security for the same obligations or any refinancings thereof; provided that such Lien does not -------- 135 extend to or cover any property other than the property covered by such Lien immediately prior to such replacement, extension or renewal of such Lien and the principal of the obligations secured thereby is not increased. B. EQUITABLE LIEN IN FAVOR OF LENDERS. If Company or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Liens excepted by the provisions of subsection 7.2A, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; provided that, notwithstanding the foregoing, -------- this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not permitted by the provisions of subsection 7.2A. C. NO FURTHER NEGATIVE PLEDGES. Except with respect to specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to an Asset Sale or as may be provided for in the Senior Subordinated Note Indenture, neither Company nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. The foregoing shall not prohibit the execution or renewal of a store lease which by its terms prohibits the hypothecation of the leasehold interest thereunder (but does not prohibit the incurrence of liens on any property of Company and its Subsidiaries other than such leasehold interest and equipment related thereto) if, despite the best efforts of Company and its Subsidiaries in accordance with subsection 6.9, the lessor will not agree to permit such hypothecation. 7.3 INVESTMENTS; JOINT VENTURES. --------------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any Joint Venture, except: (i) Company and its Subsidiaries may make and own Investments in Cash Equivalents; (ii) Company and its Subsidiaries may continue to own the Investments owned by them as of the Closing Date in any Subsidiaries of Company and described on Schedule 5.1 annexed hereto as in effect on the ------------ Closing Date; (iii) Company and its Subsidiaries may make intercompany loans to the extent permitted under subsection 7.1(iv); (iv) Company and its Subsidiaries may create or acquire new Subsidiaries to the extent otherwise permitted under this Agreement; provided that (a) any such new Subsidiary is wholly-owned by Company or -------- one of its wholly-owned Subsidiaries and the provisions of subsections 6.8 and 6.9 have been complied with and (b) to the 136 extent such creation or acquisition constitutes a Consolidated Capital Expenditure, such Consolidated Capital Expenditure is permitted under subsection 7.8; (v) Company and its Subsidiaries may continue to own the existing Investments owned by them and described in Schedule 7.3 annexed ------------ hereto; (vi) Company or any of its Subsidiaries may, so long as no Potential Event of Default or Event of Default has occurred and is continuing or occurs as a result thereof, make Development Investments in or to any Developer; provided that (a) no such Development Investment -------- shall be permitted unless, at the time of the making of such Development Investment, the Development Site and the store located or to be located at the Development Site have been leased or irrevocably committed by the Developer to be leased to Company or one of its Subsidiaries, (b) neither Company nor any of its Subsidiaries may be or become a general partner of any Developer or otherwise be liable in any manner for any Indebtedness or any other obligations of any Developer (other than pursuant to customary provisions contained in any lease pertaining to a Development Site or a store leased to Company or one of its Subsidiaries) and (c) the aggregate Development Investments, together with the maximum aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all Contingent Obligations under subsection 7.4(viii), shall not exceed $30,000,000 at any time outstanding; (vii) Company and its Subsidiaries may make and own Investments received in connection with the bankruptcy of suppliers and customers or received pursuant to a plan of reorganization of any supplier or customer, in each case in settlement of delinquent obligations or disputes with such suppliers or customers; (viii) So long as no Event of Default or Potential Event of Default shall have occurred and be continuing, Company or any of its Subsidiaries may make loans to its employees for the purpose of purchasing Common Stock of Company; provided that the aggregate amount of such loans shall -------- not exceed $4,000,000 at any time outstanding; (ix) Company and its Subsidiaries may accept promissory notes received in consideration of, or the deferral of a portion of the sales price accepted with respect to, any Asset Sale other than California Asset Sales; provided that (a) the aggregate principal amount of such -------- promissory notes and the deferred portion of such sales prices related to all Asset Sales other than California Asset Sales shall not at any time exceed $10,000,000 and (b) any such promissory notes so accepted shall be pledged as security for the Obligations pursuant to the applicable Collateral Document; (x) Company or any of its Subsidiaries may, so long as no Potential Event of Default or Event of Default has occurred and is continuing or occurs as a result thereof, make California Development Investments; provided that (a) neither Company -------- 137 nor any of its Subsidiaries may be or become a general partner of any Developer or otherwise be liable in any manner for any Indebtedness or any other obligations of any Developer (other than pursuant to customary provisions contained in any lease pertaining to a Development Site); (b) the aggregate California Development Investments, together with the maximum aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all Contingent Obligations under subsection 7.4(ix), shall not exceed $30,000,000 at any time outstanding; (c) California Development Investments may be made in cash only with respect to Excess California Land or California Stores which are then subject to an executed contract of sale or lease with a party not an Affiliate of Company and the aggregate amount of all such cash California Development Investments shall not exceed $15,000,000 at any time outstanding; provided that up to $5,000,000 in California Development Investments may -------- be made in cash with respect to Excess California Land or California Stores which are not then subject to such an executed contract of sale or lease; (xi) Company and its Subsidiaries may accept promissory notes received in consideration of, or the deferral of a portion of the sales price accepted with respect to, any California Asset Sales; provided that -------- the aggregate principal amount of such promissory notes and the deferred portion of such sales prices related to California Asset Sales shall not exceed (x) 25% of the aggregate sales prices related to California Asset Sales until Company and its Subsidiaries have received the first $33,800,000 in Net Asset Sale Proceeds from California Asset Sales, and (y) 35% of the aggregate sales prices related to California Asset Sales made after receipt by Company and its Subsidiaries of such $33,800,000; and any such promissory notes so accepted shall be pledged as security for the Obligations pursuant to the applicable Collateral Document; (xii) Company and its Subsidiaries may make loans to redevelopment agencies for business purposes in an aggregate amount not to exceed $5,000,000 at any time outstanding; (xiii) Company and its Subsidiaries may make and own Investments (a) in suppliers in anticipation of becoming a customer of such suppliers and in lieu of deposits, cash discounts or concessions and (b) in connection with joint ventures with suppliers entered into in the ordinary course of business; provided that the aggregate amount of all -------- such Investments under clauses (a) and (b), together with the amount of guarantees permitted under subsection 7.4(v), shall not exceed $5,000,000 at any time outstanding; and (xiv) Company and its Subsidiaries may make and own other Investments in an aggregate amount not to exceed at any time $5,000,000. 138 7.4 CONTINGENT OBLIGATIONS. ---------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or become or remain liable with respect to any Contingent Obligation, except: (i) Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect of the Subsidiary Guaranty, including Contingent Obligations thereunder for the benefit of Interest Rate Exchangers; (ii) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of Letters of Credit; (iii) Company may become and remain liable with respect to Contingent Obligations under Hedge Agreements required under subsection 6.10 and under other Hedge Agreements with respect to Indebtedness, which Hedge Agreements are in form and substance satisfactory to Agent; (iv) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of customary indemnification and purchase price adjustment obligations incurred in connection with Asset Sales or other sales of assets other than guaranties of Indebtedness incurred by any Person acquiring all or any portion of such assets for the purpose of financing such acquisition; provided that the maximum assumable liability in respect of all such -------- obligations shall at no time exceed the gross proceeds actually received by Company and its Subsidiaries in connection with such Asset Sales and other sales; (v) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations under guarantees in the ordinary course of business of the obligations of suppliers, customers, franchisees and licensees of Company and its Subsidiaries in an aggregate amount which, together with the amount of Investments permitted under subsection 7.3(xiii), shall not to exceed at any time $5,000,000; (vi) Company may become and remain liable with respect to Contingent Obligations under guarantees in respect of Operating Leases and Capital Leases entered into by Company or any of its Subsidiaries which are permitted under subsection 7.9; (vii) Company and its Subsidiaries, as applicable, may remain liable with respect to existing Contingent Obligations described in Schedule 7.4 annexed hereto; ------------ (viii) Company and its Subsidiaries may, so long as no Potential Event of Default or Event of Default has occurred and is continuing at the time of becoming liable therefor or occurs as a result thereof, become and remain liable with respect to Contingent Obligations that are (x) guaranties of Development Investments described 139 in clause (a) of the term "Development Investments" or (y) commitments by Company or any of its Subsidiaries to make a Development Investment; provided that, with respect to both clause (x) and clause (y) above, (1) -------- no such Contingent Obligations shall be permitted unless, at the time of becoming liable with respect to such Contingent Obligations, the Development Site and the store located or to be located at the Development Site have been leased or irrevocably committed by the Developer to be leased to Company or one of its Subsidiaries, (2) neither Company nor any of its Subsidiaries may be or become a general partner of any Developer or otherwise be liable in any manner for any Indebtedness or any other obligations of any Developer (other than pursuant to customary provisions contained in any lease pertaining to a Development Site or a store leased to Company or one of its Subsidiaries) and (3) the maximum aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all Contingent Obligations under this subsection 7.4(viii), together with the aggregate Development Investments under subsection 7.3(vi), shall not exceed $30,000,000 at any time outstanding; (ix) Company and its Subsidiaries may, so long as no Potential Event of Default or Event of Default has occurred and is continuing at the time of becoming liable therefor or occurs as a result thereof, become and remain liable with respect to Contingent Obligations that are (x) guaranties of California Development Investments described in clause (a) of the term "California Development Investments" or (y) commitments by Company or any of its Subsidiaries to make a California Development Investment; provided that, with respect to both clauses (x) and (y) -------- above, (1) no such Contingent Obligations shall be permitted unless, at the time of becoming liable with respect to such Contingent Obligations, neither Company nor any of its Subsidiaries may be or become a general partner of any Developer or otherwise be liable in any manner for any Indebtedness or any other obligations of any Developer (other than pursuant to customary provisions contained in any lease pertaining to a Development Site) and (2) the maximum aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all Contingent Obligations under this subsection 7.4(ix), together with the aggregate California Development Investments under subsection 7.3(x), shall not exceed $30,000,000 at any time outstanding; (x) Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect of subordinated guaranties in respect of the Senior Subordinated Notes in the form attached to, and to the extent required to be made in accordance with the terms and conditions of, the Senior Subordinated Note Indenture as in effect on the Closing Date; and (xi) Company and its Subsidiaries may become and remain liable with respect to other Contingent Obligations; provided that the maximum aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all such Contingent Obligations shall at no time exceed $7,000,000. 140 7.5 RESTRICTED JUNIOR PAYMENTS; OTHER RESTRICTED PAYMENTS. ----------------------------------------------------- A. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; provided that, so long as no Event of -------- Default or Potential Event of Default shall have occurred and be continuing or occurs as a result thereof: (i) on the Closing Date, Company may purchase for cash up to approximately 13,400,000 shares in aggregate of Company's Class A Common Stock and Class B Common Stock outstanding prior to the Closing Date (including certain Existing Management Stock Options) for an aggregate price not exceeding $465,000,000 pursuant to the Equity Tender Offer; (ii) on the Closing Date, Company may redeem for cash up to approximately 3,000,000 shares of its Redeemable Preferred Stock for an aggregate redemption price not exceeding $1,000,000 pursuant to the Recapitalization and Merger Agreement; (iii) on the Closing Date, Smitty's may redeem the Existing Smitty's Subordinated Notes for an aggregate redemption price not exceeding $50,000,000, plus the payment of accrued but unpaid interest thereon and premiums and consent payments with respect thereto, as described in the Smitty's Debt Purchase Offers; (iv) Company may redeem its Redeemable Preferred Stock at the times and in the amounts required under its Restated Articles of Incorporation as in effect on the Closing Date; (v) Company may make regularly scheduled payments of interest in respect of the Senior Subordinated Notes in accordance with the terms of, and only to the extent required by, and subject to the subordination provisions contained in, the Senior Subordinated Note Indenture; and (vi) Company may make regularly scheduled payments of interest in respect of Subordinated Indebtedness (other than the Senior Subordinated Notes) in accordance with the terms of, and only to the extent required by, and subject to the subordination provisions contained in, the agreements, documents and indentures evidencing and/or relating to such Subordinated Indebtedness. Neither Company nor any of its Subsidiaries will directly or indirectly declare, order, pay or make, or set apart any sum or property for, any Restricted Junior Payment or agree to do so except as permitted by this subsection 7.5. B. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in- substance or legal defeasance), sinking fund or similar payment with respect to, any Senior Indebtedness; provided that, so long as no Event of Default or -------- Potential Event of Default shall have occurred and be continuing or occurs as a result thereof, (i) Company may make payments of regularly scheduled interest in respect of any Senior Indebtedness (other than Existing Smitty's Sinking Fund Bonds) in accordance with the terms of and to the extent required by the applicable Senior Debt Indenture and (ii) Saint Lawrence Holding Company may make regularly scheduled interest and sinking fund payments in respect of any Existing Smitty's Sinking Fund Bonds in accordance with the terms of and to the extent required by the Existing Smitty's Sinking Fund Bond Indenture. 141 7.6 FINANCIAL COVENANTS. ------------------- A. MINIMUM FIXED CHARGE COVERAGE RATIO. Company shall not permit the ratio of (i) the sum of Consolidated Adjusted EBITDA plus Consolidated Rental Payments to (ii) Consolidated Fixed Charges (a) for the Fiscal Quarter ending September 28, 1996, to be less than 1.20:1.00, (b) for the two-Fiscal Quarter period ending December 28, 1996 to be less than 1.25:1.00, (c) for the three-Fiscal Quarter period ending April 5, 1997, to be less than 1.25:1.00, and (d) thereafter, for any consecutive four-Fiscal Quarter period ending as of the last day of any Fiscal Quarter set forth below to be less than the correlative ratio indicated:
MINIMUM FIXED PERIOD CHARGE COVERAGE RATIO --------------------------------- --------------------- Second Fiscal Quarter 1997 1.25:1.00 Third Fiscal Quarter 1997 1.20:1.00 Fourth Fiscal Quarter 1997 1.20:1.00 First Fiscal Quarter 1998 1.20:1.00 Second Fiscal Quarter 1998 1.20:1.00 Third Fiscal Quarter 1998 1.20:1.00 Fourth Fiscal Quarter 1998 1.25:1.00 First Fiscal Quarter 1999 1.25:1.00 Second Fiscal Quarter 1999 1.25:1.00 Third Fiscal Quarter 1999 1.25:1.00 Fourth Fiscal Quarter 1999 1.25:1.00 First Fiscal Quarter 2000 1.25:1.00 Second Fiscal Quarter 2000 1.25:1.00 Third Fiscal Quarter 2000 1.25:1.00 Fourth Fiscal Quarter 2000 1.25:1.00 First Fiscal Quarter 2001 1.30:1.00 Second Fiscal Quarter 2001 1.30:1.00 Third Fiscal Quarter 2001 1.30:1.00 Fourth Fiscal Quarter 2001 1.30:1.00 First Fiscal Quarter 2002 1.30:1.00 Second Fiscal Quarter 2002 1.30:1.00 Third Fiscal Quarter 2002 1.30:1.00 Fourth Fiscal Quarter 2002 1.30:1.00
142 First Fiscal Quarter 2003 1.35:1.00 Second Fiscal Quarter 2003 1.35:1.00 Third Fiscal Quarter 2003 1.35:1.00 Fourth Fiscal Quarter 2003 1.20:1.00 First Fiscal Quarter 2004 1.20:1.00 Second Fiscal Quarter 2004 1.20:1.00 Third Fiscal Quarter 2004 1.20:1.00 Fourth Fiscal Quarter 2004 1.20:1.00 First Fiscal Quarter 2005 1.20:1.00 Second Fiscal Quarter 2005 1.20:1.00 Third Fiscal Quarter 2005 1.20:1.00
B. MAXIMUM LEVERAGE RATIO. Company shall not permit the ratio of (i)(A) Consolidated Total Debt as of September 28, 1996, December 28, 1996, and April 5, 1997, respectively, to (B) Consolidated Adjusted EBITDA multiplied by ------------- (a) for the Fiscal Quarter ending September 28, 1996, 4.000, (b) for the two- Fiscal Quarters ending December 28, 1996, 2.000 and (c) for the three-Fiscal Quarters ending April 5, 1997, 1.325, (x) for the Fiscal Quarter ending September 28, 1996, to exceed 7.1:1.00, (y) for the two-Fiscal Quarter period ending December 28, 1996 to exceed 6.40:1.00 and (2) for the three-Fiscal Quarter period ending April 5, 1997 to exceed 6.20:1.00, and (ii) (A) Consolidated Total Debt as of the last day of any Fiscal Quarter set forth below to (B) Consolidated Adjusted EBITDA for the four-Fiscal Quarter period ending on such last day to exceed the correlative ratio indicated:
PERIOD MAXIMUM LEVERAGE RATIO --------------------------------- --------------------------- Second Fiscal Quarter 1997 5.90:1.00 Third Fiscal Quarter 1997 5.60:1.00 Fourth Fiscal Quarter 1997 5.50:1.00 First Fiscal Quarter 1998 5.40:1.00 Second Fiscal Quarter 1998 5.20:1.00 Third Fiscal Quarter 1998 5.10:1.00 Fourth Fiscal Quarter 1998 4.90:1.00 First Fiscal Quarter 1999 4.80:1.00 Second Fiscal Quarter 1999 4.70:1.00 Third Fiscal Quarter 1999 4.60:1.00 Fourth Fiscal Quarter 1999 4.50:1.00
143 First Fiscal Quarter 2000 4.40:1.00 Second Fiscal Quarter 2000 4.30:1.00 Third Fiscal Quarter 2000 4.20:1.00 Fourth Fiscal Quarter 2000 4.10:1.00 First Fiscal Quarter 2001 4.00:1.00 Second Fiscal Quarter 2001 3.90:1.00 Third Fiscal Quarter 2001 3.80:1.00 Fourth Fiscal Quarter 2001 3.70:1.00 First Fiscal Quarter 2002 3.60:1.00 Second Fiscal Quarter 2002 3.50:1.00 Third Fiscal Quarter 2002 3.40:1.00 Fourth Fiscal Quarter 2002 3.30:1.00 First Fiscal Quarter 2003 3.30:1.00 Second Fiscal Quarter 2003 3.20:1.00 Third Fiscal Quarter 2003 3.10:1.00 Fourth Fiscal Quarter 2003 2.80:1.00 First Fiscal Quarter 2004 2.80:1.00 Second Fiscal Quarter 2004 2.70:1.00 Third Fiscal Quarter 2004 2.50:1.00 Fourth Fiscal Quarter 2004 2.50:1.00 First Fiscal Quarter 2005 2.50:1.00 Second Fiscal Quarter 2005 2.50:1.00 Third Fiscal Quarter 2005 2.50:1.00
C. MINIMUM CONSOLIDATED ADJUSTED EBITDA. Company shall not permit Consolidated Adjusted EBITDA (a) for the Fiscal Quarter ending September 28, 1996, to be less than $51,900,000, (b) for the two-Fiscal Quarter period ending December 28, 1996 to be less than $114,600,000, (c) for the three-Fiscal Quarter period ending April 5, 1997, to be less than $177,700,000, and (d) thereafter, for any consecutive four-Fiscal Quarter period ending as of the last day of any Fiscal Quarter set forth below to be less than the correlative amount indicated:
MINIMUM CONSOLIDATED PERIOD ADJUSTED EBITDA --------------------------------- ----------------------- Second Fiscal Quarter 1997 $246,400,000 Third Fiscal Quarter 1997 257,500,000 Fourth Fiscal Quarter 1997 262,800,000
144 First Fiscal Quarter 1998 267,500,000 Second Fiscal Quarter 1998 275,000,000 Third Fiscal Quarter 1998 279,700,000 Fourth Fiscal Quarter 1998 283,600,000 First Fiscal Quarter 1999 286,200,000 Second Fiscal Quarter 1999 288,800,000 Third Fiscal Quarter 1999 291,700,000 Fourth Fiscal Quarter 1999 294,600,000 First Fiscal Quarter 2000 297,700,000 Second Fiscal Quarter 2000 300,600,000 Third Fiscal Quarter 2000 303,500,000 Fourth Fiscal Quarter 2000 304,500,000 First Fiscal Quarter 2001 305,500,000 Second Fiscal Quarter 2001 305,900,000 Third Fiscal Quarter 2001 308,400,000 Fourth Fiscal Quarter 2001 311,500,000 First Fiscal Quarter 2002 313,700,000 Second Fiscal Quarter 2002 316,700,000 Third Fiscal Quarter 2002 320,600,000 Fourth Fiscal Quarter 2002 324,000,000 First Fiscal Quarter 2003 327,000,000 Second Fiscal Quarter 2003 330,100,000 Third Fiscal Quarter 2003 333,200,000 Fourth Fiscal Quarter 2003 336,300,000 First Fiscal Quarter 2004 340,200,000 Second Fiscal Quarter 2004 343,800,000 Third Fiscal Quarter 2004 347,400,000 Fourth Fiscal Quarter 2004 351,200,000 First Fiscal Quarter 2005 354,000,000 Second Fiscal Quarter 2005 356,500,000 Third Fiscal Quarter 2005 359,000,000
D. MINIMUM CONSOLIDATED NET WORTH. Company shall not permit Consolidated Net Worth at any time during the period commencing on the day immediately preceding 145 the last day of such period set forth below to be less than the correlative amount indicated below for such period set forth below: MINIMUM PERIOD CONSOLIDATED NET WORTH --------------------------------- ---------------------- Third Fiscal Quarter 1996 ($115,300,000) Fourth Fiscal Quarter 1996 (113,000,000) First Fiscal Quarter 1997 (112,600,000) Second Fiscal Quarter 1997 (110,800,000) Third Fiscal Quarter 1997 (109,900,000) Fourth Fiscal Quarter 1997 (103,800,000) First Fiscal Quarter 1998 (97,800,000) Second Fiscal Quarter 1998 (91,800,000) Third Fiscal Quarter 1998 (85,800,000) Fourth Fiscal Quarter 1998 (79,800,000) First Fiscal Quarter 1999 (69,300,000) Second Fiscal Quarter 1999 (58,800,000) Third Fiscal Quarter 1999 (48,300,000) Fourth Fiscal Quarter 1999 (37,800,000) First Fiscal Quarter 2000 (23,700,000) Second Fiscal Quarter 2000 (9,500,000) Third Fiscal Quarter 2000 4,700,000 Fourth Fiscal Quarter 2000 18,900,000 First Fiscal Quarter 2001 34,400,000 Second Fiscal Quarter 2001 50,000,000 Third Fiscal Quarter 2001 65,500,000 Fourth Fiscal Quarter 2001 81,100,000 First Fiscal Quarter 2002 102,000,000 Second Fiscal Quarter 2002 122,900,000 Third Fiscal Quarter 2002 143,800,000 Fourth Fiscal Quarter 2002 164,800,000 First Fiscal Quarter 2003 188,800,000 Second Fiscal Quarter 2003 212,900,000 Third Fiscal Quarter 2003 237,000,000 Fourth Fiscal Quarter 2003 261,100,000
146 First Fiscal Quarter 2004 287,700,000 Second Fiscal Quarter 2004 314,400,000 Third Fiscal Quarter 2004 341,100,000 Fourth Fiscal Quarter 2004 367,800,000 First Fiscal Quarter 2005 385,000,000 Second Fiscal Quarter 2005 400,000,000 Third Fiscal Quarter 2005 450,000,000
7.7 RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS. ---------------------------------------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, alter the corporate, capital or legal structure of Company or any of its Subsidiaries, including the creation or acquisition of any Subsidiaries, or enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or a substantial portion of the business, property or assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except: (i) any wholly-owned Subsidiary of Company may be merged with or into Company or any wholly-owned Subsidiary, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Company or any wholly-owned Subsidiary; provided that, in the case of such a merger or consolidation, -------- Company or such wholly-owned Subsidiary shall be the continuing or surviving corporation; and provided further that if any such transaction -------- involves a Subsidiary Guarantor, the surviving corporation shall be Company or a Subsidiary Guarantor; (ii) Company and its Subsidiaries may make Consolidated Capital Expenditures permitted under subsection 7.8 and Development Investments (to the extent such Development Investments do not constitute Consolidated Capital Expenditures) permitted under subsection 7.3(vi); (iii) Company and its Subsidiaries may sell or otherwise dispose of assets in transactions that do not constitute Asset Sales; provided -------- that the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (iv) Company and its Subsidiaries may sell or otherwise dispose of damaged, worn out or obsolete assets that are no longer necessary for the proper conduct of their respective business for fair market value in the ordinary course of business; 147 (v) Company and its Subsidiaries may sell grocery stores (including equipment therein acquired after the date which precedes the Closing Date by six months) opened or acquired after the date which precedes the Closing Date by six months in connection with a concurrent lease-back of such grocery stores (including such equipment) to the extent such transactions are permitted under subsection 7.10; (vi) Company and its Subsidiaries, as lessors or sublessors, may lease or sublease any of their respective real or personal property in the ordinary course of business; (vii) Company may make California Asset Sales other than sales of Related Assets; provided that the consideration received shall be in -------- amount at least equal to the fair market value thereof and the proceeds thereof shall be applied as required by subsection 2.4B(iii)(a); and Company may make sales of Related Assets acquired pursuant to subsection 7.1(viii) or subsection 7.7(xi); provided that the consideration received -------- shall be in an amount at least equal to the fair market value thereof and the proceeds of the sale of the Related Asset shall be applied as required by subsection 7.1(viii) or subsection 7.7(xi), as the case may be; (viii) Company and its Subsidiaries may make Asset Sales of stores which are no longer useful to the business of Company and its Subsidiaries; provided that the aggregate number of any stores sold -------- pursuant to this clause (viii) shall not exceed five in any Fiscal Year plus a number of stores equal to the difference between five and the number of stores sold under this clause (viii) in the immediately preceding Fiscal Year; (ix) Company and its Subsidiaries may make Asset Sales of assets having a fair market value not in excess of $5,000,000; provided that (x) -------- the consideration received for such assets shall be in an amount at least equal to the fair market value thereof and (y) the proceeds of such Asset Sales shall be applied as required by subsection 2.4B(iii)(a); (x) Company and its Subsidiaries may sell or otherwise dispose of all or any portion of the manufacturing facilities, stores and related personal property located at or used in connection with the operation of such facilities and stores, in each case as listed on Schedule 7.7; ------------ provided that the consideration received shall be an amount at least -------- equal to the fair market value thereof and the proceeds thereof shall be applied as required by subsection 2.4B(iii)(a); and (xi) Company may transfer a store to the Owner Trustee concurrently with the receipt of an unencumbered fee interest in a Related Asset so long as each of the following conditions is satisfied: (A) the transfer is made in accordance with the terms of the documentation governing the Related Assets as in effect on the Closing Date or in accordance with terms which are approved by Arrangers; (B) the fair market value of the store or stores transferred to the Owner Trustee does not exceed the fair market 148 value of the Related Asset or Assets received by Company by more than $100,000; (C) Company closes an Asset Sale selling such Related Asset not later than 90 days after receipt of such Related Asset; and (D) the Net Asset Sale Proceeds of the Asset Sale of the Related Asset are applied by Company to permanently reduce the outstanding principal amount of Indebtedness of Company under this Agreement pursuant to subsection 2.4B(iii)(a) within the third Business Day following the date of receipt by Company of such Net Asset Sale Proceeds and without regard to any exclusion permitted pursuant to clauses (i)-(vi) of the proviso therein contained. 7.8 CONSOLIDATED CAPITAL EXPENDITURES. --------------------------------- Company shall not, and shall not permit its Subsidiaries to, make or incur Consolidated Capital Expenditures, in any Fiscal Year indicated below, in an aggregate amount in excess of the corresponding amount (the "MAXIMUM CONSOLIDATED CAPITAL EXPENDITURES AMOUNT") set forth below opposite such Fiscal Year; provided that the Maximum Consolidated Capital Expenditures Amount for any -------- Fiscal Year shall be increased (i) by an amount equal to the excess, if any (but in no event more than 25% of the Maximum Consolidated Capital Expenditures Amount for Fiscal Year 1996 as set forth in the table below and 15% of the Maximum Consolidated Capital Expenditures Amount for the immediately preceding Fiscal Year as set forth in the table below for each Fiscal Year thereafter) of the Maximum Consolidated Capital Expenditures Amount for the immediately preceding Fiscal Year (as adjusted in accordance with this proviso) over the actual amount of Consolidated Capital Expenditures for such previous Fiscal Year, (ii) by an amount up to, but in no event greater than, 10% of the Maximum Consolidated Capital Expenditures Amount for the immediately following Fiscal Year, as set forth in the table below, which amount described in this clause (ii) shall reduce the Maximum Consolidated Capital Expenditures Amount for the immediately following Fiscal Year and (iii) by an amount equal to (but in no event greater than $25,000,000 for any Fiscal Year) the aggregate amount of Net Asset Sale Proceeds (other than insurance proceeds, condemnation awards, indemnity payments and Net Asset Sale Proceeds applied in accordance with subsection 2.4B(iii)(a)(v)) received by Company and its Subsidiaries during such Fiscal Year to the extent such proceeds have been reinvested in new stores or the construction or remodeling of stores of Company and its Subsidiaries within 270 days of receipt in accordance with subsection 2.4B(iii)(a)(i)(A); provided, -------- however that the amount which may be added to the Maximum Consolidated Capital - ------- Expenditures Amount pursuant to clauses (i) and (ii) of the immediately preceding proviso shall not exceed 40% of the Maximum Consolidated Capital Expenditures Amount for Fiscal Year 1997 and 15% of the Maximum Consolidated Capital Expenditures Amount for each Fiscal Year thereafter as set forth in the table below: 149
MAXIMUM CONSOLIDATED FISCAL YEAR CAPITAL EXPENDITURES --------------------------------- ---------------------- Closing Date to 1996 Fiscal Year End $76,300,000 Fiscal Year 1997 64,100,000 Fiscal Year 1998 63,700,000 Fiscal Year 1999 63,300,000 Fiscal Year 2000 67,100,000 Fiscal Year 2001 73,100,000 Fiscal Year 2002 74,700,000 Fiscal Year 2003 76,200,000 Fiscal Year 2004 78,200,000 January 2, 2005 to August 31, 2005 55,000,000
7.9 RESTRICTION ON LEASES. --------------------- Company shall not, and shall not permit any of its Subsidiaries to, become liable in any way, whether directly or by assignment or as a guarantor or other surety, for the obligations of the lessee under any lease, whether an Operating Lease or a Capital Lease (other than intercompany leases between Company and its wholly-owned Subsidiaries), unless, immediately after giving effect to the incurrence of liability with respect to such lease, all amounts paid or payable under all Capital Leases and Operating Leases (net of sublease income) at the time in effect during the then current Fiscal Year shall not exceed the corresponding amount set forth below opposite such Fiscal Year: 150
MAXIMUM PERIOD LEASE PAYMENTS --------------------------------- ----------------------- Closing Date to 1996 Fiscal Year End $30,600,000 Fiscal Year 1997 71,500,000 Fiscal Year 1998 80,400,000 Fiscal Year 1999 89,300,000 Fiscal Year 2000 98,900,000 Fiscal Year 2001 113,900,000 Fiscal Year 2002 125,100,000 Fiscal Year 2003 134,800,000 Fiscal Year 2004 149,300,000 January 2, 2005 to August 31, 2005 105,000,000
7.10 SALES AND LEASE-BACKS. --------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired, (i) which Company or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person (other than Company or any of its Subsidiaries) or (ii) which Company or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by Company or any of its Subsidiaries to any Person (other than Company or any of its Subsidiaries) in connection with such lease; provided that Company and its Subsidiaries may become and remain -------- liable as lessee, guarantor or other surety with respect to any such lease if and to the extent that Company or any of its Subsidiaries would be permitted to enter into, and remain liable under, such lease under subsection 7.9. 151 7.11 SALE OR DISCOUNT OF RECEIVABLES. ------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable. 7.12 TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES. --------------------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of Company, on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such an Affiliate; provided that the foregoing restriction shall not apply to (i) any -------- transaction between Company and any of its wholly-owned Subsidiaries or between any of its wholly-owned Subsidiaries; (ii) reasonable and customary fees paid to members of the Boards of Directors of Company and its Subsidiaries; (iii) issuances of stock, payments of bonuses and other transactions pursuant to employment or compensation agreements, stock option agreements, indemnification agreements, severance agreements and other arrangements, in each case as in effect as of the Closing Date and unamended, and substantially similar agreements as may hereafter become effective, in each case with officers or directors who are Affiliates of Company or any of its Subsidiaries; (iv) payment of consulting and other fees and expenses and the reimbursement of losses, costs and expenses under the Management Agreement, as amended in accordance with subsection 7.15A, and in form and substance satisfactory to Agent; (v) the payment of fees and expenses to Yucaipa or its affiliates and designees and other holders of capital stock of Smitty's in connection with the Acquisition, in each case in amounts that are satisfactory to Agent; (vi) payments by Company and its Subsidiaries pursuant to tax sharing agreements in effect from time to time among Company and its Subsidiaries; or (vii) the issuance by Company of common stock to Yucaipa pursuant to Yucaipa's exercise of the Yucaipa Warrant. 7.13 DISPOSAL OF SUBSIDIARY STOCK; RESTRICTIONS ON SUBSIDIARIES. ---------------------------------------------------------- A. Except for any sale of 100% of the capital stock or other equity Securities of any of its Subsidiaries in compliance with the provisions of subsection 7.7(i) and except pursuant to the Collateral Documents, Company shall not and shall not permit any of its Subsidiaries to directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries, except to qualify directors if required by applicable law, or in the case of Company's Subsidiaries, to Company or to a wholly-owned Subsidiary of Company. B. Except as provided herein or in any of the other Loan Documents, the Senior Subordinated Note Indenture and in any other document evidencing Indebtedness in existence on the Closing Date or any permitted refinancing thereof as permitted under 152 subsection 7.1(v) (only so long as the agreements governing such refinancing shall not contain covenants that are more restrictive than the covenants contained in the indentures or documents so refinanced), Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Company, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Company or any other Subsidiary of Company, (iii) make loans or advances to Company or any other Subsidiary of Company, or (iv) transfer any of its property or assets to Company or any other Subsidiary of Company. 7.14 CONDUCT OF BUSINESS. ------------------- From and after the Closing Date, Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by Company and its Subsidiaries on the Closing Date and similar or related businesses and (ii) such other lines of business as may be consented to by Requisite Lenders. 7.15 AMENDMENTS OR WAIVERS OF CERTAIN RELATED AGREEMENTS; AMENDMENTS OF ------------------------------------------------------------------ DOCUMENTS RELATING TO SUBORDINATED INDEBTEDNESS; DESIGNATION OF ---------------------------------------------------------------- "DESIGNATED SENIOR INDEBTEDNESS". -------------------------------- A. AMENDMENTS OR WAIVERS OF CERTAIN RELATED AGREEMENTS. Company shall not, and shall not permit any of its Subsidiaries to, amend, waive any of its rights under, or otherwise change the terms of any of the Related Agreement (other than the Related Financing Documents) in each case as in effect on the Closing Date, without the prior written consent of the Requisite Lenders, if such amendment, waiver or change would increase materially the obligations of Company or any of its Subsidiaries or confer additional rights on any other party to any such agreement which would be adverse to Company or any of its Subsidiaries. B. AMENDMENTS OF DOCUMENTS RELATING TO SENIOR INDEBTEDNESS AND SUBORDINATED INDEBTEDNESS. Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of any of the Senior Indebtedness, the Senior Subordinated Notes, the Senior Debt Indentures or the Senior Subordinated Note Indenture (collectively, "RESTRICTED AGREEMENTS"), or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on any such Restricted Agreements, change any dates upon which payments of principal or interest are due thereon, change any of the covenants with respect thereto in a manner which is more restrictive to Company or any of its Subsidiaries, change any event of default or condition to an event of default with respect thereto, change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions (if any) thereof (or of any guaranty thereof), or change any collateral therefor (other than to release such collateral), or if the effect of such amendment or change, together with all other 153 amendments or changes made, is to increase the obligations of the obligor thereunder or to confer any additional rights on the holders of any such Restricted Agreements (or a trustee or other representative on their behalf) which would be adverse to any Loan Party or Lenders. C. DESIGNATION OF "DESIGNATED SENIOR INDEBTEDNESS". Company shall not designate any Indebtedness as "Designated Senior Indebtedness" (as defined in the Senior Subordinated Note Indenture) for purposes of the Senior Subordinated Note Indenture without the prior written consent of Requisite Lenders. 7.16 FISCAL YEAR ----------- Company shall not change its Fiscal Year-end from the Saturday closest to December 31. SECTION 8. EVENTS OF DEFAULT If any of the following conditions or events ("Events of Default") shall occur: 8.1 FAILURE TO MAKE PAYMENTS WHEN DUE. --------------------------------- Failure by Company to pay any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by Company to pay when due any amount payable to an Issuing Lender in reimbursement of any drawing under a Letter of Credit; or failure by Company to pay any interest on any Loan or any fee or any other amount due under this Agreement within five days after the date due; or 8.2 DEFAULT IN OTHER AGREEMENTS. --------------------------- (i) Failure of Company or any of its Subsidiaries to pay when due (a) any principal of or interest on any Indebtedness (other than Indebtedness referred to in subsection 8.1) in an individual principal amount of $5,000,000 or more or any items of Indebtedness with an aggregate principal amount of $10,000,000 or more or (b) any Contingent Obligation in an individual principal amount of $5,000,000 or more or any Contingent Obligations with an aggregate principal amount of $10,000,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default by Company or any of its Subsidiaries with respect to any other material term of (a) any evidence of any Indebtedness in an individual principal amount of $5,000,000 or more or any items of Indebtedness with an aggregate principal amount of $10,000,000 or more or any Contingent Obligation in an individual principal amount of $5,000,000 or more or any Contingent Obligations with an aggregate principal amount of $10,000,000 or more or (b) any loan agreement, mortgage, indenture or other agreement relating to such Indebtedness or Contingent Obligation(s), if the effect of such breach or default is to cause, or to permit the 154 holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise); or 8.3 BREACH OF CERTAIN COVENANTS. --------------------------- Failure of Company to perform or comply with any term or condition contained in subsection 2.5 or 6.2 or Section 7 of this Agreement; or 8.4 BREACH OF WARRANTY. ------------------ Any representation, warranty, certification or other statement made by any Loan Party in any Loan Document or in any statement or certificate at any time given by any Loan Party in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or 8.5 OTHER DEFAULTS UNDER LOAN DOCUMENTS. ----------------------------------- Any Loan Party shall default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents, other than any such term referred to in any other subsection of this Section 8, and such default shall not have been remedied or waived within 30 days after the receipt by Company of notice from Agent or any Lender of such default; or 8.6 INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. ----------------------------------------------------- (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Company or any of its Subsidiaries (other than an Inactive Subsidiary whose financial condition does not adversely affect any other Loan Party) in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Company or any of its Subsidiaries (other than an Inactive Subsidiary) under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Company or any of its Subsidiaries (other than an Inactive Subsidiary), or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of Company or any of its Subsidiaries (other than an Inactive Subsidiary) for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Company or any 155 of its Subsidiaries (other than an Inactive Subsidiary), and any such event described in this clause (ii) shall continue for 60 days unless dismissed, bonded or discharged; or 8.7 VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. --------------------------------------------------- (i) Company or any of its Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Company or any of its Subsidiaries shall make any assignment for the benefit of creditors; or (ii) Company or any of its Subsidiaries shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of Company or any of its Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or 8.8 JUDGMENTS AND ATTACHMENTS. ------------------------- Any money judgment, writ or warrant of attachment or similar process involving (i) in any individual case an amount in excess of $5,000,000 or (ii) in the aggregate at any time an amount in excess of $10,000,000 (in either case not adequately covered by insurance as to which a solvent and unaffiliated insurance company has acknowledged coverage) shall be entered or filed against Company or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 60 days (or in any event later than five days prior to the date of any proposed sale thereunder); or 8.9 DISSOLUTION. ----------- Any order, judgment or decree shall be entered against Company or any of its Subsidiaries decreeing the dissolution or split up of such Person and such order shall remain undischarged or unstayed for a period in excess of 30 days; or 8.10 EMPLOYEE BENEFIT PLANS. ---------------------- There shall occur one or more ERISA Events which individually or in the aggregate results in or could reasonably be expected to result in liability of any of the Loan Parties or any of their respective ERISA Affiliates (unless no Loan Party shall be jointly and severally liable therefor) in excess of $5,000,000 during the term of this Agreement; or there shall exist an Amount of Unfunded Benefit Liabilities individually or in the aggregate for all Pension Plans (excluding for purposes of such computation (1) any Pension Plan which has a negative Amount of Unfunded Benefit Liabilities and (2) any Pension Plan for each neither 156 Company nor any other Loan Party would have liability if the Pension Plan were terminated) which exceeds $10,000,000; or 8.11 CHANGE IN CONTROL. ----------------- A Change of Control shall have occurred; or 8.12 INVALIDITY OF SUBSIDIARY GUARANTY. --------------------------------- Upon execution and delivery thereof, the Subsidiary Guaranty for any reason, other than the satisfaction in full of all Obligations, ceases to be in full force and effect (other than in accordance with its terms) or is declared to be null and void, or any Loan Party denies that it has any further liability, including without limitation with respect to future advances by Lenders, under any Loan Document to which it is a party, or gives notice to such effect; or 8.13 FAILURE OF SECURITY. ------------------- Any Collateral Document shall, at any time, cease to be in full force and effect (other than by reason of a release of Collateral in accordance with the terms thereof) or shall be declared null and void, or the validity or enforceability thereof shall be contested by any Loan Party, or Agent shall not have or cease to have a valid and perfected first priority security interest in any significant part of the Collateral (other than as a direct result of a breach by Agent of any obligation imposed on Agent under the Collateral Documents); or 8.14 FAILURE TO CONSUMMATE THE TRANSACTIONS. -------------------------------------- Any of the Transactions and related transactions contemplated hereby (i) shall not be consummated in accordance with the Loan Documents and the Related Agreements prior to or concurrently with or immediately after the making of the initial Loans (and in any event on the Closing Date), or (ii) shall be unwound, reversed or otherwise rescinded or modified in whole or in part for any reason; or 8.15 ACTION UNDER RELATED FINANCING DOCUMENTS. ---------------------------------------- Any holder of any Indebtedness evidenced by the Related Financing Documents shall file an action seeking the rescission thereof or damages or injunctive relief relating thereto; or any event shall occur which, under the terms of any Related Financing Documents, shall require Company or any of its Subsidiaries to purchase, redeem or otherwise acquire or offer to purchase, redeem or otherwise acquire all or any portion of any Indebtedness evidenced by the Related Financing Documents; or Company or any of its Subsidiaries shall for any other reason purchase, redeem or otherwise acquire or offer to purchase, redeem or otherwise acquire, or make any other payments in respect of, all or any portion of any Indebtedness evidenced by the Related Financing Documents, except to the extent expressly permitted by subsection 7.5: 157 THEN (i) upon the occurrence of any Event of Default described in subsection 8.6 or 8.7, each of (a) the unpaid principal amount of and accrued interest on the Loans, (b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letter of Credit), and (c) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and the obligation of each Lender to make any Loan (including the obligation of Swing Line Lender to make any Swing Line Loans), the obligation of Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, Agent shall, upon the written request or with the written consent of Requisite Lenders, by written notice to Company, declare all or any portion of the amounts described in clauses (a) through (c) above to be, and the same shall forthwith become, immediately due and payable, and the obligation of each Lender to make any Loan (including the obligation of Swing Line Lender to make any Swing Line Loans), the obligation of Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate; provided that the foregoing shall not affect in any way the obligations of - -------- Revolving Lenders to purchase participations in Letters of Credit as provided in subsection 3.3C or the obligations of Lenders to purchase participations in any unpaid Swing Line Loans as provided in subsection 2.1A(vi). Any amounts described in clause (b) above, when received by Agent, shall be held by Agent pursuant to the terms of the Collateral Account Agreement and shall be applied as therein provided. Notwithstanding anything contained in the second preceding paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non- payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended to benefit Company and do not grant Company the right to require Lenders to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. 158 SECTION 9. AGENT 9.1 APPOINTMENT. ----------- A. APPOINTMENT OF AGENT. Each Lender hereby appoints, and each Interest Rate Exchanger, by its acceptance of the benefits of this Agreement and the other Loan Documents, shall be deemed to have appointed, Bankers as Agent hereunder and under the other Loan Documents and each Lender hereby authorizes, and each Interest Rate Exchanger, by its acceptance of the benefits of this Agreement and the other Loan Documents, shall be deemed to have authorized, Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents, and each Interest Rate Exchanger is considered to be a "lender" for purposes of this Section 9. Each Lender hereby appoints Bankers and Chase as Arrangers hereunder. Agent agrees to act upon the express conditions contained in this Agreement and the other Loan Documents, as applicable. The provisions of this Section 9 are solely for the benefit of Agent, Arrangers, Co-Agents and Lenders and no Loan Party shall have any rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties under this Agreement, and other than as expressly provided for in subsection 2.1D(v), Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for any Loan Party. Each Lender named as an Arranger hereunder shall have no duties or responsibilities under this Agreement or any other Loan Document to any Person, other than as a Lender hereunder and thereunder. B. APPOINTMENT OF SUPPLEMENTAL COLLATERAL AGENTS. It is the purpose of this Agreement and the other Loan Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such jurisdiction. It is recognized that in case of litigation under this Agreement or any of the other Loan Documents, and in particular in case of the enforcement of any of the Loan Documents, or in case Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other Loan Documents or take any other action which may be desirable or necessary in connection therewith, it may be necessary that Agent appoint an additional individual or institution as a separate trustee, co-trustee, collateral agent or collateral co-agent (any such additional individual or institution being referred to herein individually as a "SUPPLEMENTAL COLLATERAL AGENT" and collectively as "SUPPLEMENTAL COLLATERAL AGENTS"). In the event that Agent appoints a Supplemental Collateral Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended by this Agreement or any of the other Loan Documents to be exercised by or vested in or conveyed to Agent with respect to such Collateral shall be exercisable by and vest in such Supplemental Collateral Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Agent to exercise such rights, powers and privileges with respect to such Collateral and to perform such duties with respect to such Collateral, and every covenant 159 and obligation contained in the Loan Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Agent shall run to and be enforceable by either Agent or such Supplemental Collateral Agent, and (ii) the provisions of this Section 9 and of subsections 10.2 and 10.3 that refer to Agent shall inure to the benefit of such Supplemental Collateral Agent and all references therein to Agent shall be deemed to be references to Agent and/or such Supplemental Collateral Agent, as the context may require. Should any instrument in writing from Company or any other Loan Party be required by any Supplemental Collateral Agent so appointed by Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Company shall, or shall cause such Loan Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Agent. In case any Supplemental Collateral Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall vest in and be exercised by Agent until the appointment of a new Supplemental Collateral Agent. 9.2 POWERS AND DUTIES; GENERAL IMMUNITY. ----------------------------------- A. POWERS; DUTIES SPECIFIED. Each Lender irrevocably authorizes Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Loan Documents as are specifically delegated or granted to Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Agent shall have only those duties and responsibilities that are expressly specified in this Agreement and the other Loan Documents. Agent may exercise such powers, rights and remedies and perform such duties by or through its agents or employees. Agent shall not have, by reason of this Agreement or any of the other Loan Documents, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the other Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon Agent any obligations in respect of this Agreement or any of the other Loan Documents except as expressly set forth herein or therein. B. NO RESPONSIBILITY FOR CERTAIN MATTERS. Agent shall not be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by Agent to Lenders or by or on behalf of Company to Agent or any Lender in connection with the Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or the use of the Letters of Credit or as to the existence or 160 possible existence of any Event of Default or Potential Event of Default. Anything contained in this Agreement to the contrary notwithstanding, Agent shall not have any liability arising from confirmations of the amount of outstanding Loans or the Letter of Credit Usage or the component amounts thereof. C. EXCULPATORY PROVISIONS. Neither Agent nor any of its officers, directors, employees or agents shall be liable to Lenders for any action taken or omitted by Agent under or in connection with any of the Loan Documents except to the extent caused by Agent's gross negligence or willful misconduct. Agent shall be entitled to refrain from any act or the taking of any action (including the failure to take an action) in connection with this Agreement or any of the other Loan Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsid iaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or (where so instructed) refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6). D. AGENT ENTITLED TO ACT AS LENDER. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, Agent in its individual capacity as a Lender hereunder. With respect to its par ticipation in the Loans and the Letters of Credit, Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include Agent in its individual capacity. Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Company or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Company for services in connection with this Agreement and otherwise without having to account for the same to Lenders. 161 9.3 REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF CREDIT ------------------------------------------------------------------------- WORTHINESS. ---------- Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the making of the Loans and the issuance of Letters of Credit hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. Agent shall not have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter, and Agent shall not have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. 9.4 RIGHT TO INDEMNITY. ------------------ Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify Agent, to the extent that Agent shall not have been reimbursed by Company, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Loan Documents or otherwise in its capacity as Agent in any way relating to or arising out of this Agreement or the other Loan Documents; provided that no Lender shall be liable for any portion of such liabilities, - -------- obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. If any indemnity furnished to Agent for any purpose shall, in the opinion of Agent, be insufficient or become impaired, Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. 9.5 SUCCESSOR AGENT AND SWING LINE LENDER. ------------------------------------- A. SUCCESSOR AGENT. Agent may resign at any time by giving 30 days' prior written notice thereof to Lenders and Company, and Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to Company and Agent and signed by Requisite Lenders. Upon any such notice of resignation or any such removal, Requisite Lenders shall have the right, upon five Business Days' notice to Company, to appoint a successor Agent. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent and the retiring or removed Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Agent's resignation or removal 162 hereunder as Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. B. SUCCESSOR SWING LINE LENDER. Any resignation or removal of Agent pursuant to subsection 9.5A shall also constitute the resignation or removal of Agent or its successor as Swing Line Lender, and any successor Agent appointed pursuant to subsection 9.5A shall, upon its acceptance of such appointment, become the successor Swing Line Lender for all purposes hereunder. In such event (i) Company shall prepay any outstanding Swing Line Loans made by the retiring or removed Agent in its capacity as Swing Line Lender, (ii) upon such prepayment, the retiring or removed Agent and Swing Line Lender shall surrender the Swing Line Note held by it to Company for cancellation, and (iii) Company shall issue a new Swing Line Note to the successor Agent and Swing Line Lender substantially in the form of Exhibit VI annexed hereto, in the principal ---------- amount of the Swing Line Loan Commitment then in effect and with other appropriate insertions. 9.6 COLLATERAL DOCUMENTS AND SUBSIDIARY GUARANTY. -------------------------------------------- Each Lender hereby further authorizes Agent, on behalf of and for the benefit of Lenders, to enter into each Collateral Document as secured party and to be the agent for and representative of Lenders under the Subsidiary Guaranty, and each Lender agrees to be bound by the terms of each Collateral Document and the Subsidiary Guaranty; provided that Agent shall not (i) enter -------- into or consent to any material amendment, modification, termination or waiver of any provision contained in any Collateral Document or the Subsidiary Guaranty or (ii) release any Collateral (except as otherwise expressly permitted or required pursuant to the terms of this Agreement or the applicable Collateral Document), in each case without the prior consent of Requisite Lenders (or, if required pursuant to subsection 10.6, all Lenders); provided further, however, -------- ------- ------- that, without further written consent or authorization from Lenders, Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by this Agreement or to which Requisite Lenders have otherwise consented or (b) release any Subsidiary Guarantor from the Subsidiary Guaranty if all of the capital stock of such Subsidiary Guarantor is sold to any Person (other than an Affiliate of Company) pursuant to a sale or other disposition permitted hereunder or to which Requisite Lenders have otherwise consented. Anything contained in any of the Loan Documents to the contrary notwithstanding, Company, Agent and each Lender hereby agree that (X) no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document or to enforce the Subsidiary Guaranty, it being understood and agreed that all powers, rights and remedies under the Collateral Documents and the Subsidiary Guaranty may be exercised solely by Agent for the benefit of Lenders in accordance with the terms thereof, and (Y) in the event of a foreclosure by Agent on any of the Collateral pursuant to a public or private sale, Agent or any Lender may be the purchaser of any or all of such Collateral at any such sale and Agent, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or 163 payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Agent at such sale. SECTION 10. MISCELLANEOUS 10.1 ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF CREDIT. ------------------------------------------------------------- A. GENERAL. Subject to subsection 10.1B, each Lender shall have the right at any time to (i) sell, assign or transfer to any Eligible Assignee, or (ii) sell participations to any Person in, all or any part of its Commitments or any Loan or Loans made by it or its Letters of Credit or participations therein or any other interest herein or in any other Obligations owed to it; provided -------- that no such sale, assignment, transfer or participation shall, without the consent of Company, require Company to file a registration statement with the Securities and Exchange Commission or apply to qualify such sale, assignment, transfer or participation under the securities laws of any state; provided, -------- further that no such sale, assignment or transfer described in clause (i) above - ------- shall be effective unless and until an Assignment Agreement effecting such sale, assignment or transfer shall have been accepted by Agent and recorded in the Register as provided in subsection 10.1B(ii); provided, further that no such -------- ------- sale, assignment, transfer or participation of any Letter of Credit or any participation therein may be made separately from a sale, assignment, transfer or participation of a corresponding interest in the Revolving Loan Commitment and the Revolving Loans of the Lender effecting such sale, assignment, transfer or participation; and provided, further that, anything contained herein to the -------- ------- contrary notwithstanding, the Swing Line Loan Commitment and the Swing Line Loans of Swing Line Lender may not be sold, assigned or transferred as described in clause (i) above to any Person other than a successor Agent and Swing Line Lender to the extent contemplated by subsection 9.5. Except as otherwise provided in this subsection 10.1, no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment or transfer of, or any granting of participations in, all or any part of its Commitments or the Loans, the Letters of Credit or participations therein, or the other Obligations owed to such Lender. B. ASSIGNMENTS. (i) Amounts and Terms of Assignments. Each Commitment, Loan, -------------------------------- Letter of Credit or participation in any Letter of Credit or in any Swing Line Loan, or other Obligation may (a) be assigned in any amount to another Lender, or to an Affiliate of the assigning Lender or another Lender, with the giving of notice to Company and Agent or (b) be assigned in an aggregate amount of not less than $5,000,000 (or such lesser amount as shall constitute the aggregate amount of the Commitments, Loans, Letters of Credit and participations in any Letter of Credit or in any Swing Line Loan, and other Obligations of the assigning Lender) to any other Eligible Assignee, with the consent of Company and Agent (which consent of Company and Agent shall not be 164 unreasonably withheld or delayed). To the extent of any such assignment in accordance with either clause (a) or (b) above, the assigning Lender shall be relieved of its obligations with respect to its Commitments, Loans, Letters of Credit or participations therein, or other Obligations or the portion thereof so assigned. The parties to each such assignment shall execute and deliver to Agent, for its acceptance and recording in the Register, an Assignment Agreement, together with a processing and recordation fee of, in the case of assignments to a Lender or an Affiliate of Lender, $1,500 and, in the case of assignments to any other Eligible Assignee, $3,500 and such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Agent pursuant to subsection 2.7B(iii)(a). Upon such execution, delivery, acceptance and recordation, from and after the effective date specified in such Assignment Agreement, (y) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (z) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination of this Agreement under subsection 10.9B) and be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto); provided that, anything -------- contained in any of the Loan Documents to the contrary notwithstanding, if such Lender is the Issuing Lender with respect to any outstanding Letters of Credit such Lender shall continue to have all rights and obligations of an Issuing Lender with respect to such Letters of Credit until the cancellation or expiration of such Letters of Credit and the reimbursement of any amounts drawn thereunder). The Commitments hereunder shall be modified to reflect the Commitment of such assignee and any remaining Commitment of such assigning Lender and, if any such assignment occurs after the issuance of the Notes hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Notes to Agent for cancellation, and thereupon new Notes shall be issued to the assignee and to the assigning Lender, substantially in the form of Exhibit IV-A, ------------ Exhibit IV-B, Exhibit IV-C, Exhibit IV-D or Exhibit V annexed hereto, as ------------ ------------ ------------ --------- the case may be, with appropriate insertions, to reflect the new Commitments and/or outstanding Term Loans, as the case may be, of the assignee and/or the assigning Lender. (ii) Acceptance by Agent; Recordation in Register. Upon its -------------------------------------------- receipt of an Assignment Agreement executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with the processing and recordation fee referred to in subsection 10.1B(i) and any forms, certificates or other evidence with respect to United States federal income tax withholding matters that such assignee may be required to deliver to Agent pursuant to subsection 2.7B(iii)(a), Agent shall, if Agent 165 and Company have consented to the assignment evidenced thereby (in each case to the extent such consent is required pursuant to subsection 10.1B(i)), (a) accept such Assignment Agreement by executing a counterpart thereof as provided therein (which acceptance shall evidence any required consent of Agent to such assignment), (b) record the information contained therein in the Register, and (c) give prompt notice thereof to Company. Agent shall maintain a copy of each Assignment Agreement delivered to and accepted by it as provided in this subsection 10.1B(ii). C. PARTICIPATIONS. The holder of any participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting (i) the extension of the scheduled final maturity date of any portion of the principal amount of or the postponement of the date of payment of interest on any Loan allocated to such participation (it being understood that changes in interim amortization amounts are not extensions of scheduled final maturity dates), or the extension of the stated expiration date beyond the Revolving Loan Commitment Termination Date of any Letter of Credit allocated to such participation, or (ii) a reduction of the principal amount of or the rate of interest payable on any Loan allocated to such participation (other than any waiver of any increase in the interest rate applicable to the Loans pursuant to subsection 2.2E), and all amounts payable by Company hereunder (including without limitation amounts payable to such Lender pursuant to subsections 2.6D, 2.7 and 3.6) shall be determined as if such Lender had not sold such participation. Company and each Lender hereby acknowledge and agree that, solely for purposes of subsections 10.4 and 10.5, (a) any participation will give rise to a direct obligation of Company to the participant and (b) the participant shall be considered to be a "Lender". D. ASSIGNMENTS TO FEDERAL RESERVE BANKS. In addition to the assignments and participations permitted under the foregoing provisions of this subsection 10.1, any Lender may assign and pledge all or any portion of its Loans, the other Obligations owed to such Lender, and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank; provided that (i) no Lender shall, as between Company -------- and such Lender, be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (ii) in no event shall such Federal Reserve Bank be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder. E. INFORMATION. Each Lender may furnish any information concerning Company and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 10.19. F. REPRESENTATIONS OF LENDERS. Each Lender listed on the signature pages hereof hereby represents and warrants (i) that it is an Eligible Assignee described in clause (A) of the definition thereof; (ii) that it has experience and expertise in the making of loans such as the Loans; and (iii) that it will make its Loans for its own account in the ordinary course of 166 its business and without a view to distribution of such Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this subsection 10.1, the disposition of such Loans or any interests therein shall at all times remain within its exclusive control). Each Lender that becomes a party hereto pursuant to an Assignment Agreement shall be deemed to agree that the representations and warranties of such Lender contained in Section 2(c) of such Assignment Agreement are incorporated herein by this reference. 10.2 EXPENSES. -------- Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual and reasonable costs and expenses of the Arrangers incurred in preparation of the Loan Documents and any consents, amendments, waivers or other modifications thereto; (ii) all the costs of furnishing all opinions by counsel for Company (including without limitation any opinions requested by Lenders as to any legal matters arising hereunder) and of Company's performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Loan Documents including, without limitation, with respect to confirming compliance with environmental and insurance requirements; (iii) the reasonable fees, expenses and disbursements of counsel to Agent (including internal counsel) in connection with the negotiation, preparation, execution and administration of the Loan Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (iv) all the reasonable costs and expenses of creating and perfecting Liens in favor of Agent on behalf of Lenders pursuant to any Collateral Document, including without limitation filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums, and reasonable fees, expenses and disbursements of counsel to Agent and of counsel providing any opinions that Agent or Requisite Lenders may reasonably request in respect of the Collateral Documents or the Liens created pursuant thereto; (v) all the reasonable costs and expenses (including without limitation the reasonable fees, expenses and disbursements of any auditors, accountants or appraisers and any environmental or other consultants, advisors and agents employed or retained by Agent or its counsel) of obtaining and reviewing any appraisals provided for under subsection 6.9, any environmental audits or reports provided for under subsection 6.9; (vi) all other actual and reasonable costs and expenses incurred by Arrangers in connection with the syndication of the Commitments and the negotiation, preparation and execution of the Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (vii) after the occurrence of an Event of Default, all reasonable costs and expenses, including reasonable attorneys' fees (including internal counsel) and costs of settlement, incurred by Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Loan Party hereunder or under the other Loan Documents by reason of such Event of Default (including, without limitation, in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty) or in connection with any refinancing or 167 restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings. 10.3 INDEMNITY. --------- In addition to the payment of expenses pursuant to subsection 10.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless Agent and Lenders, and the officers, directors, employees, agents and affiliates of Agent and Lenders (collectively called the "INDEMNITEES"), from and against any and all Indemnified Liabilities (as hereinafter defined); provided that Company shall not have any obligation to any -------- Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise solely from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction. As used herein, "INDEMNIFIED LIABILITIES" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Loan Documents or the Related Agreements or the transactions contemplated hereby or thereby (including Lenders' agreement to make the Loans hereunder or the use or intended use of the proceeds thereof or the issuance of Letters of Credit hereunder or the use or intended use of any thereof, or any enforcement of any of the Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty), (ii) the statements contained in the commitment letter delivered by any Lender to Company with respect thereto, or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries and in any event including without limitation the Environmental Losses. Without limiting the generality of the foregoing, the rights of each Indemnitee under this subsection 10.3 relating to any Environmental Losses shall be in addition to any other rights and remedies of such Indemnitee against Company or its Affiliates under any 168 other document or instrument now or hereafter executed by Company or its Affiliates, or at law or in equity (including, without limitation, any right of reimbursement or contribution pursuant to CERCLA or other similar Environmental Laws), and shall not in any way be deemed a waiver of any of such rights. Company agrees that it shall have no right of contribution (including, without limitation, any right of contribution under CERCLA or other similar Environmental Laws) or subrogation against any other Loan Party, unless and until all obligations of Company have been satisfied. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this subsection 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. 10.4 SET-OFF. ------- In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default each Lender is hereby authorized by Company at any time or from time to time, without notice to Company or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities of Company to that Lender under this Agreement, the Letters of Credit and participations therein and the other Loan Documents, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement, the Letters of Credit and participations therein or any other Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loans or any amounts in respect of the Letters of Credit or any other amounts due hereunder shall have become due and payable pursuant to Section 8 and although said obligations and liabilities, or any of them, may be contingent or unmatured. 10.5 RATABLE SHARING. --------------- Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms of this Agreement), by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to that Lender hereunder or under the other Loan Documents (collectively, the "AGGREGATE AMOUNTS DUE" 169 to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; provided that if all or part of such proportionately greater payment - -------- received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. 10.6 AMENDMENTS AND WAIVERS. ---------------------- A. No amendment, modification, termination or waiver of any provision of this Agreement or of the Notes, or consent to any departure by Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders; provided that no such amendment, modification, termination, waiver or consent shall, without the consent of each Lender (with Obligations directly affected in the case of the following clause (i)): (i) extend the scheduled final maturity of any Loan or Note, or extend the stated expiration date of any Letter of Credit beyond the Revolving Loan Commitment Termination Date, or reduce the rate (other than any waiver of any increase in the interest rate applicable to any of the Loans pursuant to subsection 2.2E) or fees or extend the time of payment of interest or fees thereon, or reduce the principal amount thereof, (ii) release all or substantially all of the Collateral or all or substantially all of the Subsidiary Guarantors from the Subsidiary Guaranty except as expressly provided in the Loan Documents, (iii) amend, modify, terminate or waive any provision of this subsection 10.6, (iv) reduce the percentage specified in the definition of Requisite Lenders (it being understood that, with the consent of the Requisite Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of the Requisite Lenders on substantially the same basis as the extensions of Term Loans and Revolving Loan Commitments are included on the Closing Date) or (v) consent to the assignment or transfer by Company of any of its rights and obligations under this Agreement; provided further that no such amendment, modification, termination or waiver shall (1) increase the Commitments of any Lender over the amount thereof then in effect without the consent of such Lender (it being understood that amendments, modifications or waivers of conditions precedent, covenants, Potential Events of Default or Events of Default or of a mandatory reduction in the Commitments shall not constitute an increase of the Commitment of any Lender, and that an increase in the available portion of any 170 Commitment of any Lender shall not constitute an increase in the Commitment of such Lender); (2) without the consent of the Swing Line Lender, amend, modify, terminate or waive any provision of subsection 2.1A(vi) or any other provision of this Agreement relating to the Swing Line Loan Commitment or the Swing Line Loans; (3) without the consent of the Requisite Class Lenders of each Class which is being allocated a lesser prepayment, repayment or commitment reduction as a result of the actions described below (or without the consent of the Requisite Class Lenders of each Class in the case of an amendment to the definition of Requisite Class Lenders), amend the definition of Requisite Class Lenders or alter the required application of any prepayments or repayments (or commitment reduction), as between the Classes pursuant to subsection 2.4B(iv) (although the Requisite Lenders may waive, in whole or in part, any such prepayment, repayment or commitment reduction so long as the application, as between the Classes, of any such prepayment, repayment or commitment reduction which is still required to be made is not altered); (4) without the consent of Requisite Class Lenders of the respective Class, waive or reduce any scheduled prepayment set forth in subsections 2.4A (i)-(iv) of such affected Class; (5) no amendment, modification, termination or waiver relating to the obligations of Revolving Lenders relating to the purchase of participations in Letters of Credit shall be effective without the written concurrence of each Issuing Lender having a Letter of Credit then outstanding or which has not been reimbursed for a drawing under a Letter of Credit issued by Agent and of Agent; or (6) without the consent of Agent, amend, modify, terminate or waive any provision of Section 9 as the same applies to Agent or of any other provision of this Agreement as the same applies to the rights or obligations of Agent. B. If, in connection with any proposed amendment, modification, termination or waiver to any of the provisions of this Agreement or the Notes as contemplated by clauses (i) through (v) of the first proviso of subsection 10.6A, the consent of the Requisite Lenders is obtained but the consent of one or more of such other Lenders whose consent is required is not obtained, then Company shall have the right, so long as all non-consenting Lenders whose individual consent is required are treated as described in either clause (i) or (ii) below, to either (i) replace each such non-consenting Lender or Lenders with one or more Replacement Lenders pursuant to subsection 2.9 so long as at the time of such replacement, each such Replacement Lender consents to the proposed amendment, modification, termination or waiver, or (ii) terminate such non-consenting Lender's Commitments and repay in full its outstanding Loans in accordance with subsections 2.4B(i)(b) and 2.4B(ii)(b); provided that unless the -------- Commitments that are terminated and the Loans that are repaid pursuant to the preceding clause (ii) are immediately replaced in full at such time through the addition of new Lenders or the increase of the Commitments and/or outstanding Loans of existing Lenders (who in each case must specifically consent thereto), then in the case of any action pursuant to the preceding clause (ii), the Requisite Lenders (determined before giving effect to the proposed action) shall specifically consent thereto; provided further that Company shall not have the -------- ------- right to terminate such non-consenting Lender's Commitment and repay in full its outstanding Loans pursuant to clause (ii) of this subsection 10.6B if, immediately after the termination of such Lender's Revolving Loan Commitment in accordance with subsection 2.4B(ii)(b), the Revolving Loan Exposure of all 171 Lenders would exceed the Revolving Loan Commitments of all Lenders; provided -------- still further that Company shall not have the right to replace a Lender solely - ----- ------- as a result of the exercise of such Lender's rights (and the withholding of any required consent by such Lender) pursuant to the second proviso to subsection 10.6A. C. Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 10.6 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by Company, on Company. 10.7 INDEPENDENCE OF COVENANTS. ------------------------- All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 10.8 NOTICES. ------- Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Agent shall not be effective -------- until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Agent. 10.9 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. ------------------------------------------------------ A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit hereunder. B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 3.5A, 3.6, 10.2, 10.3 172 and 10.4 and the agreements of Lenders set forth in subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, and the termination of this Agreement. Without limiting the generality of the immediately preceding sentence, Company's obligations relating to any Environmental Losses under subsection 10.3 shall survive the sale or other transfer of subject Mortgaged Property or Covered Real Property, as the case may be, by Company (or its Affiliate) prior to the Transfer Date. 10.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. 10.11 MARSHALLING; PAYMENTS SET ASIDE. ------------------------------- Neither Agent nor any Lender shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Agent or Lenders (or to Agent for the benefit of Lenders), or Agent or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 10.12 SEVERABILITY. ------------ In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obliga tion in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.13 OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS. ---------------------------------------------------------- The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commitments of any other Lender hereunder. Nothing 173 contained herein or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 10.14 HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 10.15 APPLICABLE LAW. -------------- THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 10.16 SUCCESSORS AND ASSIGNS. ---------------------- This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders (it being understood that Lenders' rights of assignment are subject to subsection 10.1). Neither Company's rights or obligations hereunder nor any interest therein may be assigned or delegated by Company without the prior written consent of all Lenders. 10.17 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, COMPANY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; 174 (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 10.8; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 10.17 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 10.18 WAIVER OF JURY TRIAL. -------------------- EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY 175 OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 10.19 CONFIDENTIALITY. --------------- Each Lender shall hold all non-public information obtained pursuant to the requirements of or in connection with this Agreement which has been identified as confidential by Company in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates of such Lender or disclosures reasonably required by any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Loans or any participations therein or disclosures required or requested by any governmental agency or representative thereof or the NAIC or pursuant to legal process; provided that, unless specifically prohibited by -------- applicable law or court order, each Lender shall notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; and provided, further that -------- ------- in no event shall any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries. 10.20 COUNTERPARTS; EFFECTIVENESS. --------------------------- This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Agent of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 176 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: SMITH'S FOOD & DRUG CENTERS, INC. By: _______________________________________ Title: _______________________________________ Notice Address: _______________________________________ _______________________________________ _______________________________________ _______________________________________ LENDERS: BANKERS TRUST COMPANY, individually and as Agent and Arranger By: _______________________________________ Title: _______________________________________ Notice Address: _______________________________________ _______________________________________ _______________________________________ _______________________________________ S-1 THE CHASE MANHATTAN BANK, N.A., individually and as Arranger By: _______________________________________ Title: _______________________________________ Notice Address: _______________________________________ _______________________________________ _______________________________________ _______________________________________ CHASE SECURITIES, INC., as Syndication Agent By: _______________________________________ Title: _______________________________________ Notice Address: _______________________________________ _______________________________________ _______________________________________ _______________________________________ S-2 ______________________________ Individually and as Co-Agent By: _______________________________________ Title: _______________________________________ Notice Address: _______________________________________ _______________________________________ _______________________________________ _______________________________________ ______________________________ Individually and as Co-Agent By: _______________________________________ Title: _______________________________________ Notice Address: _______________________________________ _______________________________________ _______________________________________ _______________________________________ ______________________________ Individually and as Co-Agent By: _______________________________________ Title: _______________________________________ Notice Address: _______________________________________ _______________________________________ _______________________________________ _______________________________________ S-3 SCHEDULE 5.1 SUBSIDIARIES OF COMPANY SCHEDULE 2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES EX-10.2 6 STANDSTILL AGREEMENT DATED 1/29/96 EXHIBIT 10.2 AMENDED AND RESTATED -------------------- STANDSTILL AGREEMENT THIS STANDSTILL AGREEMENT, dated as of January 29, 1996 (this "Agreement"), among Smith's Food & Drug Centers, Inc., a Delaware corporation - ---------- (the "Company"), The Yucaipa Companies, a California general partnership ------- ("Yucaipa"), Yucaipa SSV Partners, L.P., a California limited partnership, - --------- Yucaipa Smitty's Partners, L.P., a California limited partnership, Yucaipa Smitty's Partners II, L.P., a California limited partnership, Yucaipa Arizona Partners, L.P., a California limited partnership, (collectively with Yucaipa and its affiliates who are required to become parties hereto pursuant to Section 7.2, the "Yucaipa Group"), Jeffrey P. Smith, Richard D. Smith, Fred L. Smith, ------------- Ida Smith, The Dee Glenn 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 (collectively, with their affiliates who are required to become parties hereto pursuant to Section 7.2, the "Smith Group"). ----------- WHEREAS, the Company, Cactus Acquisition, Inc. ("Acquisition"), ----------- Smitty's Supermarkets, Inc. ("Smitty's") and Yucaipa have entered into a -------- Recapitalization Agreement and Plan of Merger dated as of January 29, 1996 (the "Recapitalization Agreement"); -------------------------- WHEREAS, the respective Boards of Directors of the Company, Acquisition and Smitty's have approved the merger of Acquisition with and into Smitty's (the "Merger") upon the terms and conditions contained in the ------ Recapitalization Agreement; WHEREAS, as consideration in the Merger, members of the Yucaipa Group and the other stockholders of Smitty's will receive shares of the Company's Class B Common Stock, par value $.01 per share (collectively with the Company's Class A Common Stock, par value $.01 per share, and any new class of common stock of the Company created and outstanding, "Company Common Stock"); -------------------- WHEREAS, as part of the Recapitalization, the Company and Yucaipa will enter into a Management Services Agreement, in the form attached to the Recapitalization Agreement (the "Management Agreement"), pursuant to which -------------------- Yucaipa will undertake and perform various management services in respect of the Company's operations, subject to the terms and conditions contained in such agreement; and WHEREAS, the parties hereto each believe that it is desirable to establish certain provisions with respect to the shares of the Company Common Stock to be issued in connection with the transactions contemplated by the Recapitalization Agreement and all additional shares of Company Common Stock which may be acquired by, or which are currently held by, the parties hereto other than the Company. NOW, THEREFORE, in consideration of the mutual covenants and premises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Capitalized terms used herein without ----------- definition shall have the meanings given to such terms in the Recapitalization Agreement. In addition, as used in this Agreement, the following terms shall have the following meanings: 1 "affiliate" of any person shall mean any person directly or indirectly --------- controlling or controlled by such person or under common control with such person. For purposes of this Agreement, members of the Yucaipa Group or the Smith Group, on the one hand, and the Company, on the other, shall not be deemed to be affiliates of each other. "associate" shall mean any person having a business, financial or --------- familial relationship that might reasonably be expected to affect the individual's judgment with respect to matters in which a member of the Yucaipa Group or its affiliates might be interested. The term "associated" shall have a ---------- correlative meaning. "beneficial ownership", "person" and "group" shall have the respective -------------------- ------ ----- meanings ascribed to such terms pursuant to Regulation 13D-G adopted by the SEC under the Exchange Act, as in effect on the date hereof. "Combined Voting Power" shall mean, at any measurement date, the total --------------------- number of votes which could have been cast in an election of directors of the Company had a meeting of the stockholders of the Company been duly held based upon a record date as of the measurement date if all Company Voting Securities then outstanding and entitled to vote at such meeting were present and voted to the fullest extent possible at such meeting. "Company Voting Securities" shall mean, collectively, Company Common ------------------------- Stock, any preferred stock of the Company that is entitled to vote generally for the election of directors, any other class or series of Company securities that is entitled to vote generally for the election of directors and any other securities, warrants or options or rights of any nature (whether or not issued by the Company) that are convertible into, exchangeable for, or exercisable for the purchase of, or otherwise give the holder thereof any rights in respect of, Company Common Stock, or any other class or series of Company securities that is entitled to vote generally for the election of directors; provided, however, that "Company Voting Securities" shall not include any shares of Class C Common Stock of the Company to the extent the holder thereof is not entitled to convert such shares into Class B Common Stock pursuant to the Company's certificate of incorporation. "Disinterested Directors" shall mean directors of the Company who (i) ----------------------- are not employees or officers of the Company, (ii) are not serving as designees of the Yucaipa Group pursuant to Section 3.10 hereof, and (iii) are not associates of Yucaipa or its affiliates. "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended, and the rules and regulations promulgated thereunder. "13D/G Group" shall mean two or more persons acting together for the ----------- purpose of acquiring, holding, voting or disposing of Company Voting Securities, which persons would be required under the Exchange Act to file a statement on Schedule 13D or 13G with the SEC as a "person" within the meaning of Section 13(d)(3) of the Exchange Act if such persons beneficially owned sufficient securities to require such a filing under the Exchange Act. SECTION 2. REPRESENTATIONS AND WARRANTIES. ------------------------------ 2.1. The Yucaipa Group represents and warrants to the Company as follows: 2 (a) Yucaipa is a validly existing general partnership under the laws of California and has the full legal right, power and authority to enter into this Agreement and perform its obligations hereunder. (b) Each member of the Yucaipa Group (other than Yucaipa) is a validly existing limited partnership under the laws of California and has the full legal right, power and authority to enter into this Agreement and perform its respective obligations hereunder. (c) This Agreement has been duly authorized, executed and delivered by each member of the Yucaipa Group and constitutes the legally valid and binding agreement of each such member, enforceable against it in accordance with the terms hereof. (d) Neither the execution and delivery of this Agreement by each member of the Yucaipa Group nor the performance of its respective obligations hereunder will conflict with or result in a breach of or constitute a default under any law, rule, regulation, judgment, order or decree of any court, arbitrator or governmental agency or instrumentality, or of any agreement or instrument to which any member of the Yucaipa Group is bound or affected or of any organization documents of each such member. (e) Except for not more than 20 shares of Class B Common Stock of the Company, as of the date hereof, no shares of Company Common Stock are, and as of the date on which the Offer is consummated, no shares of Company Common Stock will be, beneficially owned by any member of the Yucaipa Group, except for those shares of Company Common Stock acquired pursuant to the Recapitalization Agreement or the other agreements contemplated thereby. (f) Other than the Recapitalization Agreement and the other agreements contemplated thereby, neither Yucaipa nor any of its affiliates has any agreement, arrangement or understanding with any other person or group who is not a member of the Yucaipa Group or its affiliates with respect to acquiring, holding, voting or disposing of Company Voting Securities. 2.2. The Company represents and warrants to the Yucaipa Group as follows: (a) The Company is a validly existing corporation under the laws of the jurisdiction of its organization and has the corporate power and authority to enter into this Agreement and perform its obligations hereunder. (b) This Agreement has been duly authorized, executed and delivered by the Company and constitutes the legally valid and binding agreement of the Company, enforceable against the Company in accordance with the terms hereof. (c) Neither the execution and delivery of this Agreement nor the performance of its obligations hereunder will conflict with or result in a breach of or constitute a default under, any law, rule, regulation, judgment, order or decree of any court, arbitrator or governmental agency or instrumentality, or of any agreement or instrument to which the Company is bound or affected or of any charter documents of the Company. 2.3. The Smith Group represents and warrants to the Yucaipa Group and the Company as follows: 3 (a) Each member of the Smith Group is a holder of record of shares of Company Common Stock and entitled to vote such shares for the election of directors of the Company. (b) Each member of the Smith Group that is a natural person has the capacity and legal power, and each member of the Smith Group that is a trust is validly organized and has the requisite organizational power and authority, to enter into this Agreement and perform its respective obligations hereunder. (c) This Agreement has been duly authorized (as applicable), executed and delivered by each member of the Smith Group and constitutes the legally valid and binding agreement of each such member, enforceable against it in accordance with the terms hereof. (d) Neither the execution and delivery of this Agreement nor the performance of any obligations hereunder will conflict with or result in a breach of or constitute a default under, any law, rule, regulation, judgment, order or decree of any court, arbitrator or governmental agency or instrumentality, or any agreement or instrument to which any member of the Smith Group is bound or affected or any organizational documents of any Smith Group member that is a trust or other organization. SECTION 3. COVENANTS WITH RESPECT TO THE COMPANY VOTING SECURITIES ------------------------------------------------------- AND OTHER MATTERS. - ----------------- 3.1. Acquisition of Company Voting Securities. ---------------------------------------- (a) Except as specifically set forth in the Recapitalization Agreement, until the later of the expiration, termination or withdrawal of the Offer, the termination of the Recapitalization Agreement or the Merger Closing Date (as defined in the Recapitalization Agreement), no member of the Yucaipa Group or any of their respective affiliates shall, directly or indirectly, acquire, offer to acquire, agree to acquire, become the beneficial owner of or obtain any rights in respect of any Company Voting Securities, by purchase or otherwise, or take any action in furtherance thereof. (b) Subject to Section 3.2, no member of the Yucaipa Group shall, prior to January 29, 2006, directly or indirectly acquire, offer to acquire, agree to acquire, become the beneficial owner of or obtain any rights in respect of any Company Voting Securities, by purchase or otherwise, or take any action in furtherance thereof, if the effect of such acquisition, agreement or other action would be (either immediately or upon consummation of any such acquisition, agreement or other action, or upon the expiration of any period of time provided in any such acquisition, agreement or other action) to increase the aggregate beneficial ownership of Company Voting Securities by the Yucaipa Group and its affiliates to such number of Company Voting Securities that (X) --- represents or possesses greater than 20.0% of the Combined Voting Power of Company Voting Securities, OR (Y) REPRESENTS GREATER THAN 25% OF THE TOTAL ----------------------------------------------- NUMBER OF COMPANY VOTING SECURITIES OUTSTANDING, without the approval of a - ------------------------------------------------ majority of the Company's Disinterested Directors. Notwithstanding the foregoing maximum percentage limitation, (A) no member of the Yucaipa Group shall be obligated to dispose of any Company Voting Securities beneficially owned in violation of such maximum percentage limitation if, and solely to the extent that, its beneficial ownership is or will be increased solely as a result of a repurchase, redemption or other acquisition of any Company Voting Securities by the Company or any of its subsidiaries, and (B) the foregoing shall not prohibit any purchase of Company Voting Securities by any member of the Yucaipa Group or its affiliates directly from the Company (including pursuant to the exercise of rights, 4 oversubscription rights or standby purchase obligations in connection with rights offerings by the Company), provided such purchase is approved by a majority of the Disinterested Directors. 3.2. Takeover Proposals by the Yucaipa Group. No member of the --------------------------------------- Yucaipa Group shall submit a proposal to acquire a majority of the Combined Voting Power of Company Voting Securities (a "Change of Control Proposal") to -------------------------- any person unless such Change of Control Proposal (or the submission thereof to any such person) is approved by a majority of the Disinterested Directors and the following conditions are satisfied: (a) A Change of Control Proposal shall contemplate either (i) a tender offer for all outstanding Company Common Stock not owned by the Yucaipa Group and must be conditioned upon a majority of such Common Stock not owned by the Yucaipa Group being tendered, or (ii) a merger transaction conditioned upon the holders of a majority of Combined Voting Power of the Company not owned by the Yucaipa Group present, in person or by proxy, voting in favor of such transaction. In the case of either (i) or (ii), the same consideration must be offered to all Company stockholders. (b) A special committee of the Board of Directors of the Company shall be created consisting of all of the Independent Directors (the "Special ------- Committee"). - --------- (c) The Special Committee shall retain a nationally recognized investment banking firm to advise the Special Committee with respect to the fairness of the Change of Control Proposal to the stockholders of the Company. (d) The Change of Control Proposal must be approved by the Special Committee, which shall not give its approval unless it has received an opinion from such investment banking firm that the Change of Control Proposal is fair to the stockholders of the Company other than the Yucaipa Group. Unless all of the foregoing conditions have been satisfied, the Change of Control Proposal shall not be presented to the Company's stockholders (including by way of a tender offer, merger proposal or other Change of Control Proposal that is conditioned on satisfaction of this Section 3.2). 3.3. Disposition of the Company Voting Securities and Other Related -------------------------------------------------------------- Matters. - ------- (a) Without the prior approval of a majority of the Disinterested Directors, no member of the Yucaipa Group shall, directly or indirectly, sell, transfer any beneficial interest in, pledge, hypothecate or otherwise dispose of any Company Voting Security or any shares of Company Common Stock to be acquired from the Company pursuant to the Warrant Agreement, other than to another member of the Yucaipa Group or their respective affiliates who agree to become bound by the terms of this Agreement: (i) in a transaction or series of related transactions that would result in a transfer to any person or group of greater than 3.0% of the Combined Voting Power, except in response to certain tender or exchange offers as permitted by Section 3.3(b); and (ii) in a transaction or series of related transactions that would result in a transfer to any person or group that, to the knowledge of the Yucaipa Group at the time of such transaction, upon consummation of such sale, transfer or disposition, would, 5 directly or indirectly, have beneficial ownership of or the right to acquire beneficial ownership of such number of Company Voting Securities that represent greater than 5.0% of the Combined Voting Power, except in response to certain tender or exchange offers as permitted by Section 3.3(b). The Yucaipa Group members shall request all purchasers of Company Common Stock (or rights, options or warrants to purchase any such shares) from them in negotiated transactions, and all underwriters, placement agents or brokers ("Agents") for any public offerings or open market transactions involving - -------- Company Common Stock (or rights, options or warrants to purchase any such shares), to represent and warrant that the requirements of this Section 3.3(a) have been satisfied with respect to such transactions, such representations by Agents to be qualified to the best of such Agents' knowledge. (b) Notwithstanding Section 3.3(a), on and after the eleventh business day after commencement of a tender or exchange offer made by a person who is not an affiliate of any member of the Yucaipa Group for outstanding Company Voting Securities, any member of the Yucaipa Group may tender or exchange any Company Voting Securities beneficially owned by it pursuant to such offer if such offer shall have been approved by a majority of the Disinterested Directors. (c) Proposed transfers of Company Voting Securities by members of the Yucaipa Group that are not in compliance with this Section shall be of no force or effect. 3.4. Proxy Solicitations, etc. Except as may be permitted by this ------------------------ Section 3, no member of the Yucaipa Group shall solicit proxies, assist any other person in any way, directly or indirectly, in the solicitation of proxies, become a "participant" in a "solicitation," or assist any "participant" in a "solicitation" (as such terms are defined in Rule 14a-1 of Regulation 14A under the Exchange Act) in opposition to the recommendation of a majority of the Board of Directors, or submit any proposal for the vote of stockholders of the Company, or recommend or request or induce or attempt to induce any other person to take any such actions, or seek to advise, encourage or influence any other person with respect to the voting of Company Voting Securities, in each case without the prior approval of a majority of the Disinterested Directors. 3.5. No Voting Trusts, Pooling Agreements, or Formation of "Groups". -------------------------------------------------------------- Without the prior approval of a majority of the Disinterested Directors, no member of the Yucaipa Group shall form, join in or in any other way participate in any partnership, pooling agreement, syndicate, voting trust or other "group", including a 13D/G Group, other than the Yucaipa Group, with respect to Company Voting Securities, or enter into any agreement (other than this Agreement, the Recapitalization Agreement or the other agreements contemplated thereby) or arrangement or otherwise act in concert with any other person or group, for the purpose of acquiring, holding, voting or disposing of Company Voting Securities. 3.6. Affiliate Transactions. No member of the Yucaipa Group, or any ---------------------- affiliate of any such member, shall engage in any transaction with the Company without the prior approval of a majority of the Disinterested Directors; provided that the foregoing provision shall not apply to (i) any transactions as set forth in the Recapitalization Agreement or the Management Services Agreement, Registration Rights Agreement or Warrant Agreement (each as defined in the Recapitalization Agreement), (ii) transactions contemplated by any other agreement as in effect on the date hereof or any amendment thereto, or (iii) transactions regarding the purchase or sale of goods or services, in each case, in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) which are fair to the Company pursuant to guidelines set forth by of the Board of Directors of the Company and approved by a majority of the Disinterested Directors. 6 3.7. No Solicitation of Bidders. No member of the Yucaipa Group -------------------------- shall directly or indirectly assist, solicit, encourage or induce any person to bid for or acquire outstanding Company Voting Securities in excess of 5.0% of the Combined Voting Power of Company Voting Securities, except in connection with customary investor relations activities provided pursuant to the Management Agreement. 3.8. Non-Circumvention. No member of the Yucaipa Group or any ----------------- affiliate or associate of any such member shall take any action, alone or in concert with any other person or group, to seek control of the Company or otherwise seek to circumvent the limitations of the provisions of this Section 3 of this Agreement without the approval of a majority of the Disinterested Directors. Without limiting the generality of the foregoing, no member of the Yucaipa Group shall, without the approval of a majority of the Disinterested Directors, (i) present to the Company or to any third party any proposal that can reasonably be expected to result in a change of control of the Company or in any increase beyond the percentage specified in Section 3.1 in the Combined Voting Power of Company Voting Securities beneficially owned in the aggregate by the Yucaipa Group, (ii) publicly suggest or announce its willingness or desire to engage in a transaction or group of transactions or have another person engage in a transaction or group of transactions that would result in a change of control of the Company or in any increase beyond the percentage specified in Section 3.1 in the Combined Voting Power of Company Voting Securities beneficially owned in the aggregate by the Yucaipa Group, (iii) initiate, request, induce or attempt to induce or give encouragement to any other person to initiate any proposal that can reasonably be expected to result in a change of control of the Company or in any increase beyond the percentage specified in Section 3.1 in the Combined Voting Power of Company Voting Securities beneficially owned in the aggregate by the Yucaipa Group, or (iv) publicly request, suggest or announce its desire to amend or obtain a waiver of any provision of this Agreement. 3.9. Confidential Material. --------------------- (a) Definitions. For purposes of this Section: ----------- (i) The term "Confidential Material" means all information, --------------------- whether oral, written or otherwise (including any information furnished prior to the execution of this Agreement), furnished or otherwise disclosed by the Company to any member of the Yucaipa Group or any of the Representatives (as defined below), and all notes, reports, analyses, compilations, studies and other materials prepared by the Yucaipa Group or any of the Representatives (in whatever form maintained, whether documentary, computer storage or otherwise) containing or based upon, in whole or in part, any such information. The term "Confidential Material" does not include information which is or becomes generally available to the public other than as a result of a disclosure by any member of the Yucaipa Group or any of the Representatives (as defined below) or becomes available to any member of the Yucaipa Group or any of the Representatives on a non-confidential basis from any source that is not known by such member of the Yucaipa Group or such Representative to be bound by an obligation of confidentiality to the Company. (ii) The term "Representatives" shall mean any and all --------------- partners, directors, officers, employees, agents, prospective financing sources, affiliates or representatives (including representatives of advisors) of any member of the Yucaipa Group who needs to know such information for the purpose of analyzing, structuring, financing, documenting or otherwise facilitating the transactions contemplated by this Agreement or the carrying out of the duties of Yucaipa pursuant to the Recapitalization Agreement or the Management Agreement. 7 (b) Each member of the Yucaipa Group and each of the Representatives shall preserve the confidentiality of the Confidential Material and shall not disclose any of the Confidential Material in any manner whatsoever; provided, however, that (i) any member of the Yucaipa Group may make any disclosure of such information to which the Company gives its prior written consent, (ii) the Yucaipa or its Representatives may make disclosures of such information within the scope of their authority under the Management Agreement, and (iii) any of such information may be disclosed to the Representatives who need to know, and who are informed of the confidential nature of the Confidential Material and of the terms of this Section and who agree to keep such information confidential. In any event, the Yucaipa Group shall inform each of its Representatives which have, or will have, access to any or all of the Confidential Material, of the existence and content of this Agreement and will take all reasonable action necessary to cause such Representatives to observe the confidentiality requirements of this Agreement. In any event, each member of the Yucaipa Group shall be responsible for any breach of this Agreement by any of its Representatives. (c) If any member of the Yucaipa Group or any of the Representatives are requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand, any informal or formal investigation by any government or governmental agency or authority or otherwise) to disclose any Confidential Material or such person's opinion, judgment, view or recommendation concerning the Company as developed from the Confidential Material, the Yucaipa Group agrees (i) to immediately notify the Company in writing of the existence, terms and circumstances surrounding such a request, (ii) to consult with the Company on the advisability of taking legally available steps to resist or narrow such request and shall exercise its best efforts to obtain reliable assurance that confidential treatment required hereby will be accorded such Confidential Material, and (iii) if disclosure of such information is required, to furnish only that portion of the Confidential Material which in the opinion of counsel to the Yucaipa Group the Yucaipa Group is legally compelled to disclose, and to cooperate with any action by the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Material. (d) Yucaipa hereby acknowledges on behalf of itself and all members of the Yucaipa Group (and agrees to advise the Representatives and members of the Yucaipa Group who are informed in accordance with the terms of this Section as to the matters which are the subject of this Section), that the United States securities laws prohibit any person who has received from an issuer material, non-public information, including certain information that may be part of the Confidential Material, while such information is non-public, from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. 3.10. Voting of Company Voting Securities and Other Related Matters. ------------------------------------------------------------- (a) Each member of the Yucaipa Group and the Smith Group that is a holder of record of Company Voting Securities shall be present, and each member of the Yucaipa Group and the Smith Group that is a beneficial owner of Company Voting Securities shall cause the holder of record to be present, in person or by proxy, at all meetings of the stockholders of the Company so that all Company Voting Securities owned of record or beneficially by the Yucaipa Group or the Smith Group, as the case may be counted for the purpose of determining the presence of a quorum at such meetings. (b) Subject to the provisions of the certificate of incorporation and bylaws of the Company and the approval of the Company's stockholders, as long as the members of the Yucaipa 8 Group and their respective affiliates beneficially own at least 8.0% of the outstanding shares of Company Common Stock, the Yucaipa Group shall have the right to designate two directors of the Company, and as long as the members of the Yucaipa Group and their respective affiliates beneficially own, in the aggregate, at least 5.0% of the outstanding shares of Company Common Stock, the Yucaipa Group shall have the right to designate one director of the Company; provided that no individual who is an officer, director, partner or principal stockholder of any Significant Competitor (as defined in the Management Agreement) of the Company or any of its subsidiaries shall serve as a director; provided, however, that at any time when the Yucaipa Group and its affiliates shall no longer beneficially own at least 5.0% of the outstanding shares of Company Common Stock, the Yucaipa Group shall not have the right to designate any directors of the Company, the Yucaipa Group's rights under this Section 3.10 shall terminate, and the Yucaipa Group shall cause its designees to resign forthwith such that no designee of the Yucaipa Group remains on the board of directors of the Company. (c) Subject to the provisions of the certificate of incorporation and bylaws of the Company and the approval of the Company's stockholders, as long as the members of the Smith Group and their respective affiliates beneficially own at least 8.0% of the outstanding shares of Company Common Stock, the Smith Group shall have the right to designate two directors of the Company, and as long as the members of the Smith Group and their respective affiliates beneficially own, in the aggregate, at least 5.0% of the outstanding shares of Company Common Stock of the Company, the Smith Group shall have the right to one director of the Company; provided that no individual who is an officer, director, partner or principal stockholder of any Significant Competitor of the Company or any of its subsidiaries (other than members of the Smith Group) shall serve as a director; provided, however, that at any time when the Smith Group and its affiliates shall no longer beneficially own at least 5.0% of the Company Common Stock, the Smith Group shall not have the right to designate any directors of the Company, the Smith Group's rights under this Section 3.10 shall terminate, and the Smith Group shall cause its designees to resign forthwith such that no designee of the Smith Group remains on the board of directors of the Company. (d) The Company agrees to use its best efforts, to cause to be elected to the Company's Board of Directors two nominees of Yucaipa (subject to Section 3.10(b) above), two nominees of the Smith Group (subject to Section 3.10(c) above), one member of the senior management of the Company and two "independent directors" (as required by the rules of the New York Stock Exchange, Inc.); provided that once elected by the stockholders of the Company, such "independent directors" shall be Disinterested Directors for purposes of this Agreement unless such directors subsequently take some action which would have prevented them from meeting the definition of Disinterested Director at the date of their election. (e) Each member of the Yucaipa Group shall, at any annual or special meeting of the shareholders at which 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 Company Voting Securities in favor of the election to the Board of Directors of the Company of the persons designated by the Smith Group pursuant to this Section 3.10. Each member of the Yucaipa Group shall, and shall use its best efforts to cause the directors of the Company then in office (other than the directors designated by the Smith Group) to, not take any action in furtherance of or seeking to cause an increase or decrease in the number of directors of the Company from seven directors, the removal of any directors (other than directors nominated by the Yucaipa Group) or an increase or decrease in the number of independent directors. 9 (f) Each member of the Smith Group shall, at any annual or special meeting of the shareholders at which 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 Company Voting Securities in favor of the election to the board of directors of the Company of the persons designated by the Yucaipa Group pursuant to this Section 3.10. Each member of the Smith Group shall, and shall use its best efforts to cause the directors of the Company then in office (other than the directors designated by the Yucaipa Group) to, not take any action in furtherance of or seeking to cause an increase or reduction in the number of directors of the Company from seven directors, the removal of any directors (other than directors nominated by the Smith Group) or an increase or decrease in the number of independent directors. (g) The Company shall take all necessary or appropriate action to assist in the nomination and election as directors of those persons designated by the Yucaipa Group or the Smith Group as are entitled to election to the board of directors of the Company pursuant to the provisions of this Section 3.10. Each of the Yucaipa Group and the Smith Group shall cause its respective designees on the board of directors of the Company to take all necessary or appropriate action to assist in the nomination and election as directors of such other nominees as may be necessary to fill any vacancies on the board of directors. (h) The provisions of this Section 3.10 shall be terminated in the event that the Recapitalization is terminated pursuant to Section 10.2 of the Recapitalization Agreement. 3.11. Waiver of Requirements. ---------------------- (a) Notwithstanding anything in this Section 3 to the contrary, any of the terms of Sections 3.1 through 3.10 may be waived, in whole or in part and as to particular transactions or matters or as to one or more members of the Yucaipa Group, if (a) in the case of a waiver of an obligation of a member of the Yucaipa Group, a majority of the Disinterested Directors shall have approved such waiver in accordance with applicable law, or (b) in the case of a waiver of an obligation of the Company provided for the benefit of a member of the Yucaipa Group, such member of the Yucaipa Group shall have consented in writing to such waiver. (b) Notwithstanding anything in this Section 3 to the contrary, any of the terms of Sections 3.1 through 3.10 may be waived, in whole or in part and as to particular transactions or matters or as to one or more members of the Smith Group, if (a) in the case of a waiver of an obligation of a member of the Smith Group, a majority of the Disinterested Directors shall have approved such waiver in accordance with applicable law, or (b) in the case of a waiver of an obligation of the Company provided for the benefit of a member of the Smith Group, such member of the Smith Group shall have consented in writing to such waiver. 3.12. Termination of Restrictions. The restrictions on disposition --------------------------- contained in Section 3.3 shall terminate upon, and shall not apply to, any of the following events: (a) the Company with the approval of a majority of the Disinterested Directors shall enter into and consummate an agreement with any person or group providing for an offer to be made to purchase shares of Company Common Stock or all or substantially all of the assets of the Company, or a majority of the whole Board of Directors, approves or recommends acceptance of such offer; or 10 (b) the Company shall enter into and consummate an agreement calling for the merger or consolidation of the Company with or into any other corporation in which (i) the Company's outstanding capital stock shall be converted into cash or other property, (ii) a majority of the outstanding voting stock of the surviving corporation immediately following such merger or consolidation will not be owned by persons who were stockholders of the Company immediately before the merger or consolidation and (iii) notice of a meeting of shareholders of the Company called to consider such agreement shall be given. SECTION 4. TERM OF AGREEMENT; CERTAIN PROVISIONS REGARDING ----------------------------------------------- TERMINATION. - ----------- Unless this Agreement specifically provides for earlier termination with respect to any particular right or obligation, this Agreement shall terminate if the Yucaipa Group and its affiliates shall, at any time (in compliance with this Agreement), sell or otherwise dispose of or cease to own any Company Voting Securities so that the Yucaipa Group and its affiliates beneficially own, in the aggregate, Company Voting Securities representing less than 2.0% of all shares of Company Common Stock. SECTION 5. LEGEND AND STOP TRANSFER ORDER. ------------------------------ To assist in effectuating the provisions of this Agreement, each member of the Yucaipa Group hereby consents (i) to the placement within 10 business days after any Company Voting Securities become subject to the provisions of this Agreement, of the following legend on all certificates representing ownership of Company Voting Securities owned of record or beneficially by any member of the Yucaipa Group, until such shares are sold, transferred or disposed in a manner permitted hereby to a person who is not then a member of the Yucaipa Group: The shares represented by this certificate are subject to the provisions of a Standstill Agreement by and among the Company and certain stockholders of the Company, and may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance therewith. Copies of said Standstill Agreement are on file at the office of the Corporate Secretary of the Company. and (ii) to the entry of stop transfer orders with the transfer agent or agents of Company Voting Securities against the transfer by such member of Company Voting Securities except in compliance with the requirements of this Agreement. The Company agrees to remove promptly all legends and stop transfer orders with respect to the transfer of Company Voting Securities being made to a person who is not then a member of the Yucaipa Group in compliance with the provisions of this Agreement. SECTION 6. REMEDIES. -------- Each respective member of the Yucaipa Group, the Smith Group and the Company acknowledge and agree that (i) the provisions of this Agreement are reasonable and necessary to protect the proper and legitimate interests of the parties hereto, and (ii) the parties would be irreparably damaged in the event any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to preliminary and permanent injunctive relief to prevent breaches of the provisions of this Agreement by the other parties without the necessity of proving actual damages or of posting any bond, and to enforce specifically the terms and provisions hereof and thereof in any court of the United States or any 11 state thereof having jurisdiction, which rights shall be cumulative and in addition to any other remedy to which the parties may be entitled hereunder or at law or equity. SECTION 7. GENERAL PROVISIONS. ------------------ 7.1. Choice of Law. This Agreement shall be construed, interpreted ------------- and the rights of the parties determined in accordance with the laws of the State of Delaware without reference to the choice of laws provisions thereof. 7.2. Additional Parties; Joint and Several Obligations. All of the ------------------------------------------------- obligations of the Yucaipa Group and its members hereunder shall be joint and several, and all of the obligations of the Smith Group and its members hereunder shall be joint and several. Each affiliate of a member of the Yucaipa Group or the Smith Group that shall become or have the right to become the beneficial owner, within the meaning and scope of Section 3 hereof, of Company Voting Securities shall, promptly upon becoming such owner or holder, execute and deliver to the Company a joinder agreement, agreeing to be legally bound by this Agreement as an original signatory as a member of the Yucaipa Group or the Smith Group, as applicable; provided that failure to execute such agreement shall not excuse such person's non-compliance with any provision of this Agreement. No member of the Yucaipa Group shall transfer Company Voting Securities to any of its affiliates not already a party hereto unless the transferee shall agree to be bound by this Agreement in the manner specified above in this Section 7.2. No member of the Smith Group shall transfer shares of Series I Preferred Stock to any person not already a party hereto unless the transferee shall agree to be bound by this Agreement in the manner specified above in this Section 7.2. 7.3. Smith Group Representative. The members of the Smith Group -------------------------- hereby appoint Jeffrey P. Smith as their designated representative to act on behalf of the Smith Group as a whole for all purposes under the Agreement and any party hereto may rely on such designation for written notices from the members of the Smith Group holding a majority of all the shares of common stock of the Company. 7.4. Notices. All notices, consents, requests, instructions, ------- approvals and other communications provided for herein and all legal process in regard hereto shall be in writing and shall be decreed to be validly given, made or served when delivered personally, transmitted by telex or telecopier, or deposited in the U.S. mail, postage prepaid, for delivery by express, registered or certified mail, or delivered to a recognized overnight courier service, addressed as follows: If to the Company: Smith's Food & Drug Centers, Inc. 1550 S. Redwood Road Salt Lake City, Utah 84107 Attn: General Counsel Fax Number: (801) 974-1676 12 If to Yucaipa or any member of the Yucaipa Group: The Yucaipa Companies 10000 Santa Monica Boulevard, Fifth Floor Los Angeles, California 90067 Attn: Mark A. Resnik Fax Number: (310) 789-7201 With a copy to: Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 Attn: Thomas C. Sadler, Esq. Fax Number: (213) 891-8763 If to any member of the Smith Group: Jeffrey P. Smith C/O SMITH'S FOOD & DRUG CENTERS, INC. ------------------------------------- 1550 S. REDWOOD ROAD -------------------- SALT LAKE CITY, UTAH 84104 -------------------------- FAX: (801) 974-1662 -------------------- With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attn: Robert L. Friedman, Esq. Fax Number: (212) 455-2502 or to such other address as may be specified in a notice given pursuant to this Section. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back if telexed; when receipt acknowledged, if telecopied; and the next business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. The parties may change the address to which notices are to be given by giving five days' prior notice of such change in accordance herewith. 7.5. Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. The parties hereto agree that they will use their best efforts at all times to support and defend this Agreement. 7.6. Enforcement of Agreement. The approval of a majority of the ------------------------ Board of Directors or a majority of the Disinterested Directors shall be all that is required for the Company to seek to enforce the terms of this Agreement. 13 7.7. Amendments; Waivers. Any provision of this Agreement may be ------------------- amended or waived if, and only if, such amendment or waiver is in writing and signed by each party hereto; provided that no such amendment or waiver by the Company shall be effective without the approval of a majority of the Disinterested Directors. No failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 7.8. Descriptive Headings. Descriptive headings are for convenience -------------------- only and shall not control or affect the meaning or construction of any provision of this Agreement. Reference in this Agreement to Sections are to Sections of this Agreement. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the identity of the applicable person or persons may require. 7.9. Entire Agreement; Amendment. This Agreement and the other --------------------------- instruments and agreements referred to herein embody the entire agreement of the parties hereto with respect to the subject matter hereof and supersede all prior agreements with respect thereto. 7.10. Counterparts. This Agreement shall become binding when one or ------------ more counterparts hereof, individually or taken together, bears the signatures of each of the parties hereto. This Agreement may be executed in any number of counterparts, each of which shall be an original as against the party whose signature appears thereon, or on whose behalf such counterpart is executed, but all of which taken together shall be one and the same agreement. 7.11. No Partnership. No partnership, joint venture or joint -------------- undertaking is intended to be, or is, formed between the parties hereto or any of them by reason of this Agreement or the transactions contemplated herein. 7.12. Successors and Assigns. This Agreement shall be binding upon ---------------------- and inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. All of the terms, covenants and agreements contained in this Agreement are solely for the benefit of the parties hereto, and their respective successors and assigns, and no other parties (including, without limitation, any other stockholder or creditor of the Company, or any director, officer or employee of the Company) are intended to be benefitted by, or entitled to enforce, this Agreement. 14 IN WITNESS WHEREOF, the parties hereto intending to be legally bound have duly executed this Agreement, all as of the day and year first above written. SMITH'S FOOD & DRUG CENTERS, INC. By:/S/ JEFFREY P. SMITH -------------------- Name: Jeffrey P. Smith Title: Chairman and Chief Executive Officer THE YUCAIPA COMPANIES By:/S/ MARK A. RESNIK ------------------ Name: Mark A. Resnik Title: General Partner YUCAIPA SSV PARTNERS, L.P. By: The Yucaipa Companies Its General Partner By:/S/ MARK A. RESNIK ------------------ Name: Mark A. Resnik Title: General Partner YUCAIPA SMITTY'S PARTNERS, L.P. By: The Yucaipa Companies Its General Partner By:/S/ MARK A. RESNIK ------------------ Name: Mark A. Resnik Title: General Partner S-1 YUCAIPA SMITTY'S PARTNERS II, L.P. By: The Yucaipa Companies Its General Partner By:/S/ MARK A. RESNIK ------------------ Name: Mark A. Resnik Title: General Partner YUCAIPA ARIZONA PARTNERS, L.P. By: The Yucaipa Companies Its General Partner By:/S/ MARK A. RESNIK ------------------ Name: Mark A. Resnik Title: General Partner /S/ JEFFREY P. SMITH -------------------- JEFFREY P. SMITH /S/ RICHARD D. SMITH -------------------- RICHARD D. SMITH /S/ FRED L. SMITH ----------------- FRED L. SMITH /S/ IDA SMITH ------------- IDA SMITH S-2 THE DEE GLENN SMITH MARITAL TRUST I - By:/S/ JEFFREY P. SMITH -------------------- Name: Jeffrey P. Smith Title: Trustee TRUST FOR THE CHILDREN OF JEFFREY PAUL SMITH By:/S/ JEFFREY P. SMITH -------------------- Name: Jeffrey P. Smith Title: Trustee TRUST FOR THE CHILDREN OF RICHARD DEE SMITH By:/S/ RICHARD D. SMITH -------------------- Name: Richard D. Smith Title: Trustee TRUST FOR THE CHILDREN OF FRED LORENZO SMITH By:/S/ FRED L. SMITH ----------------- Name: Fred L. Smith Title: Trustee S-3 EX-10.4 7 SMITTY'S STOCKHOLDER AGREEMENT DATED 1/29/96 EXHIBIT 10.4 SMITTY'S STOCKHOLDER AGREEMENT THIS STOCKHOLDER AGREEMENT (this "Agreement") is entered into as of --------- _____________________ __, 1996, among SMITH'S FOOD & DRUG CENTERS, INC., a - ------------------------ Delaware corporation (the "Company"), CACTUS ACQUISITION, INC., a Delaware ------- corporation AND WHOLLY-OWNED SUBSIDIARY OF THE COMPANY ("Acquisition"), and the ------------------------------------------ ----------- undersigned stockholders (individually, a "Stockholder" and, collectively, the ----------- "Stockholders") of Smitty's Supermarkets, Inc., a Delaware corporation - ------------- ("Smitty's"). - ---------- - WHEREAS, THE COMPANY, ACQUISITION, SMITTY'S AND THE YUCAIPA ----------------------------------------------------------- COMPANIES ("YUCAIPA") ARE parties to a Recapitalization Agreement and Plan of - ------------------------- Merger dated as of January 29, 1996 (the "Recapitalization Agreement"), -------------------------- providing for the merger of Acquisition with and into Smitty's pursuant to the terms and conditions of the Recapitalization Agreement (the "Merger") and ------ setting forth certain representations, warranties, covenants and agreements which each of the parties thereto is making thereby in connection with the Merger; and WHEREAS, the Recapitalization Agreement contemplates that certain stockholders of Smitty's will agree to vote their shares of Smitty's Common Stock (as hereinafter defined) in favor of the Merger and to take no action inconsistent with the Recapitalization Agreement; and WHEREAS, to comply with the Recapitalization Agreement and to induce the Company to proceed to consummate the Merger, such Stockholders have agreed to commit to vote all shares of Smitty's Common Stock held by each such Stockholder in favor of the Merger and to take no action inconsistent with the Merger; NOW, THEREFORE, in consideration of the covenants herein contemplated, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. REPRESENTATIONS OF STOCKHOLDERS. Each undersigned Stockholder represents that it (i) is the holder and beneficial owner of that number of shares of Class A or Class B Common Stock of the Company (collectively, the "Smitty's Common Stock") set forth under its signature below, (ii) has full - ---------------------- power and authority to make, enter into and carry out the terms of this Agreement, and (iii) is not a party to or bound by any contract, commitment, agreement, understanding arrangement or restriction of any kind with respect to which the execution of this Agreement, or the consummation by such Stockholder of the transactions contemplated hereby will constitute a violation, or cause a default or a conflict. 2. AGREEMENT TO VOTE SHARES. Each undersigned Stockholder shall vote its shares of Smitty's Common Stock and any New Shares (as defined in Section 6 below), and shall cause any holder of record of its shares of Smitty's Common Stock or New Shares to vote, in favor of approval of the Merger and, to the extent required, the other transactions contemplated by the Recapitalization Agreement at every meeting of the stockholders of Smitty's called for such purpose (and every adjournment thereof) or by written action without a meeting or otherwise. 3. NO-SHOP. Each undersigned Stockholder agrees that it shall not, directly or indirectly, through any officer, director, partner, agent or representative or otherwise, (i) solicit, initiate or encourage submission of proposals or offers from any person other than the Company or Acquisition 1 relating to any acquisition or purchase of all or any material portion of the assets of, or any equity interest in, or any merger, consolidation or business combination with, Smitty's or any of its subsidiaries, or (ii) participate in any discussions or negotiations regarding, or furnish any person other than the Company, Acquisition, or their officers, directors or agents any information with respect to, or otherwise cooperate with, assist in, or participate in, or facilitate or encourage any effort by any person other than the Company or Acquisition to do any of the foregoing. 4. NO ACTIONS INCONSISTENT WITH RECAPITALIZATION AGREEMENT. Each undersigned Stockholder agrees to take no action inconsistent with the Recapitalization Agreement or that would prevent any condition precedent to the Merger from being satisfied at or prior to the Effective Time of the Merger. 5. TRANSFER AND ENCUMBRANCE. Each undersigned Stockholder agrees not to transfer, sell, offer, pledge, or otherwise dispose of or reduce his or her right relative to or encumber any of its shares of Company Common Stock or New Shares without the prior written consent of the Company and Smitty's. 6. ADDITIONAL PURCHASES. Each undersigned Stockholder agrees that any New Shares acquired or purchased by it shall be subject to the terms of this Agreement. For purposes of this Agreement, the term "New Shares" shall mean any ---------- shares of Smitty's Common Stock that each Stockholder purchases, otherwise acquires beneficial ownership of or acquires the right to vote or share in the voting of, after the execution of this Agreement, including, without limitation, through the exercise of any options, warrants or other rights to purchase Smitty's Common Stock. 7. SPECIFIC PERFORMANCE. Each party hereto acknowledges that (a) it will be impossible to measure in money the damage to the Company and Acquisition if a Stockholder fails to comply with any of the obligations imposed by this Agreement, (b) every such obligation is material, and (c) in the event of any such failure, the Company and Acquisition will not have an adequate remedy at law or damages and, accordingly, each party hereto agrees that injunctive relief or other equitable remedy, in addition to remedies at law or damages, is an appropriate remedy for any such failure. 8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns and shall not be assignable without the written consent of the other parties hereto. 9. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements, written or oral, among the parties hereto with respect to the subject matter hereof and, together with the Recapitalization Agreement and any other agreement to be executed by each undersigned party pursuant to the Recapitalization Agreement, contains the entire agreement among the parties with respect to the subject matter hereof. This Agreement may not be amended, supplemented or modified and no provisions hereof may be modified or waived, except expressly by an instrument in writing signed by all the parties hereto. No waiver of any provisions hereof by any party shall be deemed a waiver by any such party, and no such waiver shall be deemed a continuing waiver of any provision hereof by such party. 10. STOCKHOLDERS' REPRESENTATIVE. YUCAIPA IS HEREBY APPOINTED AS THE - ----------------------------------------------------------------- "STOCKHOLDERS' REPRESENTATIVE" ON BEHALF OF EACH UNDERSIGNED STOCKHOLDER AND - ---------------------------------------------------------------------------- IRREVOCABLY CONSTITUTED AND APPOINTED AS SUCH STOCKHOLDER'S ATTORNEY-IN-FACT, TO - -------------------------------------------------------------------------------- ACT IN SUCH STOCKHOLDER'S NAME, PLACE AND STEAD IN ANY WAY IN WHICH SUCH - ------------------------------------------------------------------------ STOCKHOLDER COULD DO ANY OR ALL OF THE FOLLOWING: (I) TO - --------------------------------------------------------- 2 SUPERVISE THE CLOSINGS (AS DEFINED IN THE RECAPITALIZATION AGREEMENT) AND - ------------------------------------------------------------------------- DETERMINE WHETHER THE CONDITIONS TO THE CLOSINGS HAVE BEEN SATISFIED AND WAIVE - ------------------------------------------------------------------------------ ANY CONDITIONS WHICH, IN ITS SOLE DISCRETION, IT DEEMS APPROPRIATE TO FACILITATE - -------------------------------------------------------------------------------- THE CLOSINGS; (II) TO TAKE ANY AND ALL ACTIONS THAT MAY BE NECESSARY OR - ----------------------------------------------------------------------- DESIRABLE IN CONNECTION WITH THE RECAPITALIZATION AGREEMENT; (III) TO EXECUTE - ----------------------------------------------------------------------------- AND DELIVER IN ITS CAPACITY AS STOCKHOLDERS' REPRESENTATIVE ANY AND ALL NOTICES, - -------------------------------------------------------------------------------- DOCUMENTS OR CERTIFICATES TO BE EXECUTED BY THE STOCKHOLDERS' REPRESENTATIVE IN - ------------------------------------------------------------------------------- ACCORDANCE WITH THE RECAPITALIZATION AGREEMENT AND THE OTHER TRANSACTION - ------------------------------------------------------------------------ DOCUMENTS (AS DEFINED IN THE RECAPITALIZATION AGREEMENT); (IV) DELIVER AT THE - ----------------------------------------------------------------------------- MERGER CLOSING STOCK POWERS AND ANY OTHER REQUIRED INSTRUMENTS OF TRANSFER TO BE - -------------------------------------------------------------------------------- EXECUTED BY THE SMITTY'S STOCKHOLDERS, INCLUDING A LETTER OF TRANSMITTAL, AND TO - -------------------------------------------------------------------------------- ACCEPT CERTIFICATE OR CERTIFICATES IN THE NAME OF EACH SMITTY'S STOCKHOLDER - --------------------------------------------------------------------------- MERGER CONSIDERATION AS SET FORTH IN SECTION 3.1(C) OF THE RECAPITALIZATION - --------------------------------------------------------------------------- AGREEMENT; (V) TAKE ALL OTHER ACTIONS AND DO OTHER THINGS PROVIDED IN OR - ------------------------------------------------------------------------ CONTEMPLATED BY THE RECAPITALIZATION AGREEMENT AS TO BE TAKEN OR PERFORMED BY - ----------------------------------------------------------------------------- THE STOCKHOLDERS' REPRESENTATIVE. THIS POWER OF ATTORNEY SHALL BE COUPLED WITH - ------------------------------------------------------------------------------- AN INTEREST AND IRREVOCABLE AND SHALL SURVIVE, AND SHALL NOT BE AFFECTED BY, THE - -------------------------------------------------------------------------------- SUBSEQUENT DEATH, DISABILITY OR INCOMPETENCE, OR LIQUIDATION OR DISSOLUTION, AS - ------------------------------------------------------------------------------- APPLICABLE OF ANY STOCKHOLDER. - ------------------------------ 11. MISCELLANEOUS. -- a. This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of Delaware. b. If any provisions of this Agreement or the application of such provisions to any person or circumstances shall be held invalid by a court of competent jurisdiction, the remainder of the provision held invalid and the application of such provision to persons or circumstances, other than the party as to which it is held invalid, shall not be affected. c. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. d. This Agreement shall terminate upon the earlier to occur of the termination of the Recapitalization Agreement pursuant to Section 10.1 thereof or the consummation of the Merger. e. All Section headings herein are for convenience of reference only and are not part of this Agreement and no construction or reference shall be derived therefrom. f. Words used in this Agreement, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. g. Capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Recapitalization Agreement. (SIGNATURE PAGE FOLLOWS) ------------------------ 3 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above. SMITH'S FOOD & DRUG CENTERS, INC. By:/S/ JEFFREY P. SMITH ----------------------------------------- Name: Jeffrey P. Smith Title: Chairman, President and Chief Executive Officer CACTUS ACQUISITION, INC. By:/S/ JEFFREY P. SMITH ----------------------------------------- Name: Jeffrey P. Smith Title: President and Chief Executive Officer STOCKHOLDER: YUCAIPA SSV PARTNERS, L.P. By: The Yucaipa Companies Its: General Partner By:/S/ MARK A. RESNIK ----------------------------------------- Name: Mark A. Resnik Title: General Partner Address: 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 Shares of Smitty's Common Stock Beneficially Owned: Class Number of Shares ----- ---------------- A 378,872 ------------------------------------- B 0 ------------------------------------- Options or Warrants to Purchase the Following Number of Shares of Smitty's Common Stock Beneficially Owned: 0 -------------------------------------------- 4 YUCAIPA SMITTY'S PARTNERS, L.P. By: The Yucaipa Companies Its: General Partner By:/S/ MARK A. RESNIK ----------------------------------------- Name: Mark A. Resnik Title: General Partner Address: 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 Shares of Smitty's Common Stock Beneficially Owned: Class Number of Shares ----- ---------------- A 99,829.803 ------------------------------------- B 0 ------------------------------------- Options or Warrants to Purchase the Following Number of Shares of Smitty's Common Stock Beneficially Owned: 0 -------------------------------------------- YUCAIPA SMITTY'S PARTNERS II, L.P. By: The Yucaipa Companies Its: General Partner By:/S/ MARK A. RESNIK ----------------------------------------- Name: Mark A. Resnik Title: General Partner Address: 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 5 Shares of Smitty's Common Stock Beneficially Owned: Class Number of Shares ----- ---------------- A 45,419 ------------------------------------- B 0 ------------------------------------- Options or Warrants to Purchase the Following Number of Shares of Smitty's Common Stock Beneficially Owned: 0 -------------------------------------------- YUCAIPA ARIZONA PARTNERS, L.P. By: The Yucaipa Companies Its: General Partner By:/S/ MARK A. RESNIK ----------------------------------------- Name: Mark A. Resnik Title: General Partner Address: 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 Shares of Smitty's Common Stock Beneficially Owned: Class Number of Shares ----- ---------------- A 181,662 ------------------------------------- B 0 ------------------------------------- Options or Warrants to Purchase the Following Number of Shares of Smitty's Common Stock Beneficially Owned: 0 -------------------------------------------- 6 STOCKHOLDER: -------------------------------------------- (NAME OF STOCKHOLDER) --------------------- By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- Address: -------------------------------------------- -------------------------------------------- -------------------------------------------- Shares of Smitty's Common Stock Beneficially Owned: Class Number of Shares ----- ---------------- A ------------------------------------- B ------------------------------------- Options or Warrants to Purchase the Following Number of Shares of Smitty's Common Stock Beneficially Owned: -------------------------------------------- 7 EX-12.1 8 STMNT RE 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 CALIFORNIA PRO FORMA 1991 1992 1993 1994 1995 DIVESTITURE COMBINED FOR FISCAL YEAR: -------- -------- -------- -------- --------- ----------- --------- 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 ======== ======== ======== ======== ======== ======== ======== PRO FORMA 13 WEEKS ENDED SMITH'S ------------------ FOR APRIL 1, MARCH 30, CALIFORNIA PRO FORMA 1995 1996 DIVESTITURE COMBINED FOR QUARTERLY PERIOD: -------- --------- ----------- --------- Net income (loss).................................. $ 9,479 $ (1,178) $ 13,700 $ 2,700 Add: Income taxes..................................... 6,300 (800) 8,700 1,600 Fixed Charges: Interest expense............................... 15,077 14,545 14,500 35,200 Debt financing amortization.................... 100 100 100 2,500 1/3 Rental expense............................. 3,893 2,418 1,400 1,700 -------- -------- -------- -------- Total fixed charges............................ 19,070 17,063 16,000 39,400 -------- -------- -------- -------- Earnings plus fixed charges........................ $ 34,849 $ 15,085 $ 38,400 $ 43,700 ======== ======== ======== ======== Ratio of earnings to fixed charges................. 1.83 -- 2.40 1.11 ======== ======== ======== ========
EX-21.1 9 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Smith's Beverage of Wyoming, Inc., a Wyoming corporation. Western Property Investment Group, Inc., a California corporation. Treasure Valley Land Company, L.C., an Idaho limited liability company. EX-23.2 10 CONSENT OF COOPERS & LYBRAND 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 13, 1996 EX-23.3 11 CONSENT OF ERNST & YOUNG 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. 4 to the Registration Statement (Form S-3, No. 333-01601) and related Prospectus of Smith's Food & Drug Centers, Inc. dated May 14, 1996. ERNST & YOUNG LLP Salt Lake City, Utah May 10, 1996 EX-25.1 12 FORM T-1 EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM T-1 ---------- STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ---------- / / CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(B)(2) FLEET NATIONAL BANK OF CONNECTICUT --------------------------------------------------------- (Exact name of trustee as specified in its charter) Not applicable 06-0850628 - ------------------------------- ----------------------------- (State of incorporation (I.R.S. Employer if not a national bank) Identification No.) 777 Main Street, Hartford, Connecticut 06115 - ---------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code)
Patricia Beaudry, 777 Main Street, Hartford, CT 860-728-2065 -------------------------------------------------------------- (Name, address and telephone number of agent for service) Smith's Food & Drug Centers, Inc. --------------------------------------------------- (Exact name of obligor as specified in its charter) Delaware 87-0258768 - ------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1550 South Redwood Road Salt Lake City, Utah 84104 - ---------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code)
Senior Subordinated Notes due 2007 ------------------------------------------------------------------ (Title of the indenture securities) Item 1. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject, The Comptroller of the Currency, Washington, D.C. Federal Reserve Bank of Boston Boston, Massachusetts Federal Deposit Insurance Corporation Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers: The trustee is so authorized. Item 2. Affiliations with obligor and underwriter. If the obligor or any underwriter for the obligor is an affiliate of the trustee, describe each such affiliation. None with respect to the trustee. Item 16. List of exhibits. List below all exhibits filed as a part of this statement of eligibility and qualification. (1) A copy of the Articles of Association of the trustee as now in effect. (2) A copy of the Certificate of Authority of the trustee to do business. (3) A copy of the Certification of Fiduciary Powers of the trustee. (4) A copy of the By-Laws of the trustee as now in effect. (5) Consent of the trustee required by Section 321 (b) of the Act. (6) A copy of the latest Consolidated Reports of Condition and Income of the trustee published pursuant to law or the requirements of its supervising or examining authority. In as much as this Form T-1 is filed prior to the ascertainment by the trustee of all facts on which to base answers to Item 2, the answers to said Items are based upon imcomplete information. Said Items may, however, be considered correct unless amended by an amendment to this Form T-1. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, Fleet National Bank of Connecticut, a national banking association organized and existing under the laws of the United States, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Hartford, and State of Connecticut, on the 9th day of June, 1995. FLEET NATIONAL BANK OF CONNECTICUT, AS TRUSTEE By: /s/ Michael M. Hopkins ------------------------- Its Vice President EXHIBIT 1 ARTICLES OF ASSOCIATION FLEET NATIONAL BANK OF CONNECTICUT FIRST. The title of this Association, which shall carry on the business of banking under the laws of the United States, shall be "Shawmut Bank Connecticut, National Association". SECOND. The main office of the Association shall be in Hartford, County of Hartford, State of Connecticut. The general business of the Association shall be conducted at its main office and its branches. THIRD. The board of directors of this Association shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number of directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full board of directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the board of directors for any reason, including an increase in the number thereof, may be filled by action of the board of directors. FOURTH. The annual meeting of the shareholders for the election of directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office or such other place as the board of directors may designate, on the day of each year specified therefore in the bylaws, but if no election is held on that day, it may be held on any subsequent day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the board of directors. FIFTH. The authorized amount of capital stock of this Association shall be eight million five hundred thousand (8,500,000) shares of which three milliion five hundred thousand (3,500,000) shares shall be common stock with a par value of six and 25/100 dollars ($6.25) each, and of which five million (5,000,000) shares without par value shall be preferred stock. The capital stock may be increased or decreased from time to time, in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the corporation shall have any pre-emptive or preferential right of subscription to any shares of any class of stock of the Association, whether now or hereafter authorized, or to any obligations convertible into stock of the Association, issued or sold, nor any right of subscription to any thereof other than such, if any, as the board of directors, in its discretion, may from time to time determine and at such price as the board of directors may from time to time fix. The board of directors of the Association is authorized, subject to limitations prescribed by law and the provisions of this Article, to provide for the issuance from time to time in one or more series of any number of the preferred shares, and to establish the number of shares be included in each series, and to fix the designation, relative rights, preferences, qualifications and limitations of the shares of each such series. The authority of the board of directors with respect to each series shall include, but not be limited to, determination of the following: a. The number of shares constituting that series and the distinctive designation of that series; b. The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which dates or dates, and whether they shall be payable in preference to, or in anther relation to, the dividends payable to any other class or classes or series of stock; c. Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; d. Whether that series shall have conversion or exchange privileges, and, if so, the terms and conditions of such conversion or exchange, including provision for the adjustment of the conversion or exchange rate in such events as the board of directors shall determine; e. Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the manner of selecting shares for redemption if less than all shares are to be redeemed, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; f. Whether that series shall be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of shares of that series, and, if so, the terms and amounts of such sinking fund; g. The right of the shares of that series to the benefit of conditions and restrictions upon the creation of indebtedness of the Association or any subsidiary, upon the issue of any additional stock (including additional shares of such series or of any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Association or any subsidiary of any outstanding stock of the Association; h. The right shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Association and whether such rights shall be in preference to, or in another relation to, the comparable rights of any other class or classes or series of stock; and i. Any other relative, participating, optional or other special rights, qualifications, limitations or restrictions of that series. Shares of any series of preferred stock which have been redeemed (whether through the operation of a sinking fund or otherwise) or which, if convertible or exchangeable, have been converted into or exchanged for shares of stock of any other class or classes shall have the status of authorized and unissued shares of preferred stock of the same series and may be reissued as a part of the series of which they were originally a part or may be reclassified and reissued as part of a new series of preferred stock to be created by resloution or resolutions of the board of directors or as part of any other series or preferred stock, all subject to the conditions and the restrictions adopted by the board of directors providing for the issue of any series of prefeffed stock and by the provisions of any applicable law. Subject to the provisions of any applicable law, or except as otherwise provided by the resolution or resolutions providing for the issue of any series of preferred stock, the holders of outstanding shares of common stock shall exclusively possess voting power for the election of directors and for all purposes, each holder of record of shares of common stock being entitled to one vote for each share of common stock standing in his name on the books of the Association. Except as otherwise provided by the resolution or resolutions for the issue of any series of preferred stock, after payment shall have been made to the holders of preferred stock of the full amount of dividends to which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any other series of preferred stock, the holders of common stock shall be entitled, to the exclusion of the holders of preferred stock of any and all series, to receive such dividends as from time to time may be declared by the board of directors. Except as otherwise provided by the resolution or resolutions for the issue of any series of preferred stock, in the event of any liquidation, dissolution or winding up of the Association, whether voluntary or involuntary, after payment shall have been made to the holders of preferred stock of the full amount to which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of preferred stock the holders of common stock shall be entitled, to the exclusion of the holders of preferred stock of any and all series, to share, ratable according to the number of shares of common stock held by them, in all remaining assets of the Association available for distribution to its shareholders. The number of authorized shares of any class may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Association entitled to vote. SIXTH. The board of directors shall appoint one of its members president of this Association, who shall be chairman of the board, unless the board appoints another director to be the chairman. The board of directors shall have the power to appoint one or more vice presidents; and to appoint a secretary and such other officers and employees as may be required to transact the business of this Association. The board of directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all bylaws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a board of directors to do and perform. SEVENTH. The board of directors shall have the power to change the location of the main office to any other place within the limits of the City of Hartford, Connecticut, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency; and shall have the power to establish or change the location of any branch or branches of the Association to any other location, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The board of directors of this Association, or any three or more shareholders owning, in the aggregate, not less than ten percent (10%) of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place and purpose of every annual and special meeting of the shareholders shall be given by first class mail, postage prepaid, mailed at least ten (10) days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. TENTH. (A) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Association or is or was serving at the request of the Association as a director, officer employee or agent of another corporation of a partnership, joint venture, limited liability company, trust, or other enterprise, including service with respect to an empolyee benefit plan, shall be indemnified and held harmless by the Association to the fullest extent authorized by the law of the state in which the Association's ultimate parent company is incorporated, except as provided in subsection (b). The aforesaid indemnity shall protect the indemnified person against all expense, liability and loss (including attorney's fees, judgements, fines ERISA excise taxes or penalties, and amounts paid in settlement) reasonably incurred by such person in connection with such a proceeding. Such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors, and administrators, but shall only cover such person's period of service with the Association. The Association may, by action of its Board of Directors, grant rights to indemnification to agents of the Association and to any director, officer, employee or agent of any of its subsidiaries with the same scope and effect as the foregoing indemnification of directors and officers. (b) Restrictions on Indemnification. Notwithstanding the foregoing, (i) no person shall be indemnified hereunder by the Association against expenses, penalties, or other payments incurred in an administrative proceeding or action instituted by a federal bank regulatory agency which proceeding or action results in a final order assessing civil money penalties against that person, requiring affirmative action by that person in the form of payments to the Association, or removing or prohibiting that person from service with the Association, and any advancement of expenses to that person in that proceeding must be repaid; and (ii) no person shall be indemnified hereunder by the Association and no advancement of expenses shall be made to any person hereunder to the extent such indemnification or advancement of expenses would violate or conflict with any applicable federal statute now or hereafter in force or any applicable final regulation or interpretation now or hereafter adopted by the Office of the Comptroller of the Currency ("OCC") or the Federal Deposit Insurance Corporation ("FDIC"). The Association shall comply with any requirements imposed on it by any such statue or regulation in connection with any indemnification or advancement of expenses hereunder by the Association. With respect to proceedings to enforce a claimant's rights to indemnification, the Association shall indemnify any such claimant in connection with such a proceeding only as provided in subsection (d) hereof. (c) Advancement of Expenses. The conditional right to indemnification conferred in this section shall be a contract right and shall include the right to be paid by the Association the reasonable expenses (including attorney's fees) incurred in defending a proceeding in advance of its final disposition (an "advancement of expenses"); provided, however, that an advancement of expenses shall be made only upon (i) delivery to the Association of a binding written undertaking by or on behalf of the person receiving the advancement to repay all amounts so advanced if it is ultimately determined that such person is not entitled to be indemnified in such proceeding, including if such proceeding results in a final order assessing civil money penalties against that person, requiring affirmative action by that person in the form of payments to the Association, or removing or prohibiting that person from service with the Association, and (ii) compliance with any other actions or determinations required by applicable law, regulation or OCC or FDIC interpretation to be taken or made by the Board of Directors of the Association or other persons prior to an advancement of expenses. The Association shall cease advancing expenses at any time its Board of Directors believes that any of the prerequisites for advancement of expenses are no longer being met. (d) Right of Claimant to Bring Suit. If a claim under subsection (a) of the section is not paid in full by the Association within thirty (30) days after written claim has been received by the Association the claimant may at any time thereafter bring suit against the Association to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Association to recover an advancement of expenses pursuant to the terms of an undertaking, the claimant shall be entitled to be paid also the expense of prosecuting or defending such claim. It shall be a defense to any such action brought by the claimant to enforce a right to indemnification hereunder (other than an action brought to enforce a claim for an advancement of expenses where the required undertaking, if any, has been tendered to the Association) that the claimant has not met any applicable standard for indemnification under the law of the state in which the Association's ultimate parent company is incorporated. In any suit brought by the Association to recover an advancement of expenses pursuant to the terms of an undertaking, the Association shall be entitled to recover such expenses upon a final adjudication that the claimant has not met any applicable standard for indemnification standard for indemnification under the law of the state in which the Association's ultimate parent company is incorporated. (e) Non-Exclusivity of Rights. The rights to indemnification and the advancement of expenses conferred in this section shall not be exclusive of any other right which any person may have or hereafter acquired under any statute, agreement, vote of stockholders or disinterested directors or otherwise. (f) Insurance. The Association may purchase, maintain, and make payment or reimbursement for reasonable premiums on, insurance to protect itself and any director, officer, employee or agent of the Association or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Association would have the power to indemnify such person against such expense, liability or loss under the law of the state in which the Association's ultimate parent company is incorporated; provided however, that such insurance shall explicitly exclude insurance coverage for a final order of a federal bank regulatory agency assessing civil money penalties against an Association director, officer, employee or agent. ELEVENTH. These articles of association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. The notice of any shareholders' meeting at which an amendment to the articles of association of this Association is to be considered shall be given as hereinabove set forth. I hereby certify that the articles of association of this Association, in their entirety, are listed above in items first through eleventh. Secretary/Assistant Secretary - -------------------------------------------------- Dated at , as of . --------------------------------------- -------------------- Revision of January 11, 1993 EXHIBIT 2 [LOGO] - -------------------------------------------------------------------------------- COMPTROLLER OF THE CURRENCY ADMINISTRATOR OF NATIONAL BANKS - -------------------------------------------------------------------------------- Washington, D.C. 20219 CERTIFICATE I, Eugene A. Ludwig, Comptroller of the Currency, do hereby certify that: (1) The Comptroller of the Currency, pursuant to Revised Statutes 324, et seq., as amended, 12 U.S.C. 1, et seq., as amended, has possession, custody and control of all records pertaining to the chartering, regulation and supervision of all National Banking Associations. (2) "Fleet National Bank of Connecticut", Hartford, Connecticut, (Charter No. 1338), is a National Banking Association formed under the laws of the United States and is authorized thereunder to transact the business of banking on the date of this Certificate. IN TESTIMONY WHEREOF, I have hereunto subscribed my name and caused my seal of office to be affixed to these presents at the Treasury Department, in the City of Washington and District of Columbia, this 28th day of December, 1995. /s/ EUGENE A. LUDWIG ---------------------------------- Comptroller of the Currency EXHIBIT 3 [LOGO] - -------------------------------------------------------------------------------- COMPTROLLER OF THE CURRENCY ADMINISTRATOR OF NATIONAL BANKS - -------------------------------------------------------------------------------- Washington, D.C. 20219 Certification of Fiduciary Powers I, Eugene A. Ludwig, Comptroller of the Currency, do hereby certify the records in this Office evidence "Fleet National Bank of Connecticut", Hartford, Connecticut, (Charter No. 1338), was granted, under the hand and seal of the Comptroller, the right to act in all fiduciary capacities authorized under the provisions of The Act of Congress approved September 28, 1962, 76 Stat. 668, 12 U.S.C. 92a. I further certify the authority so granted remains in full force and effect. IN TESTIMONY WHEREOF, I have hereunto subscribed my name and caused my seal of Office of the Comptroller of the Currency to be affixed to these presents at the Treasury Department, in the City of Washington and District of Columbia, this 28th day of December, 1995. /s/ EUGENE A. LUDWIG ---------------------------------- Comptroller of the Currency 489 EXHIBIT 4 AMENDED AND RESTATED BY-LAWS OF FLEET NATIONAL BANK OF CONNECTICUT ARTICLE I MEETINGS OF SHAREHOLDERS Section 1. Annual Meeting. The regular annual meeting of the shareholders for the election of Directors and the transaction of any other business that may properly come before the meeting shall be held at the Main Office of the Association, or such other place as the Board of Directors may designate, on the fourth Thursday of April in each year at 1:15 o'clock in the afternoon unless some other hour of such day is fixed by the Board of Directors. If, from any cause, an election of Directors is not made on such day, the Board of Directors shall order the election to be held on some subsequent day, of of which special notice shall be given in accordance with the provisions of law, and of these bylaws. Section 2. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors, the President, or any shareholders owning not less than twenty-five percent (25%) of the stock of the Association. Section 3. Notice of Meetings of Shareholders. Except as otherwise provided by law, notice of the time and place of annual or special meetings of the share holders shall be mailed, postage prepaid, at least ten (10) days before the date of the meeting to each shareholder of record entitled to vote thereat at his address as shown upon the books of the Association; but any failure to mail such notice to any shareholder or any irregularity therein, shall not affect the validity of such meeting or of any of the proceedings therat. Notice of a special meeting shall also state the purpose of the meeting. Section 4. Quorum; Adjourned Meetings. Unless otherwise provided by law, a quorum for the transaction of business at every meeting of the shareholders shall consist of not less than two-fifths (2/5) of the outstanding capital stock represented in person or by proxy; less than such quorum may adjourn the meeting to a future time. No notice need be given of an adjourned annual or special meeting of the shareholders if the adjournment be to a definite place and time. Section 5. Votes and Proxies. At every meeting of the shareholders, each share of the capital stock shall be entitled to one vote except as otherwise provided by law. A majority of the votes cast shall decide every question or matter submitted to the shareholder at any meeting, unless otherwise provided by law or by the Articles of Association or these By-laws. Share- holders may vote by proxies duly authorized in writing and filed with the Cahsier, but no officer, clerk, teller or bookeeper of the Association may act as a proxy. Section 6. Nominations to Board of Directors. At any meeting of shareholders held for the election of Directors, nominations for election to the Board of Directors may be made, subject to the provisions of this section, by any share- holder of record of any outstanding class of stock of the Association entitled to vote for the election of Directors. No person other than those whose names are stated as proposed nominees in the proxy statement accompanying the notice of the meeting may be nominated as such meeting unless a shareholder shall have given to the President of the Association and to the Comptroller of the Currency, Washington, DC written notice of intention to nominate such other person mailed by certified mail or delivered not less than fourteen (14) days nor or more than fifty (50) days prior to the meeting of shareholders at which such nomination is to be made; provided, however, that if less than twenty-one (21) days' notice of such meeting is given to shareholders, such notice of intention to nominate shall be mailed by certified mail or delivered to said President and said Comptroller on or before the seventh day following the day on which the notice of such meeting was mailed. Such notice of intention to nominate shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the Association that will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and the number of shares of capital stock of the Association owned by the notifying shareholder. In the event such notice is given, the proposed nominee may be nominated either by the shareholder giving such notice or by any other shareholder present at the meeting at which such nomination is to be made. Such notice may contain the names or more than one proposed nominee, and if more than one is named, any one or more of those named may be nominated. Section 7. Action Taken Without a Shareholder Meeting. Any action requiring shareholder approval or consent may be taken without a meeting and without notice of such meetings by written consent of the shareholders. ARTICLE II DIRECTORS Section 1. Number. The Board of Directors shall consist of such number of shareholders, not less than five (5) nor more than twenty-five (25), as from time to time shall be determined by a majority of the votes to which all of its shareholders are at the time entitled, or by the Board of Directors as hereinafter provided. Section 2. Mandatory Retirement for Directors. No person shall be elected a director who has attained the age of 68 and no person shall continue to serve as a director after the date of the first meeting of the stockholders of the Association held on or after the date on which such person attains the age of 68; provided, however, that any director serving on the Board as of December 15, 1995 who has attanined the age of 65 on or prior to such date shall be permitted to continue to serve as a director until the date of the first meeting of the stockholders of the Association held on or after the date on which such person attains the age of 70. -2- Section 3. General Powers. The Board of Directors shall exercise all the coporate powers of the Association, except as expressly limited by law, and shall have the control, management, direction and dispositon of all its property and affairs. Section 4. Annual Meeting. Immediately following a meeting of shareholders held for the election of Directors, the Cashier shall notify the directors- elect who may be present of their election and they shall then hold a meeting at the Main Office of the Association, or such other place as the Board of Directors may designate, for the purpose of taking their oaths, organizing the new Board, electing officers and transacting any other business that may come before such meeting. Section 5. Regular Meeting. Regular meetings of the Board of Directors shall be held without notice at the Main Office of the Association, or such other place as the Board of Directors may designate, at such dates and times as the Board shall determine. If the day designated for a regular meeting falls on a legal holiday, the meeting shall be held on the next business day. Section 6. Special Meetings. A special meeting of the Board of Directors may be called at anytime upon the written request of the Chairman of the Board, the President, or of two Directors, stating the purpose of the meeting. Notice of the time and place shall be given not later than the day before the date of the meeting, by mailing a notice to each Director at his last known address, by delivering such notice to him personally, or by telephoning. Section 7. Quorum; Votes. A majority of the Board of Directors at the time holding office shall constitute a quorum for the transaction of all business, except when otherwise provided by law, but less than a quorum may adjourn a meeting from time to time and the meeting may be held, as adjourned, without further notice. If a quorum is present when a vote is taken, the affirmative vote of a majority of Directors present is the act of the Board of Directors. Section 8. Action by Directors Without a Meeting. Any action requiring Director approval or consent may be taken without a meeting and without notice of such meeting by written consent of all the Directors. Section 9. Telephonic Participation in Directors' Meetings. A Director or member of a Committee of the Board of Directors may participate in a meeting of the Board or of such Committee may participate in a meeting of the Board or of such Committee by means of a conference telephone or similar communications equipment enabling all Directors participating in the meeting to hear one another, and participation in such meeting shall constitute presence in person at such a meeting. Section 10. Vacancies. Vacancies in the Board of Directors may be filled by the remaining members of the Board at any regular or special meeting of the Board. Section 11. Interim Appointments. The Board of Directors shall, if the share- holders at any meeting for the election of Directors have determined a number of Directors less than twenty-five (25), have the power, by affirmative vote of the majority of all the Directors, to increase such number of Directors to not more than twenty-five (25) and to elect Directors to fill the resulting vacancies and to serve until the next annual meeting of shareholders or the next election of Directors; provided, however, that the number of Directors shall not be so increased by more than two (2) if the number last determined by shareholders was fifteen (15) or less, or increased by more than four (4) if the number last determined by shareholders was sixteen (16) or more. Section 12. Fees. The Board of Directors shall fix the amount and direct the payment of fees which shall be paid to each Director for attendance at any meeting of the Board of Directors or of any Committees of the Board. ARTICLE III COMMITTEES OF THE BOARD Section 1. Executive Committee. The board of directors shall appoint from its members an Executive Committee which shall consist of such number of persons as the Board of Directors shall determine; the Chairman of the Board and the President shall be members ex-officio of the Executive Committee with full voting power. The Chairman of the Board or the President may from time to time appoint from the Board of Directors as temporary additional members of the Executive Committee with full voting powers not more than two members to serve for such periods as the Chairman of the Board or the President may determine. The Board of Directors shall designate a member of the Executive Committee to serve as Chairman thereof. A meeting of the Executive Committee may be called at any time upon the written request of the Chairman of the Board, the President or the Chairman of the Executive Committee, stating the purpose of the meeting. Not less than twenty four hours' notice of said meeting shall be given to each member the Committee personally, by telephoning, or by mail. The Chairman of the Executive Committee of or, in his absence, a member of the Committee chosen by a majority of the members present shall preside at meetings of the Executive Committee. -3- The Executive Committee shall possess and may exercise all the powers of the Board when the Board is not in session except such as the Board, only, by law, is authorized to exercise; it shall keep minutes of its acts and proceedings and cause same to be presented and reported at every regular meeting and at any special meeting of the Board including specifically, all its actions relating to loans and discounts. All acts done and powers and authority conferred by the Executive Committee, from time to time, within the scope of its authority, shall be deemed to be, and may be certified as being, the acts of and under the authority of the Board. Section 2. Risk Management Committee. The Board shall appoint from its members a Risk Management Committee which shall consist of such number as the Board shall determine. The Board shall designate a member of the Risk Management Committee to serve as Chairman thereof. It shall be the duty of the Risk Management Committee to (a) serve as the channel of communication with management and the Board of Directors of Fleet Financial Group, Inc. to assure that formal processes supported by management information systems are in place for the identification, evaluation and management of significant risks inherent in or associated with lending activities, the loan portfolio, asset-liability management, the investment portfolio, trust and investment advisory activities, the sale of nondeposit investment products and new products and services and such additional activities or functions as the Board may determine from time to time; (b) assure the formulation and adoption of policies approved by the Risk Management Committee or Board governing lending activities, management of the loan portfolio, the maintenance of an adequate allowance for loan and lease losses, asset-liability management, the investment portfolio, the retail sale of non-deposit investment products, new products and services and such additional activities or functions as the Board may determine from time to time (c) assure that a comprehensive independent loan review program is in place for the early detection of problem loans and review significant reports of the loan review department, management's responses to those reports and the risk attributed to unresolved issues; (d) subject to control of the Board, exercise general supervision over trust activities, the investment of trust funds, the disposition of trust investments and the acceptance of new trusts and the terms of such acceptance, and (e) perform such additional duties and exercise such additional powers of the Board may determine from time to time. Section 3. Audit Committee. The Board shall appoint from its memebers and Audit Committee which shall consist of such number as the Board shall determine no one of whom shall be an active officer or employee of the Association or Fleet Financial Group, Inc. or any of its affiliates. In addition, members of the Audit Committee must not (i) have served as an officer or employee of the Association or any of its affiliates at any time during the year prior to their appointment; or (ii) own, control, or have owned or controlled at any time during the year prior to appointment, ten percent (10%) or more of any outstanding class of voting securities of the Association. At least two (2) members of the Audit Committee must have significant executive, professional, educational or regulatory experience in financial, auditing, accounting, or banking matters. No member of the Audit Commitee may have significant direct or indirect credit or other relationships with the Association, the termination of which would materially adversely affect the Association's financial condition or results of operations. The Board shall designate a member of the Audit Committee to serve as Chairman thereof. It shall be the duty of the Audit Committee to (a) cause a continuous audit and examination to be made on its behalf into the affairs of the Association and to review the results of such examination; (b) review significant reports of the internal auditing department, management's responses to those reports and the risk attributed to unresolved issues; (c) review the basis for the reports issued under Section 112 of The Federal Deposit Insurance Corporation Improvement Act of 1991; (d) consider, in consultation with the independent auditor and an internal auditing executive, the adequacy of the Association's internal controls,including the resolution of identified material weakness and reportable conditions; (e) review regulatory communications received from any federal or state agency with supervisory jurisdiction or other examining authority and monitor any needed corrective action by management; (f) ensure that a formal system of internal controls is in place for maintaining compliance with laws and regulations; (g) cause an audit of the Trust Department at least once during each calendar year and within 15 months of the last such audit or, in liew thereof, adopt a continuous audit system and report to the Board each calendar year and within 15 months of the previous report on the performance of such audit function; and (h) perform such additional duties and exercise such additional powers of the Board as the Board may determine from time to time. The Audit Committee may consult with internal counsel and retain its own outside counsel without approval (prior or otherwise) from the Board or management and obligate the Association to pay the fees of such counsel. -4- Section 4. Community Affairs Committee. The Board shall appoint from its members a Community Affairs Committee which shall consist of such number as the Board shall determine. The Board shall designate a member of the Community Affairs Committee to serve as Chairman thereof. It shall be the duty of the Commmunity Affairs Committee to (a) oversee compliance by the Association with the Community Reinvestment Act of 1977, as amended, and the regulations promulgated thereunder; and (b) perform such additional duties and exercise such additional powers of the Board as the Board may determine from time to time. Section 5. Regular Meetings. Except for the Executive Committee which shall meet on an ad hoc basis as set forth in Section 1 of this Article, regular meetings of the Committees of the Board of Directors shall be held, without notice, at such time and place as the Committee or the Board of Directors may appoint and as often as the business of the Association may require. Section 6. Special Meetings. A Special Meeting of any of the Committees of the Board of Directors may be called upon the written request of the Chairman of the Board or the President, or of any two members of the respective Committee, stating the purpose of the meeting. Not less than twenty-four hours' notice of such special meeting shall be given to each member of the Committee personally, by telephoning, or by mail. Section 7. Emergency Meetings. An Emergency Meeting of any of the Committees of the Board of Directors may be called at the request of the Chairman of the Board or the President, who shall state that an emergency exists, upon not less than one hour's notice to each member of the Committee personally or by telephoning. Section 8. Action Taken Without a Committee Meeting. Any Committee of the Board of Directors may take action without a meeting and without notice of such meeting by resolution assented to in writing by all members of such Committee. Section 9. Quorum. A majority of a Committee fo the Board of Directors shall constitute a quorum for the transaction of any business at any meeting of such Committee. If a quorum is not available, the Chairman of the Board or the President shall have power to make temporary appointments to a Committee of- members of the Board of Directors, to act in the place instead of members who temporarily cannot attend any such meeting; provided, however, that any temporary appointment to the Audit Committee must meet the requirements for members of that Committee set forth in Section 3 of this Article. Section 10. Record. The committes of the Board of Directors hall keeep a record of their respective meetings and proceedings which shall be presented at the regular meeting of the Board of Directors held in the calendar month next following the meetings of the Committees. If there is no regular Board of Directors meeting held in the calendar month next following the meeting of a Committee, then such Committee's records shall be presented at the next regular Board of Directors meeting held in a month subsequent to such Committee meeting. Section 11. Changes and Vacancies. The Board of Directors shall have power to change the members of any Committee at any time and to fill vacancies on any Committee; provided, however, that any newly appointed member of the Audit Committee must meet the requirements for members of that Committee set forth in Section 3 of this Article. Section 12. Other Committees. The Board of Directors may appoint, from time to time, other committees of one or more persons, for such purposes and with such powers as the Board may determine. ARTICLE IV WAIVER OF NOTICE OF MEETINGS Section 1. Waiver. Whenever notice is required to be given to any shareholder Director, or member of a Committee of the Board of Directors, such notice may be waived in writing either before or after such meeting by any shareholder, Director or Committee member respectively, as the case may be, who may be entitled to such notice; and such notice will be deemed to be waived by attendance at any such meeting. -5- ARTICLE V OFFICERS AND AGENTS Section 1. Officers. The Board shall appoint a Chairman of the Board and a President, and shall have the power to appoint one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Cashier, a Secretary, and Auditor, a Controller, one or more Trust Officers and such other officers as are deemed necessary or desirable for the proper transaction of business of the Association. The Chairman of the Board and the President shall be appointed from members of the Board of Directors. Any two or more offices, except those of President and Cashier, or Secretary, may be held by the same person. The Board may, from time to time, by resolution passed by a majority of the entire Board, designate one or more officers of the Association or of an affiliate or of Fleet Financial Group, Inc. with power to appoint one or more Vice Presidents and such other officers of the Association below the level of Vice President as the officer or officers designated in such resolution deem necessary or desirable for the proper transaction of the business of the Association. Section 2. Chairman of the Board. The chairman of the Board shall preside at all meetings of the Board of Directors. Subject to definition by the Board of Directors, he shall have general executive powers and such specific powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. Section 3. President. The president shall preside at all meetings of the Board of Directors if there be no Chairman or if the Chairman be absent. Subject to definition by the Board of Directors, he shall have general executive powers and such specific powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. -6- Section 4. Cashier and Secretary. The Cashier shall be the Secretary of the Board and of the Executive Committee, and shall keep accurate minutes of their meetings and of all meetings of the shareholders. He shall attend to the giving of all notices required by these By-laws. He shall be custodian of the corporate seal, records, documents and papers of the Association. He shall have such powers and perform such duties as pertain by law or regulation to the office of Cashier, or as are imposed by these By-laws, or as may be delegated to him from time to time by the Board of Directors, the Chairman of the Board or the President. Section 5. Auditor. The Auditor shall be the chief auditing officer of the Association. He shall continuously examine the affairs of the Association and from time to time shall report to the Board of Directors. He shall have such powers and perform such duties as are conferred upon, or assigned to him by these By-laws, or as may be delegated to him from time to time by the Board of Directors. Section 6. Officers Seriatim. The Board of Directors shall designate from time to time not less than two officers who shall in the absence or disability of the Chairman or President or both, succeed seriatim to the duties and responsibilities of the Chairman and President respectively. Section 7. Clerks and Agents. The Board of Directors may appoint, from time to time, such clerks, agents and employees as it may deem advisable for the prompt and orderly transaction of the business of the Association, define their duties, fix the salaries to be paid them and dismiss them. Subject to the authority of the Board of Directors, the Chairman of the Board or the President, or any other officer of the Association authorized by either of them may appoint and dismiss all or any clerks, agents and employees and prescribe their duties and the conditions of their employment, and from time to time fix their compensation. Section 8. Tenure. The Chairman of the Board of Directors and the President shall, except in the case of death, resignation, retirement or disqualification under these By-laws, or unless removed by the affirmative vote of at least two- thirds of all of the members of the Board of Directors, hold office for the term of one year or until their respective successors are appointed. Either of such officers appointed to fill a vacancy occurring in an unexpired term shall serve for such unexpired term of such vacancy. All other officers, clerks, agents, attorneys-in-fact and employees of the Association shall hold office during the pleasure of the Board of Directors or of the officer or committee appointing them respectively. ARTICLE VI TRUST DEPARTMENT Section 1. General Powers and Duties. All fiduciary powers of the Association shall be exercised through the Trust Department, subject to such regulations as the Comptroller of the Currency shall from time to time establish. The Trust Department shall be to placed under the management and immediate supervision of an officer or officers appointed by the Board of Directors. The duties of all officers of the Trust Department shall be to cause the policies and instructions of the Board and the Risk Management Committee with respect to the trusts under their supervision to be carried out, and to supervise the due performance of the trusts and agencies entrusted to the Association and under their supervision, in accordance with law and in accordance with the terms of such trusts and agencies. -7- ARTICLE VII BRANCH OFFICES Section 1. Establishment. The Board of Directors shall have full power to establish, to discontinue, or, from time to time, to change the location of any branch office, subject to such limitations as may be provided by law. Section 2. Supervision and Control. Subject to the general supervision and control of the Board of Directors, the affairs of branch offices shall be under the immediate supervision and control of the President or of such other officer or officers, employee or employees, or other individuals as the Board of Directors may from time to time determine, with such powers and duties as the Board of Directors may confer upon or assign to him or them. ARTICLE VIII SIGNATURE POWERS Section 1. Authorization. The power of officers, empolyees, agents and attorneys to sign on behalf of and to affix the seal of the Association shall be prescribed by the Board of Directors or by the Executive Committee or by both; provided that the President is authorized to restrict such power of any officer, employee, agent or attorney to the business of a specific department or departments, or to a specific branch office or branch offices. Facsimile signatures may be authorized. -8- ARTICLE IX STOCK CERTIFICATES AND TRANSFERS Section 1. Stock Records. The Trust Department shall have custody of the stock certificate books and stock ledgers of the Association, and shall make all transfers of stock, issue certificates thereof and disburse dividends declared thereon. Section 2. Form of Certificate. Every shareholder shall be entitled to a certificate conforming to the requirements of law and otherwise in such form as the Board of Directors may approve. The certificates shall state on the face thereof that the stock is transferable only on the books of the Association and shall be signed by such officers as may be prescribed from time to tiem by the Board of Directors or Executive Committee. Facsimile signatures may be authorized. Section 3. Transfers of Stock. Transfers of stock shall be made only on the books of the Association by the holder in person, or by attorney duly authorized in writing, upon surrender of the certificate therefor properly endorsed, or upon the surrender of such certificate accompanied by a properly executed written assignment of the same, or a written power of attorney to sell, assign or transfer the same or the shares represented thereby. Section 4. Lost Certificate. The Board of Directors or Executive Committee may order a new certificate to be issued in place of a certificate lost or destroyed, upon proof of such loss or destruction and upon tender to the Association by the shareholder, of a bond in such amount and with or without surety, as may be ordered, indemnifying the Association against all liability, loss, cost and damage by reason of such loss or destruction and the issuance of a new certificate. Section 5. Closing Transfer Books. The Board of Directors may close the transfer books for a period not exceeding thirty days preceding any regular or special meeting of the shareholders, or the day designated for the payment of a dividend or the allotment of rights. In lieu of closing the transfer books the Board of Directors may fix a day and hour not more than thirty days prior to the day of holding any meeting of the shareholders, or the day designated for the payment of a dividend, or the day designated for the allotment of rights, or the day when any change of conversion or exchange of capital stock is to go into effect, as the day as of which shareholders entitled to notice of and to vote at such meetings or entitled to such dividend or to such allotment of rights or to exercise the rights in respect of any such change, conversion or exchange of capital stock, shall be determined, and only such shareholders as shall be shareholders of record on the day and hour so fixed shall be entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights, as the case may be. ARTICLE X THE CORPORATE SEAL Section 1. Seal. The following is an impression of the seal of the Association adopted by the Board of Directors. ARTICLE XI BUSINESS HOURS Section 1. Business Hours. The main office of this Association and each branch office thereof shall be open for business each day, except Saturdays, Sundays and days recognized by the laws of the State of Rhode Island as legal holidays, for such hours as the President, or such other officer as the Board of Directors shall from time to time designate, may determine as to each office to conform to local custom and convenience, provided that any one or more of the main and branch offices or certain departments thereof may be open for such hours as the President, or such other officer as the Board of Directors shall from time to time designate, may determine as to each office or department on any legal holiday on which work is not prohibited by law, and provided further that any one or more of the main and branch offices or certain departments thereof may be ordered closed or open on any day for such hours as to each office or department as the President, or such other officer as the Board of Directors shall from time to time designate, subject to applicable laws and regulations, may determine when such action may be required by reason of disaster or other emergency condition. ARTICLE IX CHANGES IN BY-LAWS Section 1. Amendments. These By-laws may be amended upon vote of a majority of the entire Board of Directors at any meeting of the Board, provided ten (10) day's notice of the proposed amendment has been given to each member of the Board of Directors. No amendment may be made unless the By-law, as amended, is consistent with the requirements of law and of the Articles of Association. These By-laws may also be amended by the Association's shareholders. A true copy Attest: Secretary/Assistant Secretary - --------------------------------------- Dated at , as of . --------------------------------------- ---------------------- Revision of January 11, 1993 -9- EXHIBIT 5 CONSENT OF THE TRUSTEE REQUIRED BY SECTION 321(b) OF THE TRUST INDENTURE ACT OF 1939 The undersigned, as Trustee under the Indenture to be entered into between Smith's Food & Drug Centers, Inc. and Fleet National Bank of Connecticut, as Trustee, does hereby consent that, pursuant to Section 321(b) of the Trust Indenture Act of 1939, reports of examinations with respect to the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. FLEET NATIONAL BANK OF CONNECTICUT, as Trustee By /s/ Michael M. Hopkins ------------------------------- Its: Vice President Dated: March 8, 1996 EXHIBIT 6 Board of Governors of the Federal Reserve System OMB Number: 7100-0036 Federal Deposit Insurance Corporation OMB Number: 3064-0052 Office of the Comptroller of the Currency OMB Number: 1557-0081 FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL Expires March 31, 1996 - ----------------------------------------------------------------------------------------------------------------------------- Please refer to page i, / 1 / [LOGO] Table of Contents, for the required disclosure of estimated burden. - -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC AND FOREIGN OFFICES--FFIEC 031 (951231) REPORT AT THE CLOSE OF BUSINESS DECEMBER 31, 1995 ----------- (RCRI 9999) This report is required by law: 12 U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember banks); and 12 U.S.C. Section 161 (National banks). This report form is to be filed by banks with branches and consolidation subsidiaries in U.S. territories and possessions, Edge or Agreement subsidiaries, foreign branches, consolidated foreign subsidiaries, or International Banking Facilities. - -------------------------------------------------------------------------------- NOTE: The Reports of Condition and Income must be signed by an authorized officer and the Report of Condition must be attested to by not less than two directors (trustees) for State nonmember banks and three directors for State member and National banks. ----------------------------------------------------------------------------- Name and Title of Officer Authorized to Sign Report of the named bank do hereby declare that these Reports of Condition and Income (including the supporting schedules) have been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and are true to the best of my knowledge and belief. /s/ GIRO DEROSA - -------------------------------------------------------------------------------- Signature of Officer Authorized to Sign Report January 25, 1996 - -------------------------------------------------------------------------------- Date of Signature The Reports of Condition and Income are to be prepared in accordance with Federal regulatory authority instructions. NOTE: These instructions may in some cases differ from generally accepted accounting principles. We, the undersigned directors (trustees), attest to the correctness of this Report of Condition (including the supporting schedules) and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true and correct. /s/ GUNNAR S. OVERSTROM - -------------------------------------------------------------------------------- Director (Trustee) /s/ JOEL B. ALVORD - -------------------------------------------------------------------------------- Director (Trustee) /s/ DAVID L. EYLES - -------------------------------------------------------------------------------- Director (Trustee) - -------------------------------------------------------------------------------- FOR BANKS SUBMITTING HARD COPY REPORT FORMS: STATE MEMBER BANKS: Return the original and one copy to the appropriate Federal Feserve District Bank. STATE NONMEMBER BANKS: Return the original only in the special return address envelope provided. If express mail is used in lieu of the special return address envelope, return the original only to the FDIC, c/o Quality Data Systems, 2127 Espey Court, Crofton, MD 21114. NATIONAL BANKS: Return the original only in the special return address envelope provided. If express mail is used in lieu of the special return address envelope, return the original only to the FDIC, c/o Quality Data Systems, 2127 Espey Court, Crofton, MD 21114.
- ----------------------------------------------------------------------------------------------------------------------------- ___ FDIC Certificate Number | 1 | 0 | 5 | 8 | 2 | | ______________________ CALL NO. 190 31 12-31-95 (RCRI 9050) CERT: 02499 10582 STBK 09-0590 FLEET NATIONAL BANK OF CONNECTICUT 777 MAIN STREET HARTFORD, CT 06115 | | ___ ___ Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
FFIEC 031 Page i /2/ Consolidated Reports of Condition and Income for A Bank With Domestic and Foreign Offices ________________________________________________________________________________ TABLE OF CONTENTS SIGNATURE PAGE Cover REPORT OF INCOME Schedule RI--Income Statement...........................................RI-1,2,3 Schedule RI-A--Changes in Equity Capital....................................RI-3 Schedule RI-B--Charge-offs and Recoveries and Changes in Allowance for Loan and Lease Losses..................................................................RI-4,5 Schedule RI-C--Applicable Income Taxes by Taxing Authority..........................................................RI-5 Schedule RI-D--Income from International Operations..................................................RI-6 Schedule RI-E--Explanations...............................................RI-7,8 REPORT OF CONDITION Schedule RC--Balance Sheet................................................RC-1,2 Schedule RC-A--Cash and Balances Due From Depository Institutions..............................................RC-3 Schedule RC-B--Securities.................................................RC-4,5 Schedule RC-C--Loans and Lease Financing Receivables: Part I. Loans and Leases..............................................RC-6,7 Part II. Loans to Small Businesses and Small Farms (included in the forms for June 30 only).....................................................RC-7a,7b Schedule RC-D--Trading Assets and Liabilities (to be completed only by selected banks)..................................RC-8 Schedule RC-E--Deposit Liabilities.......................................RC-9,10 Schedule RC-F--Only Assets.................................................RC-11 Schedule RC-G--Other Liabilities...........................................RC-11 Schedule RC-H--Selected Balance Sheet Items for Domestic Offices.........................................................RC-12 Schedule RC-I--Selected Assets and Liabilities of IBF's.................................................................RC-13 Schedule RC-K--Quarterly Averages..........................................RC-13 Schedule RC-L--Off-Balance Sheet Items..................................RC-14,15 Schedule RC-M--Memoranda................................................RC-16,17 Schedule RC-N--Past Due and Nonaccrual Loans, Leases, and Other Assets..............................................RC-18,19 Schedule RC-O--Other Data for Deposit Insurance Assessments.................................................RC-20,21 Schedule RC-R--Risk-Based Captial.......................................RC-22,23 Optional Narrative Statement Concerning the Amounts Reported in the Reports of Conditions and Income....................................................RC-24 Special Report (TO BE COMPLETED BY ALL BANKS) Schedule RC-J--Repricing Opportunities (sent only to and to be completed only by savings banks) DISCLOSURE OF ESTIMATED BURDEN The estimated average burden associated with this information collection is 30.7 hours per respondent and is estimated to vary from 15 to 200 hours per response, depending on individual circumstances. Burden estimates include the time for reviewing instructions, gathering and maintaining data in the required form, and completing the information collection, but exclude the time for compiling and maintaining business records in the normal course of a respondent's activities. Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Office of Information and Regulatory Affairs. Office of Management and Budget, Washington, D.C. 20503, and to one of the following: Secretary Board of Governors of the Federal Reserve System Washington, D.C. 20551 Legislative and Regulatory Analysis Division Office of the Comptroller of the Currency Washington, D.C. 20219 Assistant Executive Secretary Federal Deposit Insurance Corporation Washington, D.C. 20429 For information or assistance, national and state nonmember banks should contact the FDIC's Call Reports Analysis Unit, 550 17th Street, NW, Washington, D.C. 20429, toll free on (800)688-FDIC (3342), Monday through Friday between 8:00 a.m. and 5:00 p.m., Eastern time. State member banks should contact their Federal Reserve District Bank. Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-1 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Address: 777 MAIN STREET City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| Consolidated Report of Income for the period January 1, 1995 - December 31, 1995 All Report of Income schedules are to be reported on a calendar year-to-date basis in thousands of dollars. file Schedule RI--Income Statement ________ | 1480 | |________| _______________________________________________________________________________________________ ___________|________| 1. Interest income: | ////////////////// | a. Interest and fee income on loans: | ////////////////// | (1) In domestic offices: | ////////////////// | (a) Loans secured by real estate ................................................... | 4011 382,429 | 1.a.(1)(a) (b) Loans to depository institutions ............................................... | 4019 732 | 1.a.(1)(b) (c) Loans to finance agricultural production and other loans to farmers ............ | 4024 309 | 1.a.(1)(c) (d) Commercial and industrial loans ................................................ | 4012 466,509 | 1.a.(1)(d) (e) Acceptances of other banks ..................................................... | 4026 70 | 1.a.(1)(e) (f) Loans to individuals for household, family, and other personal expenditures: | ////////////////// | (1) Credit cards and related plans ............................................. | 4054 813 | 1.a.(1)(f)(1) (2) Other ...................................................................... | 4055 52,452 | 1.a.(1)(f)(2) (g) Loans to foreign governments and official institutions.......................... | 4056 0 | 1.a.(1)(g) (h) Obligations (other than securities and leases) of states and political | ////////////////// | subdivisions in the U.S.: | ////////////////// | (1) Taxable obligations ........................................................ | 4503 240 | 1.a.(1)(h)(1) (2) Tax-exempt obligations ..................................................... | 4504 2,486 | 1.a.(1)(h)(2) (i) All other loans in domestic offices ............................................ | 4058 59,226 | 1.a.(1)(i) (2) In foreign offices, Edge and Agreement subsidiaries, and IBFs ...................... | 4059 0 | 1.a.(2) b. Income from lease financing receivables: | ////////////////// | (1) Taxable leases ..................................................................... | 4505 1,015 | 1.b.(1) (2) Tax-exempt leases .................................................................. | 4307 0 | 1.b.(2) c. Interest income on balances due from depository institutions:(1) | ////////////////// | (1) In domestic offices ................................................................ | 4105 7 | 1.c.(1) (2) In foreign offices, Edge and Agreement subsidiaries, and IBFs ...................... | 4106 4,751 | 1.c.(2) d. Interest and dividend income on securities: | ////////////////// | (1) U.S. Treasury securities and U.S. Government agency and corporation obligations .... | 4027 187,576 | 1.d.(1) (2) Securities issued by states and political subdivisions in the U.S.: | ////////////////// | (a) Taxable securities ............................................................. | 4506 0 | 1.d.(2)(a) (b) Tax-exempt securities .......................................................... | 4507 3 | 1.d.(2)(b) (3) Other domestic debt securities ..................................................... | 3657 78,170 | 1.d.(3) (4) Foreign debt securities ............................................................ | 3658 223 | 1.d.(4) (5) Equity securities (including investments in mutual funds) .......................... | 3659 6,646 | 1.d.(5) e. Interest income from assets held in trading accounts ................................... | 4069 0 | 1.e. ______________________ ____________ (1) Includes interest income on time certificates of deposit not held for trading.
3 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-2 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RI--Continued ________________ Dollar Amounts in Thousands | Year-to-date | ___________________________________________________________________________________ ______________ 1. Interest income (continued) | RIAD Bil Mil Thou | f. Interest income on federal funds sold and securities purchased | ////////////////// | under agreements to resell in domestic offices of the bank and of | ////////////////// | its Edge and Agreement subsidiaries, and in IBFs .................... | 4020 11,399 | 1.f. g. Total interest income (sum of items 1.a through 1.f) ................ | 4107 1,255,056 | 1.g. 2. Interest expense: | ////////////////// | a. Interest on deposits: | ////////////////// | (1) Interest on deposits in domestic offices: | ////////////////// | (a) Transaction accounts (NOW accounts, ATS accounts, and | ////////////////// | telephone and preauthorized transfer accounts) .............. | 4508 8,111 | 2.a.(1)(a) (b) Nontransaction accounts: | ////////////////// | (1) Money market deposit accounts (MMDAs) ................... | 4509 25,029 | 2.a.(1)(b)(1) (2) Other savings deposits .................................. | 4511 49,772 | 2.a.(1)(b)(2) (3) Time certificates of deposit of $100,000 or more ........ | 4174 102,210 | 2.a.(1)(b)(3) (4) All other time deposits ................................. | 4512 120,235 | 2.a.(1)(b)(4) (2) Interest on deposits in foreign offices, Edge and Agreement | ////////////////// | subsidiaries, and IBFs .......................................... | 4172 38,926 | 2.a.(2) b. Expense of federal funds purchased and securities sold under | ////////////////// | agreements to repurchase in domestic offices of the bank and of | ////////////////// | its Edge and Agreement subsidiaries, and in IBFs .................... | 4180 213,972 | 2.b. c. Interest on demand notes issued to the U.S. Treasury, trading | ////////////////// | liabilities, and other money borrowed ............................... | 4185 134,947 | 2.c. d. Interest on mortgage indebtedness and obligations under | ////////////////// | capitalized leases .................................................. | 4072 833 | 2.d. e. Interest on subordinated notes and debentures ....................... | 4200 19,159 | 2.e. f. Total interest expense (sum of items 2.a through 2.e) ............... | 4073 713,194 | 2.f. ___________________________ 3. Net interest income (item 1.g minus 2.f) ............................... | ////////////////// | RIAD 4074 | 541,862 | 3. ___________________________ 4. Provisions: | ////////////////// | ___________________________ a. Provision for loan and lease losses ................................. | ////////////////// | RIAD 4230 | 5,258 | 4.a. b. Provision for allocated transfer risk ............................... | ////////////////// | RIAD 4243 | 0 | 4.b. ___________________________ 5. Noninterest income: | ////////////////// | a. Income from fiduciary activities .................................... | 4070 84,978 | 5.a. b. Service charges on deposit accounts in domestic offices ............. | 4080 65,848 | 5.b. c. Trading gains (losses) and fees from foreign exchange transactions .. | 4075 1,436 | 5.c. d. Other foreign transaction gains (losses) ............................ | 4076 0 | 5.d. e. Other gains (losses) and fees from trading assets and liabilities ... | 4077 1,422 | 5.e. f. Other noninterest income: | ////////////////// | (1) Other fee income ................................................ | 5407 59,418 | 5.f.(1) (2) All other noninterest income* ................................... | 5408 54,976 | 5.f.(2) ___________________________ g. Total noninterest income (sum of items 5.a through 5.f) ............. | ////////////////// | RIAD 4079 | 268,078 | 5.g. 6. a. Realized gains (losses) on held-to-maturity securities .............. | ////////////////// | RIAD 3521 | (6) | 6.a. b. Realized gains (losses) on available-for-sale securities ............ | ////////////////// | RIAD 3196 | 300 | 6.b. | ////////////////// |___________________________ 7. Noninterest expense: | ////////////////// | a. Salaries and employee benefits ...................................... | 4135 277,219 | 7.a. b. Expenses of premises and fixed assets (net of rental income) | ////////////////// | (excluding salaries and employee benefits and mortgage interest) .... | 4217 88,758 | 7.b. c. Other noninterest expense* .......................................... | 4092 390,919 | 7.c. ___________________________ d. Total noninterest expense (sum of items 7.a through 7.c) ............ | ////////////////// | RIAD 4093 | 756,896 | 7.d. ___________________________ 8. Income (loss) before income taxes and extraordinary items and other | ////////////////// | ___________________________ adjustments (item 3 plus or minus items 4.a, 4.b, 5.g, 6.a, 6.b, and 7.d)| ////////////////// | RIAD 4301 | 48,080 | 8. 9. Applicable income taxes (on item 8) .................................... | ////////////////// | RIAD 4302 | 20,832 | 9. ___________________________ 10. Income (loss) before extraordinary items and other adjustments | ////////////////// | ___________________________ (item 8 minus 9) ....................................................... | ////////////////// | RIAD 4300 | 27,248 | 10. _________________________________________________ ____________ *Describe on Schedule RI-E--Explanations.
4 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-3 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RI--Continued ________________ | Year-to-date | ______ ______________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | ___________________________________________________________________________________ ______________ 11. Extraordinary items and other adjustments: | ////////////////// | a. Extraordinary items and other adjustments, gross of income taxes* . | 4310 0 | 11.a. b. Applicable income taxes (on item 11.a)* ........................... | 4315 0 | 11.b. c. Extraordinary items and other adjustments, net of income taxes | ////////////////// | ___________________________ (item 11.a minus 11.b) ............................................ | ////////////////// | RIAD 4320 | 0 | 11.c. 12. Net income (loss) (sum of items 10 and 11.c) ......................... | ////////////////// | RIAD 4340 | 27,248 | 12. _________________________________________________
__________ ______|__I481__| Memoranda | Year-to-date | ______ ______________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | ______________________________________________________________________________________________________ ____________________ 1. Interest expense incurred to carry tax-exempt securities, loans, and leases acquired after | ////////////////// | August 7, 1986, that is not deductible for federal income tax purposes .......................... | 4513 0 | M.1. 2. Income from the sale and servicing of mutual funds and annuities in domestic offices | ////////////////// | (included in Schedule RI, item 8) ............................................................... | 8431 0 | M.2. 3. Estimated foreign tax credit included in applicable income taxes, items 9 and 11.b above ........ | 4309 0 | M.3. 4. To be completed only by banks with $1 billion or more in total assets: | ////////////////// | Taxable equivalent adjustment to "Income (loss) before income taxes and extraordinary | ////////////////// | items and other adjustments" (item 8 above) ..................................................... | 1244 1,837 | M.4. 5. Number of full-time equivalent employees on payroll at end of current period (round to | //// Number | nearest whole number) ........................................................................... | 4150 5,002 | M.5. 6. Not applicable | ////////////////// | 7. If the reporting bank has restated its balance sheet as a result of applying push down | //// MM DD YY | accounting this calendar year, report the date of the bank's acquisition ........................ | 9106 00/00/00 | M.7. 8. Trading revenue (from cash instruments and off-balance sheet derivative instruments) | ////////////////// | (included in schedule RI, items 5.c and 5.e): | //// Bil Mil Thou | a. Interest rate esposures ...................................................................... | 8757 1,442 | M.8.a. b. Foreign exchange exposures ................................................................... | 8758 1,416 | M.8.b. c. Equity security and index exposures .......................................................... | 8759 0 | M.8.c. d. Commodity and other exposures ................................................................ | 8760 0 | M.8.d. 9. Impact on income of off-balance sheet derivatives held for purposes other than trading: | ////////////////// | a. Net increase (decrease) to interest income.....................................................| 8761 (13,220)| M.9.a. b. Net (increase) decrease to interest expense ...................................................| 8762 (6,842)| M.9.b. c. Other (noninterest) allocations ...............................................................| 8763 0 | M.9.c.
____________ *Describe on Schedule RI-E--Explanations. Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-4 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RI-A--Changes in Equity Capital Indicate decreases and losses in parentheses. _________ | I483 | _____________________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | ______________________________________________________________________________________________________|____________________| 1. Total equity capital originally reported in the December 31, 1994, Reports of Condition | ////////////////// | and Income ...................................................................................... | 3215 1,236,358 | 1. 2. Equity capital adjustments from amended Reports of Income, net* ................................. | 3216 0 | 2. 3. Amended balance end of previous calendar year (sum of items 1 and 2) ............................ | 3217 1,236,358 | 3. 4. Net income (loss) (must equal Schedule RI, item 12) ............................................. | 4340 27,248 | 4. 5. Sale, conversion, acquisition, or retirement of capital stock, net .............................. | 4346 125,000 | 5. 6. Changes incident to business combinations, net .................................................. | 4356 0 | 6. 7. LESS: Cash dividends declared on preferred stock ................................................ | 4470 11,330 | 7. 8. LESS: Cash dividends declared on common stock ................................................... | 4460 97,000 | 8. 9. Cumulative effect of changes in accounting principles from prior years* (see instructions | ////////////////// | for this schedule) .............................................................................. | 4411 0 | 9. 10. Corrections of material accounting errors from prior years* (see instructions for this schedule) | 4412 0 | 10. 11. Change in net unrealized holding gains (losses) on available-for-sale securities ................ | 8433 32,197 | 11. 12. Foreign currency translation adjustments ........................................................ | 4414 0 | 12. 13. Other transactions with parent holding company* (not included in items 5, 7, or 8 above) ........ | 4415 30,000 | 13. 14. Total equity capital end of current period (sum of items 3 through 13) (must equal Schedule RC, | ////////////////// | item 28) ........................................................................................ | 3210 1,342,473 | 14. ______________________ ____________ *Describe on Schedule RI-E--Explanations.
Schedule RI-B--Charge-offs and Recoveries and Changes in Allowance for Loan and Lease Losses Part I. Charge-offs and Recoveries on Loans and Leases Part I excludes charge-offs and recoveries through the allocated transfer risk reserve. __________ | I486 | _________________________________ ________ | (Column A) | (Column B) | | Charge-offs | Recoveries | ____________________ ____________________ | Calendar year-to-date | _________________________________________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | RIAD Bil Mil Thou | ______________________________________________________________________________ ____________________ ____________________ 1. Loans secured by real estate: | ////////////////// | ////////////////// | a. To U.S. addressees (domicile) ......................................... | 4651 73,797 | 4661 17,780 | 1.a. b. To non-U.S. addressees (domicile) ..................................... | 4652 0 | 4662 0 | 1.b. 2. Loans to depository institutions and acceptances of other banks: | ////////////////// | ////////////////// | a. To U.S. banks and other U.S. depository institutions .................. | 4653 0 | 4663 0 | 2.a. b. To foreign banks ...................................................... | 4654 0 | 4664 0 | 2.b. 3. Loans to finance agricultural production and other loans to farmers ...... | 4655 73 | 4665 97 | 3. 4. Commercial and industrial loans: | ////////////////// | ////////////////// | a. To U.S. addressees (domicile) ......................................... | 4645 11,164 | 4617 5,987 | 4.a. b. To non-U.S. addressees (domicile) ..................................... | 4646 0 | 4618 0 | 4.b. 5. Loans to individuals for household, family, and other personal | ////////////////// | ////////////////// | expenditures: | ////////////////// | ////////////////// | a. Credit cards and related plans ........................................ | 4656 1,137 | 4666 412 | 5.a. b. Other (includes single payment, installment, and all student loans) ... | 4657 3,932 | 4667 2,290 | 5.b. 6. Loans to foreign governments and official institutions ................... | 4643 0 | 4627 0 | 6. 7. All other loans .......................................................... | 4644 1,131 | 4628 269 | 7. 8. Lease financing receivables: | ////////////////// | ////////////////// | a. Of U.S. addressees (domicile) ......................................... | 4658 0 | 4668 0 | 8.a. b. Of non-U.S. addressees (domicile) ..................................... | 4659 0 | 4669 0 | 8.b. 9. Total (sum of items 1 through 8) ......................................... | 4635 91,234 | 4605 26,835 | 9. ___________________________________________
Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-5 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RI-B--Continued Part I. Continued Memoranda _________________________________ ________ | (Column A) | (Column B) | | Charge-offs | Recoveries | ____________________ ____________________ | Calendar year-to-date | _________________________________________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | RIAD Bil Mil Thou | ______________________________________________________________________________ ____________________ ____________________ 1-3. Not applicable | ////////////////// | ////////////////// | 4. Loans to finance commercial real estate, construction, and land | ////////////////// | ////////////////// | development activities (not secured by real estate) included in | ////////////////// | ////////////////// | Schedule RI-B, part I, items 4 and 7, above .............................. | 5409 1,891 | 5410 1,411 | M.4. 5. Loans secured by real estate in domestic offices (included in | ////////////////// | ////////////////// | Schedule RI-B, part I, item1, above): | ////////////////// | ////////////////// | a. Construction and land development ..................................... | 3582 6,020 | 3583 2,428 | M.5.a. b. Secured by farmLand ................................................... | 3584 104 | 3585 5 | M.5.b. c. Secured by 1-4 family residential properties: | ////////////////// | ////////////////// | (1) Revolving, open-end loans secured by 1-4 family residential | ////////////////// | ////////////////// | properties and extended under lines of credit ..................... | 5411 1,696 | 5412 65 | M.5.c.(1) (2) All other loans secured by 1-4 family residential properties ...... | 5413 19,988 | 5414 4,864 | M.5.c.(2) d. Secured by multifamily (5 or more) residential properties ............. | 3588 5,613 | 3589 1,633 | M.5.d. e. Secured by nonfarm nonresidential properties .......................... | 3590 40,376 | 3591 8,785 | M.5.e. |_________________________________________| Part II. Changes in Allowance for Loan and Lease Losses _____________________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | ___________________________________________________________________________________________________ ____________________ 1. Balance originally reported in the December 31, 1994, Reports of Condition and Income ......... | 3124 283,800 | 1. 2. Recoveries (must equal part I, item 9, column B above) ........................................ | 4605 26,835 | 2. 3. LESS: Charge-offs (must equal part I, item 9, column A above) ................................. | 4635 91,234 | 3. 4. Provision for loan and lease losses (must equal Schedule RI, item 4.a)......................... | 4230 5,258 | 4. 5. Adjustments* (see instructions for this schedule) ................................ ............ | 4815 42,284 | 5. 6. Balance end of current period (sum of items 1 through 5) (must equal Schedule RC, | ////////////////// | item 4.b) ..................................................................................... | 3123 266,943 | 6. |____________________| ____________ *Describe on Schedule RI-E--Explanations. Schedule RI-C--Applicable Income Taxes by Taxing Authority Schedule RI-C is to be reported with the December Report of Income. | I489 | ____________ ________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | ___________________________________________________________________________________________________ ____________________ 1. Federal ....................................................................................... | 4780 17,383 | 1. 2. State and local................................................................................ | 4790 3,449 | 2. 3. Foreign ....................................................................................... | 4795 0 | 3. 4. Total (sum of items 1 through 3) (must equal sum of Schedule RI, items 9 and 11.b) ............ | 4770 20,832 | 4. ____________________________| | 5. Deferred portion of item 4 ........................................ | RIAD 4772 | (69,592)| ////////////////// | 5. __________________________________________________
7 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-6 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RI-D--Income from International Operations For all banks with foreign offices, Edge or Agreement subsidiaries, or IBFs where international operations account for more than 10 percent of total revenues, total assets, or net income. Part I. Estimated Income from International Operations __________ | I492 | ______ ________ | Year-to-date | ______ ______________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | _________________________________________________________________________________________________ ____________________ 1. Interest income and expense booked at foreign offices, Edge and Agreement subsidiaries, | ////////////////// | and IBFs: | ////////////////// | a. Interest income booked ................................................................... | 4837 N/A | 1.a. b. Interest expense booked .................................................................. | 4838 N/A | 1.b. c. Net interest income booked at foreign offices, Edge and Agreement subsidiaries, and IBFs | ////////////////// | (item 1.a minus 1.b) ..................................................................... | 4839 N/A | 1.c. 2. Adjustments for booking location of international operations: | ////////////////// | a. Net interest income attributable to international operations booked at domestic offices .. | 4840 N/A | 2.a. b. Net interest income attributable to domestic business booked at foreign offices .......... | 4841 N/A | 2.b. c. Net booking location adjustment (item 2.a minus 2.b) ..................................... | 4842 N/A | 2.c. 3. Noninterest income and expense attributable to international operations: | ////////////////// | a. Noninterest income attributable to international operations .............................. | 4097 N/A | 3.a. b. Provision for loan and lease losses attributable to international operations ............. | 4235 N/A | 3.b. c. Other noninterest expense attributable to international operations ....................... | 4239 N/A | 3.c. d. Net noninterest income (expense) attributable to international operations (item 3.a | ////////////////// | minus 3.b and 3.c) ....................................................................... | 4843 N/A | 3.d. 4. Estimated pretax income attributable to international operations before capital allocation | ////////////////// | adjustment (sum of items 1.c, 2.c, and 3.d) ................................................. | 4844 N/A | 4. 5. Adjustment to pretax income for internal allocations to international operations to reflect | ////////////////// | the effects of equity capital on overall bank funding costs ................................. | 4845 N/A | 5. 6. Estimated pretax income attributable to international operations after capital allocation | ////////////////// | adjustment (sum of items 4 and 5) ........................................................... | 4846 N/A | 6. 7. Income taxes attributable to income from international operations as estimated in item 6 .... | 4797 N/A | 7. 8. Estimated net income attributable to international operations (item 6 minus 7) .............. | 4341 N/A | 8. ______________________ Memoranda ______________________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | _________________________________________________________________________________________________ ____________________ 1. Intracompany interest income included in item 1.a above ..................................... | 4847 N/A | M.1. 2. Intracompany interest expense included in item 1.b above .................................... | 4848 N/A | M.2. ______________________
Part II. Supplementary Details on Income from International Operations Required by the Departments of Commerce and Treasury for Purposes of the U.S. International Accounts and the U.S. National Income and Product Accounts ________________ | Year-to-date | ______ ______________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | _________________________________________________________________________________________________ ____________________ 1. Interest income booked at IBFs .............................................................. | 4849 N/A | 1. 2. Interest expense booked at IBFs ............................................................. | 4850 N/A | 2. 3. Noninterest income attributable to international operations booked at domestic offices | ////////////////// | (excluding IBFs): | ////////////////// | a. Gains (losses) and extraordinary items ................................................... | 5491 N/A | 3.a. b. Fees and other noninterest income ........................................................ | 5492 N/A | 3.b. 4. Provision for loan and lease losses attributable to international operations booked at | ////////////////// | domestic offices (excluding IBFs) ........................................................... | 4852 N/A | 4. 5. Other noninterest expense attributable to international operations booked at domestic offices | ////////////////// | (excluding IBFs) ............................................................................ | 4853 N/A | 5. ______________________
8 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-7 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RI-E--Explanations Schedule RI-E is to be completed each quarter on a calendar year-to-date basis. Detail all adjustments in Schedules RI-A and RI-B, all extraordinary items and other adjustments in Schedule RI, and all significant items of other noninterest income and other noninterest expense in Schedule RI. (See instructions for details.) __________ | I495 | ______ ________ | Year-to-date | ______ ______________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | __________________________________________________________________________________________________ ____________________ 1. All other noninterest income (from Schedule RI, item 5.f.(2)) | ////////////////// | Report amounts that exceed 10% of Schedule RI, item 5.f.(2): | ////////////////// | a. Net gains on other real estate owned ..................................................... | 5415 0 | 1.a. b. Net gains on sales of loans .............................................................. | 5416 0 | 1.b. c. Net gains on sales of premises and fixed assets .......................................... | 5417 0 | 1.c. Itemize and describe the three largest other amounts that exceed 10% of | ////////////////// | Schedule RI, item 5.f.(2): | ////////////////// | _____________ d. | TEXT 4461 |______________________________________________________________________________| 4461 33,165 | 1.d. ___________ REIMBURSEMENT FROM AFFILIATES e. | TEXT 4462 |______________________________________________________________________________| 4462 | 1.e. ___________ f. | TEXT 4463 |______________________________________________________________________________| 4463 | 1.f. _____________ 2. Other noninterest expense (from Schedule RI, item 7.c): | ////////////////// | a. Amortization expense of intangible assets ................................................ | 4531 23,094 | 2.a. Report amounts that exceed 10% of Schedule RI, item 7.c: | ////////////////// | b. Net losses on other real estate owned .................................................... | 5418 0 | 2.b. c. Net losses on sales of loans ............................................................. | 5419 0 | 2.c. d. Net losses on sales of premises and fixed assets ......................................... | 5420 0 | 2.d. Itemize and describe the three largest other amounts that exceed 10% of | ////////////////// | Schedule RI, item 7.c: | ////////////////// | _____________ e. | TEXT 4464 |______________________________________________________________________________| 4464 166,229 | 2.e. ___________ MERGER & RESTRUCTURING CHARGES f. | TEXT 4467 |______________________________________________________________________________| 4467 | 2.f. ___________ g. | TEXT 4468 |______________________________________________________________________________| 4468 | 2.g. _____________ 3. Extraordinary items and other adjustments (from Schedule RI, item 11.a) and | ////////////////// | applicable income tax effect (from Schedule RI, item 11.b) (itemize and describe | ////////////////// | all extraordinary items and other adjustments): | ////////////////// | _____________ a. (1) | TEXT 4469 |__________________________________________________________________________| 4469 | 3.a.(1) _____________ (2) Applicable income tax effect | RIAD 4486 | | ////////////////// | 3.a.(2) _____________ ____________________________ b. (1) | TEXT 4487 |__________________________________________________________________________| 4487 | 3.b.(1) _____________ (2) Applicable income tax effect | RIAD 4488 | | ////////////////// | 3.b.(2) _____________ ____________________________ c. (1) | TEXT 4489 |__________________________________________________________________________| 4489 | 3.c.(1) _____________ (2) Applicable income tax effect | RIAD 4491 | | ////////////////// | 3.c.(2) ____________________________ 4. Equity capital adjustments from amended Reports of Income (from Schedule RI-A, | ////////////////// | item 2) (itemize and describe all adjustments): | ////////////////// | _____________ a. | TEXT 4492 |______________________________________________________________________________| 4492 | 4.a. ___________ b. | TEXT 4493 |______________________________________________________________________________| 4493 | 4.b. _____________ 5. Cumulative effect of changes in accounting principles from prior years (from | ////////////////// | Schedule RI-A, item 9) (itemize and describe all changes in accounting principles): | ////////////////// | _____________ a. | TEXT 4494 |______________________________________________________________________________| 4494 | 5.a. ___________ b. | TEXT 4495 |______________________________________________________________________________| 4495 | 5.b. _____________ 6. Corrections of material accounting errors from prior years (from Schedule RI-A, | ////////////////// | item 10) (itemize and describe all corrections): | ////////////////// | _____________ a. | TEXT 4496 |______________________________________________________________________________| 4496 | 6.a. ___________ b. | TEXT 4497 |______________________________________________________________________________| 4497 | 6.b. _____________ ______________________
9 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RI-8 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RI-E--Continued ________________ | Year-to-date | ______ ______________ Dollar Amounts in Thousands | RIAD Bil Mil Thou | __________________________________________________________________________________________________ ____________________ 7. Other transactions with parent holding company (from Schedule RI-A, item 13) | ////////////////// | (itemize and describe all such transactions): | ////////////////// | _____________ CAPITAL CONTRIBUTION FROM THE PARENT COMPANY a. | TEXT 4498 |______________________________________________________________________________| 4498 30,000 | 7.a. ___________ b. | TEXT 4499 |______________________________________________________________________________| 4499 | 7.b. _____________ 8. Adjustments to allowance for loan and lease losses (from Schedule RI-B, part II, | ////////////////// | item 5) (itemize and describe all adjustments): | ////////////////// | _____________ a. | TEXT 4521 | ADJUSTMENT DUE TO BARCLAY'S ACQUISITION |______________________________________________________________________________| 4521 41,743 | 8.a. _____________ SCC TRANSFER b. | TEXT 4522 |______________________________________________________________________________| 4522 541 | 8.b. _____________ ____________________ 9. Other explanations (the space below is provided for the bank to briefly describe, | I498 | I499 | ______________________ at its option, any other significant items affecting the Report of Income): ___ No comment |X| (RIAD 4769) ___ Other explanations (please type or print clearly): (TEXT 4769)
10 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-1 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Banks for December 31, 1995 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC--Balance Sheet __________ | C400 | ____________ ________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | __________________________________________________________________________________________________ ____________________ ASSETS | ////////////////// | 1. Cash and balances due from depository institutions (from Schedule RC-A): | ////////////////// | a. Noninterest-bearing balances and currency and coin(1) ................................... | 0081 1,363,000 | 1.a. b. Interest-bearing balances(2) ............................................................ | 0071 50,200 | 1.b. 2. Securities: | ////////////////// | a. Held-to-maturity securities (from Schedule RC-B, column A) .............................. | 1754 3,197 | 2.a. b. Available-for-sale securities (from Schedule RC-B, column D) ............................ | 1773 4,048,366 | 2.b. 3. Federal funds sold and securities purchased under agreements to resell in domestic offices | ////////////////// | of the bank and of its Edge and Agreement subsidiaries, and in IBFs: | ////////////////// | a. Federal funds sold ...................................................................... | 0276 205,800 | 3.a. b. Securities purchased under agreements to resell ......................................... | 0277 0 | 3.b. 4. Loans and lease financing receivables: ____________________________| ////////////////// | a. Loans and leases, net of unearned income (from Schedule RC-C) | RCFD 2122 | 11,528,458 | ////////////////// | 4.a. b. LESS: Allowance for loan and lease losses ................... | RCFD 3123 | 266,943 | ////////////////// | 4.b. c. LESS: Allocated transfer risk reserve ....................... | RCFD 3128 | 0 | ////////////////// | 4.c. ____________________________ d. Loans and leases, net of unearned income, | ////////////////// | allowance, and reserve (item 4.a minus 4.b and 4.c) ..................................... | 2125 11,261,515 | 4.d. 5. Trading assets (from schedule RC-D )........................................................ | 3545 840 | 5. 6. Premises and fixed assets (including capitalized leases) ................................... | 2145 163,677 | 6. 7. Other real estate owned (from Schedule RC-M) ............................................... | 2150 684 | 7. 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) ... | 2130 0 | 8. 9. Customers' liability to this bank on acceptances outstanding ............................... | 2155 7,330 | 9. 10. Intangible assets (from Schedule RC-M) ..................................................... | 2143 310,314 | 10. 11. Other assets (from Schedule RC-F) .......................................................... | 2160 714,575 | 11. 12. Total assets (sum of items 1 through 11) ................................................... | 2170 18,129,498 | 12. ______________________ ____________ (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading.
11 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-2 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC--Continued ___________________________ Dollar Amounts in Thousands | ///////// Bil Mil Thou | _______________________________________________________________________________________________ _________________________ LIABILITIES | /////////////////////// | 13. Deposits: | /////////////////////// | a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I) ..... | RCON 2200 10,797,121 | 13.a. ____________________________ (1) Noninterest-bearing(1) ................................ | RCON 6631 3,401,997 | /////////////////////// | 13.a.(1) (2) Interest-bearing ...................................... | RCON 6636 7,395,124 | /////////////////////// | 13.a.(2) ____________________________ b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E, | /////////////////////// | part II) .............................................................................. | RCFN 2200 431,872 | 13.b. ____________________________ (1) Noninterest-bearing ................................... | RCFN 6631 0 | /////////////////////// | 13.b.(1) (2) Interest-bearing ...................................... | RCFN 6636 431,872 | /////////////////////// | 13.b.(2) ____________________________ 14. Federal funds purchased and securities sold under agreements to repurchase in domestic | /////////////////////// | offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: | /////////////////////// | a. Federal funds purchased ............................................................... | RCFD 0278 2,699,716 | 14.a. b. Securities sold under agreements to repurchase ........................................ | RCFD 0279 40,059 | 14.b. 15. a. Demand notes issued to the U.S. Treasury .............................................. | RCON 2840 304,843 | 15.a. b. Trading liabilities (from Schedule RC-D) .............................................. | RCFD 3548 814 | 15.b. 16. Other borrowed money: | /////////////////////// | a. With original maturity of one year or less ............................................ | RCFD 2332 1,557,198 | 16.a. b. With original maturity of more than one year .......................................... | RCFD 2333 131,588 | 16.b. 17. Mortgage indebtedness and obligations under capitalized leases ........................... | RCFD 2910 9,173 | 17. 18. Bank's liability on acceptances executed and outstanding ................................. | RCFD 2920 7,330 | 18. 19. Subordinated notes and debentures ........................................................ | RCFD 3200 440,000 | 19. 20. Other liabilities (from Schedule RC-G) ................................................... | RCFD 2930 367,311 | 20. 21. Total liabilities (sum of items 13 through 20) ........................................... | RCFD 2948 16,787,025 | 21. | /////////////////////// | 22. Limited-life preferred stock and related surplus ......................................... | RCFD 3282 0 | 22. EQUITY CAPITAL | /////////////////////// | 23. Perpetual preferred stock and related surplus ............................................ | RCFD 3838 125,000 | 23. 24. Common stock ............................................................................. | RCFD 3230 19,487 | 24. 25. Surplus (exclude all surplus related to preferred stock).................................. | RCFD 3839 955,984 | 25. 26. a. Undivided profits and capital reserves ................................................ | RCFD 3632 238,795 | 26.a. b. Net unrealized holding gains (losses) on available-for-sale securities ................ | RCFD 8434 3,207 | 26.b. 27. Cumulative foreign currency translation adjustments ...................................... | RCFD 3284 0 | 27. 28. Total equity capital (sum of items 23 through 27) ........................................ | RCFD 3210 1,342,473 | 28. 29. Total liabilities, limited-life preferred stock, and equity capital (sum of items 21, 22, | /////////////////////// | and 28) .................................................................................. | RCFD 3300 18,129,498 | 29. ___________________________
Memorandum To be reported only with the March Report of Condition. 1. Indicate in the box at the right the number of the statement below that best describes the Number most comprehensive level of auditing work performed for the bank by independent external __________________ auditors as of any date during 1994 ............................................................... | RCFD 6724 N/A | M.1. __________________ 1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other with generally accepted auditing standards by a certified external auditors (may be required by state chartering public accounting firm which submits a report on the bank authority) 2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external conducted in accordance with generally accepted auditing auditors standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by external submits a report on the consolidated holding company auditors (but not on the bank separately) 7 = Other audit procedures (excluding tax preparation work) 3 = Directors' examination of the bank conducted in 8 = No external audit work accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) ____________ (1) Includes total demand deposits and noninterest-bearing time and savings deposits.
12 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-3 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-A--Cash and Balances Due From Depository Institutions Exclude assets held for trading. __________ | C405 | _________________________________ ________ | (Column A) | (Column B) | | Consolidated | Domestic | | Bank | Offices | ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCON Bil Mil Thou | _____________________________________________________________________________ ____________________ ____________________ 1. Cash items in process of collection, unposted debits, and currency and | ////////////////// | ////////////////// | coin .................................................................... | 0022 257,049 | ////////////////// | 1. a. Cash items in process of collection and unposted debits .............. | ////////////////// | 0020 56,466 | 1.a. b. Currency and coin .................................................... | ////////////////// | 0080 200,583 | 1.b. 2. Balances due from depository institutions in the U.S. ................... | ////////////////// | 0082 722,819 | 2. a. U.S. branches and agencies of foreign banks (including their IBFs) ... | 0083 0 | ////////////////// | 2.a. b. Other commercial banks in the U.S. and other depository institutions | ////////////////// | ////////////////// | in the U.S. (including their IBFs) ................................... | 0085 722,819 | ////////////////// | 2.b. 3. Balances due from banks in foreign countries and foreign central banks .. | ////////////////// | 0070 51,241 | 3. a. Foreign branches of other U.S. banks ................................. | 0073 0 | ////////////////// | 3.a. b. Other banks in foreign countries and foreign central banks ........... | 0074 51,241 | ////////////////// | 3.b. 4. Balances due from Federal Reserve Banks ................................. | 0090 382,091 | 0090 382,091 | 4. 5. Total (sum of items 1 through 4) (total of column A must equal | ////////////////// | ////////////////// | Schedule RC, sum of items 1.a and 1.b) .................................. | 0010 1,413,200 | 0010 1,413,200 | 5. ___________________________________________ ______________________ Memorandum Dollar Amounts in Thousands | RCON Bil Mil Thou | __________________________________________________________________________________________________ ____________________ 1. Noninterest-bearing balances due from commercial banks in the U.S. (included in item 2, | ////////////////// | column B above) .............................................................................. | 0050 722,619 | M.1. ______________________
Schedule RC-B--Securities Exclude assets held in trading accounts. _______ | C410 | ___________________________________________________________________________ ________ | Held-to-maturity | Available-for-sale | _________________________________________ _________________________________________ | (Column A) | (Column B) | (Column C) | (Column D) | | Amortized Cost | Fair Value | Amortized Cost | Fair Value(1) | ____________________ ____________________ ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ______________________________________ ____________________ ____________________ ____________________ ____________________ 1. U.S. Treasury securities ......... | 0211 250 | 0213 250 | 1286 994,774 | 1287 987,179 | 1. 2. U.S. Government agency | ////////////////// | ////////////////// | ////////////////// | ////////////////// | and corporation obligations | ////////////////// | ////////////////// | ////////////////// | ////////////////// | (exclude mortgage-backed | ////////////////// | ////////////////// | ////////////////// | ////////////////// | securities): | ////////////////// | ////////////////// | ////////////////// | ////////////////// | a. Issued by U.S. Govern- | ////////////////// | ////////////////// | ////////////////// | ////////////////// | ment agencies(2) .............. | 1289 0 | 1290 0 | 1291 0 | 1293 0 | 2.a. b. Issued by U.S. | ////////////////// | ////////////////// | ////////////////// | ////////////////// | Government-sponsored | ////////////////// | ////////////////// | ////////////////// | ////////////////// | agencies(3) ................... | 1294 0 | 1295 0 | 1297 335,490 | 1298 335,336 | 2.b. _____________________________________________________________________________________ _____________ (1) Includes equity securities without readily determinable fair values at historical cost in item 6.c, column D. (2) Includes Small Business Administration "Guaranteed Loan Pool Certificates," U.S. Maritime Administration obligations, and Export-Import Bank participation certificates. (3) Includes obligations (other than mortgage-backed securities) issued by the Farm Credit System, the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Financing Corporation, Resolution Funding Corporation, the Student Loan Marketing Association, and the Tennessee Valley Authority.
13 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-5 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-B--Continued _____________________________________________________________________________________ | Held-to-maturity | Available-for-sale | _________________________________________ _________________________________________ | (Column A) | (Column B) | (Column C) | (Column D) | | Amortized Cost | Fair Value | Amortized Cost | Fair Value(1) | ____________________ ____________________ ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ____________________________________ ____________________ ____________________ ____________________ ____________________ 3. Securities issued by states | ////////////////// |/ //////////////// | ////////////////// | ///////////////// | and political subdivisions | ////////////////// |////////////////// | ////////////////// | ///////////////// | in the U.S.: | ////////////////// |////////////////// | ////////////////// | ////////// ////// | a. General obligations ......... | 1676 0 |1677 0 | 1678 0 | 1679 0 | 3.a. b. Revenue obligations ......... | 1681 47 |1686 52 | 1690 0 | 1691 0 | 3.b. c. Industrial development ...... | ////////////////// |////////////////// | ////////////////// | ///////////////// | and similiar obligations ........| 1694 0 |1695 0 | 1696 0 | 1697 0 | 3.c. 4. Mortgage-backed: | ////////////////// |////////////////// | ////////////////// | ///////////////// | securities (MBS): | ////////////////// |////////////////// | ////////////////// | ///////////////// | a. Pass-through securities: | ////////////////// |////////////////// | ////////////////// | ///////////////// | (1) Guaranteed by | ////////////////// |////////////////// | ////////////////// | ///////////////// | GNMA ....................... | 1698 0 |1699 0 | 1701 917 | 1702 917 | 4.a.(1) (2) Issued by FNMA | ////////////////// |////////////////// | ////////////////// | ///////////////// | and FHLMC ................. | 1703 0 |1705 0 | 1706 1,459,829 | 1707 1,468,551 | 4.a.(2) (3) Other pass-through | ////////////////// |////////////////// | ///////////////////| ///////////////// | secruities ................. | 1709 0 |1710 0 | 1711 4,961 | 1713 5,044 | 4.a.(3) b. Other mortgage-backed | ////////////////// |////////////////// | ////////////////// | ///////////////// | securities (include CMO's, | ////////////////// |////////////////// | ////////////////// | ///////////////// | REMICs, and stripped | ////////////////// |////////////////// | ////////////////// | ///////////////// | MBS): | ////////////////// |////////////////// | ////////////////// | ///////////////// | (1) Issued or guaranteed | ////////////////// |////////////////// | ////////////////// | ///////////////// | by FNMA, FHLMC, | ////////////////// |////////////////// | ////////////////// | ///////////////// | or GNMA ............... | 1714 0 |1715 0 | 1716 83,871 | 1717 85,311 | 4.b.(1) (2) Collateralized | ////////////////// |////////////////// | ////////////////// | ///////////////// | by MBS issued or | ////////////////// |////////////////// | ////////////////// | ///////////////// | guaranteed by FNMA | ////////////////// |////////////////// | ////////////////// | ///////////////// | FHLMC, or GNMA ........ | 1718 0 |1719 0 | 1731 0 | 1732 0 | 4.b.(2) (3) All other mortgage- | ////////////////// |////////////////// | ////////////////// | //////////////// | backed securities ..... | 1733 0 |1734 0 | 1735 320,670 | 1736 318,092 | 4.b.(3) 5. Other debt securities: | ////////////////// |////////////////// | ////////////////// | ///////////////// | a. Other domestic debt | ////////////////// |////////////////// | ////////////////// | ///////////////// | securities | 1737 0 |1738 0 | 1739 717,383 | 1741 723,027 | 5.a. b. Foreign debt | ////////////////// |////////////////// | ////////////////// | ///////////////// | securities ................. | 1742 2,900 |1743 2,900 | 1744 0 | 1746 0 | 5.b. 6. Equity securities: | ////////////////// |////////////////// | ////////////////// | ///////////////// | a. Investments in mutual | ////////////////// |////////////////// | ////////////////// | ///////////////// | funds ...................... | ////////////////// |////////////////// | 1747 8,471 | 1748 8,471 | 6.a. b. Other equity securities | ////////////////// |////////////////// | ////////////////// | ///////////////// | with readily determin- | ////////////////// |////////////////// | ////////////////// | ///////////////// | able fair values ........... | ////////////////// |////////////////// | 1749 0 | 1751 0 | 6.b. c. All other equity | ////////////////// |////////////////// | ////////////////// | ///////////////// | securities (1) ............. | ////////////////// |////////////////// | 1752 116,438 | 1753 116,438 | 6.c. 7. Total (sum of items 1 | ////////////////// |////////////////// | ////////////////// | ///////////////// | through 6) (total of | ////////////////// |////////////////// | ////////////////// | ///////////////// | column A must equal | ////////////////// |////////////////// | ////////////////// | ///////////////// | Schedule RC, item 2.a) | ////////////////// |////////////////// | ////////////////// | ///////////////// | (total of column D must | ////////////////// |////////////////// | ////////////////// | ///////////////// | equal Schedule RC, | ////////////////// |////////////////// | ////////////////// | ///////////////// | item 2.b) ..................... | 1754 3,197 | 1771 3,202 | 1772 4,042,804 | 1773 4,048,366 | 7. ____________ |__________________________________________________________________________________| 1) Includes equity securities without readily determinable fair values at historical cost in item 6.c, column D.
14 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-5 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-B--Continued ___________ Memoranda | C412 | ___________ _________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | __________________________________________________________________________________________________ ____________________ 1. Pledged securities(2) ......................................................................... | 0416 2,835,053 | M.1. 2. Maturity and repricing data for debt securities(2)(3)(4) (excluding those in nonaccrual status):| ////////////////// | a. Fixed rate debt securities with a remaining maturity of: | ////////////////// | (1) Three months or less ................................................................... | 0343 341,085 | M.2.a.(1) (2) Over three months through 12 months .................................................... | 0344 145,034 | M.2.a.(2) (3) Over one year through five years ....................................................... | 0345 2,473,872 | M.2.a.(3) (4) Over five years ........................................................................ | 0346 785,951 | M.2.a.(4) (5) Total fixed rate debt securities (sum of Memorandum items 2.a.(1) through 2.a.(4)) ..... | 0347 3,745,942 | M.2.a.(5) b. Floating rate debt securities with a repricing frequency of: | ////////////////// | (1) Quarterly or more frequently ........................................................... | 4544 177,962 | M.2.b.(1) (2) Annually or more frequently, but less frequently than quarterly ........................ | 4545 2,750 | M.2.b.(2) (3) Every five years or more frequently, but less frequently than annually ................. | 4551 0 | M.2.b.(3) (4) Less frequently than every five years .................................................. | 4552 0 | M.2.b.(4) (5) Total floating rate debt securities (sum of Memorandum items 2.b.(1) through 2.b.(4)) .. | 4553 180,712 | M.2.b.(5) c. Total debt securities (sum of Memorandum items 2.a.(5) and 2.b.(5)) (must equal total debt | ////////////////// | securities from Schedule RC-B, sum of items 1 through 5, columns A and D, minus nonaccrual | ////////////////// | debt securities included in Schedule RC-N, item 9, column C) ............................... | 0393 3,926,654 | M.2.c. 3. Not applicable | ////////////////// | 4. Held-to-maturity debt securities restructured and in compliance with modified terms (included | ////////////////// | in Schedule RC-B, items 3 through 5, column A, above) ......................................... | 5365 0 | M.4. 5. Not applicable | ////////////////// | 6. Floating rate debt securities with a remaining maturity of one year or less(2)(5) (to be | ////////////////// | completed by all banks ........................................................................ | 5519 0 | M.6. 7. Amortized cost of held-to-maturity securities sold or transferred to available-for-sale or | ////////////////// | trading securities during the calendar year-to-date (report the amortized cost at date of sale. | ////////////////// | or transfer ................................................................................... | 1778 3,221,535 | m.7. 8. High-Risk mortgage securities (included in the held-to-maturity and available-for-sale | ////////////////// | accounts in Schedule RC-B, item 4.b): | ////////////////// | a. Amortized cost ............................................................................. | 8780 0 | M.8.a. b. Fair Value ................................................................................. | 8781 0 | M.8.b. 9. Structured notes (included in the held-to-maturity and available-for-sale accounts in | ////////////////// | Schedule RC-B, items.2, 3, and 5): | ////////////////// | a. Amortized cost ............................................................................. | 8782 0 | M.9.a. b. Fair Value ................................................................................. | 8783 0 | M.9.b. ---------------------- ____________ (2) Includes held-to-maturity securities at amortized cost and available-for-sale securities at fair value. (3) Exclude equity securities, e.g., investments in mutual funds, Federal Reserve stock, common stock, and preferred stock. (4) Memorandum item 2 is not applicable to savings banks that must complete supplemental Schedule RC-J. (5) For commercial banks, the debt securities included in Memorandum item 6 will also have been reported in Memorandum item 2.b. above. For savings bank, the debt securities included in Memorandum item 6 will also have been reported in supplemental Schedule. RC-J, part I, item 4. Savings banks should note that available-for-sale cash debt securities are reported at fair value in Memorandum item 6 and at amortized cost in Schedule RC-J. 15
City, State Zip: HARTFORD, CT 06115
Schedule RC-C--Loans and Lease Financing Receivables Part I. Loans and Leases Do not deduct the allowance for loan and lease losses from amounts __________ reported in this schedule. Report total loans and leases, net of unearned _________________________________| C415 | income. Exclude assets held for trading. | (Column A) | (Column B) | | Consolidated | Domestic | | Bank | Offices | ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCON Bil Mil Thou | _____________________________________________________________________________ ____________________ ____________________ 1. Loans secured by real estate ........................................... | 1410 4,366,800 | ////////////////// | 1. a. Construction and land development ................................... | ////////////////// | 1415 57,923 | 1.a. b. Secured by farmland (including farm residential and other | ////////////////// | ////////////////// | improvements) ....................................................... | ////////////////// | 1420 584 | 1.b. c. Secured by 1-4 family residential properties: | ////////////////// | ////////////////// | (1) Revolving, open-end loans secured by 1-4 family residential | ////////////////// | ////////////////// | properties and extended under lines of credit ................... | ////////////////// | 1797 380,335 | 1.c.(1) (2) All other loans secured by 1-4 family residential properties: | ////////////////// | ////////////////// | (a) Secured by first liens ...................................... | ////////////////// | 5367 2,632,460 | 1.c.(2)(a) (b) Secured by junior liens ..................................... | ////////////////// | 5368 212,499 | 1.c.(2)(b) d. Secured by multifamily (5 or more) residential properties ........... | ////////////////// | 1460 63,227 | 1.d. e. Secured by nonfarm nonresidential properties ........................ | ////////////////// | 1480 1,019,772 | 1.e. 2. Loans to depository institutions: | ////////////////// | ////////////////// | a. To commercial banks in the U.S. ..................................... | ////////////////// | 1505 8,656 | 2.a. (1) To U.S. branches and agencies of foreign banks .................. | 1506 0 | ////////////////// | 2.a.(1) (2) To other commercial banks in the U.S. ........................... | 1507 8,656 | ////////////////// | 2.a.(2) b. To other depository institutions in the U.S. ........................ | 1517 0 | 1517 0 | 2.b. c. To banks in foreign countries ....................................... | ////////////////// | 1510 0 | 2.c. (1) To foreign branches of other U.S. banks ......................... | 1513 0 | ////////////////// | 2.c.(1) (2) To other banks in foreign countries ............................. | 1516 0 | ////////////////// | 2.c.(2) 3. Loans to finance agricultural production and other loans to farmers .... | 1590 962 | 1590 962 | 3. 4. Commercial and industrial loans: | ////////////////// | ////////////////// | a. To U.S. addressees (domicile) ....................................... | 1763 5,421,227 | 1763 5,421,227 | 4.a. b. To non-U.S. addressees (domicile) ................................... | 1764 0 | 1764 0 | 4.b. 5. Acceptances of other banks: | ////////////////// | ////////////////// | a. Of U.S. banks ....................................................... | 1756 1,096 | 1756 1,096| 5.a. b. Of foreign banks .................................................... | 1757 0 | 1757 0 | 5.b. 6. Loans to individuals for household, family, and other personal | ////////////////// | ////////////////// | expenditures (i.e., consumer loans) (includes purchased paper) ......... | ////////////////// | 1975 572,541 | 6. a. Credit cards and related plans (includes check credit and other | ////////////////// | ////////////////// | revolving credit plans) ............................................. | 2008 31,493 | ////////////////// | 6.a. b. Other (includes single payment, installment, and all student loans) . | 2011 541,048 | ////////////////// | 6.b. 7. Loans to foreign governments and official institutions (including | ////////////////// | ////////////////// | foreign central banks) ................................................. | 2081 0 | 2081 0 | 7. 8. Obligations (other than securities and leases) of states and political | ////////////////// | ////////////////// | subdivisions in the U.S. (includes nonrated industrial development | ////////////////// | ////////////////// | obligations) ........................................................... | 2107 34,682 | 2107 34,682 | 8. 9. Other loans ............................................................ | 1563 1,134,145 | ////////////////// | 9. a. Loans for purchasing or carrying securities (secured and unsecured) . | ////////////////// | 1545 43,527 | 9.a. b. All other loans (exclude consumer loans) ............................ | ////////////////// | 1564 1,090,618 | 9.b. 10. Lease financing receivables (net of unearned income) ................... | ////////////////// | 2165 7,046 | 10. a. Of U.S. addressees (domicile) ....................................... | 2182 7,046 | ////////////////// | 10.a. b. Of non-U.S. addressees (domicile) ................................... | 2183 0 | ////////////////// | 10.b. 11. LESS: Any unearned income on loans reflected in items 1-9 above ........ | 2123 18,697 | 2123 18,697 | 11. 12. Total loans and leases, net of unearned income (sum of items 1 through | ////////////////// | ////////////////// | 10 minus item 11) (total of column A must equal Schedule RC, item 4.a) . | 2122 11,528,458 | 2122 11,528,458 | 12. ___________________________________________
16 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 Address: 777 MAIN STREET City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-C--Continued Part I. Continued ___________________________________________ | (Column A) | (Column B) | | Consolidated | Domestic | Memoranda | Bank | Offices | ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCON Bil Mil Thou | _____________________________________________________________________________ ____________________ ____________________ 1. Commercial paper included in Schedule RC-C, part I, above .............. | 1496 0 | 1496 0 | M.1. 2. Loans and leases restructured and in compliance with modified terms | ////////////////// | ////////////////// | (included in Schedule RC-C, part I, above and not reported as past due | ////////////////// | ////////////////// | or nonaccrual in Schedule RC-N, Memorandum item 1): | ////////////////// | ////////////////// | a. Loans secured by real estate: | ////////////////// | ////////////////// | (1) To U.S. addressees (domicile) ................................... | 1687 34,952 | M.2.a.(1) (2) To non-U.S. addressees (domicile) ............................... | 1689 0 | M.2.a.(2) b. All other loans and all lease financing receivables (exclude loans | ////////////////// | to individuals for household, family, and other personal expenditures)| 8691 0 | M.2.b. c. Commercial and industrial loans to and lease financing receivables | ////////////////// | of non-U.S. addressees (domicile) included in Memorandum item 2.b | ////////////////// | above ............................................................... | 8692 0 | M.2.c. 3. Maturity and repricing data for loans and leases(1) (excluding those | ////////////////// | in nonaccrual status): | ////////////////// | a. Fixed rate loans and leases with a remaining maturity of: | ////////////////// | (1) Three months or less ............................................ | 0348 627,991 | M.3.a.(1) (2) Over three months through 12 months ............................. | 0349 91,775 | M.3.a.(2) (3) Over one year through five years ................................ | 0356 883,482 | M.3.a.(3) (4) Over five years ................................................. | 0357 1,974,606 | M.3.a.(4) (5) Total fixed rate loans and leases (sum of | ////////////////// | Memorandum items 3.a.(1) through 3.a.(4)) ....................... | 0358 3,577,854 | M.3.a.(5) b. Floating rate loans with a repricing frequency of: | ////////////////// | (1) Quarterly or more frequently .................................... | 4554 3,811,759 | M.3.b.(1) (2) Annually or more frequently, but less frequently than quarterly . | 4555 809,284 | M.3.b.(2) (3) Every five years or more frequently, but less frequently than | ////////////////// | annually ........................................................ | 4561 3,175,427 | M.3.b.(3) (4) Less frequently than every five years ........................... | 4564 107,097 | M.3.b.(4) (5) Total floating rate loans (sum of Memorandum items 3.b.(1) | ////////////////// | through 3.b.(4)) ................................................ | 4567 7,903,567 | M.3.b.(5) c. Total loans and leases (sum of Memorandum items 3.a.(5) and 3.b.(5)) | ////////////////// | (must equal the sum of total loans and leases, net, from | ////////////////// | Schedule RC-C, part I, item 12, plus unearned income from | ////////////////// | Schedule RC-C, part I, item 11, minus total nonaccrual loans and | ////////////////// | leases from Schedule RC-N, sum of items 1 through 8, column C) ...... | 1479 11,481,421 | M.3.c. 4. Loans to finance commercial real estate, construction, and land | ////////////////// | development activities (not secured by real estate) included in | ////////////////// | Schedule RC-C, part I, items 4 and 9, column A, page RC-6(2) ........... | 2746 54,772 | M.4. 5. Loans and leases held for sale (included in Schedule RC-C, part I, | ////////////////// | above .................................................................. | 5369 0 | M.5. 6. Adjustable rate closed-end loans secured by first liens on 1-4 family | ////////////////// |_____________________ residential properties (included in Schedule RC-C, part I, item | ////////////////// | RCON Bil Mil Thou | | ////////////////// |____________________ 1.c.(2)(a), column B, page RC-6) ....................................... | ////////////////// | 5370 918,495 | M.6. ___________________________________________ _____________________________ (1) Memorandum item 3 is not applicable to savings banks that must complete supplememtal Schedule RC-J. (2) Exclude loans secured by real estate that are included in Schedule RC-C, part I, item 1, column A. Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-7 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________ _________ 17 | C420 | __________________________________________________________________________________________________ _______________|________| ASSETS | /////////////////////// | 1. U.S. Treasury securities in domestic offices ................................................ | RCON 3531 0 | 1. 2. U.S. Government agency and corporation obligations in domestic offices (exclude mortgage- | /////////////////////// | backed securities) .......................................................................... | RCON 3532 0 | 2. 3. Securities issued by states and political subdivisions in the U.S. in domestic offices ...... | RCON 3533 0 | 3. 4. Mortgage-backed securities (MBS) in domestic offices ........................................ | /////////////////////// | a. Pass-through securities issued or guaranteed by FNMA, FHLMC, or GNMA ..................... | RCON 3534 0 | 4.a. b. Other mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA | /////////////////////// | (include CMOs, REMICs, and stripped MBS) ................................................. | RCON 3535 0 | 4.b. c. All other mortgage-backed securities ......................................................| RCON 3536 0 | 4.c. 5. Other debt securities in domestic offices ................................................... | RCON 3537 0 | 5. 6. Certificates of deposit in domestic offices ................................................. | RCON 3538 0 | 6. 7. Commercial paper in domestic offices ........................................................ | RCON 3539 0 | 7. 8. Bankers acceptances in domestic offices ..................................................... | RCON 3540 0 | 8. 9. Other trading assets in domestic offices .................................................... | RCON 3541 0 | 9. 10. Trading assets in foreign offices ........................................................... | RCFN 3542 0 | 10. 11. Revaluation gains on interest rate, foreign exchange rate, and other commodity and equity | /////////////////////// | contracts: | /////////////////////// | a. In domestic offices ...................................................................... | RCON 3543 840 | 11.a. b. In foreign offices ....................................................................... | RCFN 3544 0 | 11.b. 12. Total trading assets (sum of items 1 through 11) (must equal Schedule RC, item 5) ........... | RCFD 3545 840 | 12. ___________________________ ___________________________ | ///////// Bil Mil Thou | LIABILITIES _________________________ 13. Liability for short positions ............................................................... | RCFD 3546 0 | 13. 14. Revaluation losses on interest rate, foreign exchange rate, and other commodity and equity | /////////////////////// | contracts ................................................................................... | RCFD 3547 814 | 14. 15. Total trading liabilities (sum of items 13 and 14) (must equal Schedule RC, item 15.b) ...... | RCFD 3548 814 | 15. ___________________________
18 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-9 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-E--Deposit Liabilities Part I. Deposits in Domestic Offices __________ | C425 | ______________________________________________________ ________ | | Nontransaction | | Transaction Accounts | Accounts | _________________________________________ ____________________ | (Column A) | (Column B) | (Column C) | | Total transaction | Memo: Total | Total | | accounts (including| demand deposits | nontransaction | | total demand | (included in | accounts | | deposits) | column A) | (including MMDAs) | ____________________ ____________________ ____________________ Dollar Amounts in Thousands | RCON Bil Mil Thou | RCON Bil Mil Thou | RCON Bil Mil Thou | __________________________________________________________ ____________________ ____________________ ____________________ Deposits of: | ////////////////// | ////////////////// | ////////////////// | 1. Individuals, partnerships, and corporations .......... | 2201 2,628,372 | 2240 2,505,998 | 2346 7,107,737 | 1. 2. U.S. Government ...................................... | 2202 53,678 | 2280 53,432 | 2520 120 | 2. 3. States and political subdivisions in the U.S. ........ | 2203 163,019 | 2290 132,660 | 2530 133,788 | 3. 4. Commercial banks in the U.S. ......................... | 2206 554,474 | 2310 554,474 | ////////////////// | 4. a. U.S. branches and agencies of foreign banks ....... | ////////////////// | ////////////////// | 2347 0 | 4.a. b. Other commercial banks in the U.S. ................ | ////////////////// | ////////////////// | 2348 500 | 4.b. 5. Other depository institutions in the U.S. ............ | 2207 101,483 | 2312 101,483 | 2349 0 | 5. 6. Banks in foreign countries ........................... | 2213 1,730 | 2320 1,730 | ////////////////// | 6. a. Foreign branches of other U.S. banks .............. | ////////////////// | ////////////////// | 2367 0 | 6.a. b. Other banks in foreign countries .................. | ////////////////// | ////////////////// | 2373 0 | 6.b. 7. Foreign governments and official institutions | ////////////////// | ////////////////// | ////////////////// | (including foreign central banks) .................... | 2216 1,023 | 2300 1,023 | 2377 0 | 7. 8. Certified and official checks ........................ | 2330 51,197 | 2330 51,197 | ////////////////// | 8. 9. Total (sum of items 1 through 8) (sum of | ////////////////// | ////////////////// | ////////////////// | columns A and C must equal Schedule RC, | ////////////////// | ////////////////// | ////////////////// | item 13.a) ........................................... | 2215 3,554,976 | 2210 3,401,997 | 2385 7,242,145 | 9. ________________________________________________________________
______________________ Memoranda Dollar Amounts in Thousands | RCON Bil Mil Thou | ____________________________________________________________________________________________________ ____________________ 1. Selected components of total deposits (i.e., sum of item 9, columns A and C): | ////////////////// | a. Total Individual Retirement Accounts (IRAs) and Keogh Plan accounts ......................... | 6835 888,500 | M.1.a. b. Total brokered deposits ..................................................................... | 2365 1,195,257 | M.1.b. c. Fully insured brokered deposits (included in Memorandum item 1.b above): | ////////////////// | (1) Issued in denominations of less than $100,000 ........................................... | 2343 0 | M.1.c.(1) (2) Issued either in denominations of $100,000 or in denominations greater than $100,000 | ////////////////// | and participated out by the broker in shares of $100,000 or less ........................ | 2344 1,195,257 | M.1.c.(2) d. Total deposits denominated in foreign currencies ............................................ | 3776 0 | M.1.d. e. Preferred deposits (uninsured deposits of states and political subdivisions in the U.S. | ////////////////// | reported in item 3 above which are secured or collateralized as required under state law) ... | 5590 226,852 | M.1.e. 2. Components of total nontransaction accounts (sum of Memoranda items 2.a through 2.d must | ////////////////// | equal item 9, column C above): | ////////////////// | a. Savings deposits: | ////////////////// | (1) Money market deposit accounts (MMDAs) ................................................... | 6810 1,491,520 | M.2.a.(1) (2) Other savings deposits (excludes MMDAs) ................................................. | 0352 1,862,085 | M.2.a.(2) b. Total time deposits of less than $100,000 ................................................... | 6648 2,386,133 | M.2.b. c. Time certificates of deposit of $100,000 or more ............................................ | 6645 1,502,407 | M.2.c. d. Open-account time deposits of $100,000 or more .............................................. | 6646 0 | M.2.d. 3. All NOW accounts (included in column A above) .................................................. | 2398 152,979 | M.3. ______________________
19 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-10 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-E--Continued Part I. Continued Memoranda (continued) _________________________________________________________________________________________________________________________________ | Deposit Totals for FDIC Insurance Assessments ______________________ | | Dollar Amounts in Thousands | RCON Bil Mil Thou | | __________________________________________________________________________________________________ ____________________ | 4. Total deposits in domestic offices (sum of item 9, column A and item 9, column C) |/////////////////// | | | (must equal Schedule RC, item 13.a) ......................................................... | 2200 10,797,121 | M.4. | | | ////////////////// | | | a. Total demand deposits (must equal item 9, column B) ...................................... | 2210 3,401,997 | M.4.a.| | b. Total time and savings deposits(1) (must equal item 9, column A plus item 9, column C | ////////////////// | | | minus item 9, column B) .................................................................. | 2350 7,395,124 | M.4.b.| ______________________ | ____________ | | (1) For FDIC insurance assessment purposes, "total time and savings deposits" consists of nontransaction accounts and all | | transaction accounts other than demand deposits. | _________________________________________________________________________________________________________________________________
______________________ Dollar Amounts in Thousands | RCON Bil Mil Thou | ___________________________________________________________________________________________________ ____________________ 5. Time deposits of less than $100,000 and open-account time deposits of $100,000 or more | ////////////////// | (included in Memorandum items 2.b and 2.d above) with a remaining maturity or repricing | ////////////////// | frequency of:(1) | ////////////////// | a. Three months or less ....................................................................... | 0359 326,126 | M.5.a. b. Over three months through 12 months (but not over 12 months) ............................... | 3644 1,116,701 | M.5.b. 6. Maturity and repricing data for time certificates of deposit of $100,000 or more:(1) | ////////////////// | a. Fixed rate time certificates of deposit of $100,000 or more with a remaining maturity of: | ////////////////// | (1) Three months or less ................................................................... | 2761 377,758 | M.6.a.(1) (2) Over three months through 12 months .................................................... | 2762 268,933 | M.6.a.(2) (3) Over one year through five years ....................................................... | 2763 852,593 | M.6.a.(3) (4) Over five years ........................................................................ | 2765 3,123 | M.6.a.(4) (5) Total fixed rate time certificates of deposit of $100,000 or more (sum of | ////////////////// | Memorandum items 6.a.(1) through 6.a.(4)) .............................................. | 2767 1,502,407 | M.6.a.(5) b. Floating rate time certificates of deposit of $100,000 or more with a repricing frequency of:| ////////////////// | (1) Quarterly or more frequently ........................................................... | 4568 0 | M.6.b.(1) (2) Annually or more frequently, but less frequently than quarterly ........................ | 4569 0 | M.6.b.(2) (3) Every five years or more frequently, but less frequently than annually ................. | 4571 0 | M.6.b.(3) (4) Less frequently than every five years .................................................. | 4572 0 | M.6.b.(4) (5) Total floating rate time certificates of deposit of $100,000 or more (sum of | ////////////////// | Memorandum items 6.b.(1) through 6.b.(4)) .............................................. | 4573 0 | M.6.b.(5) c. Total time certificates of deposit of $100,000 or more (sum of Memorandum items 6.a.(5) | ////////////////// | and 6.b.(5)) (must equal Memorandum item 2.c. above) ....................................... | 6645 1,502,407 | M.6.c. ______________________ _____________ (1) Memorandum items 5 and 6 are not applicable to savings banks that must complete supplemental Schedule RC-J.
20 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-11 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-E--Continued Part II. Deposits in Foreign Offices (including Edge and Agreement subsidiaries and IBFs) ______________________ Dollar Amounts in Thousands | RCFN Bil Mil Thou | ___________________________________________________________________________________________________ ____________________ Deposits of: | ////////////////// | 1. Individuals, partnerships, and corporations ................................................... | 2621 401,872 | 1. 2. U.S. banks (including IBFs and foreign branches of U.S. banks) ................................ | 2623 30,000 | 2. 3. Foreign banks (including U.S. branches and | ////////////////// | agencies of foreign banks, including their IBFs) .............................................. | 2625 0 | 3. 4. Foreign governments and official institutions (including foreign central banks) ............... | 2650 0 | 4. 5. Certified and official checks ................................................................. | 2330 0 | 5. 6. All other deposits ............................................................................ | 2668 0 | 6. 7. Total (sum of items 1 through 6) (must equal Schedule RC, item 13.b) .......................... | 2200 431,872 | 7. ______________________
Schedule RC-F--Other Assets __________ | C430 | _________________ ________ Dollar Amounts in Thousands | ////////// Bil Mil Thou | __________________________________________________________________________________________________ _________________________ 1. Income earned, not collected on loans ........................................................ | RCFD 2164 56,906 | 1. 2. Net deferred tax assets(1) ................................................................... | RCFD 2148 158,056 | 2. 3. Excess residential mortgage servicing fees receivable ........................................ | RCFD 5371 18,275 | 3. 4. Other (itemize amounts that exceed 25% of this item) ......................................... | RCFD 2168 481,338 | 4. _____________ ___________________________ a. | TEXT 3549 |____________________________________________________| RCFD 3549 | | /////////////////////// | 4.a. ___________ b. | TEXT 3550 |____________________________________________________| RCFD 3550 | | /////////////////////// | 4.b. ___________ c. | TEXT 3551 |____________________________________________________| RCFD 3551 | | /////////////////////// | 4.c. _____________ ___________________________ 5. Total (sum of items 1 through 4) (must equal Schedule RC, item 11) ........................... | RCFD 2160 714,575 | 5. ___________________________ Memorandum ___________________________ Dollar Amounts in Thousands | ////////// Bil Mil Thou | __________________________________________________________________________________________________ _________________________ 1. Deferred tax assets disallowed for regulatory capital purposes ............................... | RCFD 5610 0 | M.1. ___________________________
Schedule RC-G--Other Liabilities __________ | C435 | _________________ ________ Dollar Amounts in Thousands | ////////// Bil Mil Thou | __________________________________________________________________________________________________ _________________________ 1. a. Interest accrued and unpaid on deposits in domestic offices(2) ............................ | RCON 3645 44,239 | 1.a. b. Other expenses accrued and unpaid (includes accrued income taxes payable) ................. | RCFD 3646 300,519 | 1.b. 2. Net deferred tax liabilities(1) .............................................................. | RCFD 3049 0 | 2. 3. Minority interest in consolidated subsidiaries ............................................... | RCFD 3000 0 | 3. 4. Other (itemize amounts that exceed 25% of this item) ......................................... | RCFD 2938 22,553 | 4. _____________ ___________________________ a. | TEXT 3552 |____________________________________________________| RCFD 3552 | | /////////////////////// | 4.a. ___________ b. | TEXT 3553 |____________________________________________________| RCFD 3553 | | /////////////////////// | 4.b. ___________ c. | TEXT 3554 |____________________________________________________| RCFD 3554 | | /////////////////////// | 4.c. _____________ ___________________________ 5. Total (sum of items 1 through 4) (must equal Schedule RC, item 20) ........................... | RCFD 2930 367,311 | 5. ___________________________ ____________ (1) See discussion of deferred income taxes in Glossary entry on "income taxes." (2) For savings banks, include "dividends" accrued and unpaid on deposits.
21 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-12 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-H--Selected Balance Sheet Items for Domestic Offices __________ | C440 | ____________ ________ | Domestic Offices | ____________________ Dollar Amounts in Thousands | RCON Bil Mil Thou | _____________________________________________________________________________________________________ ____________________ 1. Customers' liability to this bank on acceptances outstanding .................................... | 2155 7,330 | 1. 2. Bank's liability on acceptances executed and outstanding ........................................ | 2920 7,330 | 2. 3. Federal funds sold and securities purchased under agreements to resell .......................... | 1350 205,800 | 3. 4. Federal funds purchased and securities sold under agreements to repurchase ...................... | 2800 2,739,775 | 4. 5. Other borrowed money ............................................................................ | 3190 1,688,786 | 5. EITHER | ////////////////// | 6. Net due from own foreign offices, Edge and Agreement subsidiaries, and IBFs ..................... | 2163 N/A | 6. OR | ////////////////// | 7. Net due to own foreign offices, Edge and Agreement subsidiaries, and IBFs ....................... | 2941 381,872 | 7. 8. Total assets (excludes net due from foreign offices, Edge and Agreement subsidiaries, and IBFs) . | 2192 18,079,498 | 8. 9. Total liabilities (excludes net due to foreign offices, Edge and Agreement subsidiaries, and IBFs)| 3129 16,355,152 | 9. ______________________
Items 10-17 include held-to-maturity and available-for-sale securities in domestic offices. ______________________ | RCON Bil Mil Thou | ____________________ 10. U.S. Treasury securities ....................................................................... | 1779 987,429 | 10. 11. U.S. Government agency and corporation obligations (exclude mortgage-backed | ////////////////// | securities) .................................................................................... | 1785 335,336 | 11. 12. Securities issued by states and political subdivisions in the U.S. ............................. | 1786 47 | 12. 13. Mortgage-backed securities (MBS): | ////////////////// | a. Pass-through securities: | ////////////////// | (1) Issued or guaranteed by FNMA, FHLMC, or GNMA ............................................ | 1787 1,469,468 | 13.a.(1) (2) Other pass-through securities ........................................................... | 1869 5,044 | 13.a.(2) b. Other mortgage-backed securities (include CMOs, REMICs, and stripped MBS): | ////////////////// | (1) Issued or guaranteed by FNMA, FHLMC, or GNMA ............................................ | 1877 85,311 | 13.b.(1) (2) Other pass-through securities ........................................................... | 2253 318,092 | 13.b.(2) 14. Other domestic debt securities ................................................................. | 3159 723,027 | 14. 15. Foreign debt securities ........................................................................ | 3160 2,900 | 15. 16. Equity securities: | ////////////////// | a. Investments in mutual funds ................................................................. | 3161 8,471 | 16.a. b. Other equity securities with readily determinable fair values ............................... | 3162 0 | 16.b. c. All other equity securities ................................................................. | 3169 116,438 | 16.c. 17. Total held-to-maturity and available-for-sale securities (sum of items 10 through 16) .......... | 3170 4,051,563 | 17. ______________________
Memorandum (to be completed only by banks with IBFs and other "foreign" offices) ______________________ Dollar Amounts in Thousands | RCON Bil Mil Thou | _____________________________________________________________________________________________________ ____________________ EITHER | ////////////////// | 1. Net due from the IBF of the domestic offices of the reporting bank .............................. | 3051 N/A | M.1. OR | ////////////////// | 2. Net due to the IBF of the domestic offices of the reporting bank ................................ | 3059 N/A | M.2. ______________________
22 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-13 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-I--Selected Assets and Liabilities of IBFs To be completed only by banks with IBFs and other "foreign" offices. __________ | C445 | ____________ ________ Dollar Amounts in Thousands | RCFN Bil Mil Thou | _____________________________________________________________________________________________________ ____________________ 1. Total IBF assets of the consolidated bank (component of Schedule RC, item 12) .................. | 2133 N/A | 1. 2. Total IBF loans and lease financing receivables (component of Schedule RC-C, part I, item 12, | ////////////////// | column A) ...................................................................................... | 2076 N/A | 2. 3. IBF commercial and industrial loans (component of Schedule RC-C, part I, item 4, column A) ..... | 2077 N/A | 3. 4. Total IBF liabilities (component of Schedule RC, item 21) ...................................... | 2898 N/A | 4. 5. IBF deposit liabilities due to banks, including other IBFs (component of Schedule RC-E, | ////////////////// | part II, items 2 and 3) ........................................................................ | 2379 N/A | 5. 6. Other IBF deposit liabilities (component of Schedule RC-E, part II, items 1, 4, 5, and 6) ...... | 2381 N/A | 6. ______________________
Schedule RC-K--Quarterly Averages (1) __________ | C455 | _________________ ________ Dollar Amounts in Thousands | ///////// Bil Mil Thou | _______________________________________________________________________________________________ _________________________ ASSETS | /////////////////////// | 1. Interest-bearing balances due from depository institutions ............................... | RCFD 3381 16,087 | 1. 2. U.S. Treasury securities and U.S. Government agency and corporation obligations(2) ....... | RCFD 3382 2,872,045 | 2. 3. Securities issued by states and political subdivisions in the U.S.(2) .................... | RCFD 3383 49 | 3. 4. a. Other debt securities(2) .............................................................. | RCFD 3647 1,101,314 | 4.a. b. Equity securities(3) (includes investments in mutual funds and Federal Reserve stock) . | RCFD 3648 117,774 | 4.b. 5. Federal funds sold and securities purchased under agreements to resell in domestic offices | /////////////////////// | of the bank and of its Edge and Agreement subsidiaries, and in IBFs ...................... | RCFD 3365 160,423 | 5. 6. Loans: | /////////////////////// | a. Loans in domestic offices: | /////////////////////// | (1) Total loans ....................................................................... | RCON 3360 11,541,536 | 6.a.(1) (2) Loans secured by real estate ...................................................... | RCON 3385 4,433,576 | 6.a.(2) (3) Loans to finance agricultural production and other loans to farmers ............... | RCON 3386 2,734 | 6.a.(3) (4) Commercial and industrial loans ................................................... | RCON 3387 5,556,473 | 6.a.(4) (5) Loans to individuals for household, family, and other personal expenditures ....... | RCON 3388 600,686 | 6.a.(5) | /////////////////////// | b. Total loans in foreign offices, Edge and Agreement subsidiaries, and IBFs ............. | RCFN 3360 0 | 6.b. 7. Trading assets ........................................................................... | RCFD 3401 5,753 | 7. 8. Lease financing receivables (net of unearned income) ..................................... | RCFD 3484 8,921 | 8. 9. Total assets (4) ......................................................................... | RCFD 3368 17,423,900 | 9. LIABILITIES | /////////////////////// | 10. Interest-bearing transaction accounts in domestic offices (NOW accounts, ATS accounts, | /////////////////////// | and telephone and preauthorized transfer accounts) (exclude demand deposits) ............. | RCON 3485 167,144 | 10. 11. Nontransaction accounts in domestic offices: | /////////////////////// | a. Money market deposit accounts (MMDAs) ................................................. | RCON 3486 1,426,084 | 11.a. b. Other savings deposits ................................................................ | RCON 3487 1,882,740 | 11.b. c. Time certificates of deposit of $100,000 or more ...................................... | RCON 3345 1,601,542 | 11.c. d. All other time deposits ............................................................... | RCON 3469 2,363,615 | 11.d. 12. Interest-bearing deposits in foreign offices, Edge and Agreement subsidiaries, and IBFs .. | RCFN 3404 451,941 | 12. 13. Federal funds purchased and securities sold under agreements to repurchase in domestic | /////////////////////// | offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs .............. | RCFD 3353 3,225,979 | 13. 14. Other borrowed money ..................................................................... | RCFD 3355 1,839,039 | 14. ___________________________ _____________ (1) For all items, banks have the option of reporting either (1) an average of daily figures for the quarter, or (2) an average of weekly figures (i.e., the Wednesday of each week of the quarter). (2) Quarterly averages for all debt securities should be based on amortized cost. (3) Quarterly averages for all equity securities should be based on historical cost. (4) The quarterly average for total assets should reflect all debt securities (not held for trading) at amortized cost, equity securities with readily determinable fair values at the lower of cost or fair value, and equity securities without readily determinable fair values at historical cost.
23 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-4 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-L--Off-Balance Sheet Items Please read carefully the instructions for the preparation of Schedule RC-L. Some of the amounts reported in Schedule RC-L are regarded as volume indicators and not necessarily as measures of risk. __________ | C460 | ____________ ________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | ____________________________________________________________________________________________________ ____________________ 1. Unused commitments: | ////////////////// | a. Revolving, open-end lines secured by 1-4 family residential properties, e.g., home | ////////////////// | equity lines ............................................................................... | 3814 454,277| 1.a. b. Credit card lines .......................................................................... | 3815 0 | 1.b. c. Commercial real estate, construction, and land development: | ////////////////// | (1) Commitments to fund loans secured by real estate ....................................... | 3816 55,329 | 1.c.(1) (2) Commitments to fund loans not secured by real estate ................................... | 6550 17,337 | 1.c.(2) d. Securities underwriting .................................................................... | 3817 0 | 1.d. e. Other unused commitments ................................................................... | 3818 6,446,592 | 1.e. 2. Financial standby letters of credit and foreign office guarantees ............................. | 3819 1,024,104 | 2. ___________________________ a. Amount of financial standby letters of credit conveyed to others | RCFD 3820 | 1,074 | ////////////////// | 2.a. ___________________________ 3. Performance standby letters of credit and foreign office guarantees ........................... | 3821 121,267 | 3. a. Amount of performance standby letters of credit conveyed to | ////////////////// | ___________________________ others .......................................................... | RCFD 3822 | 0 | ////////////////// | 3.a. ___________________________ 4. Commercial and similar letters of credit ...................................................... | 3411 38,963 | 4. 5. Participations in acceptances (as described in the instructions) conveyed to others by | ////////////////// | the reporting bank ............................................................................ | 3428 0 | 5. 6. Participations in acceptances (as described in the instructions) acquired by the reporting | ////////////////// | (nonaccepting) bank ........................................................................... | 3429 0 | 6. 7. Securities borrowed ........................................................................... | 3432 0 | 7. 8. Securities lent (including customers' securities lent where the customer is indemnified | ////////////////// | against loss by the reporting bank) ........................................................... | 3433 0 | 8. 9. Mortgages transferred (i.e., sold or swapped) with recourse that have been treated as sold | ////////////////// | for Call Report purposes: | ////////////////// | a. FNMA and FHLMC residential mortgage loan pools: | ////////////////// | (1) Outstanding principal balance of mortgages transferred as of the report date ........... | 3650 62,825 | 9.a.(1) (2) Amount of recourse exposure on these mortgages as of the report date ................... | 3651 56,528 | 9.a.(2) b. Private (nongovernment-issued or -guaranteed) residential mortgage loan pools: | ////////////////// | (1) Outstanding principal balance of mortgages transferred as of the report date ........... | 3652 0 | 9.b.(1) (2) Amount of recourse exposure on these mortgages as of the report date ................... | 3653 0 | 9.b.(2) c. Farmer Mac agricultural mortgage loan pools: | ////////////////// | (1) Outstanding principal balance of mortgages transferred as of the report date ........... | 3654 0 | 9.c.(1) (2) Amount of recourse exposure on these mortgages as of the report date ................... | 3655 0 | 9.c.(2) 10. When-issued securities: | ////////////////// | a. Gross commitments to purchase .............................................................. | 3434 0 | 10.a. b. Gross commitments to sell .................................................................. | 3435 0 | 10.b. 11. Spot foreign exchange contracts ............................................................... | 8765 0 | 11. 12. All other off-balance sheet liabilities (exclude off-balance sheet derivatives ) (itemize and | ////////////////// | describe each component of this item over 25% of Schedule RC, item 28, "Total equity capital") | 3430 0 | 12. a. | TEXT 3555 |______________________________________________________| RCFD 3555 | | ////////////////// | 12.a. b. | TEXT 3556 |______________________________________________________| RCFD 3556 | | ////////////////// | 12.b. ___________ c. | TEXT 3557 |______________________________________________________| RCFD 3557 | | ////////////////// | 12.c. _____________ d. | TEXT 3558 |______________________________________________________| RCFD 3558 | | ////////////////// | 12.d. _____________ 13. All other off-balance sheet assets (exclude off-balance sheet derivatives) (itemize and | ////////////////// | describe each component of this item over 25% of Schedule RC,item 28,"Total equity capital" | 5591 0 | 13. _____________ __________________________ a. | TEXT 5592 |______________________________________________________| RCFD 5592 | | ////////////////// | 13.a. ___________ b. | TEXT 5593 |______________________________________________________| RCFD 5593 | | ////////////////// | 13.b. ___________ c. | TEXT 5594 |______________________________________________________| RCFD 5594 | | ////////////////// | 13.c. _____________ d. | TEXT 5595 |______________________________________________________| RCFD 5595 | | ////////////////// | 13.d. _____________ ________________________________________________
24
Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-15 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| Schedule RC-L -- Continued _____________ | C461 | _________________________________________ ____________________________|___________| | (Column A) | (Column B) | (Column C) | (Column D) | | Interest Rate | Foreign Exchange | Equity Derivative | Commodity and other| | Contracts | Contracts | Contracts | Contracts | |___________________|____________________|____________________|____________________| Dollar Amounts in Thousands |Tril Bil Mil Thou | Tril Bil Mil Thou | Tril Bil Mil Thou | Tril Bil Mil Thou | ______________________________________________________________________________________________________________________| | Off-balance Sheet Derivatives | ///////////////// | ////////////////// | ////////////////// | ////////////////// | | Position Indicators | ///////////////// | ////////////////// | ////////////////// | ////////////////// | ___________________________________| ///////////////// | ////////////////// | ////////////////// | ////////////////// | 14. Gross amounts (e.g., notional | ///////////////// | ////////////////// | ////////////////// | ////////////////// | amounts) (for each column, sum of | ///////////////// | ////////////////// | ////////////////// | ////////////////// | items 14.a through 14.e must equal| ///////////////// | ////////////////// | ////////////////// | ////////////////// | sum of items 15, 16.a, and 16.b): |___________________|____________________|___________________ |____________________| a. Future contracts .............. | 0 | 0 | 0 | 0 | 14.a. | RCFD 8693 | RCFD 8694 | RCFD 8695 | RCFD 8696 | b. Forward contracts ............. | 60,000 | 0 | 0 | 0 | 14.b. | RCFD 8697 | RCFD 8698 | RCFD 8699 | RCFD 8700 | c. Exchange-traded option contracts| ///////////////// | ////////////////// | ////////////////// | ////////////////// | (1) Written options .......... | 0 | 0 | 0 | 0 | 14.c.(1) | RCFD 8701 | RCFD 8702 0 | RCFD 8703 | RCFD 8704 | (2) Purchased options ........ | 0 | 0 | 0 | 0 | 14.c.(2) | RCFD 8705 | RCFD 8706 | RCFD 8707 | RCFD 8708 | d. Over-the-counter option contracts: | //////////////////| ///////////////// | ///////////////// | //////////////// | (1) Written options .......... | 70,250 | 0 | 0 | 0 | 14.d.(1) | RCFD 8709 | RCFD 8710 | RCFD 8711 | RCFD 8712 | (2) Purchased options ........ | 370,250 | 0 | 0 | 0 | 14.d.(2) | RCFD 8713 | RCFD 8714 | RCFD 8715 | RCFD 8716 | e. Swaps ............................ | 3,537,871 | 0 | 0 | 0 | 14.e. | RCFD 3450 | RCFD 3826 | RCFD 8719 | RCFD 8720 | 15. Total gross notional amount of | ///////////////// | ////////////////// | ////////////////// | ////////////////// | derivative contracts held for | ///////////////// | ////////////////// | ////////////////// | ////////////////// | trading ......................... | 191,500 | 0 | 0 | 0 | 15. | RCFD A126 | RFD A127 | RCFD 8723 | RCFD 8724 | 16. Total gross notional amount of | ///////////////// | //////////////// | ///////////////// | ////////////////// | derivative contracts held for | ///////////////// | ///////////////// | ///////////////// | ////////////////// | purposes other than trading: | ///////////////// | ///////////////// | ///////////////// | ////////////////// | a. Contracts marked to market ... | 0 | 0 | 0 | 0 | 16.a. | RCFD 8725 | RCFD 8726 | RCF 8727 | RCFD 8728 | b. Contracts not marked to market | 3,846,871 | 0 | 0 | 0 | 16.b. | RCF 8729 | RCFD 8730 | RFD 8731 | RCFD 8732 | ___________________________________________________________________________________|
25
Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-15 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| Schedule RC-L -- Continued _________________________________________ _________________________________________ | (Column A) | (Column B) | (Column C) | (Column D) | | Interest Rate | Foreign Exchange | Equity Derivative | Commodity and other| | Contracts | Contracts | Contracts | Contracts | |___________________|____________________|____________________|____________________| Dollar Amounts in thousands |RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ______________________________________________________________________________________________________________________| | Off-balance Sheet Derivatives | ///////////////// | ////////////////// | ////////////////// | ////////////////// | | Position Indicators | ///////////////// | ////////////////// | ////////////////// | ////////////////// | ___________________________________| ///////////////// | ////////////////// | ////////////////// | ////////////////// | | ///////////////// | ////////////////// | ////////////////// | ////////////////// | 17. Gross fair values of | ///////////////// | ////////////////// | ////////////////// | ////////////////// | derivative contracts: | ///////////////// | ////////////////// | ////////////////// | ////////////////// | a. Contracts held for | ///////////////// | ////////////////// | ////////////////// | ////////////////// | trading: | ///////////////// | ////////////////// | ////////////////// | ////////////////// | (1) Gross positive | ///////////////// | ////////////////// | ////////////////// | ////////////////// | fair value ................... | 8733 840 | 8734 0 | 8735 0 | 8736 0 | 17.a.(1) (2) Gross negative | ///////////////// | ////////////////// | ////////////////// | ////////////////// | fair value ................... | 8737 814 | 8738 0 | 8739 0 | 8740 0 | 17.a.(2) b. Contracts held for | ///////////////// | ////////////////// | ////////////////// | ////////////////// | purposes other than | ///////////////// | ////////////////// | ////////////////// | ////////////////// | trading that are marked | ///////////////// | ////////////////// | ////////////////// | ////////////////// | to market: | ///////////////// | ////////////////// | ////////////////// | ////////////////// | (1) Gross positive | ///////////////// | ////////////////// | ////////////////// | ////////////////// | fair value ................... | 8741 0 | 8742 0 | 8743 0 | 8744 0 | 17.b.(1) (2) Gross negative | ///////////////// | ////////////////// | ////////////////// | ////////////////// | fair value ................... | 8745 0 | 8746 0 | 8747 0 | 8748 0 | 17.b.(2) c. Contracts held for | ///////////////// | ////////////////// | ////////////////// | ////////////////// | purposes other than | ///////////////// | ////////////////// | ////////////////// | ////////////////// | trading that are not | ///////////////// | ////////////////// | ////////////////// | ////////////////// | marked to market: | ///////////////// | ////////////////// | ////////////////// | ////////////////// | (1) Gross positive | ///////////////// | ////////////////// | ////////////////// | ////////////////// | fair value .................. | 8749 4,117 | 8750 0 | 8751 0 | 8752 0 | 17.c.(1) (2) Gross negative | ///////////////// | ////////////////// | ////////////////// | ////////////////// | fair value ................... | 8753 51,811 | 8754 0 | 8755 0 | 8756 0 | 17.c.(2) |__________________________________________________________________________________| ______________________ Memoranda Dollar Amounts in Thousands | RCFD Bil Mil Thou | _________________________________________________________________________________________________________________________ 1. -2. Not applicable | ////////////////// | 3. Unused commitments with an original maturity exceeding one year that are reported in | ////////////////// | Schedule RC-L, items 1.a through 1.e, above (report only the unused portions of commitments | ////////////////// | that are fee paid or otherwise legally binding) ................................................ | 3833 4,666,515 | M.3. a. Participations in commitments with an original maturity | ////////////////// | exceeding one year conveyed to others ................................|RCFD 3834 | 77,235 | ////////////////// | M.3.a. ________________________ 4. To be completed only by banks with $1 billion or more in total assets: | ////////////////// | Standby letters of credit and foreign office guarantees (both financial and performance) issued | ////////////////// | to non-U.S. addresses (domicile) included in Schedule RC-L, items 2 and 3, above ............... | 3377 419,235 | M.4. 5. To be completed for the September report only: | ////////////////// | Installment loans to individuals for household, family, and other personal expenditures that | ////////////////// | have been securitized and sold without recourse (with servicing retained), amounts outstanding | ////////////////// | by type of loan: | ////////////////// | a. Loans to purchase private passenger automobiles ............................................. | 2741 N/A | M.5.a. b. Credit cards and related plans .............................................................. | 2742 N/A | M.5.b. c. All other consumer installment credit (Including mobile home loans) ......................... | 2743 N/A | M.5.c.
Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-17 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| _____________ | C465 | _________|___________| Schedule RC-M--Memoranda | | Dollar Amounts in Thousands | RCFD Bil Mil Thou | ______________________________________________________________________________________________________|____________________| 1. Extensions of credit by the reporting bank to its executive officers, directors, principal | ////////////////// | shareholders, and their related interests as of the report date: | ////////////////// | a. Aggregate amount of all extensions of credit to all executive officers, directors, principal | shareholders and their related interests ..................................................... | 6164 6,676 | 1.a. b. Number of executive officers, directors, and principal shareholders to whom the amount of all | ////////////////// | extensions of credit by the reporting bank (Including extensions of credit to | ////////////////// | related interests) equals or exceeds the lesser of $500,000 or 5 percent Number | ////////////////// | ___________________________| ////////////////// | of total capital as defined for this purpose in agency regulations. | RCFD 6165 | 4 | ////////////////// | ___________________________| ////////////////// | 1.b. 2. Federal funds sold and securities purchased under agreements to resell with U.S. branches | ////////////////// | and agencies of foreign banks(1) (included in Schedule RC, items 3.a and 3.b) .................... | 3405 0 | 2. 3. Not applicable. | ////////////////// | 4. Outstanding principal balance of 1-4 family residential mortgage loans serviced for others | ////////////////// | (include both retained servicing and purchased servicing): | ////////////////// | a. Mortgages serviced under a GNMA contract ...................................................... | 5500 21,759 | 4.a. b. Mortgages serviced under a FHLMC contract: | ////////////////// | (1) Serviced with recourse to servicer ........................................................ | 5501 12,023 | 4.b.(1) (2) Serviced without recourse to servicer ..................................................... | 5502 1,173,885 | 4.b.(2) c. Mortgages serviced under a FNMA contract: | ////////////////// | (1) Serviced under a regular option contract .................................................. | 5503 50,802 | 4.c.(1) (2) Serviced under a special option contract .................................................. | 5504 1,913,154 | 4.c.(2) d. Mortgages serviced under other servicing contracts ............................................ | 5505 3,879,382 | 4.d. 5. To be completed only by banks with $1 billion or more in total assets: | ////////////////// | Customers' liability to this bank on acceptances outstanding (sum of items 5.a and 5.b must | ////////////////// | equal Schedule RC, item 9): | ////////////////// | a. U.S. addressees (domicile) .................................................................... | 2103 7,330 | 5.a. b. Non-U.S. addressees (domicile) ................................................................ | 2104 0 | 5.b. 6. Intangible assets: | ////////////////// | a. Mortgage servicing rights ..................................................................... | 3164 26,116 | 6.a. b. Other identifiable intangible assets: | ////////////////// | (1) Purchased credit card relationships ....................................................... | 5506 0 | 6.b.(1) (2) All other identifiable intangible assets .................................................. | 5507 3,834 | 6.b.(2) c. Goodwill ...................................................................................... | 3163 280,364 | 6.c. d. Total (sum of items 6.a through 6.c) (must equal Schedule RC, item 10) ........................ | 2143 310,314 | 6.d. e. Amount of intangible assets (included in item 6.b.(2) above) that have been grandfathered or | ////////////////// | are otherwise qualifying for regulatory capital purposes ...................................... | 6442 0 | 6.e. 7. Mandatory convertible debt, net of common or perpetual preferred stock dedicated to | ////////////////// | redeem the debt ...................................................................................| 3295 0 | 7. ______________________ - ------------ (1) Do not report federal funds sold and securities purchased under agreements to resell with other commercial banks in the U.S. in this item.
27
Legal Title of Bank: FLEET NATINAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-18 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| Schedule RC-M--Continued ________________________ Dollar Amounts in Thousands | Bil Mil Thou| _____________________________________________________________________________________________ |_______________________| C> 8. a. Other real estate owned: | /////////////////////// | (1) Direct and indirect investments in real estate ventures ......................... | RCFD 5372 0 | 8.a.(1) (2) All other real estate owned: | /////////////////////// | (a) Construction and land development in domestic offices ....................... | RCON 5508 0 | 8.a.(2)(a) (b) Farmland in domestic offices ................................................ | RCON 5509 0 | 8.a.(2)(b) (c) 1-4 family residential properties in domestic offices ....................... | RCON 5510 517 | 8.a.(2)(c) (d) Multifamily (5 or more) residential properties in domestic offices .......... | RCON 5511 0 | 8.a.(2)(d) (e) Nonfarm nonresidential properties in domestic offices ....................... | RCON 5512 167 | 8.a.(2)(e) (f) In foreign offices .......................................................... | RCFN 5513 0 | 8.a.(2)(f) (3) Total (sum of items 8.a.(1) and 8.a.(2)) (must equal Schedule RC, item 7) ....... | RCFD 2150 684 | 8.a.(3) b. Investments in unconsolidated subsidiaries and associated companies: | /////////////////////// | (1) Direct and indirect investments in real estate ventures ......................... | RCFD 5374 0 | 8.b.(1) (2) All other investments in unconsolidated subsidiaries and associated companies ... | RCFD 5375 0 | 8.b.(2) (3) Total (sum of items 8.b.(1) and 8.b.(2)) (must equal Schedule RC, item 8) ....... | RCFD 2130 0 | 8.b.(3) c. Total assets of unconsolidated subsidiaries and associated companies ................ | RCFD 5376 0 | 8.c. 9. Noncumulative perpetual preferred stock and related surplus included in Schedule RC, | /////////////////////// | item 23, "Perpetual preferred stock and related surplus" ............................... | RCFD 3778 0 | 9. 10. Mutual fund and annuity sales in domestic offices during the quarter (include | /////////////////////// | proprietary, private label, and third party products): | /////////////////////// | a. Money market funds .................................................................. | RCON 6441 0 | 10.a. b. Equity securities funds ............................................................. | RCON 8427 0 | 10.b. c. Debt securities funds ............................................................... | RCON 8428 0 | 10.c. d. Other mutual funds .................................................................. | RCON 8429 0 | 10.d. e. Annuities ........................................................................... | RCON 8430 0 | 10.e. f. Sales of proprietary mutual funds and annuities (included in itmes 10.a through | /////////////////////// | 10.e. above) ........................................................................... | RCON 8784 0 | 10.f. _________________________
_________________________________________________________________________________________________________________________________ | | ______________________ |Memorandum Dollar Amounts in Thousands | RCFD Bil Mil Thou | | _________________________________________________________________________________________________ ____________________ |1. Interbank holdings of capital instruments (to be completed for the December report only): | ////////////////// | | | a. Reciprocal holdings of banking organizations' capital instruments ........................ | 3836 0 | M.1.a. | | b. Nonreciprocal holdings of banking organizations' capital instruments ..................... | 3837 0 | M.1.b. | ______________________ | | _________________________________________________________________________________________________________________________________
28 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-19 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-N--Past Due and Nonaccrual Loans, Leases, and Other Assets The FFIEC regards the information reported in __________ all of Memorandum item 1, in items 1 through 10, | C470 | column A, and in Memorandum items 2 through 4, ______________________________________________________ ________ column A, as confidential. | (Column A) | (Column B) | (Column C) | | Past due | Past due 90 | Nonaccrual | | 30 through 89 | days or more | | | days and still | and still | | | accruing | accruing | | ____________________ ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ______________________________________________________ ____________________ ____________________ ____________________ 1. Loans secured by real estate: | ////////////////// | ////////////////// | ////////////////// | a. To U.S. addressees (domicile) ................ | 1245 74,980 | 1246 18,839 | 1247 36,031 | 1.a. b. To non-U.S. addressees (domicile) ............ | 1248 0 | 1249 0 | 1250 0 | 1.b. 2. Loans to depository institutions and | ////////////////// | ////////////////// | ////////////////// | acceptances of other banks: | ////////////////// | ////////////////// | ////////////////// | a. To U.S. banks and other U.S. depository | ////////////////// | ////////////////// | ////////////////// | institutions ................................. | 5377 0 | 5378 0 | 5379 0 | 2.a. b. To foreign banks ............................. | 5380 0 | 5381 0 | 5382 0 | 2.b. 3. Loans to finance agricultural production and | ////////////////// | ////////////////// | ////////////////// | other loans to farmers .......................... | 1594 17 | 1597 0 | 1583 2 | 3. 4. Commercial and industrial loans: | ////////////////// | ////////////////// | ////////////////// | a. To U.S. addressees (domicile) ................ | 1251 16,064 | 1252 1,062 | 1253 26,685 | 4.a. b. To non-U.S. addressees (domicile) ............ | 1254 0 | 1255 0 | 1256 0 | 4.b. 5. Loans to individuals for household, family, and | ////////////////// | ////////////////// | ////////////////// | other personal expenditures: | ////////////////// | ////////////////// | ///////////////// | a. Credit cards and related plans ............... | 5383 592 | 5384 162 | 5385 149 | 5.a. b. Other (includes single payment, installment, | ////////////////// | ////////////////// | ////////////////// | and all student loans) ....................... | 5386 17,822 | 5387 1,880 | 5388 1,749 | 5.b. 6. Loans to foreign governments and official | ////////////////// | ////////////////// | ////////////////// | institutions .................................... | 5389 0 | 5390 0 | 5391 0 | 6. 7. All other loans ................................. | 5459 4,902 | 5460 435 | 5461 1,118 | 7. 8. Lease financing receivables: | ////////////////// | ////////////////// | ////////////////// | a. Of U.S. addressees (domicile) ................ | 1257 57 | 1258 0 | 1259 0 | 8.a. b. Of non-U.S. addressees (domicile) ............ | 1271 0 | 1272 0 | 1791 0 | 8.b. 9. Debt securities and other assets (exclude other | ////////////////// | ////////////////// | ////////////////// | real estate owned and other repossessed assets) . | 3505 0 | 3506 0 | 3507 0 | 9. ________________________________________________________________
==================================================================================================================================== Amounts reported in items 1 through 8 above include guaranteed and unguaranteed portions of past due and nonaccrual loans and leases. Report in item 10 below certain guaranteed loans and leases that have already been included in the amounts reported in items 1 through 8. ________________________________________________________________ 10. Loans and leases reported in items 1 | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ____________________ ____________________ ____________________ through 8 above which are wholly or partially | ////////////////// | ////////////////// | ////////////////// | guaranteed by the U.S. Government ............... | 5612 1,479 | 5613 321 | 5614 251 | 10. a. Guaranteed portion of loans and leases | ////////////////// | ////////////////// | ////////////////// | included in item 10 above .................... | 5615 1,252 | 5616 248 | 5617 225 | 10.a. ________________________________________________________________
29 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-20 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-N--Continued __________ | C473 | ______________________________________________________ ________ | (Column A) | (Column B) | (Column C) | | Past due | Past due 90 | Nonaccrual | | 30 through 89 | days or more | | | days and still | and still | | Memoranda | accruing | accruing | | ____________________ ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ______________________________________________________ ____________________ ____________________ ____________________ 1. Restructured loans and leases included in | ////////////////// | /////////////////// | ///////////////// | Schedule RC-N, items 1 through 8, above (and not | ////////////////// | /////////////////// | ///////////////// | reported in Schedule RC-C, part I, Memorandum | ////////////////// | /////////////////// | ///////////////// | item 2) ......................................... | 1658 0 | 1659 0 | 1661 1,578 | M.1. 2. Loans to finance commercial real estate, | ////////////////// | /////////////////// | ///////////////// | construction, and land development activities | ////////////////// | /////////////////// | ///////////////// | (not secured by real estate) included in | ////////////////// | /////////////////// | ///////////////// | Schedule RC-N, items 4 and 7, above ............. | 6558 4,511 | 6559 0 | 6560 1,403 | M.2. |____________________|____________________ |___________________ 3. Loans secured by real estate in domestic offices | RCON Bil Mil Thou | RCON Bil Mil Thou | RCON Bil Mil Thou| |___________________ |____________________ ____________________ (included in Schedule RC-N, item 1, above): | ////////////////// | ////////////////// | ////////////////// | a. Construction and land development ............ | 2759 2,261 | 2769 268 | 3492 378 | M.3.a. b. Secured by farmland .......................... | 3493 0 | 3494 0 | 3495 139 | M.3.b. c. Secured by 1-4 family residential properties: | ////////////////// | ////////////////// | ////////////////// | (1) Revolving, open-end loans secured by | ////////////////// | ////////////////// | ////////////////// | 1-4 family residential properties and | ////////////////// | ////////////////// | ////////////////// | extended under lines of credit ........... | 5398 4,446 | 5399 2,091 | 5400 2,628 | M.3.c.(1) (2) All other loans secured by 1-4 family | ////////////////// | ////////////////// | ////////////////// | residential properties ................... | 5401 39,576 | 5402 12,419 | 5403 10,421 | M.3.c.(2) d. Secured by multifamily (5 or more) | ////////////////// | ////////////////// | ////////////////// | residential properties ....................... | 3499 1,336 | 3500 175 | 3501 520 | M.3.d. e. Secured by nonfarm nonresidential properties . | 3502 27,361 | 3503 3,886 | 3504 21,945 | M.3.e. ________________________________________________________________
___________________________________________ | (Column A) | (Column B) | | Past due 30 | Past due 90 | | through 89 days | days or more | ____________________ ____________________ | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ____________________ ____________________ 4. Interest rate, foreign exchange rate, and other | ////////////////// | ////////////////// | commodity and equity contracts: | ////////////////// | ////////////////// | a. Book value of amounts carried as assets ...... | 3522 0 | 3528 0 | M.4.a. b. Replacement cost of contracts with a | ////////////////// | ////////////////// | positive replacement cost .................... | 3529 0 | 3530 0 | M.4.b. ___________________________________________
30 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-21 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
______________________ Schedule RC-O--Other Data for Deposit Insurance Assessments | C475 | |____________________| Dollar Amounts in Thousands | RCON Bil Mil Thou | ___________________________________________________________________________________________________ ____________________ 1. Unposted debits (see instructions): | ////////////////// | a. Actual amount of all unposted debits ...................................................... | 0030 N/A | 1.a. OR | ////////////////// | b. Separate amount of unposted debits: | ////////////////// | (1) Actual amount of unposted debits to demand deposits ................................... | 0031 0 | 1.b.(1) (2) Actual amount of unposted debits to time and savings deposits(1) ...................... | 0032 0 | 1.b.(2) 2. Unposted credits (see instructions): | ////////////////// | a. Actual amount of all unposted credits ..................................................... | 3510 N/A | 2.a. OR | ////////////////// | b. Separate amount of unposted credits: | ////////////////// | (1) Actual amount of unposted credits to demand deposits .................................. | 3512 182,201 | 2.b.(1) (2) Actual amount of unposted credits to time and savings deposits(1) ..................... | 3514 0 | 2.b.(2) 3. Uninvested trust funds (cash) held in bank's own trust department (not included in total | ////////////////// | deposits in domestic offices) ................................................................ | 3520 0 | 3. 4. Deposits of consolidated subsidiaries in domestic offices and in insured branches in | ////////////////// | Puerto Rico and U.S. territories and possessions (not included in total deposits): | ////////////////// | a. Demand deposits of consolidated subsidiaries .............................................. | 2211 8,343 | 4.a. b. Time and savings deposits(1) of consolidated subsidiaries ................................. | 2351 0 | 4.b. c. Interest accrued and unpaid on deposits of consolidated subsidiaries ...................... | 5514 0 | 4.c. 5. Deposits in insured branches in Puerto Rico and U.S. territories and possessions: | ////////////////// | a. Demand deposits in insured branches (included in Schedule RC-E, Part II) .................. | 2229 0 | 5.a. b. Time and savings deposits(1) in insured branches (included in Schedule RC-E, Part II) ..... | 2383 0 | 5.b. c. Interest accrued and unpaid on deposits in insured branches | ////////////////// | (included in Schedule RC-G, item 1.b) ..................................................... | 5515 0 | 5.c. ______________________ ______________________ Item 6 is not applicable to state nonmember banks that have not been authorized by the | ////////////////// | Federal Reserve to act as pass-through correspondents. | ////////////////// | 6. Reserve balances actually passed through to the Federal Reserve by the reporting bank on | ////////////////// | behalf of its respondent depository institutions that are also reflected as deposit liabilities| ////////////////// | of the reporting bank: | ////////////////// | a. Amount reflected in demand deposits (included in Schedule RC-E, Part I, | ////////////////// | Memorandum item 4.a) ...................................................................... | 2314 0 | 6.a. b. Amount reflected in time and savings deposits(1) (included in Schedule RC-E, Part I, | ////////////////// | Memorandum item 4.b) ...................................................................... | 2315 0 | 6.b. 7. Unamortized premiums and discounts on time and savings deposits:(1) | ////////////////// | a. Unamortized premiums ...................................................................... | 5516 0 | 7.a. b. Unamortized discounts ..................................................................... | 5517 0 | 7.b. ______________________ _______________________________________________________________________________________________________________________________ | | |8. To be completed by banks with "Oakar deposits." | ______________________ | Total "Adjusted Attributable Deposits" of all institutions acquired under Section 5(d)(3) of | ////////////////// | | | the Federal Deposit Insurance Act (from most recent FDIC Oakar Transaction Worksheet(s)) .... | 5518 292,130 | 8. | ______________________ | | _______________________________________________________________________________________________________________________________ ______________________ 9. Deposits in lifeline accounts ................................................................ | 5596 ///////////// | 9. 10. Benefit-responsive "Depository Institution Investment Contracts" (included in total | ////////////////// | deposits in domestic offices) ................................................................ | 8432 0 | 10. ______________________ ______________ (1) For FDIC insurance assessment purposes, "time and savings deposits" consists of nontransaction accounts and all transaction accounts other than demand deposits.
31 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-22 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-O--Continued Dollar Amounts in Thousands | RCON Bil Mil Thou | __________________________________________________________________________________________________ ____________________ 1. Adjustments to demand deposits in domestic offices reported in Schedule RC-E for | ////////////////// | certain reciprocal demand balances: | ////////////////// | a. Amount by which demand deposits would be reduced if reciprocal demand balances | ////////////////// | between the reporting bank and savings associations were reported on a net basis | ////////////////// | rather than a gross basis in Schedule RC-E .................................................. | 8785 0 | 11.a. b. Amount by which demand deposits would be increased if reciprocal demand balances | ////////////////// | between the reporting bank and U.S. branches and agencies of foreign banks were | ////////////////// | reported on a gross basis rather than a net basis in Schedule RC-E .......................... | A181 0 | 11.b. c. Amount by which demand deposits would be reduced if cash items in process of | ////////////////// | collections were included in the calculation of net reciprocal demand balances between | ////////////////// | the reporting bank and the domestic offices of U.S. banks and savings associations | ////////////////// | in Schedule RC-E ............................................................................ | A182 2,235 | 11.c. ____________________ Memoranda (to be completed each quarter except as noted) Dollar Amounts in Thousands | RCON Bil Mil Thou | ________________________________________________________________________________________________|____________________| 1. Total deposits in domestic offices of the bank (sum of Memorandum items 1.a. (1) and | ////////////////// | 1.b.(1) must equal Schedule RC, item 13.a): | ////////////////// | a. Deposits accounts of $100,000 or less: | ////////////////// | (1) amount of deposit accounts of $100,000 or less .................................... | 2702 6,065,796 | M.1.a.(1) (2) Number of deposit accounts of $100,000 or less (to be Number | ////////////////// | completed for the June report only) ..........................|RCON 3779________N/A | ////////////////// | M.1.a.(2) b. Deposit accounts of more than $100,000: | ////////////////// | (1) Amount of deposit accounts of more than $100,000 .................................. | 2710 4,731,325 | M.1.b.(1) Number | ////////////////// | (2) Number of deposit accounts of more than $100,000 .............|RCON 2722______7,493 | ////////////////// | M.1.b.(2) 2. Estimated amount of uninsured deposits in domestic offices of the bank: a. An estimate of your bank's uninsured deposits can be determined by mutiplying the number of deposit accounts of more than $100,000 reported in Memorandum item 1.b.(2) above by $100,000 and subtracting the result from the amount of deposit accounts of more than $100,000 reported in Memorandum item 1.b.(1) above. Indicate in the appropriate box at the right whether your bank has a method or procedure for determining a better estimate of uninsured deposits that the ____________YES_______NO__ estimated described above ............................................................... |RCON 6861| |///| x | M.2.a. ____________________ b. If the box marked YES has been checked, report the estimate of uninsured deposits |RCON Bil Mil Thou| determined by using your bank's method or procedure .................................... | 5597 N/A | M.2.b. _____________________________________________________________________________________________________________________________ | C477 | Person to whom questions about the Reports of Condition and Income should be directed: __________ PAMELA S. FLYNN, VICE PRESIDENT (401) 278-5194 ___________________________________________________________________________________ ______________________________________ Name and Title (TEXT 8901) Area code and phone number (TEXT 8902)
32 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 FFIEC 031 Address: 777 MAIN STREET Page RC-23 City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-R--Risk-Based Capital This schedule must be completed by all banks as follows: Banks that reported total assets of $1 billion or more in Schedule RC, item 12, for June 30, 1994, must complete items 2 through 9 and Memorandum item 1 and 2. Banks with assets of less than $1 billion must complete items 1 and 2 below or Schedule RC-R in its entirety, depending on their response to item 1 below. 1. Test for determining the extent to which Schedule RC-R must be completed. To be completed ____________ only by banks with total assets of less than $1 billion. Indicate in the appropriate | C480 | _____|__________| box at the right whether the bank has total capital greater than or equal to eight percent | YES NO | ____________ _______________ of adjusted total assets ............................................................... | RCFD 6056 | |////| | 1. _____________________________ For purposes of this test, adjusted total assets equals total assets less cash, U.S. Treasuries, U.S. Government agency obligations, and 80 percent of U.S. Government-sponsored agency obligations plus the allowance for loan and lease losses and selected off-balance sheet items as reported on Schedule RC-L (see instructions). If the box marked YES has been checked, then the bank only has to complete items 2 below. If the box marked NO has been checked, the bank must complete the remainder of this schedule. A NO response to item 1 does not necessarily mean that the bank's actual risk-based capital ratio is less than eight percent or that the bank is not in compliance with the risk-based capital guidelines.
___________________________________________ | (Column A) | (Column B) | |Subordinated Debt(1)| Other | | and Intermediate | Limited- | Item 2 is to be completed by all banks. | Term Preferred | Life Capital | | Stock | Instruments | ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ______________________________________________________________________________ ____________________ ____________________ 2. Subordinated debt(1) and other limited-life capital instruments (original | ////////////////// | ////////////////// | weighted average maturity of at least five years) with a remaining | ////////////////// | ////////////////// | maturity of: | ////////////////// | ////////////////// | a. One year or less ...................................................... | 3780 0 | 3786 0 | 2.a. b. Over one year through two years ....................................... | 3781 0 | 3787 0 | 2.b. c. Over two years through three years .................................... | 3782 0 | 3788 0 | 2.c. d. Over three years through four years ................................... | 3783 0 | 3789 0 | 2.d. e. Over four years through five years .................................... | 3784 0 | 3790 0 | 2.e. f. Over five years ....................................................... | 3785 440,000 | 3791 0 | 2.f. ___________________________________________ 3. Not applicable ___________________________________________ | (Column A) | (Column B) | Items 4-9 and Memorandum item 1 and 2 are to be completed | Assets | Credit Equiv- | by banks that answered NO to item 1 above and | Recorded | alent Amount | by banks with total assets of $1 billion or more. | on the | of Off-Balance | | Balance Sheet | Sheet Items(2) | ____________________ ____________________ 4. Assets and credit equivalent amounts of off-balance sheet items assigned | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ____________________ ____________________ to the Zero percent risk category: | ////////////////// | ////////////////// | a. Assets recorded on the balance sheet: | ////////////////// | ////////////////// | (1) Securities issued by, other claims on, and claims unconditionally | ////////////////// | ////////////////// | guaranteed by, the U.S. Government and its agencies and other | ////////////////// | ////////////////// | OECD central governments .......................................... | 3794 995,941 | ////////////////// | 4.a.(1) (2) All other ......................................................... | 3795 615,688 | ////////////////// | 4.a.(2) b. Credit equivalent amount of off-balance sheet items ................... | ////////////////// | 3796 0 | 4.b. ___________________________________________ ______________ (1) Exclude mandatory convertible debt reported in Schedule RC-M, item 7. (2) Do not report in column B the risk-weighted amount of assets reported in column A.
33 Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 Address: 777 MAIN STREET City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| ___________
Schedule RC-R--Continued ___________________________________________ | (Column A) | (Column B) | | Assets | Credit Equiv- | | Recorded | alent Amount | | on the | of Off-Balance | | Balance Sheet | Sheet Items(1) | ____________________ ____________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | RCFD Bil Mil Thou | ______________________________________________________________________________ ____________________ ____________________ 5. Assets and credit equivalent amounts of off-balance sheet items | ////////////////// | ////////////////// | assigned to the 20 percent risk category: | ////////////////// | ////////////////// | a. Assets recorded on the balance sheet: | ////////////////// | ////////////////// | (1) Claims conditionally guaranteed by the U.S. Government and its | ////////////////// | ////////////////// | agencies and other OECD central governments ....................... | 3798 21,803 | ////////////////// | 5.a.(1) (2) Claims collateralized by securities issued by the U.S. Govern- | ////////////////// | ////////////////// | ment and its agencies and other OECD central governments; by | ////////////////// | ////////////////// | securities issued by U.S. Government-sponsored agencies; and | ////////////////// | ////////////////// | by cash on deposit ................................................ | 3799 0 | ////////////////// | 5.a.(2) (3) All other ......................................................... | 3800 2,925,314 | ////////////////// | 5.a.(3) b. Credit equivalent amount of off-balance sheet items ................... | ////////////////// | 3801 50,397 | 5.b. 6. Assets and credit equivalent amounts of off-balance sheet items | ////////////////// | ////////////////// | assigned to the 50 percent risk category: | ////////////////// | ////////////////// | a. Assets recorded on the balance sheet .................................. | 3802 2,913,084 | ////////////////// | 6.a. b. Credit equivalent amount of off-balance sheet items ................... | ////////////////// | 3803 62,727 | 6.b. 7. Assets and credit equivalent amounts of off-balance sheet items | ////////////////// | ////////////////// | assigned to the 100 percent risk category: | ////////////////// | ////////////////// | a. Assets recorded on the balance sheet .................................. | 3804 10,920,564 | ////////////////// | 7.a. b. Credit equivalent amount of off-balance sheet items ................... | ////////////////// | 3805 3,386,096 | 7.b. 8. On-balance sheet asset values excluded from the calculation of the | ////////////////// | ////////////////// | risk-based capital ratio(2) .............................................. | 3806 4,047 | ////////////////// | 8. 9. Total assets recorded on the balance sheet (sum of | ////////////////// | ////////////////// | items 4.a, 5.a, 6.a, 7.a, and 8, column A)(must equal Schedule RC, | ////////////////// | ////////////////// | item 12 plus items 4.b and 4.c) .......................................... | 3807 18,396,441 | ////////////////// | 9. ___________________________________________ Memoranda ______________________ Dollar Amounts in Thousands | RCFD Bil Mil Thou | __________________________________________________________________________________________________ ____________________ 1.Current credit exposure across all off-balance sheet derivative contracts covered by the | ///////////////// | risked-based capital standards ...................................................................| 8764 4,957| M.1. |___________________| ________________________________________________________________ | With a remaining maturity of | |______________________________________________________________| | (Column A) | (Column B) | (Column C) | | | | | | One year or less | Over one year | Over five years | | | through five years | | |______________________________________________________________| | RCFD Bil Mil Thou | RCFD Bil Mil Thou | RCFD Bil Mil Thou | |____Tril____________|_____Tril___________|____Tril____________| 2. Notional principal amounts of a. Interest rate contracts ................. | 3809 1,233,650 | 8766 2,389,471 | 8767 0 | M.2.a. b. Foreign exchange contracts .............. | 3812 0 | 8769 0 | 8770 0 | M.2.b. c. Gold contracts .......................... | 8771 0 | 8772 0 | 8773 0 | M.2.c. d. Other precious metals contracts ......... | 8774 0 | 8775 0 | 8776 0 | M.2.d. e. Other commodity contracts ............... | 8777 0 | 8778 0 | 8779 0 | M.2.e. f. Equity derivative contracts ............. | A000 0 | A001 0 | A002 0 | M.2.f. |______________________________________________________________| _________________ 1) Do not report in column B the risk-weighted amount of assets reported in column A. 2) Include the difference between the fair value and the amortized cost of available-for-sale securities in item 8 and report the amortized cost of these securities in items 4 through 7 above. Item 8 also includes on-balance sheet asset values (or portions thereof) of off-balance sheet interest rate, foreign exchange rate, and commodity contracts and those contracts (e.g., futures contracts) not subject to risk-based capital. Exclude from item 8 margin accounts and accrued receivables as well as any portion of the allowance for loan and lease losses in excess of the amount that may be included in Tier 2 capital. 3) Exclude foreign exchange contracts with an original maturity of 14 days or less and all futures contracts.
Legal Title of Bank: FLEET NATIONAL BANK OF CONNECTICUT Call Date: 12/31/95 ST-BK: 09-0590 Address: 777 MAIN STREET City, State Zip: HARTFORD, CT 06115 FDIC Certificate No.: |0|2|4|9|9| THIS PAGE IS TO BE COMPLETED BY ALL BANKS - ------------------------------------------------------------------------------------------------------------------------------- | OMB No. For OCC: 1557-0081 Name and address of Bank | OMB No. For FDIC: 3064-0052 | OMB No. For Federal Reserve: 7100-0036 | Expiration Date: 3/31/96 | PLACE LABEL HERE | | SPECIAL REPORT | (Dollar Amounts in Thousands) | |___________________________________________________________________ | CLOSE OF BUSINESS| FDIC Certificate Number | | | DATE | | C-700 | | 12/31/95 | |0|2|4|9|9 | | __________________________________________________________________________________________________________________________________ LOANS TO EXECUTIVE OFFICERS (Complete as of each Call Report Date) - ---------------------------------------------------------------------------------------------------------------------------------- The following information is required by Public Laws 90-44 and 102-242, but does not constitute a part of the Report of Condition. With each Report of Condition, these Laws require all banks to furnish a report of all loans or other extensions of credit to their executive officers made since the date of the previous Report of Condition. Data regarding individual loans or other extensions of credit are not required. If no such loans or other extensions of credit were made during the period, insert "none" against subitem (a). (Exclude the first $15,000 of indebtedness of each executive officer under bank credit card plan.) See Sections 215.2 and 215.3 of Title 12 of the Code of Federal Regulations (Federal Reserve Board Regulation 0) for the definitions of "executive officer" and "extension of credit," respectively. Exclude loans and other extensions of credit to directors and principal shareholders who are not executive officers. ________________________________________________________________________________________________________________________________ a. Number of loans made to executive officers since the previous Call Report date ...................| RCFD 3561| 0 a. b. Total dollar amount of above loans (in thousands of dollars) .....................................| RCFD 3652| 0 b. c. Range of interest charged on above loans (example: 9 3/4% = 9.75) ........................................|RCFD 7701| 0.00 | % to | RCFD 7702 | 0.00 | % c. ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ SIGNATURE OF TITLE OF OFFICER AUTHORIZED TO SIGN REPORT | DATE (Month, Day, Year) | | ________________________________________________________________________________________________________________________________ NAME AND TITLE OF PERSON TO WHOM INQUIRIES MAY BE DIRECTED (TEXT 8903) | AREA CODE/PHONE NUMBER/EXTENSION | (TEXT 8904) | ROBERT P. DUFF VICE PRESIDENT | (203) 986-2474 | ________________________________________________________________________________________________________________________________ FDIC 8040/53 (6-95)
35 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-28-1996 DEC-31-1995 MAR-30-1996 11,022 0 28,008 0 297,974 411,349 1,447,435 392,282 1,485,986 323,530 648,681 3,311 0 299 411,365 1,485,986 693,165 693,165 546,606 546,606 0 0 14,545 (1,978) (800) (1,178) 0 0 0 (1,178) (0.05) (0.05)
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