<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1996
REGISTRATION NO. 333-01601
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SMITH'S FOOD & DRUG CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1550 SOUTH REDWOOD ROAD 87-0258768
(STATE OR OTHER SALT LAKE CITY, UTAH 84104 (IRS EMPLOYER
JURISDICTION OF (801) 974-1400 IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
MICHAEL C. FREI
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
SMITH'S FOOD & DRUG CENTERS, INC.
1550 SOUTH REDWOOD ROAD
SALT LAKE CITY, UTAH 84104
(801) 974-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
THOMAS C. SADLER, ESQ. MICHAEL A. BECKER, ESQ.
LATHAM & WATKINS CAHILL GORDON & REINDEL
633 WEST FIFTH STREET 80 PINE STREET
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10005
(213) 485-1234 (212) 701-3000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE(A)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Senior Subordinated
Notes due 2007 $575,000,000 100% $575,000,000 $198,276
- ---------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 6, 1996
PROSPECTUS
LOGO
[LOGO OF SMITH'S FOOD & DRUG CENTERS]
$575,000,000
SMITH'S FOOD & DRUG CENTERS, INC.
% SENIOR SUBORDINATED NOTES DUE 2007
----------
The offering (the "Offering") by Smith's Food & Drug Centers, Inc. ("Smith's"
or the "Company") of its % Senior Subordinated Notes due 2007 (the "Notes")
is part of the financing required to consummate the Recapitalization (as
defined) of Smith's and the Merger (as defined) of Smitty's Supermarkets, Inc.
("Smitty's") with a subsidiary of Smith's. Consummation of the Offering is
conditioned upon the closing of the Merger and the Recapitalization.
Interest on the Notes will be payable semiannually on each May 15 and
November 15, commencing on November 15, 1996. The Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on and after May
15, 2001, at the respective redemption prices set forth herein. In addition, on
or prior to May 15, 1999, the Company may, at its option, use the Net Cash
Proceeds (as defined) of one or more Public Equity Offerings (as defined) to
redeem up to an aggregate of 35% of the Notes originally issued, at the
respective redemption prices set forth herein. Upon a Change of Control (as
defined), each holder of Notes will have the right to require the Company to
repurchase such holder's Notes at a price equal to 101% of their principal
amount plus accrued and unpaid interest to the date of repurchase.
The Notes will be senior subordinated unsecured obligations of the Company
and will be subordinated in right of payment to all Senior Indebtedness (as
defined) of the Company, including the New Credit Facility (as defined). At
December 30, 1995, on a pro forma basis after giving effect to the Transactions
(as defined) and the California Disposition (as defined), the aggregate
outstanding amount of Senior Indebtedness of the Company would have been
approximately $813.2 million, which amount excludes any borrowings or amounts
available to be borrowed under the New Revolving Facility (as defined). The
Notes will be effectively subordinated to all existing and future liabilities,
including indebtedness, of the Company's subsidiaries. At December 30, 1995, on
a pro forma basis after giving effect to the Transactions and the California
Disposition, the Company's subsidiaries would have had indebtedness and other
liabilities reflected on the Company's consolidated balance sheet, including
trade payables and accrued expenses (but excluding guarantees of Senior
Indebtedness), of approximately $148.4 million.
The Company does not intend to apply for listing of the Notes on any national
securities exchange. See "Underwriting."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................... % % %
- ---------------------------------------------------------------------------------
Total...................................... $575,000,000 $ $
=================================================================================
</TABLE>
(1) Plus accrued interest, if any, from date of original issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses of the Offering payable by the Company, estimated
at $ .
----------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval
of certain legal matters by counsel. It is expected that delivery of the Notes
will be made on or about , 1996, at the offices of BT Securities
Corporation, One Bankers Trust Plaza, New York, New York.
----------
BT SECURITIES CORPORATION
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
----------
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Notes. Each of the Company and Smitty's is subject
to the reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder, and in accordance therewith files reports
and other information with the Commission. Such reports and other information
filed by the Company or Smitty's with the Commission can be inspected without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048; 500 West Madison Street, Chicago, Illinois 60601; and
5670 Wilshire Boulevard, Suite 500, Los Angeles, California 90036. Copies of
such materials can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed
rates. The Class B Common Stock of the Company is listed on the New York Stock
Exchange and reports, proxy statements and other information concerning the
Company can also be inspected at the office of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
This Prospectus summarizes the contents and terms of documents not included
herewith. These documents are available upon request from Smith's Food & Drug
Centers, Inc. at 1550 South Redwood Road, Salt Lake City, Utah 84104,
telephone number (801) 974-1400, Attn: Michael C. Frei, General Counsel and
Secretary.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Smith's with the Commission under the
Exchange Act are incorporated herein by reference: (i) Smith's Annual Report
on Form 10-K for its fiscal year ended December 30, 1995; (ii) Smith's current
report on Form 8-K dated February 19, 1996, and (iii) the sections of Smith's
1996 Proxy Statement for its Annual Meeting of Stockholders entitled "The
Recapitalization Agreement," and "Executive Compensation." In addition, all
documents filed by Smith's with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior
to the termination of the Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing
of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document that also is, or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Copies of documents incorporated herein by reference (excluding exhibits
unless such exhibits are specifically incorporated herein by reference) may be
obtained without charge upon request from Smith's Food & Drug Centers, Inc. at
1550 South Redwood Road, Salt Lake City, Utah 84104, telephone number
(801) 974-1400, Attn: Michael C. Frei, General Counsel and Secretary.
i
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the Financial Statements and notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise stated, references in this Prospectus to
numbers of stores prior to the consummation of the Merger are as of May 1,
1996. References to the "pro forma" number of stores to be operated by the
Company following the consummation of the Merger are based on the May 1, 1996
totals for Smith's and Smitty's, but give effect to the California Divestiture,
as described herein. Unless otherwise noted, the market share data contained
herein has been prepared by management of the Company based upon internal
research.
THE COMPANY
Smith's is a leading supermarket company in the Intermountain and
Southwestern regions of the United States, operating 120 stores located in Utah
(35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and Wyoming
(collectively, 14). Substantially all of Smith's stores offer one-stop shopping
convenience through a food and drug combination format which features a full-
line supermarket with drug and pharmacy departments and some or all of the
following specialty departments: delicatessens, hot prepared food sections, in-
store bakeries, video rental shops, floral shops, one-hour photo processing
labs, full-service banking and frozen yogurt shops. The Company's 114 food and
drug combination stores averaged approximately 63,000 square feet and $420,000
per week in sales volume in fiscal 1995. The Company has recently opened four
price impact warehouse stores and also operates two conventional supermarkets.
Through its 48 years of operations, the Company believes it has developed a
valuable and strategically located store base, strong name recognition,
customer loyalty and a reputation for quality and service.
The Company is pursuing a series of transactions designed to enhance
stockholder value and liquidity:
. Arizona Merger and Consolidation. The Company has entered into an
agreement to acquire Smitty's Supermarkets, Inc. ("Smitty's"), a
regional supermarket operator with 28 stores in the Phoenix and Tucson
markets, in a stock-for-stock exchange (the "Merger"). The Merger will
significantly enhance the Company's market position in Arizona. Smitty's
is controlled by affiliates of The Yucaipa Companies ("Yucaipa"), a
private investment group specializing in the supermarket industry.
Affiliates of Yucaipa will own approximately 13.6% of the Company's
outstanding common stock following the Merger and the Recapitalization
(as defined).
. California Disposition. The Company has completed the sale or lease of
16 stores, three non-operating properties and its primary distribution
facility in Southern California and has closed its remaining 18 stores
there (the "California Divestiture"). Management determined that because
of the attractive growth prospects in the Company's principal markets
and the competitive environment in Southern California, it would
redeploy Company resources from California into such other markets.
Following the consummation of the Transactions, the Company intends to
accelerate the disposition of its closed stores and excess land in
California (the "California Asset Disposition", and together with the
California Divestiture, the "California Disposition").
. New Senior Management. The Company will enter into a five-year
management services agreement (the "Management Services Agreement") with
Yucaipa. Ronald W. Burkle, the managing general partner of Yucaipa, will
be appointed as Chief Executive Officer of the Company. In addition,
Allen R. Rowland recently joined Smith's as President and Chief
Operating Officer. Mr. Rowland was employed by Albertson's, Inc. for 25
years and had senior executive responsibilities for all of the principal
regions in which Smith's operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding common stock (excluding shares issuable in the Merger) for
$36.00 in cash per share (the "Tender Offer"). In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
1
<PAGE>
For the fiscal year ended December 30, 1995, after giving pro forma effect to
the Transactions and the California Disposition, the Company would have had net
sales and EBITDA (as defined) of approximately $3.0 billion and $255.4 million,
respectively. See "Unaudited Pro Forma Combined Financial Statements." In
addition, management believes that the Company will benefit from significant
operating synergies and cost saving opportunities following the Merger.
COMPANY STRENGTHS
Management believes the Company has the following principal strengths: (i)
leading market positions, (ii) attractive markets, (iii) new and recently
remodeled stores, (iv) prime store locations, (v) advanced backstage operations
and (vi) substantial owned real estate.
Leading Market Positions. Pro forma for the Merger, the Company will operate
148 stores and will have the largest or second largest market share in each of
its principal markets: Salt Lake City (31%), Phoenix (24%), Las Vegas (24%) and
Albuquerque (23%). The Company believes its reputation for offering a broad
selection of quality products and low pricing combined with a high level of
customer service has created a valuable franchise with strong name recognition
and customer loyalty.
Attractive Markets. The Company's stores are located predominantly in Utah,
Arizona, Nevada and New Mexico, which are among the fastest growing states in
terms of population and employment. According to the U.S. Bureau of the Census,
the population of those four states has increased at a compound annual growth
rate of 3.0% since 1990, compared to the national average of 1.1% over the same
period. According to the U.S. Bureau of Labor Statistics, employment in the
same four states has increased at a compound annual growth rate of 4.0% since
1990, compared to the national average of 1.3% over the same period. In
addition, management believes that operating in distinct markets in several
states provides advantages due to their differences in economic cycles,
demographics and competitive conditions.
New and Recently Remodeled Stores. After giving effect to the Merger and the
California Divestiture, approximately 84% of the Company's stores will have
been opened or remodeled within the last seven years. During the five fiscal
years ended December 30, 1995, Smith's spent approximately $414 million in
capital expenditures (excluding capital expenditures associated with California
operations), which have been primarily used to build new stores and to expand
and remodel existing stores. During the five-year period ended December 30,
1995, Smitty's spent approximately $72 million in capital expenditures,
including approximately $42 million since mid-1994 to remodel substantially all
of its Phoenix-area stores.
Prime Store Locations. The Company's 48 years of operation have allowed it to
choose its store locations selectively as new residential areas have been
developed. The Company believes that many of its stores are in developed areas
where land values and the unavailability of suitable parcels would make it
difficult to replicate the Company's existing store base.
Advanced Backstage Operations. The Company owns and operates one of the most
modern and efficient backstage operations in the industry. During the five
fiscal years ended December 30, 1995, the Company spent approximately $163
million (excluding the divested California operations) to build, expand or
remodel its warehousing, distribution and processing facilities. Management
believes that the Company's approximately 3,000,000 square feet of backstage
facilities will be able to accommodate the Smitty's volume following the Merger
and support anticipated future growth.
Substantial Owned Real Estate. The Company will own 108 of the 148 stores it
will operate upon consummation of the Merger. The Company also owns its primary
warehousing, distribution and processing facilities. In addition, the Company
owns land for development, expansion or sale, as well as other non-operating
real estate assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
2
<PAGE>
THE CALIFORNIA DIVESTITURE
Smith's has completed the sale, lease or closure of its Southern California
regional operations. In December 1995, Smith's entered into an agreement to
sublease its Riverside, California distribution center and dairy plant to
Ralphs Grocery Company ("Ralphs"), an affiliate of Yucaipa, for the remaining
23-year term of Smith's lease. Ralphs also agreed to purchase certain related
equipment and inventory. In January 1996, Smith's entered into agreements to
sell or lease 16 stores and related equipment and three non-operating
properties to various supermarket companies (including Ralphs) and others.
Smith's has closed the remaining 18 stores and it is anticipated that these
closed stores will be sold or leased to other retail companies. Since December
30, 1995, the Company has received net cash proceeds of approximately $67.2
million from the California Divestiture and expects to receive an additional
$10.6 million shortly after the consummation of the Transactions. In connection
with the California Divestiture, the Company recorded pre-tax restructuring
charges of $140 million (the "California Divestiture Charge") for the year
ended December 30, 1995 and classified the assets to be leased or sold as
"assets held for sale." The California Divestiture Charge reflected (i) a
provision for anticipated future lease obligations, (ii) the anticipated cost
to the Company of closing its California stores and distribution center
(primarily termination payments and inventory), and (iii) asset valuation
adjustments for the equipment in all of the California stores and the
distribution center and for the land and buildings associated with the
properties being sold or leased. The California Divestiture, including the
transactions with Ralphs, was unrelated to the Merger or the Recapitalization.
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing and adjacent markets, (ii)
realize operating synergies and cost savings resulting from the Merger, (iii)
improve working capital management, (iv) grow its recently introduced price
impact warehouse stores and (v) dispose of remaining California real estate
following the consummation of the Transactions.
Expand Operations in Existing and Adjacent Markets. Management believes that
there are significant opportunities to increase the Company's sales and gain
efficiencies in its existing markets through new store openings and store
remodels. From 1991 through 1994, management primarily focused on the Southern
California market, opening 32 new stores in Southern California compared to a
net of 10 new stores in its other markets. In 1995, the Company opened a net of
17 new stores, only two of which were located in California. In an effort to
more fully realize its market potential in its non-California markets, in 1995
the Company began opening smaller combination stores (54,000 to 60,000 square
feet) in existing markets as part of a "fill-in" strategy. By pursuing a growth
strategy which emphasizes opening new stores within its existing and adjacent
markets, the Company believes it can increase its market share and improve its
distribution and other efficiencies, while taking advantage of such markets'
favorable growth prospects.
Realize Operating Synergies and Cost Savings Resulting from the Merger.
Management believes that approximately $25 million of net annual cost savings
are achievable over a three-year period following the Merger. The majority of
such cost savings opportunities relate to its Arizona operations and are
believed to be achievable (on an annualized basis) by the end of the first full
year of operations following the Merger. The estimates of potential cost
savings resulting from the Merger contained in this Prospectus are forward
looking statements that involve risks and inherent uncertainties that could
cause actual net annual cost savings to differ materially from those projected.
See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's and Smitty's advertising programs in
the Phoenix and Tucson markets substantially overlap and, as a result of
the Merger, management expects that the Company will be able to
eliminate a substantial portion of the combined advertising expenses.
Management estimates that annualized advertising cost savings of
approximately $7 million are achievable by the end of the first full
year of operations following the Merger.
3
<PAGE>
. General and Administrative Cost Savings. Management expects the Company
to achieve savings from the elimination of duplicative administrative
staff and headquarters facilities and the consolidation of management
information systems. Management estimates that annualized general and
administrative cost savings of approximately $13 million are achievable
by the end of the first full year of operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently operates
without any of its own distribution facilities. By incorporating the
Smitty's volume into Smith's Tolleson, Arizona warehousing and
distribution facilities, the Company expects to eliminate the expense
associated with Smitty's being supplied primarily by an independent
wholesaler, as well as reduce average unit costs resulting from improved
capacity utilization. Management estimates that annualized warehousing
and transportation cost savings of approximately $4 million are
achievable by the end of the second full year of operations following
the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to utilize Smith's electronic direct store
receiving system in all Smitty's stores, resulting in increased control
over direct store deliveries and corresponding payments. In addition, by
utilizing Smith's front-end systems in Smitty's stores, improvements in
the efficiency of Smitty's stores are expected. Management estimates
that annualized cost savings of approximately $2 million related to such
direct store delivery and store systems are achievable by the end of the
second full year of operations following the Merger.
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with aggregate annual sales (when combined with the
Company) in excess of $11 billion. Management estimates that annualized
cost savings of approximately $6 million are achievable from such
purchasing improvements by the end of the third full year of operations
following the Merger.
The sum of the components of the estimated annual cost savings exceeds $25
million; however, management expects that a portion of the savings will be
reinvested in the Company's operations. In connection with the Transactions,
the Company and Smitty's are evaluating the format mix of the combined Arizona
store base and are assessing the possibility of modifying the formats of
certain stores. It is anticipated that approximately $17 million of capital
expenditures and approximately $15 million of other expenses will be required
to integrate the Arizona operations over the next two years and realize such
cost savings.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
companies have achieved working capital improvements; however, there can be no
assurance that similar improvements can be achieved by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company recently
developed a price impact warehouse store format and during 1995 opened four of
these stores in the Las Vegas area operating under the name "PriceRite Grocery
Warehouse." Management believes that a number of the Company's markets are
underserved by price impact warehouse stores and that there are substantial
opportunities for expansion of the Company's PriceRite format through the
conversion of existing stores and the opening of new stores. Yucaipa, through
its management of other supermarket companies, has extensive experience in
expanding and profitably operating price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation of
the Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of its remaining real estate assets in
California which consist of 18 non-operating stores and excess land. The
Company would use the net cash proceeds from the California Asset Disposition
to either reinvest in the Company's business or
4
<PAGE>
reduce indebtedness incurred in connection with the Transactions. At December
30, 1995, the aggregate book value of such assets was approximately $260
million. If this strategy is adopted, as anticipated, the Company would record
a pre-tax charge to earnings, which is presently estimated to be approximately
$125 million (the "California Asset Disposition Charge") to reflect the
difference between the anticipated cash proceeds from the accelerated
dispositions and the Company's existing book values for such assets. See "Risk
Factors--Anticipated Charges to Earnings Following the Transactions."
THE TRANSACTIONS
The Merger. On January 29, 1996, Smith's and a wholly owned subsidiary of
Smith's ("Acquisition"), entered into a Recapitalization Agreement and Plan of
Merger (the "Recapitalization Agreement") with Smitty's and Yucaipa. Pursuant
to the terms of the Recapitalization Agreement, Smitty's will merge with
Acquisition, as a result of which Smitty's will become a wholly owned
subsidiary of Smith's. The consideration payable to the stockholders of
Smitty's in the Merger will consist of 3,038,888 shares of Class B Common Stock
of the Company.
Tender Offer. Smith's is offering to purchase 50% of its outstanding Class A
Common Stock and Class B Common Stock (collectively, the "Common Stock") for
$36.00 per share in cash in the Tender Offer. The shares issuable to the
stockholders of Smitty's will not be eligible to participate in the Tender
Offer. Smith's is also offering to purchase for cash certain outstanding
options to purchase Common Stock held by certain officers and employees of
Smith's for an aggregate purchase price estimated to be approximately $13.7
million.
Smith's Debt Refinancing and Preferred Stock Redemption. Smith's will repay
in full substantially all of its existing indebtedness ($667.1 million at
December 30, 1995), including all outstanding borrowings under its existing
revolving credit facilities, and will purchase approximately $1.0 million of
its outstanding Series I Preferred Stock.
Smitty's Debt Refinancing. At the time the Merger is consummated, the Company
will cause Smitty's and its subsidiary, Smitty's Super Valu, Inc. ("SSV"), to
repay in full certain existing indebtedness (approximately $34.9 million
principal amount at December 30, 1995), including all outstanding borrowings
under SSV's bank credit facility. In addition, Smitty's is offering to purchase
all of the $29.025 million principal amount at maturity (accreted value of
$18.4 million at December 30, 1995) of its Senior Discount Debentures due 2006
(the "Smitty's Debentures"), and SSV is offering to purchase all of the $50.0
million principal amount of its Senior Subordinated Notes due 2004 (the
"Smitty's Notes"). Smitty's and SSV will concurrently solicit consents from the
holders of such securities to certain amendments to the respective indentures
under which such securities were issued. The foregoing debt refinancing
transactions of Smitty's and SSV are referred to herein collectively as the
"Smitty's Refinancing."
The Offering, the Tender Offer, the purchase of certain management stock
options, the Series I Preferred Stock purchase, the Smith's debt refinancings
described above and the closing under a new senior credit facility (the "New
Credit Facility") to be provided to the Company are collectively referred to
herein as the "Recapitalization." The Recapitalization, the Merger and the
Smitty's Refinancing are collectively referred to herein as the "Transactions."
5
<PAGE>
The following table illustrates the pro forma sources and uses of funds to
consummate the Transactions, assuming the Transactions and the California
Disposition had been consummated as of December 30, 1995. Although management
believes the pro forma amounts estimated below are reasonable under the
circumstances, actual sources and uses may differ from those set forth below.
SOURCES AND USES
(dollars in millions)
<TABLE>
<CAPTION>
SOURCES USES
------- ----
<S> <C> <C> <C>
New Term Loans (a)...... $ 805.0 Purchase Smith's Common Stock............... $ 451.3
New Revolving Facility
(a)(b)................. 13.2 Purchase Smith's Management Options......... 13.7
Notes................... 575.0 Purchase Smith's Series I Preferred Stock... 1.0
California Disposition
Proceeds (b)........... 68.0 Repay Smith's Mortgage Notes................ 257.1
Repay Smith's Unsecured Notes............... 410.0
Repay Smith's Revolving Credit Facility (b). 68.0
Repay Smitty's Notes (c).................... 50.0
Repay Smitty's Debentures (c)............... 18.4
Repay Smitty's Bank Credit Facility......... 34.9
Debt Refinancing Premiums................... 56.8
Accrued Interest............................ 12.6
Fees and Expenses........................... 87.4
-------- --------
Total Sources........... $1,461.2 Total Uses.................................. $1,461.2
======== ========
</TABLE>
- --------
(a) The Company has obtained a commitment from Bankers Trust Company ("Bankers
Trust") and The Chase Manhattan Bank ("Chase Manhattan") for a new senior
credit facility that will provide up to $805 million aggregate principal
amount of term loans ("New Term Loans") and a $190 million revolving credit
facility (the "New Revolving Facility") which will be available for working
capital requirements and general corporate purposes. A portion of the New
Revolving Facility may be used to support letters of credit, approximately
$28 million of which are anticipated to be issued upon consummation of the
Transactions (the "Closing"). The New Credit Facility will be guaranteed by
all subsidiaries of the Company, including Smitty's. See "Description of
New Credit Facility."
(b) The information presented is derived from the Unaudited Pro Forma Financial
Statements contained elsewhere herein which reflect (i) the receipt of cash
proceeds from the California Divestiture and the assumed receipt of cash
proceeds from the sale of the Company's remaining California assets
pursuant to the California Asset Disposition, in an amount equal to the net
book value of such assets after giving effect to the California Asset
Disposition Charge; and (ii) the application of a portion of the cash
proceeds therefrom to repay (A) the Company's historical revolving credit
balances at December 30, 1995 ($68.0 million) and (B) $13.2 million of
indebtedness anticipated to be incurred under the New Revolving Facility in
connection with the consummation of the Transactions. Subsequent to
December 30, 1995, the Company has received net cash proceeds from the
California Divestiture of $67.2 million and expects to receive an
additional $10.6 million in proceeds from the California Divestiture
shortly after the Closing. The Company intends to use such additional
proceeds to reduce revolving loans under the New Revolving Facility. The
Company has not entered into any contracts relating to the California Asset
Disposition and there can be no assurance as to the timing or the amount of
net proceeds, if any, which the Company will actually receive from such
disposition. See "Unaudited Pro Forma Combined Financial Statements" and
"Business--The California Divestiture."
(c) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's
Refinancing. If all of the outstanding Smitty's Notes and Smitty's
Debentures are not tendered and accepted for purchase, the Company
anticipates that it would reduce other borrowings.
6
<PAGE>
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:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001................................................. %
2002................................................. %
2003................................................. %
2004 and thereafter.................................. 100.0%
</TABLE>
in each case plus accrued and unpaid interest to the
date of redemption.
In addition, on or prior to May 15, 1999, the Company
may, at its option, use the Net Cash Proceeds from
one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the principal amount of the
Notes originally issued, at a redemption price equal
to % of the principal amount thereof plus accrued
and unpaid interest to the date of redemption.
Ranking.................
The Notes will be senior subordinated unsecured
obligations of the Company and will be subordinated
in right of payment to all Senior Indebtedness (as
defined) of the Company, including the Company's
obligations under the New Credit Facility. At
December 30, 1995, on a pro forma basis after giving
effect to the Transactions and the California
Disposition, the aggregate outstanding amount of
Senior Indebtedness of the Company would have been
approximately $813.2 million, which amount excludes
any borrowings or amounts available to be borrowed
under the New Revolving Facility. The Notes will be
effectively subordinated to all existing and future
liabilities, including indebtedness of the Company's
subsidiaries. At December 30, 1995, on a pro forma
basis after giving effect to the Transactions and the
California Disposition, the Company's subsidiaries
would have had indebtedness and other liabilities
reflected on the Company's consolidated balance
sheet, including trade payables and accrued expenses
(but excluding guarantees of Senior Indebtedness), of
approximately $148.4 million.
Change of Control.......
Upon the occurrence of a Change of Control (as
defined), each holder will have the right to require
the Company to repurchase such holder's Notes at a
purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date
of repurchase.
7
<PAGE>
Certain Covenants.......
The indenture pursuant to which the Notes will be
issued (the "Indenture") will contain certain
covenants that, among other things, limit the ability
of the Company and its Restricted Subsidiaries (as
defined) to make restricted payments, incur
additional indebtedness, create liens, sell assets,
create dividend or other payment restrictions
affecting Restricted Subsidiaries, enter into
transactions with affiliates, consummate mergers or
certain other transactions or incur indebtedness
subordinated to any other indebtedness but senior to
the Notes and the ability of the Restricted
Subsidiaries to issue preferred stock.
The Company does not intend to apply for listing of the Notes on any national
securities exchange. See "Underwriting."
8
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth summary unaudited pro forma combined financial
data for the 52 weeks ended December 30, 1995, after giving effect to the (a)
Transactions and the application of the proceeds therefrom and (b) the
California Disposition and the retention of the anticipated proceeds therefrom
as cash (after reducing pro forma revolving credit balances to zero), in each
case as if they had occurred on January 1, 1995 with respect to the pro forma
operating and other data, and as of December 30, 1995, with respect to the pro
forma balance sheet data. Such pro forma information: (i) eliminates the
results of operations of the Company's California retail division and the
related assets and liabilities as of and for the 52 weeks ended December 30,
1995 from Smith's results of operations and balance sheet data as of and for
the 52 weeks ended December 30, 1995 and (ii) combines the operating results
and balance sheet data of Smith's, pro forma for the elimination of the
Company's California retail division and the related assets and liabilities, as
of and for the 52 weeks ended December 30, 1995 with the operating results and
balance sheet data of Smitty's as of and for the 52 weeks ended January 14,
1996. The pro forma financial data set forth below is not necessarily
indicative of the results that actually would have been achieved had such
transactions been consummated as of the dates indicated, or that may be
achieved in the future. The pro forma combined financial data does not reflect
(i) any of the net annual cost savings which management believes are achievable
by the end of the third full year of operations following the Merger, or (ii)
the anticipated costs expected to be incurred in connection with the
integration of operations in Arizona following the Merger. In addition, the
summary pro forma combined operating data does not reflect the California
Divestiture Charge, the California Asset Disposition Charge, an extraordinary
loss on extinguishment of debt, an anticipated charge relating to certain costs
expected to be incurred by Smith's in connection with the Merger, a potential
severance payment to the Chairman and Chief Executive Officer of the Company or
compensation expense in connection with the repurchase of certain management
stock options as part of the Recapitalization. See Note (g) to the Unaudited
Pro Forma Combined Statement of Operations. The following pro forma financial
data should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements of Smith's and Smitty's, and related notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS ENDED
DECEMBER 30, 1995(A)
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
OPERATING DATA:
Net sales............................................ $2,993.4
Gross profit......................................... 703.3
Operating, selling and administrative expenses....... 452.2
Depreciation and amortization........................ 89.9
Interest expense..................................... 141.7
Net income........................................... $ 3.8
Ratio of earnings to fixed charges(b)................ 1.06x
BALANCE SHEET DATA (END OF PERIOD):
Total assets......................................... $1,713.4
Total debt(c)........................................ 1,431.8
Redeemable preferred stock........................... 3.3
Common stockholders' equity (deficit)................ $ (121.6)
OTHER DATA:
Capital expenditures................................. $ 159.7
EBITDA (as defined)(d)(e)............................ $ 255.4
EBITDA margin(f)..................................... 8.53%
Ratio of EBITDA (as defined) to interest expense..... 1.80x
Ratio of total debt to EBITDA (as defined)........... 5.60x
</TABLE>
9
<PAGE>
- --------
(a) For purposes of the Summary Unaudited Pro Forma Combined Financial Data,
the Company has given effect to the California Asset Disposition as if each
of the relevant properties had been sold for a cash amount equal to its net
book value after giving effect to the California Asset Disposition Charge.
The proceeds of such assumed sales, together with the proceeds of the
California Divestiture, are reflected in the Company's pro forma cash
balances (net of pro forma revolving credit balances, which have been
eliminated) at December 30, 1995. INVESTORS ARE CAUTIONED THAT THE COMPANY
HAS NOT ENTERED INTO ANY CONTRACTS RELATING TO THE CALIFORNIA ASSET
DISPOSITION AND THAT THERE CAN BE NO ASSURANCE AS TO THE TIMING OR THE
AMOUNT OF NET PROCEEDS, IF ANY, WHICH THE COMPANY WILL ACTUALLY RECEIVE
FROM SUCH DISPOSITION.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor).
(c) Total debt includes long-term debt and current maturities of long-term
debt. As a result of the assumed application of a portion of the proceeds
of the California Disposition (see note (a) above) to eliminate pro forma
revolving credit balances, pro forma total debt at December 30, 1995 does
not reflect anticipated revolving credit facility borrowings upon
consummation of the Transactions of $13.2 million.
(d) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of a
company's ability to service debt and, with certain variations in
definition, is an indicator of compliance with various covenants in the
Company's debt agreements. However, EBITDA should not be construed as an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) or to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles)
and should not be construed as an indication of the Company's operating
performance or as a measure of liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For additional
information concerning the Company's historical cash flows, see "Selected
Historical Financial Data of Smith's" and the Consolidated Statements of
Cash Flows included elsewhere herein.
(e) Pro forma EBITDA (as defined) does not give effect to net annual cost
savings (as compared to such costs for the pro forma combined fiscal year
ended December 30, 1995) which management believes are achievable by the
end of the third full year of combined operations following the Merger. The
sum of the components of the estimated annual cost savings exceeds $25
million; however, management's estimate of $25 million in net annual cost
savings gives effect to an offsetting adjustment to reflect its expectation
that a portion of the savings will be reinvested in the Company's
operations. The estimates of potential cost savings resulting from the
Merger contained in this Prospectus are forward looking statements that
involve risks and inherent uncertainties that could cause actual net annual
cost savings to differ materially from those projected. See "Risk Factors--
Ability to Achieve Anticipated Cost Savings." The sum of the Company's pro
forma EBITDA (as defined) ($255.4 million) and the full amount of the
estimated net annual cost savings to be realizable by the end of the third
full year of operations following the Merger ($25.0 million) is $280.4
million. See "--Operating Strategy--Realize Operating Synergies and Cost
Savings Resulting from the Merger."
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth summary historical financial data of Smith's
for the five fiscal years ended December 30, 1995, which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of Smith's and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7
Gross profit........... 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative
expenses.............. 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization.............. 50.5 67.8 82.2 94.5 105.0
Interest expense....... 30.3 36.1 44.6 53.7 60.5
Restructuring
charges(a)............ -- -- -- -- 140.0
Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5)
Ratio of earnings to
fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x --
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt(c).......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(d)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included elsewhere
herein.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor). For the 52 weeks ended December 30, 1995, the Company's
earnings were inadequate to cover fixed charges by $69.8 million. However,
such earnings include non-cash charges of $105.4 million, primarily
consisting of depreciation and amortization, and restructuring charges of
$140.0 million.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of a
company's ability to service debt. However, EBITDA should not be construed
as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of Smith's
operating performance or as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
For additional information concerning the Company's historical cash flows,
see "Selected Historical Financial Data of Smith's" and the Consolidated
Statements of Cash Flows included elsewhere herein.
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
11
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other matters described in this Prospectus, before purchasing
the securities being sold in the Offerings.
LEVERAGE AND DEBT SERVICE
Following the consummation of the Transactions, the Company will be highly
leveraged. At December 30, 1995, pro forma for the Transactions and the
California Disposition, the Company's total debt and stockholders' equity
(deficit) would have been $1,431.8 million and $(121.6) million, respectively,
compared to actual debt and stockholders' equity of $746.2 million and $416.7
million, respectively, on such date. The Company would also have had
additional borrowing availability under the New Revolving Facility on a pro
forma basis, subject to the borrowing conditions contained therein. In
addition, as of December 30, 1995, after giving effect to the Transactions and
the California Disposition, scheduled payments under net operating leases of
the Company and its subsidiaries for the twelve months following the Merger
would have been approximately $36.9 million. The Company's ability to make
scheduled payments of the principal of, or interest on, or to refinance its
indebtedness (including the Notes) and to make scheduled payments under its
operating leases depends on its future performance, which is subject to
economic, financial, competitive and other factors beyond its control.
Based upon the current level of operations and anticipated cost savings and
future growth, the Company believes that its cash flow from operations,
together with borrowings under the New Revolving Facility and its other
sources of liquidity, will be adequate to meet its anticipated requirements
for working capital, capital expenditures, lease payments, interest payments
and scheduled principal payments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." There can be no assurance, however, that the Company's business
will continue to generate cash flow at or above current levels or that
anticipated cost savings or future growth can be achieved. In addition, no
assurances can be given as to the timing of, or the net proceeds to be
realized upon, the California Asset Disposition and, therefore, as to the
timing or amount of receipts thereof as reflected in the Unaudited Pro Forma
Combined Financial Statements. If the Company is unable to generate sufficient
cash flow from operations in the future to service its debt and make necessary
capital or other expenditures, or if its future cash flows are insufficient to
amortize all required principal payments out of internally generated funds,
the Company may be required to refinance all or a portion of its existing
debt, sell assets or obtain additional financing. There can be no assurance
that any such refinancing or asset sales would be possible or that any
additional financing could be obtained, particularly in view of the Company's
high level of debt following the Transactions and the fact that substantially
all of its assets will be pledged to secure borrowings under the New Credit
Facility and other secured obligations.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following:
(a) the Company will have significant cash requirements to service debt,
reducing funds available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (b) the Company's leveraged position will
increase its vulnerability to competitive pressures; (c) the financial
covenants and other restrictions contained in the New Credit Facility and
other agreements relating to the Company's indebtedness and in the Indenture
will require the Company to meet certain financial tests and will restrict its
ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, preferred or common stock; and (d) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes will be limited. The Company's continued growth depends, in
part, on its ability to continue its expansion and store conversion efforts,
and therefore its inability to finance capital expenditures through borrowed
funds or otherwise could have a material adverse effect on the Company's
future operations. Moreover, any default under the documents governing the
indebtedness of the Company could have a significant adverse effect on the
market value of the Notes.
The Company's capital structure immediately after the Transactions will
include a significant amount of floating rate indebtedness, causing the
Company to be significantly more sensitive to prevailing interest rates than
has historically been the case. The Company intends to enter into interest
rate protection agreements which, for the duration of such agreements, will
effectively provide fixed rates of interest or ceiling rates of interest on
12
<PAGE>
a portion of such floating rate indebtedness. There can be no assurance that
the Company will be able to enter into such agreements on favorable terms. See
"Description of New Credit Facility." In addition, following the Transactions,
the Company's blended average rates of interest are anticipated to be higher
than the rates of interest on the Company's indebtedness outstanding
immediately prior to the Transactions.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Management of the Company has estimated that approximately $25 million of
annualized net cost savings (as compared to such costs for the pro forma
combined fiscal year ended December 30, 1995) can be achieved over a three-
year period as a result of integrating the Arizona operations of Smith's and
Smitty's. The estimates of potential cost savings contained in this Prospectus
are forward looking statements that are inherently uncertain. Actual cost
savings, if any, could differ materially from those projected. All of these
forward looking statements are based on estimates and assumptions made by
management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict; therefore, undue reliance
should not be placed upon such estimates. There can be no assurance that the
savings anticipated in these forward looking statements will be achieved. The
following important factors, among others, could cause the Company not to
achieve the cost savings contemplated herein (principally those set forth in
"Summary--Operating Strategy" and "Business-- Operating Strategy") or
otherwise cause the Company's results of operations to be adversely affected
in future periods: (i) continued or increased competitive pressures from
existing competitors and new entrants, including price-cutting strategies;
(ii) unanticipated costs related to the Transactions and the integration
strategy; (iii) loss or retirement of key members of management or the
termination of the Management Services Agreement with Yucaipa; (iv) inability
to negotiate more favorable terms with suppliers or to improve working capital
management; (v) increases in interest rates or the Company's cost of borrowing
or a default under any material debt agreements; (vi) inability to develop new
stores in advantageous locations or to successfully convert existing stores;
(vii) prolonged labor disruption; (viii) deterioration in general or regional
economic conditions; (ix) adverse state or federal legislation or regulation
that increases the costs of compliance, or adverse findings by a regulator
with respect to existing operations; (x) loss of customers as a result of the
conversion of store formats; (xi) adverse determinations in connection with
pending or future litigations or other material claims against the Company;
(xii) inability to achieve future sales levels or other operating results that
support the cost savings, and (xiii) the unavailability of funds for capital
expenditures. Many of such factors are beyond the control of the Company. In
addition, there can be no assurance that unforeseen costs and expenses or
other factors will not offset the projected cost savings in whole or in part.
ANTICIPATED CHARGES TO EARNINGS FOLLOWING THE TRANSACTIONS
Upon consummation of the Transactions, the Company anticipates that it would
record charges to earnings in connection with (i) the adoption of a strategy
to accelerate the disposition of certain real estate assets in California
pursuant to the California Asset Disposition, (ii) the payment of certain
refinancing premiums and the write-off of certain debt issuance costs, (iii)
the purchase of certain management stock options, and (iv) the integration of
its Arizona operations with Smitty's. As a result of the foregoing, the
Company anticipates that it would record a substantial charge to earnings for
the quarter in which the Transactions are consummated. The Company currently
estimates that the total charge for all such items would be approximately $220
million (pre-tax). However, such estimate is based on information available as
of the date of this Prospectus and the actual total charge may differ
materially from such estimate if the actual information available to the
Company at the time the charge is recorded varies from the information
currently available. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores and the newer "alternative format" food stores, including warehouse-
style supermarkets, club stores, deep discount drug stores and "supercenters."
The Company's competitors continue to open new stores in the Company's
existing markets. In addition, new competitors have entered the Company's
markets in
13
<PAGE>
the past and could do so in the future. Supermarket chains generally compete
on the basis of price, location, quality of products, service, product variety
and store condition. The Company regularly monitors its competitors' prices
and adjusts its prices and marketing strategy as management deems appropriate
in light of existing conditions. Some of the Company's competitors have
greater financial resources than the Company and could use those resources to
take steps which could adversely affect the Company's competitive position.
The Company's ability to respond to competitive pressures could be adversely
affected by its highly leveraged financial condition. See "Business--
Competition."
CONTROL OF THE COMPANY
The Company's Class A Common Stock and Series I Preferred Stock are each
entitled to ten votes per share and the Company's Class B Common Stock is
entitled to one vote per share. Upon consummation of the Transactions, members
of the Smith Group (as defined) are expected to have beneficial ownership, in
the aggregate, of approximately 24.5% of the outstanding Common Stock and
31.6% of the outstanding Series I Preferred Stock of the Company, representing
approximately 41.8% of the aggregate voting power of the Company's capital
stock, and certain affiliates of Yucaipa will have beneficial ownership of
approximately 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
<PAGE>
CONTINGENT LIABILITIES RELATING TO CALIFORNIA DIVESTITURE
In connection with closing stores and otherwise redeploying assets, the
Company has assigned leases and subleased stores and other facilities at
various times, including the sublease to Ralphs of the Company's Riverside,
California distribution center and dairy plant and the assignment or sublease
of 10 stores to various supermarket companies (including nine to Ralphs) in
connection with the California Divestiture. Since the Company will generally
remain either primarily or secondarily liable for the underlying lease
obligations with respect to these stores and other facilities, the Company has
a contingent liability to the extent the Company's sublessees or assignees
default in the performance of their obligations under their respective
sublease or underlying lease. See "Business--California Divestiture."
FRAUDULENT CONVEYANCE RISKS
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Notes in
favor of other existing or future creditors of the Company.
Proceeds of the Offering are being used, in part, to purchase shares of
Smith's Common Stock in the Tender Offer, to redeem options to purchase Common
Stock held by Smith's management, and to purchase shares of Smith's Series I
Preferred Stock. If a court in a lawsuit on behalf of any unpaid creditor of
the Company or a representative of the Company's creditors were to find that,
at the time the Company issued the Notes, the Company (x) intended to hinder,
delay or defraud any existing or future creditor or contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (y) did not receive fair consideration in good faith or
reasonably equivalent value for issuing the Notes and the Company (i) was
insolvent, (ii) was rendered insolvent by reason of such stock purchases and
redemptions, (iii) was engaged or about to engage in a business or transaction
for which its remaining assets constituted unreasonably small capital to carry
on its business, or (iv) intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, such court could
void the Notes and void such transactions. Alternatively, in such event,
claims of the holders of Notes could be subordinated to claims of other
creditors of the Company. The Company may be viewed as insolvent at the time
of or as a result of the Tender Offer, redemption of options and preferred
stock, if the fair value of its assets does not exceed its probable
liabilities at the time of, or following such transactions.
Based upon financial and other information currently available to it,
management of the Company believes that the Notes are being incurred for
proper purposes and in good faith. Certain courts have held, however, that a
company's purchase of its own capital stock does not constitute reasonably
equivalent value or fair consideration for incurring indebtedness. By
extension, the redemption of options to purchase capital stock of a company
may also be viewed as not constituting reasonably equivalent value or fair
consideration to the company. The Company believes that it (i) is solvent and
will continue to be solvent after issuing the Notes notwithstanding the fact
that the Company, after completion of the Tender Offer, redemption of options
and redemption of preferred stock, will have a negative net worth under
generally accepted accounting principles, because the Company believes that
the fair value of the Companys' assets exceeds and will exceed its probable
liabilities, (ii) will have sufficient capital for carrying on the business it
intends to conduct after such issuance, and (iii) will be able to pay its
debts as they mature. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." There
can be no assurance, however, that a court would concur with such beliefs and
positions.
It is a condition to the consummation of the Tender Offer that the Company
shall have received an opinion from an independent valuation firm (i) as to
the value of the Company's assets and liabilities, after giving effect to the
consummation of the Transactions, and (ii) that the fair value of the
Company's assets would exceed its total stated liabilities and identified
contingent liabilities both before and after giving effect to the Transactions
by at least the aggregate par value of its issued capital stock. Houlihan,
Lokey, Howard & Zukin, Inc. has been retained by the Company to deliver such
an opinion.
15
<PAGE>
SUBORDINATION OF THE NOTES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Notes will be subordinated to the prior
payment in full of all existing and future Senior Indebtedness, including
indebtedness under the New Credit Facility. As of December 30, 1995, on a pro
forma basis after giving effect to the Transactions and the California
Disposition, the aggregate outstanding amount of Senior Indebtedness of the
Company would have been approximately $813.2 million, which amount excludes
any borrowings or amounts available to be borrowed under the New Revolving
Facility. In the event of the bankruptcy, liquidation, dissolution,
reorganization or other winding up of the Company, the assets of the Company
will be available to pay obligations on the Notes only after all Senior
Indebtedness has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on any or all of the Notes. In addition, under
certain circumstances, the Company may not pay principal of, premium, if any,
or interest on, or any other amounts owing in respect of, the Notes, or
purchase, redeem or otherwise retire the Notes, if a payment default or a non-
payment default exists with respect to certain Senior Indebtedness and, in the
case of a non-payment default, a payment blockage notice has been received by
the Trustee (as defined). See "Description of the Notes--Subordination."
The Notes will be effectively subordinated to all secured indebtedness of
the Company and its subsidiaries. The borrowings and obligations under the New
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiaries. At December 30, 1995, on a pro forma basis after giving
effect to the Transactions and the California Disposition, the Company would
have had approximately $813.2 million aggregate amount of secured indebtedness
and other obligations outstanding, which amount excludes any borrowings or
amounts available to be borrowed under the New Revolving Facility.
The Notes will also be effectively subordinated to all existing and future
liabilities, including indebtedness, of the Company's subsidiaries. The
obligations of the Company under the New Credit Facility will be guaranteed,
jointly and severally, by the Company's subsidiaries, including Smitty's. At
December 30, 1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the Company's subsidiaries would
have had indebtedness and other liabilities reflected on the Company's
consolidated balance sheet, including trade payables and accrued expenses (but
excluding guarantees of Senior Indebtedness), of approximately $148.4 million.
Claims of creditors of the Company's subsidiaries, including trade creditors,
will generally have priority as to the assets of such subsidiaries over the
claims of the Company and the holders of the Company's indebtedness, including
the Notes.
ABSENCE OF ESTABLISHED MARKET FOR THE NOTES
There is no established market for the Notes and there can be no assurance
as to the liquidity of any markets that may develop for the Notes, the ability
of holders of the Notes to sell their Notes, or the price at which holders
would be able to sell their Notes. Future trading prices of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes. However, the Underwriters are not obligated to do so and
any market-making may be discontinued at any time, by any or all of them,
without notice.
16
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated pro forma capitalization of
the Company at December 30, 1995, giving effect to the Transactions and the
California Disposition. This table should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements and the historical
consolidated financial statements of Smith's and Smitty's, and the related
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Current portion of long-term debt:
New Term Loans.................................... $ 12.3
Other indebtedness................................ 1.4
--------
Total current portion of long-term debt......... $ 13.7
========
Long-term debt:
New Term Loans(a)................................. $ 792.7
New Revolving Facility(a)(b)...................... --
Senior Subordinated Notes......................... 575.0
Other indebtedness................................ 50.4
--------
Total long-term debt............................ 1,418.1
--------
Redeemable preferred stock, $.01 par value.......... 3.3
Common stockholders' equity:
Common Stock, $.01 par value(c)................... 0.2
Additional paid-in capital........................ 164.9
Retained earnings (deficit)....................... (286.7)
--------
Total common stockholders' equity (deficit)..... (121.6)
--------
Total capitalization.......................... $1,299.8
========
</TABLE>
- --------
(a) The Company has obtained a commitment from Bankers Trust and Chase
Manhattan for the New Credit Facility that will provide up to $805 million
aggregate principal amount of New Term Loans and a $190 million New
Revolving Facility which will be available for working capital
requirements and general corporate purposes. A portion of the New
Revolving Facility may be used to support letters of credit, approximately
$28 million of which are anticipated to be issued at Closing. The New
Credit Facility will be guaranteed by all subsidiaries of the Company,
including Smitty's. See "Description of New Credit Facility."
(b) Assumes that all outstanding Smitty's Notes and Smitty's Debentures are
tendered and accepted for purchase in connection with the Smitty's
Refinancing. If all of the outstanding Smitty's Notes and Smitty's
Debentures are not tendered and accepted for purchase, the Company
anticipates that it would reduce other borrowings. As a result of the
assumed application of a portion of the proceeds of the California
Disposition to eliminate pro forma revolving credit balances, pro forma
total debt at December 30, 1995 does not reflect anticipated revolving
credit facility borrowings upon consummation of the Transactions of $13.2
million.
(c) Does not reflect (i) management options to purchase up to an aggregate of
808,250 shares of Class B Common Stock expected to be outstanding upon
consummation of the Transactions or (ii) Warrants to purchase shares of
Class C Common Stock of the Company (at an initial exercise price of
$50.00 per share) to be issued to Yucaipa upon consummation of the
Transactions. See "Certain Relationships and Related Transactions."
17
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of the
Company for the 52 weeks ended December 30, 1995 give effect to (a) the
Transactions and the application of the proceeds therefrom and (b) the
California Disposition and the retention of the anticipated proceeds therefrom
as cash (after reducing pro forma revolving credit balances to zero), in each
case as if such transactions occurred on January 1, 1995, with respect to the
pro forma operating and other data, and as of December 30, 1995, with respect
to the pro forma balance sheet data. Such pro forma information: (i)
eliminates the results of operations of the Company's California retail
division and the related assets and liabilities as of and for the 52 weeks
ended December 30, 1995 from Smith's results of operations and balance sheet
data as of and for the 52 weeks ended December 30, 1995 and (ii) combines the
operating results and balance sheet data of Smith's, pro forma for the
elimination of the Company's California retail division and the related assets
and liabilities, as of and for the 52 weeks ended December 30, 1995 with the
operating results and balance sheet data of Smitty's as of and for the 52
weeks ended January 14, 1996.
As indicated above, the Unaudited Pro Forma Combined Financial Statements
give effect to the California Divestiture and the California Asset Disposition
and the retention of the anticipated proceeds therefrom as cash. In connection
with the California Divestiture, Smith's entered into agreements to sell or
lease 16 stores and related equipment and three non-operating properties.
These transactions are expected to generate net cash proceeds of
$77.8 million, of which $67.2 million has been received to date. The remaining
18 stores in California have been closed. In connection with the California
Divestiture, the Company recorded the $140 million (pre-tax) California
Divestiture Charge for the year ended December 30, 1995 and classified the
assets to be leased or sold as "assets held for sale." The California
Divestiture Charge reflected (i) a provision for anticipated future lease
obligations, (ii) the anticipated cost to the Company of closing its
California stores and distribution center (primarily termination payments and
inventory), and (iii) certain asset valuation adjustments. The asset valuation
adjustments included in the California Divestiture Charge reflected the
reduction in net realizable values for the equipment in all of the Company's
California stores and distribution center and for the land and buildings
associated with those properties being sold or leased. Pursuant to the
California Asset Disposition, following the consummation of the Transactions
the Company intends to accelerate the disposition of its 18 non-operating
stores and its excess land in California. As a result of the adoption of this
strategy, the Company intends to record a pre-tax charge to earnings of
approximately $125 million (the California Asset Disposition Charge) to
reflect the difference between the anticipated cash proceeds from the
accelerated dispositions and the Company's existing book values for such
assets. For purposes of the Unaudited Pro Forma Combined Balance Sheet, the
Company has given effect to the California Asset Disposition as if each of the
relevant properties had been sold for a cash amount equal to its net book
value after giving effect to the California Asset Disposition Charge. The
proceeds of such assumed sales, together with the proceeds of the California
Divestiture, are reflected in the Company's pro forma cash balances (net of
pro forma revolving credit borrowings, which have been eliminated) at December
30, 1995. INVESTORS ARE CAUTIONED THAT THE COMPANY HAS NOT ENTERED INTO ANY
CONTRACTS RELATING TO THE CALIFORNIA ASSET DISPOSITION AND THAT THERE CAN BE
NO ASSURANCE AS TO THE TIMING OR THE AMOUNT OF NET PROCEEDS, IF ANY, WHICH THE
COMPANY WILL ACTUALLY RECEIVE FROM SUCH DISPOSITION.
The pro forma adjustments to give effect to the California Disposition and
the Transactions are based upon currently available information and upon
certain assumptions that management believes are reasonable. The statement of
results of operations used to derive the adjustments to eliminate the
California results of operations differs from a complete statement in that
allocations for interest expense and certain services provided by the Company,
including, but not limited to, portions of legal assistance, employee benefits
administration, treasury, accounting, auditing, tax functions and real estate,
have not been made. The Merger will be accounted for by the Company as a
purchase of Smitty's by Smith's and Smitty's assets and liabilities will be
recorded at their estimated fair market values at the date of the Merger. The
adjustments included in the Unaudited Pro Forma Combined Financial Statements
represent the Company's preliminary determination of these adjustments based
upon available information. There can be no assurance that the actual
adjustments will not differ significantly from the pro forma adjustments
reflected in the pro forma financial information. The Unaudited Pro Forma
Combined Financial Statements are not necessarily indicative of either future
results of operations or results that
18
<PAGE>
might have been achieved if the foregoing transactions had been consummated as
of the indicated dates. The Unaudited Pro Forma Combined Financial Statements
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements of Smith's and Smitty's, together with the related notes
thereto, included elsewhere in this Prospectus.
The Unaudited Pro Forma Combined Financial Statements do not reflect (i) any
of the net annual cost savings which management believes are achievable by the
end of the third full year of operations following the Merger, or (ii) the
anticipated costs to be incurred in connection with the integration of
operations in Arizona following the Merger. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview." The
Unaudited Pro Forma Combined Statement of Operations included herein does not
reflect the California Divestiture Charge, the California Asset Disposition
Charge, an extraordinary loss on extinguishment of debt, an anticipated charge
relating to certain costs expected to be incurred by Smith's in connection
with the Merger, a potential severance payment to the Chairman and Chief
Executive Officer of the Company or compensation expense in connection with
the repurchase of certain management stock options as part of the
Recapitalization. See Note (g) to the Unaudited Pro Forma Combined Statement
of Operations.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------------------
JANUARY 14, ADJUSTMENTS
DECEMBER 30, 1995 1996 FOR PRO FORMA
---------------------------------------------- ------------ CALIFORNIA COMBINED FOR
SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA
(HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION
(AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
------------ --------------- ----------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 3,083.7 $(674.6) $ 2,409.1 $ 584.3 $ $ 2,993.4
Cost of goods sold...... 2,386.7 (516.2) 1,870.5 419.6 2,290.1
---------- ------- ---------- --------- ------ ----------
697.0 (158.4) 538.6 164.7 703.3
Expenses:
Operating, selling and
administrative....... 461.4 (145.6) 315.8 136.0 0.4 (b) 452.2
Depreciation and
amortization......... 105.0 (27.0) 78.0 12.3 (1.3)(c)
0.9 (d) 89.9
Restructuring charges. 140.0 (140.0)
Interest.............. 60.0 60.0 18.4 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
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(a) Reflects the elimination of the 1995 operating results for the California
stores, excess real estate and distribution center which were sold, leased
or closed, and the reversal of the restructuring charge recorded, in
connection with the California Divestiture and the anticipated sale of the
Company's remaining California real estate pursuant to the California
Asset Disposition, but does not reflect the California Asset Disposition
Charge of $125 million (pre-tax) which is anticipated to be recorded in
connection with the adoption of a strategy to dispose of such remaining
California assets following the consummation of the Transactions.
(b) Represents fees payable to Yucaipa pursuant to the Management Services
Agreement ($1.0 million) and the elimination of the historical Yucaipa
management fees ($0.6 million) paid by Smitty's. See "Certain
Relationships and Related Transactions--Management Services Agreement."
(c) Represents a reduction in depreciation expense associated with the $14.1
million write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
(d) Reflects the amortization of excess costs over net assets acquired in the
Merger ($2.0 million) and the elimination of Smitty's historical
amortization ($1.1 million). Amortization has been allocated on the
straight line basis over a period of 40 years.
(e) The following table presents a reconciliation of pro forma interest
expense and amortization of debt issuance costs:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Interest expense:
Smitty's.......................................... $ 18.4
Pro forma Smith's................................. 60.0
------
78.4
------
Plus: Interest on:
New Term Loans.................................... 71.5
Bank fees......................................... 0.3
Notes............................................. 63.3
Less: Interest on:
Old bank term loans:
Pro forma Smith's............................... (59.5)
Smitty's........................................ (3.1)
Bank fees......................................... (0.4)
Smitty's Notes.................................... (6.5)
Accretion of Smitty's Debentures.................. (2.3)
------
Pro forma adjustment............................... 63.3
------
Pro forma interest expense.......................... $141.7
======
Historical amortization of debt issuance costs...... $ 1.4
Plus:
Financing fees--New Credit Facility............... 7.2
Financing fees--Notes............................. 3.0
Less:
Historical financing costs:....................... (1.4)
------
Pro forma adjustment............................... 8.8
------
Pro forma amortization of debt issuance costs....... $ 10.2
======
</TABLE>
(f) The pro forma adjustment to income tax benefit is based upon an assumed
blended rate of 39% applied to the pro forma net loss adjusted for
permanent differences between book and tax income. The deferred tax asset
recognized in the Unaudited Pro Forma Combined Financial Statements is
more likely than not to be realized due to the expected future reversal of
taxable temporary differences and the existence of taxable income in each
of the prior three carryback years available.
(g) The Unaudited Pro Forma Statement of Operations does not reflect the
California Asset Disposition Charge, the California Divestiture Charge or
costs related to (i) expenses to be incurred in connection with the
purchase of certain management stock options as part of the
Recapitalization which are estimated to be $12.5 million, (ii) the
integration of the Company's operations which are estimated to be $15.0
million over a two-year period and (iii) a potential severance payment to
the Chairman and Chief Executive Officer of the Company (definitive
agreements with respect to which have not yet been reached). See
"Business--Operating Strategy" and "Certain Relationships and Related
Transactions--CEO's Severance Discussions." The unaudited pro forma
results of operations also does not include an extraordinary item for the
loss on extinguishment of debt of $42.5 million, net of $27.2 million
income tax benefit.
(h) Net income (loss) per common share has been computed using the weighted
average number of shares of Smith's Common Stock outstanding after giving
effect to the issuance of 3,038,888 shares of Class B Common Stock of the
Company to the stockholders of Smitty's as consideration in the Merger and
the purchase of 50% of the outstanding Smith's Common Stock (excluding
shares issuable in the Merger) in the Tender Offer. Common stock
equivalents in the form of stock options do not have an impact on the
weighted average number of common shares.
21
<PAGE>
(i) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor).
(j) EBITDA (as defined) represents loss before income taxes, plus interest
expense, depreciation and amortization, LIFO provision and restructuring
charges. EBITDA is a widely accepted financial indicator of a company's
ability to service debt and, with certain variations in definition, is an
indicator of compliance with various covenants in the Company's debt
agreements. However, EBITDA should not be construed as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles) or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles)
and should not be construed as an indication of the Company's operating
performance or as a measure of liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The following table presents a reconciliation of pro forma EBITDA (as
defined):
<TABLE>
<CAPTION>
52 WEEKS ENDED
DECEMBER 30, 1995
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
EBITDA (as defined):
Pro forma Smith's EBITDA (as defined)............. $226.8
Historical Smitty's EBITDA (as defined)........... 29.0
Less: Pro forma adjustments......................... (0.4)
------
Pro forma EBITDA (as defined)....................... $255.4
======
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------------------------
JANUARY 14, ADJUSTMENTS
DECEMBER 30, 1995 1996 FOR PRO FORMA
---------------------------------------------- ------------ CALIFORNIA COMBINED FOR
SMITH'S ADJUSTMENTS FOR PRO FORMA SMITH'S SMITTY'S DISPOSITION CALIFORNIA
(HISTORICAL) CALIFORNIA FOR CALIFORNIA (HISTORICAL) AND DISPOSITION
(AUDITED) DIVESTITURE(A) DIVESTITURE (UNAUDITED) TRANSACTIONS AND TRANSACTIONS
------------ASSETS--------------- ----------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents........... $ 16.1 $ $ 16.1 $ 11.5 $ 82.7 (b)(c) $ 110.3
Rebates and accounts
receivable............ 23.8 (5.0) 18.8 9.3 28.1
Inventories............ 395.0 (76.0) 319.0 56.7 1.0 (d) 376.7
Prepaid expenses and
deposits.............. 21.3 (2.0) 19.3 3.3 22.6
Refundable income
taxes................. 1.9 1.9
Deferred tax assets.... 23.9 13.1 37.0 18.0 (e) 55.0
Assets held for sale... 125.0 (125.0)
-------- ------- -------- ------ ------- --------
Total current assets. 605.1 (194.9) 410.2 82.7 101.7 594.6
Property and equipment:
Land................... 276.6 276.6 18.6 (128.3)(c) 166.9
Building............... 610.0 610.0 50.6 (107.2)(c)(f) 553.4
Leasehold
improvements.......... 55.8 55.8 9.8 (20.2)(c)(f) 45.4
Furniture and
equipment............. 509.5 509.5 69.9 (27.9)(c)(f) 551.5
-------- ------- -------- ------ ------- --------
Less allowances for
depreciation and
amortization......... (390.9) (390.9) (14.1) 23.3 (c)(f) (381.7)
-------- ------- -------- ------ ------- --------
Net property and
equipment........... 1,061.0 1,061.0 134.8 (260.3) 935.5
Goodwill, net........... 31.5 46.7 (g) 78.2
Other assets............ 20.1 (4.6) 15.5 11.0 78.6 (h)(i) 105.1
-------- ------- -------- ------ ------- --------
$1,686.2 $(199.5) $1,486.7 $260.0 $ (33.3) $1,713.4
======== ======= ======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts
payable............... $ 214.2 $ (42.0) $ 172.2 $ 39.6 $ 0.0 $ 211.8
Accrued sales and
other taxes and other
liabilities........... 50.7 (12.0) 38.7 12.0 (12.6)(j)
10.0 (k) 48.1
Accrued payroll and
related benefits...... 97.5 (32.0) 65.5 19.2 84.7
Current maturities of
long-term debt........ 20.9 20.9 6.2 (13.4)(l) 13.7
Current maturities of
Redeemable Preferred
Stock................. 1.0 1.0 (1.0)(m)
Accrued restructuring
costs................. 58.0 (58.0)
-------- ------- -------- ------ ------- --------
Total current
liabilities......... 442.3 (144.0) 298.3 77.0 (17.0) 358.3
Long-term debt, less
current maturities..... 725.3 (28.6) 696.7 139.8 611.4 (n)
(39.4)(c)
(0.9)(n)
4.6 (i)
13.4 (l)
(7.5)(o) 1,418.1
Accrued restructuring
costs, less current
portion................ 40.0 (40.0)
Deferred income taxes... 58.6 13.1 71.7 13.8 (27.2)(p)
(30.7)(e) 27.6
Other liabilities....... 20.2 7.5 (o) 27.7
Redeemable Preferred
Stock, less current
maturities............. 3.3 3.3 3.3
Common Stockholders'
Equity:
Convertible Class A
Common Stock........... 0.1 0.1 0.1
Class B Common Stock.... 0.2 0.2 (0.1)(q) 0.1
Additional paid-in
capital................ 285.2 285.2 11.0 (11.0)(r)
(165.8)(q)
45.5 (s) 164.9
Retained earnings(t).... 238.0 238.0 (1.8) (35.2)(u)
(405.9)(q)
(76.3)(e)
(7.3)(v)
1.8 (r) (286.7)
-------- ------- -------- ------ ------- --------
523.5 523.5 9.2 (654.3) (121.6)
Less cost of common
stock in the treasury.. (106.8) (106.8) (464.9)(q)
571.7 (q)
-------- ------- -------- ------ ------- --------
416.7 416.7 9.2 (547.5) (121.6)
-------- ------- -------- ------ ------- --------
$1,686.2 $(199.5) $1,486.7 $260.0 $ (33.3) $1,713.4
======== ======= ======== ====== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects the sale of the California stores and other related assets,
excess real estate and distribution center in connection with the
California Divestiture. The Company has received $67.2 million subsequent
to December 30, 1995 and expects to receive an additional $10.6 million
shortly after the consummation of the Transactions. The net proceeds of
such sale is reflected as a reduction of the historical revolving credit
balance ($28.6 million) and payment of certain liabilities in the
Company's Unaudited Pro Forma Combined Balance Sheet at December 30, 1995.
(b) Reflects gross proceeds received from (i) New Term Loans, (ii) the New
Revolving Facility, and (iii) the Offering used to finance the
Transactions and pay related costs and fees as set forth in the following
table:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans...................................... $ 805.0
Notes............................................... 575.0
Repay Smitty's Notes................................ (50.0)
Discount on Smitty's Notes.......................... 0.4
Repay Smitty's Debentures........................... (18.4)
Discount on Smitty's Debentures..................... 0.5
Repay Smitty's Bank Credit Facility................. (34.9)
Repay Smith's Mortgage Notes and Other Indebtedness. (667.1)
Purchase existing Smith's Series I Preferred Stock.. (1.0)
Purchase 50% of Smith's Common Stock................ (451.3)
Purchase Management Options......................... (13.7)
Accrued Interest.................................... (12.6)
Fees and Expenses................................... (145.1)
-------
Use of California Proceeds (See Note (c)).......... $ 13.2
=======
</TABLE>
(c) Assumes the anticipated sale of the Company's remaining California real
estate pursuant to the California Asset Disposition. Also reflects the
California Asset Disposition Charge of $125 million (pre-tax) in
connection with the adoption of a strategy to dispose of such remaining
California assets following the consummation of the Transactions.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Disposal of Property and Equipment
Land.............................................. $ 128.3
Buildings......................................... 104.0
Leasehold improvements............................ 19.6
Furniture and equipment........................... 17.6
-------
269.5
Depreciation and amortization..................... (9.2)
-------
Net book value of property and equipment.......... 260.3
Write-down of California assets to net realizable
value............................................ (125.0)
-------
Proceeds from California Asset Disposition........ 135.3
Reduction in historical revolving credit balance
................................................. (39.4)
Reduction of anticipated indebtedness under the
New Revolving Facility
(See Note (b))................................... (13.2)
-------
Cash provided by the California Asset Disposi-
tion........................................... $ 82.7
=======
</TABLE>
(d) Reflects the elimination of Smitty's historical LIFO reserve which adjusts
Smitty's inventory to reflect current estimated selling prices less costs
of disposal and a reasonable profit allowance for the acquiring company.
(e) Represents the $125 million California Asset Disposition Charge, tax
effected at 39% tax rate and the recognition of the related deferred tax
asset. The California Asset Disposition Charge reflects the write-down of
California assets, other than assets held for sale at December 30, 1995,
under the Company's strategy to accelerate the disposition of its 18 non-
operating stores and excess land in California following the consummation
of the Transactions.
(f) Reflects the write-off of accumulated depreciation and amortization which
adjusts Smitty's property and equipment to estimated fair market value.
24
<PAGE>
(g) Reflects the excess of costs over the fair value of net assets of Smitty's
acquired in connection with the Merger ($78.2 million) and the elimination
of Smitty's historical goodwill ($31.5 million). The purchase price for
Smitty's will be determined by reference to the trading price of the
Company's Class B Common Stock following the consummation of the Merger.
The purchase price and preliminary calculation of the excess of costs over
the fair value of net assets acquired is as follows:
<TABLE>
<S> <C>
Purchase Price:
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Smith's equity received in exchange for Smitty's
equity
with an assumed market value of $15.00/share...... $ 45.5
Fees and expenses.................................. 1.4
-------
Total purchase price............................... 46.9
Fair value of assets acquired...................... 229.5
Fair value of liabilities assumed.................. 260.8
-------
(31.3)
-------
Goodwill........................................... $ 78.2
=======
</TABLE>
(h) Reflects the debt issuance costs associated with the New Credit Facility
($52.5 million) and the Notes ($33.5 million). These amounts have been
capitalized as deferred financing costs.
(i) Reflects the elimination of deferred financing costs associated with the
Smitty's Bank Credit Facility ($1.8 million), the Smitty's Notes ($3.1
million), the Smitty's Debentures ($0.6 million), the Smith's Mortgage
Notes and Other Indebtedness ($1.9 million) and the write-off of an
interest rate swap agreement ($4.6 million), included in historical long-
term debt, to be refinanced in connection with the Merger.
(j) Reflects the payment of accrued interest on Smitty's Bank Credit Facility
($0.1 million), Smitty's Notes ($0.6 million) and Smith's Mortgage Notes
and Other Indebtedness ($11.9 million) to be repaid in connection with the
Merger.
(k) Represents severance payments and other costs associated with the
integration of Smith's and Smitty's.
(l) Reflects the repayment and cancellation of the current maturities of the
Smitty's Bank Credit Facility ($4.9 million) and Smith's Mortgage Notes
and Other Indebtedness ($20.8 million) and the recording of the current
maturities of the New Term Loans ($12.3 million).
(m) Reflects the retirement of 3,000,000 shares of Series I Preferred Stock.
(n) Reflects the repayment and cancellation of the Smitty's Bank Credit
Facility, the Smitty's Notes, the Smitty's Debentures, the Smith's
Revolving Credit Facility, the Smith's Mortgage Notes and Other
Indebtedness and records borrowings under the New Term Loans and New
Revolving Facility and the issuance of the Notes.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
New Term Loans..................................... $ 805.0
Notes.............................................. 575.0
Repay Smitty's Notes............................... (50.0)
Discount on Smitty's Notes ........................ 0.4
Repay Smitty's Debentures.......................... (18.4)
Discount on Smitty's Debentures ................... 0.5
Repay Smitty's Bank Credit Facility................ (34.9)
Repay Smith's Mortgage Notes and Other
Indebtedness...................................... (667.1)
-------
$ 610.5
=======
</TABLE>
(o) Represents a reclassification of $7.5 million of Smith's deferred
compensation and other long-term liabilities to conform to the pro forma
combined classification.
(p) Represents the deferred tax asset associated with the write-off of the
deferred debt issuance costs and the premium over book value on Smith's
and Smitty's debt to be refinanced. The deferred tax asset recognized in
the Unaudited Pro Forma Combined Financial Statements is more likely than
not to be realized due to the expected future reversal of taxable
temporary differences and the existence of taxable income in each of the
prior three carryback years available.
(q) Reflects redemption of 50% of Smith's outstanding Common Stock prior to
the Merger at $36.00 per share, the retirement of all treasury shares and
the purchase of certain outstanding management stock options.
(r) Reflects the elimination of Smitty's historical equity.
(s) Represents the issuance of 3,038,888 shares of Smith's Common Stock at an
assumed market value of $15.00 per share as consideration in the Merger.
(t) The Unaudited Pro Forma Combined Balance Sheet does not include (i)
certain costs related to the purchase of certain management stock options
as part of the Recapitalization which are estimated to be $12.5 million,
(ii) the integration of the Company's operations which are estimated to be
$15.0 million over a two-year period and (iii) a potential severance
payment to the Chairman and Chief Executive Officer of the Company
(definitive agreements with respect to which have not yet been reached).
See "Certain Relationships and Related Transactions--CEO's Severance
Discussions."
(u) Represents the premium over book value attributable to "make whole"
payments and other premiums payable in connection with the retirement of
Smith's Mortgage Notes and Other Indebtedness and the Smitty's Notes and
Debentures, net of 39% tax rate. The actual amount of such payments may
vary substantially based on the yields of certain U.S. Treasury debt
securities at the time such indebtedness is actually repaid.
(v) Represents the write-off of the historical deferred debt issuance costs of
Smith's and Smitty's related to its refinanced debt, net of 39% tax rate.
25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITH'S
The following table sets forth selected historical financial data of Smith's
for the five fiscal years ended December 30, 1995 which have been derived from
the financial statements of Smith's audited by Ernst & Young LLP, independent
auditors. The following information should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical consolidated financial statements of Smith's and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $2,217.4 $2,649.9 $2,807.2 $2,981.4 $3,083.7
Gross profit........... 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative ex-
penses................ 344.4 419.7 430.3 440.8 461.4
Depreciation and amor-
tization.............. 50.5 67.8 82.2 94.5 105.0
Interest expense....... 30.3 36.1 44.6 53.7 60.5
Restructuring
charges(a)............ -- -- -- -- 140.0
Net income (loss)...... $ 45.1 $ 53.7 $ 45.8 $ 48.8 $ (40.5)
Ratio of earnings to
fixed charges(b)...... 3.02x 3.06x 2.55x 2.18x --
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets........... 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt(c).......... 395.4 612.7 725.5 718.9 746.2
Redeemable preferred
stock................. 8.5 7.5 6.5 5.4 4.3
Common stockholders'
equity................ $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
OTHER DATA:
Stores open at end of
period(d)............. 109 119 129 137 154
Capital expenditures... $ 281.6 $ 288.0 $ 322.3 $ 146.7 $ 149.0
Cash provided by oper-
ating activities...... 61.9 84.6 118.6 203.6 140.6
Cash used in investing
activities............ (277.4) (286.6) (164.4) (127.4) (146.3)
Cash provided by (used
in) financing
activities............ 212.8 203.1 92.3 (123.9) 7.5
EBITDA (as defined)(e). $ 154.2 $ 192.0 $ 208.5 $ 230.8 $ 239.6
EBITDA margin(f)....... 7.0% 7.2% 7.4% 7.7% 7.8%
</TABLE>
- --------
(a) Reflects charges in connection with the California Divestiture. See Note K
to Notes to Consolidated Financial Statements of Smith's included
elsewhere herein.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income (loss) before income taxes and fixed charges.
"Fixed charges" consist of interest on all indebtedness, amortization of
deferred financing costs, and one-third of rental expense (the portion of
annual rental expense deemed by the Company to be representative of the
interest factor). For the 52 weeks ended December 30, 1995, the Company's
earnings were inadequate to cover fixed charges by $69.8 million. However,
such earnings include non-cash charges of $105.4 million, primarily
consisting of depreciation and amortization, and restructuring charges of
$140.0 million.
(c) Total debt includes long-term debt and current maturities of long-term
debt.
(d) See "Business--Store Development and Expansion."
(e) EBITDA (as defined) represents income (loss) before interest expense,
income taxes, depreciation and amortization expense, LIFO provision and
restructuring charges. EBITDA is a widely accepted financial indicator of
a company's ability to service debt. However, EBITDA should not be
construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
Smith's operating performance or as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(f) EBITDA margin represents EBITDA (as defined) as a percentage of net sales.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SMITTY'S
The following table sets forth certain selected consolidated historical
financial and operating data of Smitty's and its Predecessor. The operating
and balance sheet data of Smitty's as of and for the year ended July 30, 1995
and the period from June 29, 1994 to July 31, 1994, and of the Predecessor as
of for the period from August 2, 1993 to June 28, 1994, the 52 weeks ended
August 1, 1993, the 53 weeks ended August 2, 1992 and the 52 weeks ended July
28, 1991 set forth in the table below have been derived from the financial
statements of Smitty's and its Predecessor audited by Coopers & Lybrand
L.L.P., independent accountants. The operating and balance sheet data of
Smitty's as of and for the 24 weeks ended January 14, 1996 and the 24 weeks
ended January 15, 1995 have been derived from unaudited financial statements
of Smitty's which, in the opinion of management, reflect all material
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of such data. The following information should be read in
conjunction with the Unaudited Pro Forma Combined Financial Statements,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the historical consolidated financial statements of Smitty's
and its predecessor, and related notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR SMITTY'S
---------------------------------------- --------------------------------------------
PERIOD FROM PERIOD FROM
52 WEEKS 53 WEEKS 52 WEEKS AUGUST 2, JUNE 29, 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED 1993 TO 1994 TO ENDED ENDED ENDED
JULY 28, AUGUST 2, AUGUST 1, JUNE 28, JULY 31, JULY 30, JANUARY 15, JANUARY 14,
1991 1992 1993 1994 1994 1995 1995 1996
-------- --------- --------- ----------- ----------- -------- ----------- -----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales(a)............... $625.3 $599.1 $605.1 $551.7 $ 48.4 $594.0 $286.2 $276.5
Gross profit........... 158.9 160.9 150.5 138.0 12.9 162.0 73.7 76.4
Operating, selling,
general
and administrative
expenses(b)(c)(d)..... 143.9 138.8 147.5 117.4 10.8 131.4 59.0 63.6
Depreciation and
amortization.......... 10.2 10.2 9.5 8.0 1.0 10.9 4.6 6.0
Interest expense(e).... 10.1 7.3 6.5 6.4 1.5 18.7 7.9 8.6
Net income (loss)...... $ (3.0) $ 2.3 $ (8.2) $ 3.1 $ (0.4) $ 0.3 $ 0.9 $ (1.8)
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 0.8 $ 5.0 $ 5.3 $ 31.5 $ 27.9 $ 17.3 $ 23.6 $ 5.7
Total assets(f)........ 245.1 242.8 242.8 204.8 235.3 265.7 258.2 260.0
Total debt(g)(h)....... 72.5 59.9 66.6 140.3 143.9 147.9 154.0 146.0
Total stockholders'
equity(h)............. $126.4 $128.7 $120.5 $ 11.2 $ 10.6 $ 10.9 $ 11.4 $ 9.3
OTHER DATA:
Stores open at end of
period................ 24 24 28 27 27 28 29 28
Capital expenditures... $ 3.1 $ 7.2 $ 16.2 $ 3.7 $ 0.3 $ 22.9 $ 6.2 $ 18.7
Cash provided by
operating activities.. 10.7 18.9 16.6 9.0 1.1 18.2 7.1 1.1
Cash provided by (used
in) investing
activities............ (2.0) (7.2) (4.2) 7.9 (0.3) (9.0) (5.1) (12.4)
Cash provided by (used
in) financing
activities............ (7.3) (13.2) (10.3) (13.4) 4.4 (3.5) (2.0) (2.9)
EBITDA (as defined)
(i)................... $ 13.6 $ 22.9 $ 26.9 $ 26.1 $ 2.4 $ 29.0 $ 13.2 $ 13.2
EBITDA margin (j)...... 2.2% 3.8% 4.5% 4.7% 5.0% 4.9% 4.6% 4.8%
</TABLE>
- -------
(a) In fiscal 1993, Smitty's leased its food service operations to Morrison,
Incorporated, thereby increasing operating income but decreasing sales and
gross profit. In September 1994, Smitty's resumed its food service
operations. As a result, food service sales and attributable costs are
included in the consolidated results of operation subsequent to such date.
Food service sales were $9.6 million, $6.6 million, $17.8 million, $0,
$2.5 million and $24.9 million for the 24 weeks ended January 14, 1996,
the 24 weeks ended January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993
and fiscal 1992, respectively. Food service gross profit was $6.0 million,
$4.3 million, $11.4 million, $0, $1.5 million and $16.5 million for the 24
weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, fiscal
1995, fiscal 1994, fiscal 1993 and fiscal 1992, respectively.
(b) In November 1993, Smitty's agreed to a settlement of a litigation which
required Smitty's to pay $4.75 million in cash and issue a $6.25 million
two-year mortgage note. Fiscal 1993 results of operations include an $11.0
million charge for the settlement, plus a $1.8 million charge for Smitty's
litigation costs. Smitty's used the proceeds from a four-year term loan to
finance the cash payment. Also in November 1993, Smitty's reached a
settlement of a litigation filed by a former supplier providing for a $0.5
million cash payment and a $0.5 million one-year mortgage note. Fiscal
1993 results of operations include a $1.0 million charge for this
settlement. Both mortgage notes were repaid on June 29, 1994.
27
<PAGE>
(c) Included in operating, selling, general and administrative expenses are
parent reorganization costs incurred by Smitty's in connection with
efforts initiated by its former stockholder, Steinberg International,
Inc., to sell its interest in Smitty's. Reorganization costs were $0.7
million and $0.6 million for fiscal 1994 and 1993, respectively. There
were no reorganization costs for the 24 weeks ended January 14, 1996, the
24 weeks ended January 15, 1995, fiscal 1995, fiscal 1992 and fiscal 1991.
In fiscal 1995, Smitty's had a $1.9 million benefit resulting from the
Morrison litigation settlement.
(d) A real estate development partnership in which Smitty's was a partner was
liquidated in July 1993. In connection with this liquidation, Smitty's
obtained ownership of an operating shopping center property and an
undeveloped shopping center property in exchange for the forgiveness of
notes and accrued interest receivable from the partnership and its
managing partner. Fiscal 1993 results of operations include an
$8.9 million charge representing the difference between the current value
of these two properties and the carrying value of the notes and accrued
interest receivable. Such properties were transferred to Steinberg
International, Inc. prior to the acquisition of SSV by Smitty's.
(e) Includes amortization of deferred financing costs of $0.4 million, $0.4
million, $0.9 million, $0.2 million, $0.2 million, $0.2 million, and $0.2
million for the 24 weeks ended January 14, 1996, the 24 weeks ended
January 15, 1995, fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, and
fiscal 1991, respectively. Interest expense for the 24 weeks ended January
14, 1996, the 24 weeks ended January 15, 1995, fiscal 1995 and fiscal 1994
includes $1.1 million, $1.0 million, $2.1 million and $0.2 million,
respectively, of non-cash interest expense attributable to the Smitty's
Debentures.
(f) Except at January 14, 1996, January 15, 1995, July 30, 1995 and July 31,
1994, total assets includes certain properties which were not purchased by
Smitty's in the acquisition from Steinberg International, Inc. that had a
net book value of $27.5 million at August 1, 1993.
(g) Total debt includes total long-term debt and current maturities of long-
term debt.
(h) During fiscal 1991, Smitty's issued 688 shares of common stock to
Steinberg International, Inc. in exchange for $1.2 million cash and the
cancellation of $65.6 million of indebtedness.
(i) EBITDA (as defined) represents income (loss) before income taxes, plus
interest expense, depreciation and amortization, severance and employment
contract termination costs, loss on store closing, LIFO provision and Non-
Operating Expenses. Non-Operating Expenses are defined as parent
reorganization costs, gain (loss) on real estate disposals, loss on
partnership liquidation, and litigation settlements, all of which are
included in operating, selling, general and administrative expenses.
EBITDA is a widely accepted financial indicator of a company's ability to
service debt and, with certain variations in definition, is an indicator
of compliance with various covenants in Smitty's debt agreements. However,
EBITDA should not be construed as an alternative to operating income (as
determined in accordance with generally accepted accounting principles) or
to cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as
an indication of Smitty's operating performance or as a measure of
liquidity.
(j) EBITDA margin represents EBITDA (as defined) as a percentage of sales.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Due to the Transactions and the California Divestiture, the Company believes
that its future operating results may not be directly comparable to its
historical operating results. Certain factors which are expected to affect the
future operating results of the Company (or their comparability to prior
periods) are discussed below.
California Divestiture. Smith's has historically focused on expansion into
high growth markets, which led to its entrance into Southern California in
1991. During the period from 1991 through 1995, Smith's opened 34 stores in
Southern California and a 1,100,000 square foot distribution center and dairy
plant in Riverside, California. Management determined that because of the
attractive growth prospects in the Company's principal markets and the
competitive environment in Southern California, it would redeploy Company
resources from California into such other markets. In December 1995, the
Company executed a sublease with Ralphs pursuant to which Ralphs agreed to
sublease the Riverside distribution center and dairy plant for the remaining
23-year term of Smith's lease. Ralphs also agreed to purchase certain related
equipment and inventory. The sublease term commenced and the related purchases
were consummated on January 29, 1996. In January 1996, the Company entered
into agreements to sell or lease 16 of its California stores and related
equipment and three non-operating properties to various supermarket companies
(including Ralphs) and others. Smith's has closed the remaining 18 stores and
it is anticipated that these stores will be sold or leased to other retail
companies. Of the stores being sold or leased, four stores owned by Smith's
are being sold outright, two store leases are being assigned, three stores
owned by Smith's are being leased and seven leased stores are being subleased.
Since December 30, 1995, the Company has received net cash proceeds of
approximately $67.2 million from the California Divestiture and expects to
receive an additional approximately $10.6 million shortly after the
consummation of the Transactions. All of the remaining California stores were
closed by March 16, 1996. In connection with its decision to cease operations
in California, Smith's recorded the California Divestiture Charge of $140
million (pre-tax) for the year ended December 30, 1995 and classified the
assets to be leased or sold pursuant to the California Divestiture as "assets
held for sale" on its balance sheet at such date. The California Divestiture
Charge reflected (i) a provision for anticipated future lease obligations,
(ii) the anticipated cost to the Company of closing its California stores and
distribution center (primarily termination payments and inventory), and (iii)
certain asset valuation adjustments. The asset valuation adjustments included
in the California Divestiture Charge reflected the reduction in net realizable
values for the equipment in all of the Company's California stores and
distribution center and for the land and buildings associated with those
properties being sold or leased. See Note K of the Notes to Consolidated
Financial Statements of Smith's.
Certain information pertaining to the Company's California operations is
summarized below:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California stores at end
of period.............. 9 18 26 32 34
Net sales............... $ 35.9 $320.4 $472.8 $652.9 $674.6
Capital expenditures:
Stores................ 118.4 160.0 136.1 53.0 23.4
Backstage facilities.. 1.1 33.8 80.6 2.7 1.3
------ ------ ------ ------ ------
Total capital
expenditures....... $119.5 $193.8 $216.7 $ 55.7 $ 24.7
====== ====== ====== ====== ======
</TABLE>
Remaining California Real Estate. After completion of the California
Divestiture, Smith's continues to own real estate assets in California having
an aggregate book value at December 30, 1995 of approximately $260 million.
These assets include the stores leased or subleased as part of the California
Divestiture (having an aggregate book value at December 30, 1995 of $42.5
million), the closed stores (aggregate book value--$115.3
29
<PAGE>
million) and certain non-operating stores and other excess real estate
(aggregate book value--$102.2 million). These properties have annual carrying
costs of approximately $7 million (excluding depreciation and amortization).
Management's present policy is to own and manage its real estate assets,
including those in California, in order to maximize their long-term values,
and, as a result, the Company maintains a fully staffed real estate,
construction and property management capability. The Company believes that
there are several viable strategies for maximizing the value of its remaining
California real estate assets over the next five years and that the
implementation of these policies would not have any material negative impact
on future earnings. Following the consummation of the Transactions, however,
management, in conjunction with Yucaipa, anticipates that it will pursue a
strategy to accelerate the disposition of its remaining real estate assets in
California including its non-operating stores and excess land. The Company
would use the net cash proceeds from the sales of these assets to either
reinvest in the Company's business or reduce indebtedness incurred in
connection with the Transactions. If this strategy is adopted, as anticipated,
the Company would record a charge to earnings, presently estimated to be
approximately $125 million (pre-tax), to reflect the difference between the
anticipated cash proceeds from the accelerated dispositions and the Company's
existing book values for such assets. This charge will cause a substantial
decrease in the Company's earnings for such period and net worth, but is not
otherwise anticipated to adversely affect the Company's liquidity or ongoing
results of operations. See the "Unaudited Pro Forma Combined Financial
Statements" included elsewhere herein.
Debt Refinancing and Recapitalization Charges. In connection with the
anticipated consummation of the Transactions, the Company will refinance
substantially all of its existing mortgage notes and unsecured indebtedness
(approximately $667.1 million at December 30, 1995), including all outstanding
borrowings under its existing revolving credit facilities. The Company will
also refinance approximately $103.3 million of existing indebtedness of
Smitty's (pro forma at December 30, 1995 and assuming a 100% tender of the
existing Smitty's Notes and Smitty's Debentures). In connection with such debt
refinancings, the Company will pay make-whole and other premiums estimated at
approximately $56.8 million. These refinancing premiums, together with
approximately $12.0 million of debt issuance costs, will be written off upon
the consummation of the Transactions and reflected as an extraordinary charge
for the quarter in which the Transactions are consummated. It is estimated
that this charge, net of taxes, will be approximately $42.5 million. The
Company will also record approximately $12.5 million of pre-tax compensation
expense in connection with the purchase of certain management stock options as
part of the Recapitalization.
Integration of Arizona Operations. Following the Merger, management of the
Company has estimated that approximately $25 million of net annual cost
savings (as compared to costs for the pro forma combined fiscal year ended
December 30, 1995) are achievable by the end of the third year of combined
operations. Management believes that approximately $17 million in Merger-
related capital expenditures and approximately $15 million of other expenses
will be required to integrate Arizona operations over the next two years and
realize such cost savings. Management anticipates that a charge related to
such costs will be recorded in the quarter in which the Transactions are
consummated.
Purchase Accounting. The Merger will be accounted for as a purchase of
Smitty's by Smith's. As a result, the assets and liabilities of Smitty's will
be recorded at their estimated fair value as of the date the Merger is
consummated. The purchase price for Smitty's will be determined by reference
to the trading price of the Company's Class B Common Stock following the
consummation of the Merger. The purchase price in excess of the fair value of
Smitty's assets will be recorded as goodwill and amortized over a 40-year
period. The purchase price allocation reflected in the pro forma statements is
based on management's preliminary estimates. The actual purchase accounting
adjustments will be determined following the Merger and may vary from the
amounts reflected in the Unaudited Pro Forma Combined Financial Statements
included elsewhere herein.
RECENT OPERATING RESULTS OF SMITH'S
Net sales decreased $53.5 million, or 7.2%, from $746.7 million for the
thirteen weeks ended April 1, 1995 to $693.2 million for the thirteen weeks
ended March 30, 1996. The sales decrease in 1996 was attributable to the
closure of 34 stores in California, offset in part by the addition of 14 new
stores outside of California from
30
<PAGE>
the same period a year ago. Same store sales for the thirteen week period
decreased 5.6% in 1996. As adjusted to exclude the Company's California
stores, net sales increased $35.7 million, or 6.1%, from $584.4 million in
1995 to $620.1 million in 1996. As adjusted to exclude the Company's
California stores, same store sales for the thirteen week period decreased
2.7% in 1996, caused primarily by the Company's discontinuance of its "ad
match" program in the Phoenix and Tucson markets.
Earnings from operations decreased on a comparative basis from the first
quarter of 1995 to the first quarter of 1996, primarily as a result of the
winding down of the California retail operations. The California stores, which
were operated during the first quarter and all closed by the end of the
quarter, incurred losses connected with additional inventory clearance sales
and other expenses affected by the disposal process. A California regional
pre-tax loss of approximately $25 million significantly impacted first quarter
earnings. Earnings from continuing operations in the Company's Intermountain
and Southwest regions for the first quarter of 1996 were comparable to those
in the first quarter of 1995.
RESULTS OF OPERATIONS OF SMITH'S
The Company's fiscal year ends on the Saturday closest to December 31. The
following table sets forth the selected historical operating results of
Smith's for the three fiscal years ended December 30, 1995:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 1, DECEMBER 31, DECEMBER 30,
1994 1994 1995 1994 1994 1995
---------- ------------ ------------ ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $2,807.2 $2,981.4 $3,083.7 100.0% 100.0% 100.0%
Gross profit............ 637.2 669.1 697.0 22.7 22.4 22.6
Operating, selling and
administrative
expenses............... 430.3 440.8 461.4 15.3 14.8 15.0
Depreciation and
amortization........... 82.2 94.5 105.0 2.9 3.2 3.4
Operating income........ 124.7 133.8 130.7 4.4 4.5 4.2
Interest expense........ 44.6 53.7 60.5 1.6 1.8 2.0
Restructuring charges... -- -- 140.0 -- -- 4.5
Income taxes (benefit).. 34.3 31.3 (29.3) 1.2 1.1 (1.0)
Net income (loss)....... 45.8 48.8 (40.5) 1.6 1.6 (1.3)
</TABLE>
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
30, 1995 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
31, 1994
Net Sales. Net sales increased $102.3 million, or 3.4%, from $2,981.4
million in 1994 to $3,083.7 million in 1995. The sales increase in 1995 was
attributable to a net increase of 17 stores as of the end of 1995, offset in
part by a 3.4% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales increased $80.7 million, or 3.5%, from
$2,328.5 million in 1994 to $2,409.2 million in 1995. As adjusted to exclude
the Company's California stores, same store sales decreased 3.2% in 1995,
caused primarily by the Company's discontinuance of its "ad match" program in
the Phoenix and Tucson markets and new stores opened by competitors in the
Company's markets.
Gross Profit. Gross profit increased $27.9 million, or 4.2%, from $669.1
million in 1994 to $697.0 million in 1995. Gross margins during 1995 and 1994
were 22.6% and 22.4%, respectively. The increase in 1995 is due primarily to
less aggressive promotional activity in the Phoenix and Tucson markets
following the discontinuance of the Company's "ad match" program, reduced
charges for inventory shrinkage and improved competitive conditions in Utah,
which were partially offset by the increase in the LIFO charge and increased
new store openings. The pre-tax LIFO charge was $4.0 million in 1995 compared
to $2.5 million in 1994. Newly opened stores apply pressure on gross margins
until the stores become established in their respective markets. Smith's
opened 19 new stores during 1995 (including two in California) compared to
eight stores in 1994 (including six in California).
31
<PAGE>
Operating, Selling and Administrative Expenses. Operating, selling and
administrative expenses ("OS&A") increased $20.6 million, or 4.7%, from $440.8
million in 1994 to $461.4 million in 1995. As a percent of net sales, OS&A
increased from 14.8% in 1994 to 15.0% in 1995. The increase was caused
principally by the increase in new store opening costs compared to the prior
year. The decrease in same store sales also contributed to the increase of
OS&A as a percentage of net sales.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $10.5 million, or 11.1%, from $94.5 million in 1994 to
$105.0 million in 1995, primarily due to the addition of new combination
stores and equipment replacements in remodeled stores.
Interest Expense. Interest expense increased $6.8 million from $53.7 million
in 1994 to $60.5 million in 1995 primarily as a result of net increases in the
average debt amounts for each period.
Restructuring Charges. As a result of the California Divestiture, the
Company recorded $140.0 million of pre-tax restructuring charges to reflect
the estimated costs associated with the sale, lease or closure of its Southern
California stores and the Riverside distribution center. See Note K of the
Notes to Consolidated Financial Statements of the Company included elsewhere
herein.
Income Taxes. The Company recorded a tax benefit of $29.3 million in 1995
compared to an expense of $31.3 million in 1994. The benefit recorded in 1995
reflects an adjustment (benefit) of $53.4 million of the Company's deferred
taxes as a result of losses incurred in connection with the California
Divestiture.
Net Income (Loss). Net income before restructuring charges decreased by $5.3
million, or 10.9%, from $48.8 million in 1994 to $43.5 million in 1995. Income
per common share before restructuring charges decreased 0.6% from $1.73 in
1994 to $1.72 in 1995. Primarily as a result of the restructuring charges, the
Company recorded a net loss of $40.5 million for 1995 ($1.62 per share)
compared to net income of $48.8 million in 1994 ($1.73 per share). The
weighted average number of common shares outstanding was 25,030,882 in 1995
and 28,176,907 in 1994.
COMPARISON OF SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED DECEMBER
31, 1994 WITH SMITH'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 1,
1994
Net Sales. Net sales increased $174.2 million, or 6.2%, from $2,807.2
million in 1993 to $2,981.4 million in 1994. The sales increase in 1994 was
attributable to a net increase of eight stores as of the end of 1994, offset
in part by a 2.3% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales decreased $5.9 million, or 0.3%, from
$2,334.4 million in 1993 to $2,328.5 million in 1994. As adjusted to exclude
the Company's California stores, same store sales decreased 1.3% in 1994. The
decrease in same store sales (excluding California) in 1994 was caused
primarily by competitive new store openings in the Company's principal market
areas and increased overall price competition in Utah.
Gross Profit. Gross profit increased $31.9 million, or 5.0%, from $637.2
million in 1993 to $669.1 million in 1994. Gross margins during 1994 and 1993
were 22.4% and 22.7%, respectively. The decrease in gross margin in 1994 was
caused primarily by Smith's aggressive Utah pricing program which commenced in
the second half of 1993 and continued through most of 1994. To reinforce
Smith's everyday low price program, prices in Utah stores were lowered on more
than 10,000 grocery, meat and produce items. Smith's opened eight new stores
during 1994 (including six in California) compared to ten new stores during
1993 (including eight in California).
Operating, Selling and Administrative Expenses. OS&A increased $10.5
million, or 2.4%, from $430.3 million in 1993 to $440.8 million in 1994. As a
percent of net sales, OS&A decreased from 15.3% in 1993 to 14.8% in 1994. The
decrease in 1994, resulting primarily from Smith's program to reduce operating
costs, was somewhat offset by the higher operating and labor costs associated
with the expansion into Southern California.
32
<PAGE>
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $12.3 million, or 15.0%, from $82.2 million in 1993 to
$94.5 million in 1994, due to the addition of new food and drug combination
stores and distribution and processing facilities.
Interest Expense. Interest expense increased $9.1 million from $44.6 million
in 1993 to $53.7 million in 1994 as a result of net increases in the average
debt amounts for each period.
Income Taxes. Income taxes as a percent of income before income taxes were
39.1% in 1994 and 42.8% in 1993. The Omnibus Budget Reconciliation Act of 1993
increased Smith's Federal tax rate from 34% to 35%. As a result of the
increased tax rate, net income for 1993 was reduced by $2.75 million, or $0.09
per common share. This reduction consisted of $0.8 million, or $0.03 per
common share, for the rate increase on income earned in 1993 and $1.95
million, or $.06 per common share, for the increase in recorded deferred
taxes.
Net Income. Net income increased 6.6% from $45.8 million in 1993 to $48.8
million in 1994. However, as a result of a reduction in the number of shares
outstanding through Smith's buy-back programs, net income per common share
increased 14% from $1.52 to $1.73. During 1994, Smith's repurchased 4.9
million shares of Common Stock in the open market. The weighted average number
of shares of Common Stock outstanding in 1994 was reduced by approximately 1.9
million shares, which increased net income per common share by $0.11.
RESULTS OF OPERATIONS OF SMITTY'S
Smitty's is a leading regional supermarket operator based in Phoenix,
Arizona with 25 stores in the Phoenix area and three stores in the Tucson
area. Smitty's stores offer high quality fresh and prepared foods, groceries
and general merchandise, restaurants and ancillary services in a shopping
environment which emphasizes service, convenience, quality, selection and
customer satisfaction. On June 29, 1994, Smitty's became the sole stockholder
of SSV when it acquired all of the outstanding shares of common stock of SSV
from Steinberg International, Inc. ("Steinberg"). Smitty's was formed in April
1994 by affiliates of Yucaipa for the purpose of effecting such acquisition.
Smitty's currently operates (i) 21 food and general merchandise "super
combination" stores which average 105,000 square feet in size, (ii) six food
and drug combination stores, which average 52,000 square feet in size, and
(iii) one conventional supermarket. The "super combination" stores offer a
full line of supermarket items, a broad range of drug store and pharmaceutical
items and an expanded selection of general merchandise. These stores offer
numerous services and specialty departments, including video and photo
departments, pharmacies, food courts, restaurants and full-service bank
branches, family style hair salons and airline ticket counters. Smitty's food
and drug combination stores offer a full selection of products and services,
including full-service fresh meat, delicatessen, seafood and bakery
departments, an expanded line of health care and beauty aids, a restaurant,
snack bar or food court and full-service banking.
At the end of the second quarter of fiscal 1996, Smitty's had completed its
comprehensive remodel program which included 18 stores and resulted in 93% of
its stores being new or remodeled within the last three years. Upon completion
of the remodel program, Smitty's launched an extensive marketing program to
promote its newly remodeled stores which included an increase of 50% in both
broadcast and print media, a billboard campaign estimated to have been seen by
50% of the Phoenix population and a customer service training program that
included substantially all of Smitty's employees. Smitty's management believes
the extensive marketing program and the newly remodeled stores were
significant factors in the reduction of the decline in same store sales from
10.8% in the first quarter to 2.4% in the second quarter of fiscal 1996. The
remodel program includes an increased allocation of floor space to the
supermarket section of each store resulting in at least 60% of the square
footage in each super combination store being devoted to supermarket items
compared to 40% prior to the remodel. The expanded supermarket selling areas
provide increased display and shelf space and enlarged self-service bakeries,
dairy, frozen food and produce departments. Display cases and related
refrigeration in meat, deli, bakery, produce, frozen foods and dairy
departments have generally been replaced and upgraded.
33
<PAGE>
On September 25, 1994, the lease by which Morrison, Incorporated
("Morrison") leased and operated Smitty's food service operations was
rescinded in connection with the litigation between Smitty's and Morrison. In
connection with such rescission, Morrison paid Smitty's $2.6 million and
transferred title to all of the inventories, fixtures and equipment to
Smitty's and Smitty's began operating food service operations. Rental income
from Morrison was $1.4 million in the 24 weeks ended January 15, 1995. Food
service sales and gross profit were $9.6 million and $6.0 million,
respectively, in the 24 weeks ended January 14, 1996.
Smitty's fiscal year ends on the Sunday closest to July 31. The following
table sets forth the selected historical operating results of Smitty's for the
24 weeks ended January 14, 1996, the 24 weeks ended January 15, 1995, the 52
weeks ended July 30, 1995 ("fiscal 1995"), the 52 weeks ended July 31, 1994
("fiscal 1994") and the 52 weeks ended August 1, 1993 ("fiscal 1993"):
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
---------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14, AUGUST 1, JULY 31, JULY 30, JANUARY 15, JANUARY 14,
1993 1994(1) 1995 1995 1996 1993 1994 1995 1995 1996
--------- -------- -------- ----------- ----------- --------- -------- -------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales........... $605.1 $600.1 $594.0 $286.2 $276.5 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.... 150.5 150.9 162.0 73.7 76.4 24.9 25.1 27.3 25.7 27.6
Operating,
selling,
general and
administrative
expenses....... 147.5 128.2 131.4 59.0 63.6 24.4 21.4 22.1 20.6 22.9
Depreciation and
amortization... 9.5 9.0 10.9 4.6 6.0 1.6 1.5 1.8 1.6 2.2
Operating income
(loss)......... (6.5) 13.8 19.7 10.2 6.8 (1.1) 2.3 3.3 3.6 2.5
</TABLE>
- --------
(1) The operating results for the 52-week period ended July 31, 1994 combines
the results of operations of Smitty's for the period from June 29, 1994 to
July 31, 1994 with the results of operations of its predecessor for the
period from August 2, 1993 to June 28, 1994.
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY
14, 1996 WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 24 WEEKS ENDED JANUARY
15, 1995
Sales. Sales decreased $9.7 million, or 3.4%, from $286.2 million in the 24
weeks ended January 15, 1995 to $276.5 million in the 24 weeks ended January
14, 1996. The decrease is primarily the result of a decline in same store
sales and the closure of one store in the third quarter of fiscal 1995,
partially offset by sales from food service operations and sales increases
from the opening of two stores in the second quarter of fiscal 1995. Although
same store sales decreased 6.6% in the 24 weeks ended January 14, 1996, the
decline in same store sales has improved from 10.8% in the 12 weeks ended
October 22, 1995 to 2.4% in the 12 weeks ended January 14, 1996 due in part to
the completion of the remodel program and increased advertising and promotions
associated with the grand re-opening of the remodeled stores.
Gross Profit. Gross profit increased $2.7 million from $73.7 million, or
25.7% of sales, in the 24 weeks ended January 15, 1995 to $76.4 million, or
27.6% of sales, in the 24 weeks ended January 14, 1996. The increase in gross
profit margin in the 24 weeks ended January 14, 1996, is primarily
attributable to increased vendor allowances and rebates arising from improved
procurement practices and the operation of food service for an additional
eight weeks compared to the prior year.
Operating, Selling, General and Administrative Expenses. Operating, selling,
general and administrative expenses ("OSG&A") were $59.0 million, or 20.6% of
sales, in the 24 weeks ended January 15, 1995 and $63.6 million, or 22.9% of
sales, in the 24 weeks ended January 14, 1996. This increase was primarily
attributable to the fixed cost component of OSG&A being compared to a lower
sales base, the addition of food service operations, and increased rent
expense associated with new and remodeled stores. In addition, Smitty's
incurred $1.8 million of advertising and promotional expenses for an extensive
marketing program implemented in the second quarter of fiscal 1996. These
additional expenses were offset by advertising allowances received in
34
<PAGE>
connection with the marketing program. In the 24 weeks ended January 15, 1995,
Smitty's had a $1.9 million benefit resulting from the favorable Morrison
litigation settlement.
Depreciation and Amortization. Depreciation and amortization was $4.6
million in the 24 weeks ended January 15, 1995, and $6.0 million in the 24
weeks ended January 14, 1996. The increase relates primarily to the
depreciation of new stores, property and equipment, depreciation on new
fixtures and equipment in newly remodeled stores and additional depreciation
on the equipment Smitty's received in the Morrison settlement.
Operating Income. Operating income decreased $3.4 million from $10.2 million
in the 24 weeks ended January 15, 1995 to $6.8 million in the 24 weeks ended
January 14, 1996. The decrease in operating income is primarily attributable
to the factors described above.
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 30,
1995 (FISCAL 1995) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
JULY 31, 1994 (FISCAL 1994).
Sales. Sales decreased $6.1 million, or 1.0%, from $600.1 million in fiscal
1994 to $594.0 million in fiscal 1995. The decrease was primarily the result
of a 6.7% decline in same store sales and the closure of one store partially
offset by sales from food service operations and sales increases from the
opening of two new stores in Phoenix and the new store that opened in fiscal
1994. The same store sales decline was attributable to sales lost at stores
undergoing remodels and competitive factors, including an increase in new
stores opened by competitors and pricing and promotional activities.
Gross Profit. Gross profit increased $11.1 million from $150.9 million, or
25.1% of sales, in fiscal 1994 to $162.0 million, or 27.3% of sales, in fiscal
1995. Excluding food service, gross profit as a percentage of sales increased
from 25.1% in fiscal 1994 to 26.1% in fiscal 1995. These increases were
primarily attributable to reduced cost of goods sold, reduced inventory
shortages and additional vendor allowances and rebates arising from improved
procurement practices.
Operating, Selling, General and Administrative Expenses. OSG&A was $131.4
million and $128.2 million in fiscal 1995 and 1994, respectively. Excluding
food service expenses and rental income from Morrison, OSG&A decreased $0.2
million from $127.1 million in fiscal 1994 to $126.9 million in fiscal 1995.
On this basis, OSG&A as a percentage of sales increased from 21.2% in fiscal
1994 to 22.0% in fiscal 1995. This increase was primarily attributable to
increased advertising and promotional expenditures, new union pension fund
contributions and increased rent expense associated with new stores.
Additionally, in fiscal 1994, Smitty's incurred severance and employment
termination costs consisting of a $2.0 million payment to the former Chief
Executive Officer of Smitty's in connection with the termination of certain
rights under his employment contract, a $0.5 million loss relating to closing
a store which was subleased, and a $2.9 million expense primarily from real
estate disposals and reorganization costs. In fiscal 1995 Smitty's had a $1.9
million benefit resulting from the favorable Morrison litigation settlement.
Depreciation and Amortization. Depreciation and amortization increased by
$1.9 million from $9.0 million in fiscal 1994 to $10.9 million in fiscal 1995.
These increases related primarily to depreciation of new stores property and
equipment and increased amortization of beneficial leaseholds.
Operating Income. Operating income increased $5.9 million from $13.8 million
in fiscal 1994 to $19.7 million in fiscal 1995. The increase in operating
income was primarily attributable to the factors described above.
35
<PAGE>
COMPARISON OF SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JULY 31,
1994 (FISCAL 1994) WITH SMITTY'S RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED
AUGUST 1, 1993 (FISCAL 1993).
Sales. Sales decreased $5.0 million, or 0.8%, from $605.1 million in fiscal
1993 to $600.1 million in fiscal 1994. The decrease was primarily the result
of a 5.8% decline in same store sales and the closure of two stores in 1994,
partially offset by the opening of one new store in Tucson, and sales
increases from four new stores opened in fiscal 1993. The same store sales
decline was attributable to competitive factors, including an increase in new
stores opened by competitors and pricing and promotional activities.
Gross Profit. Gross profit increased $0.4 million from $150.5 million or
24.9% of sales in fiscal 1993 to $150.9 million or 25.1% of sales in fiscal
1994. These increases were primarily attributable to additional vendor
allowances and rebates earned during fiscal 1994.
Operating, Selling, General and Administrative Expenses. OSG&A was $128.2
million and $147.5 million in fiscal 1994 and 1993, respectively. OSG&A was
affected by severance and employment contract termination costs in fiscal 1994
consisting of a $2.0 million payment to the Chief Executive Officer of
Smitty's in connection with the termination of certain rights under his
employment contract and a charge of $0.5 million relating to the loss on the
closing of a store which was subleased during the period. In addition,
Smitty's incurred other expense of $23.3 million and $2.9 million in fiscal
1993 and fiscal 1994, respectively. The fiscal 1993 expense consisted
primarily of $8.9 million arising from the liquidation of a partnership whose
former properties have been transferred to Steinberg and $13.8 million related
to litigation settlements. The fiscal 1994 expense consisted primarily of a
$2.2 million loss on real estate disposals. Excluding the items noted above,
OSG&A decreased by $1.4 million from $124.2 million in fiscal 1993 to $122.8
million in fiscal 1994. On this basis, OSG&A, as a percentage of sales,
remained constant at 20.5% for both periods. The decrease in OSG&A primarily
reflected reductions in supplies expenses and liability insurance costs and a
lower sales base.
Depreciation and Amortization. Depreciation and amortization decreased by
$0.5 million due to the sale and leaseback in fiscal 1993 of certain fixtures
and equipment related to four stores and the completion of the amortization of
deferred Shoppers Passport card costs in fiscal 1993. Shoppers Passport is
Smitty's "frequent shopper" program.
Operating Income. Operating income increased $20.3 million from an operating
loss of $6.5 million in fiscal 1993 to operating income of $13.8 million in
fiscal 1994. The increase in operating income was primarily attributable to
the factors described above.
COMPANY LIQUIDITY AND CAPITAL RESOURCES
Smith's cash flow from operating activities was $140.6 million for fiscal
1995 and $203.6 million for fiscal 1994. The decrease in cash flow from
operating activities was due primarily to balance fluctuations in operating
assets and liabilities resulting from the execution of cash management
policies based upon cash availability. Trade accounts payable decreased cash
provided by operating activities by $21.7 million in 1995 and increased cash
provided by operating activities by $50.6 million in 1994. One of the
Company's principal uses of cash in its operating activities is inventory
purchases. However, supermarket operators typically require small amounts of
working capital since inventory is generally sold prior to the time that
payments to suppliers are due. This reduces the need for short-term borrowings
and allows cash from operations to be used for non-current purposes such as
financing capital expenditures and other investing activities.
Smith's cash used in investing activities was $146.3 million during fiscal
1995 and $127.4 million during fiscal 1994. Investing activities consisted
primarily of additions to property and equipment for new stores, remodels and
equipment purchases.
Smith's received approximately $7.5 million of cash from financing
activities for fiscal 1995 and used approximately $123.9 million of cash in
financing activities in fiscal 1994. The primary difference in financing
activities from 1994 to 1995 of $131.4 million was the repurchase of Common
Stock in 1994. In 1994, the Company purchased approximately $109.2 million of
its Common Stock under its stock buy-back program.
36
<PAGE>
In order to consummate the Transactions, Smith's expects to utilize total
new financing proceeds in the amount of approximately $1.4 billion. The
Company will enter into the New Credit Facility pursuant to which it will
borrow up to $805 million of New Term Loans and will have available a $190
million New Revolving Facility, of which approximately $13.2 million is
anticipated to be borrowed in connection with the Transactions. The Company
will also issue $575 million principal amount of Notes. The proceeds from the
New Credit Facility and the Offering will provide the sources of financing
required to consummate the Transactions and pay related fees and expenses
(including debt refinancing premiums). The Company will also assume certain
existing indebtedness of Smitty's. See "Summary--The Transactions--Sources and
Uses."
The New Revolving Facility will be available, subject to the satisfaction of
customary borrowing conditions, for working capital requirements and general
corporate purposes. A portion of the New Revolving Facility may be used to
support letters of credit, approximately $28 million of which are anticipated
to be outstanding upon consummation of the Transactions. The New Revolving
Facility will be non-amortizing and will have a six and one-quarter year term.
The Company will be required to reduce loans outstanding under the New
Revolving Facility to $85 million for a period of not less than 30 consecutive
days during the first 12 months following the Merger and to $75 million for a
period of not less than 30 consecutive days during each consecutive 12-month
period thereafter. At December 30, 1995, on a pro forma basis, giving effect
to the Transactions and the California Disposition and letter of credit
issuances, the Company's remaining borrowing availability under the New
Revolving Facility would have been approximately $162.0 million. Pursuant to
the New Credit Facility, the New Term Loans will be issued in four tranches:
(i) Tranche A, in the amount of $325 million, will have a six and one-quarter
year term; (ii) Tranche B, in the amount of $160 million, will have a seven
and one-half year term; (iii) Tranche C, in the amount of $160 million, will
have an eight and one-half year term; and (iv) Tranche D, in the amount of
$160 million, will have a nine and one-quarter year term. The New Term Loans
will require quarterly amortization payments. The New Credit Facility will be
guaranteed by each of the Company's subsidiaries and secured by liens on
substantially all of the unencumbered assets of the Company and its
subsidiaries and by a pledge of the Company's stock in such subsidiaries. The
New Credit Facility will contain financial covenants which are expected to
require, among other things, the maintenance of specified levels of cash flow
and stockholders' equity. See "Description of New Credit Facility."
The capital expenditures of the Company (excluding expenditures in
California) were $91.0 million for fiscal 1994 and $124.3 million for fiscal
1995. The Company currently anticipates that its aggregate capital
expenditures for fiscal 1996 will be approximately $100.0 million, excluding
the approximately $17 million of capital expenditures which are estimated to
be required in connection with the integration of Arizona operations. The
Company intends to finance these capital expenditures primarily with cash
provided by operations and other sources of liquidity including borrowings and
leases. No assurance can be given that sources of financing for capital
expenditures will be available or sufficient. However, the capital expenditure
program has substantial flexibility and is subject to revision based on
various factors. Management believes that if the Company were to substantially
reduce or postpone these programs, there would be no substantial impact on
short-term operating profitability. In the long term, however, if these
programs were substantially reduced, management believes its operating
businesses, and ultimately its cash flow, would be adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing
markets or to enter other markets. Future acquisitions may require the Company
to seek additional debt or equity financing depending on the size of the
transaction. With the exception of the Transactions, the Company is not
currently engaged in discussions concerning any material acquisition which it
considers probable.
Following the consummation of the Transactions, the Company will be highly
leveraged. Based upon current levels of operations and anticipated cost
savings and future growth, the Company believes that its cash flow from
operations, together with available borrowings under the New Revolving
Facility and its other sources of liquidity (including leases), will be
adequate to meet its anticipated requirements for working capital, capital
expenditures, lease payments, interest payments and scheduled principal
payments. There can be no assurance,
37
<PAGE>
however, that the Company's business will continue to generate cash flow at or
above current levels or that estimated cost savings or growth can be achieved.
See "Risk Factors--Leverage and Debt Service."
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed Of." The Company will be
required to adopt this standard in the first quarter of 1996. The adoption of
SFAS No. 121 will not have a significant impact on the Company's financial
condition.
EFFECTS OF INFLATION
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain gross profit margins by adjusting retail
prices, but competitive conditions may from time to time render the Company
unable to do so while maintaining its market share.
38
<PAGE>
BUSINESS
GENERAL
Smith's is a leading supermarket company in the Intermountain and
Southwestern regions of the United States, operating 120 stores located in
Utah (35), Arizona (30), Nevada (22), New Mexico (19) and Idaho, Texas and
Wyoming (collectively, 14). Substantially all of Smith's stores offer one-stop
shopping convenience through a food and drug combination format which features
a full-line supermarket with drug and pharmacy departments and some or all of
the following specialty departments: delicatessens, hot prepared food
sections, in-store bakeries, video rental shops, floral shops, one-hour photo
processing labs, full-service banking and frozen yogurt shops. The Company's
114 food and drug combination stores averaged approximately 63,000 square feet
and $420,000 per week in sales volume in fiscal 1995. The Company has recently
opened four price impact warehouse stores and also operates two conventional
supermarkets. Through its 48 years of operations, the Company believes it has
developed a valuable and strategically located store base, strong name
recognition, customer loyalty and a reputation for quality and service.
The Company is pursuing a series of transactions designed to enhance
stockholder value and liquidity:
. Arizona Merger and Consolidation. The Company has entered into an
agreement to acquire Smitty's, a regional supermarket operator with 28
stores in the Phoenix and Tucson markets, in a stock-for-stock exchange.
The Merger will significantly enhance the Company's market position in
Arizona. Smitty's is controlled by affiliates of Yucaipa, a private
investment group specializing in the supermarket industry. Such
affiliates of Yucaipa will own approximately 13.6% of the Company's
outstanding Common Stock following the Merger and the Recapitalization.
Following the Merger, the Company will consolidate its Arizona
operations with those of Smitty's. See "--Operating Strategy."
. California Disposition. The Company has completed the sale or lease of
16 stores, three non-operating properties and its primary distribution
facility in Southern California and has closed its remaining 18 stores
there. Management determined that because of the attractive growth
prospects in the Company's principal markets and the competitive
environment in Southern California, it would redeploy Company resources
from California into such other markets. Following the consummation of
the Transactions, the Company intends to accelerate the disposition of
its closed stores and excess land in California pursuant to the
California Asset Disposition.
. New Senior Management. The Company will enter into the five-year
Management Services Agreement with Yucaipa. Ronald W. Burkle, the
managing general partner of Yucaipa, will be appointed as Chief
Executive Officer of the Company. In addition, Allen R. Rowland recently
joined Smith's as President and Chief Operating Officer. Mr. Rowland was
employed by Albertson's, Inc. for 25 years and had senior executive
responsibilities for all of the principal regions in which Smith's
operates.
. Recapitalization. The Company is offering to purchase 50% of its
outstanding Common Stock (excluding shares issuable in the Merger) for
$36.00 per share in cash in the Tender Offer. In addition, the Company
is refinancing certain of its existing indebtedness and is refinancing
or assuming certain existing indebtedness of Smitty's concurrently with
the consummation of the Merger.
For the fiscal year ended December 30, 1995, after giving pro forma effect
to the Transactions and the California Disposition, the Company would have had
net sales and EBITDA (as defined) of approximately $3.0 billion and $255.4
million, respectively. See "Unaudited Pro Forma Combined Financial
Statements." In addition, management believes that the Company will benefit
from significant operating synergies and cost saving opportunities following
the Merger.
OPERATING STRATEGY
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing and adjacent markets, (ii)
realize operating synergies and cost savings resulting from the Merger,
39
<PAGE>
(iii) improve working capital management, (iv) grow its recently introduced
price impact warehouse stores and (v) dispose of remaining California real
estate following consummation of the Transactions.
Expand Operations in Existing and Adjacent Markets. Management believes that
there are significant opportunities to increase the Company's sales and gain
efficiencies in its existing markets through new store openings and store
remodels. From 1991 through 1994, management primarily focused on the Southern
California market, opening 32 new stores in Southern California compared to a
net of 10 new stores in its other markets. In 1995, the Company opened a net
of 17 new stores, only two of which were located in California. In an effort
to more fully realize its market potential in its non-California markets, in
1995 the Company began opening smaller combination stores (54,000 to 60,000
square feet) in existing markets as part of a "fill-in" strategy. By pursuing
a growth strategy which emphasizes opening new stores within its existing and
adjacent markets, the Company believes it can increase its market share and
improve its distribution and other efficiencies, while taking advantage of
such markets' favorable growth prospects.
Realize Operating Synergies and Cost Savings Resulting from the
Merger. Management believes that approximately $25 million of net annual cost
savings are achievable over a three-year period following the Merger. The
majority of such cost savings opportunities relate to its Arizona operations
and are believed to be achievable (on an annualized basis) by the end of the
first full year of operations following the Merger. The estimates of potential
cost savings resulting from the Merger contained in this Prospectus are
forward looking statements that involve risks and inherent uncertainties that
could cause actual net annual cost savings to differ materially from those
projected. See "Risk Factors--Ability to Achieve Anticipated Cost Savings."
. Advertising Cost Savings. Smith's and Smitty's advertising programs in
the Phoenix and Tucson markets substantially overlap, and as a result of
the Merger, management expects that the Company will be able to
eliminate a substantial portion of the combined advertising expenses.
Management estimates that annualized advertising cost savings of
approximately $7 million are achievable by the end of the first full
year of operations following the Merger.
. General and Administrative Cost Savings. Management expects the Company
to achieve savings from the elimination of duplicative administrative
staff and headquarters facilities and the consolidation of management
information systems. Management estimates that annualized general and
administrative cost savings of approximately $13 million are achievable
by the end of the first full year of operations following the Merger.
. Warehousing and Transportation Cost Savings. Smitty's currently operates
without any of its own distribution facilities. By incorporating the
Smitty's volume into Smith's Tolleson, Arizona warehousing and
distribution facilities, the Company expects to eliminate the expense
associated with Smitty's being supplied primarily by an independent
wholesaler, as well as reduce average unit costs resulting from improved
capacity utilization. Management estimates that annualized warehousing
and transportation cost savings of approximately $4 million are
achievable by the end of the second full year of operations following
the Merger.
. Direct Store Delivery and Store Systems. The Merger is expected to
result in an opportunity to utilize Smith's electronic direct store
receiving system in all Smitty's stores, resulting in increased control
over direct store deliveries and corresponding payments. In addition, by
utilizing Smith's front-end systems in Smitty's stores, improvements in
the efficiency of Smitty's stores are expected. Management estimates
that annualized cost savings of approximately $2 million related to such
direct store delivery and store systems are achievable by the end of the
second full year of operations following the Merger.
. Purchasing Improvements. Management believes that the Company can
achieve savings as a result of increased promotional allowances and
discounts through a coordinated buying effort with Yucaipa-affiliated
supermarket chains with aggregate annual sales (including the Company)
in excess of $11 billion. Management estimates that annualized cost
savings of approximately $6 million are achievable from such purchasing
improvements by the end of the third full year of operations following
the Merger.
40
<PAGE>
The sum of the components of the estimated annual cost savings exceeds $25
million; however, management expects that a portion of the savings will be
reinvested in the Company's operations. In connection with the Transactions,
the Company and Smitty's are evaluating the format mix of the combined Arizona
store base and are assessing the possibility of modifying the formats of
certain stores. It is anticipated that approximately $17 million of capital
expenditures and approximately $15 million of other expenses will be required
to integrate the Arizona operations over the next two years and realize such
cost savings.
Improve Working Capital Management. Management believes that the Company can
improve its working capital management. Under Yucaipa's management, other
companies have achieved working capital improvements; however, there can be no
assurance that similar improvements can be achieved by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company recently
developed a price impact warehouse store format and during 1995 opened four of
these stores in the Las Vegas area operating under the name "PriceRite Grocery
Warehouse." Management believes that a number of the Company's markets are
underserved by price impact warehouse stores and that there are substantial
opportunities for expansion of the Company's PriceRite format through the
conversion of existing stores and the opening of new stores. Yucaipa, through
its management of other supermarket companies, has extensive experience in
expanding and profitably operating price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation of
the Transactions, management, in conjunction with Yucaipa, anticipates that it
will pursue a strategy to dispose of its remaining real estate assets in
California which consist of 18 non-operating stores and excess land. The
Company would use the net cash proceeds from the California Asset Disposition
to either reinvest in the Company's business or reduce indebtedness incurred
in connection with the Transactions. At December 30, 1995, the aggregate book
value of such assets was approximately $260 million. If this strategy is
adopted, as anticipated, the Company would record a pre-tax charge to
earnings, which is presently estimated to be approximately $125 million, to
reflect the difference between the anticipated cash proceeds from the
accelerated dispositions and the Company's existing book values for such
assets. See "Risk Factors--Anticipated Charges to Earnings Following the
Transactions."
PRINCIPAL MARKETS
The Company's stores are located predominantly in Utah, Arizona, Nevada and
New Mexico, which are among the fastest growing states in terms of population
and employment. According to the U.S. Bureau of the Census, the population of
those four states has increased at a compound annual growth rate of 3.0% since
1990, compared to the national average of 1.1% over the same period. According
to the U.S. Bureau of Labor Statistics, employment in the same four states has
increased at a compound annual growth rate of 4.0% since 1990, compared to the
national average of 1.3% over the same period. In addition, management
believes that operating in distinct markets in several states provides
advantages due to the differences in economic cycles, demographics and
competitive conditions among such markets.
The Company has achieved strong competitive positions in each of its
principal markets. Smith's currently has leading market shares in Salt Lake
City (31%), Las Vegas (24%) and Albuquerque (23%) and, after giving effect to
the Merger, the Company will also have a leading market share in Phoenix
(24%). The Company believes its reputation for offering a broad selection of
quality products and low pricing combined with quality customer service has
created a valuable franchise with strong name recognition and customer
loyalty.
STORE FORMATS
Smith's operates three types of retail stores: (i) 114 food and drug
combination stores; (ii) four warehouse stores; and (iii) two conventional
supermarkets. The food and drug combination stores range in size from 30,000
to 88,000 square feet (with an average size of 63,000 square feet) and offer
an extensive line of supermarket, non-food and drug products. A typical
Smith's food and drug combination store offers approximately 50,000 SKUs, in
comparison to approximately 20,000 SKUs offered at the average conventional
supermarket
41
<PAGE>
nationwide. All stores carry a full line of supermarket products, including
groceries, meat, poultry, produce, dairy products, bakery goods, frozen foods
and health and beauty aids. In addition, combination stores carry a wide
variety of general merchandise, including drugs, toys, hardware, giftware and
small appliances. Within each category of merchandise, the stores offer
multiple selections of nationally advertised brand name items. In addition,
the stores carry an extensive selection of private label merchandise, which
provides comparable quality products priced lower than national brands. The
Company also carries a variety of bulk merchandise and generic brand products
which enhance the Company's low price image. These stores feature modern
layouts with wide aisles and well-lighted spaces to facilitate convenient
shopping, a variety of specialty departments along the periphery and
centralized checkout facilities. The Company's four price impact warehouse
stores operating under the PriceRite Grocery Warehouse name, average 55,000
square feet in size, and are targeted to price-conscious consumers rather than
conventional supermarket consumers. The PriceRite stores offer lower prices,
fewer SKUs and fewer service departments than the Company's food and drug
combination stores and conventional stores. The Company's conventional stores
average 26,000 square feet in size and have the appearance of traditional
supermarkets.
Smitty's, which will become a subsidiary of the Company upon consummation of
the Merger, currently operates (i) 21 food and general merchandise "super
combination" stores which average 105,000 square feet in size, (ii) six food
and drug combination stores, which average 52,000 square feet in size, and
(iii) one conventional supermarket. The "super combination" stores offer a
full line of supermarket items, a broad range of drug store and pharmaceutical
items and an expanded selection of general merchandise. These stores offer
numerous services and specialty departments, including fresh produce, full-
service fresh meat, delicatessen, seafood, bakery, prepared foods, fresh-cut
flowers and video and photo departments, pharmacies, food courts, restaurants
and full-service bank branches, family style hair salons and airline ticket
counters. Smitty's food and drug combination stores offer a full selection of
products and services, including full-service fresh meat, delicatessen,
seafood and bakery departments, an expanded line of health care and beauty
aids, a restaurant, snack bar or food court and full-service banking. In
connection with the Merger, the Company and Smitty's are evaluating the format
mix of the combined Arizona store base and are assessing the possibility of
converting the format of certain stores.
STORE DEVELOPMENT AND EXPANSION
The following table sets forth information concerning changes in the store
base of the Company and Smitty's over the last five years.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STORES OPENED (NET):
Smith's:
Intermountain and Southwest...................... 5 1 2 2 15
California....................................... 9 9 8 6 2
Smitty's.......................................... 0 2 3 0 (1)
TOTAL NUMBER OF STORES (END OF PERIOD):
Smith's:
Intermountain and Southwest...................... 100 101 103 105 120
California....................................... 9 18 26 32 34
Smitty's.......................................... 24 26 29 29 28
</TABLE>
After giving effect to the Merger, approximately 84% of the Company's stores
will have been opened or remodeled within the last seven years. Over the past
five fiscal years, the Company's capital expenditures for the construction of
new and remodeled stores (not including California operations) totaled
approximately $414 million. In addition, during the same period the Company
invested approximately $163 million in distribution, processing and other
support facilities (not including California operations). During the five year
period ended December 30, 1995, Smitty's spent approximately $72 million in
capital expenditures, including approximately $42 million since mid-1994 to
remodel substantially all of its Phoenix-area stores.
42
<PAGE>
The Company's real estate department locates, acquires and develops sites
for future stores. The Company's 48 years of operation have allowed it to
choose its store locations selectively as new residential areas have been
developed. The Company believes that many of its stores are in developed areas
where land values and the difficulties in locating suitable parcels would make
it difficult to replicate the Company's existing store base. The Company has
historically sought to purchase the best potential new store locations
available in any target market. If the Company cannot purchase the best
potential locations, however, it will consider leasing a location from its
owner or a local developer. As a result of this strategy, after giving effect
to the Merger, the Company will own 108 of its 148 stores, including the
underlying land with respect to 97 of such owned stores. See "Business--
Properties." In order to maximize its future capital expenditure resources,
the Company intends to place a greater emphasis on leasing new stores
following the consummation of the Transactions.
MERCHANDISING
The Company's merchandising strategy is to offer customers the ability to
fulfill a significant portion of their daily and weekly shopping needs at one
convenient location and to establish and promote its reputation as a low price
leader in the trade area of each of its stores. The cornerstones of this
strategy include:
Everyday Low Pricing. The Company offers its products on an everyday low
pricing ("EDLP") basis in all markets other than Phoenix and Tucson, where the
Company offers a combination of EDLP and promotional pricing. The Company
offers an EDLP program in most markets because the Company believes that it
generally allows for higher overall profitability than a promotional pricing
program. An EDLP program allows for more consistent prices over time than a
promotional program, which entails variable pricing and higher levels of
demand for sale products. As a result, EDLP simplifies inventory management
and lowers operating costs.
Quality Customer Service. The Company believes a key to its success is its
emphasis on quality customer service. The Company provides courteous and
efficient customer service by placing a high degree of emphasis on employee
training. Most stores have a customer service counter located near the store
entrance to answer questions and to assist customers in locating merchandise.
The Company also provides rapid in-store checkout services, aided by the use
of computerized scanning devices and the bagging of groceries at checkout. In
most locations, stores are open 24 hours each day.
Advertising and Promotion. The Company reinforces its low price image
through extensive television advertising and through print advertising in
newspapers and circulars. The Company divides its advertising budgets in a
similar manner across its markets, with approximately 80% committed to print
advertising and approximately 20% committed to radio and television
advertising. The Company also takes an active interest in the communities in
which its stores are located and maintains programs designed to contribute
funds, products and manpower to local charities and civic groups.
Specialty Departments. Each combination store provides certain specialty
departments designed to provide one-stop shopping convenience to customers and
to increase the frequency with which customers return to the store. The
specialty departments, which vary depending upon store size and location,
include delicatessens with prepared foods, full-service fresh fish and meat
departments, bakeries, dry cleaning drop-off facilities, U.S. Post Office
branches, pharmacies, video rental departments, take-out food counters, camera
and photo departments with on-site film processing, floral departments and in-
store banking provided by a regional or local bank.
Private Label Program. Through its private label program, the Company offers
in excess of one thousand items under the "Smith's," "Mountain Dairy," "Creek
View" and other brand names. These products provide customers with quality
comparable to that of national brands but at lower prices. Management believes
that the Company's private label program is one of the most successful
programs in the industry. The Company's owned manufacturing and processing
facilities, including its milk and beverage plants, cultured dairy products
plant, ice cream processing plant and frozen dough plant, supply the Company's
stores with private label milk, milk products, fruit punches, sour cream,
yogurt, cottage cheese, chip dip products, ice cream and novelty items, baked
goods and other products and allow the Company to generate gross margins on
such private label items that are generally higher than on national brands.
43
<PAGE>
Frequent Shopper Program. Smitty's has developed a proprietary information
system that updates and maintains a comprehensive customer database used for
its unique frequent shopper program, Shopper's Passport. Customers obtain a
Shopper's Passport bar-coded scan readable card which entitles them to receive
a number of benefits, including discounts on certain purchases, check cashing
authorization and participation in special promotions held throughout the
calendar year. Management believes that as a result of this program, Shopper's
Passport has established one of the most comprehensive supermarket customer
data bases in the country. The Company is evaluating plans to utilize the
Shoppers Passport program in Smith's stores throughout the Phoenix and Tucson
markets following the Merger.
OPERATIONS
The Company is divided into two major operating regions, the Intermountain
Region and the Southwest Region, which are segmented into eight geographic
districts. The Intermountain Region consists of stores in Utah, Idaho, Nevada
and Wyoming. The Southwest Region consists of stores in Arizona, New Mexico
and Texas. The districts are staffed with operational managers who are given
as much autonomy as possible while retaining the advantages of central control
over accounting, real estate, legal, data processing and other functions at
the Company's headquarters. This operational autonomy enables management to
react quickly to changes in local markets.
District and store managers are responsible for store operations, local
advertising formats, employee relations and development, customer relations,
community affairs and other functions relating to local operations. The
regional staff includes supervisors responsible for the meat, produce, bakery,
non-food, pharmacy, one-hour photo, deli and prepared foods departments, who
help each regional manager.
PURCHASING, DISTRIBUTION AND PROCESSING
The Company's purchasing activities are regionally centralized, with most
food products and all general merchandise being purchased in volume through
regional buyers supervised by headquarters' management. Certain specialized or
perishable products are purchased at regional warehouse levels. Management
believes that, following the Merger, the Company can achieve increased
promotional allowances and discounts through a coordinated buying effort with
Yucaipa-affiliated supermarket chains with aggregate annual sales (when
combined with the Company) in excess of $11 billion.
The Company owns and operates one of the most modern and efficient backstage
operations in the industry. The Company's warehousing, distribution and
processing facilities, which comprise approximately 3,000,000 square feet,
have all been built, expanded or remodeled in the last five years. Central
distribution facilities in Salt Lake City and Layton, Utah supply products to
all stores in the Intermountain Region and distributes the majority of non-
food merchandise, pharmaceutical products and certain bulk products to stores
in the Southwest Region. An integrated distribution and processing center in
Tolleson, Arizona includes complete warehousing operations and a dairy
processing plant. The facility supplies products to all stores in the
Southwest Region and Las Vegas. The Company also operates two produce
warehouses, one in Ontario, California and the other in Albuquerque, New
Mexico. See "--Properties." Approximately 80% of products sold in 1995 were
shipped through the Company's distribution network.
The Company transports food and merchandise from its distribution centers
primarily through a Company-owned fleet of tractors and trailers which
primarily serve nearby stores and through common carriers for stores located
at greater distances. As of December 30, 1995, the Company's owned fleet
included 158 tractors and 406 trailers. The Company seeks to lower costs on
shipments by taking advantage of backhauling opportunities where available.
The Company's processing facilities located in Tolleson, Arizona and Layton,
Utah produce a variety of products under the Company's private label for
distribution to Company stores. The Company's dairy plants process a variety
of milk, milk products and fruit punches. The Company's automated frozen dough
plant produces frozen bakery goods for final baking at in-store bakeries. The
Company's cultured dairy products plant
44
<PAGE>
produces sour cream, yogurt, cottage cheese and chip dip products. The
Company's ice cream processing plant supplies all stores with Smith's private
label ice cream and novelty items.
The Company believes that its central distribution facilities provide
several advantages. Management is able to control inventory levels throughout
its system in order to maximize the Company's in-stock position, while at the
same time optimizing the use of store shelf space. Costs of products are
reduced through centralized volume purchases and effective management of per-
item transportation costs. Stores are also served more efficiently through
central control of delivery schedules. By managing overall inventory levels,
the Company seeks to maximize inventory turns and minimize investments in
inventory. Management believes the Company's backstage operations will be able
to accommodate the increased volume resulting from the integration of the
Smitty's operations in Arizona following the Merger and to support anticipated
future growth.
Smitty's currently makes approximately 60% of its annual purchases from
Fleming Companies, Inc. ("Fleming") under a supply agreement which by its
original terms expires in June, 1997. Smitty's is negotiating with Fleming to
amend the supply agreement, subject to certain conditions, whereby Fleming
will become a secondary supplier to Smitty's and, following the Merger, to the
Company through the end of 1997. Pursuant to its discussions with Fleming,
Smitty's would purchase inventory from Fleming in an amount not less than
approximately $10 million per month through December 31, 1997. Notwithstanding
the foregoing, it is anticipated that Smitty's would have the right to
terminate the supply agreement at any time if its aggregate purchases of
inventory from Fleming exceeded $200 million.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company is currently supported by a full range of advanced management
systems. Smith's has implemented store-level inventory and item management
systems developed on UNIX in-store processors using the Informix relational
database. This application includes direct store delivery store receiving,
which allows goods to be scanned electronically upon arrival at each store
receiving dock. This system also includes price verification and order entry
using hand-held personal computers. Store checkout is supported by NCR point-
of-sale scanning. Smith's stores are supported by pharmacy, video rental,
labor scheduling and time and attendance systems which help the Company
facilitate customer service while managing labor costs.
The Company's buying operations are supported by the AS/400-based E3
forecasting and purchasing system which uses statistical models of
seasonality, promotions and buying behavior to optimize inventory levels. The
Company's distribution centers operate utilizing leading software of the
Dallas Systems Company. The key components are the Distribution Center
Management Control System, which is used for all inventory processing, and the
Distribution Center Assignment Monitoring System (DCAMS), which is used for
labor standards management. To increase operating efficiency and decrease
labor costs, the DCAMS system transmits work assignments to lift drivers and
order selectors through a radio-frequency terminal. Smith's is currently
installing the OMI purchasing and forecasting system which will be used for
distribution center replenishment. The installation is expected to be
completed during 1996.
Smith's computer operations and applications development activities were
outsourced to Electronic Data Systems in 1992 under a ten-year outsourcing
agreement.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse-
style supermarkets, club stores, deep discount drug stores and "supercenters."
In addition, new competitors have entered the Company's markets in the past
and could do so in the future. Supermarket chains generally compete on the
basis of price, location, quality and variety of products, service and store
condition. The Company regularly monitors
45
<PAGE>
its competitors' prices and adjusts its prices and marketing strategy in light
of existing conditions. Some of the Company's competitors have greater
financial resources than the Company and could use those resources to take
steps which could adversely affect the Company's competitive position.
The Company's principal supermarket competitors in the Salt Lake City market
are Albertson's, Ream's Food Stores, Harmons, Fred Meyer, and Dan's Foods. In
the Phoenix market, the Company's principal supermarket competitors include
Fry's, Bashas Markets, Safeway, ABCO, Albertson's and Mega Foods and, prior to
the Merger, Smitty's. In Albuquerque, the Company's principal supermarket
competitors are Furr's, Jewel Osco and Albertson's, and in Las Vegas, the
Company's main supermarket competitors are Lucky, Vons and Albertson's. The
Company also competes with various drug chains and other non-food operators in
each of its markets. See "Risk Factors--Competition."
EMPLOYEES AND LABOR RELATIONS
The Company's policy is to train and develop its employees and promote from
within. The Company generally prefers to promote its own employees to store
manager positions. Management-level employees, including store department
managers, participate in incentive compensation programs tied to
profitability, and such compensation programs can represent a significant
percentage of such managers' total compensation. The Company believes that its
employee retention rate is high within the industry, especially at the store
manager level and above.
Excluding California operations, as of December 30, 1995, Smith's employed
approximately 16,000 persons, approximately 53% of whom were full-time and 47%
of whom were part-time. Approximately 42% of the Company's employees are
unionized. The Company's unionized employees work under 15 collective
bargaining agreements with local labor unions, primarily in Arizona, Nevada
and New Mexico, which typically have three-year terms. Management of the
Company believes that it will be able to renew existing agreements on terms
satisfactory to the Company. If it is unable to do so, however, there could be
a material adverse effect on the Company's operations. The wages and benefits
provided in the Company's collective bargaining agreements are substantially
similar to those of its supermarket competitors. The Company has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
As of January 14, 1996, Smitty's employed approximately 4,600 people, of
whom approximately 36% were full-time and approximately 64% were part-time.
Approximately 4,100 employees working in the stores, constituting
approximately 89% of Smitty's employees, are covered by a collective
bargaining agreement that expires in October 1997. Smitty's has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
PROPERTIES
As of December 30, 1995, after giving effect to the Merger and the
California Divestiture, the Company would have owned 108 of its 148 operating
stores, including the underlying land with respect to 97 of such owned stores.
The Company's stores are located throughout a seven-state area as follows:
<TABLE>
<CAPTION>
STATE STORES OWNED STORES LEASED TOTAL
----- ------------ ------------- -----
<S> <C> <C> <C>
Arizona.................................. 40 18 58
Utah..................................... 30 5 35
Nevada................................... 12 10 22
New Mexico............................... 15 4 19
Idaho.................................... 4 1 5
Wyoming.................................. 3 2 5
Texas.................................... 4 0 4
--- --- ---
Total.................................. 108 40 148
=== === ===
</TABLE>
46
<PAGE>
The Company leases or subleases 40 of its operating stores from third
parties under leases expiring between 1997 and 2023. Eleven of the Company-
owned stores are located on property which is ground-leased from third parties
under leases expiring between 2007 and 2045. In most cases, such building and
ground leases are subject to customary renewal options.
The Company owns a 1,180,000 square-foot distribution and dairy processing
center in Tolleson, Arizona, 573,000 square feet of grocery warehousing
facilities and 348,000 square feet of processing plants in Layton, Utah and a
226,000 square-foot non-food warehouse in Salt Lake City, Utah. The Company
also leases a 40,000 square-foot produce and forward-purchasing warehouse in
Albuquerque, New Mexico, a 408,000 square-foot non-foods warehouse in Salt
Lake City, Utah and a 205,000 square-foot produce warehouse in Ontario,
California, under leases expiring in 1997, 1997 and 1999, respectively.
The Company's corporate offices, data processing and records storage
facilities are located in over 100,000 square feet of office and warehouse
space owned by the Company in Salt Lake City, Utah.
CALIFORNIA DIVESTITURE
In late 1995, management determined that because of the attractive growth
prospects of the Company's principal markets and the competitive environment
in California, the Company would attempt to sell its California operations and
redeploy its resources into its non-California markets.
In December 1995, Smith's entered into an agreement to sublease its
Riverside, California distribution center to Ralphs. On January 29, 1996,
Ralphs commenced the sublease of the Riverside distribution center and dairy
plant for an initial term of 23 years. Ralphs also purchased certain equipment
and inventory for an aggregate purchase price (net of certain offsetting
payments) of approximately $8.7 million. The sublease provides for a subrental
of approximately $8.8 million per annum, which is substantially the same
amount as is payable by Smith's under the master lease, and requires Ralphs to
fulfill substantially all of the other monetary obligations of Smith's under
the master lease.
In January 1996, the Company entered into agreements to sell or lease 16 of
its California stores and three non-operating properties. The Company has
substantially completed the sale of these stores, including related equipment
and inventory. Of the stores being sold or leased, the Company has leased or
subleased eight operating stores and one non-operating store to Ralphs. The
non-operating store, located in Beaumont, California, is partially completed,
and has been subleased by Ralphs in "as is" condition. The subleases to Ralphs
are for terms, and at subrentals, that are substantially equivalent to the
terms of, and the rentals payable under, the master store leases (except that
Ralphs is not responsible for rent escalations in the master store lease of
one of the subleased stores). The remaining eight stores were sold to other
supermarket companies, four pursuant to outright sales, two pursuant to
assignments of underlying leases and two pursuant to subleases. The two
subleases are subject to early termination if the Company has not satisfied
certain conditions within 18 months. In order to satisfy these conditions, the
Company is required to either (i) obtain fee simple title to the properties by
removing them from the Sale-Leaseback Financing (as defined below) and
delivering such title to the sublessee or (ii) obtaining certain estoppel,
non-disturbance and attornment agreements to protect the sublessee's interests
in such premises. If the Company is unable to satisfy either of these
conditions, then each sublessee will have the option to terminate the sublease
and receive indemnification for certain costs. In order to convey fee simple
title to the properties, the Company may be required to assume certain related
indebtedness and would apply the net proceeds of the sale to reduce other
indebtedness. See "--California Sale-Leaseback Financing" below.
The Company has completed the California Divestiture transactions described
above and, since December 30, 1995, has received net cash proceeds of
approximately $67.2 million (excluding store inventory). The Company expects
to receive approximately $10.6 million of additional cash proceeds from the
sale of certain undeveloped real estate shortly following the consummation of
the Transactions. All of the remaining California stores were closed by March
16, 1996. In connection with its decision to cease operations in California,
Smith's
47
<PAGE>
recorded pre-tax restructuring charges of $140 million for the year ended
December 30, 1995 to reflect the anticipated cost to Smith's of the California
Divestiture. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
In connection with the California Divestiture, the Company entered into a
settlement agreement with the California Attorney General (the "CAG") relating
to the stores that were sold, leased, or closed. Under the settlement
agreement, the Company agreed that, for a period of five years, it would not
operate any of the closed stores as supermarkets without the permission of the
CAG. In addition, for the same five-year period, the Company agreed not to (i)
transfer the closed stores to third parties for supermarket use without the
CAG's approval, (ii) transfer such stores for non-supermarket use without
prior notice to the CAG, and (iii) sell any of such stores subject to
restrictions as to future supermarket use.
CALIFORNIA SALE-LEASEBACK FINANCING
In order to finance its Riverside, California distribution center and eight
of its California stores the Company completed a sale-leaseback financing (the
"Sale-Leaseback Financing") in 1994. Pursuant to such financing, the Company
sold a portion of its interest in the properties to an owner trustee and
entered into an operating lease for each property. In order to provide the
financing for owner trustee's purchase of the properties, the Company filed a
registration statement with the Commission pertaining to a public offering of
$152.4 million of pass through certificates. Each of the pass through trusts
issuing the certificates used the proceeds of the offering to acquire notes
from the owner trustee (which in turn used the proceeds to acquire its
interest in the properties from the Company). Neither the notes nor the pass
through certificates are obligations of, nor are they guaranteed by, the
Company and, accordingly, are not reflected as indebtedness or other
liabilities of the Company under generally accepted accounting principles.
Under the terms of the Sale-Leaseback Financing, the Company may terminate
its lease with respect to the various California properties if it deems such
properties to be obsolete, uneconomic for use or surplus to the Company's
needs. In connection with any such termination, the Company may elect to
satisfy all of the rights and obligations of the owner trustee in respect of
the related notes by exchanging such notes for (a) if the property is sold to
a party other than the Company, unsecured, full recourse securities of the
Company or (b) if such property is sold to the Company, secured, full recourse
securities of the Company. In addition, the Company may substitute other
properties (including properties located outside California) for properties
which it deems to be obsolete, uneconomic for use or surplus to its needs. The
substitute properties must have a fair market value, utility and useful life
equal to or greater than that of the substituted property. The Company would
not be required to assume any indebtedness in connection with such a
substitution. Any such exchange or substitution may be made by the Company
only if certain conditions are satisfied.
In April 1996, the Company received a letter from a holder of pass through
certificates pointing out an inaccurate statement in the 1994 pass through
certificate prospectus. The letter referred to a statement in the prospectus
disclosing that holders of the certificates would not receive any covenant
protection in the event of a highly leveraged transaction involving the
Company, including any transaction resulting in a change of control. The
prospectus went on to state that none of the then-outstanding indebtedness of
the Company contained provisions affording holders of such indebtedness
protection in the event of a change of control, which was characterized in the
letter as a material representation. At the date of such prospectus, a
substantial amount of the Company's then-existing indebtedness did contain
such change of control provisions. The Company has pointed out to the holder
that consummation of the Transactions will not result in a change of control
of the Company under the terms of such existing debt instruments although the
indebtedness under such debt instruments will be repaid in order to remove
certain financial and other covenants contained therein that would otherwise
hinder the Company's ability to consummate the Transactions. The Company is
currently reviewing the relevant facts and circumstances.The letter suggested
that all interested parties be made aware of the existence of the alleged
misrepresentation, but made no specific claim or demand on the Company.
Although no assurances can be given, the Company does not believe that any
claims by the holders of the pass through certificates, if made, would have a
material adverse effect on the Company or its ability to complete the
California Disposition.
48
<PAGE>
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental laws, rules,
regulations and investigative or enforcement activities, as are other
companies in the same or similar business. The Company believes it is in
substantial compliance with such laws, rules and regulations. These laws,
rules, regulations and agency activities change from time to time, and such
changes may affect the ongoing business and operations of the Company. The
Company, from time to time, has or may in the future receive requests from
environmental regulatory authorities to provide information or to conduct
investigation or remediation activities. None of these requests is expected by
management to have a material adverse effect on the Company's business.
GOVERNMENTAL REGULATION
The Company is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies which regulate the
distribution and sale of alcoholic beverages, pharmaceuticals, milk and other
agricultural products, as well as various other food and drug items and also
regulate trade practices, advertising, building standards, labor, health,
safety and environmental matters. The Company from time to time receives
inquiries from state and federal regulatory authorities with respect to its
comparative advertising practices, pricing policies, employment practices and
other trade practices. None of these inquiries, individually or in the
aggregate, has resulted, or is expected by management to result, in any order,
judgment, fine or other action that has, or would have, a material adverse
effect on the business or financial position of the Company.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses a variety of trade names, service marks and trademarks in
its business including "Smith's," "Smith's Food & Drug Centers," "Mountain
Dairy," "Creek View," "PriceRite," and numerous others. While the Company
believes its trademarks are important to its business, except for "Smith's,"
"Smith's Food & Drug Centers," "PriceRite" and, following the Merger,
"Smitty's," "Smitty's Super Valu" and "Shoppers Passport," the Company does
not believe any of such trademarks are, or will be, critical to its business.
LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to various
legal actions. Management believes these are routine in nature and incidental
to the operations of the Company. Management believes that the outcome of any
proceedings to which the Company is currently a party will not, individually
or in the aggregate, have a material adverse effect on the operations or
financial condition of the Company.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
persons who are expected to serve as the executive officers and directors of
the Company following the consummation of the Transactions. Following the
Recapitalization, the Board of Directors will be comprised of seven directors,
including two nominees of the Smith Group (as defined) and two nominees of the
Yucaipa Group (as defined). See "Certain Relationships and Related
Transactions--Standstill Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Jeffrey P. Smith.................... 46 Chairman of the Board
Ronald W. Burkle.................... 43 Chief Executive Officer, Director
Allen R. Rowland.................... 51 President, Chief Operating Officer,
Director
Robert D. Bolinder.................. 65 Executive Vice President--Corporate
Planning and Development
Matthew G. Tezak.................... 40 Senior Vice President, Chief
Financial Officer
J. Craig Gilbert.................... 48 Senior Vice President, Regional
Manager-- Intermountain Region
James W. Hallsey.................... 53 Senior Vice President, Regional
Manager-- Southwest Region
Richard C. Bylski................... 57 Senior Vice President, Human
Resources
Michael C. Frei..................... 50 Senior Vice President, General
Counsel and Secretary
Kenneth A. Martindale............... 36 Senior Vice President, Marketing
Fred F. Urbanek..................... 60 Senior Vice President, Facility
Engineering
John T. Standley.................... 32 Senior Vice President,
Administration
Fred L. Smith....................... 48 Director
Linda McLoughlin Figel.............. 32 Director
Bruce Karatz........................ 50 Director
Bertram R. Zweig.................... 61 Director
</TABLE>
Jeffrey P. Smith has been a director of Smith's since 1971. He has served as
Chairman of the Board and Chief Executive Officer since 1988. He served as
Chief Operating Officer of Smith's from 1984 to 1988.
Ronald W. Burkle has been the Chairman of the Board of Smitty's and a
director of SSV since 1994 and Chairman of the Board of SSV since October
1995. Mr. Burkle co-founded Yucaipa in 1986 and has served as a director of
Ralphs Grocery Company since 1995. Mr. Burkle served as Chairman of the Board
of Ralphs Grocery Company from 1995 to January 1996 and as Chief Executive
Officer and a director of its predecessor, Food 4 Less Supermarkets, Inc.
since 1987. Mr. Burkle served as Chief Executive Officer and a director of
Dominick's Supermarkets, Inc. from 1995 to 1996 and currently serves as its
Chairman of the Board. From 1986 to 1988, Mr. Burkle was Chairman and Chief
Executive Officer of Jurgensen's, a Southern California gourmet food retailer.
Mr. Burkle has served as a director of Kaufman and Broad Home Corporation
since March 1995.
Allen R. Rowland has been President and Chief Operating Officer since
joining Smith's in January 1996. From 1989 to 1996 he served as a Senior Vice
President/Regional Manager of Albertson's, Inc. From 1982 to 1989 he was a
Vice President/Division Manager with the Florida and Texas Divisions of
Albertson's, Inc.
Robert D. Bolinder has been a director of Smith's since 1985. He has served
as Executive Vice President, Corporate Planning and Development of Smith's
since 1993. He served as Executive Vice President and Chief Financial Officer
of Smith's from 1988 to 1993, after serving four years as a supermarket
industry management consultant. He is also a director of Hannaford Bros.
Company, Inc., a regional supermarket chain, and Idaho Power Company, a public
utility company. Prior to 1984, Mr. Bolinder was Vice Chairman and a director
of Albertson's, Inc. for many years.
50
<PAGE>
Matthew G. Tezak has been Senior Vice President and Chief Financial Officer
of Smith's since 1993. He served as Senior Vice President, Finance and
Treasurer from 1992 to 1993 and Vice President, Finance and Treasurer from
1987 to 1992. Mr. Tezak, a certified public accountant, joined Smith's in 1979
as Assistant Controller.
J. Craig Gilbert has served as Senior Vice President, Regional Manager,
Intermountain Region of Smith's since 1993. From 1992 to 1993 he served as
Senior Vice President, Regional Manager, Southwest Region. From 1991 to 1992
he was Vice President, Regional Manager, Southwest Region and from 1985 to
1991 he served as Vice President, Sales and Merchandising, Intermountain
Region.
James W. Hallsey has served as Senior Vice President, Regional Manager,
Southwest Region since 1995. He rejoined Smith's in 1994 as Senior Vice
President, Special Projects after serving most of 1994 as Senior Vice
President at McKesson Drug Company, a pharmacy company. In 1993, Mr. Hallsey
retired as a director of Smith's (a capacity in which he served since 1985)
and Senior Vice President, Corporate Nonfoods Director (a capacity in which he
served since 1992). From 1980 to 1992 he served as Vice President, Corporate
Nonfoods Director of the Company.
Richard C. Bylski has been Senior Vice President, Human Resources of Smith's
since 1992. He served as Vice President, Human Resources of Smith's from 1985
to 1992.
Michael C. Frei joined Smith's in 1990 as Senior Vice President, General
Counsel and Secretary. Prior to that time, Mr. Frei served as Vice President
and General Counsel of Price Development Company, a commercial real estate
developer, since 1981.
Kenneth A. Martindale has served as Senior Vice President, Marketing of
Smith's since 1995. He served as Vice President, Merchandising, California
Region from 1991 to 1995. From 1984 to 1991, he served as a district manager
in the Intermountain Region.
Fred F. Urbanek has been Senior Vice President, Facility Engineering of
Smith's since 1992. He served as Vice President, Facility Engineering of
Smith's from 1985 to 1992.
John T. Standley is the Chief Financial Officer, Vice President and
Assistant Secretary of Smitty's and SSV, and upon consummation of the Merger,
will be the Senior Vice President, Administration of the Company. Mr. Standley
joined Smitty's in December 1994. Prior to that time, Mr. Standley was Vice
President of Finance for Food 4 Less Supermarkets, Inc. from 1991 to 1994.
Prior to 1991, he was a manager at Arthur Andersen & Company.
Fred L. Smith has been a director of Smith's since 1968. Since 1988, he has
been President of Fred Smith's Honda Automobiles of Palm Springs, an auto
dealership, prior to which time he was a private investor. Since 1989, he has
also been President of Fred Smith's Jaguar/Rolls Royce of Rancho Mirage, an
auto dealership.
Linda McLoughlin Figel joined Yucaipa in 1989 and became a general partner
in 1991. Prior to that time, she was employed by Bankers Trust Company in its
Structured Finance Group.
Bruce Karatz has been the President, Chief Executive Officer and a director
of Kaufman and Broad Home Corporation since 1986 and its Chairman of the Board
since July 1993. Mr. Karatz is also a director of Honeywell, Inc., National
Golf Properties, Inc. and a Trustee of the National Park Foundation and the
RAND Corporation.
Bertram R. Zweig is a partner with the law firm of Jones, Day, Reavis &
Pogue. Mr. Zweig was with Jones, Day from 1962 to 1978, and rejoined the firm
in 1995. Between August 1992 and June 1995, Mr. Zweig was a partner with the
law firm of Graham and James, and from January 1988 to July 1992 he was a
partner with the law firm of Stroock & Stroock & Lavan. He is a member of the
Board of Directors of Wedbush Corporation, the parent of Wedbush Morgan
Securities, Inc., a regional investment banking firm in Los Angeles. Mr. Zweig
is a member of the Board of Directors of Aquatic Water Systems Incorporated.
51
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Amended and Restated Certificate of Incorporation of the Company will
provide that the full Board of Directors will be comprised of seven directors
and, without the unanimous approval of the directors then in office, the
number of directors may not be altered. The Board of Directors will be divided
into three classes as nearly equal in number as possible, with the term of
office of one class expiring each year and each director serving for a term
ending at the third annual meeting of stockholders of the Company following
the annual meeting at which such director was elected, except for the
directors to be elected at the Company's 1996 annual meeting of stockholders,
who shall have the one, two or three-year term for which such directors are
elected at such meeting.
Any increase in the number of directors or any vacancy on the Board of
Directors may be filled, subject to the rights of any holders of any series of
Preferred Stock to elect additional directors, only by the affirmative vote of
a majority of the remaining directors then in office, even though less than a
quorum of the Board. Any director elected in accordance with the preceding
sentence will hold office for the remainder of the full term of the class of
directors in which the new directorship was created or such vacancy occurred.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding ownership of the
Company's voting securities as of April 15, 1996, giving effect to the
Transactions. The table has been prepared based on the assumptions that (a)
50% of the outstanding Common Stock of each holder is purchased pursuant to
the Tender Offer, (b) 3,000,000 shares of Series I Preferred Stock are
purchased by the Company from the Dee Glen Smith Marital Trust I (2,100,000
shares) and Ida Smith (900,000 shares), and (c) 2,206,000 shares of Series I
Preferred Stock are directly or indirectly conveyed by the Dee Glen Smith
Marital Trust I to certain charitable organizations. Based on such assumptions
and giving effect to the foregoing events, the following table sets forth the
ownership of Common Stock and Series I Preferred Stock of the Company by each
person who to the knowledge of Smith's will own 5% or more of any class of the
Company's outstanding voting stock, by each person who will be a director or
executive officer of the Company, and by all executive officers and directors
of the Company as a group. Share amounts and percentage ownership information
set forth below are subject to change pending finalization of the
Recapitalization and may vary depending on the actual number and class of
shares tendered in the Tender Offer. The actual number of shares of Series I
Preferred Stock which (x) the Company elects to purchase and/or (y) the Dee
Glen Smith Marital Trust I directly or indirectly conveys to charitable
organizations in connection with the consummation of the Transactions may be
increased or decreased by amounts that are not expected to have a material
adverse effect on the Company.
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES I
COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF
----------------- ------------- ------------------- ALL VOTES OF
NUMBER NUMBER NUMBER ALL CLASSES
OF SHARES % OF SHARES % OF SHARES % OF STOCK
--------- ---- --------- --- ----------- ----- ------------
BENEFICIAL OWNER(A)
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P. Smith
1550 S. Redwood Rd.
Salt Lake City, UT
84104................... 1,670,954(b) 29.4 5,300 * 3,149,000(c) 31.6 29.0
Dee Glen Smith Marital
Trust I
c/o Ida W. Smith
1066 North East Capital
Blvd.
Salt Lake City, UT
84103................... 231,210(d) 4.1 -- -- 3,149,000(d) 31.6 20.3
Richard D. Smith
1550 South Redwood Road
Salt Lake City, UT
84104................... 1,174,463(e) 20.7 -- -- -- -- 7.1
Fred L. Smith
74285 Quail Lake Dr.
Indian Wells, CA 92210.. 957,498(f) 16.8 -- -- -- -- 5.8
Trust for the Children
of
Jeffrey P. Smith
2551 Brentwood Circle
Salt Lake City, UT
84121................... 577,650(d) 10.2 -- -- -- -- 3.5
Trust for the Children
of
Fred L. Smith
74285 Quail Lake Dr.
Indian Wells, CA 92210.. 577,650(g) 10.2 -- -- -- -- 3.5
Trust for the Children
of
Richard D. Smith
1038 North East Capital
Blvd.
Salt Lake City, UT
84103................... 557,650(h) 9.8 -- -- -- -- 3.4
Corporation of the
President of
the Church of Jesus
Christ of
Latter-day Saints
50 East North Temple
Salt Lake City, UT
84150................... -- -- -- -- 2,000,009 20.1 12.0
University of Utah
Medical School
407 Park Building
Salt Lake City, UT
84112................... -- -- -- -- 1,000,000 10.0 6.0
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES I
COMMON STOCK COMMON STOCK PREFERRED STOCK PERCENT OF
----------------- ----------------- --------------- ALL VOTES OF
NUMBER NUMBER NUMBER ALL CLASSES
OF SHARES % OF SHARES % OF SHARES % OF STOCK
--------- ---- --------- ---- --------------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
City of Hope
1500 East Duarte Road
Duarte, CA 91010........ -- -- -- -- 500,004 5.0 3.0
Ronald W. Burkle
c/o The Yucaipa
Companies
10000 Santa Monica Blvd.
Los Angeles, CA 90067... -- -- 2,125,406(i) 21.5 -- -- 1.3
Allen P. Martindale..... 310,000(j) 5.5 -- -- -- -- 1.9
Allen R. Rowland........ -- -- -- -- -- -- --
Kenneth A. Martindale... 53,500(k) * 9,497(l) * -- -- *
Robert D. Bolinder...... 50,000 * 15,000(m) * -- -- *
J. Craig Gilbert........ 32,500(n) * -- -- -- -- *
Matthew G. Tezak........ 30,000 * 16,048 * -- -- *
James W. Hallsey........ 16,750(o) * -- -- -- -- *
Michael C. Frei......... -- -- 1,584 * -- -- *
Richard C. Bylski....... 28,009(p) * 983 * -- -- *
Fred F. Urbanek......... 22,500 * 505 * -- -- *
John T. Standley........ -- -- -- (i) -- -- -- --
Linda McLoughlin Figel.. -- -- -- (i) -- -- -- --
Bruce Karatz............ -- -- -- -- -- -- --
Bertram R. Zweig........ -- -- -- -- -- -- --
All directors and
officers as a group (16
persons)............... 2,861,711 50.4 2,174,323 22.0 3,149,000 31.6 37.5
</TABLE>
- --------
* Less than one-percent.
(a) Each person has sole investment and voting power with respect to the
shares indicated, except as otherwise set forth in the footnotes to this
table. Each share of Class A Common Stock is convertible at any time at
the option of the holder into one share of Class B Common Stock.
(b) Includes 771,055 shares which are held of record by four trusts of which
Jeffrey P. Smith is the trustee and of which his children and the children
of Richard D. Smith are beneficiaries, and 231,210 shares held of record
by a trust for benefit of Ida W. Smith and of which Mr. Smith is trustee.
(c) Such shares are held of record by a trust for the benefit of Ida W. Smith
and of which Jeffrey P. Smith is trustee.
(d) Included in the shares shown for Jeffrey P. Smith.
(e) Includes 733,501 shares which are held of record by four trusts of which
Richard D. Smith is trustee and of which his children and the children of
Jeffrey P. Smith are beneficiaries and 5,871 shares held of record by Mr.
Smith's wife.
(f) Includes 679,389 shares which are held of record by four trusts of which
Fred L. Smith is trustee and of which his children are beneficiaries, and
17,600 shares held of record by Mr. Smith's wife.
(g) Included in the shares shown for Fred L. Smith.
(h) Included in the shares shown for Richard D. Smith.
(i) Such shares are held of record by the following four limited partnerships
of which Yucaipa is the general partner: Yucaipa SSV Partners, L.P.
(1,140,816); Yucaipa Smitty's Partners, L.P. (300,667); Yucaipa Smitty's
Partners II, L.P. (136,793); and Yucaipa Arizona Partners, L.P. (547,130).
Mr. Burkle is a limited partner in two of those partnerships and is also
the controlling general partner of Yucaipa. Linda McLoughlin Figel, a
nominee for director of the Company, is a limited partner in Yucaipa SSV
Partners, L.P. Mr. Standley, who will be the Senior Vice President,
Administration of the Company following the Merger, is a limited partner
in Yucaipa Smitty's Partners, L.P. and Yucaipa Smitty's Partners II, L.P.
Under certain circumstances, the Company may prepay a portion of the
management fees payable to Yucaipa under the Management Services Agreement
through the issuance of up to 100,000 shares of the Company's Class B
Common Stock at its then current fair market value.
(j) Such shares are held of record by a trust for the benefit of Mr.
Martindale and his wife and of which Mr. Martindale is trustee.
(k) Includes 3,500 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(l) Includes 4,800 shares held of record by two children of Mr. Martindale and
of which Mr. Martindale is custodian.
(m) Includes 15,000 shares issuable upon exercise of vested options as of
April 15, 1996.
(n) Such shares are held of record by a trust for the benefit of Mr. Gilbert
and his wife and of which Mr. Gilbert is trustee.
(o) Includes 500 shares held of record by a child of Mr. Hallsey and of which
Mr. Hallsey is custodian.
(p) Includes 5,119 shares held of record by a partnership of which Mr. Bylski
is a general partner and 600 shares held of record by children of Mr.
Bylski and of which Mr. Bylski is custodian.
54
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT
Yucaipa will provide certain management services to the Company pursuant to
the Management Services Agreement to be executed upon consummation of the
Transactions. The Management Services Agreement will have a five-year term and
will provide for annual management fees of $1,000,000, plus reimbursement of
all of Yucaipa's reasonable out-of-pocket costs and expenses. Under the
Management Services Agreement, Yucaipa, through its partners, employees or
other designated agents, will provide the Company with management consultation
and advice regarding strategic planning and development, budgeting and future
financing plans, selection and retention of management personnel, integration
strategy, legal and governmental affairs, board presentations and similar
management services as may be requested from time to time. In addition, the
Company may retain Yucaipa in an advisory capacity in connection with certain
acquisitions or sale transactions, debt and equity financings, or any other
services not otherwise covered by the Management Services Agreement, for which
the Company will pay Yucaipa additional compensation in an amount to be agreed
upon by the Company and Yucaipa (and approved by a majority of the Company's
disinterested directors). Under certain circumstances, the Company may prepay
a portion of the management fees payable to Yucaipa under the Management
Services Agreement through the issuance of up to 100,000 shares of the
Company's Class B Common Stock at its then current fair market value.
During the term of the Management Services Agreement, Ronald W. Burkle, the
managing general partner of Yucaipa, will, if he so elects, have the right to
serve as the Chief Executive Officer of the Company and will have all rights
and responsibilities customarily vested in a Chief Executive Officer. Mr.
Burkle will not receive any compensation for serving in such capacity beyond
the management fees paid to Yucaipa under the Management Services Agreement.
The Management Services Agreement may be terminated by the Company: (a) at
any time by giving Yucaipa at least 90 days' written notice; (b) if Yucaipa
shall fail to reasonably perform any material covenant, agreement, term or
provision under the Management Services Agreement following 60 days' written
notice of such failure; (c) at any time if Yucaipa commits any act of fraud,
dishonesty or gross negligence in connection with its performance under the
Management Services Agreement which is materially detrimental to the Company's
business or reputation; (d) upon the occurrence of certain defaults or events
of default under the Indentures, the New Credit Facility, or any other
material debt agreements entered into to refinance such indebtedness, if such
default is not cured or waived within a specified period; (e) if Yucaipa is in
material default under the Standstill Agreement following 90 days' written
notice of such default; or (f) at any time if Yucaipa and its affiliates own
less than 50% of the shares of Class B Common Stock acquired by them in the
Merger. Yucaipa may terminate the Management Services Agreement: (a) if the
Company fails to reasonably perform any material covenant, agreement, term or
provision under the Management Services Agreement following 60 days' written
notice; (b) if the Company fails to make any payment to Yucaipa under the
Management Services Agreement following 30 days' written notice of such
failure; (c) if the Yucaipa nominees cease to hold Board seats as required by
the Standstill Agreement; (d) if the Board of Directors fails to approve two
or more material recommendations by Yucaipa to the Board (provided that
Yucaipa may not designate more than four such matters during any calendar year
as material) or the Board otherwise takes action which materially interferes
with the ability of Yucaipa to perform its responsibilities under the
Management Services Agreement following 60 days' written notice; or (e) if Mr.
Burkle ceases to be Chief Executive Officer of the Company, other than by
reason of his death, disability, termination for cause or voluntary
resignation. Either Yucaipa or the Company may terminate the Management
Services Agreement upon a change of control of the Company (defined generally,
subject to certain exceptions and conditions, as either (i) the acquisition of
beneficial ownership of 40% or more of the Company's outstanding shares of
voting stock, or (ii) the sale of substantially all of the Company's assets or
capital stock, excluding any transaction with Yucaipa or any of its partners
or affiliates or any member of the Smith Group). If the Management Services
Agreement is terminated (i) by the Company for the reason set forth in clause
(a) of the first sentence of this paragraph, (ii) by Yucaipa in accordance
with the Management Services Agreement, or (iii) pursuant to a change of
control of the Company, Yucaipa will be
55
<PAGE>
entitled to the greater of (x) $5 million, or (y) twice the total fees that
would have been earned by Yucaipa under the then remaining term of the
Management Services Agreement.
Yucaipa will agree that during the term of the Management Services Agreement
it will not, without the Company's prior written consent, provide management
or consulting services to, or make equity investments in excess of 5% in, any
business which operates in excess of five retail supermarkets in any market in
which the Company operates in excess of five retail supermarket stores,
subject to certain exceptions and conditions.
During the term of the Management Services Agreement, the Company will agree
to indemnify and hold harmless Yucaipa and each of its affiliates, partners,
officers, agents and the employees from and against all losses, claims,
damages, liabilities or expenses (collectively, "losses") resulting from any
claim, lawsuit or other proceeding by any person to which any of them may
become subject which is related to or arising out of the performance of the
services to be provided under the Management Services Agreement or the
Recapitalization Agreement, including all reasonable out-of-pocket expenses,
unless such losses result from (i) Yucaipa's or such party's gross negligence
or willful misconduct or any intentional, material breach of the Management
Services Agreement, or (ii) any settlement effected without the written
consent of the Company, which consent will not be unreasonably withheld.
STOCKHOLDERS' AGREEMENTS
On January 29, 1996, Smith's, Acquisition and certain stockholders of
Smitty's entered into a stockholders agreement (the "Smitty's Stockholders
Agreement") and Smitty's, Yucaipa and certain stockholders of Smith's entered
into a similar shareholders agreement (the "Smith's Shareholders Agreement").
Under the terms of the Smitty's Stockholders Agreement and the Smith's
Shareholders Agreement, each of the parties thereto agreed (i) to vote its
respective shares of Smitty's Common Stock or Smith's Common Stock, as
applicable, in favor of approval of the Recapitalization Agreement; (ii) to
refrain from soliciting any person other than Smitty's or Smith's, as
applicable, to purchase all or any material portion of the assets of, or
equity interests in, the Company; (iii) to refrain from transferring their
shares of the Company's stock without consent from Smith's or Smitty's, as
applicable, and the Company; and (iv) to take no action inconsistent with the
Recapitalization Agreement or that would prevent any condition precedent to
the Merger from being satisfied. Under the terms of the Smith's Shareholders
Agreement, the Smith's stockholders parties thereto have agreed to tender a
sufficient number of their shares of Common Stock in the Tender Offer to
enable Smith's to purchase 50% of the outstanding shares of Common Stock in
the Tender Offer.
STANDSTILL AGREEMENT
On January 29, 1996, the Company, Yucaipa and each of the limited
partnerships which own shares in Smitty's for which Yucaipa acts as the
general partner (the "Smitty's Principal Stockholders"; together with Yucaipa,
the "Yucaipa Group") entered into the Standstill Agreement. Pursuant to the
Standstill Agreement, the Yucaipa Group has agreed that for a 10-year period
ending on January 29, 2006, it will not acquire, offer to acquire, agree to
acquire, become the beneficial owner of, or obtain any rights in respect of
any Company Voting Securities (as defined below), by purchase or otherwise, or
take any action in furtherance thereof, if the effect of such action would be
to increase its aggregate beneficial ownership of securities that are entitled
to vote generally for the election of directors (the "Company Voting
Securities") above (x) 20% of the total number of votes that could be cast at
a stockholders' meeting of the Company (the "Combined Voting Power") or (y)
25% of the total number of Company Voting Securities outstanding, subject to
certain exceptions. In addition, without the approval of a majority of the
Disinterested Directors (defined as directors of the Company who are not
employees or officers of the Company, are not serving as designees of the
Yucaipa Group, and are not associates of Yucaipa or its affiliates) and
subject to certain limited exceptions, no member of the Yucaipa Group will
during such 10-year period (i) submit any proposals to acquire a majority of
the Combined Voting Power of Company Voting Securities (a "Change of Control
Proposal"), (ii) directly or indirectly sell, transfer any beneficial interest
in, pledge, hypothecate or otherwise dispose of any Company Voting Securities
or any shares of Company Common
56
<PAGE>
Stock to be acquired from the Company pursuant to the Warrant Agreement, other
than to another member of the Yucaipa Group or their respective affiliates in
any transaction or series of transactions that would result in a transfer of
greater than 3% of the Combined Voting Power or would result in any person
having, or having the right to acquire, beneficial ownership greater than 5%
of the Combined Voting Power, (iii) solicit any proxies, or assist any other
person in any way in solicitation of proxies, or submit any proposal for the
vote of stockholders of the Company, or induce another person to take any such
actions with respect to the voting of any of the Company Voting Securities,
(iv) directly or indirectly solicit or induce any person to bid for or acquire
Company Voting Securities in excess of 5% of the Combined Voting Power of
Company Voting Securities, or (v) engage in certain affiliate transactions.
Pursuant to the Standstill Agreement, the Company will use its best efforts
to cause to be elected to the Company's Board of Directors two designees of
the Smith Group, two designees of the Yucaipa Group, one member of the senior
management of the Company and two "independent directors" (as required by the
rules of the NYSE) who are also Disinterested Directors. Subject to the
provisions of the Certificate of Incorporation and By-laws of the Company and
the approval of the Company's stockholders, as long as the members of the
Smith Group and the Yucaipa Group and their respective affiliates each
beneficially own at least 8% of the outstanding shares of Common Stock, each
such Group will have the right to designate two directors of the Company, and
so long as the members of the Smith Group and the Yucaipa Group and their
respective affiliates each beneficially own at least 5% of the outstanding
shares of Common Stock, each such Group will have the right to designate one
director of the Company. However, no individual who is an officer, director,
partner, or principal stockholder of any Significant Competitor (as defined in
the Management Services Agreement) of the Company or any of its subsidiaries
will serve as director. At any time when the Yucaipa Group and its affiliates
or the Smith Group and its affiliates no longer beneficially own at least 5%
of the outstanding shares of Common Stock, such Group will not have the right
to designate any director of the Company, such Group's rights with regard to
the voting of Company securities will terminate and such Group will cause its
designees to the Board of Directors to resign.
Jeffrey Smith and Fred Smith have been nominated to be directors of the
Company as designees of the Smith Group and Ronald Burkle and Linda McLoughlin
Figel have been nominated to be directors of the Company as designees of the
Yucaipa Group.
In addition, each of the Smith Group and the Yucaipa Group has agreed that
they each will, at any annual or special meeting of the stockholders at which
the directors of the Company are to be elected or in connection with a
solicitation of consents through which directors of the Company are to be
selected, to vote (or give a written consent with respect to) all of their
respective Company Voting Securities in favor of the election to the Company's
Board of Directors of the nominees designated by such other Group.
The Standstill Agreement will terminate at any time that the Yucaipa Group
and its affiliates own less than 2% of the outstanding shares of Common Stock.
The Standstill Agreement may be amended or waived if such amendment or waiver
is in writing and executed by all parties thereto; provided that any amendment
or waiver requires the approval of a majority of the Disinterested Directors
of the Company.
YUCAIPA WARRANT
Upon closing of the Recapitalization, the Company has agreed to issue
Yucaipa warrants to purchase shares of Class C Common Stock of the Company
(the "Warrants") representing approximately 10% of the outstanding shares of
Common Stock on a fully diluted basis upon consummation of the Transactions.
The initial exercise price of the Warrants will be $50.00 per share. One-half
of the Warrants will be designated "Series A Warrants" and will be exercisable
at the election of Yucaipa on or prior to the fourth anniversary of the
Closing, and one-half of the Warrants will be designated "Series B Warrants"
and will be exercisable at the election of Yucaipa on or prior to the fifth
anniversary of the Closing. The foregoing expiration dates will each be
extended by five years in the event that, prior to such respective dates, the
market price of Class B Common Stock equals or exceeds the exercise price (as
adjusted from time to time) for a period of not less than 60 consecutive
trading
57
<PAGE>
days. The cashless exercise provisions of the Warrants allow the holder to
elect to exercise the Warrants without the payment of cash consideration,
provided that the Company will withhold from the shares otherwise issuable
upon such exercise a number of shares having a fair market value as of the
exercise date equal to the aggregate exercise price. The Class C Common Stock
to be issued to Yucaipa upon exercise of its Warrants will be identical in all
respects to the Class B Common Stock, except that the Class C Common Stock
will be non-voting. Shares of Class C Common Stock will be convertible into an
equal number of shares of Class B Common Stock following the transfer of such
shares by Yucaipa to any person or entity not affiliated with Yucaipa. The
number of shares to be issued upon exercise of the Warrants and the exercise
price are each subject to adjustment under standard anti-dilution provisions.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Recapitalization Agreement, upon consummation of the Merger
the Company will enter into a registration rights agreement (the "Registration
Rights Agreement") with Jeffrey Smith, Yucaipa, and certain holders of
Smitty's Common Stock who will receive Class B Common Stock as consideration
in the Merger (collectively, the "Holders"). Under the terms of the
Registration Rights Agreement, each of (i) Yucaipa and the holders of Smitty's
Common Stock receiving Class B Common Stock in the Merger and their
transferees, as a group (the "Yucaipa Holder Group"), and (ii) Jeffrey Smith
and his affiliates and transferees, as a group (the "Smith Holder Group"),
will be entitled to require the Company to effect a registration under the
Securities Act (a "Demand Registration") of all or a portion (but not less
than 20%) of the Registrable Securities (as defined) held by such Holders,
subject to certain limitations. Upon such demand, the Company will give prompt
notice thereof to each registered holder of Registrable Securities and will
prepare, file and use its best efforts to cause to become effective a
registration statement in respect of all Registrable Securities requested to
be included therein. Each of the Smith Holder Group and the Yucaipa Holder
Group will be entitled to two Demand Registrations. Notwithstanding the
foregoing, the Company will not be required to effect more than one Demand
Registration during any six-month period. Such Demand Registration may, at the
election of the demanding Holders, be in the form of an underwritten offering
and such demanding Holders shall be entitled to select the underwriters.
Members of the Yucaipa Holder Group may at any time prior to the second
anniversary of the Closing Date demand that the Company promptly file a shelf
registration statement pursuant to Rule 415 under the Securities Act which
will provide for resales of Registrable Securities held by the Yucaipa Group.
The Company will keep such Shelf Registration statement continuously effective
for at least 120 days following the effective date (or such longer period as
such Holders' Registrable Securities constitute "restricted securities" under
Rule 144 and are subject to the two-year holding period for affiliates under
Rule 144(c)); provided that in no event will the Company be required to keep
such shelf registration statement effective after the second anniversary of
the Closing Date.
Holders of Registrable Securities will also have the right to include such
Registrable Securities in any registration statement under the Securities Act
filed by the Company for its own account or for the account of any of its
securityholders (other than (i) a registration statement on Form S-4 or S-8,
(ii) a registration statement filed in connection with a Demand Registration
or a Shelf Registration or (iii) a registration statement filed in connection
with an offer of securities solely to existing securityholders) for sale on
the same terms and conditions as the securities of Smitty's or any other
selling securityholder included therein (a "Piggy-Back Registration"). In the
event that, pursuant to any Demand Registration or any Piggy-Back
Registration, the Company is advised by the managing underwriter therefor that
the total number of shares proposed to be included therein is such as to
materially and adversely affect the success of the offering, the Company has
granted certain priority rights to the Smith Group which enables the Smith
Group to have its Registrable Securities (up to certain designated amounts)
included in such registrations before the Yucaipa Group is entitled to include
its Registrable Securities in such registrations.
The Company will be obligated to pay its expenses associated with
registration of the Registrable Securities, regardless of whether any
registration statement required by the Registration Rights Agreement becomes
58
<PAGE>
effective, and the reasonable fees and expenses of any party to the
Registration Rights Agreement who participates in any registration effected
thereunder. In addition, the Company will provide a customary securities law
indemnification to any party who participates in any registration effected
under the Registration Rights Agreement.
The Registration Rights Agreement will terminate upon the earlier to occur
of (i) the mutual agreement by the parties thereto, (ii) with respect to any
Holder, such Holder ceasing to own any Registrable Securities, (iii) the
fifteenth anniversary of the Closing Date, or (iv) with respect to the Smith
Holder Group or the Yucaipa Holder Group, the date on which the aggregate
number of shares of outstanding Registrable Securities held by the Smith
Holder Group or the Yucaipa Holder Group, as applicable, is less than 20% of
the Registrable Shares originally held by the Smith Holder Group or the
Yucaipa Holder Group, as applicable, immediately following the consummation of
the Transactions (except with respect to any Holder that is an "affiliate" of
the Company within the meaning of the Securities Act).
OTHER TRANSACTIONS WITH YUCAIPA OR ITS AFFILIATES
Pursuant to the Recapitalization Agreement, Yucaipa will receive a success
fee of $15 million upon consummation of the Offering and the Recapitalization.
In December 1995, the Company entered into an agreement to sublease its
Riverside, California distribution center and dairy processing plant to
Ralphs, an affiliate of Yucaipa. Pursuant to the sublease, Ralphs will pay the
Company annual rent of approximately $8.8 million for the remaining 23-year
term of the lease. In connection with such transaction, Ralphs purchased
certain inventory, fixtures and equipment from the Company for an aggregate
purchase price (net of certain offsetting payments) of approximately $8.7
million. As part of the California Divestiture, in January 1996 the Company
entered into agreements to lease or sublease certain of its real property
located in California, including eight operating stores and one non-operating
store, to Ralphs, an affiliate of Yucaipa. See "Business--California
Divestiture."
CEO'S SEVERANCE DISCUSSIONS
The Company and Jeffrey Smith, the Chairman and Chief Executive Officer of
the Company, have held limited discussions regarding the termination of his
employment with the Company and the continuing role he might have with the
Company. While he is not expected to continue to be actively engaged in the
management of the Company, he will continue as Chairman of the Board after the
consummation of the Transactions and may provide consulting services to the
Company. In addition, Mr. Smith and the Company have had tentative discussions
regarding an arrangement to provide Mr. Smith with the use and possible
ownership of the Company airplane after the consummation of the Transactions.
It is anticipated that a definitive agreement regarding such matters will be
reached prior to the consummation of the Transactions.
OTHER TRANSACTIONS
During fiscal 1995, Smith's paid $217,524 in advertising fees to radio and
television stations operated by subsidiary companies of Bonneville
International Corporation ("Bonneville"). Rodney H. Brady, a former director
of Smith's, serves as President and Chief Executive Officer of Bonneville, but
has no role in Smith's advertising decisions. Also during fiscal 1995, Smith's
paid $15,385 to an automobile dealership owned by Fred Smith, one of Smith's
directors, in connection with the purchase of an automobile for use by
Smith's.
In January 1996, Alan R. Hoefer, a former director of Smith's, received
consulting fees from the Company in an aggregate amount equal to $250,000 in
connection with certain financial consulting services rendered by him in 1995.
Smith's believes that the terms of the foregoing transactions were no less
favorable to Smith's than those which could have been obtained from
unaffiliated third parties.
59
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued under an indenture (the "Indenture"), to be dated
as of , 1996, by and among the Company and , as Trustee (the
"Trustee").
The following summary of certain provisions of the Notes and the Indenture
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and to all of the provisions of the Notes and the Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA. The definitions of certain capitalized
terms used in the following summary are set forth below under "--Certain
Definitions." A copy of the form of the Indenture has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration or transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to holders of
Notes (the "Holders"). The Company will pay principal (and premium, if any) on
the Notes at the Trustee's corporate office located in New York, New York. At
the Company's option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of the Holders.
As used below in this "Description of Notes," the "Company" means Smith's
Food & Drug Centers, Inc., but not any of the Subsidiaries.
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NOTES
The Notes are limited in aggregate principal amount to $575,000,000 and will
mature on May 15, 2007. Interest on the Notes will accrue at the rates per
annum set forth on the cover page of this Prospectus. Interest on the Notes
will be payable semi-annually on each May 15 and November 15, commencing on
November 15, 1996, to the Holders of record on the immediately preceding May 1
and November 1.
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
issuance. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the option of the Company, in whole at any
time or in part from time to time, on and after May 15, 2001, at the following
redemption prices (expressed as percentages of the principal amount) if
redeemed during the twelve-month period commencing on May 15 of the year set
forth below, plus, in each case, accrued and unpaid interest to the date of
redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.......................................... %
2002.......................................... %
2003.......................................... %
2004 and thereafter........................... 100.0%
</TABLE>
60
<PAGE>
In addition, on or prior to May 15, 1999, the Company may, at its option,
use the Net Cash Proceeds of one or more Public Equity Offerings to redeem up
to an aggregate of 35% of the principal amount of the Notes originally issued,
at the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the 12 months commencing on May 15 of the year set
forth below, plus, in each case, accrued and unpaid interest, if any, to the
date of redemption (provided that the redemption notice shall have been sent
not later than 60 days after the consummation of such Public Equity Offering):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1996.......................................... %
1997.......................................... %
1998.......................................... %
</TABLE>
The documents evidencing Senior Indebtedness will restrict the Company's
ability to optionally redeem Notes.
NOTICES AND SELECTION
In the event of a redemption of less than all of the Notes, the Notes will
be selected for redemption by the Trustee pro rata, by lot or by any other
method that the Trustee considers fair and appropriate and, if the Notes are
listed on any securities exchange, by a method that complies with the
requirements of such exchange; provided, however, that any redemption of the
Notes pursuant to the provisions relating to a Public Equity Offering shall be
made on a pro rata basis unless such method is otherwise prohibited. Notice of
redemption will be mailed at least 30 days but not more than 60 days before
the date of redemption to each Holder to be redeemed at such Holder's
registered address. On and after the date of redemption, interest will cease
to accrue on Notes or portions thereof called for redemption (unless the
Company shall default in the payment of the redemption price or accrued
interest). Notes that are redeemed by the Company or that are purchased by the
Company pursuant to a Net Proceeds Offer (as defined under "--Certain
Covenants--Limitation on Asset Sales") or pursuant to a Change of Control
Offer as described under "--Change of Control" below or that are otherwise
acquired by the Company will be surrendered to the Trustee for cancellation.
SUBORDINATION
The payment of the Obligations on the Notes will be subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash
or Cash Equivalents of all Senior Indebtedness, whether outstanding on the
Issue Date or thereafter Incurred, including, with respect to Designated
Senior Indebtedness, any interest accruing subsequent to a bankruptcy or other
similar proceeding whether or not such interest is an allowed claim
enforceable against the Company in a bankruptcy case under Title 11 of the
United States Code.
Upon any distribution of assets of the Company of any kind or character,
whether in cash, property or securities upon any dissolution, winding up,
total or partial liquidation or reorganization of the Company (including,
without limitation, in bankruptcy, insolvency, or receivership proceedings or
upon any assignment for the benefit of creditors or any other marshalling of
the Company's assets and liabilities), the holders of Senior Indebtedness
shall first be entitled to receive payment in full in cash or Cash Equivalents
of all amounts payable under Senior Indebtedness (including, with respect to
Designated Senior Indebtedness, any interest accruing after the commencement
of any such proceeding at the rate specified in the applicable Designated
Senior Indebtedness whether or not such interest is an allowed claim
enforceable against the Company in any such proceeding) before the Holders
will be entitled to receive any payment with respect to the Notes (excluding
Permitted Subordinated Reorganization Securities), and until all Obligations
with respect to Senior Indebtedness are paid in full in cash or Cash
Equivalents, any distribution to which the Holders would be entitled
(excluding Permitted Subordinated Reorganization Securities) shall be made to
the holders of Senior Indebtedness.
61
<PAGE>
No direct or indirect payment (other than payments by a trust previously
established pursuant to the provisions described under "--Defeasance of
Indenture" below) by or on behalf of the Company of Obligations on the Notes
whether pursuant to the terms of the Notes or upon acceleration or otherwise
shall be made if, at the time of such payment, there exists a default in the
payment of all or any portion of principal of, premium, if any, or interest on
(i) any Designated Senior Indebtedness or (ii) any other Senior Indebtedness
which, at the time of determination, is equal to or greater than $50 million
in aggregate principal amount ("Significant Senior Indebtedness") (and the
Trustee has received written notice thereof), and such default shall not have
been cured or waived by or on behalf of the holders of such Designated Senior
Indebtedness or Significant Senior Indebtedness, as the case may be, or shall
have ceased to exist, until such default shall have been cured or waived or
shall have ceased to exist or such Designated Senior Indebtedness or
Significant Senior Indebtedness, as the case may be, shall have been
discharged or paid in full in cash or Cash Equivalents, after which the
Company shall resume making any and all required payments in respect of the
Notes, including any missed payments.
In addition, during the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon the earliest to occur of (a) receipt by the
Trustee of written notice from the holders of a majority of the outstanding
principal amount of the Designated Senior Indebtedness or their
representative, or (b) if such event of default results from the acceleration
of the Notes, the date of such acceleration, no such payment (other than
payments by a trust previously established pursuant to the provisions
described under "--Defeasance of Indenture" below) may be made by the Company
upon or in respect of the Notes for a period ("Payment Blockage Period")
commencing on the earlier of the date of receipt of such notice or the date of
such acceleration and ending 179 days thereafter (unless (x) such Payment
Blockage Period shall be terminated by written notice to the Trustee from the
holders of a majority of the outstanding principal amount of such Designated
Senior Indebtedness or their representative who delivered such notice or (y)
such default is cured or waived, or ceases to exist or such Designated Senior
Indebtedness is discharged or paid in full in cash or Cash Equivalents), after
which the Company shall resume making any and all required payments in respect
of the Notes, including any missed payments. Notwithstanding anything herein
to the contrary, in no event will a Payment Blockage Period extend beyond 179
days from the date on which such Payment Blockage Period was commenced. Not
more than one Payment Blockage Period may be commenced with respect to the
Notes during any period of 365 consecutive days. No event of default which
existed or was continuing on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period shall be, or be made, the basis for the
commencement of a second Payment Blockage Period by the holders of such
Designated Senior Indebtedness or their representative whether or not within a
period of 365 consecutive days unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the Holders to accelerate the
maturity of the Notes. See "--Events of Default."
By reason of such subordination, in the event of the insolvency of the
Company, the Holders may recover less, ratably, than holders of Senior
Indebtedness.
At December 30, 1995, on a pro forma basis after giving effect to the
Transactions and the California Disposition, the Company would have had
approximately $813.2 million aggregate amount of Senior Indebtedness
outstanding, which amount excludes any borrowings or amounts available to be
borrowed under the New Revolving Facility.
In addition, the Notes will be effectively subordinated to all existing and
future liabilities, including Indebtedness, of the Subsidiaries. At December
30, 1995, after giving pro forma effect to the Transactions and the California
Disposition, the Subsidiaries would have had Indebtedness and other
liabilities reflected on the Company's consolidated balance sheet (other than
guarantees of Senior Indebtedness), including trade payables and accrued
expenses, of approximately $148.4 million.
62
<PAGE>
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of a Change of Control,
each Holder will have the right to require the repurchase of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer"),
at a purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest to the date of repurchase (the "Change of Control Offer
Price").
The Indenture will provide that no later than 30 days following the date
upon which the Change of Control occurred, the Company must send, by first
class mail, a notice to each Holder, with a copy to the Trustee, which notice
shall govern the terms of the Change of Control Offer. The Indenture shall
require that notice of an event giving rise to a Change of Control shall be
given on the same date and in the same manner to all Holders. Such notice
shall state, among other things, the purchase date, which must be no earlier
than 30 days nor later than 40 days from the date such notice is mailed, other
than as may be required by law (the "Change of Control Payment Date"). Holders
electing to have a Note purchased pursuant to a Change of Control Offer will
be required to surrender the Note, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Note completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the
Business Day prior to the Change of Control Payment Date. Each Change of
Control Offer is required to remain open for at least 20 Business Days or such
longer period as may be required by law.
The Indenture will further provide that, notwithstanding the foregoing,
prior to the mailing of the notice of a Change of Control Offer referred to
above, within 30 days following a Change of Control, the Company shall either
(a) repay in full all Indebtedness, and terminate all commitments, under the
Credit Agreement to the extent required upon a change of control pursuant to
the terms thereof (or offer to repay in full all such Indebtedness and
terminate all such commitments and repay all such Indebtedness owed to each
lender which has accepted such offer and terminate all such commitments of
each such lender), or (b) obtain the requisite consents under the Credit
Agreement, the terms of which require repayment upon a change of control, to
permit the repurchase of the Notes as provided above. The Company shall first
comply with the covenant in the immediately preceding sentence before it shall
be required to repurchase Notes pursuant to the provisions described above.
The Company's failure to comply with the covenants described in this paragraph
shall constitute an Event of Default under the Indenture.
Notwithstanding the foregoing, the Company shall not be required to make a
Change of Control Offer, as provided above, if, in connection with any Change
of Control, it has made an offer to purchase (an "Alternate Offer") any and
all Notes validly tendered at a cash price equal to or higher than the Change
of Control Offer Price and has purchased all Notes properly tendered in
accordance with the terms of such Alternate Offer.
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of state and federal securities laws to the extent applicable in
connection with a Change of Control Offer or an Alternate Offer.
CERTAIN COVENANTS
Except as otherwise specified below, the Indenture will contain, among other
things, the following covenants:
Limitation on Restricted Payments. The Indenture will provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, directly
or indirectly, make any Restricted Payment if, at the time of such proposed
Restricted Payment, or after giving effect thereto, (a) a Default or an Event
of Default shall have occurred and be continuing, (b) the Company could not
Incur $1.00 of additional Indebtedness pursuant to the proviso in the covenant
described under "--Limitation on Incurrences of Additional Indebtedness" below
or (c) the aggregate amount expended for all Restricted Payments, including
such proposed Restricted Payment (the amount of any Restricted Payment, if
other than cash, to be the fair market value thereof at the date of payment as
determined in good faith by the Board of Directors of the Company as evidenced
by a Board Resolution),
63
<PAGE>
subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate
Consolidated Net Income (or if such aggregate Consolidated Net Income is a
loss, minus 100% of such loss) earned during the period beginning on the Issue
Date and ending on the date of the proposed Restricted Payment (the "Reference
Date") plus (ii) 100% of the aggregate Net Proceeds received by the Company
from any Person (other than a Subsidiary) from the issuance and sale
(including upon exchange or conversion for other securities of the Company)
subsequent to the Issue Date and on or prior to the Reference Date of
Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a
dividend on any Capital Stock or as interest on any Indebtedness and (B) any
Net Proceeds from issuances and sales financed directly or indirectly using
funds borrowed from the Company or any Subsidiary, until and to the extent
such borrowing is repaid), plus (iii) 100% of the Net Proceeds from (x) the
sale or other disposition of Investments (other than Permitted Investments
described in clauses (i)-(vi) inclusive of the definition thereof) made by the
Company or any Restricted Subsidiary or (y) the sale of the Capital Stock of
any Unrestricted Subsidiary by the Company or any Restricted Subsidiary or the
sale of all or substantially all of the assets of any Unrestricted Subsidiary
to the extent that a liquidating dividend or similar distribution is paid to
the Company or any Restricted Subsidiary from the proceeds of such asset sale.
The Indenture will provide that the provisions set forth in the immediately
preceding paragraph will not prevent (1) the payment of any dividend within 60
days after the date of its declaration if the dividend would have been
permitted on the date of declaration, (2) the acquisition of any shares of
Capital Stock of the Company or the repurchase, redemption or other repayment
of any Subordinated Indebtedness, in each case, in exchange for or solely out
of the Net Cash Proceeds of the substantially concurrent sale (other than to a
Subsidiary) of shares of Qualified Capital Stock of the Company, provided that
no proceeds of such sale of Qualified Capital Stock shall be included in
clause (ii) of the preceding paragraph, (3) the repurchase, redemption or
other repayment of any Subordinated Indebtedness in exchange for or solely out
of the Net Cash Proceeds of the substantially concurrent sale (other than to a
Subsidiary) of Subordinated Indebtedness of the Company with an Average Life
equal to or greater than the then remaining Average Life of the Subordinated
Indebtedness repurchased, redeemed or repaid, and (4) Permitted Payments;
provided, however, that, at the time of, and after giving effect to, any
Restricted Payment made under clause (3) or (4), no Default or Event of
Default shall have occurred and be continuing; provided, further, however,
that the declaration of each dividend paid in accordance with clause (1) above
and each payment under clause (iv) of the definition of "Permitted Payments"
shall each be counted for purposes of computing amounts expended pursuant to
subclause (c) in the immediately preceding paragraph, and no amounts expended
pursuant to clause (2) or (3) above or clause (i), (ii), (iii), (v), (vi) or
(vii) of the definition of "Permitted Payments" shall be so counted.
Limitation on Incurrences of Additional Indebtedness. The Indenture will
provide that the Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, Incur any Indebtedness oth er than
Permitted Indebtedness; provided, however, that if no Default with respect to
payment of principal of, or
interest on, the Notes or Event of Default shall have occurred and be
continuing at the time or as a consequence of the Incurrence of any such
Indebtedness, the Company or any Restricted Subsidiary may Incur Indebtedness
if immediately after giving effect to the Incurrence of such Indebtedness the
Operating Coverage Ratio would be greater than 2.0 to 1.0.
Limitation on Liens. The Indenture will provide that the Company shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than Permitted Liens)
that secures any Indebtedness of the Company which is expressly by its terms
subordinated in right of payment to any other Indebtedness of the Company on
any asset or property of the Company or any Restricted Subsidiary, unless the
Notes are secured by a Lien on such asset or property that is (x) pari passu
with such other Indebtedness if such other Indebtedness is pari passu with the
Notes or (y) if such other Indebtedness is subordinated to the Notes, senior
in priority to the Lien securing such other Indebtedness, in each case, until
such time as such obligations are no longer secured by a Lien.
Limitation on Asset Sales. The Indenture will provide that the Company shall
not, and shall not permit any Restricted Subsidiary to, consummate an Asset
Sale unless (a) the Company or such Restricted Subsidiary, as
64
<PAGE>
the case may be, receives consideration at the time of such Asset Sale at
least equal to the fair market value of the assets sold or otherwise disposed
of (as determined in good faith by the Company) and (b) upon consummation of
such Asset Sale, the Company will within 365 days of the receipt of the
proceeds therefrom: (i) apply or cause such Restricted Subsidiary to apply the
Net Cash Proceeds of such Asset Sale to (A) a Related Business Investment, (B)
an investment in properties and assets that replace the properties and assets
that are the subject of such Asset Sale or (C) an investment in properties and
assets that will be used in the business of the Company and the Restricted
Subsidiaries existing on the Issue Date or in businesses reasonably related
thereto; (ii) in the case of a sale of a store or stores, deem such Net Cash
Proceeds to have been applied to the extent of any capital expenditures made
to acquire or construct a replacement store in the general vicinity of the
store sold within 365 days preceding the date of such Asset Sale; (iii) apply
such Net Cash Proceeds (or cause such Net Cash Proceeds to be applied) to the
permanent repayment of Pari Passu Indebtedness, any Indebtedness of any
Restricted Subsidiary or any Senior Indebtedness; provided, however, that the
repayment of any revolving loan (under the Credit Agreement or otherwise)
shall result in a permanent reduction in the commitment thereunder; (iv) use
such Net Cash Proceeds to secure Letter of Credit Obligations to the extent
the related letters of credit have not been drawn upon or returned undrawn; or
(v) after such time as the accumulated Net Cash Proceeds not applied pursuant
to the foregoing clauses (i) through (iv) equals or exceeds $20.0 million,
apply such Net Cash Proceeds (or cause such Net Cash Proceeds to be applied)
to the purchase of Notes tendered to the Company for purchase at a price equal
to 100% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase pursuant to an offer to purchase made by the
Company as set forth below (a "Net Proceeds Offer"); provided, however, that
the Company shall have the right to exclude from the foregoing provisions
Asset Sales subsequent to the Issue Date, the proceeds of which are derived
from the sale and substantially concurrent lease-back of a supermarket and/or
related assets or equipment which are acquired or constructed by the Company
or a Restricted Subsidiary subsequent to the date that is six months prior to
the Issue Date, provided that such sale and substantially concurrent lease-
back occurs within 365 days following such acquisition or the completion of
such construction, as the case may be. Pending the utilization of any Net Cash
Proceeds in the manner (and within the time period) described above, the
Company may use any such Net Cash Proceeds to repay revolving loans (under the
Credit Agreement or otherwise) without a permanent reduction of the commitment
thereunder.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders not less than 325 nor more than 365 days after the
relevant Asset Sale, with a copy to the Trustee, shall specify the purchase
date (which shall be no earlier than 30 days nor later than 40 days from the
date such notice is mailed) and shall otherwise comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer, Notes of tendering
Holders will be repurchased on a pro rata basis (based on amounts tendered). A
Net Proceeds Offer shall remain open for a period of 20 Business Days or such
longer period as may be required by law.
The Company must comply with Rule 14e-1 under the Exchange Act and other
provisions of State and federal securities laws to the extent applicable in
connection with a Net Proceeds Offer.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture will provide that the Company shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, create or
suffer to exist, or allow to become effective any consensual Payment
Restriction with respect to any of the Restricted Subsidiaries, except for (a)
any such restrictions contained in (i) the Credit Agreement and related
documents as any such Payment Restriction may apply to any present or future
Subsidiary, (ii) the Indenture, (iii) any agreement in effect at or entered
into on the Issue Date, as each of the agreements referred to in the foregoing
clauses (i), (ii) or (iii) is in effect on the Issue Date or as thereafter
amended, supplemented or amended and restated in a manner, as it relates to
such restrictions, not materially adverse to the Holders and (iv) Indebtedness
of a Person existing at the time such Person becomes a Restricted Subsidiary
(provided that (x) such Indebtedness is not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary, (y) such
restriction is not applicable to any Person, or the properties or assets of
any
65
<PAGE>
Person, other than the Person so acquired and (z) such Indebtedness is
otherwise permitted to be Incurred pursuant to the provisions of the covenant
described under "--Limitation on Incurrences of Additional Indebtedness"
above); (b) limitations contained in agreements governing secured Indebtedness
otherwise permitted to be Incurred pursuant to the provisions of the covenants
described under "--Limitation on Incurrences of Additional Indebtedness" and
"--Limitation on Liens" above on the right of the debtor to dispose of the
assets securing such Indebtedness; (c) customary non-assignment provisions
restricting subletting or assignment of any lease or other agreement entered
into by a Restricted Subsidiary; (d) customary net worth or similar provisions
contained in leases and other agreements entered into by a Restricted
Subsidiary in the ordinary course of business; (e) customary restrictions with
respect to a Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Restricted Subsidiary; (f) customary
provisions in joint venture agreements and other similar agreements; (g)
restrictions contained in Indebtedness Incurred to refinance, refund, extend
or renew Indebtedness referred to in clauses (a) and (b) above; provided that
the restrictions contained therein are not materially more restrictive taken
as a whole than those provided for in such Indebtedness being refinanced,
refunded, extended or renewed; and (h) Payment Restrictions contained in any
other Indebtedness permitted to be Incurred subsequent to the Issue Date
pursuant to the provisions of the covenant described under""--Limitation on
Incurrences of Additional Indebtedness" above; provided that any such Payment
Restrictions are ordinary and customary with respect to the type of
Indebtedness being Incurred (under the relevant circumstances).
Limitation on Transactions with Affiliates. The Indenture will provide that
the Company shall not, and shall not permit any Restricted Subsidiary to, in a
single transaction or series of related transactions, (i) sell, lease,
transfer or otherwise dispose of any of its properties or assets or issue
securities (other than equity securities which do not constitute Disqualified
Capital Stock) to, (ii) purchase any property, assets or securities from,
(iii) make any Investment in, or (iv) enter into or suffer to exist any
contract or agreement with or for the benefit of, an Affiliate or Significant
Stockholder (or any Affiliate of such Significant Stockholder) of the Company
or any Subsidiary (any of the foregoing, an "Affiliate Transaction"), unless
(I) (A) such Affiliate Transaction is in the ordinary course of business or
otherwise on terms that are at least as favorable to the Company or such
Restricted Subsidiary, as the case may be, as might reasonably have been
obtainable at such time from an unaffiliated party; (B) in the case of an
Affiliate Transaction involving aggregate payments in excess of $2.0 million
and less than or equal to $5.0 million, the Company or such Restricted
Subsidiary, as the case may be, shall have delivered an officers' certificate
to the Trustee certifying that such Affiliate Transaction is on terms that are
at least as favorable to the Company or such Restricted Subsidiary, as the
case may be, as might reasonably have been obtainable at such time from an
unaffiliated party; and (C) in the case of an Affiliate Transaction involving
aggregate payments in excess of $5.0 million and less than or equal to $15.0
million, the Company or such Restricted Subsidiary, as the case may be, shall
have delivered an officers' certificate to the Trustee certifying to the same
effect as specified in clause (B) above and also that such Affiliate
Transaction has received the approval of a majority of the disinterested
members of the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, or, in the absence of any such approval, that
an Independent Financial Advisor has provided the Board of Directors with
written confirmation to the effect specified in clause (II) below and (D) in
the case of an Affiliate Transaction involving aggregate payments in excess of
$15.0 million, the Company or such Restricted Subsidiary, as the case may be,
shall have delivered to the Trustee a written opinion of an Independent
Financial Advisor to the effect specified in clause (II) below or (II) the
Company or such Restricted Subsidiary, as the case may be, shall have
delivered to the Trustee a written opinion of an Independent Financial Advisor
to the effect that such transaction is fair to the Company or such Restricted
Subsidiary, as the case may be, from a financial point of view or that the
terms of such Affiliate Transaction are at least as favorable to the Company
or such Restricted Subsidiary, as the case may be, as those that might
reasonably have been obtainable at such time from a Person that is not an
Affiliate of the Company or such Restricted Subsidiary, as the case may be.
The provisions of the foregoing paragraph shall not apply to (i) any
Permitted Payment, (ii) any Restricted Payment that is made in compliance with
the provisions of the covenant described under "--Limitation on
66
<PAGE>
Restricted Payments" above, (iii) reasonable and customary fees and
compensation paid to, and indemnity provided on behalf of, officers,
directors, consultants or employees of the Company or any Restricted
Subsidiary, as determined in good faith by the Board of Directors of the
Company or such Restricted Subsidiary or the senior management thereof, (iv)
transactions exclusively between or among the Company and any of its wholly
owned Restricted Subsidiaries or exclusively between or among such wholly
owned Restricted Subsidiaries; provided such transactions are not otherwise
prohibited by the Indenture, (v) the Standstill Agreement and any other
agreement in effect on the Issue Date as in effect on such date (or any
transaction contemplated thereby) or as amended thereafter (including
transactions contemplated pursuant to such amendment) so long as any such
amendment is not disadvantageous to the Holders in any material respect, (vi)
the existence of, or the performance by the Company or any of the Restricted
Subsidiaries of its obligations under the terms of, any stockholders agreement
(including any registration rights agreement or purchase agreement related
thereto) to which it is a party as of the Issue Date and any similar
agreements which it may enter into thereafter; provided, however, that the
existence of, or the performance by the Company or any Restricted Subsidiary
of obligations under any future amendment to, any such existing agreement or
under any similar agreement entered into after the Issue Date shall only be
permitted by this clause (vi) to the extent that the terms of any such
amendment or new agreement are not otherwise disadvantageous to the Holders in
any material respect, (vii) transactions permitted by, and complying with, the
provisions of the covenant described under "--Limitation on Mergers and
Certain Other Transactions" below and (viii) transactions with suppliers or
other purchases or sales of goods or services, in each case in the ordinary
course of business (including, without limitation, pursuant to joint venture
agreements) and otherwise in compliance with the terms of the Indenture which
are fair to the Company, in the reasonable determination of the Board of
Directors of the Company or the senior management thereof, or are on terms at
least as favorable as might reasonably have been obtained at such time from an
unaffiliated party.
Limitation on Subsidiary Assets and Indebtedness. If at any time subsequent
to the Issue Date (i)(a) the Company transfers any of its property, plant or
equipment to one or more of the Restricted Subsidiaries (other than
Guarantors) and (b) as a result of such transfer or transfers, the book value
of all such transferred property, plant and equipment of the Company and the
Guarantors, as reflected on a balance sheet prepared in accordance with GAAP
in any filing made with the Commission, is greater than 35% of the then book
value of the total property, plant and equipment of the Company and the
Restricted Subsidiaries, on a consolidated basis; or (ii) any Restricted
Subsidiary (other than a Guarantor) incurs Indebtedness (other than Permitted
Indebtedness pursuant to clause (a) (to the extent such Indebtedness
represents a guarantee of obligations under the Credit Agreement or a
revolving loan thereunder), (b), (c), (d), (g), (h), (i), (j), (k) or (l) of
the definition thereof) that, together with any other Indebtedness (including
Permitted Indebtedness) Incurred subsequent to the Issue Date by all
Restricted Subsidiaries (other than those that are then Guarantors) then
outstanding, would represent more than 35% of the consolidated total long-term
Indebtedness of the Company and the Restricted Subsidiaries as reflected on a
balance sheet prepared in accordance with GAAP in any filing made with the
Commission (each of the foregoing clauses (i) and (ii) being referred to
herein as a "Guarantee Condition"), then the Company shall, promptly following
any such filing with the Commission, cause one or more of the Restricted
Subsidiaries to unconditionally guarantee, jointly and severally, the
Company's obligations under the Notes on a senior subordinated unsecured basis
(the "Guarantees"), pursuant to supplemental indentures satisfactory in form
to the Trustee, so that following the issuance of such Guarantees, neither of
the Guarantee Conditions shall exist. The Indebtedness represented by each
Guarantee (including the payment of Obligations on the Notes) will be
subordinated on the same basis to senior indebtedness of the Guarantors as the
Notes are subordinated to Senior Indebtedness. So long as no Default or Event
of Default shall have occurred and be continuing, one or more Guarantors may
be released within 10 Business Days following any filing with the Commission
from their Guarantees pursuant to supplemental indentures or such other
instruments satisfactory in form to the Trustee if after giving effect to such
release neither of the Guarantee Conditions shall exist. Notwithstanding the
foregoing, neither of the Guarantee Conditions shall be deemed to exist during
any period when the Company's Operating Coverage Ratio is greater than 3.0 to
1.0.
Upon the sale or disposition (whether by merger, stock sale, asset sale or
otherwise) to any Person which is not a Restricted Subsidiary of all of the
Company's or any Subsidiary's Capital Stock in, or all or substantially
67
<PAGE>
all of the assets of, any Guarantor, which sale or disposition is otherwise in
compliance with the Indenture, in each case, such Guarantor shall be deemed
released from all its obligations under its Guarantee.
The obligations of each Guarantor under its Guarantee would be limited to
the maximum amount as will, after giving effect to all other contingent and
fixed liabilities of such Guarantor and after giving effect to any collections
from or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, result in the obligations of
such Guarantor under such Guarantee not constituting a fraudulent conveyance
or fraudulent transfer under federal or state law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount based on the relative net
assets of each Guarantor.
Limitation on Preferred Stock of Restricted Subsidiaries. The Indenture will
provide that the Company shall not permit any of the Restricted Subsidiaries
to issue any Preferred Stock (other than to the Company or to a wholly owned
Restricted Subsidiary) or permit any Person (other than the Company or a
wholly owned Restricted Subsidiary) to own any Preferred Stock of any
Restricted Subsidiary.
Limitation on Mergers and Certain Other Transactions. The Indenture will
provide that the Company, in a single transaction or through a series of
related transactions, shall not (i) consolidate with or merge with or into any
other Person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to another Person or group of affiliated Persons or (ii) adopt
a Plan of Liquidation, unless, in either case, (1) either the Company shall be
the continuing Person, or the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which all or
substantially all of the properties and assets of the Company as an entirety
or substantially as an entirety are transferred (or, in the case of a Plan of
Liquidation, any Person to which assets are transferred) (the Company or such
other Person being hereinafter referred to as the "Surviving Person") shall be
a corporation organized and validly existing under the laws of the United
States, any state thereof or the District of Columbia, and shall expressly
assume, by supplemental indenture, all the obligations of the Company under
the Indenture and the Notes; (2) immediately after and giving effect to such
transaction and the assumption contemplated by clause (1) above and the
Incurrence or anticipated Incurrence of any Indebtedness to be Incurred in
connection therewith, the Surviving Person shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction; and (3) immediately before and immediately after
giving effect to such transaction and the assumption of the obligations as set
forth in clause (1) above and the Incurrence or anticipated Incurrence of any
Indebtedness to be Incurred in connection therewith, no Default or Event of
Default shall have occurred and be continuing.
The Indenture will provide that upon any consolidation or merger or any
transfer of all or substantially all of the assets of the Company or any
adoption of a Plan of Liquidation by the Company in accordance with the
foregoing, the surviving Person formed by such consolidation or into which the
Company is merged or to which such transfer is made (or, in the case of a Plan
of Liquidation, to which assets are transferred) shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such surviving Person had been named
as the Company therein; provided, however, that solely for purposes of
computing amounts described in subclause (c) of the first paragraph of the
covenant described under "--Limitation on Restricted Payments" above, any such
surviving Person shall be deemed to have succeeded to and be substituted for
the Company only with respect to periods subsequent to the effective time of
such merger, consolidation or transfer of assets.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Capital Stock of which constitutes all or substantially
all of the properties and assets of the Company shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
68
<PAGE>
Limitation on Other Senior Subordinated Indebtedness. The Indenture will
provide that the Company shall not, directly or indirectly, incur any
Indebtedness that by its terms (or by the terms of the agreement governing
such Indebtedness) is subordinate in right of payment to any other
Indebtedness of the Company unless such Indebtedness is also by its terms (or
the terms of the agreement governing such Indebtedness) made expressly either
(a) pari passu in right of payment with the Notes or (b) subordinate in right
of payment to the Notes in the same manner and at least to the same extent as
the Notes are subordinate to Senior Indebtedness.
Limitation on Restricted and Unrestricted Subsidiaries. The Indenture will
provide that the Board of Directors of the Company may, if no Default or Event
of Default shall have occurred and be continuing or would result therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such
designation is at that time permitted under "--Limitation on Restricted
Payments" above. The Indenture will also provide that the Board of Directors
of the Company may, if no Default or Event of Default shall have occurred and
be continuing or would result therefrom, designate an Unrestricted Subsidiary
to be a Restricted Subsidiary; provided, however, that (i) any such
redesignation shall be deemed to be an Incurrence as of the date of such
redesignation by the Company and the Restricted Subsidiaries of the
Indebtedness (if any) of such redesignated Subsidiary for purposes of "--
Limitation on Incurrences of Additional Indebtedness" above; and (ii) unless
such redesignated Subsidiary shall not have any Indebtedness outstanding
(other than Indebtedness which would be Permitted Indebtedness), no such
designation shall be permitted if immediately after giving effect to such
redesignation and the Incurrence of any such Indebtedness, the Company could
not incur $1.00 of additional Indebtedness pursuant to the proviso of the
covenant described under "--Limitation on Incurrences of Additional
Indebtedness" above. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by the filing with the Trustee of a
certified copy of the Board Resolution of the Company's Board of Directors
giving effect to such designation or redesignation and an officers'
certificate certifying that such designation or redesignation complied with
the foregoing conditions and setting forth in reasonable detail the underlying
calculations.
The Indenture will provide that Subsidiaries that are not designated by the
Board of Directors as Restricted or Unrestricted Subsidiaries will be deemed
to be Restricted Subsidiaries. The designation of a Restricted Subsidiary as
an Unrestricted Subsidiary shall be deemed to include a designation of all of
the subsidiaries of such Unrestricted Subsidiary as Unrestricted Subsidiaries.
REPORTS TO HOLDERS
The Indenture will provide that the Company shall deliver to the Trustee
within 15 days after the filing of the same with the Commission, copies of the
quarterly and annual reports and other reports, if any, which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act. The Indenture will further provide that, notwithstanding that
the Company may not be subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Company shall file with the Commission, to the
extent permitted, and provide the Trustee and Holders with such quarterly and
annual reports and other reports specified in Sections 13 and 15(d) of the
Exchange Act. The Company will also comply with the other provisions of TIA
(S) 314(a).
EVENTS OF DEFAULT
The following events constitute "Events of Default" under the Indenture: (i)
failure to make any interest payment on the Notes when due and the continuance
of such default for a period of 30 days, whether or not prohibited by the
provisions described under "--Subordination"; (ii) failure to pay principal
of, or premium, if any, on the Notes when due, whether at maturity, upon
acceleration, redemption, required repurchase or otherwise, whether or not
prohibited by the provisions described under "--Subordination"; (iii) failure
to comply with any other agreement contained in the Notes or the Indenture, if
such failure continues unremedied for 30 days after written notice given by
the Trustee or the Holders of at least 25% in principal amount of the Notes
then outstanding (except in the case of a default with respect to the
covenants described under "--Change
69
<PAGE>
of Control," "--Certain Covenants--Limitation on Restricted Payments," "--
Limitation on Asset Sales" and "--Limitation on Mergers and Certain Other
Transactions," which shall constitute Events of Default with notice but
without passage of time); (iv) a default under any Indebtedness of the Company
or any Restricted Subsidiary, whether such Indebtedness now exists or shall
hereinafter be created, if both (A) such default either (1) results from the
failure to pay any such Indebtedness at its stated final maturity or (2)
relates to an obligation other than the obligation to pay such Indebtedness at
its stated final maturity and results in the holder or holders of such
Indebtedness causing such Indebtedness to become due prior to its stated
maturity and (B) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal at stated final maturity or the maturity of which has been so
accelerated, aggregates $20 million or more at any one time outstanding; (v)
any final judgment or order for payment of money in excess of $20 million
shall be entered against the Company or any Significant Subsidiary and shall
not be discharged for a period of 60 days after such judgment becomes final
and nonappealable; (vi) either the Company or any Significant Subsidiary
pursuant to or within the meaning of any Bankruptcy Law: (a) commences a
voluntary case or proceeding; (b) consents to the entry of an order for relief
against it in an involuntary case or proceeding; (c) consents to the
appointment of a Custodian of it or for all or substantially all of its
property; or (d) makes a general assignment for the benefit of its creditors;
(vii) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (a) is for relief against the Company or any Significant
Subsidiary in an involuntary case or proceeding; (b) appoints a Custodian of
the Company or any Significant Subsidiary, or for all or any substantial part
of their respective properties; or (c) orders the liquidation of the Company
or any Significant Subsidiary, and in each case the order or decree remains
unstayed and in effect for 60 days; or (viii) the lenders under the Credit
Agreement shall commence judicial proceedings to foreclose upon any material
portion of the assets of the Company and the Subsidiaries.
In the event of a declaration of acceleration because an Event of Default
set forth in clause (iv) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
either (x) the holders of the Indebtedness which is the subject of such Event
of Default have waived such failure to pay at maturity or have rescinded the
acceleration in respect of such Indebtedness within 90 days of such maturity
or declaration of acceleration, as the case may be, and no other Event of
Default has occurred during such 90-day period which has not been cured or
waived, or (y) such Indebtedness shall have been discharged or the maturity
thereof shall have been extended such that it is not then due and payable, or
the underlying default has been cured (and any acceleration based thereon of
such other Indebtedness has been rescinded), within 90 days of such maturity
or declaration of acceleration, as the case may be.
If an Event of Default (other than an Event of Default under clause (vi) or
(vii) above with respect to the Company or a Significant Subsidiary) occurs
and is continuing, the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Notes may declare due and payable all unpaid
principal and interest accrued and unpaid on the then outstanding Notes by
notice in writing to the Company, the administrative agent under the Credit
Agreement and the Trustee specifying the respective Event of Default and that
it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i)
shall become immediately due and payable or (ii) if there is any Indebtedness
outstanding under the Credit Agreement, shall become due and payable upon the
first to occur of an acceleration under the Credit Agreement, or five business
days after receipt by the Company and the administrative agent under the
Credit Agreement of such Acceleration Notice. If an Event of Default under
clause (vi) or (vii) above with respect to the Company or a Significant
Subsidiary shall occur, all unpaid principal of and accrued interest on all
then outstanding Notes shall be immediately due and payable without any
declaration or other act on the part of the Trustee or any of the Holders.
After a declaration of acceleration under the Indenture, subject to certain
conditions, the Holders of a majority in principal amount of the then
outstanding Notes, by notice to the Trustee, may rescind such declaration if
all existing Events of Default are remedied. In certain cases the Holders of a
majority in principal amount of outstanding Notes may waive a past Default and
its consequences, except a Default in the payment of or interest on any of the
Notes.
The Indenture provides that if a Default or Event of Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Holder notice of the Default or Event of Default within 90 days after
70
<PAGE>
such Default or Event of Default occurs; provided, however, that, except in
the case of a Default or Event of Default in the payment of the principal of
or interest on any Notes, including the failure to make payment on a Change of
Control Payment Date pursuant to a Change of Control Offer or payment when due
pursuant to a Net Proceeds Offer, the Trustee may withhold such notice if it
in good faith determines that withholding such notice is in the interest of
the Holders.
The Indenture provides that no Holder may pursue any remedy thereunder
unless the Trustee (i) shall have failed to act for a period of 60 days after
receiving written notice of a continuing Event of Default by such Holder and a
request to act by Holders of at least 25% in principal amount of Notes and
(ii) has received indemnification satisfactory to it; provided, however, that
such provision does not affect the right of any Holder to sue for enforcement
of any overdue payment of principal of, premium, if any, or interest on,
Notes.
The Indenture provides that two officers of the Company are required to
certify to the Trustee within 120 days after the end of each fiscal year of
the Company whether or not they know of any Default that occurred during such
fiscal year and, if applicable, describe such Default and the status thereof.
DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Notes
("Legal Defeasance"). Legal Defeasance means that the Company shall be deemed
to have paid and discharged the entire Indebtedness represented by the Notes
except for (i) the rights of Holders of Notes to receive payments in respect
of the principal of, premium, if any, and interest on Notes when such payments
are due solely from the funds held by the Trustee in the trust referred to
below; (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of Notes, replace mutilated, destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of Notes and
money for security payments held in trust in respect of Notes; (iii) the
rights, powers, trusts, duties and immunities of the Trustee and the Company's
obligations in connection therewith; and (iv) the Legal Defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time
elect to have the obligations of the Company released with respect to certain
covenants described above under "--Certain Covenants" ("Covenant Defeasance"),
and thereafter any omission to comply with such obligations shall not
constitute a Default or Event of Default.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must have irrevocably deposited with the Trustee, in trust, for the
benefit of the Holders, cash in U.S. dollars, U.S. Government Obligations (as
defined in the Indenture), or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the outstanding Notes to redemption or maturity provided that the Trustee
shall have been irrevocably instructed to apply such money or the proceeds of
such U.S. Government Obligations to said payments with respect to the Notes on
the maturity date or such redemption date, as the case may be; (ii) the
Company shall have delivered to the Trustee one or more opinions of
independent counsel to the effect that (A) the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance or Covenant Defeasance, as the case may be, and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance or Covenant
Defeasance, as the case may be, had not occurred (which opinion, in the case
of Legal Defeasance, shall be based upon a change in the applicable federal
income tax law since the Issue Date or a ruling received from or published by
the Internal Revenue Service), (B) after the 91st day following the deposit
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and will not be subject to any rights of holders of Senior
Indebtedness and (C) the deposit will not cause the Trustee or the trust so
created to be subject to the Investment Company Act of 1940; (iii) no Default
or Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as clauses (vi) and (vii) under the first paragraph under
"--Events of Default" above are concerned, at any time in the period ending on
the 91st day after the date of deposit; (iv) such Legal Defeasance or Covenant
Defeasance shall not cause the
71
<PAGE>
Trustee to have a conflicting interest with respect to the Notes; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under, the Indenture or any other
material agreement or instrument to which the Company is a party or by which
it is bound (and in that connection, the Trustee shall have received a
certificate from the administrative agent under the Credit Agreement to that
effect with respect to such Credit Agreement if then in effect); (vi) the
Company shall have delivered to the Trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring the
Holders over other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(vii) the Company shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent provided
for relating to the Legal Defeasance or Covenant Defeasance, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all outstanding Notes, when either (a) all Notes theretofore authenticated
and delivered (except lost, stolen or destroyed Notes which have been replaced
or paid and Notes for whose payment money has theretofore been deposited in
trust and thereafter repaid to the Company) have been delivered to the Trustee
for cancellation; or (b)(i) all Notes not theretofore delivered to the Trustee
for cancellation have become due and payable by reason of the making of a
notice of redemption or otherwise and the Company has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust for the
purpose an amount of money sufficient to pay and discharge the entire
indebtedness on Notes not theretofore delivered to the Trustee for
cancellation for principal, premium, if any, and accrued interest to the date
of maturity or redemption; (ii) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or shall occur as a
result of such deposit and such deposit will not result in a breach or
violation of, or constitute a default under, any other instrument to which the
Company is a party or by which it is bound; (iii) the Company has paid all
sums payable by it under the Indenture; and (iv) the Company has delivered
irrevocable instructions to the Trustee to apply the deposited money toward
the payment of Notes at maturity or the redemption date, as the case may be.
In addition, the Company must deliver an officers' certificate and an opinion
of counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been complied with.
MODIFICATION OF THE INDENTURE
The Indenture and the Notes may be amended or supplemented (and compliance
with any provision thereof may be waived) by the Company, the Trustee and the
Holders of not less than a majority in aggregate principal amount of Notes
then outstanding, except that (i) without the consent of each Holder of Notes
affected, no such amendment, supplement or waiver may (1) change the principal
amount of the Notes the Holders of which must consent to an amendment,
supplement or waiver of any provision of the Indenture or the Notes, (2)
reduce the rate or extend the time for payment of interest on any Notes, (3)
reduce the principal amount of any Notes, (4) change the Maturity Date or
alter the redemption provisions in the Indenture or the Notes in a manner
adverse to any Holder, (5) make any changes in the provisions concerning
waivers of Defaults or Events of Default by Holders or the rights of Holders
to recover the principal of, interest on or redemption payment with respect to
any Notes, (6) make the principal of, or interest on, any Notes payable with
anything or in any manner other than as provided for in the Indenture and the
Notes or (7) modify the subordination provisions of the Indenture (including
certain related definitions) so as to adversely affect the ranking of any
Note; provided, however, that it is understood that any amendment the purpose
of which is to permit the Incurrence of additional Indebtedness under the
Indenture shall not be construed as adversely affecting the ranking of any
Note and (ii) without the consent of Holders of not less than 66 2/3% in
aggregate principal amount of Notes then outstanding, no such amendment,
supplement or waiver may change the Change of Control Payment Date or the
purchase price in connection with any repurchase of Notes pursuant to the
covenant described under "--Change of Control" above in a manner adverse to
any Holder or waive a Default or Event of Default resulting from a failure to
comply with the covenant described under "--Change of Control" above.
72
<PAGE>
In addition, the Indenture and the Notes may be amended by the Company and
the Trustee (a) to cure any ambiguity, defect or inconsistency therein;
provided that such amendment or supplement does not adversely affect the
rights of any Holder or (b) to make any other change that does not adversely
affect the rights of any Holder in any material respect.
THE TRUSTEE
The Indenture will provide that the Holders of a majority in principal
amount of the outstanding Notes may remove the Trustee and appoint a successor
trustee with the Company's consent, by so notifying the trustee to be so
removed and the Company. In addition, the Holders of a majority in principal
amount of the outstanding Notes have the right, subject to certain
limitations, to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee.
The Indenture will provide that, if a Default or an Event of Default has
occurred and is continuing, the Trustee shall exercise such of the rights and
powers vested in it by the Indenture, and use the same degree of care and
skill in the exercise thereof, as a prudent Person would exercise or use under
the circumstances in the conduct of such Person's own affairs. Subject to the
latter provision, the Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless they shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred thereby. If the Company fails to pay such amounts of principal of,
premium, if any, or interest on, the Notes as shall have become due and
payable upon demand as specified in the Indenture, the Trustee, at the request
of the Holders of a majority in aggregate principal amount of Notes at the
time outstanding, and upon being offered such reasonable indemnity as it may
be required against the costs, expenses and liabilities incurred by it, except
as a result of its negligence or bad faith, shall institute any actions or
proceedings at law or in equity for the collection of the sums so due and
unpaid, and collect in the manner provided by law the monies adjudged or
decreed to be payable.
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to be realized on certain property received by it in respect of any such
claims, securities or otherwise. The Trustee is permitted to engage in other
transactions; however, if the Trustee acquires any "conflicting interest," it
must eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "affiliated," "controlling" and "controlled" have meanings correlative
to the foregoing. So long as the Management Services Agreement is in effect or
Yucaipa (together with its Affiliates) owns voting securities representing
more than 10% of the total voting power of the then outstanding voting
securities entitled to vote on a regular basis for the Board of Directors of
the Company, Yucaipa and its Affiliates shall be deemed Affiliates of the
Company.
"Asset Sale" means any sale, transfer or other disposition or series of
sales, transfers or other dispositions by the Company or any Restricted
Subsidiary (including, without limitation, any merger or consolidation of any
Restricted Subsidiary with or into another Person (other than the Company or
any wholly owned Restricted Subsidiary) whereby such Restricted Subsidiary
shall cease to be a Restricted Subsidiary) to any Person (other than to the
Company or a wholly owned Restricted Subsidiary) of any assets of the Company
or any Restricted Subsidiary, including, without limitation, assets consisting
of any Capital Stock or other securities held by the Company or any Restricted
Subsidiary, and any Capital Stock issued by any Restricted Subsidiary, in each
case, outside of the ordinary course of business, excluding, however, any
sale, transfer or other disposition, or series of related sales, transfers or
other dispositions (i) resulting in Net Proceeds to the Company and the
Restricted
73
<PAGE>
Subsidiaries of $500,000 or less, (ii) pursuant to any foreclosure of assets
or other remedy provided by applicable law to a creditor of the Company or any
Subsidiary with a Lien on such assets, which Lien is permitted under the
Indenture; provided that such foreclosure or other remedy is conducted in a
commercially reasonable manner or in accordance with any Bankruptcy Law, (iii)
involving only Cash Equivalents or inventory in the ordinary course of
business or obsolete equipment in the ordinary course of business consistent
with past practices of the Company; (iv) involving only the lease or sublease
of any real or personal property in the ordinary course of business; (v)
pursuant to the California Disposition or involving certain other assets set
forth on a schedule to the Indenture; or (vi) resulting from (a) the
designation of any Restricted Subsidiary as an Unrestricted Subsidiary, or the
contribution to the capital of any Unrestricted Subsidiary, in accordance with
the applicable provisions of the Indenture or (b) the sale of the Capital
Stock of any Unrestricted Subsidiary or the sale of all or substantially all
of the assets of any Unrestricted Subsidiary.
"Average Life" means, as of any date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products
of the number of years from the date of determination to the dates of each
successive scheduled principal payments of such debt security multiplied by
the amount of each such principal payment by (ii) the sum of all such
principal payments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or
foreign law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or of a subsidiary of such Person or any duly
authorized committee of that Board.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such Person.
"Capitalized Lease Obligation" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or
obligations issued by any agency or instrumentality thereof and backed by the
full faith and credit of the United States of America, (ii) commercial paper
rated the highest grade by Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group and maturing not more than one year from the date of
creation thereof, (iii) time deposits with, and certificates of deposit and
banker's acceptances issued by, any bank having capital surplus and undivided
profits aggregating at least $500 million and maturing not more than one year
from the date of creation thereof, (iv) repurchase agreements that are secured
by a perfected security interest in an obligation described in clause (i) and
are with any bank described in clause (iii), (v) shares of any money market
mutual fund that (a) has at least 95% of its assets invested continuously in
the types of investments referred to in clauses (i) and (ii) above, (b) has
net assets of not less than $500 million, and (c) has the highest rating
obtainable from either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. and (vi) readily marketable direct obligations issued by any
state of the United States of America or any political subdivision thereof
having one of the two highest rating categories obtainable from either Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group.
"Change of Control" means the acquisition after the Issue Date, in one or
more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) by (i) any Person (other than any Permitted Holder) or
(ii) any group (within the meaning of Section 13(d)(3) of the Exchange Act) of
Persons (excluding any Permitted Holders), in either case, of any securities
of the Company such that, as a result of such
74
<PAGE>
acquisition, such Person or group beneficially owns (within the meaning of
Rule 13d-3 under the Exchange Act), directly or indirectly, voting securities
representing 40% or more of the total voting power of the then outstanding
voting securities entitled to vote on a regular basis for the Board of
Directors of the Company (but only to the extent that such beneficial
ownership is not shared with any Permitted Holder who has the power to direct
the vote thereof); provided, however, that no such Change of Control shall be
deemed to have occurred if (A) the Permitted Holders beneficially own, in the
aggregate, at such time, voting securities representing a greater percentage
of such voting power than such other Person or group or (B) at the time of
such acquisition, the Permitted Holders (or any of them) possess the ability
(by contract or otherwise) to elect, or cause the election, of a majority of
the members of the Company's Board of Directors.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however
designated and whether voting or nonvoting) of, such Person's common stock,
whether outstanding at the Issue Date or issued after the Issue Date, and
includes, without limitation, all series and classes of such common stock.
"Consolidated Interest Expense" means for any period, the aggregate amount
of interest, whether expensed or capitalized, paid, accrued or scheduled to be
paid or accrued during such period (except to the extent accrued in a prior
period) in respect of all Indebtedness of the Company and the Restricted
Subsidiaries (including (a) original issue discount on any Indebtedness
(including (without duplication), in the case of the Company, any original
issue discount on the Notes but excluding amortization of debt issuance costs)
and (b) the interest portion of all deferred payment obligations, calculated
in accordance with the effective interest method, in each case to the extent
attributable to such period but excluding the amortization of debt issuance
costs). For purposes of this definition, (a) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
by the Company to be the rate of interest implicit in such Capitalized Lease
Obligation in accordance with GAAP, (b) interest on Indebtedness that is
determined on a fluctuating basis shall be deemed to have accrued at a fixed
rate per annum equal to the rate of interest of such Indebtedness in effect on
the date Consolidated Interest Expense is being calculated, (c) interest on
Indebtedness that may optionally be determined at an interest rate based upon
a factor of a prime or similar rate, a eurocurrency interbank offered rate, or
other rate, shall be deemed to have been based upon the rate actually chosen,
or, if none, then based upon such optional rate chosen as the Company may
designate, and (d) Consolidated Interest Expense shall be increased or reduced
by the net cost (including amortization of discount) or benefit associated
with Interest Swap Obligations attributable to such period.
"Consolidated Net Income" means for any period, the aggregate of the net
income (or loss) of the Company and the Restricted Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP; provided
that (a) the net income of any other Person in which the Company or any
Restricted Subsidiary has an interest (which interest does not cause the net
income of such other Person to be consolidated with the net income of the
Company and the Restricted Subsidiaries in accordance with GAAP) shall be
included only to the extent of the amount of dividends or distributions
actually paid to the Company or such Restricted Subsidiary by such other
Person in such period; (b) the net income of any Restricted Subsidiary that is
subject to any Payment Restriction shall be excluded to the extent such
Payment Restriction would actually prevent the payment of an amount that
otherwise could have been paid to, or received by, the Company or a Restricted
Subsidiary not subject to any Payment Restriction; and (c)(i) the net income
(or loss) of any other Person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition, (ii) all gains and
losses realized on any Asset Sale or any other sale of assets that would
constitute an "Asset Sale" but for the exceptions set forth in clauses (i),
(ii), (v), or (vi) of the definition thereof; (iii) all gains realized upon or
in connection with or as a consequence of the issuance of the Capital Stock of
the Company or any Restricted Subsidiary and any gains on pension reversions
received by the Company or any Restricted Subsidiary, (iv) all gains and
losses realized on the purchase or other acquisition by the Company or any
Restricted Subsidiary of any securities of the Company or any Restricted
Subsidiary, (v) all gains and losses resulting from the cumulative effect of
any accounting change pursuant to the application of Accounting Principles
Board Opinion No. 20, as
75
<PAGE>
amended, or Statement of Financial Accounting Standards No. 121, (vi) all
other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) all
severance, deferred compensation or other employee termination costs, (C) up
to $20 million of compensation expenses resulting from the repurchase or
amendment of certain management stock options, (D) all debt refinancing
premiums and (E) any other reserves or charges (provided, however, that any
net cash payments actually made (after-tax) with respect to the liabilities
for which such reserves or charges were created shall be deducted from
Consolidated Net Income in the period when made), in each case under this
clause (vii), recorded by the Company or any Restricted Subsidiary in
connection with the Transactions and the California Disposition, including,
without limitation, the integration of operations in the State of Arizona,
(viii) losses incurred by the Company and the Restricted Subsidiaries
resulting from earthquakes and (ix) with respect to the Company and the
Restricted Subsidiaries, all deferred financing costs written off in
connection with the early extinguishment of any Indebtedness, shall each be
excluded.
"Consolidated Net Worth" means, with respect to any Person, the total
stockholders' equity (exclusive of any Disqualified Capital Stock) of such
Person and its Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP.
"Credit Agreement" means the Credit Agreement, dated as of the Issue Date,
by and among Smith's as borrower, its subsidiaries as guarantors, the Lenders
referred to therein, Bankers Trust Company and The Chase Manhattan Bank, as
arrangers, and Bankers Trust Company, as administrative agent, as the same may
be amended, extended, renewed, restated, supplemented or otherwise modified
(in each case, in whole or in part, and without limitation as to amount,
terms, conditions, covenants and other provisions) from time to time, and any
agreement governing Indebtedness Incurred to refund, replace or refinance any
borrowings and commitments then outstanding or permitted to be outstanding
under such Credit Agreement or any such prior agreement as the same may be
amended, extended, renewed, restated, supplemented or otherwise modified (in
each case, in whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions). The term "Credit Agreement" shall
include all related or ancillary documents, including, without limitation, any
guarantee agreements and security documents. The Company shall promptly notify
the Trustee of any such refunding or refinancing of the Credit Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) in the event any Indebtedness is
outstanding under the Credit Agreement, all Senior Indebtedness under the
Credit Agreement and (ii) if no Indebtedness is outstanding under the Credit
Agreement, any other issue of Senior Indebtedness which (a) at the time of the
determination is equal to or greater than $50 million in aggregate principal
amount and (b) is specifically designated in the instrument evidencing such
Senior Indebtedness as "Designated Senior Indebtedness" by the Company. For
purposes of this definition, the term "Credit Agreement" shall not include any
agreement governing Indebtedness Incurred to refund, replace or refinance
borrowings or commitments under the Credit Agreement other than any such
agreements governing Indebtedness Incurred to refund, replace or refinance the
entirety of the borrowings and commitments then outstanding or permitted to be
outstanding thereunder.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person or its subsidiaries that, by its terms, by the terms of
any agreement related thereto or by the terms of any security into which it is
convertible, puttable or exchangeable, is, or upon the happening of any event
or the passage of time would be, required to be redeemed or repurchased by
such Person or its subsidiaries, including at the option of the holder
thereof, in whole or in part, or has, or upon the happening of an event or
passage of time would have, a redemption or similar payment due, on or prior
to the Maturity Date, or any other Capital Stock of such Person or its
subsidiaries designated as Disqualified Capital Stock by such Person at the
time of issuance; provided, however, that if such Capital Stock is either (i)
redeemable or repurchasable solely at the option of such Person
76
<PAGE>
or (ii) issued to employees of the Company or the Subsidiaries or to any plan
for the benefit of such employees, such Capital Stock shall not constitute
Disqualified Capital Stock unless so designated.
"EBITDA" means, for any period, the Consolidated Net Income for such period,
plus, in each case to the extent deducted in computing Consolidated Net Income
for such period (without duplication) (i) provisions for income taxes or
similar charges recognized by the Company and the Restricted Subsidiaries
accrued during such period, (ii) depreciation and amortization expense of the
Company and the Restricted Subsidiaries accrued during such period (but only
to the extent not included in Consolidated Interest Expense), (iii)
Consolidated Interest Expense of the Company and the Restricted Subsidiaries
for such period, (iv) LIFO charges (credits) of the Company and the Restricted
Subsidiaries for such period, (v) the amount of any restructuring reserve or
charge recorded during such period in accordance with GAAP, including any such
reserve or charge related to the Transactions or the California Disposition,
less, without duplication, the amount of all net cash payments made by the
Company and the Restricted Subsidiaries during such period to the extent that
such cash payments have been provided for in a restructuring reserve or charge
referred to in clause (v) above (and were not otherwise deducted in the
computation of EBITDA for such period).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Existing Indebtedness" means all indebtedness of the Company and the
Restricted Subsidiaries to the extent outstanding on the Issue Date after
giving effect to the Transactions (other than Indebtedness under the Credit
Agreement and the Indentures), including operating leases outstanding on the
Issue Date that are, or may be, required under GAAP to be reported or
reclassified after the Issue Date as Capitalized Lease Obligations.
"Foreign Exchange Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
against fluctuations in currency values.
"Guarantor" means each Restricted Subsidiary, if any, which becomes a
guarantor of the Notes in compliance with the provisions set forth under "--
Certain Covenants--Limitation on Subsidiary Assets and Indebtedness."
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligations or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing).
"Indebtedness" means with respect to any Person, without duplication, (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures, drafts accepted or similar instruments or letters of credit or
representing the balance deferred and unpaid of the purchase price of any
property (other than any such balance that represents an account payable or
any other monetary obligation to a trade creditor (whether or not an
Affiliate) Incurred by such Person in the ordinary course of business of such
Person in connection with obtaining goods, materials or services and due
within twelve months (or such longer period for payment as is customarily
extended by such trade creditor) of the Incurrence thereof, which account is
not overdue by more than 90 days, according to the original terms of sale,
unless such account payable is being contested in good faith), or (c) for the
payment of money relating to a Capitalized Lease Obligation; (ii) the maximum
fixed repurchase price of all Disqualified Capital Stock of such Person; (iii)
reimbursement obligations of such Person with respect to letters of credit;
(iv) obligations of such Person with respect to Interest Swap Obligations and
Foreign Exchange Agreements; (v) all liabilities of others of the kind
described in the preceding clause (i), (ii), (iii) or (iv) that such Person
has guaranteed or that is otherwise its legal liability; and (vi) all
obligations of others secured by a Lien to which any of the properties or
assets (including, without limitation, leasehold interests and any other
tangible or intangible property rights) of such Person are subject,
77
<PAGE>
whether or not the obligations secured thereby shall have been assumed by such
Person or shall otherwise be such Person's legal liability (provided that if
the obligations so secured have not been assumed by such Person or are not
otherwise such Person's legal liability, such obligations shall be deemed to
be in an amount equal to the fair market value of such properties or assets,
as determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution). For purposes of the
preceding sentence, the "maximum fixed repurchase price" of any Disqualified
Capital Stock that does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such
price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock (or any equity security for which it may be
exchanged or converted), such fair market value shall be determined in good
faith by the Board of Directors of such Person, which determination shall be
evidenced by a Board Resolution.
"Independent Financial Advisor" means a reputable accounting, appraisal or
nationally recognized investment banking or consulting firm that is, in the
reasonable judgment of the Board of Directors of the Company, qualified to
perform the tasks for which such firm has been engaged and independent with
respect to the Company and its Affiliates.
"Interest Swap Obligation" means any obligation of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a fixed or floating rate of interest on a stated notional
amount in exchange for periodic payments made by such Person calculated by
applying a fixed or floating rate of interest on the same notional amount;
provided that the term "Interest Swap Obligation" shall also include interest
rate exchange, collar, cap, swap option or similar agreements providing
interest rate protection.
"Investment" by any Person in any other Person means any investment by such
Person in such other Person, whether by share purchase, capital contribution,
loan, advance (other than reasonable loans and advances
to employees for moving and travel expenses, as salary advances or to permit
the purchase of Qualified Capital Stock of the Company and other similar
customary expenses incurred, in each case in the ordinary course of business
consistent with past practice) or similar credit extension constituting
Indebtedness of such other Person, and any guarantee of Indebtedness of any
other Person. In addition, for purposes of the covenant described under "--
Limitation on Restricted Payments" above, (i) an "Investment" shall be deemed
to have been made at the time any Restricted Subsidiary is designated as an
Unrestricted Subsidiary in an amount (proportionate to the Company's equity
interest in such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated as an
Unrestricted Subsidiary; and (ii) at any date the aggregate of all Restricted
Payments made as Investments since the Issue Date shall exclude and be reduced
by an amount (proportionate to the Company's equity interest in such
Subsidiary) equal to the net worth of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated a Restricted Subsidiary (in
each case "net worth" to be calculated based upon the fair market value of the
assets and liabilities of such Subsidiary as of any such date of designation,
as determined by the Company's Board of Directors).
"Issue Date" means the date of original issuance of the Notes under the
Indenture.
"Letter of Credit Obligations" means Indebtedness of the Company or any of
the Subsidiaries with respect to letters of credit issued pursuant to the
Credit Agreement, and for purposes of determining the aggregate amount of
Indebtedness at any time, shall be deemed to consist of (a) the aggregate
maximum amount then available to be drawn under all such letters of credit
(the determination of such maximum amount to assume compliance with all
conditions for drawing), and (b) the aggregate amount that has then been paid
by, and not reimbursed to, the issuers under such letters of credit.
"Lien" means, with respect to any asset or property, any mortgage, pledge,
lien, encumbrance, charge or security interest of any kind in respect of such
asset or property, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the
78
<PAGE>
nature thereof, any option or other agreement to sell or give a security
interest, and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction);
provided, however, that in no event shall an operating lease be deemed to
constitute a Lien.
"Management Services Agreement" means that certain Management Services
Agreement dated as of the Issue Date, between Smith's and Yucaipa (as such
Management Services Agreement may be amended or replaced, so long as such
amendment or replacement has been approved by a majority of the Independent
Directors (as defined in the Standstill Agreement) and is not disadvantageous
to the Holders in any material respect).
"Maturity Date" means May 15, 2007.
"Net Cash Proceeds" means Net Proceeds received in the form of cash or Cash
Equivalents.
"Net Proceeds" means (a) in the case of any Asset Sale or any issuance and
sale by any Person of Qualified Capital Stock, the aggregate net proceeds
received by such Person after payment of expenses, taxes, commissions and the
like incurred in connection therewith (and, in the case of any Asset Sale, net
of the amount of cash applied to repay Indebtedness secured by the asset
involved in such Asset Sale), whether such proceeds are in cash or in property
(valued at the fair market value thereof at the time of receipt as determined
with respect to any Asset Sale resulting in Net Proceeds in excess of $10
million in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution) and (b) in the case of
any conversion or exchange of any outstanding Indebtedness or Disqualified
Capital Stock of such Person for or into shares of Qualified Capital Stock of
the Company, the sum of (i) the fair market value of the proceeds received by
the Company in connection with the issuance of such Indebtedness or
Disqualified Capital Stock on the date of such issuance and (ii) any
additional amount paid by the holder thereof to the Company upon such
conversion or exchange.
"Obligations" means all obligations of every nature whether for principal,
reimbursements, interest, fees, expenses, indemnities or otherwise, and
whether primary, secondary, direct, indirect, contingent, fixed or otherwise
(including obligations of performance) under the documentation governing any
Indebtedness.
"Operating Coverage Ratio" means the ratio of (1) EBITDA for the period (the
"Pro Forma Period") consisting of the most recent four full fiscal quarters
for which financial information in respect thereof is available immediately
prior to the date of the transaction giving rise to the need to calculate the
Operating Coverage Ratio (the "Transaction Date") to (2) the Consolidated
Interest Expense for the fiscal quarter in which the Transaction Date occurs
and the three fiscal quarters immediately subsequent to such fiscal quarter
(the "Forward Period") reasonably anticipated by the Board of Directors of the
Company to become due from time to time during such period. For purposes of
this definition, if the Transaction Date occurs prior to the first anniversary
of the Transactions, "EBITDA" for the Pro Forma Period shall be calculated
after giving effect on a pro forma basis to the Transactions and the
California Disposition as if they had occurred on the first day of the Pro
Forma Period. In addition to, but without duplication of, the foregoing, for
purposes of this definition, "EBITDA" shall be calculated after giving effect
(without duplication), on a pro forma basis for the Pro Forma Period (but no
longer), to (a) any Investment, during the period commencing on the first day
of the Pro Forma Period to and including the Transaction Date (the "Reference
Period"), in any other Person that, as a result of such Investment, becomes a
Restricted Subsidiary, (b) the acquisition, during the Reference Period (by
merger, consolidation or purchase of stock or assets) of any business or
assets, which acquisition is not prohibited by the Indenture, and (c) any
sales or other dispositions of any Restricted Subsidiary or any line of
business (or geographical area thereof) of the Company or any Restricted
Subsidiary occurring during the Reference Period, in each case as if such
incurrence, Investment, repayment, acquisition or asset sale had occurred on
the first day of the Reference Period. In addition, for purposes of this
definition, "Consolidated Interest Expense" shall be calculated after giving
effect (without duplication), on a pro forma basis for the Forward Period, to
any Indebtedness Incurred or repaid on or after the first day of the Forward
Period and prior to the Transaction Date. If the Company or any Restricted
Subsidiary directly or indirectly guarantees any Indebtedness of a third
Person,
79
<PAGE>
the Operating Coverage Ratio shall give effect to the Incurrence of such
Indebtedness as if the Company or such Restricted Subsidiary had directly
Incurred such guaranteed Indebtedness.
"operating lease" means any lease the obligations under which do not
constitute Capitalized Lease Obligations.
"Pari Passu Indebtedness" means the Notes and any Indebtedness of the
Company which ranks pari passu in right of payment to the Notes.
"Payment Restriction" means, with respect to a subsidiary of any Person, any
encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation, on the ability of (i) such
subsidiary to (a) pay dividends or make other distributions on its Capital
Stock or make payments on any obligation, liability or Indebtedness owed to
such Person or any other subsidiary of such Person, (b) make loans or advances
to such Person or any other subsidiary of such Person or (c) transfer any of
its properties or assets to such Person or any other subsidiary of such
Person, or (ii) such Person or any other subsidiary of such Person to receive
or retain any such (a) dividends, distributions or payments, (b) loans or
advances or (c) transfer of properties or assets.
"Permitted Holder" means (i) Yucaipa, or any entity controlled thereby or
any of the partners thereof, (ii) Jeffrey P. Smith, Richard D. Smith, Fred L.
Smith, Ida Smith, the Dee Glen Smith Marital Trust I, Trust for the Children
of Jeffrey Paul Smith, Trust for the Children of Richard Dee Smith, and Trust
for the Children of Fred Lorenzo Smith, (iii) an employee benefit plan of the
Company, or any of its subsidiaries or any participant therein, (iv) a trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries or (v) any Permitted Transferee of any of
the foregoing Persons.
"Permitted Indebtedness" means:
a. Indebtedness of the Company and the Restricted Subsidiaries (and the
Company and each Restricted Subsidiary (to the extent it is not the primary
obligor thereof) may guarantee such Indebtedness) (i) under the Credit
Agreement (including the Letter of Credit Obligations) in an aggregate
principal amount at any time outstanding not to exceed $1,025.0 million,
less all principal repayments of Term Loans and all permanent commitment
reductions under the revolving credit facility, in each case, pursuant to
and in accordance with the covenant described under "--Certain Covenants--
Limitation on Asset Sales" above or (ii) Incurred under the Credit
Agreement pursuant to and in compliance with (x) clause (n) of this
definition and (y) the proviso in the covenant described under the caption
"--Limitation on Incurrence of Additional Indebtedness" above;
b. Indebtedness of a Restricted Subsidiary owed to and held by the
Company or a Restricted Subsidiary; or Indebtedness of the Company owed to
and held by a Restricted Subsidiary;
c. Indebtedness Incurred by the Company or any Restricted Subsidiary in
connection with the purchase or improvement of property (real or personal)
or equipment or other capital expenditures in the ordinary course of
business (including for the purchase of assets or stock of any retail
grocery store or business) or consisting of Capitalized Lease Obligations,
provided that (i) at the time of the Incurrence thereof, such Indebtedness,
together with any other Indebtedness Incurred during the most recently
completed four fiscal quarter period in reliance upon this clause (c) does
not exceed, in the aggregate, 3% of net sales of the Company and the
Restricted Subsidiaries during the most recently completed four fiscal
quarter period on a consolidated basis (calculated on a pro forma basis if
the date of Incurrence is prior to the end of the fourth fiscal quarter
following the Issue Date) and (ii) such Indebtedness, together with all
then outstanding Indebtedness Incurred in reliance upon this clause (c)
does not exceed, in the aggregate, 3% of the aggregate net sales of the
Company and the Restricted Subsidiaries during the most recently completed
twelve fiscal quarter period on a consolidated basis (calculated on a pro
forma basis if the date of Incurrence is prior to the end of the twelfth
fiscal quarter following the Issue Date);
80
<PAGE>
d. Indebtedness Incurred by the Company or any Restricted Subsidiary in
connection with expenditures in an aggregate principal amount not to exceed
$25.0 million; provided that such expenditures relate solely to the
integration of the operations of Smith's, Smitty's and their respective
subsidiaries as described in this Prospectus;
e. Indebtedness of the Company Incurred under Foreign Exchange Agreements
and Interest Swap Obligations entered into with respect to Indebtedness
otherwise permitted to be Incurred under the covenant described under "--
Certain Covenants--Limitation on Incurrences of Additional Indebtedness"
above, including this definition of "Permitted Indebtedness" (other than
this clause (e)), in a notional amount not exceeding the aggregate
principal amount of such Indebtedness;
f. guarantees Incurred in the ordinary course of business by the Company
or a Restricted Subsidiary of Indebtedness of any other Person in aggregate
not to exceed $20.0 million at any time outstanding;
g. Refinancing Indebtedness;
h. Indebtedness of the Company or any Restricted Subsidiary for letters
of credit relating to workers' compensation claims and self-insurance or
similar requirements in the ordinary course of business;
i. Existing Indebtedness;
j. Indebtedness arising from guarantees of Indebtedness of the Company or
any Restricted Subsidiary or other agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary, other than
guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose
of financing such acquisition; provided that the maximum aggregate
liability in respect of all such Indebtedness shall at no time exceed the
gross proceeds actually received by the Company and the Restricted
Subsidiary in connection with such disposition;
k. obligations in respect of performance bonds and completion guarantees
provided by the Company or any Restricted Subsidiary in the ordinary course
of business;
l. guarantees by the Company or a Restricted Subsidiary of Indebtedness
Incurred by the Company or a Restricted Subsidiary so long as the
Incurrence of such Indebtedness by the Company or any such Restricted
Subsidiary is otherwise permitted by the terms of the Indenture;
m. Indebtedness Incurred by the Company in connection with the transfer
to the Company or a third party of the California assets leased by the
Company from certain trusts and securing such trusts' obligations to the
Smith's Food & Drug Centers Inc. 1994-A Pass Through Trusts (the "Related
Assets"); provided, however, that (i) if the Related Assets are transferred
to the Company, the Company shall consummate an Asset Sale with respect to
such Related Assets within 90 days after the Incurrence of such
Indebtedness and shall apply the Net Proceeds of such Asset Sale to
permanently reduce Pari Passu Indebtedness, Indebtedness of any Restricted
Subsidiary or Senior Indebtedness, and (ii) if the Related Assets are
transferred to any Person other than the Company or any Subsidiary, the
Company shall, within 90 days after the Incurrence of such Indebtedness,
apply any proceeds received from the owner trust in respect of such
transfer of the Related Assets to permanently reduce Pari Passu
Indebtedness, Indebtedness of any Restricted Subsidiary or Senior
Indebtedness; provided, further, however, that up to $5.0 million in
aggregate amount of Net Proceeds under clause (i) or proceeds under clause
(ii) may be applied to repay outstanding borrowings under the revolving
credit facility pursuant to the Credit Agreement without a corresponding
reduction in commitments; and
n. additional Indebtedness of the Company or any Restricted Subsidiary
(together with the Indebtedness Incurred pursuant to clause (a)(ii) above)
in an aggregate amount not to exceed $140.0 million at any time
outstanding.
81
<PAGE>
"Permitted Investment" by any Person means (i) any Related Business
Investment, (ii) Investments in securities not constituting cash or Cash
Equivalents and received in connection with an Asset Sale made pursuant to the
provisions of the covenant described under "--Certain Covenants--Limitation on
Asset Sales" above or any other disposition of assets not constituting an
Asset Sale by reason of the exceptions contained in the definition thereof,
(iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date,
(v) Investments specifically permitted by and made in accordance with the
second paragraph of the covenant described under "--Certain Covenants--
Limitation on Transactions with Affiliates," (vi) Investments in the Company
or the wholly owned Restricted Subsidiaries and (vii) additional Investments
in an aggregate amount not exceeding $15.0 million.
"Permitted Liens" shall mean (i) Liens for taxes, assessments and
governmental charges or claims not yet due or which are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted and if a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made therefor; (ii) statutory
Liens of landlords and carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen or other like Liens arising in the ordinary course of
business, deposits made to obtain the release of such Liens, and with respect
to amounts not yet delinquent for a period of more than 60 days or being
contested in good faith by an appropriate process of law, and for which a
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made; (iii) Liens incurred or pledges or deposits made in the
ordinary course of business to secure obligations under workers' compensation,
unemployment insurance and other types of social security or similar
legislation; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, zoning or other restrictions, minor defects or irregularities
in title and other similar charges or encumbrances not interfering in any
material respect with the business of the Company or any of the Restricted
Subsidiaries incurred in the ordinary course of business; (vi) Liens upon
specific items of inventory or other goods and proceeds of any Person securing
such Person's obligations in respect of bankers' acceptances issued or created
for the account of such Person to facilitate the purchase, shipment or storage
of such inventory or other goods in the ordinary course of business; (vii)
Liens securing reimbursement obligations with respect to letters of credit
which encumber documents and other property relating to such letters of credit
and the products and proceeds thereof; (viii) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of
nondelinquent customs duties in connection with the importation of goods; (ix)
judgment and attachment Liens not giving rise to a Default or Event of
Default; (x) leases or subleases granted to others not interfering in any
material respect with the business of the Company or any Restricted
Subsidiary; (xi) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that are
within the general parameters customary in the industry, in each case securing
Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements
and forward contracts, option futures contracts, futures options or similar
agreements or arrangements designed to protect the Company or any Restricted
Subsidiary from fluctuations in the price of commodities; (xii) Liens
encumbering deposits made in the ordinary course of business to secure
nondelinquent obligations arising from statutory, regulatory, contractual or
warranty requirements of the Company or the Restricted Subsidiaries for which
a reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made; (xiii) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Company or any
Restricted Subsidiary in the ordinary course of business in accordance with
past practices; (xiv) any interest or title of a lessor in the property
subject to any lease, whether characterized as capitalized or operating other
than any such interest or title resulting from or arising out of a default by
the Company or any Restricted Subsidiary of its obligations under such lease;
(xv) Liens arising from filing UCC financing statements for precautionary
purposes in connection with true leases of personal property that are
otherwise permitted under the applicable Indenture and under which the Company
or any Restricted Subsidiary is lessee; (xvi) Liens in favor of the Trustee
and any substantially equivalent Lien granted to any trustee or similar
institution under any indenture governing Indebtedness permitted to be
Incurred or outstanding under the Indenture; and (xvii) Liens securing
Indebtedness permitted to be Incurred pursuant to clause (m) of the definition
of Permitted Indebtedness above, provided that such Liens extend only to the
Related Assets (as defined in such clause (m)).
82
<PAGE>
"Permitted Payments" means
(i) the consummation of the Transactions as described herein;
(ii) payments by the Company to effect the mandatory redemption of its
Series I Preferred Stock; provided, however, that such payments shall not
be made on any date earlier, or in any amount greater, than the dates and
amounts provided for in the Company's Certificate of Incorporation as in
effect on the Issue Date;
(iii) any payment by the Company or any Subsidiary to Yucaipa or the
principals or any Affiliates thereof for consulting, management, investment
banking or similar services, or for reimbursement of costs and expenses (x)
pursuant to the Management Services Agreement or (y) as approved by a
majority of the Independent Directors (as defined in the Standstill
Agreement);
(iv) any payment to pay for the purchase, retirement or other acquisition
for value of any Capital Stock of the Company held by any future, present
or former employee or director of the Company or any Subsidiary pursuant to
any management equity plan or stock option plan or any other agreement,
provided that the aggregate amount of Restricted Payments made under this
clause does not exceed $5 million in any fiscal year (provided that any
unused amounts may be carried over to any subsequent fiscal year subject to
a maximum amount of $10 million in any fiscal year);
(v) pro rata dividends paid by any Restricted Subsidiary that is not
wholly owned by the Company or another wholly owned Restricted Subsidiary;
(vi) Investments in Unrestricted Subsidiaries in an aggregate amount not
to exceed $10.0 million; and
(vii) other Restricted Payments in an aggregate amount not to exceed
$25.0 million.
"Permitted Subordinated Reorganization Securities" means securities of the
Company issued in a plan of reorganization in a case under Bankruptcy Law
relating to the Company which constitutes either (y) Capital Stock (other than
Disqualified Capital Stock with the reference to "Maturity Date" in the
definition of such term modified to relate to the final stated maturity of any
debt securities issued in such plan of reorganization to the holders of
Designated Senior Indebtedness ("Senior Reorganization Securities")) or (z)
debt securities of the Company which are (i) unsecured, (ii) have no scheduled
mandatory amortization thereon prior to the final stated maturity of the
Senior Reorganization Securities and (iii) are subordinated in right of
payment to the Senior Reorganization Securities to at least the same extent as
the Notes are subordinated to Designated Senior Indebtedness.
"Permitted Transferees" means, with respect to any Person, (i) any Affiliate
of such Person, (ii) the heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership, the stockholders or
general or limited partners of which, include only such Person or his or her
parents, spouse or lineal descendants, in each case to whom such Person has
transferred the beneficial ownership of any securities of the Company, (iv)
any investment account whose investment managers and investment advisors
consist solely of such Person and/or Permitted Transferees of such Person and
(v) any investment fund or investment entity that is a subsidiary of such
Person or a Permitted Transferee of such Person.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, joint venture, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Plan of Liquidation" means, with respect to any Person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety
or substantially as an entirety and (ii) the distribution of all or
substantially
83
<PAGE>
all of the proceeds of such sale, lease, conveyance or other disposition and
all or substantially all of the remaining assets of such Person to holders of
Capital Stock of such Person.
"Preferred Stock" means, with respect to any Person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indentures, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as
interpreted by the Company's chief financial officer or Board of Directors in
consultation with its independent certified public accountants.
"Public Equity Offering" means an underwritten public offering of Common
Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act.
"Qualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person that is not Disqualified Capital Stock.
"Refinancing Indebtedness" means, with respect to any Person, Indebtedness
of such Person issued in exchange for, or the proceeds from the issuance and
sale or disbursement of which are used to substantially concurrently repay,
redeem, refund, refinance, discharge or otherwise retire for value, in whole
or in part (collectively, "repay"), or constituting an amendment, modification
or supplement to, or a deferral or renewal of (collectively, an "amendment"),
any Indebtedness of such Person existing on the Issue Date or Indebtedness
(other than Permitted Indebtedness, except Permitted Indebtedness Incurred
pursuant to clauses (c), (d), (g), (i) and (m) of the definition thereof)
Incurred in accordance with the applicable Indenture (a) in a principal amount
(or, if such Refinancing Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon the acceleration thereof,
with an original issue price) not in excess of (without duplication) (i) the
principal amount or the original issue price, as the case may be, of the
Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances
Indebtedness under a revolving credit facility or other agreement providing a
commitment for subsequent borrowings, with a maximum commitment not to exceed
the maximum commitment under such revolving credit facility or other
agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii)
premiums, penalties, fees and expenses actually incurred by such Person in
connection with the repayment or amendment thereof and (b) with respect to
Refinancing Indebtedness that repays or constitutes an amendment to
Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have
any fixed mandatory redemption or sinking fund requirement in an amount
greater than or at a time prior to the amounts and times specified in such
repaid or amended Subordinated Indebtedness, except to the extent that any
such requirement applies on a date after the Maturity Date and (y) shall
contain subordination and default provisions no less favorable in any material
respect to Holders than those contained in such repaid or amended Subordinated
Indebtedness.
"Related Business Investment" means (i) any Investment by a Person in any
other Person a majority of whose revenues are derived from the operation of
one or more retail grocery stores or supermarkets or any other line of
business engaged in by the Company or any of the Subsidiaries as of the Issue
Date; (ii) any Investment by such Person in any cooperative or other supplier,
including, without limitation, any joint venture which is intended to supply
any product or service useful to the business of the Company and the
Restricted Subsidiaries as it is conducted as of the Issue Date and as such
business may thereafter evolve or change; and (iii) any capital
expenditure or Investment, in each case reasonably related to the business of
the Company and the Restricted Subsidiaries as it is conducted as of the Issue
Date and as such business may thereafter evolve or change.
"Restricted Payment" means (i) any Stock Payment or (ii) any Investment
(other than a Permitted Investment).
84
<PAGE>
"Restricted Subsidiary" means any Subsidiary that, as of the date of
determination, is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, and all other Obligations with respect to, any Indebtedness of the
Company, whether outstanding on the Issue Date or thereafter Incurred, unless,
in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Without limiting the generality of the foregoing, "Senior Indebtedness"
shall include (x) the principal of, premium, if any, and interest on all
obligations of every nature of the Company from time to time owed to the
lenders under the Credit Agreement, including, without limitation, the Letter
of Credit Obligations and principal of and interest on, all fees and expenses
payable under the Credit Agreement, and (y) interest accruing thereon
subsequent to the occurrence of any Event of Default specified in clause (vi)
or (vii) under "-- Events of Default" relating to the Company, whether or not
the claim for such interest is allowed under any applicable Bankruptcy Law.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a)
Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly
subordinate or junior in right of payment to any Indebtedness of the Company,
(c) Indebtedness which, when Incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without recourse to
the Company (other than Capitalized Lease Obligations), (d) Indebtedness which
is represented by Disqualified Capital Stock, (e) obligations for goods,
materials or services purchased in the ordinary course of business or
obligations consisting of trade payables, (f) Indebtedness of or amounts owed
by the Company for compensation to employees or for services rendered to the
Company, (g) any liability for federal, state, local or other taxes owed or
owing by the Company, (h) Indebtedness of the Company to a Subsidiary of the
Company, and (i) that portion of any Indebtedness which is Incurred by the
Company in violation of the Indenture.
"Significant Stockholder" means, with respect to any Person, any other
Person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 10% of any class of equity securities of such
Person that are entitled to vote on a regular basis for the election of
directors of such Person.
"Significant Subsidiary" means each Restricted Subsidiary that is either (a)
a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under
the Securities Act and the Exchange Act (as such regulation is in effect on
the Issue Date) or (b) material to the financial condition or results of
operations of the Company and the Restricted Subsidiaries taken as a whole.
"Standstill Agreement" means the Standstill Agreement dated as of January
29, 1996 among the Company, Yucaipa and each of the limited partnerships that
owns shares in Smitty's for which Yucaipa acts as the general partner (as such
Standstill Agreement may be amended or replaced, so long as such amendment or
replacement has been approved by a majority of the Independent Directors (as
defined in the Standstill Agreement as in effect prior to such amendment or
replacement) and is not disadvantageous to the Holders in any material
respect).
"Stock Payment" means, with respect to any Person, (a) the declaration or
payment by such Person, either in cash or in property, of any dividend on
(except, in the case of the Company, dividends payable solely in
Qualified Capital Stock of the Company), or the making by such Person or any
of its subsidiaries of any other distribution in respect of, such Person's
Qualified Capital Stock or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock (other than exchangeable or
convertible Indebtedness of such Person), or (b) the redemption, repurchase,
retirement or other acquisition for value by such Person or any of its
subsidiaries, directly or indirectly, of such Person's Qualified Capital Stock
(and, in the case of a Subsidiary, Qualified Capital Stock of the Company) or
any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock (other than exchangeable or convertible Indebtedness of
such Person), other than, in the case of the Company, through the issuance in
exchange therefor solely of Qualified Capital Stock of the
85
<PAGE>
Company; provided, however, that in the case of a Restricted Subsidiary, the
term "Stock Payment" shall not include any such payment with respect to its
Capital Stock or warrants, rights or options to purchase or acquire shares of
any class of its Capital Stock that are owned solely by the Company or a
wholly owned Restricted Subsidiary.
"Subordinated Indebtedness" means Indebtedness of the Company which is
subordinated in right of payment to the Notes.
"subsidiary" of any Person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such Person, by one or more subsidiaries of such Person or by such Person and
one or more subsidiaries of such Person or (ii) a partnership in which such
Person or a subsidiary of such Person is, at the date of determination, a
general partner of such partnership, but only if such Person or its subsidiary
is entitled to receive more than fifty percent of the assets of such
partnership upon its dissolution, or (iii) any other Person (other than a
corporation or a partnership) in which such Person, a subsidiary of such
Person or such Person and one or more subsidiaries of such Person, directly or
indirectly, at the date of determination, has (x) at least a majority
ownership interest or (y) the power to elect or direct the election of a
majority of the directors or other governing body of such Person.
"Subsidiary" means any subsidiary of the Company.
"Term Loans" means the term loan facility under the Credit Agreement and any
agreement governing Indebtedness Incurred to refund, replace or refinance any
borrowings outstanding under such facility or under any prior refunding,
replacement or refinancing thereof (in each case, in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions).
"Unrestricted Subsidiary" means any Subsidiary (including its subsidiaries)
so designated by a Board Resolution adopted by the Board of Directors of the
Company in accordance with "--Certain Covenants--Limitation on Restricted and
Unrestricted Subsidiaries" above. Notwithstanding the foregoing, an
Unrestricted Subsidiary shall be deemed to be redesignated a Restricted
Subsidiary at any time if (a) the Company or any other Restricted Subsidiary
(i) provides credit support for, or a guarantee of, any Indebtedness of such
Unrestricted Subsidiary or any of its subsidiaries (including any undertaking,
agreement or instrument evidencing such Indebtedness) or (ii) is directly or
indirectly liable for any Indebtedness of such Unrestricted Subsidiary or any
of its subsidiaries, (b) a default with respect to any Indebtedness of such
Unrestricted Subsidiary or any of its subsidiaries (including any right which
the holders thereof may have to take enforcement action against any of them)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity or (c) such Unrestricted
Subsidiary or any of its subsidiaries Incurs Indebtedness pursuant to which
the lender has recourse to any of the assets of the Company or any Restricted
Subsidiary.
"Yucaipa" means The Yucaipa Companies, a California general partnership, or
any successor thereto which is an affiliate of Ronald W. Burkle or his
Permitted Transferees.
86
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon filing of the Amended and Restated Certificate of Incorporation, the
Company's authorized capital stock will consist of (i) 20,000,000 shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
(ii) 100,000,000 shares of Class B Common Stock, par value $.01 per share (the
"Class B Common Stock"), (iii) 20,000,000 shares of Class C Common Stock, par
value $.01 (the "Class C Common Stock"), and (iv) 85,000,000 shares of
Preferred Stock, par value $.01 per share, of which 34,524,579 shares are
designated as Series I Preferred Stock. As of April 15, 1996, there were
11,366,532 shares of Class A Common Stock outstanding, 13,705,191 shares of
Class B Common Stock outstanding and 12,956,747 shares of Series I Preferred
Stock outstanding.
COMMON STOCK
All holders of shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Company's Board of Directors in its
discretion from funds legally available therefor, and upon liquidation or
dissolution are entitled to receive all assets available for distribution to
the holders of Common Stock. Under the Delaware Corporation Law, the Company
may declare and pay dividends only out of its surplus, or out of its net
profits for the fiscal year in which the dividend is declared or the preceding
year. Under certain of the Company's credit agreements, the Company's ability
to pay dividends is restricted based on various measures, including the
Company's net income for designated period. All of the outstanding shares of
Common Stock are legally issued, fully paid and nonassessable. Holders of
Common Stock have no preemptive or other rights to subscribe for additional
shares which the Company may issue and there are no redemption provisions or
sinking fund provisions applicable to any class of Common Stock, nor is the
Common Stock subject to calls or assessments by the Company.
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except the holders of
Class A Common Stock are entitled to ten votes per share and the holders of
Class B Common Stock are entitled to one vote per share on all matters
submitted to the vote of stockholders for their vote or approval, including
the election of directors. The holders of Class C Common Stock will not be
entitled to vote on matters submitted to the vote of Company stockholders.
However, if shares of Class C Common Stock are transferred to a holder other
than an Original Class C Holder (as defined in the Amended and Restated
Certificate of Incorporation), such transferred shares of Class C Common Stock
will be convertible, at the option of the holder, into shares of voting Class
B Common Stock. There is no provision made for cumulative voting, and no class
of outstanding Common Stock or Preferred Stock alone is entitled to elect any
directors. The holders of Class A Common Stock and the holders of Series I
Preferred Stock, voting together have, and after consummation of the
Transactions will continue to have, effective control of the Company through
holding approximately 94% of the combined voting power of the outstanding
capital stock and will have the ability to elect all the directors of the
Company and to effect or prevent certain corporate transactions which require
majority approval of the combined classes, including mergers and other
business combinations.
Under the Company's bylaws, directors may be removed with or without cause
by the holders of a majority of the votes entitled to be cast for the election
of directors. However, under Delaware law, stockholders in a company with a
staggered board (such as Smith's) may only remove directors for cause, unless
the certificate of incorporation provides otherwise. A vacancy on the Board
created by the removal or resignation of a director or by expansion of the
authorized number of directors may be filled by the remaining directors then
in office or by the stockholders at a special meeting.
Under the Delaware General Corporation Law, the holders of Class A Common
Stock, Class B Common Stock and Class C Common Stock are entitled to vote as
separate classes on any amendment to the Company's Amended and Restated
Certificate of Incorporation that would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value
of the shares of such class, or alter or change the powers, preferences or
special rights of the shares of such class so as to affect them adversely.
87
<PAGE>
Each share of Class A Common Stock is convertible at any time at the option
of the holder into Class B Common Stock on a share-for-share basis. The
Company's Certificate of Incorporation also provides that each share of Class
A Common Stock will be converted automatically into one share of Class B
Common Stock if, at any time, the number of shares of Class A Common Stock
issued and outstanding shall be less than 2,910,885. The Class B Common Stock
has no conversion rights.
Shares of Class A Common Stock may not be sold, gifted, or transferred
except to and among the Company, a spouse, child, grandchild, sibling or
parent of the person to whom the Class A Common Stock was issued originally (a
"Permitted Transferee"), and certain entities controlled or owned by one or
more Permitted Transferees. The Company's Certificate of Incorporation
provides that any holder of shares of Class A Common Stock desiring to
transfer such shares to a person other than a Permitted Transferee or such
transferee must present such shares to the Company for conversion into an
equal number of shares of Class B Common Stock upon such transfer. Thereafter,
such shares of Class B Common Stock may be freely transferred to persons other
than Permitted Transferees.
SERIES I PREFERRED STOCK
Except as described below, each share of Series I Preferred Stock is
entitled to ten votes per share on all matters submitted to the vote of the
stockholders, including the election of directors, for their vote or approval.
Except as described below, holders of Series I Preferred Stock vote together
with the holders of Common Stock, including the election of directors. The
affirmative vote of the holders of a majority of the Series I Preferred Stock,
voting as a class, is required upon any amendment to the Company's Certificate
of Incorporation adversely affecting in any manner the rights of such holders.
Under the Company's Certificate of Incorporation, upon liquidation of the
Company, each share of Series I Preferred Stock is entitled to a liquidation
preference of $.33 1/3, on a pro-rata basis with any other series of Preferred
Stock ranking on parity with the Series I Preferred Stock, before any
distribution to the holders of any class of Common Stock.
All shares of Series I Preferred Stock are subject to redemption at any time
upon 60 days' notice at the option of the Board of Directors, in such numbers
as the Board may determine, at a redemption price of $.33 1/3 per share (the
"Redemption Price"). In addition, on December 1 of each year commencing in
1989, one-eleventh of the total authorized number of shares of Series I
Preferred Stock is subject to mandatory redemption at the Redemption Price.
The Series I Preferred Stock has no dividend requirement. If approved by a
majority of the outstanding shares of Series I Preferred Stock, the Amended
and Restated Certificate of Incorporation will include certain provisions with
respect to the Series I Preferred Stock which: (i) eliminate for a five-year
period the annual mandatory redemption of original outstanding shares of
Series I Preferred Stock (with mandatory redemptions of one-eleventh of the
outstanding shares of Series I Preferred Stock resuming thereafter), and (ii)
restrict for two-year period the optional redemption of shares of Series I
Preferred Stock, and (iii) the addition of transfer or sale restrictions which
reduce the number of allocated votes per share of Series I Preferred Stock
from ten votes to one vote per share in the event of transfers or sales not
made to certain affiliated or other designated transferees.
UNDESIGNATED PREFERRED STOCK
Additional Preferred Stock may be issued from time to time in one or more
series and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking funds and any other rights, preferences, privileges and restrictions
applicable to each such series of Preferred Stock. However, under the
Company's Amended and Restated Certificate of Incorporation, no series of
Preferred Stock may have rights or preferences superior to the Series I
Preferred Stock, and no share of Preferred Stock other than shares designated
as Series I Preferred Stock may be entitled to more than one vote upon any
matter presented to the Company's stockholders for vote or approval, including
the election of directors.
88
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
In connection with the Transactions, Smith's will enter into the New Credit
Facility with a syndicate of financial institutions for whom Bankers Trust
will act as administrative agent. Smith's has accepted a commitment letter
(the "Commitment Letter") from Bankers Trust and Chase Manhattan pursuant to
which Bankers Trust and Chase Manhattan, as Arrangers (the "Arrangers"), have
agreed, subject to certain conditions, to provide the Company $995 million of
financing under the New Credit Facility. The following is a summary of the
anticipated material terms and conditions of the New Credit Facility. This
summary does not purport to be a complete description of the New Credit
Facility and is subject to the detailed provisions of the loan agreement (the
"Loan Agreement") and various related documents to be entered into in
connection with the New Credit Facility.
GENERAL
The New Credit Facility will provide for (i) term loans in the aggregate
amount of $805 million, comprised of the $325 million Tranche A Loans, the
$160 million Tranche B Loans, the $160 million Tranche C Loans and the $160
million Tranche D Loans; and (ii) the $190 million New Revolving Facility
under which working capital loans may be made and commercial or standby
letters of credit in the maximum aggregate amount to be agreed upon among the
Company and the Arrangers, under which approximately $28 million of letters of
credit are expected to be issued upon consummation of the Transactions.
Proceeds of the New Term Loans and loans under the Revolving Credit Facility
on the Closing, together with proceeds from the Offering and the California
Divestiture will be used to fund the cash requirements for the Tender Offer
and the Smitty's Refinancing, refinance certain other existing indebtedness of
Smith's, redeem a portion of Smith's Series I Preferred Stock, redeem Smith's
management options and pay various refinancing premiums fees, expenses and
other costs associated with the Transactions. The New Revolving Facility will
be available to provide for the working capital requirements and general
corporate purposes of the Company and to issue commercial and standby letters
of credit.
INTEREST RATE; FEES
Borrowings under (i) the New Revolving Facility and the Tranche A Loans will
bear interest at a rate equal to the Base Rate (as defined in the Loan
Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as
defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loans
will bear interest at the Base Rate plus 2.00% per annum or the reserve
adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loans will
bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted
Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loans will bear
interest at the Base Rate plus 2.75% per annum or the reserve adjusted Euro-
Dollar Rate plus 4.00% per annum, in each case as selected by the Company.
Applicable interest rates on Tranche A Loans and the New Revolving Facility
and the fees payable under the New Revolving Facility on letters of credit,
will be reduced in increments of 0.25% per annum, up to an aggregate of 0.50%
per annum, after the New Term Loans have been reduced by such amounts and if
the Company meets certain financial tests to be agreed upon among the Company
and the Arrangers. Up to $30 million of the New Revolving Facility will be
available as a swingline facility and loans outstanding under the swingline
facility shall bear interest at the Base Rate plus 1.00% per annum (subject to
adjustment as described in the preceding sentence). After the occurrence of a
default under the New Credit Facility, interest will accrue at the rate equal
to the rate on loans bearing interest at the rate determined by reference to
the Base Rate plus an additional 2.00% per annum. The Company will pay the
issuing bank a fee of 0.25% per annum on each standby letter of credit and
each commercial letter of credit and will pay the lenders under the New Credit
Facility a fee equal to the margin on Eurodollar Rate loans under the
Revolving Credit Facility (the "Eurodollar Margin") for standby letters of
credit and a fee equal to the Eurodollar Margin minus 1.00% per annum for
commercial letters of credit. Each of these fees will be calculated based on
the amount available to be drawn under a letter of credit. In addition, the
Company will pay a commitment fee of 0.50% per annum on the unused portions of
the New Revolving Facility and for purposes of calculating this fee, loans
under the swingline facility shall not be deemed
89
<PAGE>
to be outstanding. The New Credit Facility will require the Company to enter
into hedging agreements to limit its exposure to increases in interest rates
for a period of not less than two years after the Closing. The New Credit
Facility may be prepaid in whole or in part without premium or penalty.
AMORTIZATION; PREPAYMENTS
The Tranche A Loans will mature six and one-quarter years after the Closing
and will be subject to amortization, commencing on the nine month anniversary
of the Closing in the amount of $7.5 million, and thereafter commencing on the
first anniversary of the Closing on a quarterly basis in aggregate annual
amounts of $45 million in the second year, $55 million in the third year, $65
million in the fourth year, $65 million in the fifth year, $60 million in the
sixth year, and $13.75 million on the sixth anniversary of the Closing and in
the first quarter of the seventh year. The Tranche B Loan will mature seven
and one-half years after the Closing and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.6 million for the first six
years and in the seventh year payable in installments of $4.0 million in the
first quarter and $18 million in each of the last three quarters and in the
eighth year payable in installments of $22.7 million in the first quarter and
$69.7 million in the second quarter. The Tranche C Loans will mature eight and
one-half years after the Closing and will be subject to amortization on a
quarterly basis in aggregate annual amounts of $1.6 million for the first
seven years and in the eighth year payable in installments of $0.4 million in
each of the first two quarters and $25 million in each of the last two
quarters and in the ninth year payable in installments of $25 million in the
first quarter and $73 million in the second quarter. The Tranche D Loans will
mature nine and one-quarter years after the Closing and will be subject to
amortization on a quarterly basis in aggregate annual amounts of$1.6 million
for the first eight years and in the ninth year payable in installments of
$0.4 million in each of the first two quarters, $29 million in the third
quarter and $32 million in the last quarter and in the tenth year in an
installment of $85.4 million in the first quarter. The New Revolving Facility
will mature on the same date as the Tranche A Loans. The Company will be
required to reduce loans outstanding under the New Revolving Facility to $85
million for a period of not less than 30 consecutive days during the first 12-
month period following the Closing and to $75 million for a period of not less
than 30 consecutive days during each consecutive 12-month period thereafter.
The Company will be required to make certain prepayments, subject to certain
exceptions, on the New Credit Facility with 75% of Consolidated Excess Cash
Flow (as defined in the Loan Agreement) and with the proceeds from certain
asset sales, issuances of debt and equity securities and any pension plan
reversion. Such prepayments will be allocated pro rata between the Tranche A
Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans and to
scheduled amortization payments of the Tranche A Loans, the Tranche B Loans,
Tranche C Loans, and the Tranche D Loans pro rata, provided that at the
election of the Company mandatory prepayments of Tranche A Loans made with
Excess Land Proceeds (as defined in the Loan Agreement) may be applied to the
Tranche A Loans in forward order of maturity up to $50 million. At the option
of the Company, mandatory prepayments on the Tranche B Loans, the Tranche C
Loans and the Tranche D Loans will be used to make an offer to repay such
Loans and to the extent not accepted by the holders of such loans (x) in the
event such mandatory prepayments are to be made from Excess Land Proceeds,
such mandatory prepayments not so accepted will be applied to the prepayment
of the Tranche A Loans and (y) in the event of all other mandatory
prepayments, 50% of such amount will be applied to reduce Tranche A Loans on a
pro rata basis and the remaining 50% may be retained by the Company.
GUARANTEES AND COLLATERAL
All subsidiaries of the Company will guarantee the Company's obligations
under the New Credit Facility. The Company's obligations and the guarantees of
its subsidiaries will be secured by a first priority lien on all existing and
after-acquired personal property of the Company and its subsidiaries,
including a pledge of the stock of all subsidiaries of the Company and by
first priority liens on all unencumbered real property fee interests of the
Company and its subsidiaries and the Company and its subsidiaries will use
their reasonable economic efforts to provide the lenders with a first priority
lien on all unencumbered leasehold interests of the Company and its
subsidiaries.
90
<PAGE>
COVENANTS
The obligation of the lenders under the New Credit Facility to advance funds
is subject to the satisfaction of certain conditions customary in agreements
of this type. In addition, the Company will be subject to certain customary
affirmative and negative covenants contained in the New Credit Facility,
including, without limitation, covenants that restrict, subject to specified
exceptions, (i) the incurrence of additional indebtedness and other
obligations, (ii) mergers and acquisitions, (iii) asset sales, (iv) the
granting of liens, (v) prepayment or repurchase of other indebtedness, (vi)
engaging in transactions with affiliates, (vii) capital expenditures, (vii)
the making of investments, (ix) dividends and other payments with respect to
equity interests, or (x) rental payments. Certain of these covenants may be
more restrictive than those in favor of holders of the Notes as described
herein and as set forth in the Indenture. In addition, the New Credit Facility
will require that the Company maintain certain specified financial covenants,
including a minimum fixed charge coverage, a minimum EBITDA, a maximum ratio
of total debt to EBITDA and a minimum net worth.
EVENTS OF DEFAULT
The New Credit Facility also provides for customary events of default,
including a change of control (which may be defined differently than in the
Indenture). The occurrence of any of such events of default could result in
acceleration of the Company's obligations under the New Credit Facility and
foreclosure on the collateral securing such obligations, which could have
material adverse results to holders of the Notes.
91
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among Smith's and BT Securities Corporation ("BT
Securities"), CS First Boston Corporation ("CS First Boston"), Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), Goldman, Sachs & Co.
("Goldman Sachs") and Chase Securities Inc. ("Chase") (collectively, the
"Underwriters"), the Underwriters have agreed to purchase, and the Company has
agreed to sell to the Underwriters, the entire principal amount of the Notes
offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to the approval of
certain legal matters by counsel and to various other conditions. The nature
of each Underwriter's obligation is such that each is severally committed to
purchase the aggregate principal amount of Notes set forth opposite its name
if it purchases any.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
------------ ----------------
<S> <C>
BT Securities Corporation.................................. $
CS First Boston Corporation................................
Donaldson, Lufkin & Jenrette
Securities Corporation....................................
Goldman, Sachs & Co. ......................................
Chase Securities Inc. .....................................
------------
Total.................................................. $575,000,000
============
</TABLE>
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page hereof, and to certain
dealers at such price less a concession not in excess of $ per $1,000
principal amount of the Notes. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per $1,000 principal amount of
the Notes. After the initial public offering of the Notes, the public offering
prices and other selling terms may be changed.
The Company does not intend to apply for listing of the Notes on a national
securities exchange, but has been advised by each of the Underwriters that it
presently intends to make a market in the Notes, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Notes, and any such market making may be discontinued at any
time by one or all of the Underwriters at the sole discretion of such
Underwriters. There can be no assurance that an active public market for the
Notes will develop.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
BT Securities and CS First Boston have been engaged by Smitty's to act as
dealer managers and consent solicitation agents in connection with the
Smitty's Refinancing. BT Securities and CS First Boston will receive customary
fees in connection with such services.
Chase Manhattan, an affiliate of Chase, has been the administrative agent
and a lender under SSV's existing credit facilities. Proceeds of the Offering
will be used, in part, to repay indebtedness to Chase Manhattan and the other
lenders under such credit facilities. Bankers Trust, an affiliate of BT
Securities, and Chase Manhattan are the Arrangers of the New Credit Facility,
and Bankers Trust will act as administrative agent for the New Credit
Facility. Bankers Trust and Chase Manhattan will receive customary fees in
connection with such services. It is anticipated that Bankers Trust, Chase
Manhattan and Pearl Street L.P. (an affiliate of Goldman Sachs) will be
lenders under the New Credit Facility.
92
<PAGE>
An affiliate of Chase is a limited partner in a partnership controlled by
Yucaipa which owns shares of Smitty's Class A Common Stock. The partnership
will receive shares of Smith's Class B Common Stock in the Merger in exchange
for such shares.
Goldman Sachs is serving as financial advisor to the Company in connection
with the Transactions and has delivered a written opinion to the Company's
Board of Directors that, as of January 29, 1996, the exchange ratio pursuant
to the Recapitalization Agreement is fair to the Company. Goldman Sachs has
been engaged by the Company to act as dealer manager in connection with the
Tender Offer. Goldman Sachs has received, and will receive, customary fees in
connection with such services.
Affiliates of CS First Boston own shares of Smitty's Class B Common Stock
and will receive shares of Smith's Common Stock in the Merger in exchange for
such shares of Smitty's Class B Common Stock.
Each of the Underwriters has from time to time provided investment banking
and financial advisory services to one or more of Smith's, Smitty's, Yucaipa
and/or their respective affiliates and may continue to do so in the future.
The Underwriters have received customary fees for such services.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Latham & Watkins, Los Angeles, California. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by
Cahill Gordon and Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The consolidated financial statements of Smith's Food & Drug Centers, Inc.
at December 30, 1995 and December 31, 1994 and for each of three years in the
period ended December 30, 1995 included in this Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated balance sheet of Smitty's Supermarkets, Inc. as of July 30,
1995 and July 31, 1994 and the related consolidated statements of operations,
stockholder's equity, and cash flows for year ended July 31, 1995, and for the
period from June 29, 1994 (date of inception) to July 31, 1994 (Smitty's), and
for the period from August 2, 1993 to June 28, 1994 and the year ended August
1, 1993 (Predecessor), included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SMITH'S FOOD & DRUG CENTERS, INC.:
Report of Independent Auditors (Ernst & Young LLP)....................... F-2
Consolidated balance sheets at December 30, 1995 and December 31, 1994... F-3
Consolidated statements of income for the years ended January 1, 1994,
December 31, 1994 and December 30, 1995................................. F-4
Consolidated statements of common stockholders' equity for the years
ended January 1, 1994, December 31, 1994 and December 30, 1995.......... F-5
Consolidated statements of cash flows for the years ended January 1,
1994, December 31, 1994 and December 30, 1995........................... F-6
Notes to consolidated financial statements............................... F-7
SMITTY'S SUPERMARKETS, INC.:
Report of Independent Auditors (Coopers & Lybrand L.L.P.)................ F-17
Consolidated balance sheets as of July 31, 1994 and July 30, 1995 and
January 14, 1996 (unaudited)............................................ F-18
Consolidated statements of operations for the 52 weeks ended July 30,
1995 and for the period from June 29, 1994 (date of inception) to July
31, 1994; for the period from August 2, 1993 to June 28, 1994 and the
year ended August 1, 1993 (Predecessor); for the 24 weeks ended January
14, 1996 (unaudited) and the 24 weeks ended January 15, 1995
(unaudited)............................................................. F-19
Consolidated statements of stockholders' equity for the 52 weeks ended
July 30, 1995 and for the period from June 29, 1994 (date of inception)
to July 31, 1994; for the period from August 2, 1992 to June 29, 1994
and the year ended August 1, 1993 (Predecessor); for the 24 weeks ended
January 14, 1996 (unaudited)............................................ F-20
Consolidated statements of cash flows for the 52 weeks ended July 30,
1995 and for the period from June 29, 1994 (date of inception) to July
31, 1994; for the period from August 2, 1993 to June 28, 1994 and the
year ended August 1, 1993 (Predecessor); for the 24 weeks ended January
14, 1996 (unaudited) and the 24 weeks ended January 15, 1995
(unaudited)............................................................. F-21
Notes to consolidated financial statements............................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Smith's Food & Drug Centers, Inc.
We have audited the accompanying consolidated balance sheets of Smith's Food
& Drug Centers, Inc. and subsidiaries as of December 30, 1995 and December 31,
1994, and the related consolidated statements of income, common stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
December 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Smith's Food
& Drug Centers, Inc. and subsidiaries at December 30, 1995 and December 31,
1994, and the consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended December 30, 1995, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
January 29, 1996
F-2
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
ASSETS 1995 1994
------ ------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents........................... $ 16,079 $ 14,188
Rebates and accounts receivable..................... 23,802 25,596
Inventories......................................... 394,982 389,564
Prepaid expenses and deposits....................... 21,255 15,858
Deferred tax assets................................. 23,900 1,400
Assets held for sale................................ 125,000
---------- ----------
Total Current Assets.............................. 605,018 446,606
Property and Equipment
Land................................................ 276,626 303,701
Buildings........................................... 610,049 619,056
Leasehold improvements.............................. 55,830 42,369
Fixtures and equipment.............................. 509,524 589,480
---------- ----------
1,452,029 1,554,606
Less allowances for depreciation and amortization... 390,933 364,741
---------- ----------
1,061,096 1,189,865
Other Assets.......................................... 20,066 16,996
---------- ----------
$1,686,180 $1,653,467
========== ==========
<CAPTION>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
-------------------------------------------
<S> <C> <C>
Current Liabilities
Trade accounts payable.............................. $ 214,152 $ 235,843
Accrued sales and other taxes....................... 50,749 44,379
Accrued payroll and related benefits................ 97,455 84,083
Current maturities of long-term debt................ 20,932 19,011
Current maturities of Redeemable Preferred Stock.... 1,008 1,017
Accrued restructuring costs......................... 58,000
---------- ----------
Total Current Liabilities......................... 442,296 384,333
Long-term debt, less current maturities............... 725,253 699,882
Accrued restructuring costs, less current portion..... 40,000
Deferred income taxes................................. 58,600 89,500
Redeemable Preferred Stock, less current maturities... 3,311 4,410
Common Stockholders' Equity
</TABLE>
<TABLE>
<S> <C> <C>
Convertible Class A Common Stock (shares issued and
outstanding, 11,613,043 in 1995 and 12,140,317 in
1994)................................................. 116 121
Class B Common Stock (shares issued, 18,348,968 in 1995
and 17,821,694 in 1994)............................... 183 178
Additional paid-in capital............................. 285,236 285,592
Retained earnings...................................... 238,027 293,456
---------- ----------
523,562 579,347
Less cost of Common Stock in the treasury (4,890,302
shares in 1995 and 4,772,822 shares in 1994).......... 106,842 104,005
---------- ----------
416,720 475,342
---------- ----------
$1,686,180 $1,653,467
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Net sales................................. $3,083,737 $2,981,359 $2,807,165
Cost of goods sold........................ 2,386,707 2,312,228 2,169,987
---------- ---------- ----------
697,030 669,131 637,178
Expenses:
Operating, selling and administrative... 461,401 440,844 430,258
Depreciation and amortization........... 104,963 94,491 82,173
Interest................................ 60,478 53,715 44,627
Restructuring charges................... 140,000
---------- ---------- ----------
766,842 589,050 557,058
---------- ---------- ----------
Income (loss) before income taxes......... (69,812) 80,081 80,120
Income taxes.............................. (29,300) 31,300 34,300
---------- ---------- ----------
Net income (loss)......................... $ (40,512) $ 48,781 $ 45,820
========== ========== ==========
Net income (loss) per share of Common
Stock.................................... $ (1.62) $ 1.73 $ 1.52
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
----------------- ---------------- ADDITIONAL
NUMBER OF PAR NUMBER OF PAR PAIDIN RETAINED TREASURY
SHARES VALUE SHARES VALUE CAPITAL EARNINGS STOCK TOTAL
---------- ----- ---------- ----- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 3,
1993................... 13,403,132 $134 16,558,879 $165 $285,980 $229,110 $515,389
Net income for 1993.... 45,820 45,820
Conversion of shares
from
Class A to Class B.... (785,687) (8) 785,687 8
Purchase of Class B
Common Stock for the
treasury.............. $ (11,074) (11,074)
Shares sold to the
Employee Stock Profit
Sharing Plan.......... (212) 3,237 3,025
Shares sold under the
Employee Stock
Purchase Plan......... (771) 4,853 4,082
Cash dividends--$.52
per share............. (15,530) (15,530)
Other.................. 485 485
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at January 1,
1994................... 12,617,445 126 17,344,566 173 285,482 259,400 (2,984) 542,197
Net income for 1994.... 48,781 48,781
Conversion of shares
from
Class A to Class B.... (477,128) (5) 477,128 5
Purchase of Class B
Common Stock for the
treasury.............. (109,239) (109,239)
Shares sold to the
Employee Stock Profit
Sharing Plan.......... 143 1,505 1,648
Shares sold under the
Employee Stock
Purchase Plan......... (668) 6,713 6,045
Cash dividends--$.52
per share............. (14,725) (14,725)
Other.................. 635 635
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at December 31,
1994................... 12,140,317 121 17,821,694 178 285,592 293,456 (104,005) 475,342
Net loss for 1995...... (40,512) (40,512)
Conversion of shares
from
Class A to Class B.... (527,274) (5) 527,274 5
Purchase of Class B
Common Stock for the
treasury.............. (9,039) (9,039)
Shares sold to the
Employee Stock Profit
Sharing Plan.......... 2 108 110
Shares sold under the
Employee Stock
Purchase Plan......... (926) 6,094 5,168
Cash dividends--$.60
per share............. (14,917) (14,917)
Other.................. 568 568
---------- ---- ---------- ---- -------- -------- --------- --------
Balance at December 30,
1995................... 11,613,043 $116 18,348,968 $183 $285,236 $238,027 $(106,842) $416,720
========== ==== ========== ==== ======== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Operating Activities
Net income (loss)........................ $ (40,512) $ 48,781 $ 45,820
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation and amortization.......... 104,963 94,491 82,173
Deferred income taxes.................. (53,400) 10,500 15,400
Restructuring charges.................. 140,000
Other.................................. 568 635 485
Changes in operating assets and
liabilities:
Rebates and accounts receivable....... 1,794 (4,758) (4,038)
Inventories........................... (5,418) (11,625) (36,523)
Prepaid expenses and deposits......... (5,397) (1,324) (518)
Trade accounts payable................ (21,691) 50,618 1,119
Accrued sales and other taxes......... 6,370 5,616 6,625
Accrued payroll and related benefits.. 13,372 10,616 8,007
--------- --------- ---------
Cash provided by operating activities..... 140,649 203,550 118,550
Investing Activities
Additions to property and equipment...... (149,035) (146,676) (322,301)
Sale/leaseback arrangements and other
property and equipment sales............ 5,841 20,949 159,137
Other.................................... (3,070) (1,649) (1,258)
--------- --------- ---------
Cash used in investing activities......... (146,264) (127,376) (164,422)
Financing Activities
Additions to long-term debt.............. 45,978 27,000 262,000
Payments on long-term debt............... (18,686) (33,594) (149,197)
Redemptions of Redeemable Preferred
Stock................................... (1,108) (1,042) (1,039)
Purchases of Treasury Stock.............. (9,039) (109,239) (11,074)
Proceeds from sales of Treasury Stock.... 5,278 7,693 7,107
Payment of dividends..................... (14,917) (14,725) (15,530)
--------- --------- ---------
Cash provided by (used in) financing
activities............................... 7,506 (123,907) 92,267
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. 1,891 (47,733) 46,395
Cash and cash equivalents at beginning of
year..................................... 14,188 61,921 15,526
--------- --------- ---------
Cash and cash equivalents at end of year.. $ 16,079 $ 14,188 $ 61,921
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Smith's Food &
Drug Centers, Inc. and its wholly-owned subsidiaries (the "Company"), after
the elimination of significant intercompany transactions and accounts. The
Company operates a regional supermarket and drug store chain in the
Intermountain and Southwestern regions of the United States.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Definition of Accounting Period
The Company's fiscal year ends on the Saturday nearest to December 31.
Fiscal year operating results include 52 weeks for each year.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities less than three months. The amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Inventories
Inventories are valued at the lower of cost, determined on the last-in,
first-out (LIFO) method, or market. Approximately 95% of inventories in 1995
and 1994 were valued using the LIFO method. Other inventories were valued
using the first-in, first-out (FIFO) method. The FIFO cost exceeded the LIFO
value of inventories by $8.1 million in 1995 and $4.1 million in 1994. The
pretax LIFO charge was $4.0 million in 1995, $2.5 million in 1994, and $1.6
million in 1993.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided by the straight-line method based upon estimated useful lives.
Improvements to leased property are amortized over their estimated useful
lives or the remaining terms of the leases, whichever is shorter.
Accrued Insurance Claims
The Company is self-insured, with certain stop loss insurance coverage, for
workers' compensation, non-union employee health care and general liability
claims. Claims expense is recorded through the accrual of claims reserves
based on estimates of ultimate claim costs, including claims incurred but not
reported. The liabilities for accrued insurance claims were $31.8 million and
$25.3 million at the end of 1995 and 1994, respectively. These liabilities are
not discounted.
F-7
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pre-Operating and Closing Costs
Costs incurred in connection with the opening of new stores and distribution
facilities are expensed as incurred. The remaining net investment in stores
closed, less salvage value, is charged against earnings in the period of
closing. For leased stores that are closed and subleased to third parties, a
provision is made for the remaining lease liability, net of expected sublease
rental. For leased stores that are closed but not yet subleased, a provision
is made based on discounted lease payments through the estimated period until
subleased.
Interest Costs
Interest costs are expensed as incurred, except for interest costs which
have been capitalized as part of the cost of properties under development. The
Company's cash payments for interest (net of capitalized interest of
approximately $1.4 million in 1995, $5.8 million in 1994 and $14.5 million in
1993) amounted to $60.7 million in 1995, $54.0 million in 1994 and $39.8
million in 1993.
Income Taxes
The Company determines its deferred tax assets and liabilities based on
differences between the financial reporting and tax basis of its assets and
liabilities using the tax rates that will be in effect when the differences
are expected to reverse.
Net Income Per Share of Common Stock
Net income per share of Common Stock is computed by dividing the net income
by the weighted average number of shares of Common Stock outstanding of
25,030,882 in 1995, 28,176,907 in 1994 and 30,238,811 in 1993. Common Stock
equivalents in the form of stock options are excluded from the weighted
average number of common shares in 1995 due to the net loss.
Adoption of Accounting Standard
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Due to
the nature of the Company's operations and the number of estimates required to
assess the impact of Statement 121, the financial statement impact of adoption
has not yet been determined.
Litigation
The Company is a party to certain legal actions arising out of the ordinary
course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
Company's results of operations or financial position.
Reclassifications
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform with the 1995 presentation.
F-8
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--PROPERTY AND EQUIPMENT
The Company depreciates its buildings over 25 to 30 years and its fixtures
and equipment over a period of 2 to 9 years and amortizes its leasehold
improvements over their estimated useful lives or the life of the lease,
whichever is shorter. Property and equipment consists of the following (dollar
amounts in thousands):
<TABLE>
<CAPTION>
ALLOWANCES FOR CURRENT YEAR
DEPRECIATION AND NET DEPRECIATION AND
COST AMORTIZATION BOOK VALUE AMORTIZATION
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
DECEMBER 30, 1995
Land.................. $ 276,626 $ 276,626
Buildings............. 610,049 $108,985 501,064 $ 19,907
Leasehold
improvements......... 55,830 12,556 43,274 2,970
Fixtures and
equipment............ 509,524 269,392 240,132 82,086
---------- -------- ---------- --------
$1,452,029 $390,933 $1,061,096 $104,963
========== ======== ========== ========
DECEMBER 31, 1994
Land.................. $ 303,701 $ 303,701
Buildings............. 619,056 $ 92,542 526,514 $ 18,334
Leasehold
improvements......... 42,369 10,122 32,247 1,842
Fixtures and
equipment............ 589,480 262,077 327,403 74,315
---------- -------- ---------- --------
$1,554,606 $364,741 $1,189,865 $ 94,491
========== ======== ========== ========
</TABLE>
NOTE C--LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Mortgage notes, collateralized by property and
equipment with a cost of $420.7 million in
1995 and $413.0 million in 1994, due through
2011 with interest at an average rate of
9.68% in 1995 and 9.73% in 1994.............. $254,385 $270,082
Unsecured notes, due in 2002 through 2015 with
varying annual installments starting in 2000
which accrue interest at an average rate of
7.68% in 1995 and 1994....................... 410,000 410,000
Revolving credit bank loans................... 68,000 27,000
Industrial revenue bonds, collateralized by
property and
equipment with a cost of $11.7 million in
1995 and $11.6 million in 1994 due in 2000
through 2010 plus interest at an average rate
of 7.44% in 1995 and 7.47% in 1994........... 6,308 6,597
Other......................................... 7,492 5,214
-------- --------
746,185 718,893
Less current maturities....................... 20,932 19,011
-------- --------
$725,253 $699,882
======== ========
</TABLE>
F-9
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest rates on the revolving credit bank loans averaged 6.06% in 1995 and
5.89% in 1994. The agreements are reviewed annually with the banks, at which
time the date each installment is due is generally extended one year. At
December 30, 1995, the Company had unused lines of credit related to unsecured
revolving credit bank loans of $60.0 million.
The Company's loan agreements contain provisions which require the Company
to maintain a specified level of consolidated net worth, fixed charge coverage
and ratio of debt to net worth.
Maturities of the Company's long-term debt for the five fiscal years
succeeding December 30, 1995 are approximately $20.9 million in 1996, $22.1
million in 1997, $23.7 million in 1998, $45.4 million in 1999 and $28.9
million in 2000.
The amounts classified as revolving credit bank loans approximate their fair
value. The fair value of the Company's long-term debt was estimated using
discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of debt arrangements.
NOTE D--REDEEMABLE PREFERRED STOCK
The Company has 85,000,000 shares of $.01 per share par value Preferred
Stock authorized. The Company has designated 34,524,579 of these shares as
Series I Preferred Stock, of which 12,956,747 shares and 16,281,777 shares
were issued and outstanding in 1995 and 1994, respectively. The Series I
Preferred Stock has no dividend requirement.
All shares of the Company's Series I Preferred Stock are subject to
redemption at any time at the option of the Board of Directors, in such
numbers as the Board may determine, and at a redemption price of $.33 1/3 per
share. The scheduled redemptions of the Company's Series I Preferred Stock are
approximately $1.0 million each year until all outstanding shares are
redeemed. Upon liquidation of the Company, each share of Series I Preferred
Stock is entitled to a liquidation preference of $.33 1/3, on a pro rata basis
with any other series of Preferred Stock, before any distribution to the
holders of Class A Common Stock or Class B Common Stock. Each share of Series
I Preferred Stock is entitled to ten votes. Series I Preferred Stock is stated
at redemption value in the balance sheet.
The amount included in the balance sheet for Series I Preferred Stock
approximates its fair value.
NOTE E--COMMON STOCKHOLDERS' EQUITY
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except that the
holders of Class A Common Stock have ten votes per share and the holders of
Class B Common Stock have one vote per share. Each share of Class A Common
Stock is convertible at any time at the option of the holder into one share of
Class B Common Stock. The Company's Certificate of Incorporation also provides
that each share of Class A Common Stock will be converted automatically into
one share of Class B Common Stock if at any time the number of shares of Class
A Common Stock issued and outstanding shall be less than 2,910,885. Future
sales or transfers of the Company's Class A Common Stock are restricted to the
Company or immediate family members of the original Class A Common
Stockholders unless first presented to the Company for conversion into an
equal number of Class B Common Stock shares. The Class B Common Stock has no
conversion rights. At December 30, 1995 there were 20,000,000 shares of $.01
per share par value Class A Common Stock and 100,000,000 shares of $.01 per
share par value Class B Common Stock authorized.
F-10
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--INCOME TAXES
Income tax expense (benefit) consists of the following (dollar amounts in
thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Current:
Federal................................. $ 20,220 $17,211 $15,715
State................................... 3,880 3,589 3,185
-------- ------- -------
24,100 20,800 18,900
Deferred:
Federal................................. (46,681) 9,247 13,012
State................................... ( 6,719) 1,253 2,388
-------- ------- -------
(53,400) 10,500 15,400
-------- ------- -------
$(29,300) $31,300 $34,300
======== ======= =======
Income tax expense included a charge of $1.95 million in 1993 resulting from
applying the increased federal tax rate to deferred tax items. Cash
disbursements for income taxes were $19.2 million in 1995, $21.7 million in
1994 and $17.3 million in 1993.
The difference between income tax expense (benefit) and the tax computed by
applying the statutory income tax rate to income before income taxes is as
follows:
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Statutory federal income tax rate......... (35.0)% 35.0 % 35.0%
State income tax rate, net of federal
income tax effect........................ (4.3) 4.7 5.2
Effect of income tax rate changes on de-
ferred taxes............................. (3.6) 2.4
Other..................................... .9 (.6) .2
-------- ------- -------
(42.0)% 39.1 % 42.8%
======== ======= =======
</TABLE>
The effect of temporary differences that give rise to deferred tax balances
are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................. $ 81,008 $ 98,186
Other......................................... 13,572 11,935
-------- --------
94,580 110,121
Deferred tax assets:
Accrued restructuring costs................... (33,305)
Accrued insurance claims...................... (12,271) (10,126)
Rent.......................................... (8,138) (6,006)
Other......................................... (6,166) (5,889)
-------- --------
(59,880) (22,021)
-------- --------
34,700 88,100
Net current deferred tax assets................. 23,900 1,400
-------- --------
Net non-current deferred tax liabilities........ $ 58,600 $ 89,500
======== ========
</TABLE>
F-11
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related fair values of the Company's financial
instruments are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 31, 1994
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents............ $ 16,079 $ 16,079 $ 14,188 $ 14,188
Long-term debt....................... 746,185 803,613 718,893 680,460
Redeemable Preferred Stock........... 4,319 4,319 5,427 5,427
</TABLE>
The methods of determining the fair value of the Company's financial
instruments are disclosed in the respective notes to the consolidated
financial statements.
NOTE H--LEASE AND COMMITMENTS
The Company leases property and equipment under terms which include, in some
cases, renewal options, escalation clauses or contingent rentals which are
based on sales. Total rental expense for such leases amounted to the following
(dollar amounts in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Minimum rentals...................... $ 46,460 $ 39,852 $ 19,539
Contingent rentals................... 235 293 281
-------- -------- --------
46,695 40,145 19,820
Less sublease rental income.......... 7,334 5,953 5,506
-------- -------- --------
$ 39,361 $ 34,192 $ 14,314
======== ======== ========
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):
<CAPTION>
MINIMUM LESS
RENTAL SUBLEASE
PAYMENTS RENTALS TOTAL
------------ ------------ ----------
<S> <C> <C> <C>
1996................................. $ 48,781 $ 16,419 $ 32,362
1997................................. 40,223 16,932 23,291
1998................................. 43,759 16,934 26,825
1999................................. 46,205 16,600 29,605
2000................................. 45,998 16,433 29,565
Thereafter........................... 697,832 201,864 495,968
-------- -------- --------
$922,798 $285,182 $637,616
======== ======== ========
</TABLE>
At December 30, 1995 the Company had contract commitments of approximately
$3.6 million for future construction and a contract for information technology
services requiring payments of approximately $19.6 million in 1996, $21.3
million in 1997, $24.1 million in 1998, $26.7 million in 1999 and $35.0
million in 2000.
NOTE I--EMPLOYEE STOCK PLANS
In 1993 the Company established a stock profit sharing plan under which year
end employees who are compensated for more than 1,000 hours during the year
are participants. Eligible employees are allocated shares of the Company's
Class B Common Stock based on hours of service up to 2,080 hours.
Contributions are made at the sole discretion of the Company based on its
profitability. The contribution expense was $1.4 million in 1995, $1.6 million
in 1994 and $3.0 million in 1993.
F-12
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993 the Company established a stock purchase plan which permits
employees to purchase shares of the Company's Class B Common Stock through
payroll deductions at 85% of fair market value at the time of purchase.
Employees purchased 282,485 shares, 309,553 shares and 180,950 shares from the
Treasury during 1995, 1994 and 1993, respectively.
The Company has a Stock Option Plan which authorizes the Compensation
Committee of the Board of Directors to grant options to key employees for the
purchase of Class B Common Stock. The aggregate number of shares available for
grant under the plan is equal to 10% of the number of shares of Class B Common
Stock authorized. However, the number of outstanding and unexercised options
shall not exceed 10% of the number of shares of Class A and Class B Common
Stock outstanding. The number of unoptioned shares of Class B Common Stock
available for grant was 890,671 shares and 973,419 shares at the end of 1995
and 1994, respectively. The options may be either incentive stock options or
non-qualified stock options. Stock options granted to key employees and
options outstanding are as follows:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
------------ ---------
<S> <C> <C>
Balance at January 3, 1993........................ $19.00 1,107,500
Granted......................................... 19.00 622,000
Forfeited....................................... 19.00 (232,000)
------ ---------
Balance at January 1, 1994........................ 19.00 1,497,500
Granted......................................... 19.00 81,000
Forfeited....................................... 19.00 (33,000)
------ ---------
Balance at December 31, 1994...................... 19.00 1,545,500
Granted......................................... 19.00 317,000
Forfeited....................................... 19.00 (246,000)
------ ---------
Balance at December 30, 1995...................... $19.00 1,616,500
====== =========
</TABLE>
The options are exercisable as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Options exercisable in the future
1997.......................................................... 25,000
1999.......................................................... 453,000
2000.......................................................... 130,000
2001.......................................................... 207,000
2002.......................................................... 64,500
2003.......................................................... 528,000
2004.......................................................... 11,000
2005.......................................................... 138,000
---------
1,556,500
Options currently exercisable................................... 60,000
---------
1,616,500
=========
</TABLE>
Compensation expense for the difference between the market value of the
options on the grant date and the grant price is recognized on a straight-line
basis over the vesting period of the options. The amount charged to operations
in 1995, 1994 and 1993 was immaterial.
F-13
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--PENSION PLANS
Employees whose terms of employment are determined by negotiations with
recognized collective bargaining units are covered by their respective multi-
employer defined benefit pension plans to which the Company contributes. The
costs charged to operations for these plans amounted to approximately $4.6
million in 1995, $4.2 million in 1994 and $3.3 million in 1993. Other
information for these multi-employer plans is not available to the Company.
The Company maintains a defined benefit pension plan for all other permanent
employees which provides for normal retirement at age 65. Employees are
eligible to join when they complete at least one year of service and have
reached age 21. The benefits are based on years of service and stated amounts
associated with those years of service. The Company's funding policy is to
contribute annually up to the maximum amount deductible for federal income tax
purposes. Net pension cost includes the following components (dollar amounts
in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Service cost--present value of benefits
earned during the period................. $ 2,119 $ 2,326 $ 1,869
Interest cost on projected benefit obliga-
tion..................................... 1,966 1,725 1,350
Actual return on plan assets.............. (9,692) 237 (1,053)
Net amortization and deferral............. 7,598 (1,615) (304)
------- ------- -------
$ 1,991 $ 2,673 $ 1,862
======= ======= =======
</TABLE>
The following table presents the plan's funded status and amounts recognized
in the Company's consolidated balance sheets (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Actuarial present value of accumulated bene-
fits based on service rendered to date:
Vested...................................... $29,649 $16,965
Non-vested.................................. 3,482 3,438
------- -------
33,131 20,403
Fair value of plan assets (primarily in equity
and fixed income funds and real estate)...... 37,934 20,993
------- -------
Fair value of plan assets in excess of pro-
jected benefit obligation.................... 4,803 590
Unrecognized net loss......................... 7,473 5,737
Prior service cost............................ 133 160
Unrecognized net asset........................ (978) (1,141)
------- -------
Net prepaid pension cost...................... $11,431 $ 5,346
======= =======
</TABLE>
The weighted average discount rate used to determine the actuarial present
value of the projected benefit obligation was 7.25% in 1995 and 8.5% in 1994.
The expected long-term rate of return on plan assets was 8.5% in 1995 and
1994, and 9.5% in 1993.
The Company provides a 401(k) plan for virtually all employees. The plan is
entirely funded by employee contributions which are based on employee
compensation not to exceed certain limits.
F-14
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K--RESTRUCTURING CHARGES
In December 1995, the Company recorded restructuring charges amounting to
$140 million related to its decision to sell, lease or close all 34 stores and
the distribution center comprising its Southern California Region. The
Southern California Region contributed sales of approximately $675 million,
$653 million and $473 million in 1995, 1994 and 1993, respectively, and
recognized operating losses of $14.2 million, $18.8 million and $12.9 million
in 1995, 1994 and 1993, respectively. These losses do not include allocations
for interest expense and corporate overhead. The restructuring charges include
the following components:
<TABLE>
<CAPTION>
ACCRUED
RESTRUCTURING
TOTAL ADJUSTMENTS COSTS
RESTRUCTURING TO -----------------
CHARGES CARRYING VALUE CURRENT LONG-TERM
------------- -------------- ------- ---------
<S> <C> <C> <C> <C>
Charges for lease obliga-
tions................... $ 65,600 $25,600 $40,000
Asset valuation adjust-
ments:
Closed stores.......... 21,700 $21,700
Assets sold............ 20,300 20,300
Inventory................ 16,000 16,000
Termination payments..... 10,000 10,000
Other.................... 6,400 6,400
-------- ------- ------- -------
$140,000 $42,000 $58,000 $40,000
======== ======= ======= =======
</TABLE>
The lease rental obligations primarily relate to closed stores and consist
of average annual lease expense over a five year period net of any sublease
income discounted at a rate of 9%. Also included is a $15 million charge for
certain fees associated with the sublease of the distribution center which is
expected to be paid by March 1996. The distribution center and nine stores
have been leased or subleased to another supermarket company controlled by the
same group of investors that controls Smitty's Supermarkets, Inc., with whom
the Company has entered into a definitive merger agreement (see Note L).
The charges for store and distribution center inventories represent
incremental losses for shrinkage, damage and liquidation sales expected to be
incurred during the closing process.
The termination payments relate to substantially all of the Company's 3,900
store and distribution center employees in the Southern California Region. The
termination payments are expected to be made by the end of March 1996 and have
been estimated based on existing employment contracts and involuntary
termination statutes.
The other costs represent charges for taxes, fees, contractual obligations,
and other costs associated with closing the region.
The restructuring charges include management's best estimates of the amounts
expected to be realized on the disposal of the remaining stores and closure of
the region. At December 30, 1995, the Company's carrying value of closed
stores, leased stores and excess land in California was approximately $260
million. The Company's current management has not determined the ultimate
disposition or use of these real estate assets and believes that their
disposal in the ordinary course of business would not result in a significant
impact on carrying values. However, should the Company complete the subsequent
event (see Note L), management may decide to pursue the sale of these assets.
The amounts the Company may realize on disposal could differ significantly in
the near term from the carrying values.
F-15
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE L--SUBSEQUENT EVENT
On January 29, 1996, the Company announced it had entered into a definitive
merger agreement with Smitty's Supermarkets, Inc. ("Smitty's") in which
Smitty's will become a wholly owned subsidiary of the Company. The merger will
be completed by issuing 3,038,888 shares of the Company's Class B Common Stock
for all of Smitty's outstanding common stock, subject to adjustment under
certain circumstances. The Company will assume or refinance approximately $148
million of Smitty's debt.
The Company also announced it will commence a self tender offer to purchase
50% of its outstanding Class A and Class B Common Stock for $36 per share,
excluding shares to be issued in connection with the Smitty's merger. Debt of
approximately $1.4 billion is expected to be issued at various interest rates
to finance the stock purchase, repay certain existing indebtedness, and
premiums related to early repayment.
Completion of the tender offer will be subject to the tender of at least 50%
of the Company's outstanding Common Stock, the receipt of adequate financing
and various other conditions. Completion of the merger with Smitty's will be
conditioned on the Company's purchase of shares pursuant to the self tender
offer, receipt of adequate financing, regulatory approvals, approval by the
Company's stockholders and various other conditions. The tender offer is
expected to commence in April 1996 and be consummated in May 1996. The merger
with Smitty's is expected to be consummated concurrently with the closing of
the tender offer.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Smitty's Supermarkets, Inc.
We have audited the accompanying consolidated balance sheets of Smitty's
Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and
the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended July 30, 1995 and the period from June 29, 1994
(date of inception) to July 31, 1994. We have also audited the consolidated
statements of operations, stockholders' equity and cash flows of the Company's
predecessor (the "Predecessor") for the period from August 2, 1993 to
June 28, 1994 and the year ended August 1, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Smitty's
Supermarkets, Inc. and subsidiaries as of July 30, 1995 and July 31, 1994 and
the consolidated results of their operations and their cash flows for the year
ended July 30, 1995 and the period from June 28, 1994 (date of inception) to
July 31, 1994 and the consolidated results of the Predecessor's operations and
cash flows for the period from August 2, 1993 to June 28, 1994 and the year
ended August 1, 1993 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Phoenix, Arizona
October 3, 1995, except for Note 18
as to which the date is January 29, 1996
F-17
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 14, JULY 30, JULY 31,
ASSETS 1996 1995 1994
------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and short-term investments............... $ 11,505 $ 25,653 $ 19,969
Accounts and notes receivable, net of allow-
ances of $440, $506
and $683..................................... 9,290 7,700 7,994
Inventories................................... 56,726 55,475 51,013
Prepaid expenses.............................. 3,279 3,767 2,177
Refundable income taxes....................... 1,895 2,471 546
-------- -------- --------
Total current assets......................... 82,695 95,066 81,699
Property and equipment, net.................... 134,843 128,289 119,218
Goodwill, net of accumulated amortization of
$1,296, $917 and $40.......................... 31,520 31,899 17,500
Property held for sale......................... 3,209 2,360 2,154
Other assets................................... 7,769 8,108 14,741
-------- -------- --------
$260,036 $265,722 $235,312
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable.............................. $ 39,620 $ 35,247 $ 25,396
Accrued compensation.......................... 5,335 6,514 4,876
Taxes, other than income taxes................ 7,372 5,482 4,781
Deferred income taxes......................... 4,642 4,642 3,356
Other accrued expenses........................ 13,851 19,764 12,805
Current portion of long-term debt............. 6,216 6,089 2,560
-------- -------- --------
Total current liabilities.................... 77,036 77,738 53,774
Long-term debt................................. 139,830 141,835 141,356
Deferred income taxes.......................... 13,767 13,767 15,658
Other liabilities.............................. 20,147 21,449 13,937
-------- -------- --------
Total liabilities............................ 250,780 254,789 224,725
Stockholders' Equity
Preferred stock, $.01 par value; 10,000 shares
authorized
Class A common stock, $.01 par value;
1,000,000 shares authorized; 696,700 shares
issued and outstanding at July 30, 1995 and
July 31, 1994; 705,697 shares issued and
outstanding at January 14, 1996.............. 7 7 7
Class B common stock, $.01 par value; 500,000
shares authorized; 303,300 shares issued and
outstanding.................................. 3 3 3
Additional paid-in capital.................... 11,036 10,936 10,936
Retained earnings (deficit)................... (1,790) (13) (359)
-------- -------- --------
Total stockholders' equity................... 9,256 10,933 10,587
-------- -------- --------
$260,036 $265,722 $235,312
======== ======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
--------------------------------------------------- -----------------------------
24 WEEKS 24 WEEKS PERIOD FROM PERIOD FROM
ENDED ENDED JUNE 29, 1994 AUGUST 2, 1993
JANUARY 14, JANUARY 15, YEAR ENDED TO TO YEAR ENDED
1996 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
----------- ----------- ------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Sales................... $ 276,507 $ 286,245 $ 594,019 $ 48,411 $551,681 $605,132
Cost of sales........... 200,100 212,579 432,067 35,476 413,696 454,672
--------- --------- --------- --------- -------- --------
Gross profit............ 76,407 73,666 161,952 12,935 137,985 150,460
Operating, selling,
general, and
administrative
expenses............... 63,596 60,832 133,242 10,828 117,350 147,472
Litigation settlement... (1,866) (1,866)
Depreciation and
amortization........... 6,010 4,566 10,855 959 8,022 9,461
--------- --------- --------- --------- -------- --------
Operating income (loss). 6,801 10,134 19,721 1,148 12,613 (6,473)
Interest expense:
Interest expense,
excluding amortization
of deferred financing
costs................. 8,136 7,508 17,797 1,422 6,219 6,364
Amortization of
deferred financing
costs................. 442 407 923 83 134 182
--------- --------- --------- --------- -------- --------
8,578 7,915 18,720 1,505 6,353 6,546
--------- --------- --------- --------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (1,777) 2,219 1,001 (357) 6,260 (13,019)
Income taxes (benefit).. 1,360 655 2 2,492 (4,822)
--------- --------- --------- --------- -------- --------
Income (loss) before
extraordinary item..... (1,777) 859 346 (359) 3,768 (8,197)
Extraordinary item:
Loss on extinguishment
of debt, net of $413
income tax benefit.... (628)
--------- --------- --------- --------- -------- --------
Net income (loss)....... $ (1,777) $ 859 $ 346 $ (359) $ 3,140 $ (8,197)
========= ========= ========= ========= ======== ========
Income (loss) per share:
Income (loss) before
extraordinary item.... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,716 $ (8,084)
Extraordinary item..... (619)
--------- --------- --------- --------- -------- --------
Income (loss).......... $ (1.77) $ 0.86 $ 0.35 $ (0.36) $ 3,097 $ (8,084)
========= ========= ========= ========= ======== ========
Weighted average common
shares outstanding..... 1,002,196 1,000,000 1,000,000 1,000,000 1,014 1,014
========= ========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-19
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------- ------------- ADDITIONAL RETAINED TOTAL
PAR PAR PAID-IN EARNINGS STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) EQUITY
------- ----- ------- ----- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
THE COMPANY
BALANCE AT JUNE 29, 1994
(INCEPTION)
Sale of common stock... 696,700 $7 303,300 $ 3 $10,936 $ 0 $10,946
Net loss............... (359) (359)
------- --- ------- --- ------- ------- -------
BALANCE AT JULY 31,
1994................... 696,700 7 303,300 3 10,936 (359) 10,587
Net income............. 346 346
------- --- ------- --- ------- ------- -------
BALANCE AT JULY 30,
1995................... 696,700 7 303,300 3 10,936 (13) 10,933
Sale of common stock... 8,997 100 100
Net loss (unaudited)... (1,777) (1,777)
------- --- ------- --- ------- ------- -------
BALANCE AT JANUARY 14,
1996................... 705,697 $ 7 303,300 $ 3 $11,036 $(1,790) $ 9,256
======= === ======= === ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
------------- ADDITIONAL RETAINED TOTAL
PAR PAID-IN EARNINGS STOCKHOLDERS'
SHARES VALUE CAPITAL (DEFICIT) EQUITY
------ ----- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
BALANCE AT AUGUST 2, 1992...... 1,014 $ 1 $126,420 $ 2,260 $128,681
Net loss...................... (8,197) (8,197)
----- ---- -------- ------- --------
BALANCE AT AUGUST 1, 1993...... 1,014 1 126,420 (5,937) 120,484
Purchase of common stock...... (284) (27,823) (27,823)
Net income.................... 3,140 3,140
----- ---- -------- ------- --------
BALANCE AT JUNE 29, 1994
(pre-acquisition)............. 730 1 98,597 (2,797) 95,801
Cancellation of Predecessor
equity....................... (730) (1) (98,597) 2,797 (95,801)
----- ---- -------- ------- --------
BALANCE AT JUNE 29, 1994
(post-acquisition)............ -- $-- $ -- $ -- $ --
===== ==== ======== ======= ========
</TABLE>
See accompanying notes.
F-20
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
---------------------------------------------------------------- -------------------------------
PERIOD FROM PERIOD FROM
24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 AUGUST 2, 1993 YEAR ENDED
JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 TO JULY 31, 1994 TO JUNE 28, 1994 AUGUST 1, 1993
---------------- ---------------- ------------- ---------------- ---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash provided (used) by
operating activities:
Net income (loss)....... $(1,777) $ 859 $ 346 $ (359) $3,140 $(8,197)
Adjustments to reconcile
net income (loss) to
net cash provided
by operating
activities:
Depreciation and amor-
tization............. 6,010 4,566 10,855 959 8,286 9,461
Amortization of de-
ferred
financing costs and
discount on long-term
debt................. 489 454 1,025 92 1,236 587
LIFO provision........ 359 359 325 270 228 708
Deferred income taxes. 81 374 26 3,172 (6,825)
Accreted interest on
debentures........... 1,085 973 2,136 195
Loss (gain) on
disposals of assets.. (344) (69) 590 (88)
Loss on partnership
liquidation.......... 8,900
Litigation settle-
ments................ (1,866) (1,866) 13,805
Adjust rentals to
straight-line........ 75 (220) (169) 75 51 (904)
Changes in operating
assets and
liabilities, net of
acquisition
adjustments:
Accounts and notes
receivable......... (1,599) (709) 184 (340) (225) (413)
Inventories, net of
LIFO............... (1,610) (9,385) (4,514) 4,147 (5,953) (504)
Prepaid expenses.... (360) (494) (2,067) 400 (354) (919)
Refundable income
taxes.............. 576 546 (1,925) (24) (157) (410)
Other assets........ 2 54 165
Accounts payable.... 4,373 7,170 9,851 (4,261) (1,340) 2,315
Accrued expenses and
other liabilities.. (6,504) 4,022 3,938 (33) 285 (299)
Income taxes pay-
able............... 733 (775)
------- ------ ------- ------ ------ -------
Net cash provided by
operating
activities............. $ 1,117 $7,089 $18,151 $1,078 $9,013 $16,607
======= ====== ======= ====== ====== =======
</TABLE>
See accompanying notes.
F-21
<PAGE>
SMITTY'S SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
----------------------------------------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
24 WEEKS ENDED 24 WEEKS ENDED YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JANUARY 14, 1996 JANUARY 15, 1995 JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
---------------- ---------------- ------------- ----------------- ----------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash provided (used) by
investing activities:
Purchase of property
and equipment....... $(18,714) $(6,192) $(22,855) $ (271) $ (3,729) $(16,233)
Proceeds from sale of
assets.............. 7,656 681 8,464 4 6,074 13,745
Deferred gain on sale
of real estate...... 1,877
Payments for other
assets.............. (1,334) (1,183) (392) (35) (375)
Repayment of notes
receivable.......... 37 1,625 5,811 3,871 538
Advances to
partnerships........ (169) (1,901)
-------- ------- -------- ------- -------- --------
Net cash provided
(used) by investing
activities............ (12,355) (5,069) (8,972) (267) 7,889 (4,226)
-------- ------- -------- ------- -------- --------
Cash provided (used) by
financing activities:
Proceeds from
borrowings.......... 6,500 10,601
Principal payments on
borrowings.......... (3,010) (1,863) (3,178) (108) (19,303) (20,712)
Payments of debt
issuance costs...... (166) (317) (915) (226)
Proceeds from sale of
stock............... 100
Proceeds from
acquisition
financing, net...... 8,401
Payment of
acquisition costs... (2,947)
Purchase of preferred
stock from
affiliate........... (585)
-------- ------- -------- ------- -------- --------
Net cash provided
(used) by financing
activities............ (2,910) (2,029) (3,495) 4,431 (13,388) (10,337)
-------- ------- -------- ------- -------- --------
Increase (decrease) in
cash and short- term
investments........... (14,148) (9) 5,684 5,242 3,514 2,044
Cash and short-term
investments, beginning
of period............. 25,653 19,969 19,969 14,727 11,213 9,169
-------- ------- -------- ------- -------- --------
Cash and short-term
investments, end of
period................ $ 11,505 $19,960 $ 25,653 $19,969 $ 14,727 $ 11,213
======== ======= ======== ======= ======== ========
Supplemental cash flow
disclosures:
Interest paid......... $ 7,518 $ 5,811 $ 14,299 $ 1,025 $ 7,232 $ 5,959
Income taxes paid..... 2,643 573 3,198
Income tax refunds
received............. 576 1,958 1,578 11
Non-cash investing and
financing activities:
Capital lease
obligations entered
into................ $10,889 $ 4,948 $ 10,933 $ 4,929
Notes receivable
obtained through
sales of property
and equipment....... 11,126
Assets transferred to
affiliate in
exchange for
preferred stock..... 27,238
Notes receivable
obtained in exchange
for preferred stock. 27,823
Common stock acquired
from cancellation of
note receivable..... 27,823
</TABLE>
See accompanying notes.
F-22
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Smitty's
Supermarkets, Inc. (the "Company") and its wholly-owned subsidiaries. All
intercompany transactions and accounts are eliminated in consolidation. The
Company is a partner in a real estate development partnership which is being
accounted for under the equity method.
Statement Presentation
On June 29, 1994, the Company acquired Smitty's Super Valu, Inc. (the
"Predecessor"). The financial statements for both the Company and the
Predecessor are included herein.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest the last day of July.
The 1995, 1994 and 1993 fiscal years consisted of 52 weeks each.
Interim Financial Statements
The consolidated balance sheet of the Company as of January 14, 1996 and the
consolidated statements of operations and cash flows for the interim periods
ended January 14, 1996 and January 15, 1995 are unaudited, but include all
adjustments (consisting of only normal recurring accruals) which the Company
considers necessary for a fair presentation of its consolidated financial
position, results of operations and cash flows for these periods. These
interim financial statements do not include all disclosures required by
generally accepted accounting principles, and, therefore, should be read in
conjunction with the Company's financial statements and notes thereto included
herein. Results of operations for interim periods are not necessarily
indicative of the results for a full fiscal year.
Short-Term Investments
Short-term investments consist of highly liquid investments with original
maturities of three months or less. The Company considers such investments to
be cash equivalents for purposes of determining cash flow.
Inventories
Merchandise inventories are valued at LIFO (last-in, first-out) cost, which
is lower than market, for about 95% of the total inventory, and at the lower
of FIFO (first-in, first-out) cost or market for the balance of the inventory.
Property and Equipment
Owned property and equipment are stated at cost and capital lease assets are
stated at the present value of future rentals, less accumulated depreciation
and amortization.
Maintenance and repairs are charged against operations in the year incurred
and major additions to property and equipment are capitalized.
Depreciation and amortization are computed by the straight-line method based
upon the following lives:
<TABLE>
<S> <C>
Buildings and improvements................................. 40 years
Store fixtures and equipment............................... 10 years
Transportation equipment................................... 6 to 12 years
Leasehold improvements, capital leases and beneficial
leaseholds................................................ Term of lease
</TABLE>
F-23
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
acquired assets, less accumulated amortization. Goodwill is amortized on the
straight-line method over forty years. It is the Company's policy to
periodically review and evaluate the recoverability of the acquired
intangibles by assessing current and future profitability and cash flows and
to determine whether the amortization of the balance over its remaining life
can be recovered through expected future results and cash flows.
Deferred Charges
Deferred debt issuance costs are amortized using the interest method.
Property Held for Sale
Property held for sale is comprised of several undeveloped properties and is
valued at the lower of cost or estimated net realizable value.
Self-Insurance
The Company self-insures, with certain stop loss insurance coverage, for
workers' compensation, non-union employee health care and general liability
claims. Claims expense is recorded in the year of occurrence through the
accrual of claim reserves based on estimates of ultimate claims costs and
settlement expenses discounted at a rate of 8%.
Pre-opening and Remodel Costs
All costs associated with store openings and promotional costs associated
with major store remodels are charged to operations ratably over the twelve
months following store openings and remodel completion dates, respectively.
Income Taxes
Effective August 2, 1993, the Predecessor adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
the provisions of SFAS 109, deferred tax assets and liabilities are recognized
for the expected future tax consequences of events that have been included in
the financial statements or income tax returns. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the presentation in the 1995 financial statements.
2. BUSINESS ACQUISITION
On June 29, 1994, the Company acquired the Predecessor for $24,768 net of
transaction costs and the repayment or assumption of certain liabilities (the
"Acquisition").
The Acquisition has been accounted for by the purchase method. Accordingly,
the costs of the Acquisition were allocated to the assets acquired and
liabilities assumed based upon their respective fair values. The
F-24
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
allocation of the purchase price was finalized during 1995. Because of the
effects of the Acquisition, the consolidated financial statements of the
Company are not comparable to the consolidated financial statements of the
Predecessor.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $ 218,046
Fair value of liabilities assumed.............................. (226,094)
Excess costs over acquired net assets.......................... 32,816
---------
Total purchase price........................................... $ 24,768
=========
</TABLE>
In connection with the Acquisition on April 28, 1994, the Predecessor paid
$585 and transferred property and equipment and property held for sale with a
net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly-
owned subsidiary of the Predecessor's former sole shareholder, Steinberg
International, Inc. ("International"), in exchange for Holdings' preferred
stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased
certain shares of its common stock from International in consideration of a
$27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior
to the Acquisition, the Company transferred Holdings' preferred stock to
International in consideration of the repayment of the promissory note.
3. CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of short-term investments and receivables.
The Company's short-term investments are in high quality securities placed
with major banks and financial institutions. The Company's investment policy
limits its exposure to concentrations of credit risk.
The Company's receivables result primarily from vendor rebates and
allowances, and redemption of manufacturer coupons. The vendor rebates and
allowances reflect a broad base, while the coupons are concentrated with one
processor. As a consequence, concentrations of credit risk are limited. The
Company routinely assesses the financial strength of its vendors and coupon
processor.
4. INVENTORIES
If inventories had been valued using the FIFO method, inventories would have
been higher (lower) and gross profit and operating income would have been
greater as follows:
<TABLE>
<CAPTION>
GROSS
PROFIT AND
OPERATING
INVENTORIES INCOME
----------- ----------
<S> <C> <C>
THE COMPANY
July 30, 1995 and the year then ended............... $(4,370) $325
July 31, 1994 and the period from June 29, 1994to
July 31, 1994...................................... $(4,695) $270
PREDECESSOR
June 28, 1994 and the period from August 2, 1993to
June 28, 1994...................................... $ 4,776 $228
August 1, 1993 and the year then ended.............. $ 4,548 $708
</TABLE>
F-25
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
5. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases consist of
the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Land and improvements........................ $ 19,861 $ 24,332
Buildings and improvements................... 76,528 69,748
Store fixtures and equipment................. 32,163 16,697
Beneficial leaseholds........................ 9,233 9,233
-------- --------
137,785 120,010
Less accumulated depreciation and amortiza-
tion........................................ (9,496) (792)
-------- --------
$128,289 $119,218
======== ========
</TABLE>
Included in property and equipment above are assets recorded under capital
leases consisting of the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Land and improvements......................... $ 1,358 $ 1,358
Buildings and improvements.................... 21,211 21,296
Store fixtures and equipment.................. 4,948
Beneficial leaseholds......................... 9,233 9,233
------- -------
36,750 31,887
Less accumulated amortization................. (1,982) (165)
------- -------
$34,768 $31,722
======= =======
</TABLE>
At July 31, 1994, store fixtures and equipment and accumulated depreciation
and amortization includes $1,295 and $28, respectively, relating to subleased
equipment. At July 30, 1995 there were no store fixtures and equipment
subleased.
Depreciation expense relating to property and equipment are as follows:
<TABLE>
<S> <C>
THE COMPANY
Year ended July 30, 1995.......................................... $9,432
Period from June 29, 1994 to July 31, 1994........................ $ 792
PREDECESSOR
Period from August 2, 1993 to June 28, 1994....................... $7,324
Year ended August 1, 1993......................................... $8,261
</TABLE>
F-26
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Term loan payable to banks, interest at LIBOR rate
plus 2%, 8% at July 30, 1995, maturities to 1999. $ 37,382 $ 40,000
Senior subordinated notes, 12 3/4% interest, net
of debt discount of $496 and $552, respectively,
due 2004......................................... 49,504 49,448
Senior discount debentures, 13 3/4% interest, net
of debt discount of $506 and $552, respectively,
due 2006......................................... 16,819 14,637
Sinking fund bonds, 10 1/2% interest, semi-annual
maturities to 2016............................... 12,123 12,198
Mortgage notes payable, repaid in 1995............ 77
Capital lease obligations......................... 32,096 27,556
-------- --------
147,924 143,916
Less current portion.............................. (6,089) (2,560)
-------- --------
$141,835 $141,356
======== ========
</TABLE>
In July, 1994, the Company's subsidiary entered into a Credit Agreement
whereby the lender agreed to provide a $40,000 Term Loan Facility (the "Term
Loan") and a $20,000 Revolving Credit Facility (the "Revolving Loan"). At July
30, 1995, $37,382 was outstanding under the term loan and $1,640 of the
revolving loan was utilized for various outstanding letters of credit. No
compensating balances are required. The interest rate for both facilities is
equal to, at the Company's option, the bank's prime rate plus 0.75% or LIBOR
rate plus 2%.
In connection with the Acquisition described in Note 2, the Company issued
$29,025 Senior Discount Debentures (the "Debentures"). The Debentures are
issued at a discount to their aggregate principal amount and the original
issue discount in the Debenture accretes from the issue date until June 15,
1999. Cash interest will not accrue on the Debentures prior to June 15, 1999.
The Debentures will bear cash interest payable semi-annually in arrears on
June 15 and December 15. The Debentures may be redeemed beginning in 1999 at a
redemption price of 105%. The redemption price declines ratably to 100% in
2004.
The Company's subsidiary issued $50,000 principal amount of Senior
Subordinated Notes (the "Subordinated Notes") in connection with the
Acquisition described in Note 2. The Subordinated Notes bear interest, payable
semi-annually on June 15 and December 15 at an annual rate of 12.75%. The
Subordinated Notes are subordinated to all Senior Indebtedness (as defined) of
the Company's subsidiary, and may be redeemed on or after June 15, 1999 at a
redemption price of 105%. The redemption price declines ratably to 100% in
2000.
Under the most restrictive covenants of the Company's long-term debt
agreements, payments of cash dividends and acquisition of capital stock are
not permitted. Additionally, the agreements require maintenance of specified
ratios.
At July 30, 1995, substantially all of the Company's assets were pledged as
collateral for the Term Loan, the Revolving Loan and the Sinking fund bonds.
F-27
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Maturities of the long-term obligations as of July 30, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 6,089
1997........................................................... 10,194
1998........................................................... 12,169
1999........................................................... 14,282
2000........................................................... 1,755
Thereafter..................................................... 103,435
--------
$147,924
========
</TABLE>
7. LEASES
The Company is a party to a number of non-cancelable lease agreements for
store and warehouse facilities with remaining lease terms ranging from 1 to 25
years and, in certain instances, providing for renewal periods of 5 to 30
years. The Company also subleases store departments, warehouse facilities and
properties with remaining lease terms ranging from 1 to 10 years. At July 30,
1995, future minimum lease payments under capital leases and future minimum
rental payments under operating leases having initial or remaining non-
cancelable terms of more than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUBLEASE
LEASES LEASES RENTALS TOTALS
-------- --------- -------- --------
<S> <C> <C> <C> <C>
1996................................ $ 5,014 $ 10,253 $(1,669) $ 13,598
1997................................ 5,051 9,264 (1,108) 13,207
1998................................ 4,922 7,075 (903) 11,094
1999................................ 4,925 5,442 (861) 9,506
2000................................ 5,024 4,965 (828) 9,161
Thereafter.......................... 64,380 68,570 (2,042) 130,908
-------- -------- ------- --------
89,316 $105,569 $(7,411) $187,474
======== ======= ========
Less amount representing
executory costs.................... (5,658)
Less amount representing interest... (51,562)
--------
$ 32,096
========
</TABLE>
F-28
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
Effective September, 1992, the Predecessor entered into an agreement to
lease its restaurant, snack bar/food court and candy departments to Morrison
Incorporated ("Morrison"). The agreement provided for an initial lease term of
ten years and three five-year renewal options. Minimum rentals under the lease
were $2,525 in the first year, $3,500 in the second year, and $4,000 per year
thereafter. In addition, Morrison was obligated to pay electricity and
property taxes for the leased premises. In September, 1994, the Company
resumed its food service operations and sales and costs attributed to such
operations are included in the Company's financial statements for the year
ended July 30, 1995. Results of operations prior to the agreement and
subsequent to September 24, 1994, for these departments are as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------- --------------
YEAR ENDED YEAR ENDED
JULY 30, 1995 AUGUST 1, 1993
------------- --------------
<S> <C> <C>
Sales........................................ $17,753 $2,476
Cost of sales................................ 6,329 933
------- ------
Gross profit................................. 11,424 1,543
Expenses..................................... 10,478 1,351
------- ------
Operating profit............................. $ 946 $ 192
======= ======
</TABLE>
Rental income from Morrison, determined on the basis of the straight-line
amounts of the total rentals during the ten-year lease term, are as follows:
<TABLE>
<S> <C>
THE COMPANY
Year ended July 30, 1995......................................... $2,783
Period from June 29, 1994 to July 31, 1994....................... $ 273
PREDECESSOR
Period from August 2, 1993 to June 28, 1994...................... $3,068
Year ended August 1, 1993........................................ $3,293
</TABLE>
Rent expense for all leases is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Minimum rentals......... $ 7,913 $ 625 $ 6,518 $ 5,169
Contingent rentals:
Capital................ 393 34 318 410
Operating.............. 31 6 34 176
Less sublease.......... (5,229) (471) (5,779) (5,891)
------- ----- ------- -------
$ 3,108 $ 194 $ 1,091 $ (136)
======= ===== ======= =======
</TABLE>
Contingent rental payments are principally determined on the basis of store
sales volume.
F-29
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
8. PENSION AND PROFIT-SHARING PLANS
The Company maintains a profit-sharing/401(k) plan for employees.
Contributions are made to the plan at the discretion of the Company's Board of
Directors. The Company also contributes to a multi-employer defined benefit
union pension plan covering union employees. Contributions to these plans are
as follows:
<TABLE>
<CAPTION>
PROFIT MUTLI-
SHARING EMPLOYER
401(K) PLAN PENSION PLAN
----------- ------------
<S> <C> <C>
THE COMPANY
Year ended July 30, 1995........................ $525 $1,402
Period from June 29, 1994 to July 31, 1994...... $ 38 $ 3
PREDECESSOR
Period from August 2, 1993 to June 28, 1994..... $386 $ 26
Year ended August 1, 1993....................... $360 $ 268
</TABLE>
At September 30, 1993, the date of the most recent actuarial valuation, the
assets of the union pension fund exceeded the liability for vested benefits.
The Company's relative position with the union plan is not determinable.
9. SEVERANCE AND EMPLOYMENT CONTRACT TERMINATION COSTS
During 1993, the Predecessor underwent a reorganization which resulted in
the elimination of various office, store and warehouse positions. The 1993
results of operations include charges of $329 for severance payments and
related benefits for employees whose positions were eliminated.
In February, 1994, the Predecessor and the Predecessor's chairman entered
into an amendment to the chairman's employment contract. Results of operations
for the period from August 2, 1993 to June 28, 1994 include a $2 million
charge for a payment to the chairman under the terms of the amendment.
10. LITIGATION SETTLEMENTS
In November, 1993, the Predecessor agreed to a settlement of a lawsuit in
which an adverse jury verdict had been rendered. Under the terms of the
settlement agreement, the Predecessor agreed to pay $4.75 million cash and
issue a $6.25 million two-year mortgage note. Fiscal 1993 results of
operations include an $11 million charge for the settlement, plus a $1.8
million charge for the Predecessor's litigation costs incurred in fiscal 1993
and expected to be incurred in fiscal 1994. The Predecessor used the proceeds
from a four-year term loan payable to bank to finance the cash payment. Also
in November, 1993, the Predecessor reached a settlement of a lawsuit filed by
a former supplier providing for a $500 cash payment and a $500 one-year
mortgage note. Fiscal 1993 results of operations include a $1 million charge
for this settlement. Both mortgage notes were repaid on June 29, 1994.
In October, 1993, the Predecessor was served with proceedings in Maricopa
County, Arizona Superior Court instituted by Morrison seeking rescission of
the 1992 lease agreement and damages of not less than $3,000. In August, 1994,
the Company settled its litigation with Morrison. The settlement provided for
the cancellation of the lease agreement on September 25, 1994, in
consideration for which Morrison paid the Company $2.6 million and transferred
title to all of its inventories and fixtures and equipment in the restaurant,
snack bar/food court and candy departments.
F-30
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
11. STEINBERG REORGANIZATION
In May, 1992, International's sole shareholder Steinberg, Inc. ("Steinberg")
filed for protection under Section C-36 of the CCAA. During the period from
June 29, 1994 to July 31, 1994, the period from August 2, 1993 to June 28,
1994 and fiscal 1993, the Predecessor incurred $50, $635 and $631,
respectively, of costs arising from the filing by Steinberg for protection
under Section C-36 of the CCAA and the subsequent reorganization of Steinberg.
In connection with the Acquisition, on April 28, 1994, the Predecessor paid
$585 and transferred property and equipment and property held for sale with a
net carrying value of $27,238 to SLHC Holdings, Inc. ("Holdings"), a wholly-
owned subsidiary of the Predecessor's former sole shareholder, Steinberg
International, Inc. ("International"), in exchange for Holdings' preferred
stock. On June 29, 1994, prior to the Acquisition, the Predecessor repurchased
certain shares of its common stock from International in consideration of a
$27,823 promissory note payable. Subsequently, also on June 29, 1994 and prior
to the Acquisition, the Predecessor transferred Holdings preferred stock to
International in consideration of the repayment of the promissory note.
12. LOSS ON PARTNERSHIP LIQUIDATION
A real estate development partnership in which the Predecessor was a partner
was liquidated in July, 1993. In connection with this liquidation, the
Predecessor obtained ownership of an operating shopping center property and an
undeveloped shopping center property in exchange for the forgiveness of notes
and accrued interest receivable from the partnership and its managing partner.
Fiscal 1993 results of operations include a $8,900 charge representing the
difference between the current value of the properties and the carrying value
of the notes and accrued interest receivable. The properties were transferred
to Holdings on April 28, 1994.
13. INCOME TAXES
In February, 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"), which supersedes Statement of Financial Accounting Standards No. 96
with the same title ("SFAS 96"). SFAS 96 was never adopted by the Predecessor.
The Predecessor adopted the provisions of SFAS 109 on August 2, 1993 and
elected not to restate prior year financial statements. The effect from prior
years of adopting SFAS 109 as of August 2, 1993 was not material.
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Current........ $281 $(24) $(1,093) $ 2,003
Deferred....... 374 26 3,172 (6,825)
---- ---- ------- -------
$655 $ 2 $ 2,079 $(4,822)
==== ==== ======= =======
</TABLE>
The provision for income taxes for the period from August 2, 1993 to June
28, 1994 is net of $413 income tax benefit relating to the loss on
extinguishment of debt.
F-31
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
A reconciliation of the provision (benefit) for income taxes and the amount
that would be computed using statutory federal income tax rates on income
before income taxes is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Income taxes computed at
statutory federal
income tax rates....... $ 340 $(121) $1,774 $(4,426)
State income taxes...... 56 (9) 293 (684)
Amortization of
intangible assets...... 298 16 (104) 259
Deduction of tax
goodwill............... (425)
Amortization of discount
on capital lease
obligations............ 77 70
Increase in valuation
allowance.............. 336
Other................... 50 116 39 (41)
----- ----- ------ -------
$ 655 $ 2 $2,079 $(4,822)
===== ===== ====== =======
</TABLE>
At July 30, 1995 the Company had minimum tax credit and general business
credit carryovers for tax purposes of $2,956 and $488, respectively. Upon
recognition, the minimum tax credit carryover will be credited to the
valuation allowance.
The income tax effects of loss carryforwards, tax credit carryforwards and
temporary differences between financial and income tax reporting that give
rise to the deferred income tax assets and liabilities under the provisions of
SFAS 109 are as follows:
<TABLE>
<CAPTION>
JULY 30, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................ $ 649 $ 547
Inventories........................................ 298 332
Other assets....................................... 59 59
Accrued liabilities................................ 15,145 9,425
Capital Leases..................................... 2,313
Net operating loss carryovers and credits.......... 11,515 12,587
-------- --------
Gross deferred tax assets......................... 29,979 22,950
Valuation allowance............................... (29,979) (19,998)
-------- --------
Net deferred tax assets........................... 2,952
-------- --------
Deferred tax liabilities:
Inventories........................................ (4,642) (4,686)
Property and equipment............................. (13,767) (16,922)
Other assets....................................... (358)
-------- --------
Gross deferred tax liability...................... (18,409) (21,966)
-------- --------
Net deferred tax liability........................ $(18,409) $(19,014)
======== ========
</TABLE>
The changes in deferred tax assets and liabilities during 1995 primarily
resulted from the Company's finalization of the allocation of the Acquisition
purchase price. See Note 2.
F-32
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS)
14. FAIR VALUE OF INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short Term Investments
The carrying amount approximates fair value because of the short maturity of
these instruments.
Accounts and Notes Receivable
The carrying amount approximates fair value as a result of the short
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on quoted
market prices or if market prices are not available, the present value of the
underlying cash flows discounted at the Company's incremental borrowing rates.
The carrying amounts and fair values of the Company's significant financial
instruments at July 30, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Cash and short-term investments................ $25,653 $25,653
Accounts and Notes receivable.................. 7,700 7,700
Long-term debt................................. 147,924 143,888
</TABLE>
15. CONTINGENCIES
The Company or its subsidiaries are defendants in a number of cases
currently in litigation or potential claims encountered in the ordinary course
of business which are being vigorously defended. The Company believes that the
ultimate resolution of these matters will not have a material adverse effect
on the financial position of the Company.
16. RELATED PARTY TRANSACTIONS
The Company has a five-year consulting agreement with an affiliated company,
effective June 29, 1994 for management services. The agreement is
automatically renewed on January 1 of each year for a five-year term unless
ninety (90) days' notice is given by either party. The contract provides for
annual management fees in an amount equal to one-tenth of one percent of
consolidated sales of the Company and advisory fees for acquisition and
financing transactions.
Fees paid for management services were $600 and $50 for fiscal years ended
July 30, 1995 and the period from June 29, 1994 to July 31, 1994,
respectively. Advisory fees paid or accrued for financing transactions are
capitalized and amortized over the term of the related financing. In
connection with the Acquisition, capitalized fees of $3 million were paid to
this affiliated company in fiscal 1994 for acquisition services.
F-33
<PAGE>
SMITTY'S SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(THOUSANDS OF DOLLARS)
17. OTHER INCOME (EXPENSE)--NET
The components of other income (expense) included in operating, selling,
general and administration expense are as follows:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------------ --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 29, 1994 TO AUGUST 2, 1993 TO YEAR ENDED
JULY 30, 1995 JULY 31, 1994 JUNE 28, 1994 AUGUST 1, 1993
------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Gain (loss) on real
estate disposals....... $(2,173) $ 41
Steinberg reorganization
costs.................. $(50) (635) (631)
Loss on partnership
liquidation............ (8,900)
Litigation settlements.. $1,866 (13,805)
Other................... 387
------ ---- ------- --------
$1,866 $(50) $(2,808) $(22,908)
====== ==== ======= ========
</TABLE>
18. SUBSEQUENT EVENT
On January 29, 1996, the Company entered into a definitive Recapitalization
Agreement and Plan of Merger (the "Recapitalization Agreement") by and among
Smith's Food & Drug Centers, Inc., a Delaware corporation ("Smith's"), Cactus
Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of
Smith's ("Acquisition"), the Company and The Yucaipa Companies, a California
general partnership, pursuant to which Acquisition will be merged with and
into the Company (the "Merger"), subject to the satisfaction or waiver of
various conditions. The Company, as the surviving corporation in the Merger,
will become a wholly owned subsidiary of Smith's. Consummation of the Merger
is subject to various conditions, including the receipt of regulatory
approvals and other necessary consents, receipt of financing and consummation
of the Recapitalization described below.
Upon effectiveness of the Merger, each share of common stock of the Company,
without distinction as to class, will be exchanged for 3.011803 shares of
Smith's Class B Common Stock, par value $.01 per share, subject to adjustment
under certain circumstances. This represents an aggregate of 3,038,888 shares
of Smith's Class B Common Stock issuable as consideration in the Merger.
Pursuant to the Recapitalization Agreement, on the closing date of the
Merger, Smith's shall assume, repay, or cause to be repaid, all outstanding
principal and interest, and other amounts payable, under the 12 3/4% Senior
Subordinated Notes due 2004 of Smitty's Super Valu, Inc., a wholly owned
subsidiary of the Company, the 13 3/4% Senior Discount Debentures due 2006 of
the Company, and the Company's existing credit facility with The Chase
Manhattan Bank, N.A.
Pursuant to the Recapitalization Agreement, Smith's will, subject to various
conditions, commence a tender offer to purchase 50% of its outstanding Class A
and Class B Common Stock; issue an aggregate of approximately $575 million of
new senior subordinated notes; borrow approximately $805 million under a new
$995 million bank credit facility; repay certain existing indebtedness and
engage in certain other recapitalization transactions (collectively, the
"Recapitalization") concurrently with the Merger. Smith's will also use its
reasonable efforts to cause Ronald W. Burkle, the Chairman of the Board of the
Company, to be elected Chief Executive Officer of Smith's upon the
consummation of the Merger and the Recapitalization.
F-34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... i
Summary................................................................... 1
Risk Factors.............................................................. 12
Pro Forma Capitalization.................................................. 17
Unaudited Pro Forma Combined Financial Statements......................... 18
Selected Historical Financial Data of Smith's............................. 26
Selected Historical Financial Data of Smitty's............................ 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 39
Management................................................................ 50
Principal Stockholders.................................................... 53
Certain Relationships and Related Transactions............................ 55
Description of Notes...................................................... 60
Description of Capital Stock.............................................. 87
Description of New Credit Facility........................................ 89
Underwriting.............................................................. 92
Legal Matters............................................................. 93
Experts................................................................... 93
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
------------------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the Notes.
<TABLE>
<S> <C>
SEC registration fee........................................... $250,000
NASD filing fee................................................ 30,500
Blue Sky fees and expenses.....................................
Accounting fees and expenses...................................
Legal fees and expenses........................................
Printing and engraving expenses................................
Trustee fees...................................................
Miscellaneous..................................................
--------
Total...................................................... $
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Smith's, Smitty's, and SSV are Delaware corporations and their Certificates
of Incorporation and Bylaws provide for indemnification of their officers and
directors to the fullest extent permitted by law. Pursuant to Section
102(b)(7) of the Delaware General Corporation Law (the "DGCL") the
certificates of incorporation of Smith's, Smitty's and SSV eliminate the
personal liability of a corporation's directors to a corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liabilities related to breach of duty of loyalty, actions not in
good faith, and certain other liabilities.
Section 145 of the DGCL permits the indemnification by a Delaware
corporation of its directors, officers, employees and agents in connection
with actions, suits or proceedings brought against them by a third party or in
the right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against liabilities and expenses
incurred in any such action, suit or proceeding.
The Underwriting Agreement provides for indemnification by the Underwriters
of Smith's and its directors, officers and controlling persons for certain
liabilities arising under the Securities Act.
The directors and officers of Smith's, Smitty's and SSV are insured against
certain liabilities under directors' and officers' liability insurance.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
A list of exhibits filed with this Registration Statement on Form S-3 is
set forth in the Index to Exhibits on page E-1, and is incorporated herein
by reference.
(b) Financial Statement Schedules
Not Applicable.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that
II-1
<PAGE>
a claim for indemnification against such liabilities (other than the payment
by the registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants
will, unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Salt Lake City, State of Utah, on
May 6, 1996.
Smith's Food & Drug Centers, Inc.
/s/ MATTHEW G. TEZAK
By___________________________________
MATTHEW G. TEZAK
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
* Chairman of the
- ------------------------------------- Board and Chief May 6, 1996
JEFFREY P. SMITH Executive Officer
* President and Chief
- ------------------------------------- Operating Officer May 6, 1996
ALLEN R. ROWLAND
/s/ MATTHEW G. TEZAK Senior Vice
- ------------------------------------- President and Chief May 6, 1996
MATTHEW G. TEZAK Financial Officer
(Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------- May 6, 1996
DELONNE ANDERSON
* Director
- ------------------------------------- May 6, 1996
ROBERT D. BOLINDER
II-3
<PAGE>
SIGNATURES TITLE DATE
* Director
- ------------------------------------- May 6, 1996
ALLEN P. MARTINDALE
* Director
- ------------------------------------- May 6, 1996
NICOLE MILLER
* Director
- ------------------------------------- May 6, 1996
DUANE PETERS
* Director
- ------------------------------------- May 6, 1996
RAY V. ROSE
* Director
- ------------------------------------- May 6, 1996
FRED L. SMITH
* Director
- ------------------------------------- May 6, 1996
RICHARD D. SMITH
* Director
- ------------------------------------- May 6, 1996
SEAN D. SMITH
* Director
- ------------------------------------- May 6, 1996
DOUGLAS JOHN TIGERT
* Director
- ------------------------------------- May 6, 1996
KENNETH A. WHITE
*By: /s/ MATTHEW G. TEZAK
----------------------------------
MATTHEW G. TEZAK
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement by and among Smith's Food & Drug
Centers, Inc. ("Smith's") and BT Securities Corporation, CS
First Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman, Sachs & Co. and Chase
Securities Inc. (the "Underwriters") with respect to the %
Senior Subordinated Notes due 2007 (the "Notes").
+2.1 Recapitalization Agreement and Plan of Merger dated as of
January 29, 1996 by and among Smith's Food & Drug Centers,
Inc., Cactus Acquisition, Inc., Smitty's Supermarkets, Inc. and
The Yucaipa Companies (incorporated by reference to Exhibit 2.1
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995).
*3.1 Form of Amended and Restated Certificate of Incorporation of
Smith's.
*3.2 Form of Amended and Restated Bylaws of Smith's.
4.1 Form of Indenture by and between Smith's and
, as Trustee, with respect to the Notes.
*5.1 Opinion of Latham & Watkins regarding the legality of the
Notes, including consent.
*8.1 Opinion of Latham & Watkins regarding certain federal income
tax matters, including consent.
*10.1 Credit Agreement dated as of , 1996 by and among
Smith's, Bankers Trust Company and The Chase Manhattan Bank, as
Arrangers, the lenders named therein and Bankers Trust Company,
as Administrative Agent.
+10.2 Standstill Agreement dated as of January 29, 1996 by and among
the Company, The Yucaipa Companies, Yucaipa SSV Partners, L.P.,
Yucaipa Smitty's Partners, L.P., Yucaipa Smitty's Partners II,
L.P., Yucaipa Arizona Partners, L.P., Jeffrey P. Smith, Richard
D. Smith, Fred L. Smith, Ida Smith and the other shareholders
of the Company named therein.
+10.3 Smith's Shareholder Agreement dated as of January 29, 1996 by
and among Smitty's Supermarkets, Inc., The Yucaipa Companies
and the shareholders of the Company named therein.
+10.4 Smitty's Stockholder Agreement dated as of January 29, 1996 by
and among the Company, Cactus Acquisition, Inc. and the
stockholders of Smitty's Supermarkets, Inc. named therein.
+10.5 Form of Registration Rights Agreement by and among the Company
and the holders of the Company's Common Stock named therein.
+10.6 Form of Management Services Agreement by and between the
Company and The Yucaipa Companies.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
+10.7 Form of Warrant Agreement by and between the Company and The
Yucaipa Companies.
12.1 Statement regarding computation of ratio of earnings to fixed
charges.
+21.1 Subsidiaries of the Company.
*23.1 Consent of Latham & Watkins (included in the opinions filed as
Exhibits 5 and 8 to the Registration Statement).
23.2 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.3 Consent of Ernst & Young LLP, independent auditors.
+23.4 Consent of Houlihan, Lokey, Howard & Zukin, Inc.
+24.1 Power of Attorney (included on signature page to the
Registration Statement).
*25.1 Statement of Eligibility and Qualification on Form T-1 of ,
as Trustee with respect to the Notes (No. 22- ).
+27 Financial Data Schedule.
+99.1 Consent of Linda McLoughlin Figel to be named as a proposed
Director.
+99.2 Consent of Ronald W. Burkle to be named as a proposed Director.
+99.3 Consent of Bruce Karatz to be named as a proposed Director.
+99.4 Consent of Bertram R. Zweig to be named as a proposed Director.
</TABLE>
- --------
* To be filed by amendment
+ Previously filed
<PAGE>
EXHIBIT 1.1
SMITH'S FOOD & DRUG CENTERS, INC.
$575,000,000 [ ]% Senior Subordinated Notes due 2007
UNDERWRITING AGREEMENT
----------------------
, 1996
BT Securities Corporation
CS First Boston Corporation
Donaldson, Lufkin & Jenrette
Securities Corporation
Goldman, Sachs & Co.
Chase Securities Inc.
c/o BT Securities Corporation
One Bankers Trust Plaza
New York, New York 10005
Ladies and Gentlemen:
Smith's Food & Drug Centers, Inc., a Delaware corpo-
ration (the "Company"), hereby confirms its agreement with each
-------
of you (the "Underwriters"), as set forth below.
------------
1. The Securities. Subject to the terms and condi-
--------------
tions herein contained, the Company proposes to issue and sell
to the Underwriters $575,000,000 aggregate principal amount of
its [ ]% Senior Subordinated Notes due 2007 (the
"Securities").
----------
The Securities will be issued pursuant to an Inden-
ture to be entered into by the Company, as issuer, and
, as trustee (the "Trustee").
-------
Pursuant to a Recapitalization Agreement and Plan of
Merger, dated as of January 29, 1996 (the "Recapitalization
----------------
Agreement"), among the Company, Cactus Acquisition, Inc., a
- ---------
Delaware corporation and a wholly owned subsidiary of the Com-
pany ("Acquisition"), Smitty's Supermarkets, Inc., a Delaware
-----------
corporation ("Smitty's"), and The Yucaipa Companies, a Califor-
--------
nia general partnership ("Yucaipa"), Acquisition will merge
-------
(the "Merger") with and into Smitty's. Upon consummation of
------
the Merger, Smitty's will become a wholly owned subsidiary of
the Company.
<PAGE>
-2-
In connection with the Merger, the Company is offering (the
"Tender Offer") to purchase 50% of the outstanding shares (excluding shares
------------
issuable in the Merger) of its common stock, par value $.01 per share (the
"Common Stock"), from the holders thereof for $36.00 in cash per share.
------------
Concurrently with the Tender Offer, the Company intends to redeem certain
shares of its Series I Preferred Stock, to repay certain indebtedness and
repurchase certain outstanding employee stock options (such redemption,
repayments and repurchases, the "Repayments").
----------
At the time the Merger is consummated, Smitty's and its wholly
owned subsidiary Smitty's Super Valu, Inc. ("SSV") will repay certain
---
indebtedness, including, through offers to purchase (the "Smitty's Offers
---------------
to Purchase") from the holders thereof, the 13.75% Senior Discount
- -----------
Debentures due 2006 of Smitty's and the 12.75% Senior Subordinated Notes
due 2004 of SSV (collectively, the "Smitty's Securities"). Consents will
-------------------
be solicited (the "Consent Solicitations") from the holders of the Smitty's
---------------------
Securities to certain amendments to the respective indentures under which
the Smitty's Securities were issued. The repayment of Smitty's
indebtedness, including through the Smitty's Offers to Purchase, and the
Consent Solicitations are referred to herein collectively as the "Smitty's
--------
Refinancing."
- -----------
The Tender Offer, the Repayments and the Smitty's Refinancing
will be funded with the proceeds from the offering of the Securities (the
"Offering"), together with the initial borrowings under a new senior credit
--------
facility (the "New Credit Facility") to be entered into among the Company,
-------------------
Bankers Trust Company, as administrative agent, and the other financial
institutions party thereto (the "Lenders") and certain proceeds of the
-------
divestiture of the Company's Southern California operations (the
"California Divestiture").
----------------------
The Offering, the Tender Offer, the Repayments and the closing
under the New Credit Facility are collectively referred to herein as the
"Recapitalization." The Recapitalization, the Merger, the Smitty's
----------------
Refinancing, the California Divestiture and the disposition of the
Company's closed stores and excess real estate in California pursuant to
the California Asset Disposition (as defined in the Registration Statement)
are collectively referred to herein as the "Transactions." The Securities,
------------
the Indenture, the New Credit Facility and the related credit documents
(including the guarantees and collateral documents relating thereto), the
Recapitalization Agreement and each of the agreements annexed as an exhibit
thereto, the Equity Dealer Manager Agreement (as defined), the Debt
<PAGE>
-3-
Dealer Manager Agreement (as defined) and this Agreement are collectively
referred to herein as the "Transaction Documents".
---------------------
2. Representations and Warranties. The Company represents
------------------------------
and warrants to the Underwriters that (it being understood that references
in this Section 2 (other than in subsection (a) or (b) hereof) to the
Prospectus, if not in existence, shall be deemed to be to the most recent
Preliminary Prospectus (as defined)):
(a) A registration statement on Form S-3 (File No. 333-01601)
with respect to the Securities, including a prospectus subject to
completion with respect to the Securities, has been filed by the
Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (together
----------
with the rules and regulations of the Commission promulgated
thereunder, the "Act"); and one or more amendments to such registra-
---
tion statement also have been so filed. After the execution of this
Agreement, the Company will file with the Commission either (x) if
such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been
filed, in such registration statement) with such changes or
insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act and as have been provided to and approved
by the Underwriters prior to the execution of this Agreement, or (y)
if such registration statement, as it may have been amended, has not
been declared by the Commission to be effective under the Act, an
amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and
approved by the Underwriters prior to the execution of this
Agreement. As used in this Agreement, the term "Registration
------------
Statement" means such registration statement, as amended at the time
---------
when it was or is declared effective, including all documents
incorporated by reference therein and all financial schedules and
exhibits thereto and including any information omitted therefrom
pursuant to Rule 430A under the Act and included in the Prospectus
(as hereinafter defined); the term "Preliminary Prospectus" means
----------------------
each prospectus subject to completion, filed with such registration
statement or any amendment thereto (including the prospectus subject
to completion, if any, included in the Registration
<PAGE>
-4-
Statement); and the term "Prospectus" means the prospectus relating to the
----------
Securities, as first filed with the Commission pursuant to Rule 424(b)
under the Act or, if no prospectus is required to be filed pursuant to
said Rule 424(b) such term means the prospectus relating to the Securities
included in the Registration Statement. Any reference herein to any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto shall be deemed to refer to and include the documents incorporated
therein by reference as of the date of such Preliminary Prospectus or the
Prospectus pursuant to Item 12 of Form S-3 under the Act, as the case may
be, and any reference herein to the terms "amend," "amendment" or
----- ---------
"supplement" with respect to any Preliminary Prospectus or the Prospectus
----------
shall be deemed to refer to and include any documents filed with the
Commission after such date under the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder (collectively, the "Exchange Act"), and so incorporated by
------------
reference (all such incorporated documents being herein called the
"Incorporated Documents").
----------------------
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any
Preliminary Prospectus was filed with the Commission it (x) complied
in all material respects with the requirements of the Act and the
Exchange Act and (y) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement was or is declared effective, it (1) contained or will
contain all statements required to be stated therein in accordance
with, and complied or will comply in all material respect with the
requirements of, the Act and (2) did not or will not include any
untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading. When
the Prospectus is filed with the Commission pursuant to Rule 424(b)
(or, if the Prospectus is not required to be so filed, when the
Registration Statement was or is declared effective) and on the
Closing Date (as defined in Section 3), the Prospectus (i) complied
or will comply in all material respects with the requirements of the
Act and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements therein, in
<PAGE>
-5-
the light of the circumstances under which they were made, not misleading.
The foregoing provisions of this paragraph (b) do not apply to statements
or omissions made in any Preliminary Prospectus, the Registration
Statement or the Prospectus in reliance upon and in conformity with
written information furnished to the Company by the Underwriters
specifically for use therein or to the Statement of Eligibility and
Qualification (the "Forms T-1") under the Trust Indenture Act of 1939, as
---------
amended (the "Trust Indenture Act"), of the Trustee filed as an exhibit to
-------------------
the Registration Statement.
(c) The Company has prepared and filed with the Commission in
accordance with the Exchange Act (x) a proxy statement and form of
proxy relating to the 1996 annual meeting of the Company's
stockholders (the "Stockholders Meeting") at which the Company's
--------------------
stockholders approved the Recapitalization Agreement and the
transactions contemplated thereby, including the Tender Offer,
(ii) an Issuer Tender Offer Statement on Schedule 13E-4 under the
Exchange Act with respect to the Tender Offer. As used in this
Agreement, the term "Proxy Statement" means the definitive proxy
---------------
statement and form of proxy, including any annexes, financial
statements and schedules, and any amendments or supplements thereto
in the form filed with the Commission pursuant to Rule 14a-6(b) under
the Exchange Act; and the term "Offer to Purchase" means the offer to
-----------------
purchase, the related form of letter of transmittal, summary
advertisement and exhibits thereto, in the form filed as part of the
Issuer Tender Offer Statement on Schedule 13E-4 under the Exchange
Act.
(d) On the date that the Proxy Statement was mailed to the
Company's stockholders and on the date of the Stockholders' Meeting,
the Proxy Statement complied in all material respects with the
provisions of the Exchange Act, and the Proxy Statement at such times
and on the Closing Date did not and will not, as the case may be,
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein, in light of the
circumstances under which they were made, or necessary in order to
make the statements therein not misleading. On the date that the
Offer to Purchase was mailed to the Company's stockholders, it
complied in all material respects with the provisions of the Exchange
Act, and the Offer to Purchase at such times and on the Closing Date
did not and will not, as the case may be, contain an
<PAGE>
-6-
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstance under which they were made, not
misleading.
(e) Annex B hereto lists all of the direct and indirect
-------
subsidiaries of the Company after giving effect to the Transactions
(the "Subsidiaries"). Neither the Company nor any of the
------------
Subsidiaries owns, or after giving effect to the Transactions will
own, directly or indirectly, any shares of capital stock or other
equity securities of any person not listed on such Annex. The
Company and each of the Subsidiaries have been duly incorporated and
are validly existing in good standing as corporations under the laws
of their respective jurisdictions of incorporation, with all
requisite corporate power and authority to own or lease their
respective properties and conduct their respective businesses as
described in the Prospectus. The Company and each of the
Subsidiaries are, and will be after giving effect to the
Transactions, duly qualified to do business as foreign corporations
in good standing in all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their
respective businesses requires such qualification, except where the
failure to be so qualified, individually or in the aggregate, would
not have (x) a material adverse effect on the business, condition
(financial or other), results of operations or prospects of the Com-
pany and the Subsidiaries taken as a whole or (y) an adverse effect
on the ability of the Company or any Subsidiary to perform any of its
material obligations under any of the Transaction Documents to which
it is or will be a party or to consummate any of the Transactions
(collectively, a "Material Adverse Effect"). The Company has, and
-----------------------
upon consummation of the Transactions, will have (based upon the
assumptions described or referred to in the first paragraph under the
caption "Pro Forma Capitalization" in the Prospectus), in all
material respects, the authorized, issued and outstanding
capitalization set forth in the Prospectus. The outstanding shares
of capital stock of the Company and each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and
nonassessable and were not issued in violation of any preemptive or
similar rights granted by the Company or any Subsidiary. Except as
described in the Prospectus and except as to any indebtedness to be
repaid on the Closing Date, all of the outstanding shares of capital
stock of each of
<PAGE>
-7-
the Subsidiaries are, or will be upon consummation of the Transactions,
owned beneficially by the Company, directly or indirectly, free and clear
of all liens, encumbrances, security interests, mortgages, pledges,
charges or claims. No holder of securities of the Company or any of the
Subsidiaries is entitled to have such securities registered under the
Registration Statement.
(f) The Company and each of the Subsidiaries have all
necessary corporate power and authority to execute and deliver each
of the Transaction Documents, to perform their respective obligations
thereunder (including the issuance of the Securities) and to
consummate the Transactions (in each case, to the extent each is a
party thereto).
(g) The Securities have been duly and validly authorized by
the Company for issuance and, when executed by the Company and
authenticated by the Trustee in accordance with the provisions of the
Indenture, and delivered to and paid for by the Underwriters in
accordance with the terms hereof, will have been duly executed,
issued and delivered and will constitute legally valid and binding
obligations of the Company, entitled to the benefits of the Indenture
and enforceable against the Company in accordance with their terms,
except that the enforcement thereof may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally, (ii)
general principles of equity and the discretion of the court before
which any proceeding therefor may be brought (regardless of whether
such enforcement is considered in a proceeding in equity or at law),
(iii) the unenforceability, under certain circumstances, of
provisions imposing penalties, forfeitures, late payment charges or
an increase in interest rate upon delinquency in payment or the
occurrence of a default, and (iv) the unenforceability of any
provision requiring the payment of attorneys' fees, except to the
extent that a court determines such fees to be reasonable (each of
clauses (i), (ii), (iii) and (iv), an "Enforceability Limitation").
-------------------------
The Indenture has been duly authorized by the Company and, when
executed and delivered by the Company (assuming the due
authorization, execution and delivery thereof by the Trustee), will
constitute a legally valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except
that the enforcement thereof may be
<PAGE>
-8-
subject to (x) the Enforceability Limitations and (y) the unenforceability
of the provisions contained in the Indenture relating to the waiver of
stay, extension or usury laws. The Indenture has been qualified under the
Trust Indenture Act and complies as to form in all material respects with
the requirements of the Trust Indenture Act.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming the due authorization,
execution and delivery hereof by the Underwriters, constitutes the
legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except that the
enforcement hereof may be subject to (x) the Enforceability Limita-
tions and (y) the unenforceability under certain circumstances under
law or court decisions of provisions for the indemnification of or
contribution to a party with respect to a liability where such
indemnification or contribution is contrary to public policy.
(i) Each of the Transactions and Transaction Documents
conforms in all material respects to the descriptions thereof in the
Prospectus.
(j) Except as described in the Prospectus, no consent,
approval, authorization or order of any court or governmental agency
or body is required for the performance of any of the Transaction
Documents by the Company or any of the Subsidiaries (to the extent
each such person is a party thereto) or the consummation by the
Company or any of the Subsidiaries of any of the Transactions, except
such as have been obtained and such as may be required under the Act,
the Trust Indenture Act or state securities or "Blue Sky" laws, or
where the failure to obtain such consent, approval, authorization or
order, individually or in the aggregate, would not have a Material
Adverse Effect. Neither the Company nor any of the Subsidiaries is,
or upon consummation of the Transactions will be, (i) in violation of
its certificate of incorporation or bylaws, (ii) in violation of any
statute, judgment, decree, order, rule or regulation applicable to
it, which violation, individually or in the aggregate, would have a
Material Adverse Effect, or (iii) in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, deed of trust, loan
agreement, note, lease, license, franchise agreement, permit,
certificate or other
<PAGE>
-9-
agreement or instrument to which it or any of its properties is subject
(collectively, "Contracts"), which default, individually or in the
---------
aggregate, would have a Material Adverse Effect.
(k) Neither the execution, delivery and performance by the
Company or any of the Subsidiaries of any of the Transaction
Documents (to the extent each such person is a party thereto), nor
the consummation by the Company or any of the Subsidiaries of any of
the Transactions will (after giving effect to all amendments and
waivers obtained on or prior to the Closing Date) conflict with or
constitute or result in a breach or violation by the Company or any
of the Subsidiaries of any of (i) the terms or provisions of, or
constitute a default by the Company or any of the Subsidiaries under,
any of the Contracts, which conflict, breach, violation or default,
individually or in the aggregate, would have a Material Adverse
Effect, (ii) the certificate of incorporation or bylaws of any such
person, or (iii) any statute, judgment, decree, order, rule or
regulation (excluding state securities and "Blue Sky" laws) of any court
or governmental agency or other body applicable to any such person or any
of their respective properties, which conflict, breach, violation or
default, individually or in the aggregate, would have a Material Adverse
Effect.
(l) (x) Immediately after the consummation of the
Transactions, the fair value and present fair saleable value of the
assets of the Company will exceed the sum of its stated liabilities
and identified contingent liabilities; and (y) after giving effect to
the execution, delivery and performance of the Transaction Documents
and the consummation of the Transactions, neither the Company nor any
of the Subsidiaries is, or will be, (i) left with unreasonably small
capital with which to carry on its business as it is proposed to be
conducted as described in the Prospectus, (ii) unable to pay its
debts (contingent or otherwise) as they mature or (iii) insolvent.
(m) As of the Closing Date, each of the Transaction Documents
(other than the Indenture, the Securities or this Agreement) will
have been duly and validly authorized by the Company and each of the
Subsidiaries (to the extent each is a party thereto); and, when
executed and delivered by the Company and the Subsidiaries (to the
extent each is a party thereto), assuming the due authorization,
<PAGE>
-10-
execution and delivery thereof by all other parties thereto, each
such Transaction Document will constitute a legally valid and binding
obligation of the Company and each of the Subsidiaries, to the extent
each is a party thereto, enforceable against each such person in
accordance with its terms, except that the enforcement thereof may be
subject to (x) the Enforceability Limitations and (y) the
unenforceability under certain circumstances under law or court
decisions of provisions for the indemnification of or contribution to
a party with respect to a liability where such indemnification or
contribution is contrary to public policy.
(n) Except as disclosed in the Prospectus, and except as would
not, individually or in the aggregate, have a Material Adverse
Effect, (i) the Company and each of the Subsidiaries are in
compliance with all applicable Environmental Laws (as defined below),
(x) the Company and each of the Subsidiaries have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are in compliance with their requirements,
(ii) there are no pending or, to the best knowledge of the Company,
threatened Environmental Claims (as defined below) against the
Company or any of the Subsidiaries and (iii) the Company has no
knowledge of any circumstances that could reasonably be anticipated
to form the basis of an Environmental Claim against the Company or any of
the Subsidiaries or any of their respective properties or operations and
the business operations relating thereto which Environmental Claim,
individually or in the aggregate, would have a Material Adverse Effect.
For purposes of this Agreement, the following terms shall have the
following meanings: "Environmental Law" means, with respect to any person,
-----------------
any federal, state, local or municipal statute, law, rule, regulation,
ordinance, code and any published judicial or administrative
interpretation thereof including any judicial or administrative order,
consent decree or judgment binding on or applicable to such person or any
of its subsidiaries, relating to the environment, health, safety or any
chemical, material or substance, exposure to which is prohibited, limited
or regulated by any such governmental authority. "Environmental Claims"
--------------------
means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigations or proceedings relating in any way to any
Environmental Law.
<PAGE>
-11-
(o) The audited consolidated financial statements and
schedules of the Company and of Smitty's in the Registration
Statement and Prospectus present fairly the consolidated financial
position, results of operations and cash flows of the Company and of
Smitty's, respectively, at the dates and for the periods to which
they relate, and have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis, except
as otherwise stated therein, and the unaudited consolidated financial
statements of Smitty's and the related notes included in the
Prospectus present fairly the consolidated financial position,
results of operations and cash flows of Smitty's at the dates and for
the periods to which they relate, subject to year-end audit
adjustments, and have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis, except
as otherwise stated therein.
(p) The pro forma financial statements and other pro forma
financial information (including the notes thereto) included in the
Prospectus and the Registration Statement have been prepared in
accordance with applicable requirements of Regulation S-X promulgated
under the Exchange Act and have been properly computed on the bases
described therein. The assumptions used in the preparation of the pro
forma financial statements and other pro forma financial information in
the Registration Statement and Prospectus are set forth therein and are
reasonable, and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
(q) Ernst & Young LLP, which has audited certain financial
statements and schedules as set forth in its reports included in the
Registration Statement and the Prospectus, is an independent public
accounting firm with respect to the Company as required by the Act.
Coopers & Lybrand L.L.P., which has audited certain financial state-
ments and schedules as set forth in its reports included in the
Registration Statement and the Prospectus, is an independent public
accounting firm with respect to Smitty's as required by the Act.
(r) The forward-looking statements relating to cost savings in
the Prospectus are based on assumptions that the Company believes to
be reasonable. The other statistical and market-related data in the
Prospectus are based
<PAGE>
-12-
on or derived from sources that the Company believes to be reliable and
accurate.
(s) Except as described in the Prospectus, there is not
pending or, to the best of the Company's knowledge, threatened any
action, suit, proceeding, inquiry or investigation to which the
Company or any of the Subsidiaries or to which the property of the
Company or any of the Subsidiaries is subject, before or brought by
any court or governmental agency or body, which, individually or in
the aggregate, would if determined adversely to the Company have a
Material Adverse Effect.
(t) The Company and each of the Subsidiaries have (a) good and
marketable title to all the real properties and other material assets
(personal, tangible, intangible or mixed) owned or purported to be
owned by them respectively, and, as of the Closing Date (after giving
effect to the Transactions), such title will be free and clear of all
liens, except for liens which would be permitted under the Indenture
and (b) peaceful and undisturbed possession under all leases to which
they are party as lessee or sublessee, except for such defects in
title or lack of possession that, individually or in the aggregate,
would not have a Material Adverse Effect. The Company and each of
the Subsidiaries operate all material real and personal property
leased by them under valid and enforceable leases and have performed
in all material respects the obligations required to be performed by
them with respect to each such lease, except for such leases and
obligations which, individually or in the aggregate, would not have a
Material Adverse Effect. As to leases with respect to which the Company
or any Subsidiary is the lessor, the lessees and other parties under such
leases are in compliance with all terms and conditions thereunder and such
leases are in full force and effect except for any failures to comply or
remain in full force and effect which, individually or in the aggregate,
would not have a Material Adverse Effect. All tangible assets and
properties of the Company and each of the Subsidiaries are in good working
order (subject to ordinary wear and tear) and are adequate for the uses to
which they are being put or would be put in the ordinary course of
business except for such assets and properties as in the aggregate will
not, after giving effect to the Transactions, be material to the business,
condition (financial or otherwise), results of
<PAGE>
-13-
operations or prospects of the Company and the Subsidiaries taken as a
whole.
(u) The Company and the Subsidiaries own, or possess licenses
with respect to, and have the rights to use, all trademarks and trade
names (collectively, "Intellectual Property") used in, or necessary
---------------------
for the conduct of, their respective businesses as described in the
Prospectus, and the consummation of the Transactions will not alter
or impair any such rights, except for such alterations or impairments
as would not, individually or in the aggregate, have a Material
Adverse Effect. To the best of the Company's knowledge, no claims
have been asserted by any person to the use of any such Intellectual
Property or challenging or questioning the validity or effectiveness
of any license or agreement related thereto, except for such claims
as would not, individually or in the aggregate, have a Material
Adverse Effect. To the best of the Company's knowledge, there is no
valid basis for any such claim and the use of such Intellectual
Property by the Company and the Subsidiaries does not infringe on the
rights of any person. The Company and each of the Subsidiaries have
obtained all licenses, permits, franchises and other governmental
authorizations the lack of which, individually or in the aggregate,
would have a Material Adverse Effect.
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as
described therein, (x) neither the Company nor any of the
Subsidiaries has incurred any material liabilities or obligations,
direct or contingent, or entered into any material transactions, not
in the ordinary course of business and (y) neither the Company nor any of
the Subsidiaries has purchased any of its respective outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution
of any kind on their respective capital stock or otherwise.
(w) All taxes, assessments, fees and other charges (including,
without limitation, withholding taxes, penalties, and interest) due
or claimed to be due from the Company or any of the Subsidiaries that
are due and payable have been paid, other than those being contested
in good faith or those currently payable without penalty or interest
and for which an adequate reserve or accrual has been established in
accordance with generally accepted
<PAGE>
-14-
accounting principles, and except where the failure so to pay would not,
individually or in the aggregate, have a Material Adverse Effect. The
Company knows of no actual or proposed additional tax assessments for any
fiscal period against the Company and the Subsidiaries that, individually
or in the aggregate, would have a Material Adverse Effect.
(x) Neither the Company nor any of the Subsidiaries is now, or
after giving effect to the Transactions will be, an "investment
company" or a company "controlled by" an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(y) Except as stated in the Prospectus, the Company knows of
no outstanding claims for services, either in the nature of a
finder's fee, financial advisory fee, origination fee or similar fee,
with respect to any of the Transactions.
(z) Each of the representations and warranties set forth in
the Recapitalization Agreement was true and correct in all materials
respects at the time as of which such representations and warranties
were made and will be true and correct at and as of the Closing Date
as if made at and as of such date (other than to the extent any such
representation or warranty is expressly made as to only a certain
other date).
(aa) As of the Closing Date, each of the representations and
warranties of the Company and the Subsidiaries set forth in the
Credit Agreement will be true and correct as if made at and as of
such date (other than to the extent any such representation or
warranty is expressly made as to only a certain other date).
(ab) Each of the representations and warranties set forth in
the Dealer Manager Agreement dated , 1996 between the
Company and Goldman, Sachs & Co. (the "Equity Dealer Manager Agreement")
-------------------------------
was true and correct in all material respects at the time as of which such
representations and warranties were made and will be true and correct at
and as of the Closing Date as if made at and as of such date (other than
to the extent any such representation or warranty is expressly made as to
only a certain other date).
<PAGE>
-15-
(ac) Except as stated in the Prospectus, neither the Company
nor any of the Subsidiaries nor, to the best of the Company's
knowledge, any of their respective directors, officers or controlling
persons has taken, directly or indirectly, any action designed, or
which might reasonably be expected, to cause or result, under the Act
or otherwise, in, or which has constituted, stabilization or
manipulation of the price of any security of the Company or any of
the Subsidiaries to facilitate the sale of the Securities or the
Smitty's Offers to Purchase or the Tender Offer.
(ad) As of the Closing Date, the Company will have delivered
to the Underwriters a true and correct copy of each of the
Transaction Documents, together with all related agreements and all
schedules and exhibits thereto, and there shall have been no material
amendments, alterations, modifications and waivers as to which the
Underwriters have not been advised in writing and which would be
required to be disclosed in the Prospectus; and there exists as of
the Closing Date (after giving effect to the Transactions) no event
or condition which would constitute a default or an event of default
(in each case as defined in each of the Transaction Documents) under
any of the Transaction Documents which, individually or in the aggre-
gate, would have a Material Adverse Effect.
Any certificate signed by any officer of the Company or any
Subsidiary and delivered pursuant to this Agreement or in connection with
the payment of the purchase price and delivery of the Securities shall be
deemed a representation and warranty by the Company or such Subsidiary, as
the case may be, to each Underwriter as to the matters covered thereby, and
shall not be deemed a representation by such officer as an individual.
3. Purchase, Sale and Delivery of the Securities. On the
---------------------------------------------
basis of the representations, warranties, agreements and covenants herein
contained and subject to the terms and conditions herein set forth, the
Company agrees to issue and sell to the Underwriters, and each of the
Underwriters severally agrees to purchase from the Company, at % of
their principal amount, the respective principal amounts of the Securities set
forth opposite their respective names on Annex A hereto. The obligations of the
-------
Underwriters under this Agreement are several and not joint. Certificates in
definitive form for the Securities that the Underwriters have agreed to purchase
<PAGE>
-16-
hereunder, and in such denominations and registered in such name or names as
each Underwriter requests upon notice to the Company at least 48 hours prior to
the Closing Date, shall be delivered by or on behalf of the Company, against
payment by or on behalf of the Underwriters of the purchase price therefor by
wire transfer or check of immediately available funds to the account of the
Company. Such delivery of and payment for the Securities shall be made at the
offices of Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, at
10:00 A.M., New York time, on May , 1996, or at such other place, time or date
as the Underwriters and the Company may agree upon or as the Underwriters may
determine pursuant to Section 7(a) hereof, such time and date of delivery
against payment being herein referred to as the "Closing Date." The Company will
------------
make such certificates for the Securities available for checking and packaging
by the Underwriters at the offices in New York, New York of BT Securities
Corporation at least 24 hours prior to the Closing Date.
4. Offering by the Underwriters. After the Registration
----------------------------
Statement becomes effective, the Underwriters propose to offer for sale to
the public the Securities at the price and upon the terms set forth in the
Prospectus.
5. Certain Covenants. The Company covenants and agrees with
-----------------
the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of
this Agreement, and any amendments thereto, to become effective
promptly. If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in
reliance upon Rule 430A of the rules and regulations of the Commis-
sion under the Act, then immediately following the execution of this
Agreement, the Company will prepare, and thereafter the Company will
file or transmit for filing with the Commission in accordance with
such Rule 430A and Rule 424(b) of the rules and regulations of the
Commission under the Act, copies of the Prospectus, or, if required
by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all
information so omitted. The Company will give each Underwriter
notice of its intention to file or prepare any amendment to the
Registration Statement (including any post-effective amendment) or any
amendment or supplement to the Prospectus (including any revised
<PAGE>
-17-
prospectus which the Company proposes for use by the Underwriters in
connection with the offering of the Securities which differs from the
prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is
required to be filed pursuant to Rule 424(b) of the rules any regulations
of the Commission under the Act), will furnish the Underwriters with
copies of any such amendment or supplement a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not
file any such amendment or supplement or use any such prospectus to which
the Underwriters shall reasonably object or which is not in compliance
with the Act or the Exchange Act. The Company will advise the
Underwriters, promptly after it receives notice thereof, of the time when
the Registration Statement or any amendment thereto has been filed or
declared effective or when the Prospectus or any amendment or supplement
thereto has been filed and will provide evidence satisfactory to the
Underwriters of each such filing or effectiveness.
(b) The Company will advise the Underwriters, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance
by the Commission of any stop order suspending the effectiveness of
the Registration Statement or any amendment thereto or any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, (ii) the
suspension of the qualification of any of the Securities for offering
or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose or (iv) any
request made by the Commission for amending the Registration
Statement, for amending or supplementing the Prospectus or for addi-
tional information. The Company will use its best efforts to prevent
the issuance of any such stop order and, if any such stop order is
issued, to obtain the withdrawal thereof as promptly as possible.
(c) The Company will cooperate with the Underwriters in
arranging for the qualification of the Securities for offering and
sale under the securities or "Blue Sky" laws of such jurisdictions as
the Underwriters may designate and will continue such qualifications
in effect for as long as may be necessary to complete the initial
distribution of the Securities by the Underwriters; provided, how-
-------- ----
ever, that in connection therewith the Company shall not
----
<PAGE>
-18-
be required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction or, except at the
expense of the Underwriters, to keep any state qualification effective
after one year.
(d) If any event shall occur as a result of which it is
necessary, in the judgment of counsel for the Underwriters, to amend
or supplement the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it
is, or is to be, delivered to a purchaser of Securities, or if for
any other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Act and the Exchange Act, the
Company shall (subject to Section 5(a)) forthwith amend or supplement
the Prospectus (in form and substance reasonably satisfactory to the
Underwriters and in compliance with the Act) so that, as so amended
or supplemented, the Prospectus will not include an untrue statement
of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances existing at the time it is, or is to be, delivered to a
purchaser of Securities, not misleading and will comply with the Act
and the Exchange Act, and the Company will furnish to the
Underwriters a reasonable number of copies of such amendment or
supplement.
(e) The Company will, without charge, provide (i) to each
Underwriter and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the
Securities and each amendment thereto (in each case including
exhibits thereto) and (ii) so long as a prospectus relating to the
Securities is required to be delivered under the Act, as many copies
of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Underwriters may reasonably request.
(f) Subject to Section 5(a), the Company will timely complete
all required filings and otherwise comply fully in a timely manner
with all provisions of the Exchange Act and promptly file all reports
and any definitive proxy or information statements required to be
filed by the Company with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the
Prospectus and for so long as the delivery of a prospectus
<PAGE>
-19-
is required in connection with the offer or sale of any of the
Securities.
(g) The Company, as soon as practicable, will make generally
available to its security holders a consolidated earnings statement
of the Company that satisfies the provisions of Section 11(a) of the
Act and Rule 158 thereunder.
(h) The Company will apply the net proceeds from the sale of
the Securities, along with borrowings under the New Credit Facility,
as set forth under "Summary -- The Transactions -- Sources and Uses"
in the Prospectus.
(i) The Company will not voluntarily claim, and will actively
resist any attempts to claim, the benefit of any usury laws against
holders of the Securities.
(j) The Company will not take at any time, directly or
indirectly, any action intended, or which might reasonably be
expected, to cause or result in, or which will constitute,
stabilization of the price of any of the Securities to facilitate the
sale or resale of any of the Securities.
6. Expenses. The Company agrees to pay all costs and
--------
expenses incident to the performance of its obligations under this
Agreement, whether or not the transactions contemplated herein are
consummated or this Agreement is terminated pursuant to Section 10 hereof,
including all costs and expenses incident to (i) the printing, word
processing or other production of documents with respect to such
transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto,
any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, and any "Blue Sky" memoranda, (ii) all arrangements
relating to the delivery to the Underwriters of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants
and any other experts or advisors retained by the Company or any
Subsidiary, (iv) the preparation, issuance and delivery to the Underwriters
of any certificates evidencing the Securities, (v) the qualification of the
Securities under state securities and "Blue Sky" laws, including filing
fees and reasonable fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities,
(vii) expenses
<PAGE>
-20-
of the Company and the Subsidiaries in connection with any
meetings with prospective investors in the Securities, (viii) fees and
expenses of the Trustee, including fees and expenses of its counsel,
(ix) advertising relating to the offering of the Securities (other than as
shall have been specifically approved by the Underwriters to be paid for by
the Underwriters), and (x) any fees charged by investment rating agencies for
the rating of the Securities.
7. Conditions of the Underwriters' Obligations. The
-------------------------------------------
obligation of the Underwriters to purchase and pay for the Securities are
subject to the accuracy of the representations and warranties contained
herein, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the registration statement originally filed with
respect to the Securities or any amendment thereto filed prior to the
Closing Date has not been declared effective as of the time of
execution hereof, the Registration Statement or such amendment shall
have been declared effective not later than 12:00 noon, New York City
time, on the date on which the amendments to the registration
statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information
regarding the initial public offering price of the Securities has
been filed with the Commission, or such later time and date as shall
have been consented to by the Underwriters; if required, the
Prospectus and any amendment or supplement thereto shall have been
filed in accordance with Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any
amendment thereto or the qualification of the Indenture under the
Trust Indenture Act shall have been issued and no proceedings for
that purpose shall have been instituted or threatened or, to the best
of the Company's knowledge, any Subsidiary or the Underwriters, shall
be contemplated by the Commission; and the Underwriters shall have
received a certificate, with respect to the Company, dated the
Closing Date and signed by the Chairman, President, a Senior Vice
President or a Vice President of the Company (who may rely upon the
best of his information and belief), to that effect.
(b) The Underwriters shall have received opinions in form and
substance satisfactory to the Underwriters, dated the Closing Date,
of (i) Latham & Watkins, special counsel
<PAGE>
-21-
for the Company, substantially in the form of Exhibit A hereto, (ii)
---------
Simpson, Thacher & Bartlett, special counsel for the Company,
substantially in the form of Exhibit B hereto, (iii) the General Counsel
---------
of the Company, substantially in the form of Exhibit C hereto and (iv) the
---------
General Counsel of the Smitty's, substantially in the form of Exhibit D
---------
hereto.
(c) The Underwriters shall have received an opinion, dated the
Closing Date, of Cahill Gordon & Reindel, counsel for the
Underwriters, with respect to the sufficiency of certain corporate
proceedings and other legal matters relating to this Agreement, and
such other related matters as the Underwriters may require. In
rendering such opinion, Cahill Gordon & Reindel shall have received
and may rely upon such certificates and other documents and infor-
mation as they may reasonably request to pass upon such matters.
(d) The Underwriters shall have received from Ernst & Young
LLP, letters dated the date hereof and the Closing Date, in form and
substance satisfactory to the Underwriters.
(e) The Underwriters shall have received from Coopers &
Lybrand L.L.P. letters dated the date hereof and the Closing Date, in
form and substance satisfactory to the Underwriters.
(f) The representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on and as of the Closing Date (other than to the extent any
such representation or warranty is expressly made as to a certain
other date); the Company shall have complied with all agreements and
satisfied all conditions on its part to be performed or satisfied
hereunder at or prior to the Closing Date; and subsequent to December
30, 1995 (except as specifically disclosed in the Prospectus), there
shall have been no material adverse change in the business, condition
(financial or other), results of operations or prospects of the Com-
pany and the Subsidiaries taken as a whole (a "Material Adverse
----------------
Change"), or any development involving a prospective Material Adverse
------
Change, except as set forth in, or contemplated by, the Prospectus.
<PAGE>
-22-
(g) None of the Transactions shall be enjoined (temporarily or
permanently) and no restraining order or other injunctive order shall
have been issued or any action, suit or proceeding shall have been
commenced with respect to any Transaction Document, any Transaction
before any court or governmental authority.
(h) The Underwriters shall have received a certificate, dated
the Closing Date, of the Chairman, President or any Vice President
(and with respect to (iii) below, the Chief Financial Officer) of the
Company to the effect that:
(i) The representations and warranties of the Company in
this Agreement are true and correct in all material respects as
if made on and as of the Closing Date, and the Company has
performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior
to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any amendment thereto or the
qualification of the Indenture under the Trust Indenture Act
has been issued, and no proceedings for those purposes have
been instituted or threatened or, to the best of the Company's
knowledge, are contemplated by the Commission;
(iii) Subsequent to December 30, 1995 (except as
specifically disclosed in the Prospectus), there has not been a
Material Adverse Change;
(iv) Neither the sale of the Securities by the Company
hereunder nor any of the Transactions has been enjoined
(temporarily or permanently);
(v) There have been no material amendments, alterations,
modifications, or waivers of any provisions of any of the
Transaction Documents since the date of the execution and
delivery thereof by the parties thereto; and
(vi) The Company and the Subsidiaries, to the extent each
is a party thereto, have complied in all material respects with
all agreements and covenants in the Transaction Documents and
performed in all
<PAGE>
-23-
material respects all conditions specified therein contemplated by
the Prospectus to be complied with or performed by them at or prior
to the Closing Date.
(i) The Underwriters shall have received a certificate, dated
the Closing Date, of the Chairman, President or any Vice President
(and with respect to (ii) below the Chief Financial Officer) of
Smitty's to the effect that:
(i) The representations and warranties of Smitty's in
the Recapitalization Agreement are true and correct in all
material respects as if made on and as of the Closing Date
(other than to the extent any such representation or warranty
is expressly made as to only a certain other date), and Smitty's and
its subsidiaries have performed all covenants and agreements and
satisfied all conditions on their part to be performed or satisfied
at or prior to the Closing Date after giving effect to the
Transactions;
(ii) Subsequent to July 30, 1995 (except as specifically
disclosed in the Prospectus), there has not been any material
adverse change, or any developments involving a prospective
material adverse change, in the business, condition (financial
or other), results of operations or prospects of Smitty's and
its subsidiaries taken as a whole; and
(iii) Smitty's and its subsidiaries have complied in all
material respects with all agreements and covenants in the
Transaction Documents, to the extent each is a party thereto, and
performed in all material respects all conditions specified therein
contemplated by the Prospectus to be complied with or performed by
them at or prior to the Closing Date.
(j) On the Closing Date, the Underwriters shall have received
(i) a letter, dated the Closing Date, from Houlihan, Lokey, Howard &
Zukin, Inc. with respect to the solvency of the Company and the
Subsidiaries in form, scope and substance satisfactory to the
Underwriters and (ii) environmental audit reports in form, scope and
substance satisfactory to the Underwriters.
(k) On the Closing Date, the Company and the Subsidiaries
shall have, to the extent each is a party thereto, complied in all
material respects with all agreements and
<PAGE>
-24-
covenants in the Transaction Documents and performed all conditions
specified therein (other than agreements or covenants which have been
waived but only if such waivers are not required to be set forth in the
Prospectus) to be complied with or performed at or prior to the Closing
Date, and each of the Transaction Documents shall be in full force and
effect.
(l) On the Closing Date, the Underwriters shall have received
copies of all certificates, documents and opinions, reasonably
requested by the Underwriters, delivered by the Company or any of the
Subsidiaries or any of their counsels and such other certificates,
documents and opinions reasonably obtainable by the Company or any of
the Subsidiaries under the Transaction Documents in connection with
any of the Transactions, together with letters addressed to the
Underwriters, stating that the Underwriters may rely on such
certificates and opinions as if they had been addressed to the
Underwriters.
(m) Each of the Transactions (other than the Offerings) shall
have been consummated, or shall be consummated simultaneously with
the Offerings, on the terms and conditions set forth in the
Transaction Documents.
(n) On the Closing Date, the Certificate of Merger with
respect to the Merger shall be in form and substance satisfactory to
the Underwriters and shall have been filed with the Secretary of
State of the State of Delaware.
On or before the Closing Date, the Underwriters shall have
received such further documents, opinions, certificates and schedules or
instruments relating to the business, corporate, legal and financial
affairs of the Company and the Subsidiaries as they shall have heretofore
reasonably requested from the Company and the Subsidiaries.
All such opinions, certificates, letters, schedules, documents
or instruments delivered pursuant to this Agreement will comply with the
provisions hereof only if they are reasonably satisfactory in all material
respects to the Underwriters. The Company and the Subsidiaries shall
furnish to the Underwriters such conformed copies of such opinions,
certificates, letters, schedules, documents and instruments in such quanti-
ties as the Underwriters shall reasonably request.
<PAGE>
-25-
8. Indemnification and Contribution. (a) The Company
--------------------------------
agrees to indemnify and hold harmless each Underwriter, each person, if
any, who controls either of the Underwriters within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and each of their
respective officers, directors, employees, representatives and agents
(collectively, the "Underwriter Indemnitees"), against any losses, claims,
-----------------------
damages or liabilities, joint or several, to which such Underwriter
Indemnitee may become subject under the Act, the Exchange Act or otherwise,
insofar as any such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of any
material fact contained in (A) the registration statement originally
filed with respect to the Securities or any amendment thereto or any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or any
Subsidiary or based upon written information furnished by or on behalf of
the Company or any Subsidiary filed in any jurisdiction in order to
qualify the Securities under the securities or "Blue Sky" laws thereof or
filed with the Commission or any securities association or securities
exchange (each, an "Application") or
-----------
(ii) the omission or alleged omission to state, in such
registration statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading,
and will reimburse, as incurred, each Underwriter Indemnitee, for any legal
or other expenses reasonably incurred by such Underwriter Indemnitee in
connection with investigating, defending against or appearing as a third-
party witness in connection with any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such
-------- -------
case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or any Application in reliance upon and in
conformity with written information furnished to the Company by
<PAGE>
-26-
any of the Underwriters specifically for use therein; and provided, further,
-------- -------
that the Company will not be liable to any Underwriter Indemnitee with respect
to any such untrue statement or omission made in any Preliminary Prospectus that
is corrected in the Prospectus (or any amendment or supplement thereto if the
Company shall have furnished such Underwriter with such amendment or supplement
on a timely basis) if the person asserting any such loss, claim, damage or
liability purchased Securities from the related Underwriter in reliance upon
such Preliminary Prospectus but was not sent or given a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished such
Underwriter with such amendment or supplement on a timely basis) at or prior to
the written confirmation of the sale of such Securities to such person in any
case where such delivery of the Prospectus (as so amended or supplemented if the
Company shall have furnished such Underwriter with such amendment or supplement
on a timely basis) is required by the Act, unless such failure to deliver the
Prospectus (as amended or supplemented if the Company shall have furnished such
Underwriter with such amendment or supplement on a timely basis) was a result of
noncompliance by the Company with Section 5(e)(ii) of this Agreement.
Notwithstanding anything to the contrary herein, no Underwriter shall be
obligated to send or give any supplement or amendment to any document
incorporated by reference in any Preliminary Prospectus or the Prospectus to any
person in order to benefit from the indemnification provisions herein or
otherwise. This indemnity agreement will be in addition to any liability that
the Company may otherwise have to the Underwriter Indemnitees, including under
the indemnity letter agreement dated January 25, 1996 between Smith's and
Smitty's on the one hand and the Underwriters on the other hand. The Company
will not, without the prior written consent of the Underwriters, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification from the
Company may be sought hereunder (whether or not any Underwriter Indemnitee is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of the Underwriter
Indemnitees from all liability arising out of such claim, action, suit or
proceeding.
(b) Each Underwriter will severally and not jointly indemnify
and hold harmless the Company and its directors, officers who signed the
Registration Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act
<PAGE>
-27-
(collectively, the "Company Indemnitees") against any losses, claims,
-------------------
damages or liabilities to which such Company Indemnitee may become subject
under the Act, the Exchange Act, or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application, or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter specifically for use therein; and, subject to
the limitation set forth immediately preceding this clause, will reimburse,
as incurred, any legal or other expenses reasonably incurred by such
Company Indemnitee in connection with investigating or defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action in respect thereof. The Company agrees and
acknowledges that, for all purposes of this Agreement, the only information
provided by the Underwriters to the Company are the paragraph immediately
above "Available Information" and the table and the third paragraph under
"Underwriting" in the Prospectus. This indemnity agreement will be in
addition to any liability that the Underwriters may otherwise have to the
Company Indemnitees. The Underwriters will not, without the prior written
consent of the Company, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification from the Underwriters may be sought hereunder
(whether or not any Company Indemnitee is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Company Indemnitees from all liability arising out
of such claim, action, suit or proceeding.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of
the commencement
<PAGE>
-28-
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 8 except to the extent the failure to provide such notice
materially prejudices the indemnifying parties. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, that if the
-------- -------
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties that are different from or additional to those available to
the indemnifying party, then the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and, subject to the next sentence, such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the immediately preceding
sentence (it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Underwriters in the
case of paragraph (a) of this Section 8 or the Company in the case of paragraph
(b) of this Section 8, representing the indemnified parties under such paragraph
(a) or paragraph (b), as the case may be, who are parties to such action or
actions) or (ii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. After such
notice from the indemnifying party to such indemnified party, the indemnifying
party will not be liable for the costs and expenses of any settlement of such
action effected by
<PAGE>
-29-
such indemnified party without the consent of the indemnifying party, unless
such indemnified party waived its rights under this Section 8, in which case the
indemnified party may effect such a settlement without such consent.
(d) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 8 is unavailable or
insufficient to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabili-
ties (or actions in respect thereof) in such proportion as is appropriate
to reflect (i) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party on the other from the
offering of the Securities or (ii) if the allocation provided by the
foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in
connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof). The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be in
the same proportion as the total proceeds from the Offerings (before
deducting expenses other than underwriting discounts and commissions)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault of the
parties shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other,
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Company on the one hand and the Under-writers on the other hand were treated as
one entity for such purpose) or by any other method of allocation that does not
take into account the equitable considerations referred to in the first sentence
of this paragraph (d). Notwithstanding any other provision of this paragraph
(d), the Underwriters shall
<PAGE>
-30-
not be obligated to make contributions hereunder that in the aggregate exceed
the total underwriting discounts and commis-sions received by the Underwriters
under this Agreement, less the aggregate amount of any damages that the
Underwriters have otherwise been required to pay by reason of untrue or alleged
untrue statements or omissions or alleged omissions to state a material fact,
and no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
paragraph (d), each Underwriter Indemnitee (other than any Underwriter) shall
have the same rights to contribution as the Underwriters, and each Company
Indemnitee (other than the Company) shall have the same rights to contribution
as the Company.
9. Survival Clause. The respective representations,
---------------
warranties, agreements, covenants, indemnities and other statements of the
Company, Smitty's, their respective officers and the Underwriters set forth
in this Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement shall remain in full force and effect, regardless of
(i) any investigation made by or on behalf of the Company, Smitty's, any
Company Indemnitee or any Underwriter Indemnitee and (ii) delivery of and
payment for the Securities, and shall be binding upon and shall inure to
the benefit of any successors, assigns, heirs, personal representatives of
the Company Indemnitees and the Underwriter Indemnitees. The respective
agreements, covenants, indemnities and other statements set forth in
Sections 6 and 8 hereof shall remain in full force and effect, regardless
of any termination or cancellation of this Agreement.
10. Termination. (a) This Agreement may be terminated in
-----------
the sole discretion of the Underwriters by notice to the Company given
prior to the Closing Date in the event that the Company shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder at or prior thereto or, if at or
prior to the Closing Date:
(i) the Company or any Subsidiary shall have sustained any
loss or interference with respect to its businesses or properties
from fire, flood, hurricane, earthquake, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, which loss or interference,
<PAGE>
-31-
individually or in the aggregate, has had or has a Material Adverse
Effect, or there shall have been any material adverse change, or any
development involving a prospective material adverse change
(including without limitation a change in management or control of
the Company or any Subsidiary), in the business, condition (financial
or other), results of operations or prospects of the Company and the
Subsidiaries taken as a whole, except as described in the Prospectus
(exclusive of any amendment or supplement thereto);
(ii) trading in securities generally on the New York or
American Stock Exchange shall have been suspended or minimum or
maximum prices shall have been established on any such exchange;
(iii) a banking moratorium shall have been declared by New York
or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (c) any material change in the
financial markets of the United States which, in the sole judgment of
the Underwriters, makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Securities as
contemplated by the Registration Statement, as amended as of the date
hereof.
(b) Termination of this Agreement pursuant to this Section 10
shall be without liability of any party to any other party except as
provided in Section 9 hereof.
11. Defaulting Underwriters. If, on the Closing Date, any
-----------------------
one or more of the Underwriters shall fail or refuse to purchase Securities
that it or they have agreed to purchase hereunder and the aggregate
principal amount of Securities with respect to which such default occurs
(the "Defaulted Securities") is not more than one-tenth of the aggregate
--------------------
principal amount of Securities to be purchased by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the principal amount of Securities set forth opposite its name on
Annex A bears to the total principal amount of Defaulted Securities, to
- -------
purchase Defaulted Securities. If, on the Closing Date, any one or more
Underwriters shall fail or refuse to purchase Securities which it or they
<PAGE>
-32-
have agreed to purchase hereunder and the aggregate principal amount of
Securities with respect to which such default occurs is more than one-tenth
of the aggregate principal amount of Securities to be purchased by all
Underwriters and arrangements satisfactory to you and the Company for the
purchase of such Defaulted Securities are not made within 36 hours after
such default, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter or of the Company, except as provided in
Section 13. In any such case which does not result in termination of this
Agreement, you shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and the Prospectus or in any other
documents or arrangements may be effected. No action taken under this
paragraph shall relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
12. Notices. All communications hereunder shall be in
-------
writing and, if sent to the Underwriters, shall be mailed or delivered or
telecopied and confirmed in writing to the Underwriters c/o BT Securities
Corporation, One Bankers Trust Plaza, New York, New York 10005, Attention:
[Gerry McConnell], with a copy to Cahill Gordon & Reindel, 80 Pine Street,
New York, New York 10005, Attention: Michael A. Becker, Esq., and if sent
to the Company, shall be mailed, delivered or telegraphed and confirmed in
writing to Attention:
[ ], with a copy to Latham & Watkins, 633 West Fifth
Street, Suite 4000, Los Angeles, California 90071, Attention: Thomas C.
Sadler, Esq.
13. Successors. This Agreement shall inure to the benefit of
----------
and be binding upon the Underwriters, the Company, and their respective
successors and legal representatives, and nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any other person
any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained; this Agreement and all
conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person; provided, however, that (i) the indemnities of the Company
-------- -------
contained in Section 8 of this Agreement shall also be for the benefit of
the other Underwriter Indemnitees and (ii) the indemnities of the
Underwriters contained in Section 8 of this Agreement shall also be for the
benefit of the other Company Indemnitees. No purchaser
<PAGE>
-33-
of any of the Securities from the Underwriters will be deemed a successor
because of such purchase.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
--------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAW.
15. Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
<PAGE>
-34-
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement between
the Company and the Underwriters.
Very truly yours,
SMITH'S FOOD & DRUG CENTERS, INC.
By: ______________________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
BT SECURITIES CORPORATION
CS FIRST BOSTON CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
By: BT SECURITIES CORPORATION
By: _____________________________
Name:
Title:
<PAGE>
Annex A
-------
<TABLE>
<CAPTION>
Principal Amount
Underwriter of Securities
- ----------- ----------------
<S> <C>
BT Securities Corporation
CS First Boston Corporation
Donaldson, Lufkin & Jenrette
Securities Corporation
Goldman, Sachs & Co.
Chase Securities Inc.
----------------
$575,000,000
</TABLE>
<PAGE>
Annex B
-------
Subsidiaries
------------
<PAGE>
EXHIBIT 4.1
- --------------------------------------------------------------------------------
SMITH'S FOOD & DRUG CENTERS, INC.
AND
[ ],
as Trustee
_________________
INDENTURE
Dated as of May 23, 1996
_________________
$575,000,000
% Senior Subordinated Notes
due 2007
- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- ------- ---------
<S> <C>
310(a)(1).......................................... 8.10
(a)(2).......................................... 8.10
(a)(3).......................................... N.A.
(a)(4).......................................... N.A.
(a)(5).......................................... 8.10; 8.11
(b)............................................. 8.08; 8.10;
13.02
(c)............................................. N.A.
311(a)............................................. 8.11
(b)............................................. 8.11
(c)............................................. N.A.
312(a)............................................. 2.05
(b)............................................. 13.03
(c)............................................. 13.03
313(a)............................................. 8.06
(b)(1).......................................... N.A.
(b)(2).......................................... 8.06
(c)............................................. 8.06; 13.02
(d)............................................. 8.06
314(a)............................................. 5.07; 5.09;
13.02
(b)............................................. N.A.
(c)(1).......................................... 8.02; 13.04
(c)(2).......................................... 8.02; 13.04
(c)(3).......................................... N.A.
(d)............................................. N.A.
(e)............................................. 13.05
(f)............................................. N.A.
315(a)............................................. 8.01(b)
(b)............................................. 8.05; 13.02
(c)............................................. 8.01(a)
(d)............................................. 8.01(c)
(e)............................................. 7.11
316(a)(last sentence).............................. 2.09
(a)(1)(A)....................................... 7.05
(a)(1)(B)....................................... 7.04
(a)(2).......................................... N.A.
(b)............................................. 7.07
(c).............................................
317(a)(1).......................................... 7.08
(a)(2).......................................... 7.09
(b)............................................. 2.04
318(a)............................................. 13.01
(c)............................................. 13.01
</TABLE>
______________________
N.A. means Not Applicable
NOTE: This Cross-Reference Table shall not, for any purpose,
be deemed to be a part of the Indenture.
-i-
<PAGE>
TABLE OF CONTENTS
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1.01 Definitions..................................... 1
Section 1.02 Incorporation by Reference of TIA............... 32
Section 1.03 Rules of Construction........................... 33
ARTICLE TWO
THE SECURITIES
Section 2.01 Form and Dating................................. 33
Section 2.02 Execution and Authentication.................... 34
Section 2.03 Registrar and Paying Agent...................... 35
Section 2.04 Paying Agent To Hold Assets in
Trust......................................... 36
Section 2.05 Holder Lists.................................... 36
Section 2.06 Transfer and Exchange........................... 36
Section 2.07 Replacement Securities.......................... 37
Section 2.08 Outstanding Securities.......................... 37
Section 2.09 Treasury Securities............................. 38
Section 2.10 Temporary Securities............................ 38
Section 2.11 Cancellation.................................... 38
Section 2.12 Defaulted Interest.............................. 39
Section 2.13 CUSIP Number.................................... 39
ARTICLE THREE
REDEMPTION
Section 3.01 Notices to Trustee.............................. 40
Section 3.02 Selection of Securities To Be
Redeemed...................................... 40
Section 3.03 Notice of Redemption............................ 41
Section 3.04 Effect of Notice of Redemption.................. 42
Section 3.05 Deposit of Redemption Price..................... 42
Section 3.06 Securities Redeemed in Part..................... 42
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE FOUR
SUBORDINATION
Section 4.01 Securities Subordinated to Senior
Indebtedness.................................. 43
Section 4.02 Suspension of Payment When Senior
Indebtedness in Default....................... 43
Section 4.03 Securities Subordinated to Prior
Payment of All Senior
Indebtedness on Dissolution,
Liquidation or Reorganization of
Company....................................... 45
Section 4.04 Holders To Be Subrogated to Rights
of Holders of Senior
Indebtedness.................................. 47
Section 4.05 Obligations of the Company
Unconditional................................. 48
Section 4.06 Trustee Entitled To Assume
Payments Not Prohibited in
Absence of Notice............................. 48
Section 4.07 Application by Trustee of Assets
Deposited with It............................. 49
Section 4.08 No Waiver of Subordination
Provisions.................................... 49
Section 4.09 Holders Authorize Trustee To
Effectuate Subordination of
Securities.................................... 50
Section 4.10 Right of Trustee To Hold Senior
Indebtedness.................................. 51
Section 4.11 No Suspension of Remedies....................... 51
Section 4.12 No Fiduciary Duty of Trustee to
Holders of Senior Indebtedness................ 52
ARTICLE FIVE
COVENANTS
Section 5.01 Payment of Securities........................... 52
Section 5.02 Maintenance of Office or Agency................. 52
Section 5.03 Limitation on Restricted Payments............... 53
Section 5.04 Corporate Existence............................. 54
Section 5.05 Payment of Taxes and Other Claims............... 55
Section 5.06 Maintenance of Properties and
Insurance..................................... 55
Section 5.07 Compliance Certificate; Notice of
Default....................................... 56
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 5.08 Compliance with Laws............................ 57
Section 5.09 SEC Reports..................................... 57
Section 5.10 Waiver of Stay, Extension or Usury
Laws.......................................... 58
Section 5.11 Limitation on Transactions with
Affiliates.................................... 58
Section 5.12 Limitation on Incurrences of
Additional Indebtedness....................... 60
Section 5.13 Limitation on Dividends and Other
Payment Restrictions Affecting
Subsidiaries.................................. 61
Section 5.14 Limitation on Liens............................. 62
Section 5.15 Limitation on Change of Control................. 62
Section 5.16 Limitation on Asset Sales....................... 65
Section 5.17 Limitation on Subsidiary Assets
and Indebtedness.............................. 68
Section 5.18 Limitation on Preferred Stock of
Restricted Subsidiaries....................... 68
Section 5.19 Limitation on Other Senior
Subordinated Indebtedness..................... 70
Section 5.20 Limitation on Restricted and
Unrestricted Subsidiaries..................... 70
ARTICLE SIX
SUCCESSOR CORPORATION
Section 6.01 Limitation on Mergers and Certain
Other Transactions............................ 71
Section 6.02 Successor Corporation Substituted............... 72
ARTICLE SEVEN
DEFAULT AND REMEDIES
Section 7.01 Events of Default............................... 73
Section 7.02 Acceleration.................................... 74
Section 7.03 Other Remedies.................................. 75
Section 7.04 Waiver of Past Defaults......................... 76
Section 7.05 Control by Majority............................. 76
Section 7.06 Limitation on Suits............................. 76
Section 7.07 Rights of Holders To Receive
Payment....................................... 77
Section 7.08 Collection Suit by Trustee...................... 77
Section 7.09 Trustee May File Proofs of Claim................ 78
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 7.10 Priorities...................................... 78
Section 7.11 Rights and Remedies Cumulative.................. 79
Section 7.12 Delay or Omission Not Waiver.................... 79
Section 7.13 Undertaking for Costs........................... 79
ARTICLE EIGHT
TRUSTEE
Section 8.01 Duties of Trustee............................... 80
Section 8.02 Rights of Trustee............................... 81
Section 8.03 Individual Rights of Trustee.................... 82
Section 8.04 Trustee's Disclaimer............................ 82
Section 8.05 Notice of Default............................... 82
Section 8.06 Reports by Trustee to Holders................... 83
Section 8.07 Compensation and Indemnity...................... 83
Section 8.08 Replacement of Trustee.......................... 84
Section 8.09 Successor Trustee by Merger, Etc................ 85
Section 8.10 Eligibility; Disqualification................... 85
Section 8.11 Preferential Collection of Claims
Against Company............................... 86
ARTICLE NINE
SATISFACTION AND DISCHARGE OF INDENTURE
Section 9.01 Termination of the Company's
Obligations................................... 86
Section 9.02 Legal Defeasance and Covenant
Defeasance.................................... 88
Section 9.03 Application of Trust Money...................... 92
Section 9.04 Repayment to the Company or the
Guarantors.................................... 93
Section 9.05 Reinstatement................................... 93
ARTICLE TEN
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 10.01 Without Consent of Holders...................... 94
Section 10.02 With Consent of Holders......................... 94
Section 10.03 Compliance with TIA............................. 96
Section 10.04 Revocation and Effect of Consents............... 97
</TABLE>
-v-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 10.05 Notation on or Exchange of
Securities.................................... 97
Section 10.06 Trustee To Sign Amendments, Etc................. 98
ARTICLE ELEVEN
GUARANTEE
Section 11.01 Unconditional Guarantee......................... 98
Section 11.02 Subordination of Guarantee...................... 99
Section 11.03 Severability.................................... 100
Section 11.04 Release of a Guarantor.......................... 100
Section 11.05 Limitation of Guarantor's
Liability..................................... 100
Section 11.06 Guarantors May Consolidate, etc.,
on Certain Terms.............................. 101
Section 11.07 Contribution.................................... 102
Section 11.08 Waiver of Subrogation........................... 103
Section 11.09 Execution of Guarantee.......................... 103
Section 11.10 Waiver of Stay, Extension or Usury
Laws.......................................... 104
ARTICLE TWELVE
SUBORDINATION OF GUARANTEE OBLIGATIONS
Section 12.01 Guarantee Obligations Subordinated
to Guarantor Senior Indebtedness.............. 105
Section 12.02 Suspension of Guarantee
Obligations When Guarantor
Senior Indebtedness in Default................ 105
Section 12.03 Guarantee Obligations Subordinated
to Prior Payment of All
Guarantor Senior Indebtedness on
Dissolution, Liquidation or
Reorganization of Such Guarantor.............. 107
Section 12.04 Holders of Guarantee Obligations
To Be Subrogated to Rights of
Holders of Guarantor Senior
Indebtedness.................................. 109
Section 12.05 Obligations of the Guarantors
Unconditional................................. 110
Section 12.06 Trustee Entitled To Assume
Payments Not Prohibited in
Absence of Notice............................. 111
</TABLE>
-vi-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 12.07 Application by Trustee of Assets
Deposited with It............................. 111
Section 12.08 No Waiver of Subordination
Provisions.................................... 112
Section 12.09 Holders Authorize Trustee To
Effectuate Subordination of
Guarantee Obligations......................... 113
Section 12.10 Right of Trustee To Hold Guarantor
Senior Indebtedness........................... 113
Section 12.11 No Suspension of Remedies....................... 114
Section 12.12 No Fiduciary Duty of Trustee to
Holders of Guarantor Senior
Indebtedness.................................. 114
ARTICLE THIRTEEN
MISCELLANEOUS
Section 13.01 TIA Controls.................................... 114
Section 13.02 Notices......................................... 115
Section 13.03 Communications by Holders with
Other Holders................................. 116
Section 13.04 Certificate and Opinion as to
Conditions Precedent.......................... 116
Section 13.05 Statements Required in Certificate
or Opinion.................................... 117
Section 13.06 Rules by Trustee, Paying Agent,
Registrar..................................... 117
Section 13.07 Legal Holidays.................................. 117
Section 13.08 Governing Law................................... 118
Section 13.09 No Adverse Interpretation of Other
Agreements.................................... 118
Section 13.10 No Recourse Against Others...................... 118
Section 13.11 Successors...................................... 118
Section 13.12 Duplicate Originals............................. 118
Section 13.13 Severability.................................... 118
Section 13.14 No Violation.................................... 119
Signatures........................................................ S-1
Exhibit A - Form of Note
</TABLE>
Note: This Table of Contents shall not, for any purpose, be
deemed to be part of the Indenture.
-vii-
<PAGE>
INDENTURE dated as of May 23, 1996, between SMITH'S
FOOD & DRUG CENTERS, INC., a Delaware corporation, and
, a
corporation, as Trustee.
Each party hereto agrees as follows for the benefit
of each other party and for the equal and ratable benefit of
the Holders of the Company's % Senior Subordinated Notes due
2007 (the "Securities"):
----------
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
-----------
"Acquisition" means Cactus Acquisition, Inc., a
-----------
Delaware corporation and a wholly owned subsidiary of the
Company.
"Adjusted Net Assets" shall have the meaning provided
-------------------
in Section 11.07.
"Affiliate" means, with respect to any Person, any
---------
other Person directly or indirectly controlling or controlled
by or under direct or indirect common control with such
specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power
-------
to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms
"affiliated," "controlling" and "controlled" have meanings
---------- ----------- ----------
correlative to the foregoing. So long as the Management
Services Agreement is in effect or Yucaipa (together with its
Affiliates) owns voting securities representing more than 10%
of the total voting power of the then outstanding voting
securities entitled to vote on a regular basis for the Board of
Directors of the Company, Yucaipa and its Affiliates shall be
deemed Affiliates of the Company.
"Affiliate Transaction" shall have the meaning
---------------------
provided in Section 5.11(a).
"Agent" means any Registrar, Paying Agent or co-
-----
Registrar.
<PAGE>
-2-
"Alternate Offer" shall have the meaning provided in
---------------
Section 5.15(f).
"Asset Sale" means any sale, transfer or other
----------
disposition or series of sales, transfers or other dispositions
by the Company or any Restricted Subsidiary (including, without
limitation, any merger or consolidation of any Restricted
Subsidiary with or into another Person (other than the Company
or any wholly owned Restricted Subsidiary) whereby such
Restricted Subsidiary shall cease to be a Restricted
Subsidiary) to any Person (other than to the Company or a
wholly owned Restricted Subsidiary) of any assets of the
Company or any Restricted Subsidiary, including, without
limitation, assets consisting of any Capital Stock or other
securities held by the Company or any Restricted Subsidiary,
and any Capital Stock issued by any Restricted Subsidiary, in
each case, outside of the ordinary course of business,
excluding, however, any sale, transfer or other disposition, or
series of related sales, transfers or other dispositions (i)
resulting in Net Proceeds to the Company and the Restricted
Subsidiaries of $500,000 or less, (ii) pursuant to any
foreclosure of assets or other remedy provided by applicable
law to a creditor of the Company or any Subsidiary with a Lien
on such assets, which Lien is permitted under the Indenture;
provided that such foreclosure or other remedy is conducted in
a commercially reasonable manner or in accordance with any
Bankruptcy Law, (iii) involving only Cash Equivalents or
inventory in the ordinary course of business or obsolete
equipment in the ordinary course of business consistent with
past practices of the Company, (iv) involving only the lease or
sublease of any real or personal property in the ordinary
course of business, (v) pursuant to the California Disposition
or involving the assets described in Schedule 1.01 hereto or
-------------
(vi) resulting from (a) the designation of any Restricted
Subsidiary as an Unrestricted Subsidiary, or contribution to
the capital of any Unrestricted Subsidiary, in accordance with
the applicable provisions hereof or (b) the sale of the Capital
Stock of any Unrestricted Subsidiary or the sale of all or
substantially all of the assets of any Unrestricted Subsidiary.
"Average Life" means, as of any date of
------------
determination, with respect to any debt security, the quotient
obtained by dividing (i) the sum of the products of the number
of years from the date of determination to the dates of each
successive scheduled principal payments of such debt security
multiplied by the amount of each such principal payment by (ii)
the sum of all such principal payments.
<PAGE>
-3-
"Bankruptcy Law" means Title 11, U.S. Code or any
--------------
similar Federal, state or foreign law for the relief of
debtors.
"Board of Directors" means, with respect to any
------------------
Person, the Board of Directors of such Person or of a
subsidiary of such Person or any duly authorized committee of
that Board.
"Board Resolution" means, with respect to any Person,
----------------
a duly adopted resolution of the Board of Directors of such
Person.
"Business Day" means a day that is not a Legal
------------
Holiday.
"California Asset Disposition" means the disposition
----------------------------
by the Company of its real estate assets remaining in
California following the California Divestiture, as described
in the Prospectus.
"California Disposition" means the California
----------------------
Divestiture and the California Asset Disposition.
"California Divestiture" means the divestiture by the
----------------------
Company of its Southern California operations as described in
the Prospectus.
"Capital Stock" means, with respect to any Person,
-------------
any and all shares, interests, participation or other
equivalents (however designated) of corporate stock, including
each class of common stock and preferred stock of such Person.
"Capitalized Lease Obligation" means obligations
----------------------------
under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of
Indebtedness represented by such obligations shall be the
capitalized amount of such obligations determined in accordance
with GAAP.
"Cash Equivalents" means (i) obligations issued or
----------------
unconditionally guaranteed by the United States of America or
any agency thereof, or obligations issued by any agency or
instrumentality thereof and backed by the full faith and credit
of the United States of America, (ii) commercial paper rated
the highest grade by Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group and maturing not more than one
year from the date of creation thereof, (iii) time deposits with,
<PAGE>
-4-
and certificates of deposit and banker's acceptances issued
by, any bank having capital surplus and undivided
profits aggregating at least $500 million and maturing not more
than one year from the date of creation thereof, (iv)
repurchase agreements that are secured by a perfected security
interest in an obligation described in clause (i) and are with
any bank described in clause (iii), (v) shares of any money
market mutual fund that (a) has at least 95% of its assets
invested continuously in the types of investments referred to
in clauses (i) and (ii) above, (b) has net assets of not less
than $500 million, and (c) has the highest rating obtainable
from either Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. and (vi) readily marketable direct
obligations issued by any state of the United States of America
or any political subdivision thereof having one of the two
highest rating categories obtainable from either Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group.
"Change of Control" means the acquisition after the
-----------------
Issue Date, in one or more transactions, of beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange
Act) by (i) any Person (other than any Permitted Holder) or
(ii) any group (within the meaning of Section 13(d)(3) of the
Exchange Act) of Persons (excluding any Permitted Holders), in
either case, of any securities of the Company such that, as a
result of such acquisition, such Person or group beneficially
owns (within the meaning of Rule 13d-3 under the Exchange Act),
directly or indirectly, voting securities representing 40% or
more of the total voting power of the then outstanding voting
securities entitled to vote on a regular basis for the Board of
Directors of the Company (but only to the extent that such
beneficial ownership is not shared with any Permitted Holder
who has the power to direct the vote thereof); provided,
--------
however, that no such Change of Control shall be deemed to have
- -------
occurred if (A) the Permitted Holders beneficially own, in the
aggregate, at such time, voting securities representing a
greater percentage of such voting power than such other Person
or group or (B) at the time of such acquisition, the Permitted
Holders (or any of them) possess the ability (by contract or
otherwise) to elect, or cause the election, of a majority of
the members of the Company's Board of Directors.
"Change of Control Date" shall have the meaning
----------------------
provided in Section 5.15.
"Change of Control Offer" shall have the meaning
-----------------------
provided in Section 5.15.
<PAGE>
-5-
"Change of Control Offer Price" shall have the
-----------------------------
meaning provided in Section 5.15.
"Change of Control Payment Date" shall have the
------------------------------
meaning provided in Section 5.15.
"Commission" means the Securities and Exchange
----------
Commission.
"Common Stock" means, with respect to any Person, any
------------
and all shares, interests or other participations in, and other
equivalents (however designated and whether voting or
nonvoting) of, such Person's common stock, whether outstanding
at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common
stock.
"Company" means Smith's Food & Drug Centers, Inc., a
-------
Delaware corporation.
"Consent Solicitations" means the consents solicited
---------------------
from holders of the Smitty's Securities to certain amendments
to the respective indentures under which the Smitty's
Securities were issued.
"Consolidated Interest Expense" means for any period,
-----------------------------
the aggregate amount of interest, whether expensed or
capitalized, paid, accrued or scheduled to be paid or accrued
during such period (except to the extent accrued in a prior
period) in respect of all Indebtedness of the Company and the
Restricted Subsidiaries (including (a) original issue discount
on any Indebtedness (including (without duplication), in the
case of the Company, any original issue discount on the
Securities but excluding amortization of debt issuance costs)
and (b) the interest portion of all deferred payment
obligations, calculated in accordance with the effective
interest method, in each case to the extent attributable to
such period but excluding the amortization of debt issuance
costs). For purposes of this definition, (a) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by the Company to be the
rate of interest implicit in such Capitalized Lease Obligation
in accordance with GAAP, (b) interest on Indebtedness that is
determined on a fluctuating basis shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest
of such Indebtedness in effect on the date Consolidated
Interest Expense is being calculated, (c) interest on
Indebtedness that may optionally be determined at an interest
rate based upon a factor of a prime
<PAGE>
-6-
or similar rate, a eurocurrency interbank offered rate, or
other rate, shall be deemed to have been based upon the rate
actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate, and (d) Consolidated
Interest Expense shall be increased or reduced by the net cost
(including amortization of discount) or benefit associated with
Interest Swap Obligations attributable to such period.
"Consolidated Net Income" means for any period, the
-----------------------
aggregate of the net income (or loss) of the Company and the
Restricted Subsidiaries for such period on a consolidated
basis, determined in accordance with GAAP; provided that (a)
the net income of any other Person in which the Company or any
Restricted Subsidiary has an interest (which interest does not
cause the net income of such other Person to be consolidated
with the net income of the Company and the Restricted
Subsidiaries in accordance with GAAP) shall be included only to
the extent of the amount of dividends or distributions actually
paid to the Company or such Restricted Subsidiary by such other
Person in such period; (b) the net income of any Restricted
Subsidiary that is subject to any Payment Restriction shall be
excluded to the extent such Payment Restriction would actually
prevent the payment of an amount that otherwise could have been
paid to, or received by, the Company or a Restricted Subsidiary
not subject to any Payment Restriction; and (c)(i) the net
income (or loss) of any other Person acquired in a pooling of
interests transaction for any period prior to the date of such
acquisition, (ii) all gains and losses realized on any Asset
Sale or any other sale of assets that would constitute an
"Asset Sale" but for the exceptions set forth in clauses (i),
(ii), (v), or (vi) of the definition thereof; (iii) all gains
realized upon or in connection with or as a consequence of the
issuance of the Capital Stock of the Company or any Restricted
Subsidiary and any gains on pension reversions received by the
Company or any Restricted Subsidiary, (iv) all gains and losses
realized on the purchase or other acquisition by the Company or
any Restricted Subsidiary of any securities of the Company or
any Restricted Subsidiary, (v) all gains and losses resulting
from the cumulative effect of any accounting change pursuant to
the application of Accounting Principles Board Opinion No. 20,
as amended, or Statement of Financial Accounting Standards
No. 121, (vi) all other extraordinary gains and losses,
(vii) (A) all non-cash charges, (B) all severance, deferred
compensation or other employee termination costs, (C) up to $20
million of compensation expenses resulting from the repurchase
or amendment of certain management stock options, (D) all debt
refinancing premiums and (E) any other reserves or charges
<PAGE>
-7-
(provided, however, that any net cash payments actually made
-------- -------
(after-tax) with respect to the liabilities for which such
reserves or charges were created shall be deducted from
Consolidated Net Income in the period when made), in each case
under this clause (vii), recorded by the Company or any
Restricted Subsidiary in connection with the Transactions and
the California Disposition, including, without limitation, the
integration of operations in the State of Arizona,
(viii) losses incurred by the Company and the Restricted
Subsidiaries resulting from earthquakes and (ix) with respect
to the Company and the Restricted Subsidiaries, all deferred
financing costs written off in connection with the early
extinguishment of any Indebtedness, shall each be excluded.
"Consolidated Net Worth" means, with respect to any
----------------------
Person, the total stockholders' equity (exclusive of any
Disqualified Capital Stock) of such Person and its Restricted
Subsidiaries determined on a consolidated basis in accordance
with GAAP.
"Credit Agent" means, at any time, the then-acting
------------
Administrative Agent as defined in and under the Credit
Agreement, which initially shall be Bankers Trust Company. The
Company shall promptly notify the Trustee of any change in the
Credit Agent.
"Credit Agreement" means the Credit Agreement, dated
----------------
as of the Issue Date, by and among Smith's as borrower, its
subsidiaries as guarantors, the Lenders referred to therein,
Bankers Trust Company and The Chase Manhattan Bank, as
arrangers, and Bankers Trust Company, as administrative agent,
as the same may be amended, extended, renewed, restated,
supplemented or otherwise modified (in each case, in whole or
in part, and without limitation as to amount, terms,
conditions, covenants and other provisions) from time to time,
and any agreement governing Indebtedness Incurred to refund,
replace or refinance any borrowings and commitments then
outstanding or permitted to be outstanding under such Credit
Agreement or any such prior agreement as the same may be
amended, extended, renewed, restated, supplemented or otherwise
modified (in each case, in whole or in part, and without
limitation as to amount, terms, conditions, covenants and other
provisions). The term "Credit Agreement" shall include all
----------------
related or ancillary documents, including, without limitation,
any guarantee agreements and security documents. The Company
shall promptly notify the Trustee of any such refunding or
refinancing of the Credit Agreement.
<PAGE>
-8-
"Custodian" means any receiver, trustee, assignee,
---------
liquidator, sequestrator or similar official under any
Bankruptcy Law.
"Default" means any event or condition that is, or
-------
after notice or passage of time or both would be, an Event of
Default.
"Designated Senior Indebtedness" means (i) in the
------------------------------
event any Indebtedness is outstanding under the Credit
Agreement, all Senior Indebtedness under the Credit Agreement
and (ii) if no Indebtedness is outstanding under the Credit
Agreement, any other issue of Senior Indebtedness which (a) at
the time of the determination is equal to or greater than $50
million in aggregate principal amount and (b) is specifically
designated in the instrument evidencing such Senior
Indebtedness as "Designated Senior Indebtedness" by the
Company. For purposes of this definition, the term "Credit
------
Agreement" shall not include any agreement governing
- ---------
Indebtedness Incurred to refund, replace or refinance
borrowings or commitments under the Credit Agreement other than
any such agreements governing Indebtedness Incurred to refund,
replace or refinance the entirety of the borrowings and
commitments then outstanding or permitted to be outstanding
thereunder.
"Disqualified Capital Stock" means, with respect to
--------------------------
any Person, any Capital Stock of such Person or its
subsidiaries that, by its terms, by the terms of any agreement
related thereto or by the terms of any security into which it
is convertible, puttable or exchangeable, is, or upon the
happening of any event or the passage of time would be,
required to be redeemed or repurchased by such Person or its
subsidiaries, including at the option of the holder thereof, in
whole or in part, or has, or upon the happening of an event or
passage of time would have, a redemption or similar payment due
on or prior to the Maturity Date, or any other Capital Stock of
such Person or its subsidiaries designated as Disqualified
Capital Stock by such Person at the time of issuance; provided,
--------
however, that if such Capital Stock is either (i) redeemable or
- -------
repurchasable solely at the option of such Person or (ii)
issued to employees of the Company or the Subsidiaries or to
any plan for the benefit of such employees, such Capital Stock
shall not constitute Disqualified Capital Stock unless so
designated.
"EBITDA" means, for any period, the Consolidated Net
------
Income for such period, plus, in each case to the extent
----
<PAGE>
-9-
deducted in computing Consolidated Net Income for such period
(without duplication) (i) provisions for income taxes or
similar charges recognized by the Company and the Restricted
Subsidiaries accrued during such period, (ii) depreciation and
amortization expense of the Company and the Restricted
Subsidiaries accrued during such period (but only to the extent
not included in Consolidated Interest Expense), (iii)
Consolidated Interest Expense of the Company and the Restricted
Subsidiaries for such period, (iv) LIFO charges (credits) of
the Company and the Restricted Subsidiaries for such period,
(v) the amount of any restructuring reserve or charge recorded
during such period in accordance with GAAP, including any such
reserve or charge related to the Transactions or the California
Disposition, less, without duplication, the amount of all net
----
cash payments made by the Company and the Restricted
Subsidiaries during such period to the extent that such cash
payments have been provided for in a restructuring reserve or
charge referred to in clause (v) above (and were not otherwise
deducted in the computation of EBITDA for such period).
"Event of Default" shall have the meaning provided in
----------------
Section 7.01.
"Exchange Act" means the Securities Exchange Act of
------------
1934, as amended, and the rules and regulations promulgated by
the Commission thereunder.
"Exchange Debentures" means the Company's [ ]%
-------------------
Subordinated Exchange Debentures due 2008 issuable at the
option of the Company in exchange for all of the outstanding
shares of New Preferred Stock and any such debentures paid in
lieu of cash interest thereon in accordance with the terms
thereof.
"Existing Indebtedness" means all indebtedness of the
---------------------
Company and the Restricted Subsidiaries to the extent
outstanding on the Issue Date after giving effect to the
Transactions (other than Indebtedness under the Credit
Agreement and the Indenture), including operating leases
outstanding on the Issue Date that are, or may be, required
under GAAP to be reported or reclassified after the Issue Date
as Capitalized Lease Obligations.
"Foreign Exchange Agreement" means any foreign
--------------------------
exchange contract, currency swap agreement or other similar
agreement or arrangement designed to protect against
fluctuations in currency values.
<PAGE>
-10-
"GAAP" means generally accepted accounting principles
----
in effect in the United States of America as of the date of
this Indenture.
"Guarantee" shall have the meaning set forth in
---------
Section 5.17.
"Guarantee Obligations" shall have the meaning
---------------------
provided in Section 12.01.
"Guarantor" means each Person that becomes a
---------
guarantor of the Securities in compliance with the provisions
set forth in Section 5.17.
"Guarantor Payment Blockage Period" shall have the
---------------------------------
meaning provided in Section 12.02.
"Guarantor Senior Indebtedness" means, with respect
-----------------------------
to any Guarantor, the principal of, premium, if any, and
interest on, and all other Obligations with respect to, any
Indebtedness of such Guarantor, whether outstanding on the
Issue Date or thereafter Incurred, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing
the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of
payment to the Guarantee of such Guarantor. Without limiting
the generality of the foregoing, "Guarantor Senior
----------------
Indebtedness" shall include (x) the principal of, premium, if
- ------------
any, and interest on all Obligations of every nature of such
Guarantor from time to time owed to the lenders under the
Credit Agreement, including, without limitation, the Letter of
Credit Obligations and principal of and interest on, and all
fees, indemnities and expenses payable under the Credit
Agreement, and (y) interest accruing thereon subsequent to the
occurrence of any Event of Default specified in clause (vi) or
(vii) in Section 7.01 relating to such Guarantor, whether or
not the claim for such interest is allowed under any applicable
Bankruptcy Law. Notwithstanding the foregoing, "Guarantor
---------
Senior Indebtedness" shall not include (a) Indebtedness
- -------------------
evidenced by the Guarantee of such Guarantor, (b) Indebtedness
that is expressly subordinate or junior in right of payment to
any Indebtedness of such Guarantor, (c) Indebtedness which,
when incurred and without respect to any election under Section
1111(b) of Title 11, United States Code, is without recourse to
such Guarantor (other than Capitalized Lease Obligations),
(d) Indebtedness which is represented by Disqualified Capital
Stock, (e) obligations for goods, materials or services
purchased in the
<PAGE>
-11-
ordinary course of business or obligations consisting of trade
payables, (f) Indebtedness of or amounts owed by such Guarantors
for compensation to employees or for services rendered to such
Guarantors, (g) any liability for federal, state, local or other
taxes owed or owing by such Guarantor, (h) Indebtedness of such
Guarantor representing a guarantee of Subordinated Indebtedness
or Pari Passu Indebtedness (in each case, with respect to the
Securities or any Guarantee) of the Company or any other
Guarantor, (i) Indebtedness of such Guarantor to a Subsidiary of
the Company and (j) that portion of any Indebtedness which is
incurred by such Guarantor in violation of this Indenture.
"Holder" means the Person in whose name a Security is
------
registered on the Registrar's books.
"Incur" means, with respect to any Indebtedness or
-----
other obligation of any Person, to create, issue, incur (by
conversion, exchange or otherwise), assume, guarantee or
otherwise become liable in respect of such Indebtedness or
other obligations or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation
on the balance sheet of such Person (and "Incurrence,"
----------
"Incurred" and "Incurring" shall have meanings correlative to
-------- ---------
the foregoing).
"Indebtedness" means with respect to any Person,
------------
without duplication, (i) all liabilities, contingent or
otherwise, of such Person (a) for borrowed money (whether or
not the recourse of the lender is to the whole of the assets of
such Person or only to a portion thereof), (b) evidenced by
bonds, notes, debentures, drafts accepted or similar
instruments or letters of credit or representing the balance
deferred and unpaid of the purchase price of any property
(other than any such balance that represents an account payable
or any other monetary obligation to a trade creditor (whether
or not an Affiliate) Incurred by such Person in the ordinary
course of business of such Person in connection with obtaining
goods, materials or services and due within twelve months (or
such longer period for payment as is customarily extended by
such trade creditor) of the Incurrence thereof, which account
is not overdue by more than 90 days, according to the original
terms of sale, unless such account payable is being contested
in good faith), or (c) for the payment of money relating to a
Capitalized Lease Obligation; (ii) the maximum fixed repurchase
price of all Disqualified Capital Stock of such Person; (iii)
reimbursement obligations of such Person with respect to
letters of credit; (iv) obligations of such Person with respect
to
<PAGE>
-12-
Interest Swap Obligations and Foreign Exchange Agreements;
(v) all liabilities of others of the kind described in the
preceding clause (i), (ii), (iii) or (iv) that such Person has
guaranteed or that is otherwise its legal liability; and (vi)
all obligations of others secured by a Lien to which any of the
properties or assets (including, without limitation, leasehold
interests and any other tangible or intangible property rights)
of such Person are subject, whether or not the obligations
secured thereby shall have been assumed by such Person or shall
otherwise be such Person's legal liability (provided that if
the obligations so secured have not been assumed by such Person
or are not otherwise such Person's legal liability, such
obligations shall be deemed to be in an amount equal to the
fair market value of such properties or assets, as determined
in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution). For
purposes of the preceding sentence, the "maximum fixed
-------------
repurchase price" of any Disqualified Capital Stock that does
- ----------------
not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Capital Stock as
if such Disqualified Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined
pursuant to this Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital
Stock (or any equity security for which it may be exchanged or
converted), such fair market value shall be determined in good
faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution.
"Indenture" means this Indenture, as amended or
---------
supplemented from time to time in accordance with the terms
hereof.
"Independent Financial Advisor" means a reputable
-----------------------------
accounting, appraisal or nationally recognized investment
banking or consulting firm that is, in the reasonable judgment
of the Board of Directors of the Company, qualified to perform
the tasks for which such firm has been engaged and independent
with respect to the Company and its Affiliates.
"Interest Payment Date" means the stated maturity of
---------------------
an installment of interest on the Securities.
"Interest Swap Obligation" means any obligation of
------------------------
any Person pursuant to any arrangement with any other Person
whereby, directly or indirectly, such Person is entitled to
receive from time to time periodic payments calculated by
<PAGE>
-13-
applying either a fixed or floating rate of interest on a
stated notional amount in exchange for periodic payments made
by such Person calculated by applying a fixed or floating rate
of interest on the same notional amount; provided that the term
--------
"Interest Swap Obligation" shall also include interest rate
------------------------
exchange, collar, cap, swap option or similar agreements
providing interest rate protection.
"Investment" by any Person in any other Person means
----------
any investment by such Person in such other Person, whether by
share purchase, capital contribution, loan, advance (other than
reasonable loans and advances to employees for moving and
travel expenses, as salary advances or to permit the purchase
of Qualified Capital Stock of the Company and other similar
customary expenses incurred, in each case in the ordinary
course of business consistent with past practice) or similar
credit extension constituting Indebtedness of such other
Person, and any guarantee of Indebtedness of any other Person.
In addition, for purposes of the covenant described in Section
5.03, (i) an "Investment" shall be deemed to have been made at
----------
the time any Restricted Subsidiary is designated as an
Unrestricted Subsidiary in an amount (proportionate to the
Company's equity interest in such Subsidiary) equal to the net
worth of such Restricted Subsidiary at the time that such
Restricted Subsidiary is designated as an Unrestricted
Subsidiary; and (ii) at any date the aggregate of all
Restricted Payments made as Investments since the Issue Date
shall exclude and be reduced by an amount (proportionate to the
Company's equity interest in such Subsidiary) equal to the net
worth of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary
(in each case "net worth" to be calculated based upon the fair
---------
market value of the assets and liabilities of such Subsidiary
as of any such date of designation, as determined by the
Company's Board of Directors).
"Issue Date" means May 23, 1996, the date of original
----------
issuance of the Securities under the Indenture.
"Legal Holiday" shall have the meaning provided in
-------------
Section 13.07.
"Letter of Credit Obligations" means Indebtedness of
----------------------------
the Company or any of the Subsidiaries with respect to letters
of credit issued pursuant to the Credit Agreement, and for
purposes of determining the aggregate amount of Indebtedness at
any time, shall be deemed to consist of (a) the aggregate
<PAGE>
-14-
maximum amount then available to be drawn under all such
letters of credit (the determination of such maximum amount to
assume compliance with all conditions for drawing), and (b) the
aggregate amount that has then been paid by, and not reimbursed
to, the issuers under such letters of credit.
"Lien" means, with respect to any asset or property,
----
any mortgage, pledge, lien, encumbrance, charge or security
interest of any kind in respect of such asset or property,
whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any
option or other agreement to sell or give a security interest,
and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of
any jurisdiction); provided, however, that in no event shall an
-------- -------
operating lease be deemed to constitute a Lien.
"Management Services Agreement" means that certain
-----------------------------
Management Services Agreement dated as of the Issue Date,
between the Company and Yucaipa (as such Management Services
Agreement may be amended or replaced, so long as such amendment
or replacement has been approved by a majority of the
Independent Directors (as defined in the Standstill Agreement)
and is not disadvantageous to the Holders in any material
respect).
"Maturity Date" means May 15, 2007.
-------------
"Merger" means the merger of Acquisition with and
------
into Smitty's pursuant to the Recapitalization Agreement.
"Net Cash Proceeds" means Net Proceeds received in
-----------------
the form of cash or Cash Equivalents.
"Net Proceeds" means (a) in the case of any Asset
------------
Sale or any issuance and sale by any Person of Qualified
Capital Stock, the aggregate net proceeds received by such
Person after payment of expenses, taxes, commissions and the
like incurred in connection therewith (and, in the case of any
Asset Sale, net of the amount of cash applied to repay
Indebtedness secured by the asset involved in such Asset Sale),
whether such proceeds are in cash or in property (valued at the
fair market value thereof at the time of receipt as determined
with respect to any Asset Sale resulting in Net Proceeds in
excess of $10 million in good faith by the Board of Directors
of such Person, which determination shall be evidenced by a
Board Resolution) and (b) in the case of any conversion or
exchange of any
<PAGE>
-15-
outstanding Indebtedness or Disqualified Capital Stock of such
Person for or into shares of Qualified Capital Stock of the
Company, the sum of (i) the fair market value of the proceeds
received by the Company in connection with the issuance of such
Indebtedness or Disqualified Capital Stock on the date of such
issuance and (ii) any additional amount paid by the holder
thereof to the Company upon such conversion or exchange.
"Net Proceeds Offer" shall have the meaning provided
------------------
in Section 5.16(a).
"Obligations" means all obligations of every nature
-----------
whether for principal, reimbursements, interest, fees,
expenses, indemnities or otherwise, and whether primary,
secondary, direct, indirect, contingent, fixed or otherwise
(including obligations of performance) under the documentation
governing any Indebtedness.
"Offering" means the offerings of the Securities.
--------
"Officer" means, with respect to any Person, the
-------
Chairman of the Board, the President, any Vice President, the
Chief Financial Officer, the Controller, or the Secretary of
such Person.
"Officers' Certificate" means, with respect to any
---------------------
Person, a certificate signed by two Officers or by an Officer
and either an Assistant Treasurer or an Assistant Secretary of
such Person and otherwise complying with the requirements of
Sections 13.04 and 13.05.
"Operating Coverage Ratio" means the ratio of
------------------------
(1) EBITDA for the period (the "Pro Forma Period") consisting
----------------
of the most recent four full fiscal quarters for which
financial information in respect thereof is available
immediately prior to the date of the transaction giving rise to
the need to calculate the Operating Coverage Ratio (the
"Transaction Date") to (2) the Consolidated Interest Expense
----------------
for the fiscal quarter in which the Transaction Date occurs and
the three fiscal quarters immediately subsequent to such fiscal
quarter (the "Forward Period") reasonably anticipated by the
--------------
Board of Directors of the Company to become due from time to
time during such period. For purposes of this definition, if
the Transaction Date occurs prior to the first anniversary of
the Transactions, "EBITDA" for the Pro Forma Period shall be
calculated after giving effect on a pro forma basis to the
Transactions and the California Disposition as if they had
occurred on the first day
<PAGE>
-16-
of the Pro Forma Period. In addition to, but without duplication
of, the foregoing, for purposes of this definition, "EBITDA"
shall be calculated after giving effect (without duplication), on
a pro forma basis for the Pro Forma Period (but no longer), to
(a) any Investment, during the period commencing on the first day
of the Pro Forma Period to and including the Transaction Date
(the "Reference Period"), in any other Person that, as a result
----------------
of such Investment, becomes a Restricted Subsidiary, (b) the
acquisition, during the Reference Period (by merger,
consolidation or purchase of stock or assets) of any business or
assets, which acquisition is not prohibited by this Indenture,
and (c) any sales or other dispositions of any Restricted
Subsidiary or any line of business (or geographical area thereof)
of the Company or any Restricted Subsidiary occurring during the
Reference Period, in each case as if such incurrence, Investment,
repayment, acquisition or asset sale had occurred on the first
day of the Reference Period. In addition, for purposes of this
definition, "Consolidated Interest Expense" shall be calculated
after giving effect (without duplication), on a pro forma basis
for the Forward Period, to any Indebtedness Incurred or repaid on
or after the first day of the Forward Period and prior to the
Transaction Date. If the Company or any Restricted Subsidiary
directly or indirectly guarantees any Indebtedness of a third
Person, the Operating Coverage Ratio shall give effect to the
Incurrence of such Indebtedness as if the Company or such
Restricted Subsidiary had directly Incurred such guaranteed
Indebtedness.
"operating lease" means any lease the obligations
---------------
under which do not constitute Capitalized Lease Obligations.
"Opinion of Counsel" means a written opinion from
------------------
legal counsel who is reasonably acceptable to the Trustee
complying with the requirements of Sections 13.04 and 13.05.
Unless otherwise required by the Trustee, the legal counsel may
be an employee of or counsel to the Company or the Trustee.
"Pari Passu Indebtedness" means the Securities and
-----------------------
any Indebtedness of the Company which ranks pari passu in right
of payment with the Securities.
"Paying Agent" shall have the meaning provided in
------------
Section 2.03.
"Payment Restriction" means, with respect to a
-------------------
subsidiary of any Person, any encumbrance, restriction or
<PAGE>
-17-
limitation, whether by operation of the terms of its charter or
by reason of any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation, on the ability
of (i) such subsidiary to (a) pay dividends or make other
distributions on its Capital Stock or make payments on any
obligation, liability or Indebtedness owed to such Person or
any other subsidiary of such Person, (b) make loans or advances
to such Person or any other subsidiary of such Person or
(c) transfer any of its properties or assets to such Person or
any other subsidiary of such Person, or (ii) such Person or any
other subsidiary of such Person to receive or retain any such
(a) dividends, distributions or payments, (b) loans or advances
or (c) transfer of properties or assets.
"Permitted Holder" means (i) Yucaipa, or any entity
----------------
controlled thereby or any of the partners thereof, (ii) Jeffrey
P. Smith, Richard D. Smith, Fred L. Smith, Ida Smith, the Dee
Glen Smith Marital Trust I, Trust for the Children of Jeffrey
Paul Smith, Trust for the Children of Richard Dee Smith, and
Trust for the Children of Fred Lorenzo Smith, (iii) an employee
benefit plan of the Company, or any of its subsidiaries or any
participant therein, (iv) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any
of its subsidiaries or (v) any Permitted Transferee of any of
the foregoing Persons.
"Permitted Indebtedness" means:
----------------------
a. Indebtedness of the Company and the Restricted
Subsidiaries (and the Company and each Restricted Subsidiary
(to the extent it is not the primary obligor thereof) may
guarantee such Indebtedness) (i) under the Credit Agreement
(including the Letter of Credit Obligations) in an aggregate
principal amount at any time outstanding not to exceed $1,025.0
million, less all principal repayments of Term Loans and all
permanent commitment reductions under the revolving credit
facility, in each case, pursuant to and in accordance with
Section 5.16 hereof or (ii) Incurred under the Credit Agreement
pursuant to and in compliance with (x) clause (n) of this
definition and (y) the proviso of Section 5.12 hereof;
b. Indebtedness of a Restricted Subsidiary owed to
and held by the Company or a Restricted Subsidiary; or
Indebtedness of the Company owed to and held by a Restricted
Subsidiary;
<PAGE>
-18-
c. Indebtedness Incurred by the Company or any
Restricted Subsidiary in connection with the purchase or
improvement of property (real or personal) or equipment or
other capital expenditures in the ordinary course of business
(including for the purchase of assets or stock of any retail
grocery store or business) or consisting of Capitalized Lease
Obligations, provided that (i) at the time of the Incurrence
--------
thereof, such Indebtedness, together with any other
Indebtedness Incurred during the most recently completed four
fiscal quarter period in reliance upon this clause (c) does not
exceed, in the aggregate, 3% of net sales of the Company and
the Restricted Subsidiaries during the most recently completed
four fiscal quarter period on a consolidated basis (calculated
on a pro forma basis if the date of Incurrence is prior to the
end of the fourth fiscal quarter following the Issue Date) and
(ii) such Indebtedness, together with all then outstanding
Indebtedness Incurred in reliance upon this clause (c) does not
exceed, in the aggregate, 3% of the aggregate net sales of the
Company and the Restricted Subsidiaries during the most
recently completed twelve fiscal quarter period on a
consolidated basis (calculated on a pro forma basis if the date
of Incurrence is prior to the end of the twelfth fiscal quarter
following the Issue Date);
d. Indebtedness Incurred by the Company or any
Restricted Subsidiary in connection with expenditures in an
aggregate principal amount not to exceed $25.0 million;
provided that such expenditures relate solely to the
- --------
integration of the operations of Smith's, Smitty's and their
respective subsidiaries as described in the Prospectus;
e. Indebtedness of the Company Incurred under
Foreign Exchange Agreements and Interest Swap Obligations
entered into with respect to Indebtedness otherwise permitted
to be Incurred under Section 5.12 hereof, including this
definition of "Permitted Indebtedness" (other than this clause
(e)), in a notional amount not exceeding the aggregate
principal amount of such Indebtedness;
f. guarantees Incurred in the ordinary course of
business by the Company or a Restricted Subsidiary of
Indebtedness of any other Person in aggregate not to exceed
$20.0 million at any time outstanding;
g. Refinancing Indebtedness;
<PAGE>
-19-
h. Indebtedness of the Company or any Restricted
Subsidiary for letters of credit relating to workers'
compensation claims and self-insurance or similar requirements
in the ordinary course of business;
i. Existing Indebtedness;
j. Indebtedness arising from guarantees of
Indebtedness of the Company or any Restricted Subsidiary or
other agreements of the Company or a Restricted Subsidiary
providing for indemnification, adjustment of purchase price or
similar obligations, in each case, Incurred in connection with
the disposition of any business, assets or Restricted
Subsidiary, other than guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business,
assets or Restricted Subsidiary for the purpose of financing
such acquisition; provided, however, that the maximum aggregate
-------- -------
liability in respect of all such Indebtedness shall at no time
exceed the gross proceeds actually received by the Company and
the Restricted Subsidiary in connection with such disposition;
k. obligations in respect of performance bonds and
completion guarantees provided by the Company or any Restricted
Subsidiary in the ordinary course of business;
l. guarantees by the Company or a Restricted
Subsidiary of Indebtedness Incurred by the Company or a
Restricted Subsidiary so long as the Incurrence of such
Indebtedness by the Company or any such Restricted Subsidiary
is otherwise permitted by the terms of this Indenture;
m. Indebtedness Incurred by the Company in
connection with the transfer to the Company or a third party of
the California assets leased by the Company from certain trusts
and securing such trusts' obligations to the Smith's Food &
Drug Centers Inc. 1994-A Pass Through Trusts (the "Related
-------
Assets"); provided, however, that (i) if the Related Assets are
- ------ -------- -------
transferred to the Company, the Company shall consummate an
Asset Sale with respect to such Related Assets within 90 days
after the Incurrence of such Indebtedness and shall apply the
Net Proceeds of such Asset Sale to permanently reduce Pari
Passu Indebtedness, Indebtedness of any Restricted Subsidiary
or Senior Indebtedness, and (ii) if the Related Assets are
transferred to any Person other than the Company or any
Subsidiary, the Company shall, within 90 days after the
Incurrence of such Indebtedness, apply any proceeds received
from the owner trust in respect of such transfer of the Related
Assets to
<PAGE>
-20-
permanently reduce Pari Passu Indebtedness, Indebtedness of any
Restricted Subsidiary or Senior Indebtedness; provided, further,
-------- -------
however, that up to $5.0 million in aggregate amount of Net
- -------
Proceeds under clause (i) or proceeds under clause (ii) may be
applied to repay outstanding borrowings under the revolving
credit facility pursuant to the Credit Agreement without a
corresponding reduction in commitments; and
n. additional Indebtedness of the Company or any
Restricted Subsidiary (together with the Indebtedness Incurred
pursuant to clause (a)(ii) above) in an aggregate amount not to
exceed $140.0 million at any time outstanding.
"Permitted Investment" by any Person means (i) any
--------------------
Related Business Investment, (ii) Investments in securities not
constituting cash or Cash Equivalents and received in
connection with an Asset Sale made pursuant to Section 5.16
hereof or any other disposition of assets not constituting an
Asset Sale by reason of the exceptions contained in the
definition thereof, (iii) cash and Cash Equivalents, (iv)
Investments existing on the Issue Date, (v) Investments
specifically permitted by and made in accordance with Section
5.11(b), (vi) Investments in the Company or the wholly owned
Restricted Subsidiaries and (vii) additional Investments in an
aggregate amount not exceeding $15.0 million.
"Permitted Liens" shall mean (i) Liens for taxes,
---------------
assessments and governmental charges or claims not yet due or
which are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and if
a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made therefor;
(ii) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other like
Liens arising in the ordinary course of business, deposits made
to obtain the release of such Liens, and with respect to
amounts not yet delinquent for a period of more than 60 days or
being contested in good faith by an appropriate process of law,
and for which a reserve or other appropriate provision, if any,
as shall be required by GAAP shall have been made; (iii) Liens
incurred or pledges or deposits made in the ordinary course of
business to secure obligations under workers' compensation,
unemployment insurance and other types of social security or
similar legislation; (iv) Liens incurred or deposits made to
secure the performance of tenders, bids, leases, statutory
obligations, surety and appeal bonds, government contracts,
performance and return of money bonds and other obligations of
<PAGE>
-21-
a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money);
(v) easements, rights-of-way, zoning or other restrictions,
minor defects or irregularities in title and other similar
charges or encumbrances not interfering in any material respect
with the business of the Company or any of the Restricted
Subsidiaries incurred in the ordinary course of business;
(vi) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in
respect of bankers' acceptances issued or created for the
account of such Person to facilitate the purchase, shipment or
storage of such inventory or other goods in the ordinary course
of business; (vii) Liens securing reimbursement obligations
with respect to letters of credit which encumber documents and
other property relating to such letters of credit and the
products and proceeds thereof; (viii) Liens in favor of customs
and revenue authorities arising as a matter of law to secure
payment of nondelinquent customs duties in connection with the
importation of goods; (ix) judgment and attachment Liens not
giving rise to a Default or Event of Default; (x) leases or
subleases granted to others not interfering in any material
respect with the business of the Company or any Restricted
Subsidiary; (xi) Liens encumbering customary initial deposits
and margin deposits, and other Liens incurred in the ordinary
course of business that are within the general parameters
customary in the industry, in each case securing Indebtedness
under Interest Swap Obligations and Foreign Exchange Agreements
and forward contracts, option futures contracts, futures
options or similar agreements or arrangements designed to
protect the Company or any Restricted Subsidiary from
fluctuations in the price of commodities; (xii) Liens
encumbering deposits made in the ordinary course of business to
secure nondelinquent obligations arising from statutory,
regulatory, contractual or warranty requirements of the Company
or the Restricted Subsidiaries for which a reserve or other
appropriate provision, if any, as shall be required by GAAP
shall have been made; (xiii) Liens arising out of consignment
or similar arrangements for the sale of goods entered into by
the Company or any Restricted Subsidiary in the ordinary course
of business in accordance with past practices; (xiv) any
interest or title of a lessor in the property subject to any
lease, whether characterized as capitalized or operating other
than any such interest or title resulting from or arising out
of a default by the Company or any Restricted Subsidiary of its
obligations under such lease; (xv) Liens arising from filing
UCC financing statements for precautionary purposes in
connection with true leases of personal property that are
otherwise permitted under the
<PAGE>
-22-
applicable Indenture and under which the Company or any
Restricted Subsidiary is lessee; (xvi) Liens in favor of the
Senior Note Trustee under the Senior Note Indenture and any
substantially equivalent Lien granted to any trustee or similar
institution under any indenture governing Indebtedness permitted
to be Incurred or outstanding under the Senior Note Indenture;
(xvii) Liens securing Indebtedness permitted to be Incurred
pursuant to clause (m) of the definition of Permitted
Indebtedness above.
"Permitted Payments" means
------------------
(i) the consummation of the Transactions as
described in the Prospectus;
(ii) payments by the Company to effect the mandatory
redemption of its Series I Preferred Stock; provided, however,
-------- -------
that such payments shall not be made on any date earlier, or in
any amount greater, than the dates and amounts provided for in
the Company's Certificate of Incorporation as in effect on the
Issue Date;
(iii) any payment by the Company or any Subsidiary to
Yucaipa or the principals or any Affiliates thereof for
consulting, management, investment banking or similar services,
or for reimbursement of costs and expenses (x) pursuant to the
Management Services Agreement or (y) as approved by a majority
of the Independent Directors (as defined in the Standstill
Agreement);
(iv) any payment to pay for the purchase, retirement
or other acquisition for value of any Capital Stock of the
Company held by any future, present or former employee or
director of the Company or any Subsidiary pursuant to any
management equity plan or stock option plan or any other
agreement, provided that the aggregate amount of Restricted
--------
Payments made under this clause does not exceed $5 million in
any fiscal year (provided that any unused amounts may be
--------
carried over to any subsequent fiscal year subject to a maximum
amount of $10 million in any fiscal year);
(v) pro rata dividends paid by any Restricted
Subsidiary that is not wholly owned by the Company or another
wholly owned Restricted Subsidiary;
(vi) Investments in Unrestricted Subsidiaries in an
aggregate amount not to exceed $10.0 million; and
<PAGE>
-23-
(vii) other Restricted Payments in an aggregate amount
not to exceed $25.0 million.
"Permitted Subordinated Reorganization Securities"
------------------------------------------------
means securities of the Company issued in a plan of
reorganization in a case under Bankruptcy Law relating to the
Company which constitutes either (x) Capital Stock (other than
Disqualified Capital Stock with the reference to "Maturity
Date" in the definition of such term modified to relate to the
final stated maturity of any debt securities issued in such
plan of reorganization to the holders of Designated Senior
Indebtedness ("Senior Reorganization Securities")) or (y) debt
--------------------------------
securities of the Company which (i) are unsecured, (ii) have no
scheduled mandatory amortization thereon prior to the final
stated maturity of the Senior Reorganization Securities and
(iii) are subordinated in right of payment to the Senior
Reorganization Securities to at least the same extent as the
Securities are subordinated to Designated Senior Indebtedness.
"Permitted Transferees" means, with respect to any
---------------------
Person, (i) any Affiliate of such Person, (ii) the heirs,
executors, administrators, testamentary trustees, legatees or
beneficiaries of any such Person, (iii) a trust the
beneficiaries of which, or a corporation or partnership the
stockholders or general or limited partners of which, include
only such Person or his or her parents, spouse or lineal
descendants, in each case to whom such Person has transferred
the beneficial ownership of any securities of the Company, (iv)
any investment account whose investment managers and investment
advisors consist solely of such Person and/or Permitted
Transferees of such Person and (v) any investment fund or
investment entity that is a subsidiary of such Person or a
Permitted Transferee of such Person.
"Person" means any individual, corporation, limited
------
or general partnership, limited liability company, joint
venture, association, joint stock company, trust,
unincorporated organization or government or any agency or
political subdivision thereof.
"Plan of Liquidation" means, with respect to any
-------------------
Person, a plan that provides for, contemplates or the
effectuation of which is preceded or accompanied by (whether or
not substantially contemporaneously, in phases or otherwise)
(i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than
as an entirety or substantially as an entirety and (ii) the
distribution of
<PAGE>
-24-
all or substantially all of the proceeds of such sale, lease,
conveyance or other disposition and all or substantially all of
the remaining assets of such Person to holders of Capital Stock
of such Person.
"Preferred Stock" means, with respect to any Person,
---------------
Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such
Person.
"pro forma" means, with respect to any calculation
---------
made or required to be made pursuant to the terms of this
Indenture, a calculation in accordance with Article 11 of
Regulation S-X under the Securities Act, as interpreted by the
Company's chief financial officer or Board of Directors in
consultation with its independent certified public accountants.
"Prospectus" means the prospectus of the Company
----------
dated May 17, 1996 relating to the Securities.
"Public Equity Offering" means an underwritten public
----------------------
offering of Common Stock of the Company pursuant to a
registration statement filed with the Commission in accordance
with the Securities Act.
"Qualified Capital Stock" means, with respect to any
-----------------------
Person, any Capital Stock of such Person that is not
Disqualified Capital Stock.
"Recapitalization" means the Offering, the Tender
----------------
Offer, the Repayments and the closing under the Credit
Agreement.
"Recapitalization Agreement" means the
--------------------------
Recapitalization Agreement and Plan of Merger, dated as of
January 29, 1996, among the Company, Acquisition, Smitty's and
Yucaipa.
"Record Date" means the Record Dates specified in the
-----------
Securities; provided, however, that if any such date is a Legal
-------- -------
Holiday, the Record Date shall be the first day immediately
preceding such specified day that is not a Legal Holiday.
"Redemption Date," when used with respect to any
---------------
Security to be redeemed, means the date fixed for such
<PAGE>
-25-
redemption pursuant to this Indenture and Paragraph 5 of the
Securities.
"Redemption Price," when used with respect to any
----------------
Security to be redeemed, means the price fixed for such
redemption pursuant to this Indenture and Paragraph 5 of the
Securities.
"Refinancing Indebtedness" means, with respect to any
------------------------
Person, Indebtedness of such Person issued in exchange for, or
the proceeds from the issuance and sale or disbursement of
which are used to substantially concurrently repay, redeem,
refund, refinance, discharge or otherwise retire for value, in
whole or in part (collectively, "repay"), or constituting an
-----
amendment, modification or supplement to, or a deferral or
renewal of (collectively, an "amendment"), any Indebtedness of
---------
such Person existing on the Issue Date or Indebtedness (other
than Permitted Indebtedness, except Permitted Indebtedness
Incurred pursuant to clauses (c), (d), (g), (i) and (m) of the
definition thereof) Incurred in accordance with the applicable
Indenture (a) in a principal amount (or, if such Refinancing
Indebtedness provides for an amount less than the principal
amount thereof to be due and payable upon the acceleration
thereof, with an original issue price) not in excess of
(without duplication) (i) the principal amount or the original
issue price, as the case may be, of the Indebtedness so
refinanced (or, if such Refinancing Indebtedness refinances
Indebtedness under a revolving credit facility or other
agreement providing a commitment for subsequent borrowings,
with a maximum commitment not to exceed the maximum commitment
under such revolving credit facility or other agreement) plus
(ii) unpaid accrued interest on such Indebtedness plus (iii)
premiums, penalties, fees and expenses actually incurred by
such Person in connection with the repayment or amendment
thereof and (b) with respect to Refinancing Indebtedness that
repays or constitutes an amendment to Subordinated
Indebtedness, such Refinancing Indebtedness (x) shall not have
any fixed mandatory redemption or sinking fund requirement in
an amount greater than or at a time prior to the amounts and
times specified in such repaid or amended Subordinated
Indebtedness, except to the extent that any such requirement
applies on a date after the Maturity Date and (y) shall contain
subordination and default provisions no less favorable in any
material respect to the Holders than those contained in such
repaid or amended Subordinated Indebtedness.
<PAGE>
-26-
"Registrar" shall have the meaning provided in
---------
Section 2.03.
"Related Business Investment" means (i) any
---------------------------
Investment by a Person in any other Person a majority of whose
revenues are derived from the operation of one or more retail
grocery stores or supermarkets or any other line of business
engaged in by the Company or any of the Subsidiaries as of the
Issue Date; (ii) any Investment by such Person in any
cooperative or other supplier, including, without limitation,
any joint venture which is intended to supply any product or
service useful to the business of the Company and the
Restricted Subsidiaries as it is conducted as of the Issue Date
and as such business may thereafter evolve or change; and (iii)
any capital expenditure or Investment, in each case reasonably
related to the business of the Company and the Restricted
Subsidiaries as it is conducted as of the Issue Date and as
such business may thereafter evolve or change.
"Repayments" means the Company's purchase of $1.0
----------
million of its Series I Preferred Stock, repayment of $735.1
million of its outstanding indebtedness and purchase of $13.7
million of employee stock options, all as described in the
Prospectus.
"Representative" means the indenture trustee or other
--------------
trustee, agent or representative for any Senior indebtedness;
provided, however, that in no event shall ,
- -------- -------
in its capacity as Trustee, Registrar, co-Registrar or Paying
Agent, serve as Representative.
"Restricted Payment" means (i) any Stock Payment or
------------------
(ii) Investment (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary that, as
---------------------
of the date of determination, is not an Unrestricted
Subsidiary.
"Securities Act" means the Securities Act of 1933, as
--------------
amended, and the rules and regulations of the Commission
promulgated thereunder.
"Senior Indebtedness" means the principal of,
-------------------
premium, if any, and interest on, and all other Obligations
with respect to, any Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter Incurred, unless,
in the case of any particular Indebtedness, the instrument
creating or
<PAGE>
-27-
evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in
right of payment to the Securities. Without limiting the
generality of the foregoing, "Senior Indebtedness" shall include
-------------------
(x) the principal of, premium, if any, and interest on all
obligations of every nature of the Company from time to time owed
to the lenders under the Credit Agreement, including, without
limitation, the Letter of Credit Obligations and principal of and
interest on, all fees and expenses payable under the Credit
Agreement and (y) interest accruing thereon subsequent to the
occurrence of any Event of Default specified in clause (vi) or
(vii) in Section 7.01 relating to the Company, whether or not the
claim for such interest is allowed under any applicable
Bankruptcy Law. Notwithstanding the foregoing, "Senior
------
Indebtedness" shall not include (a) Indebtedness evidenced by the
- ------------
Securities, (b) Indebtedness that is expressly subordinate or
junior in right of payment to any Indebtedness of the Company,
(c) Indebtedness which, when Incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code,
is without recourse to the Company (other than Capitalized Lease
Obligations), (d) Indebtedness which is represented by
Disqualified Capital Stock, (e) obligations for goods, materials
or services purchased in the ordinary course of business or
obligations consisting of trade payables, (f) Indebtedness of or
amounts owed by the Company for compensation to employees or for
services rendered to the Company, (g) any liability for federal,
state, local or other taxes owed or owing by the Company, (h)
Indebtedness of the Company to a Subsidiary of the Company, and
(i) that portion of any Indebtedness which is Incurred by the
Company in violation of this Indenture.
"Series I Preferred Stock" means the Series I
------------------------
Preferred Stock of the Company, par value $.01 per share.
"Significant Senior Indebtedness" shall have the
-------------------------------
meaning provided in Section 4.02(a).
"Significant Stockholder" means, with respect to any
Person, any other Person who is the beneficial owner (within
the meaning of Rule 13d-3 under the Exchange Act) of more than
10% of any class of equity securities of such Person that are
entitled to vote on a regular basis for the election of
directors of such Person.
"Significant Subsidiary" means each Restricted
----------------------
Subsidiary that is either (a) a "significant subsidiary" as
<PAGE>
-28-
defined in Rule 1-02(v) of Regulation S-X under the Securities
Act and the Exchange Act (as such regulation is in effect on
the Issue Date) or (b) material to the financial condition or
results of operations of the Company and the Restricted
Subsidiaries taken as a whole.
"Smitty's" means Smitty's Supermarkets, Inc., a
--------
Delaware corporation.
"Smitty's Offers to Purchase" means the offers to
---------------------------
purchase the Smitty's Securities from the holders thereof.
"Smitty's Refinancing" means the repayment of
--------------------
Smitty's indebtedness, including pursuant to the Smitty's
Offers to Purchase.
"Smitty's Securities" means the 13.75% Senior
Discount Debentures due 2006 of Smitty's and the 12.75% Senior
Subordinated Notes due 2004 of SSV.
"SSV" means Smitty's Super Valu, Inc., a Delaware
---
corporation and a wholly owned subsidiary of Smitty's.
"Standstill Agreement" means the Standstill Agreement
--------------------
dated as of January 29, 1996 among the Company, Yucaipa and
each of the limited partnerships that owns shares in Smitty's
for which Yucaipa acts as the general partner (as such
Standstill Agreement may be amended or replaced, so long as
such amendment or replacement has been approved by a majority
of the Independent Directors (as defined in the Standstill
Agreement as in effect prior to such amendment or replacement)
and is not disadvantageous to the Holders of the Securities in
any material respect).
"Stock Payment" means, with respect to any Person,
-------------
(a) the declaration or payment by such Person, either in cash
or in property, of any dividend on (except, in the case of the
Company, dividends payable solely in Qualified Capital Stock of
the Company), or the making by such Person or any of its
subsidiaries of any other distribution in respect of, such
Person's Qualified Capital Stock or any warrants, rights or
options to purchase or acquire shares of any class of such
Capital Stock (other than exchangeable or convertible
Indebtedness of such Person), or (b) the redemption,
repurchase, retirement or other acquisition for value by such
Person or any of its subsidiaries, directly or indirectly, of
such Person's Qualified Capital Stock (and, in the case of a
Subsidiary, Qualified
<PAGE>
-29-
Capital Stock of the Company) or any warrants, rights or options
to purchase or acquire shares of any class of such Capital Stock
(other than exchangeable or convertible Indebtedness of such
Person), other than, in the case of the Company, through the
issuance in exchange therefor solely of Qualified Capital Stock
of the Company; provided, however, that in the case of a
-------- -------
Restricted Subsidiary, the term "Stock Payment" shall not include
-------------
any such payment with respect to its Capital Stock or warrants,
rights or options to purchase or acquire shares of any class of
its Capital Stock that are owned solely by the Company or a
wholly owned Restricted Subsidiary.
"Subordinated Indebtedness" means Indebtedness of the
-------------------------
Company which is subordinated in right of payment to the
Securities.
"subsidiary" of any Person means (i) a corporation a
----------
majority of whose Capital Stock with voting power, under
ordinary circumstances, to elect directors is, at the date of
determination, directly or indirectly, owned by such Person, by
one or more subsidiaries of such Person or by such Person and
one or more subsidiaries of such Person or (ii) a partnership
in which such Person or a subsidiary of such Person is, at the
date of determination, a general partner of such partnership,
but only if such Person or its subsidiary is entitled to
receive more than fifty percent of the assets of such
partnership upon its dissolution, or (iii) any other Person
(other than a corporation or a partnership) in which such
Person, a subsidiary of such Person or such Person and one or
more subsidiaries of such Person, directly or indirectly, at
the date of determination, has (x) at least a majority
ownership interest or (y) the power to elect or direct the
election of a majority of the directors or other governing body
of such Person.
"Subsidiary" means any subsidiary of the Company.
----------
"Surviving Person" shall have the meaning provided in
----------------
Section 6.01(a)(1).
"Tender Offer" means the Company's offer to purchase
------------
50% of the outstanding shares (excluding shares issuable in the
Merger) of Common Stock from the holders thereof for $36.00 in
cash per share.
"Term Loans" means the term loan facility under the
----------
Credit Agreement and any agreement governing Indebtedness
<PAGE>
-30-
Incurred to refund, replace or refinance any borrowings
outstanding under such facility or under any prior refunding,
replacement or refinancing thereof (in each case, in whole or
in part, and without limitation as to amount, terms,
conditions, covenants and other provisions).
"TIA" means the Trust Indenture Act of 1939 (15 U.S.
---
Code (SS) 77aaa-77bbbb), as amended, as in effect on the date
this Indenture is qualified under the TIA, except as otherwise
provided in Section 10.03.
"Transactions" means the Recapitalization, the Merger
------------
and the Smitty's Refinancing.
"Trust Officer" means any officer of the Trustee
-------------
assigned by the Trustee to administer its corporate trust
matters.
"Trustee" means the party named as such in this
-------
Indenture until a successor replaces it in accordance with the
provisions of this Indenture and thereafter means such
successor.
"Unrestricted Subsidiary" means any Subsidiary
-----------------------
(including its subsidiaries) so designated by a Board
Resolution adopted by the Board of Directors of the Company in
accordance with Section 5.20 hereof. Notwithstanding the
foregoing, an Unrestricted Subsidiary shall be deemed to be
redesignated a Restricted Subsidiary at any time if (a) the
Company or any other Restricted Subsidiary (i) provides credit
support for, or a guarantee of, any Indebtedness of such
Unrestricted Subsidiary or any of its subsidiaries (including
any undertaking, agreement or instrument evidencing such
Indebtedness) or (ii) is directly or indirectly liable for any
Indebtedness of such Unrestricted Subsidiary or any of its
subsidiaries, (b) a default with respect to any Indebtedness of
such Unrestricted Subsidiary or any of its subsidiaries
(including any right which the holders thereof may have to take
enforcement action against any of them) would permit (upon
notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to
declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its final
scheduled maturity or (c) such Unrestricted Subsidiary or any
of its subsidiaries Incurs Indebtedness pursuant to which the
lender has recourse to any of the assets of the Company or any
Restricted Subsidiary.
<PAGE>
-31-
"U.S. Government Obligations" shall have the meaning
---------------------------
provided in Section 9.02.
"U.S. Legal Tender" means such coin or currency of
-----------------
the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts.
"Yucaipa" means The Yucaipa Companies, a California
-------
general partnership, or any successor thereto which is an
affiliate of Ronald W. Burkle or his Permitted Transferees.
SECTION 1.02. Incorporation by Reference of TIA.
---------------------------------
Whenever this Indenture refers to a provision of the
TIA, such provision is incorporated by reference in, and made a
part of, this Indenture. The following TIA terms used in this
Indenture have the following meanings:
"indenture securities" means the Securities.
--------------------
"indenture security holder" means a Holder.
-------------------------
"indenture to be qualified" means this Indenture.
-------------------------
"indenture trustee" or "institutional trustee" means
----------------- ---------------------
the Trustee.
"obligor" on the indenture securities means the
-------
Company, any Guarantor or any other obligor on the Securities
or Guarantees.
All other TIA terms used in this Indenture that are
defined by the TIA, defined by TIA reference to another statute
or defined by SEC rule and not otherwise defined herein have
the meanings assigned to them therein.
SECTION 1.03. Rules of Construction.
---------------------
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
--
<PAGE>
-32-
(4) words in the singular include the plural, and
words in the plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) "herein," "hereof" and other words of similar
------ ------
import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.
ARTICLE TWO
THE SECURITIES
SECTION 2.01. Form and Dating.
---------------
The Securities, the notation thereon relating to the
Guarantees (if and when delivered) and the Trustee's certificate
of authentication shall be substantially in the form of Exhibit
A. The Securities may have notations, legends or endorsements
required by law, stock exchange rule or usage. The Company and
the Trustee shall approve the form of the Securities and any
notation, legend or endorsement on them. Each Security shall be
dated the date of its authentication.
The terms and provisions contained in the Securities
and the Guarantees (if and when delivered) shall constitute,
and are hereby expressly made, a part of this Indenture and, to
the extent applicable, the Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby.
SECTION 2.02. Execution and Authentication.
----------------------------
Two Officers, or an Officer and an Assistant
Secretary, shall sign, or one Officer shall sign and one
Officer or an Assistant Secretary (each of whom shall, in each
case, have been duly authorized by all requisite corporate
actions) shall attest to, the Securities for the Company by
manual or facsimile signature. Each Guarantor shall execute
the Guarantee in the manner set forth in Section 11.09.
If an Officer whose signature is on a Security was an
Officer at the time of such execution but no longer holds that
office at the time the Trustee authenticates the Security, the
Security shall be valid nevertheless.
<PAGE>
-33-
A Security shall not be valid until an authorized
signatory of the Trustee manually signs the certificate of
authentication on the Security. The signature shall be
conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee shall authenticate Securities for
original issue in the aggregate principal amount of
$575,000,000 upon a written order of the Company in the form of
an Officers' Certificate. The Officers' Certificate shall
specify the amount of Securities to be authenticated and the
date on which the Securities are to be authenticated. The
aggregate principal amount of Securities outstanding at any
time may not exceed $575,000,000 (or such lesser amount as is
requested authenticated by the Trustee and issued by the
Company on the Issue Date), except as provided in Section 2.07.
The Trustee may appoint an authenticating agent
reasonably acceptable to the Company to authenticate
Securities. Unless otherwise provided in the appointment, an
authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent
to deal with the Company and Affiliates of the Company.
The Securities shall be issuable only in registered
form without coupons in denominations of $1,000 and integral
multiples thereof.
SECTION 2.03. Registrar and Paying Agent.
--------------------------
The Company shall maintain an office or agency in the
Borough of Manhattan, The City of New York, where (a) Secu-
rities may be presented or surrendered for registration of
transfer or for exchange ("Registrar"), (b) Securities may be
---------
presented or surrendered for payment ("Paying Agent") and
------------
(c) notices and demands to or upon the Company in respect of
the Securities and this Indenture may be served. The Company
may also from time to time designate one or more other offices
or agencies where the Securities may be presented or
surrendered for any or all such purposes and may from time to
time rescind such designations; provided, however, that no such
-------- -------
designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in
the Borough of Manhattan, The City of New York, for such
purposes. The Company may act as its own Registrar or Paying
Agent except
<PAGE>
-34-
that for the purposes of Articles Three and Nine and Sections
5.15 and 5.16, neither the Company nor any Affiliate of the
Company shall act as Paying Agent. The Registrar shall keep a
register of the Securities and of their transfer and exchange.
The Company, upon notice to the Trustee, may have one or more co-
Registrars and one or more additional paying agents reasonably
acceptable to the Trustee. The term "Paying Agent" includes any
------------
additional paying agent. The Company initially appoints the
Trustee as Registrar and Paying Agent until such time as the
Trustee has resigned or a successor has been appointed.
The Company shall enter into an appropriate agency
agreement with any Agent not a party to this Indenture, which
agreement shall implement the provisions of this Indenture that
relate to such Agent. The Company shall notify the Trustee, in
advance, of the name and address of any such Agent. If the
Company fails to maintain a Registrar or Paying Agent, the
Trustee shall act as such.
SECTION 2.04. Paying Agent To Hold Assets in Trust.
------------------------------------
The Company shall require each Paying Agent other
than the Trustee to agree in writing that, subject to Article
Four and Article Twelve, each Paying Agent shall hold in trust
for the benefit of Holders or the Trustee all assets held by
the Paying Agent for the payment of principal of, or interest
on, the Securities (whether such assets have been distributed
to it by the Company or any other obligor on the Securities),
and shall notify the Trustee of any Default by the Company (or
any other obligor on the Securities) in making any such
payment. If the Company or a Subsidiary acts as Paying Agent,
it shall segregate such assets and hold them as a separate
trust fund, subject to Article Four and Article Twelve. The
Company at any time may require a Paying Agent to distribute
all assets held by it to the Trustee and account for any assets
disbursed and the Trustee may at any time during the
continuance of any payment Default, upon written request to a
Paying Agent, require such Paying Agent to distribute all
assets held by it to the Trustee and to account for any assets
distributed. Upon distribution to the Trustee of all assets
that shall have been delivered by the Company to the Paying
Agent, the Paying Agent shall have no further liability for
such assets.
<PAGE>
-35-
SECTION 2.05. Holder Lists.
------------
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of
the names and addresses of Holders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee on or
before each Interest Payment Date and at such other times as
the Trustee may request in writing a list in such form and as
of such date as the Trustee may reasonably require of the names
and addresses of Holders, which list may be conclusively relied
upon by the Trustee.
SECTION 2.06. Transfer and Exchange.
---------------------
When Securities are presented to the Registrar or a
co-Registrar with a request to register the transfer of such
Securities or to exchange such Securities for an equal
principal amount of Securities of other authorized
denominations, the Registrar or co-Registrar shall register the
transfer or make the exchange as requested if its requirements
for such transaction are met; provided, however, that the
-------- -------
Securities surrendered for transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Registrar or
co-Registrar, duly executed by the Holder thereof or his
attorney duly authorized in writing. To permit registrations
of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Securities at the Registrar's or
co-Registrar's request. No service charge shall be made for
any registration of transfer or exchange, but the Company may
require payment of a sum sufficient to cover any transfer tax
or similar governmental charge payable in connection therewith
(other than any such transfer taxes or similar governmental
charge payable upon exchanges or transfers pursuant to Sections
2.02, 2.07, 2.10, 3.06, 5.15, 5.16 or 10.05). The Registrar or
co-Registrar shall not be required to register the transfer of
or exchange of any Security (i) during a period beginning at
the opening of business 15 days before the mailing of a notice
of redemption of Securities and ending at the close of business
on the day of such mailing and (ii) selected for redemption in
whole or in part pursuant to Article Three, except the
unredeemed portion of any Security being redeemed in part.
SECTION 2.07. Replacement Securities.
----------------------
If a mutilated Security is surrendered to the Trustee
or if the Holder of a Security claims that the Security has
<PAGE>
-36-
been lost, destroyed or wrongfully taken, the Company shall
issue and the Trustee shall authenticate a replacement Security
if the Trustee's requirements are met. If required by the
Trustee or the Company, such Holder must provide an indemnity
bond or other indemnity, sufficient in the judgment of both the
Company and the Trustee, to protect the Company, the Trustee or
any Agent from any loss which any of them may suffer if a
Security is replaced. The Company may charge such Holder for
its reasonable out-of-pocket expenses in replacing a Security
pursuant to this Section 2.07, including reasonable fees and
expenses of counsel.
Every replacement Security is an additional
obligation of the Company.
SECTION 2.08. Outstanding Securities.
----------------------
Securities outstanding at any time are all the
Securities that have been authenticated by the Trustee except
those cancelled by it, those delivered to it for cancellation
and those described in this Section as not outstanding. A
Security does not cease to be outstanding because the Company,
the Guarantors or any of their respective Affiliates holds the
Security.
If a Security is replaced pursuant to Section 2.07
(other than a mutilated Security surrendered for replacement),
it ceases to be outstanding unless the Trustee receives proof
satisfactory to it that the replaced Security is held by a bona
----
fide purchaser. A mutilated Security ceases to be outstanding
- ----
upon surrender of such Security and replacement thereof
pursuant to Section 2.07.
If on a Redemption Date or the Maturity Date the
Paying Agent (other than the Company or a Subsidiary) holds
U.S. Legal Tender or U.S. Government obligations sufficient to
pay all of the principal and interest due on the Securities
payable on that date, then on and after that date such
Securities cease to be outstanding and interest on them ceases
to accrue unless, pursuant to the provisions of Article Four
and Article Twelve, the Paying Agent is unable to make payments
on the Securities to the Holders thereof.
SECTION 2.09. Treasury Securities.
-------------------
In determining whether the Holders of the required
principal amount of Securities have concurred in any direction,
<PAGE>
-37-
waiver or consent, Securities owned by the Company, the
Guarantors or any of their respective Affiliates shall be
disregarded, except that, for the purposes of determining
whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Securities that the Trustee
knows or has reason to know are so owned shall be disregarded.
SECTION 2.10. Temporary Securities.
--------------------
Until definitive Securities are ready for delivery,
the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities but may have
variations that the Company considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall
prepare and the Trustee shall authenticate definitive
Securities in exchange for temporary Securities.
SECTION 2.11. Cancellation.
------------
The Company at any time may deliver Securities to the
Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them
for transfer, exchange or payment. The Trustee, or at the
direction of the Trustee, the Registrar or the Paying Agent
(other than the Company or a Subsidiary), and no one else,
shall cancel and, at the written direction of the Company,
shall dispose of all Securities surrendered for transfer,
exchange, payment or cancellation. Subject to Section 2.07,
the Company may not issue new Securities to replace Securities
that it has paid or delivered to the Trustee for cancellation.
If the Company or any Guarantor shall acquire any of the
Securities, such acquisition shall not operate as a redemption
or satisfaction of the Indebtedness represented by such
Securities unless and until the same are surrendered to the
Trustee for cancellation pursuant to this Section 2.11.
SECTION 2.12. Defaulted Interest.
------------------
If the Company defaults in a payment of interest on
the Securities, it shall, unless the Trustee fixes another
record date pursuant to Section 7.10, pay the defaulted
interest, plus (to the extent lawful) any interest payable on
the defaulted interest, to the persons who are Holders on a
subsequent special record date, which date shall be the
fifteenth day next preceding the date fixed by the Company for
the payment of defaulted interest or the next succeeding
Business Day
<PAGE>
-38-
if such date is not a Business Day. At least 15 days before the
subsequent special record date, the Company shall mail to each
Holder, with a copy to the Trustee, a notice that states the
subsequent special record date, the payment date and the amount
of defaulted interest, and interest payable on such defaulted
interest, if any, to be paid.
SECTION 2.13. CUSIP Number.
------------
The Company in issuing the Securities may use a
"CUSIP" number, and if so, the Trustee shall use the CUSIP
number in notices of redemption or exchange as a convenience to
Holders; provided, however, that any such notice may state that
-------- -------
no representation is made as to the correctness or accuracy of
the CUSIP number printed in the notice or on the Securities,
and that reliance may be placed only on the other
identification numbers printed on the Securities.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Notices to Trustee.
------------------
If the Company elects to redeem Securities pursuant
to Paragraph 5 of the Securities, it shall notify the Trustee,
with a copy to the Credit Agent, of the Redemption Date and the
principal amount of Securities to be redeemed and whether it
wants the Trustee to give notice of redemption to the Holders
at least 30 days (unless a shorter notice shall be satisfactory
to the Trustee) but not more than 60 days before the Redemption
Date. In order to effect a redemption pursuant to Paragraph 5
of the Securities with the proceeds of a Public Equity
Offering, the Company shall send the redemption notice not
later than 60 days after the consummation of such Public Equity
Offering. Any such notice may be cancelled at any time prior
to notice of such redemption being mailed to any Holder and
shall thereby be void and of no effect.
SECTION 3.02. Selection of Securities To Be Redeemed.
--------------------------------------
If fewer than all of the Securities are to be
redeemed, the Trustee shall select the Securities to be
redeemed pro rata by lot or by any other method that the
Trustee considers fair and appropriate and, if such Securities
are
<PAGE>
-39-
listed on any securities exchange, by a method that complies with
the requirements of such exchange; provided, however, that any
-------- -------
redemption pursuant to Paragraph 5 of the Securities with the
proceeds of a Public Equity Offering shall be made on a pro rata
basis unless such method is otherwise prohibited.
The Trustee shall make the selection from the
Securities outstanding and not previously called for redemption
and shall promptly notify the Company in writing of the
Securities selected for redemption and, in the case of any
Security selected for partial redemption, the principal amount
thereof to be redeemed. Securities in denominations of $1,000
may be redeemed only in whole. The Trustee may select for
redemption portions (equal to $1,000 or integral multiples
thereof) of the principal amount of Securities that have
denominations larger than $1,000. Provisions of this Indenture
that apply to Securities called for redemption also apply to
portions of Securities called for redemption.
SECTION 3.03. Notice of Redemption.
--------------------
At least 30 days but not more than 60 days before a
Redemption Date, the Company shall mail a notice of redemption
by first class mail to each Holder whose Securities are to be
redeemed at such Holder's registered address, with a copy to
the Trustee and the Credit Agent. In order to effect a
redemption pursuant to Paragraph 5 of the Securities with the
proceeds of a Public Equity Offering, the Company shall send
the redemption notice not later than 60 days after the
consummation of such Public Equity Offering. At the Company's
request, the Trustee shall give the notice of redemption in the
Company's name and at the Company's expense. Each notice for
redemption shall identify the Securities to be redeemed and
shall state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be
surrendered to the Paying Agent to collect the Redemption
Price;
(5) that, unless (a) the Company defaults in making
the redemption payment on the Redemption Date or (b) such
redemption payment is prohibited pursuant to Article Four
<PAGE>
-40-
or Article Twelve hereof or otherwise, interest on
Securities called for redemption ceases to accrue on and
after the Redemption Date, and the only remaining right of
the Holders of such Securities is to receive payment of
the Redemption Price upon surrender to the Paying Agent of
the Securities redeemed;
(6) if any Security is being redeemed in part, the
portion of the principal amount of such Security to be
redeemed and that, after the Redemption Date, and upon
surrender of such Security, a new Security or Securities
in aggregate principal amount equal to the unredeemed
portion thereof will be issued; and
(7) if fewer than all the Securities are to be
redeemed, the identification of the particular Securities
(or portion thereof) to be redeemed, as well as the
aggregate principal amount of Securities to be redeemed
and the aggregate principal amount of Securities to be
outstanding after such partial redemption.
SECTION 3.04. Effect of Notice of Redemption.
------------------------------
Once notice of redemption is mailed in accordance
with Section 3.03, Securities called for redemption become due
and payable on the Redemption Date and at the Redemption Price.
Upon surrender to the Trustee or Paying Agent, such Securities
called for redemption shall be paid at the Redemption Price
unless prohibited pursuant to Article Four or Article Twelve or
otherwise pursuant to this Indenture. Securities that are
redeemed by the Company or that are purchased by the Company
pursuant to a Net Proceeds Offer as described in Section 5.16
or pursuant to a Change of Control Offer as described in
Section 5.15 or that are otherwise acquired by the Company will
be surrendered to the Trustee for cancellation.
SECTION 3.05. Deposit of Redemption Price.
---------------------------
On or before the Redemption Date, the Company shall
deposit with the Paying Agent U.S. Legal Tender sufficient to
pay the Redemption Price of all Securities to be redeemed on
that date (other than Securities or portions thereof called for
redemption on that date which have been delivered by the
Company to the Trustee for cancellation). The Paying Agent
shall promptly return to the Company any U.S. Legal Tender so
deposited which is not required for that purpose upon the
written
<PAGE>
-41-
request of the Company, except with respect to monies owed as
obligations to the Trustee pursuant to Article Eight hereof.
If the Company complies with the preceding paragraph
and payment of the Securities called for redemption is not
prohibited under Article Four or Article Twelve or otherwise,
then, unless the Company defaults in the payment of such
Redemption Price, interest on the Securities or portions
thereof to be redeemed will cease to accrue on and after the
applicable Redemption Date, whether or not such Securities are
presented for payment.
SECTION 3.06. Securities Redeemed in Part.
---------------------------
Upon surrender of a Security that is to be redeemed
in part, the Trustee shall authenticate for the Holder a new
Security or Securities equal in principal amount to the
unredeemed portion of the Security surrendered.
ARTICLE FOUR
SUBORDINATION
SECTION 4.01. Securities Subordinated to Senior Indebtedness.
----------------------------------------------
Anything herein to the contrary notwithstanding, the
Company, for itself and its successors, and each Holder, by his
acceptance of Securities, agrees that the payment of the
Obligations on the Securities is subordinated, to the extent
and in the manner provided in this Article Four, to the prior
payment in full in cash or Cash Equivalents of all Senior
Indebtedness, whether outstanding on the Issue Date or
thereafter Incurred, including with respect to Designated
Senior Indebtedness, any interest accruing subsequent to a
bankruptcy or other similar proceeding whether or not such
interest is an allowed claim enforceable against the Company in
a bankruptcy case under Bankruptcy Law.
This Article Four shall constitute a continuing offer
to all persons who become holders of, or continue to hold,
Senior Indebtedness, and such provisions are made for the
benefit of the holders of Senior Indebtedness and such holders
are made obligees hereunder and any one or more of them may
enforce such provisions.
<PAGE>
-42-
The obligations of the Company to the Trustee under
Section 8.07 shall not be subject to the provisions of this
Article Four.
SECTION 4.02. Suspension of Payment When Senior
Indebtedness in Default.
---------------------------------
(a) Unless Section 4.03 shall be applicable, no
direct or indirect payment (other than payments by a trust
previously established pursuant to Article Nine hereof) by or
on behalf of the Company of Obligations on the Securities
whether pursuant to the terms of the Securities or upon
acceleration or otherwise shall be made if, at the time of such
payment, there exists a default in the payment of all or any
portion of principal of, premium, if any, or interest on (i)
any Designated Senior Indebtedness or (ii) any other Senior
Indebtedness which, at the time of determination, is equal to
or greater than $50 million in aggregate principal amount
("Significant Senior Indebtedness") (and the Trustee has
-------------------------------
received written notice thereof), and such default shall not
have been cured or waived by or on behalf of the holders of
such Designated Senior Indebtedness or Significant Senior
Indebtedness, as the case may be, or shall have ceased to
exist, until such default shall have been cured or waived or
shall have ceased to exist or such Designated Senior
Indebtedness or Significant Senior Indebtedness, as the case
may be, shall have been discharged or paid in full in cash or
Cash Equivalents, after which the Company shall resume making
any and all required payments in respect of the Securities,
including any missed payments.
(b) Unless Section 4.03 shall be applicable, during
the continuance of any other event of default with respect to
any Designated Senior Indebtedness pursuant to which the
maturity thereof may be accelerated, upon the earliest to occur
of (a) receipt by the Trustee of written notice from the
holders of a majority of the outstanding principal amount of
the Designated Senior Indebtedness or their Representative, or
(b) if such event of default results from the acceleration of
the Securities, the date of such acceleration, no such payment
(other than payments by a trust previously established pursuant
to Article Nine hereof) may be made by the Company upon or in
respect of the Securities for a period ("Payment Blockage
----------------
Period") commencing on the earlier of the date of receipt of
- ------
such notice or the date of such acceleration and ending 179
days thereafter (unless (x) such Payment Blockage Period shall
be terminated by written notice to the Trustee from the holders
of a majority of the outstanding principal amount of such
<PAGE>
-43-
Designated Senior Indebtedness or their representative who
delivered such notice or (y) such default is cured or waived,
or ceases to exist or such Designated Senior Indebtedness is
discharged or paid in full in cash or Cash Equivalents), after
which the Company shall resume making any and all required
payments in respect of the Securities, including any missed
payments. Notwithstanding anything herein to the contrary, in
no event will a Payment Blockage Period extend beyond 179 days
from the date on which such Payment Blockage Period was
commenced. Not more than one Payment Blockage Period may be
commenced with respect to the Securities during any period of
365 consecutive days. No event of default which existed or was
continuing on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior
Indebtedness initiating such Payment Blockage Period shall be,
or be made, the basis for the commencement of a second Payment
Blockage Period by the holders of such Designated Senior
Indebtedness or their representative whether or not within a
period of 365 consecutive days unless such event of default
shall have been cured or waived for a period of not less than
90 consecutive days.
(c) In the event that, notwithstanding the
foregoing, the Trustee or the Holder of any Security shall have
received any payment prohibited by the foregoing provisions of
this Section 4.02, then and in such event such payment shall be
paid over and delivered forthwith to the Representative or as a
court of competent jurisdiction shall direct.
SECTION 4.03. Securities Subordinated to Prior Payment of
All Senior Indebtedness on Dissolution,
Liquidation or Reorganization of Company.
-------------------------------------------
Upon any distribution of assets of the Company of any
kind or character, whether in cash, property or securities,
upon any dissolution, winding-up, total or partial liquidation
or reorganization of the Company (including, without
limitation, in bankruptcy, insolvency or receivership
proceedings or upon any assignment for the benefit of creditors
or any other marshalling of the Company's assets and
liabilities):
(a) the holders of Senior Indebtedness shall first
be entitled to receive payments in full in cash or Cash
Equivalents of all amounts payable under Senior
Indebtedness (including, with respect to Designated Senior
Indebtedness, any interest accruing after the commencement
of any such proceeding at the rate specified in the
<PAGE>
-44-
applicable Designated Senior Indebtedness whether or not
interest is an allowed claim enforceable against the
Company in any such proceeding) before the Holders will be
entitled to receive any payment with respect to the
Securities (excluding Permitted Subordinated
Reorganization Securities), and until all Obligations with
respect to Senior Indebtedness are paid in full in cash or
Cash Equivalents, any distribution to which the Holders
would be entitled (excluding Permitted Subordinated
Reorganization Securities) shall be made to the holders of
Senior Indebtedness; provided, however, that no payment of
-------- -------
any Guarantee shall constitute payment on behalf of the
Company for purposes of this Section 4.03(a);
(b) any distribution of assets of the Company of any
kind or character, whether in cash, property or
securities, to which the Holders or the Trustee on behalf
of the Holders would be entitled (excluding Permitted
Subordinated Reorganization Securities) except for the
provisions of this Article Four, shall be paid by the
liquidating trustee or agent or other person making such a
payment or distribution, directly to the holders of Senior
Indebtedness or their Representative, ratably according to
the respective amounts of Senior Indebtedness remaining
unpaid held or represented by each, until all Senior
Indebtedness remaining unpaid shall have been paid in full
in cash or Cash Equivalents after giving effect to any
concurrent payment or distribution to the holders of such
Senior Indebtedness; and
(c) in the event that, notwithstanding the
foregoing, any distribution of assets of the Company of
any kind or character, whether in cash, property or
securities, shall be received by the Trustee or the
Holders or any Paying Agent on account of principal of,
premium, if any, or interest on the Securities (excluding
Permitted Subordinated Reorganization Securities) before
all Senior Indebtedness is paid in full in cash or Cash
Equivalents, such payment or distribution (subject to the
provisions of Sections 4.06 and 4.07) shall be received,
segregated from other funds, and held in trust by the
Trustee or such Holder or Paying Agent for the benefit of,
and shall immediately be paid over to, the holders of
Senior Indebtedness or their Representative, ratably
according to the respective amounts of Senior Indebtedness
held or represented by each, until all Senior Indebtedness
remaining unpaid shall have been paid in full in cash or
Cash
<PAGE>
-45-
Equivalents, after giving effect to any concurrent
distribution to or for the holders of Senior Indebtedness.
Notwithstanding anything to the contrary contained herein,
in the absence of its gross negligence or wilful
misconduct, the Trustee shall have no duty to collect or
retrieve monies previously paid by it in good faith;
provided, however, that this sentence shall not affect the
-------- -------
obligation of any other party receiving such payment to
hold such payment for the benefit of, and to pay over such
payment over to, the holders of Senior Indebtedness or
their Representative.
The consolidation of the Company with, or the merger
of the Company with or into, another person or the liquidation
or dissolution of the Company following the conveyance,
transfer or lease of its properties and assets substantially as
an entirety to another person upon the terms and conditions set
forth in Article Six hereof shall not be deemed a dissolution,
winding-up, liquidation, reorganization, assignment for the
benefit of creditors or marshaling of assets and liabilities of
the Company for the purposes of this Article Four if the person
formed by such consolidation or the surviving entity of such
merger or the person which acquires by conveyance, transfer or
lease such properties and assets substantially as an entirety,
as the case may be, shall, as a part of such consolidation,
merger, conveyance, transfer or lease, comply with the
conditions set forth in such Article Six.
The Company shall give prompt notice to the Trustee
prior to any dissolution, winding-up, total or partial
liquidation or reorganization (including, without limitation,
in bankruptcy, insolvency, or receivership proceedings or upon
any assignment for the benefit of creditors or any other
marshalling of the Company's assets and liabilities).
SECTION 4.04. Holders To Be Subrogated to Rights
of Holders of Senior Indebtedness.
----------------------------------
Subject to the payment in full in cash or Cash
Equivalents of all Senior Indebtedness, the Holders of
Securities shall be subrogated to the rights of the holders of
Senior Indebtedness to receive payments or distributions of
assets of the Company applicable to the Senior Indebtedness
until all amounts owing on the Securities shall be paid in full
in cash, and for the purpose of such subrogation no payments or
distributions to the holders of Senior Indebtedness by or on
behalf of the Company, or by or on behalf of the Holders by
virtue of
<PAGE>
-46-
this Article Four, which otherwise would have been made to the
Holders, shall, as between the Company and the Holders, be deemed
to be payment by the Company to or on account of the Senior
Indebtedness, it being understood that the provisions of this
Article Four are and are intended solely for the purpose of
defining the relative rights of the Holders, on the one hand, and
the holders of Senior Indebtedness, on the other hand.
If any payment or distribution to which the Holders
would otherwise have been entitled but for the provisions of
this Article Four shall have been applied, pursuant to the
provisions of this Article Four, to the payment of all amounts
payable under the Senior Indebtedness, then the Holders shall
be entitled to receive from the holders of such Senior
Indebtedness any payments or distributions received by such
holders of Senior Indebtedness in excess of the amount
sufficient to pay all amounts payable under or in respect of
the Senior Indebtedness in full in cash or Cash Equivalents.
SECTION 4.05. Obligations of the Company Unconditional.
----------------------------------------
Nothing contained in this Article Four or elsewhere
in this Indenture or in the Securities is intended to or shall
impair, as between the Company and the Holders, the obligation
of the Company, which is absolute and unconditional, to pay to
the Holders the principal of and interest on the Securities as
and when the same shall become due and payable in accordance
with their terms, or is intended to or shall affect the
relative rights of the Holders and creditors of the Company
other than the holders of the Senior Indebtedness, nor shall
anything herein or therein prevent the Trustee or any Holder
from exercising all remedies otherwise permitted by applicable
law upon default under this Indenture, subject to the rights,
if any, under this Article Four, of the holders of Senior
Indebtedness in respect of cash, property or securities of the
Company received upon the exercise of any such remedy. Upon
any payment or distribution of assets or securities of the
Company referred to in this Article Four, the Trustee, subject
to the provisions of Sections 8.01 and 8.02, and the Holders
shall be entitled to rely upon any order or decree made by any
court of competent jurisdiction in which any dissolution,
winding-up, liquidation or reorganization proceedings are
pending, or a certificate of the receiver, trustee in
bankruptcy, liquidating trustee or agent or other person making
any payment or distribution to the Trustee or to the Holders
for the purpose of ascertaining the persons entitled to
participate in such
<PAGE>
-47-
payment or distribution, the holders of Senior Indebtedness and
other Indebtedness of the Company, the amount thereof or payable
thereon, the amount or amounts paid or distributed thereon and
all other facts pertinent thereto or to this Article Four.
Nothing in this Section 4.05 shall apply to the claims of, or
payments to, the Trustee under or pursuant to Section 8.07.
SECTION 4.06. Trustee Entitled To Assume Payments Not
Prohibited in Absence of Notice.
---------------------------------------
The Trustee shall not at any time be charged with
knowledge of the existence of any facts that would prohibit the
making of any payment to or by the Trustee unless and until the
Trustee or any Paying Agent shall have received written notice
thereof from the Company or from one or more holders of Senior
Indebtedness or from any Representative therefor and, prior to
the receipt of any such notice, the Trustee, subject to the
provisions of Sections 8.01 and 8.02, shall be entitled in all
respects conclusively to assume that no such fact exists.
SECTION 4.07. Application by Trustee of Assets Deposited
with It.
------------------------------------------
U.S. Legal Tender or U.S. Government Obligations
deposited in trust with the Trustee pursuant to and in
accordance with Section 9.02 shall be for the sole benefit of
Holders and, to the extent allocated for the payment of
Securities, shall not be subject to the subordination
provisions of this Article Four. Otherwise, any deposit of
assets or securities by or on behalf of the Company with the
Trustee or any Paying Agent (whether or not in trust) for the
payment of principal of or interest on any Securities shall be
subject to the provisions of this Article Four; provided,
--------
however, that if prior to the second Business Day preceding the
- -------
date on which by the terms of this Indenture any such assets
may become distributable for any purpose (including, without
limitation, the payment of either principal of or interest on
any Security) the Trustee or such Paying Agent shall not have
received with respect to such assets the notice provided for in
Section 4.06, then the Trustee or such Paying Agent shall have
full power and authority to receive such assets and to apply
the same to the purpose for which they were received, and shall
not be affected by any notice to the contrary received by it on
or after such date; provided, further, however, that no payment
-------- ------- -------
on any Guarantee shall constitute payment on behalf of the
Company for purposes of this Section 4.07. The foregoing shall
not apply to the Paying Agent if the Company or any Subsidiary
or
<PAGE>
-48-
Affiliate of the Company is acting as Paying Agent. Nothing
contained in this Section 4.07 shall limit the right of the
holders of Senior Indebtedness to recover payments as
contemplated by this Article Four.
SECTION 4.08. No Waiver of Subordinated Provisions.
------------------------------------
(a) No right of any present or future holder of any
Senior Indebtedness to enforce subordination as herein provided
shall at any time in any way be prejudiced or impaired by any
act or failure to act on the part of the Company or by any act
or failure to act, in good faith, by any such holder, or by any
non-compliance by the Company with the terms, provisions and
covenants of this Indenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.
(b) Without limiting the generality of subsection
(a) of this Section 4.08, the holders of Senior Indebtedness
may, at any time and from time to time, without the consent of
or notice to the Trustee or the Holders without incurring
responsibility to the Holders and without impairing or
releasing the subordination provided in this Article Four or
the obligations hereunder of the Holders to the holders of
Senior Indebtedness, do any one or more of the following:
(1) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter, Senior Indebtedness or
any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding; (2) sell, exchange, release
or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; (3) release any person
liable in any manner for the collection or payment of Senior
Indebtedness; and (4) exercise or refrain from exercising any
rights against the Company and any other person; provided,
--------
however, that in no event shall any such actions limit the
- -------
right of the Holders to take any action to accelerate the
maturity of the Securities pursuant to Article Seven hereof or
to pursue any rights or remedies hereunder or under applicable
laws if the taking of such action does not otherwise violate
the terms of this Indenture.
(c) Each Holder by accepting a Security agrees that
the Representative of any Senior Indebtedness, in its
discretion, without notice or demand and without affecting any
rights of any holder of Senior Indebtedness under this
Article Four, may foreclose any mortgage or deed of trust
covering interests in real property secured thereby, by
judicial or nonjudicial sale; and such Holder hereby waives any
defense to the
<PAGE>
-49-
enforcement by the Representative of any Senior Indebtedness or
by any holder of any Senior Indebtedness against such Holder of
this Article Four after a judicial or nonjudicial sale or other
disposition of its interests in real property secured by such
mortgage or deed of trust.
SECTION 4.09. Holders Authorize Trustee To Effectuate
Subordination of Securities.
---------------------------------------
Each Holder of the Securities by his acceptance
thereof authorizes and expressly directs the Trustee on his
behalf to take such action as may be necessary or appropriate
to effect the subordination provisions contained in this
Article Four, and appoints the Trustee his attorney-in-fact for
such purpose, including, in the event of any dissolution,
winding-up, liquidation or reorganization of the Company
(whether in bankruptcy, insolvency or receivership proceedings
or upon an assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company) tending
towards liquidation or reorganization of the business and
assets of the Company, the immediate filing of a claim for the
unpaid balance of such Holder's Securities in the form required
in said proceedings and cause said claim to be approved. If
the Trustee does not file a proper claim or proof of debt in
the form required in such proceeding prior to 30 days before
the expiration of the time to file such claim or claims, then
the holders of the Senior Indebtedness or their Representative
is hereby authorized to file an appropriate claim for and on
behalf of the Holders of said Securities. Nothing herein
contained shall be deemed to authorize the Trustee or the
holders of Senior Indebtedness or their Representative to
authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any
Holder thereof, or to authorize the Trustee or the holders of
Senior Indebtedness or their Representative to vote in respect
of the claim of any Holder in any such proceeding.
SECTION 4.10. Right of Trustee To Hold Senior Indebtedness.
--------------------------------------------
The Trustee shall be entitled to all of the rights
set forth in this Article Four in respect of any Senior
Indebtedness at any time held by it to the same extent as any
other holder of Senior Indebtedness, and nothing in this
Indenture shall be construed to deprive the Trustee of any of
its rights as such holder.
<PAGE>
-50-
SECTION 4.11. No Suspension of Remedies.
-------------------------
The failure to make a payment on account of principal
of or interest on the Securities by reason of any provision of
this Article Four shall not be construed as preventing the
occurrence of a Default or an Event of Default under Section
7.01.
Nothing contained in this Article Four shall limit
the right of the Trustee or the Holders to take any action to
accelerate the maturity of the Securities pursuant to
Article Seven or to pursue any rights or remedies hereunder or
under applicable law, subject to the rights, if any, under this
Article Four of the holders, from time to time, of Senior
Indebtedness.
SECTION 4.12. No Fiduciary Duty of Trustee to Holders of
Senior Indebtedness.
------------------------------------------
The Trustee shall not be deemed to owe any fiduciary
duty to the holders of Senior Indebtedness, and shall not be
liable to any such holders (other than for its willful
misconduct or gross negligence) if it shall in good faith
mistakenly pay over or deliver to the Holders or the Company or
any other person, money or assets to which any holders of
Senior Indebtedness shall be entitled by virtue of this Article
Four or otherwise. Nothing in this Section 4.12 shall affect
the obligation of any person other than the Trustee to hold
such payment for the benefit of, and to pay such payment over
to, the holders of Senior Indebtedness or their Representative.
ARTICLE FIVE
COVENANTS
SECTION 5.01. Payment of Securities.
---------------------
The Company shall pay the principal of and interest
on the Securities on the dates and in the manner provided in
the Securities. An installment of principal of or interest on
the Securities shall be considered paid on the date it is due
if the Trustee or Paying Agent (other than the Company or a
Subsidiary) holds on that date U.S. Legal Tender designated for
and sufficient to pay the installment; provided, however, that
-------- -------
U.S. Legal Tender held by the Trustee for the benefit of
<PAGE>
-51-
holders of Senior Indebtedness or Guarantor Senior Indebtedness
or the payment of which to the Holders is prohibited pursuant
to the provisions of Article Four or Article Twelve hereof or
otherwise shall not be considered to be designated for the
payment of any installment of principal or interest on the
Securities within the meaning of this Section 5.01.
The Company shall pay interest on overdue principal
at the rate borne by the Securities and it shall pay interest
on overdue installments of interest at the same rate, to the
extent lawful.
SECTION 5.02. Maintenance of Office or Agency.
-------------------------------
The Company shall maintain in the Borough of
Manhattan, The City of New York, the office or agency required
under Section 2.03 hereof. The Company shall give prior notice
to the Trustee of the location, and any change in the location,
of such office or agency. If at any time the Company shall
fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or
served at the address of the Trustee set forth in Section
13.02.
SECTION 5.03. Limitation on Restricted Payments.
---------------------------------
(a) The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, make any
Restricted Payment if, at the time of such proposed Restricted
Payment, or after giving effect thereto, (1) a Default or an
Event of Default shall have occurred and be continuing, (2) the
Company could not Incur $1.00 of additional Indebtedness
pursuant to the proviso in Section 5.12 hereof or (3) the
aggregate amount expended for all Restricted Payments,
including such proposed Restricted Payment (the amount of any
Restricted Payment, if other than cash, to be the fair market
value thereof at the date of payment as determined in good
faith by the Board of Directors of the Company as evidenced by
a Board Resolution), subsequent to the Issue Date, shall exceed
the sum of (i) 50% of the aggregate Consolidated Net Income (or
if such aggregate Consolidated Net Income is a loss, minus 100%
of such loss) earned during the period beginning on the Issue
Date and ending on the date of the proposed Restricted Payment
(the "Reference Date") plus (ii) 100% of the aggregate Net
--------------
Proceeds received by the Company from any Person (other than a
Subsidiary) from the issuance and sale (including upon exchange
or conversion for other securities of the Company) subsequent
to
<PAGE>
-52-
the Issue Date and on or prior to the Reference Date of
Qualified Capital Stock (excluding (A) Qualified Capital Stock
paid as a dividend on any Capital Stock or as interest on any
Indebtedness and (B) any Net Proceeds from issuances and sales
financed directly or indirectly using funds borrowed from the
Company or any Subsidiary, until and to the extent such
borrowing is repaid), plus (iii) 100% of the Net Proceeds from
(x) the sale or other disposition of Investments (other than
Permitted Investments described in clauses (i)-(vi) inclusive
of the definition thereof) made by the Company or any
Restricted Subsidiary or (y) the sale of the Capital Stock of
any Unrestricted Subsidiary by the Company or any Restricted
Subsidiary or the sale of all or substantially all of the
assets of any Unrestricted Subsidiary to the extent that a
liquidating dividend or similar distribution is paid to the
Company or any Restricted Subsidiary from the proceeds of such
asset sale.
(b) The provisions set forth in the immediately
preceding paragraph will not prevent (1) the payment of any
dividend within 60 days after the date of its declaration if
the dividend would have been permitted on the date of
declaration, (2) the acquisition of any shares of Capital Stock
of the Company or the repurchase, redemption or other repayment
of any Subordinated Indebtedness, in each case, in exchange for
or solely out of the Net Cash Proceeds of the substantially
concurrent sale (other than to a Subsidiary) of shares of
Qualified Capital Stock of the Company; provided, however, that
-------- -------
no proceeds of such sale of Qualified Capital Stock shall be
included in clause (ii) of the preceding paragraph, (3) the
repurchase, redemption or other repayment of any Subordinated
Indebtedness in exchange for or solely out of the Net Cash
Proceeds of the substantially concurrent sale (other than to a
Subsidiary) of Subordinated Indebtedness of the Company with an
Average Life equal to or greater than the then remaining
Average Life of the Subordinated Indebtedness repurchased,
redeemed or repaid, and (4) Permitted Payments; provided,
--------
however, that, at the time of, and after giving effect to, any
- -------
Restricted Payment made under clause (3) or (4), no Default or
Event of Default shall have occurred and be continuing;
provided, further, however, that the declaration of each
- -------- -------
dividend paid in accordance with clause (1) above and each
payment under clause (iv) of the definition of "Permitted
Payments" shall each be counted for purposes of computing
amounts expended pursuant to subclause (3) in the immediately
preceding paragraph, and no amounts expended pursuant to clause
(2) or (3) above or clause
<PAGE>
-53-
(i), (ii), (iii), (v), (vi) or (vii) of the definition of
"Permitted Payments" shall be so counted.
SECTION 5.04. Corporate Existence.
-------------------
Except as otherwise permitted by Article Six, the
Company shall do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate
existence and the corporate or other existence of each of its
Significant Subsidiaries in accordance with the respective
organizational documents of each such Significant Subsidiary
and the rights (charter and statutory) and franchises of the
Company and each such Significant Subsidiary; provided,
--------
however, that the Company shall not be required to preserve,
- -------
with respect to itself, any right or franchise, and with
respect to any of its Significant Subsidiaries, any such
existence, right or franchise, if the Board of Directors of the
Company or such Significant Subsidiary, as the case may be,
shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company or any
such Significant Subsidiary.
SECTION 5.05. Payment of Taxes and Other Claims.
---------------------------------
The Company shall pay or discharge or cause to be
paid or discharged, before the same shall become delinquent,
(i) all taxes, assessments and governmental charges (including
withholding taxes and any penalties, interest and additions to
taxes) levied or imposed upon it or any of the Subsidiaries or
properties of it or any of the Subsidiaries and (ii) all lawful
claims for labor, materials and supplies that, if unpaid, might
by law become a Lien upon the property of it or any of the
Subsidiaries; provided, however, that the Company shall not be
-------- -------
required to pay or discharge or cause to be paid or discharged
any such tax, assessment, charge or claim if either (a) the
amount, applicability or validity thereof is being contested in
good faith by appropriate proceedings and an adequate reserve
has been established therefor to the extent required by GAAP or
(b) the failure to make such payment or effect such discharge
(together with all other such failures) would not have a
material adverse effect on the financial condition or results
or operations of the Company and the Subsidiaries taken as a
whole.
<PAGE>
-54-
SECTION 5.06. Maintenance of Properties and Insurance.
---------------------------------------
(a) The Company shall cause all properties used or
useful to the conduct of its business or the business of any of
the Subsidiaries to be maintained and kept in good condition,
repair and working order and supplied with all necessary
equipment and shall cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof,
all as in its judgment may be necessary, so that the business
carried on in connection therewith may be properly and
advantageously conducted at all times unless the failure to so
maintain such properties (together with all other such
failures) would not have a material adverse effect on the
financial condition or results of operations of the Company and
the Subsidiaries taken as a whole; provided, however, that
-------- -------
nothing in this Section 5.06 shall prevent the Company or any
Subsidiary from discontinuing the operation or maintenance of
any of such properties, or disposing of any of them, if such
discontinuance or disposal is either (i) in the ordinary course
of business, (ii) in the good faith judgment of the Board of
Directors of the Company or the Subsidiary concerned, or of the
senior officers of the Company or such Subsidiary, as the case
may be, desirable in the conduct of the business of the Company
or such Subsidiary, as the case may be, or (iii) is otherwise
permitted by this Indenture.
(b) The Company shall provide or cause to be
provided, for itself and each of the Subsidiaries, insurance
(including appropriate self-insurance) against loss or damage
of the kinds that, in the reasonable, good faith opinion of the
Company are adequate and appropriate for the conduct of the
business of the Company and the Subsidiaries in a prudent
manner, with reputable insurers or with the government of the
United States of America or an agency or instrumentality
thereof, in such amounts, with such deductibles, and by such
methods as shall be either (i) consistent with past practices
of the Company or the applicable Subsidiary or (ii) customary,
in the reasonable, good faith opinion of the Company, for
corporations similarly situated in the industry, unless the
failure to provide such insurance (together with all other such
failures) would not have a material adverse effect on the
financial condition or results of operations of the Company and
the Subsidiaries, taken as a whole.
<PAGE>
-55-
SECTION 5.07. Compliance Certificate; Notice of Default.
-----------------------------------------
(a) The Company shall deliver to the Trustee within
120 days after the end of the Company's fiscal year an
Officers' Certificate stating that a review of its activities
and the activities of the Subsidiaries during the preceding
fiscal year has been made under the supervision of the signing
Officers with a view to determining whether it has kept,
observed, performed and fulfilled its obligations under this
Indenture and further stating, as to each such Officer signing
such certificate, that to the best of his or her knowledge the
Company during such preceding fiscal year has kept, observed,
performed and fulfilled each and every such covenant and no
event of default in respect of any payment obligation under the
Credit Agreement and no Default or Event of Default occurred
during such year or, if such signers do know of such an event
of default, Default or Event of Default, the certificate shall
describe the event of default, Default or Event of Default and
its status with particularity. The Officers' Certificate shall
also notify the Trustee should the Company elect to change the
manner in which it fixes its fiscal year end.
(b) So long as, and to the extent, not contrary to
the then current recommendations of the American Institute of
Certified Public Accountants, the Company shall deliver to the
Trustee within 120 days after the end of each fiscal year a
written statement by the Company's independent certified public
accountants stating (A) that their audit examination has
included a review of the terms of this Indenture and the
Securities as they relate to accounting matters, and
(B) whether, in connection with their audit examination, any
Default has come to their attention and if such a Default has
come to their attention, specifying the nature and period of
existence thereof.
(c) The Company shall deliver to the Trustee,
forthwith upon becoming aware, and in any event within 5 days
after the occurrence, of (i) any Default or Event of Default;
(ii) any event of default in respect of any payment obligation
under the Credit Agreement or any event of default under any
bond, debenture, note, or other evidence of Indebtedness of the
Company or any of the Subsidiaries, or under any mortgage,
indenture or other instrument if such event of default related
to Indebtedness at any time in an aggregate principal amount
exceeding $20 million, an Officers' Certificate specifying with
particularity such event.
<PAGE>
-56-
SECTION 5.08. Compliance with Laws.
--------------------
The Company shall comply, and shall cause each of the
Subsidiaries to comply, with all applicable statutes, rules,
regulations, orders and restrictions of the United States of
America, all states and municipalities thereof, and of any
governmental department, commission, board, regulatory
authority, bureau, agency and instrumentality of the foregoing,
in respect of the conduct of their respective businesses and
the ownership of their respective properties, except such as
are being contested in good faith and by appropriate
proceedings and except for such noncompliances as would not in
the aggregate have a material adverse effect on the financial
condition or results of operations of the Company and the
Subsidiaries taken as a whole.
SECTION 5.09. SEC Reports.
-----------
The Company will deliver to the Trustee within 15
days after the filing of the same with the Commission, copies
of the quarterly and annual reports and other reports, if any,
which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act.
Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent
permitted, and provide the Trustee and the Holder with such
quarterly and annual reports and other reports specified in
Section 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a).
SECTION 5.10. Waiver of Stay, Extension or Usury Laws.
---------------------------------------
The Company covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay or extension law or any usury law or
other law that would prohibit or forgive the Company from
paying all or any portion of the principal of or interest on
the Securities as contemplated herein, wherever enacted, now or
at any time hereafter in force, or which may affect the
covenants or the performance of this Indenture; and (to the
extent that it may lawfully do so) the Company hereby expressly
waives all benefit or advantage of any such law, and covenants
that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit
the
<PAGE>
-57-
execution of every such power as though no such law had been
enacted.
SECTION 5.11. Limitation on Transactions with Affiliates.
------------------------------------------
(a) The Company shall not, and shall not permit any
Restricted Subsidiary to, in a single transaction or series of
related transactions, (i) sell, lease, transfer or otherwise
dispose of any of its properties or assets or issue securities
(other than equity securities which do not constitute
Disqualified Capital Stock) to, (ii) purchase any property,
assets or securities from, (iii) make any Investment in, or
(iv) enter into or suffer to exist any contract or agreement
with or for the benefit of, an Affiliate or Significant
Stockholder (or any Affiliate of such Significant Stockholder)
of the Company or any Subsidiary (any of the foregoing, an
"Affiliate Transaction"), unless (I) (A) such Affiliate
---------------------
Transaction is in the ordinary course of business or otherwise
on terms that are at least as favorable to the Company or such
Restricted Subsidiary, as the case may be, as might reasonably
have been obtainable at such time from an unaffiliated party;
(B) in the case of an Affiliate Transaction involving aggregate
payments in excess of $2.0 million and less than or equal to
$5.0 million, the Company or such Restricted Subsidiary, as the
case may be, shall have delivered an Officers' Certificate to
the Trustee certifying that such Affiliate Transaction is on
terms that are at least as favorable to the Company or such
Restricted Subsidiary, as the case may be, as might reasonably
have been obtainable at such time from an unaffiliated party;
(C) in the case of an Affiliate Transaction involving aggregate
payments in excess of $5.0 million and less than or equal to
$15.0 million, the Company or such Restricted Subsidiary, as
the case may be, shall have delivered an Officers' Certificate
to the Trustee certifying to the same effect as specified in
clause (B) above and also that such Affiliate Transaction has
received the approval of a majority of the disinterested
members of the Board of Directors of the Company or such
Restricted Subsidiary, as the case may be, or, in the absence
of any such approval, that an Independent Financial Advisor has
provided the Board of Directors with written confirmation to
the effect specified in clause (II) below; and (D) in the case
of an Affiliate Transaction involving aggregate payments in
excess of $15.0 million, the Company or such Restricted
Subsidiary, as the case may be, shall have delivered to the
Trustee a written opinion of an Independent Financial Advisor
to the effect specified in clause (II) below or (II) the
Company or such Restricted Subsidiary, as the case may be,
shall have delivered
<PAGE>
-58-
to the Trustee a written opinion of an Independent Financial
Advisor to the effect that such transaction is fair to the
Company or such Restricted Subsidiary, as the case may be, from a
financial point of view or that the terms of such Affiliate
Transaction are at least as favorable to the Company or such
Restricted Subsidiary, as the case may be, as those that might
reasonably have been obtainable at such time from a Person that
is not an Affiliate of the Company or such Restricted Subsidiary,
as the case may be.
(b) The provisions of the foregoing paragraph shall
not apply to (i) any Permitted Payment, (ii) any Restricted
Payment that is made in compliance with Section 5.03 hereof,
(iii) reasonable and customary fees and compensation paid to,
and indemnity provided on behalf of, officers, directors,
consultants or employees of the Company or any Restricted
Subsidiary, as determined in good faith by the Board of
Directors of the Company or such Restricted Subsidiary or the
senior management thereof, (iv) transactions exclusively
between or among the Company and any of its wholly owned
Restricted Subsidiaries or exclusively between or among such
wholly owned Restricted Subsidiaries; provided such
transactions are not otherwise prohibited by the applicable
Indenture, (v) the Standstill Agreement and any other agreement
in effect on the Issue Date as in effect on such date (or any
transaction contemplated thereby) or as amended thereafter
(including transactions contemplated pursuant to such
amendment) so long as any such amendment is not disadvantageous
to the Holders of the Securities in any material respect, (vi)
the existence of, or the performance by the Company or any of
the Restricted Subsidiaries of its obligations under the terms
of, any stockholders agreement (including any registration
rights agreement or purchase agreement related thereto) to
which it is a party as of the Issue Date and any similar
agreements which it may enter into thereafter; provided,
--------
however, that the existence of, or the performance by the
- -------
Company or any Restricted Subsidiary of obligations under any
future amendment to, any such existing agreement or under any
similar agreement entered into after the Issue Date shall only
be permitted by this clause (vi) to the extent that the terms
of any such amendment or new agreement are not otherwise
disadvantageous to the Holders of the Securities in any
material respect, (vii) transactions permitted by, and
complying with, Article Six hereof and (viii) transactions with
suppliers or other purchases or sales of goods or services, in
each case in the ordinary course of business (including,
without limitation, pursuant to joint venture agreements) and
otherwise in compliance with the terms of this Indenture which
are fair to
<PAGE>
-59-
the Company, in the reasonable determination of the Board of
Directors of the Company or the senior management thereof, or are
on terms at least as favorable as might reasonably have been
obtained at such time from an unaffiliated party.
SECTION 5.12. Limitation on Incurrences of
Additional Indebtedness.
----------------------------
The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur any
Indebtedness other than Permitted Indebtedness; provided,
--------
however, that if no Default with respect to payment of
- -------
principal of, or interest on, the Securities or Event of
Default shall have occurred and be continuing at the time or as
a consequence of the Incurrence of any such Indebtedness, the
Company or any Restricted Subsidiary may Incur Indebtedness if
immediately after giving effect to the Incurrence of such
Indebtedness the Operating Coverage Ratio would be greater than
2.0 to 1.0.
SECTION 5.13. Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries.
-----------------------------------------------
The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or
suffer to exist, or allow to become effective any consensual
Payment Restriction with respect to any of the Restricted
Subsidiaries, except for (a) any such restrictions contained in
(i) the Credit Agreement and related documents as any such
Payment Restriction may apply to any present or future
Subsidiary, (ii) the Senior Note Indenture and this Indenture,
(iii) any agreement in effect at or entered into on the Issue
Date, as each of the agreements referred to in the foregoing
clauses (i), (ii) or (iii) is in effect on the Issue Date or as
thereafter amended, supplemented or amended and restated in a
manner, as it relates to such restrictions, not materially
adverse to the Holders and (iv) Indebtedness of a Person
existing at the time such Person becomes a Restricted
Subsidiary (provided that (x) such Indebtedness is not Incurred
--------
in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary, (y) such restriction is not
applicable to any Person, or the properties or assets of any
Person, other than the Person so acquired and (z) such
Indebtedness is otherwise permitted to be Incurred pursuant to
Section 5.12 hereof); (b) limitations contained in agreements
governing secured Indebtedness otherwise permitted to be
Incurred pursuant to Sections 5.12 and 5.14 hereof on the right
of the debtor to dispose of the assets securing such
Indebtedness; (c) customary non-assignment
<PAGE>
-60-
provisions restricting subletting or assignment of any lease or
other agreement entered into by a Restricted Subsidiary; (d)
customary net worth or similar provisions contained in leases and
other agreements entered into by a Restricted Subsidiary in the
ordinary course of business; (e) customary restrictions with
respect to a Restricted Subsidiary pursuant to an agreement that
has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such
Restricted Subsidiary; (f) customary provisions in joint venture
agreements and other similar agreements; (g) restrictions
contained in Indebtedness Incurred to refinance, refund, extend
or renew Indebtedness referred to in clauses (a) and (b) above;
provided that the restrictions contained therein are not
- --------
materially more restrictive taken as a whole than those provided
for in such Indebtedness being refinanced, refunded, extended or
renewed; and (h) Payment Restrictions contained in any other
Indebtedness permitted to be Incurred subsequent to the Issue
Date pursuant to Section 5.12 hereof; provided that any such
--------
Payment Restrictions are ordinary and customary with respect to
the type of Indebtedness being Incurred (under the relevant
circumstances).
SECTION 5.14. Limitation on Liens.
-------------------
The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien (other than Permitted
Liens pursuant to clauses (i) through (xv) of the definition
thereof) that secures any Indebtedness of the Company which is
expressly by its terms subordinated in right of payment to any
other Indebtedness of the Company on any asset or property of
the Company or any Restricted Subsidiary, unless the Securities
are secured by a Lien on such asset or property that is (x)
pari passu with such other Indebtedness if such other
Indebtedness is pari passu with the Securities or (y) if such
other Indebtedness is subordinated to the Securities, senior in
priority to the Lien securing such other Indebtedness, in each
case, until such time as such obligations are no longer secured
by a Lien.
SECTION 5.15. Limitation on Change of Control.
-------------------------------
(a) Upon the occurrence of a Change of Control, each
Holder will have the right to require the repurchase of such
Holder's Securities pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101%
-----------------------
of the principal amount thereof plus accrued and unpaid
<PAGE>
-61-
interest to the date of repurchase (the "Change of Control
-----------------
Offer Price").
- -----------
(b) No later than 30 days following the date upon
which the Change of Control occurred, the Company must send, by
first class mail, a notice to each Holder, with a copy to the
Trustee, which notice shall govern the terms of the Change of
Control Offer. Notice of an event giving rise to a Change of
Control shall be given on the same date and in the same manner
to all Holders. Such notice shall state:
(1) that the Change of Control Offer is being made
pursuant to this Section 5.15 and that all Securities
tendered will be accepted for payment;
(2) the purchase price (including the amount of
accrued interest) and the purchase date (which shall be no
earlier than 30 days nor later than 40 days from the date
such notice is mailed, other than as may be required by
law) (the "Change of Control Payment Date");
------------------------------
(3) that any Security not tendered will continue to
accrue interest if interest is then accruing;
(4) that, unless (i) the Company defaults in making
payment therefor or (ii) such payment is prohibited
pursuant to Article Four, any Security accepted for
payment pursuant to the Change of Control Offer shall
cease to accrue interest after the Change of Control
Payment Date;
(5) that Holders electing to have a Security
purchased pursuant to a Change of Control Offer will be
required to surrender the Security, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the
Security completed, to the Paying Agent at the address
specified in the notice prior to the close of business on
the Business Day prior to the Change of Control Payment
Date;
(6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than two
Business Days prior to the Change of Control Payment Date,
a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount
of the Securities the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to
have such Security purchased;
<PAGE>
-62-
(7) that Holders whose Securities are purchased only
in part will be issued new Securities equal in principal
amount to the unpurchased portions of the Securities
surrendered; provided that each Security purchased and
--------
each Security issued shall be in an original principal
amount of $1,000 or integral multiples thereof;
(8) that each Change of Control Offer is required to
remain open for at least 20 Business Days or such longer
period as may be required by law and until 12:00 Midnight
New York City time on the applicable Change of Control
Payment Date; and
(9) the circumstances and relevant facts regarding
such Change of Control.
(c) On or before the Change of Control Payment Date,
the Company shall (i) accept for payment Securities or portions
thereof tendered pursuant to the Change of Control Offer,
(ii) deposit with the Paying Agent U.S. Legal Tender sufficient
to pay the purchase price of all Securities so tendered and
(iii) deliver to the Trustee Securities so accepted together
with an Officers' Certificate stating the Securities or
portions thereof being purchased by the Company. The Paying
Agent shall promptly mail to the Holders of Securities so
accepted payment in an amount equal to the purchase price (and
the Trustee shall promptly authenticate and mail to such
Holders new Securities equal in principal amount to any
unpurchased portion of the Securities surrendered provided that
each such new Security shall be in the principal amount of
$1,000 or integral multiples thereof) unless such payment is
prohibited pursuant to Article Four or otherwise. The Company
will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control
Payment Date. For purposes of this Section 5.15, the Trustee
shall act as the Paying Agent.
(d) Notwithstanding the foregoing, prior to the
mailing of the notice of a Change of Control Offer referred to
above, within 30 days following a Change of Control, the
Company shall either (i) repay in full all Indebtedness, and
terminate all commitments, under the Credit Agreement to the
extent required upon a change of control pursuant to the terms
thereof (or offer to repay in full all such Indebtedness and
terminate all such commitments and repay all such Indebtedness
owed to each lender which has accepted such offer and terminate
all such commitments of each such lender), or (ii) obtain the
<PAGE>
-63-
requisite consents under the Credit Agreement, the terms of
which require repayment upon a change of control, to permit the
repurchase of the Securities as provided above. The Company
shall first comply with the covenant in the immediately
preceding sentence before it shall be required to repurchase
Securities pursuant to the provisions described above. The
Company's failure to comply with the covenants described in
this paragraph shall constitute an Event of Default hereunder.
(e) Notwithstanding the foregoing, the Company shall
not be required to make a Change of Control Offer, as provided
above, if, in connection with any Change of Control, it has
made an offer to purchase (an "Alternate Offer") any and all
---------------
Securities validly tendered at a cash price equal to or higher
than the Change of Control Offer Price and has purchased all
Securities properly tendered in accordance with the terms of
such Alternate Offer.
(f) The Company must comply with Rule 14e-1 under
the Exchange Act and other provisions of state and federal
securities laws to the extent applicable in connection with a
Change of Control Offer or an Alternate Offer.
SECTION 5.16. Limitation on Asset Sales.
-------------------------
(a) The Company shall not, and shall not permit any
Restricted Subsidiary to, consummate an Asset Sale unless (a)
the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Company) and
(b) upon consummation of such Asset Sale, the Company will
within 365 days of the receipt of the proceeds therefrom: (i)
apply or cause such Restricted Subsidiary to apply the Net Cash
Proceeds of such Asset Sale to (A) a Related Business
Investment, (B) an investment in properties and assets that
replace the properties and assets that are the subject of such
Asset Sale or (C) an investment in properties and assets that
will be used in the business of the Company and the Restricted
Subsidiaries existing on the Issue Date or in businesses
reasonably related thereto; (ii) in the case of a sale of a
store or stores, deem such Net Cash Proceeds to have been
applied to the extent of any capital expenditures made to
acquire or construct a replacement store in the general
vicinity of the store sold within 365 days preceding the date
of such Asset Sale; (iii) apply such Net Cash Proceeds (or
cause such Net Cash Proceeds to be applied) to the permanent
repayment of Pari Passu
<PAGE>
-64-
Indebtedness, any Indebtedness of any Restricted Subsidiary or
any Senior Indebtedness; provided, however, that the repayment of
-------- -------
any revolving loan (under the Credit Agreement or otherwise)
shall result in a permanent reduction in the commitment
thereunder; (iv) use such Net Cash Proceeds to secure Letter of
Credit Obligations to the extent the related letters of credit
have not been drawn upon or returned undrawn; or (v) after such
time as the accumulated Net Cash Proceeds not applied pursuant to
the foregoing clauses (i) through (iv) equals or exceeds $20.0
million, apply such Net Cash Proceeds (or cause such Net Cash
Proceeds to be applied) to the purchase of Securities issued
hereunder tendered to the Company for purchase at a price equal
to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase pursuant to an offer to
purchase made by the Company as set forth below (a "Net Proceeds
------------
Offer"); provided, however, that the Company shall have the right
- ----- -------- -------
to exclude from the foregoing provisions Asset Sales subsequent
to the Issue Date, the proceeds of which are derived from the
sale and substantially concurrent lease-back of a supermarket
and/or related assets or equipment which are acquired or
constructed by the Company or a Restricted Subsidiary subsequent
to the date that is six months prior to the Issue Date, provided
--------
that such sale and substantially concurrent lease-back occurs
within 365 days following such acquisition or the completion of
such construction, as the case may be. Pending the utilization of
any Net Cash Proceeds in the manner (and within the time period)
described above, the Company may use any such Net Cash Proceeds
to repay revolving loans (under the Credit Agreement or
otherwise) without a permanent reduction of the commitment
thereunder.
(b) Each Net Proceeds Offer will be mailed to the
record Holders of the Securities as shown on the register of
Holders of such Securities not less than 325 nor more than 365
days after the relevant Asset Sale, with a copy to the
applicable Trustee. The notice shall contain all instructions
and materials necessary to enable such Holders to tender
Securities pursuant to the Net Proceeds Offer and shall state
the following terms:
(1) that the Net Proceeds Offer is being made
pursuant to Section 5.16 hereof and that all Securities
tendered will be accepted for payment, provided, however,
-------- -------
that if the aggregate principal amount of Securities
tendered in a Net Proceeds Offer plus accrued interest at
the expiration of such offer exceeds the aggregate amount
of the Net Proceeds Offer, the Company shall select the
<PAGE>
-65-
Securities to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so
that only Securities in denominations of $1,000 or
multiples thereof shall be purchased);
(2) the purchase price (including the amount of
accrued interest) and the purchase date (which shall be no
earlier than 30 days nor later than 40 days from the date
such notice is mailed, other than as may be required by
law) (the "Proceeds Purchase Date");
----------------------
(3) that any Security not tendered will continue to
accrue interest if interest is then accruing;
(4) that, unless (i) the Company defaults in making
payment therefor or (ii) such payment is prohibited
pursuant to Article Four hereof or otherwise, any Security
accepted for payment pursuant to the Net Proceeds Offer
shall cease to accrue interest after the Proceeds Purchase
Date;
(5) that Holders electing to have a Security
purchased pursuant to a Net Proceeds Offer will be
required to surrender the Security, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the
Security completed, to the Paying Agent at the address
specified in the notice prior to the close of business on
the Business Day prior to the Proceeds Purchase Date;
(6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than two
Business Days prior to the Proceeds Purchase Date, a
telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the
Securities the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to
have such Security purchased;
(7) that Holders whose Securities were purchased
only in part will be issued new Securities equal in
principal amount to the unpurchased portion of the
Securities surrendered; provided, however, that each
-------- -------
Security purchased and each new Security issued shall be
in an original principal amount of $1,000 or integral
multiples thereof; and
<PAGE>
-66-
(8) that the Net Proceeds Offer shall remain open
for a period of 20 Business Days or such longer period as
may be required by law.
(c) On or before the Proceeds Purchase Date, the
Company shall (i) accept for payment Securities or portions
thereof tendered pursuant to the Net Proceeds Offer which are
to be purchased in accordance with item (b)(1) above, (ii)
deposit with the Paying Agent U.S. Legal Tender sufficient to
pay the purchase price of all Securities to be purchased and
(iii) deliver to the Trustee Securities so accepted together
with an Officers' Certificate stating the Securities or
portions thereof being purchased by the Company. The Paying
Agent shall promptly mail to the Holders of Securities so
accepted payment in an amount equal to the purchase price (and
the Trustee shall promptly authenticate and mail or deliver to
such Holders a new Security equal in principal amount to any
unpurchased portion of the Security surrendered provided that
each such new Security shall be in the principal amount of
$1,000 or integral multiples thereof) unless such payment is
prohibited pursuant to Article Four hereof or otherwise. The
Company will publicly announce the results of the Net Proceeds
Offer on or as soon as practicable after the Proceeds Purchase
Date. For purposes of this Section 5.16, the Trustee shall act
as the Paying Agent.
(d) Any amounts remaining after the purchase of
Securities pursuant to a Net Proceeds Offer shall be returned
by the Trustee to the Company.
(e) The Company must comply with Rule 14e-1 under
the Exchange Act and other provisions of State and federal
securities laws to the extent applicable in connection with a
Net Proceeds Offer.
SECTION 5.17. Limitation on Subsidiary
Assets and Indebtedness.
------------------------
(a) If at any time subsequent to the Issue Date
(i)(a) the Company transfers any of its property, plant or
equipment to one or more of the Restricted Subsidiaries (other
than Guarantors) and (b) as a result of such transfer or
transfers, the book value of all such transferred property,
plant and equipment of the Company and the Guarantors, as
reflected on a balance sheet prepared in accordance with GAAP
in any filing made with the Commission, is greater than 35% of
the then book value of the total property, plant and equipment
of the
<PAGE>
-67-
Company and the Restricted Subsidiaries, on a consolidated basis;
or (ii) any Restricted Subsidiary (other than a Guarantor) incurs
Indebtedness (other than Permitted Indebtedness pursuant to
clause (a) (to the extent such Indebtedness represents a
guarantee of obligations under the Credit Agreement or a
revolving loan thereunder), (b), (c), (d), (g), (h), (i), (j),
(k) or (l) of the definition thereof) that, together with any
other Indebtedness (including Permitted Indebtedness) Incurred
subsequent to the Issue Date by all Restricted Subsidiaries
(other than those that are then Guarantors) then outstanding,
would represent more than 35% of the consolidated total long-term
Indebtedness of the Company and the Restricted Subsidiaries as
reflected on a balance sheet prepared in accordance with GAAP in
any filing made with the Commission (each of the foregoing
clauses (i) and (ii) being referred to herein as a "Guarantee
---------
Condition"), then the Company shall, promptly following any such
- ---------
filing with the Commission, cause one or more of the Restricted
Subsidiaries to unconditionally guarantee, jointly and severally,
the Company's obligations hereunder on a senior subordinated
unsecured basis (each such guarantee, a "Guarantee"), pursuant to
---------
a supplemental indenture satisfactory in form to the Trustee, so
that following the issuance of such Guarantee, neither of the
Guarantee Conditions shall exist. The Indebtedness represented by
each Guarantee (including the payment of Obligations on the
Securities) will be subordinated on the same basis to senior
indebtedness of the Guarantors as the Securities are subordinated
to Senior Indebtedness. So long as no Default or Event of Default
shall have occurred and be continuing, one or more Guarantors may
be released within 10 Business Days following any filing with the
Commission from their Guarantees pursuant to a supplemental
indenture or such other instrument satisfactory in form to the
Trustee if after giving effect to such release neither of the
Guarantee Conditions shall exist. Notwithstanding the foregoing,
neither of the Guarantee Conditions shall be deemed to exist
during any period when the Company's Operating Coverage Ratio is
greater than 3.0 to 1.0.
(b) Upon the sale or disposition (whether by merger,
stock sale, asset sale or otherwise) to any Person which is not
a Restricted Subsidiary of all of the Company's or any
Subsidiary's Capital Stock in, or all or substantially all of
the assets of, any Guarantor, which sale or disposition is
otherwise in compliance with this Indenture, such Guarantor
shall be deemed released from all its obligations under its
Guarantee.
<PAGE>
-68-
(c) The obligations of each Guarantor under its
Guarantee would be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of
such Guarantor and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its
Guarantee, or pursuant to its contribution obligations under
this Indenture, result in the obligations of such Guarantor
under such Guarantee not constituting a fraudulent conveyance
or fraudulent transfer under federal or state law. Each
Guarantor that makes a payment or distribution under a
Guarantee shall be entitled to a contribution from each other
Guarantor in a pro rata amount based on the relative net assets
of each Guarantor.
SECTION 5.18. Limitation on Preferred Stock
of Restricted Subsidiaries.
-----------------------------
The Company shall not permit any of the Restricted
Subsidiaries to issue any Preferred Stock (other than to the
Company or to a wholly owned Restricted Subsidiary) or permit
any Person (other than the Company or a wholly owned Restricted
Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary.
SECTION 5.19. Limitation on Other Senior Subordinated
Indebtedness.
---------------------------------------
The Company shall not, directly or indirectly, incur
any Indebtedness that by its terms (or by the terms of the
agreement governing such Indebtedness) is subordinate in right
of payment to any other Indebtedness of the Company unless such
Indebtedness is also by its terms (or the terms of the
agreement governing such Indebtedness) made expressly either
(a) pari passu in right of payment with the Securities or (b)
subordinate in right of payment to the Securities in the same
manner and at least to the same extent as the Securities are
subordinate to Senior Indebtedness.
SECTION 5.20. Limitation on Restricted and
Unrestricted Subsidiaries.
----------------------------
(a) The Board of Directors of the Company may, if no
Default or Event of Default shall have occurred and be
continuing or would result therefrom, designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation
is at that time permitted under Section 5.03 hereof. The Board
of
<PAGE>
-69-
Directors of the Company may, if no Default or Event of Default
shall have occurred and be continuing or would result therefrom,
designate an Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that (i) any such redesignation
-------- -------
shall be deemed to be an Incurrence as of the date of such
redesignation by the Company and the Restricted Subsidiaries of
the Indebtedness (if any) of such redesignated Subsidiary for
purposes of Section 5.12 hereof; and (ii) unless such
redesignated Subsidiary shall not have any Indebtedness
outstanding (other than Indebtedness which would be Permitted
Indebtedness), no such designation shall be permitted if
immediately after giving effect to such redesignation and the
Incurrence of any such Indebtedness, the Company could not incur
$1.00 of additional Indebtedness pursuant to the proviso of
Section 5.12 hereof. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by the
filing with the Trustee of a certified copy of the Board
Resolution of the Company's Board of Directors giving effect to
such designation or redesignation and an Officers' Certificate
certifying that such designation or redesignation complied with
the foregoing conditions and setting forth in reasonable detail
the underlying calculations.
(b) Subsidiaries that are not designated by the
Board of Directors as Restricted or Unrestricted Subsidiaries
will be deemed to be Restricted Subsidiaries. The designation
of a Restricted Subsidiary as an Unrestricted Subsidiary shall
be deemed to include a designation of all of the subsidiaries
of such Unrestricted Subsidiary as Unrestricted Subsidiaries.
ARTICLE SIX
SUCCESSOR CORPORATION
SECTION 6.01. Limitations on Mergers and Certain Other
Transactions.
----------------------------------------
(a) The Company, in a single transaction or through
a series of related transactions, shall not (i) consolidate
with or merge with or into any other Person, or transfer (by
lease, assignment, sale or otherwise) all or substantially all
of its properties and assets as an entirety or substantially as
an entirety to another Person or group of affiliated Persons or
(ii) adopt a Plan of Liquidation, unless, in either case:
<PAGE>
-70-
(1) either the Company shall be the continuing
Person, or the Person (if other than the Company) formed
by such consolidation or into which the Company is merged
or to which all or substantially all of the properties and
assets of the Company as an entirety or substantially as
an entirety are transferred (or, in the case of a Plan of
Liquidation, any Person to which assets are transferred)
(the Company or such other Person being hereinafter
referred to as the "Surviving Person") shall be a
----------------
corporation organized and validly existing under the laws
of the United States, any state thereof or the District of
Columbia, and shall expressly assume, by supplemental
indenture, all the obligations of the Company hereunder
and the Securities issued hereunder;
(2) immediately after and giving effect to such
transaction and the assumption contemplated by clause (1)
above and the Incurrence or anticipated Incurrence of any
Indebtedness to be Incurred in connection therewith, the
Surviving Person shall have a Consolidated Net Worth equal
to or greater than the Consolidated Net Worth of the
Company immediately preceding the transaction; and
(3) immediately before and immediately after giving
effect to such transaction and the assumption of the
obligations as set forth in clause (1) above and the
Incurrence or anticipated Incurrence of any Indebtedness
to be Incurred in connection therewith, no Default or
Event of Default shall have occurred and be continuing.
(b) For purposes of the foregoing, the transfer (by
lease, assignment, sale or otherwise) of all or substantially
all of the properties and assets of one or more Subsidiaries,
the Capital Stock of which constitutes all or substantially all
of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties
and assets of the Company.
SECTION 6.02. Successor Corporation Substituted.
---------------------------------
Upon any consolidation or merger or any transfer of
all or substantially all of the assets of the Company or any
adoption of a Plan of Liquidation by the Company in accordance
with Section 6.01 hereof, the Surviving Person shall succeed
to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture with the same effect
as if the Surviving Person had been named as the Company
<PAGE>
-71-
herein; provided, however, that solely for purposes of
-------- -------
computing amounts described in subclause (3) of Section
5.03(a), the Surviving Person shall be deemed to have succeeded
to and be substituted for the Company only with respect to
periods subsequent to the effective time of such merger,
consolidation or transfer of assets.
ARTICLE SEVEN
DEFAULT AND REMEDIES
SECTION 7.01. Events of Default.
-----------------
Each of the following events constitutes an "Event of
Default":
(i) failure to make any interest payment on the
Securities when due and the continuance of such default
for a period of 30 days (whether or not prohibited by
Article Four);
(ii) failure to pay principal of, or premium, if any,
on the Securities when due, whether at maturity, upon
acceleration, redemption, required repurchase or otherwise
(whether or not prohibited by Article Four);
(iii) failure to comply with any other agreement
contained in the Securities or this Indenture, if such
failure continues unremedied for 30 days after written
notice given by the Trustee or the Holders of at least 25%
in principal amount of the Securities then outstanding
(except in the case of a failure to comply with Section
5.03, Section 5.15, Section 5.16 or Section 6.01, which
shall constitute Events of Default with notice but without
passage of time);
(iv) a default under any Indebtedness of the Company
or any Restricted Subsidiary, whether such Indebtedness
now exists or shall hereinafter be created, if both (A)
such default either (1) results from the failure to pay
any such Indebtedness at its stated final maturity or (2)
relates to an obligation other than the obligation to pay
such Indebtedness at its stated final maturity and results
in the holder or holders of such Indebtedness causing such
Indebtedness to become due prior to its stated maturity
<PAGE>
-72-
and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such
Indebtedness in default for failure to pay principal at
stated final maturity or the maturity of which has been so
accelerated, aggregates $20 million or more at any one
time outstanding;
(v) any final judgment or order for payment of money
in excess of $20 million shall be entered against the
Company or any Significant Subsidiary and shall not be
discharged for a period of 60 days after such judgment
becomes final and nonappealable;
(vi) either the Company or any Significant Subsidiary
pursuant to or within the meaning of any Bankruptcy Law:
(a) commences a voluntary case or proceeding; (b) consents
to the entry of an order for relief against it in an
involuntary case or proceeding; (c) consents to the
appointment of a Custodian of it or for all or
substantially all of its property; or (d) makes a general
assignment for the benefit of its creditors;
(vii) a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that: (a) is for
relief against the Company or any Significant Subsidiary
in an involuntary case or proceeding; (b) appoints a
Custodian of the Company or any Significant Subsidiary, or
for all or any substantial part of their respective
properties; or (c) orders the liquidation of the Company
or any Significant Subsidiary, and in each case the order
or decree remains unstayed and in effect for 60 days; or
(viii) the lenders under the Credit Agreement shall
commence judicial proceedings to foreclose upon any
material portion of the assets of the Company and the
Subsidiaries.
SECTION 7.02. Acceleration.
------------
(a) If an Event of Default (other than an Event of
Default under clause (vi) or (vii) above with respect to the
Company or a Significant Subsidiary) occurs and is continuing
hereunder, the Trustee hereunder or the Holders of at least 25%
in principal amount of the then outstanding Securities may
declare due and payable all unpaid principal and interest
accrued and unpaid on the then outstanding Securities issued
hereunder by notice in writing to the Company, the
<PAGE>
-73-
administrative agent under the Credit Agreement and the Trustee
specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice"), and the
-------------------
same (i) shall become immediately due and payable or (ii) if
there is any Indebtedness outstanding under the Credit
Agreement, shall become due and payable upon the first to occur
of an acceleration under the Credit Agreement, or five business
days after receipt by the Company and the administrative agent
under the Credit Agreement of such Acceleration Notice. If an
Event of Default under clause (vi) or (vii) above with respect
to the Company or a Significant Subsidiary shall occur
hereunder, all unpaid principal of and accrued interest on all
then outstanding Securities issued hereunder shall be
immediately due and payable without any declaration or other
act on the part of the Trustee or any of the Holders of the
Securities. After a declaration of acceleration hereunder,
subject to certain conditions, the Holders of a majority in
principal amount of the then outstanding Securities, by notice
to the Trustee, may rescind such declaration if all existing
Events of Default hereunder are remedied. In certain cases the
Holders of a majority in principal amount of outstanding
Securities may waive a past Default hereunder and its
consequences, except a Default in the payment of or interest on
any of the Securities.
(b) In the event of a declaration of acceleration
because an Event of Default set forth in clause (iv) above has
occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled if either (x) the
holders of the Indebtedness which is the subject of such Event
of Default have waived such failure to pay at maturity or have
rescinded the acceleration in respect of such Indebtedness
within 90 days of such maturity or declaration of acceleration,
as the case may be, and no other Event of Default has occurred
during such 90-day period which has not been cured or waived,
or (y) such Indebtedness shall have been discharged or the
maturity thereof shall have been extended such that it is not
then due and payable, or the underlying default has been cured
(and any acceleration based thereon of such other Indebtedness
has been rescinded), within 90 days of such maturity or
declaration of acceleration, as the case may be.
SECTION 7.03. Other Remedies.
--------------
If an Event of Default occurs and is continuing, the
Trustee may pursue any available remedy by proceeding at law or
in equity to collect the payment of principal of or interest on
<PAGE>
-74-
the Securities or to enforce the performance of any provision
of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does
not possess any of the Securities or does not produce any of
them in the proceeding. A delay or omission by the Trustee or
any Holder in exercising any right or remedy accruing upon an
Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default.
No remedy is exclusive of any other remedy. All available
remedies are cumulative to the extent permitted by law.
SECTION 7.04. Waiver of Past Defaults.
-----------------------
Subject to Sections 7.07 and 10.02, the Holders of a
majority in principal amount of the outstanding Securities by
notice to the Trustee may waive an existing Default or Event of
Default and its consequences, except a Default in the payment
of principal of or interest on any Security as specified in
clauses (i) and (ii) of Section 7.01. When a Default or Event
of Default is waived, it is cured and ceases.
SECTION 7.05. Control by Majority.
-------------------
Subject to Section 2.09, the Holders of a majority in
principal amount of the outstanding Securities may direct the
time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or
power conferred on it, including, without limitation, any
remedies provided for in Section 7.03. Subject to
Section 8.01, however, the Trustee may refuse to follow any
direction that conflicts with any law or this Indenture, that
the Trustee determines may be unduly prejudicial to the rights
of another Holder, or that may involve the Trustee in personal
liability; provided, however, that the Trustee may take any
-------- -------
other action deemed proper by the Trustee which is not
inconsistent with such direction.
SECTION 7.06. Limitation on Suits.
-------------------
A Holder may not pursue any remedy with respect to
this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice
of a continuing Event of Default;
<PAGE>
-75-
(2) the Holder or Holders of at least 25% in
principal amount of the outstanding Securities make a
written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee
indemnity satisfactory to the Trustee against any loss,
liability or expense to be incurred in compliance with
such request;
(4) the Trustee does not comply with the request
within 60 days after receipt of the request and the offer
of indemnity; and
(5) during such 60-day period the Holder or Holders
of a majority in principal amount of the outstanding
Securities do not give the Trustee a direction which, in
the opinion of the Trustee, is inconsistent with the
request;
provided, however, that this Section 7.06 shall not affect the
- -------- -------
right of any Holder to sue for enforcement of any overdue
payment of principal of, premium, if any, or interest on, the
Securities.
A Holder may not use this Indenture to prejudice the
rights of another Holder or to obtain a preference or priority
over such other Holder.
SECTION 7.07. Rights of Holders To Receive Payment.
------------------------------------
Notwithstanding any other provision of this
Indenture, the right of any Holder to receive payment of
principal of and interest on a Security, on or after the
respective due dates expressed in such Security, or to bring
suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the
consent of the Holder.
SECTION 7.08. Collection Suit by Trustee.
--------------------------
If an Event of Default in payment of principal or
interest specified in clause (i) or (ii) of Section 7.01 occurs
and is continuing, the Trustee may recover judgment in its own
name and as trustee of an express trust against the Company or
any other obligor on the Securities for the whole amount of
principal and accrued interest remaining unpaid, together with
interest on overdue principal and, to the extent that payment
of such interest is lawful, interest on overdue installments of
<PAGE>
-76-
interest, in each case at the rate per annum borne by the
Securities and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel.
SECTION 7.09. Trustee May File Proofs of Claim.
--------------------------------
The Trustee may file such proofs of claim and other
papers or documents as may be necessary or advisable in order
to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel) and the Holders allowed
in any judicial proceedings relating to the Company or any
other obligor upon the Securities, any of their respective
creditors or any of their respective property and shall be
entitled and empowered to collect and receive any monies or
other property payable or deliverable on any such claims and to
distribute the same, and any Custodian in any such judicial
proceedings is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due to it for the
reasonable compensation, expenses, disbursements and advances
of the Trustee, its agent and counsel, and any other amounts
due the Trustee under Section 8.07. Nothing herein contained
shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition
affecting the Securities or the rights of any Holder, or to
authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding.
SECTION 7.10. Priorities.
----------
If the Trustee collects any money pursuant to this
Article Seven, it shall pay out the money in the following
order:
First: to the Trustee for amounts due under
Section 8.07;
Second: subject to Article Four and Article Twelve,
to Holders for interest accrued on the Securities,
ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securities
for interest;
<PAGE>
-77-
Third: subject to Article Four and Article Twelve,
to Holders for principal amounts due and unpaid on the
Securities, ratably, without preference or priority of any
kind, according to the amounts due and payable on the
Securities for principal; and
Fourth: subject to Article Four and Article Twelve,
to the Company or the Guarantors, as their respective
interests may appear.
The Trustee, upon prior notice to the Company, may
fix a record date and payment date for any payment to Holders
pursuant to this Section 7.10.
SECTION 7.11. Rights and Remedies Cumulative.
------------------------------
No right or remedy herein conferred upon or reserved
to the Trustee or to the Holders is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to
the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 7.12. Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder
of any Security to exercise any right or remedy accruing upon
any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this
Article Seven or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders, as the case may
be.
SECTION 7.13. Undertaking for Costs.
---------------------
In any suit for the enforcement of any right or
remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in
its discretion may require the filing by any party litigant in
the suit of an undertaking to pay the costs of the suit, and
the court in its discretion may assess reasonable costs,
including reasonable attorneys' fees, against any party
litigant in the suit, having due regard to the merits and good
faith of the
<PAGE>
-78-
claims or defenses made by the party litigant. This Section 7.13
does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 7.07, or a suit by a Holder or Holders of
more than 10% in principal amount of the outstanding Securities.
ARTICLE EIGHT
TRUSTEE
The Trustee hereby accepts the trust imposed upon it
by this Indenture and covenants and agrees to perform the same,
as herein expressed.
SECTION 8.01. Duties of Trustee.
-----------------
(a) If a Default or an Event of Default of which the
Trustee is aware has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by
this Indenture and use the same degree of care and skill in its
exercise thereof as a prudent person would exercise or use
under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of a Default or an
Event of Default:
(1) The Trustee need undertake to perform only those
duties as are specifically set forth in this Indenture and
no covenants or obligations shall be implied in this
Indenture against the Trustee.
(2) In the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this
Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Trustee shall have no liability except for
its own negligent action, its own negligent failure to act, or
its own willful misconduct, except that:
<PAGE>
-79-
(1) This paragraph does not limit the effect of
paragraph (b) of this Section 8.01.
(2) The Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it
is proved that the Trustee was negligent in ascertaining
the pertinent facts.
(3) The Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in
accordance with a direction received by it pursuant to
Section 7.05.
(d) No provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties
hereunder or in the exercise of any of its rights or powers if
it shall have reasonable grounds for believing that repayment
of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(e) Every provision of this Indenture that in any
way relates to the Trustee is subject to paragraphs (a), (b),
(c) and (d) of this Section 8.01.
(f) The Trustee shall not be liable for interest on
any assets received by it. Assets held in trust by the Trustee
need not be segregated from other assets except to the extent
required by law.
SECTION 8.02. Rights of Trustee.
-----------------
Subject to Section 8.01:
(a) The Trustee may rely on and shall be protected
in acting or refraining from acting upon any document believed
by it to be genuine and to have been signed or presented by the
proper person. The Trustee need not investigate any fact or
matter stated in the document.
(b) Before the Trustee acts or refrains from acting,
it may consult with counsel and may require in addition to
written direction from the Company an Officers' Certificate or
an Opinion of Counsel, which shall conform to Sections 13.04
and 13.05. The Trustee shall not be liable for any action it
takes or omits to take in good faith in reliance on such
certificate or opinion.
<PAGE>
-80-
(c) The Trustee may act through its attorneys and
agents and shall not be responsible for the misconduct or
negligence of any attorney or agent appointed with due care.
(d) The Trustee shall not be liable for any action
that it takes or omits to take in good faith which it believes
to be authorized or within its rights or powers.
(e) The Trustee shall not be bound to make any
investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion,
notice, request, direction, consent, order, bond, debenture, or
other paper or document, but the Trustee, in its discretion,
may make such further inquiry or investigation into such facts
or matters as it may see fit.
(f) The Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this
Indenture at the request, order or direction of any of the
Holders pursuant to the provisions of this Indenture, unless
such Holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
SECTION 8.03. Individual Rights of Trustee.
----------------------------
The Trustee in its individual or any other capacity
may become the owner or pledgee of Securities and may otherwise
deal with the Company, its Subsidiaries, or their respective
Affiliates with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However,
the Trustee must comply with Sections 8.10 and 8.11.
SECTION 8.04. Trustee's Disclaimer.
--------------------
The Trustee makes no representation as to the
validity or adequacy of this Indenture or the Securities, it
shall not be accountable for the Company's use of the proceeds
from the Securities, and it shall not be responsible for any
statement in the Securities other than the Trustee's
certificate of authentication.
SECTION 8.05. Notice of Default.
-----------------
If a Default or an Event of Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall
mail to each Holder of Securities notice of the Default or
<PAGE>
-81-
Event of Default within 90 days after such Default or Event of
Default occurs or if such Default or Event of Default is known
to the Trustee during such 90-day period, promptly after such
Default or Event of Default becomes known to the Trustee;
provided, however, that, except in the case of a Default or
- -------- -------
Event of Default in the payment of the principal of or interest
on any Security, including the failure to make payment on a
Change of Control Payment Date pursuant to a Change of Control
Offer or payment when due pursuant to a Net Proceeds Offer, the
Trustee may withhold such notice if it in good faith determines
that withholding such notice is in the interest of the Holders.
SECTION 8.06. Reports by Trustee to Holders.
-----------------------------
Within 60 days after each May 15 beginning with the
first May 15 following the date of this Indenture, the Trustee
shall, to the extent that any of the events described in TIA
(S) 313(a) occurred within the previous twelve months, but not
otherwise, mail to each Holder a brief report dated as of such
May 15 that complies with TIA (S) 313(a). The Trustee also shall
comply with TIA (SS) 313(b) and 313(c).
A copy of each report at the time of its mailing to
Holders shall be mailed to the Company and filed with the
Commission and each stock exchange, if any, on which the
Securities are listed.
The Company shall notify the Trustee if the
Securities become listed on any stock exchange.
SECTION 8.07. Compensation and Indemnity.
--------------------------
The Company shall pay to the Trustee from time to
time reasonable compensation for its services. The Trustee's
compensation shall not be limited by any law on compensation of
a trustee of an express trust. The Company shall reimburse the
Trustee upon request for all reasonable disbursements, expenses
and advances incurred or made by it. Such expenses shall
include the reasonable compensation, disbursements and expenses
of the Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold
it harmless against, any loss or liability incurred by it
except for such actions to the extent caused by any negligence
or bad faith on its part, arising out of or in connection with
the administration of this trust and its rights or duties
hereunder. The Trustee shall notify the Company promptly of
any
<PAGE>
-82-
claim asserted against the Trustee for which it may seek
indemnity. The Company shall defend the claim and the Trustee
shall cooperate in the defense. The Trustee may have separate
counsel and the Company shall pay the reasonable fees and
expenses of such counsel; provided, however, that the Company
-------- -------
will not be required to pay such fees and expenses if it
assumes the Trustee's defense and there is no conflict of
interest between the Company and the Trustee in connection with
such defense as reasonably determined by the Trustee. The
Company need not pay for any settlement made without its
written consent. The Company need not reimburse any expense or
indemnify against any loss or liability to the extent incurred
by the Trustee through its negligence, bad faith or willful
misconduct.
To secure the Company's payment obligations in this
Section 8.07, the Trustee shall have a lien prior to the
Securities on all assets held or collected by the Trustee, in
its capacity as Trustee, except assets held in trust to pay
principal of or interest on particular Securities.
When the Trustee incurs expenses or renders services
after an Event of Default specified in Section 7.01(vi) or
(vii) occurs, the expenses and the compensation for the
services are intended to constitute expenses of administration
under any Bankruptcy Law.
SECTION 8.08. Replacement of Trustee.
----------------------
The Trustee may resign by so notifying the Company.
The Holders of a majority in principal amount of the
outstanding Securities may remove the Trustee and appoint a
successor trustee with the Company's consent, by so notifying
the Company and the Trustee. The Company may remove the
Trustee if:
(1) the Trustee fails to comply with Section 8.10;
(2) the Trustee is adjudged a bankrupt or an
insolvent;
(3) a receiver or other public officer takes charge
of the Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy
exists in the office of Trustee for any reason, the Company
shall notify each Holder of such event and shall promptly
<PAGE>
-83-
appoint a successor Trustee. Within one year after the
successor Trustee takes office, the Holders of a majority in
principal amount of the Securities may appoint a successor
Trustee to replace the successor Trustee appointed by the
Company.
A successor Trustee shall deliver a written
acceptance of its appointment to the retiring Trustee and to
the Company. Immediately after that, the retiring Trustee
shall transfer all property held by it as Trustee to the
successor Trustee, subject to the lien provided in
Section 8.07, the resignation or removal of the retiring
Trustee shall become effective, and the successor Trustee shall
have all the rights, powers and duties of the Trustee under
this Indenture. A successor Trustee shall mail notice of its
succession to each Holder.
If a successor Trustee does not take office within 60
days after the retiring Trustee resigns or is removed, the
retiring Trustee, the Company or the Holders of at least 10% in
principal amount of the outstanding Securities may petition any
court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee fails to comply with Section 8.10, any
Holder may petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor
Trustee.
Notwithstanding replacement of the Trustee pursuant
to this Section 8.08, the Company's obligations under
Section 8.07 shall continue for the benefit of the retiring
Trustee.
SECTION 8.09. Successor Trustee by Merger, Etc.
--------------------------------
If the Trustee consolidates with, merges or converts
into, or transfers all or substantially all of its corporate
trust business to, another corporation, the resulting,
surviving or transferee corporation without any further act
shall, if such resulting, surviving or transferee corporation
is otherwise eligible hereunder, be the successor Trustee.
SECTION 8.10. Eligibility; Disqualification.
-----------------------------
This Indenture shall always have a Trustee who
satisfies the requirement of TIA (SS) 310(a)(1) and 310(a)(5).
The Trustee shall have a combined capital and surplus of at
least $100,000,000 as set forth in its most recent published
annual
<PAGE>
-84-
report of condition. The Trustee shall comply with TIA (S) 310(b);
provided, however, that there shall be excluded from the
- -------- -------
operation of TIA (S) 310(b)(1) any indenture or indentures under
which other securities, or certificates of interest or
participation in other securities, of the Company are
outstanding, if the requirements for such exclusion set forth in
TIA (S) 310(b)(1) are met.
SECTION 8.11. Preferential Collection of Claims Against
Company.
-----------------------------------------
The Trustee shall comply with TIA (S) 311(a), excluding
any creditor relationship listed in TIA (S) 311(b). A Trustee
who has resigned or been removed shall be subject to TIA
(S) 311(a) to the extent indicated.
ARTICLE NINE
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 9.01. Termination of the Company's
Obligations.
----------------------------
The Company may terminate its obligations under the
Securities and this Indenture, and the obligations of any
Guarantor shall terminate, except those obligations referred to
in the penultimate paragraph of this Section 9.01, if all
Securities previously authenticated and delivered (other than
lost, stolen or destroyed Securities which have been replaced
or paid or Securities for whose payment money has theretofore
been deposited with the Trustee or the Paying Agent in trust
and thereafter repaid to the Company, as provided in
Section 9.04) have been delivered to the Trustee for
cancellation and the Company has paid all sums payable by it
hereunder, or if:
(1) all Securities not theretofore delivered to the
Trustee for cancellation have become due and payable by
reason of the making of a notice of redemption pursuant to
Article Three or otherwise;
(2) the Company shall have irrevocably deposited or
caused to be deposited with the Trustee, under the terms
of an irrevocable trust agreement in form and substance
satisfactory to the Trustee, as trust funds in trust
solely for the benefit of the Holders for that purpose,
<PAGE>
-85-
money in such amount as is sufficient without consideration
of reinvestment of such interest, to pay and discharge the
entire indebtedness on the Notes not theretofore delivered
to the Trustee for cancellation for principal of, premium,
if any, and accrued interest to the date of maturity or
redemption; provided, however, that the Trustee shall have
-------- -------
been irrevocably instructed to apply such money to the
payment of said principal, premium, if any, and interest
with respect to the Securities and, provided, further, that
-------- -------
from and after the time of deposit, the money deposited
shall not be subject to the rights of holders of Senior
Indebtedness pursuant to the provisions of Article Four and
Article Twelve;
(3) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or
shall occur as a result of such deposit and such deposit
will not result in a breach or violation of, or constitute
a default under, any other instrument to which the Company
is a party or by which it is bound;
(4) the Company shall have paid all other sums
payable by it hereunder; and
(5) the Company shall have delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel, each
stating that all conditions precedent providing for the
termination of the Company's and any Guarantor's
obligation under the Securities and this Indenture have
been complied with. Such Opinion of Counsel shall also
state that such satisfaction and discharge does not result
in a default under the Credit Agreement (if then in
effect) or any other agreement or instrument then known to
such counsel that binds or affects the Company.
Notwithstanding the foregoing paragraph, the
Company's obligations in Sections 2.05, 2.06, 2.07, 2.08, 5.01,
5.02 and 8.07 and any Guarantors's obligations in respect
thereof shall survive until the Securities are no longer
outstanding pursuant to the last paragraph of Section 2.08.
After the Securities are no longer outstanding, the Company's
obligations in Sections 8.07, 9.04 and 9.05 and any Guarantor's
obligations in respect thereof shall survive.
After such delivery or irrevocable deposit the
Trustee upon request shall acknowledge in writing the discharge
of the Company's and any Guarantor's obligations under the
<PAGE>
-86-
Securities and this Indenture except for those surviving
obligations specified above.
SECTION 9.02. Legal Defeasance and Covenant
Defeasance.
-----------------------------
(a) The Company may, at its option by Board
Resolution of the Board of Directors of the Company, at any
time, with respect to the Securities, elect to have either
paragraph (b) or paragraph (c) below be applied to the
outstanding Securities upon compliance with the conditions set
forth in paragraph (d).
(b) Upon the Company's exercise under paragraph (a)
of the option applicable to this paragraph (b), the Company and
any Guarantor shall be deemed to have been released and
discharged from its obligations with respect to the outstanding
Securities on the date the conditions set forth below are
satisfied (hereinafter, "legal defeasance"). For this purpose,
----------------
such legal defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by
the outstanding Securities, which shall thereafter be deemed to
be "outstanding" only for the purposes of paragraph (e) below
and the other Sections of and matters under this Indenture
referred to in (i) and (ii) below, and to have satisfied all
its other obligations under such Securities and this Indenture
insofar as such Securities are concerned (and the Trustee, at
the expense of the Company, shall execute proper instruments
acknowledging the same), and Holders of the Securities and the
Guarantees and any amounts deposited under paragraph (d) below
shall cease to be subject to any obligations to, or the rights
of, any holder of Senior Indebtedness or Guarantor Senior
Indebtedness under Article Four or Article Twelve or otherwise,
except for the following which shall survive until otherwise
terminated or discharged hereunder: (i) the rights of Holders
of outstanding Securities to receive solely from the funds held
by the Trustee in the trust fund described in paragraph (d)
below and as more fully set forth in such paragraph, payments
in respect of the principal of, premium, if any, and interest
on such Securities when such payments are due, (ii) the
Company's obligations with respect to such Securities under
Sections 2.06, 2.07 and 5.02, and, with respect to the Trustee,
under Section 8.07 and any Guarantor's obligations in respect
thereof, (iii) the rights, powers, trusts, duties and
immunities of the Trustee hereunder and the Company's
obligations in connection therewith and (iv) this Section 9.02
and Section 9.05. Subject to compliance with this
Section 9.02,
<PAGE>
-87-
the Company may exercise its option under this paragraph (b)
notwithstanding the prior exercise of its option under paragraph
(c) below with respect to the Securities.
(c) Upon the Company's exercise under paragraph (a)
of the option applicable to this paragraph (c), the Company
shall be released and discharged from its obligations under any
covenant contained in Article Four and Article Six and in
Sections 5.03, 5.05 through 5.09 and 5.11 through 5.20 with
respect to the outstanding Securities on and after the date the
conditions set forth below are satisfied (hereinafter,
"covenant defeasance"), and the Securities shall thereafter be
-------------------
deemed to be not "outstanding" for the purpose of any
direction, waiver, consent or declaration or act of Holders
(and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "outstanding" for
all other purposes hereunder and Holders of the Securities and
the Guarantees and any amounts deposited under paragraph (d)
below shall cease to be subject to any obligations to, or the
rights of, any holder of Senior Indebtedness or Guarantor
Senior Indebtedness under Article Four, Article Twelve or
otherwise. For this purpose, such covenant defeasance means
that, with respect to the outstanding Securities, the Company
and any Guarantor may omit to comply with and shall have no
liability in respect of any term, condition or limitation set
forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant
or by reason of any reference in any such covenant to any other
provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default
under Section 7.01(iii), but, except as specified above, the
remainder of this Indenture and such Securities shall be
unaffected thereby.
(d) The following shall be the conditions to
application of either paragraph (b) or paragraph (c) above to
the outstanding Securities:
(i) the Company must have irrevocably deposited with
the Trustee (or another trustee satisfying the
requirements of Section 8.10 who shall agree to comply
with the provisions of this Section 9.02 applicable to it)
in trust, for the benefit of the Holders, cash in U.S.
dollars, U.S. Government Obligations, or a combination
thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if
<PAGE>
-88-
any, and interest on the Securities to redemption or
maturity provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds
of such U.S. Government Obligations to said payments with
respect to the Securities on the Maturity Date or such
Redemption Date, as the case may be;
(ii) the Company shall have delivered to the Trustee
one or more Opinions of independent Counsel to the effect
that (A) the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such
legal defeasance or covenant defeasance, as the case may
be, and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would
have been the case if such legal defeasance or covenant
defeasance, as the case may be, had not occurred (which
opinion, in the case of legal defeasance, shall be based
upon a change in the applicable federal income tax law
since the Issue Date or a ruling received from or
published by the Internal Revenue Service), (B) after the
91st day following the deposit the trust funds will not be
subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting
creditors' rights generally and will not be subject to any
rights of holders of Senior Indebtedness and (C) the
deposit will not cause the applicable Trustee or the trust
so created to be subject to the Investment Company Act of
1940;
(iii) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or
insofar as clauses (vi) and (vii) of Section 7.01 are
concerned, at any time in the period ending on the 91st
day after the date of deposit;
(iv) such legal defeasance or covenant defeasance
shall not cause the Trustee to have a conflicting interest
with respect to the Securities;
(v) such legal defeasance or covenant defeasance
shall not result in a breach or violation of, or
constitute a default under, this Indenture or any other
material agreement or instrument to which the Company is a
party or by which it is bound (and in that connection, the
Trustee shall have received a certificate from the Credit
Agent to that effect with respect to the Credit Agreement
if then in effect);
<PAGE>
-89-
(vi) the Company shall have delivered to the
applicable Trustee an Officers' Certificate stating that
the deposit was not made by the Company with the intent of
preferring the Holders over other creditors of the Company
or with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and
(vii) the Company shall have delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel, each
stating that all conditions precedent provided for
relating to the legal defeasance or covenant defeasance,
have been complied with.
(e) All money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee (or
other qualifying trustee, collectively for purposes of this
paragraph (e), the "Trustee") pursuant to paragraph (d) above
in respect of the outstanding Securities shall be held in trust
and applied by the Trustee, in accordance with the provisions
of such Securities and this Indenture, to the payment, either
directly or through any Paying Agent (other than the Company or
any Affiliate of the Company), to the Holders of such
Securities of all sums due and to become due thereon in respect
of principal, premium and interest, but such money need not be
segregated from other funds except to the extent required by
law.
The Company shall pay and indemnify the Trustee
against any tax, fee or other charge imposed on or assessed
against the U.S. Government Obligations deposited pursuant to
paragraph (d) above or the principal, premium, if any, and
interest received in respect thereof other than any such tax,
fee or other charge which by law is for the account of the
Holders of the outstanding Securities. The Company's
obligations to pay and indemnify the Trustee as set forth in
this paragraph shall survive the termination of this Indenture
and the Securities.
Anything in this Section 9.02 to the contrary
notwithstanding, the Trustee shall deliver or pay to the
Company from time to time upon the request, in writing, by the
Company any money or U.S. Government Obligations held by it as
provided in paragraph (d) above which, in the opinion of a
nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof which would then
be required to
<PAGE>
-90-
be deposited to effect an equivalent legal defeasance or covenant
defeasance.
SECTION 9.03. Application of Trust Money.
--------------------------
The Trustee shall hold in trust money or U.S.
Government Obligations deposited with it pursuant to Sections
9.01 and 9.02, and shall apply the deposited money and the
money from U.S. Government Obligations in accordance with this
Indenture to the payment of principal of, premium, if any, and
interest on the Securities.
SECTION 9.04. Repayment to the Company or Subsidiary
Guarantors.
--------------------------------------
Subject to Sections 8.07, 9.01 and 9.02, the Trustee
shall promptly pay to the Company, or if deposited with the
Trustee by any Guarantor, to each Guarantor, upon receipt by
the Trustee of an Officers' Certificate, any excess money,
determined in accordance with Section 9.02, held by it at any
time. The Trustee and the Paying Agent shall pay to the
Company or any Guarantor, as the case may be, upon receipt by
the Trustee or the Paying Agent, as the case may be, of an
Officers' Certificate, any money held by it for the payment of
principal, premium, if any, or interest that remains unclaimed
for two years after payment to the Holders is required;
provided, however, that the Trustee and the Paying Agent before
- -------- -------
being required to make any payment may, but need not, at the
expense of the Company cause to be published once in a
newspaper of general circulation in The City of New York or
mail to each Holder entitled to such money notice that such
money remains unclaimed and that after a date specified
therein, which shall be at least 30 days from the date of such
publication or mailing, any unclaimed balance of such money
then remaining will be repaid to the Company. After payment to
the Company or the Guarantor, as the case may be, Holders
entitled to money must look solely to the Company for payment
as general creditors unless an applicable abandoned property
law designates another person, and all liability of the Trustee
or Paying Agent with respect to such money shall thereupon
cease.
SECTION 9.05. Reinstatement.
-------------
If the Trustee or Paying Agent is unable to apply any
money or U.S. Government Obligations in accordance with this
Indenture by reason of any legal proceeding or by reason of any
order or judgment of any court or governmental authority
<PAGE>
-91-
enjoining, restraining or otherwise prohibiting such application,
then and only then the Company's and each Guarantor's, if any,
obligations under this Indenture and the Securities shall be
revived and reinstated as though no deposit had been made
pursuant to this Indenture until such time as the Trustee is
permitted to apply all such money or U.S. Government Obligations
in accordance with this Indenture; provided, however, that if the
-------- -------
Company or the Guarantors, as the case may be, have made any
payment of principal of, premium, if any, or interest on any
Securities because of the reinstatement of its obligations, the
Company or the Guarantors, as the case may be, shall be,
subrogated to the rights of the holders of such Securities to
receive such payment from the money or U.S. Government
Obligations held by the Trustee or Paying Agent.
ARTICLE TEN
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 10.01. Without Consent of Holders.
--------------------------
The Company, when authorized by a Board Resolution,
and the Trustee, together, may amend or supplement this
Indenture or the Securities without notice to or consent of any
Holder:
(1) to cure any ambiguity, defect or inconsistency;
provided that such amendment or supplement does not
--------
adversely affect the rights of any Holder;
(2) to comply with Article Six and Section 11.06;
(3) to make any other change that does not adversely
affect the rights of any Holder in any material respect;
or
(4) to comply with any requirements of the
Commission in connection with the qualification of this
Indenture under the TIA;
provided that the Company has delivered to the Trustee an
- --------
Opinion of Counsel stating that such amendment or supplement
complies with the provisions of this Section 10.01.
<PAGE>
-92-
SECTION 10.02. With Consent of Holders.
-----------------------
Subject to Section 7.07, the Company, when authorized
by a Board Resolution, the Trustee and the Holders of not less
than a majority in aggregate principal amount of the Securities
then outstanding, may amend or supplement (or waive compliance
with any provision of) this Indenture and the Securities, except
that (i) without the consent of each Holder of the Securities
affected, no such amendment, supplement or waiver may:
(1) change the principal amount of the Securities the
Holders of which must consent to an amendment, supplement
or waiver of any provision of this Indenture or the
Securities;
(2) reduce the rate or extend the time for payment of
interest on any Securities;
(3) reduce the principal amount of any Securities;
(4) change the Maturity Date of any Securities or alter
the redemption provisions in this Indenture or the
Securities in a manner adverse to any Holder of the
Securities;
(5) make any changes in the provisions concerning waivers
of Defaults or Events of Default by Holders or the rights
of Holders to recover the principal of, interest on or
redemption payment with respect to any Securities;
(6) make the principal of, or interest on, any Securities
payable with anything or in any manner other than as
provided for in this Indenture and the Securities; or
(7) modify the subordination provisions of this Indenture
(including certain related definitions) so as to adversely
affect the ranking of any Security;
provided, however, that it is understood that any amendment the
- -------- -------
purpose of which is to permit the Incurrence of additional
Indebtedness under this Indenture shall not be construed as
adversely affecting the ranking of any Security and (ii)
without the consent of Holders of not less than 66 2/3% in
aggregate principal amount of the Securities then outstanding,
no such amendment, supplement or waiver may change the Change
of Control Payment Date or the purchase price in connection
with any repurchase of such Securities pursuant to Section 5.15
herein in a manner adverse to any Holder of the Securities or
<PAGE>
-93-
waive a Default or Event of Default resulting from a failure to
comply with Section 5.15 herein.
It shall not be necessary for the consent of the
Holders under this Section to approve the particular form of
any proposed amendment, supplement or waiver, but it shall be
sufficient if such consent approves the substance thereof.
After an amendment, supplement or waiver under this
Section becomes effective, the Company shall mail to the
Holders affected thereby a notice briefly describing the
amendment, supplement or waiver. Any failure of the Company to
mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental
indenture.
In connection with any amendment, supplement or
waiver under this Article Ten, the Company may, but shall not
be obligated to, offer to any Holder who consents to such
amendment, supplement or waiver, or to all Holders,
consideration for such Holder's consent to such amendment,
supplement or waiver.
SECTION 10.03. Compliance with TIA.
-------------------
From the date on which the Indenture is qualified
under the TIA, every amendment, waiver or supplement of this
Indenture or the Securities shall comply with the TIA as then
in effect.
SECTION 10.04. Revocation and Effect of Consents.
---------------------------------
Until an amendment, waiver or supplement becomes
effective, a consent to it by a Holder is a continuing consent
by the Holder and every subsequent Holder of a Security or
portion of a Security that evidences the same debt as the
consenting Holder's Security, even if notation of the consent
is not made on any Security. However, any such Holder or
subsequent Holder may revoke the consent as to his Security or
portion of his Security by notice to the Trustee or the Company
received before the date on which the Trustee receives an
Officers' Certificate certifying that the Holders of the
requisite principal amount of Securities have consented (and
not theretofore revoked such consent) to the amendment,
supplement or waiver.
The Company may, but shall not be obligated to, fix a
record date for the purpose of determining the Holders entitled
<PAGE>
-94-
to consent to any amendment, supplement or waiver, which record
date shall be at least 30 days prior to the first solicitation
of such consent. If a record date is fixed, then
notwithstanding the last sentence of the immediately preceding
paragraph, those persons who were Holders at such record date
(or their duly designated proxies), and only those persons,
shall be entitled to revoke any consent previously given,
whether or not such persons continue to be Holders after such
record date. No such consent shall be valid or effective for
more than 90 days after such record date.
After an amendment, supplement or waiver becomes
effective, it shall bind every Holder, unless it makes a change
described in any of clauses (1) through (8) of Section 10.02,
in which case, the amendment, supplement or waiver shall bind
only each Holder of a Security who has consented to it and
every subsequent Holder of a Security or portion of a Security
that evidences the same debt as the consenting Holder's
Security; provided that any such waiver shall not impair or
--------
affect the right of any Holder to receive payment of principal
of and interest on a Security, on or after the respective due
dates expressed in such Security, or to bring suit for the
enforcement of any such payment on or after such respective
dates without the consent of such Holder.
SECTION 10.05. Notation on or Exchange of Securities.
-------------------------------------
If an amendment, supplement or waiver changes the
terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee may place
an appropriate notation on the Security about the changed terms
and return it to the Holder. Alternatively, if the Company or
the Trustee so determines, the Company in exchange for the
Security shall issue and the Trustee shall authenticate a new
Security that reflects the changed terms.
SECTION 10.06. Trustee To Sign Amendments, Etc.
-------------------------------
The Trustee shall execute any amendment, supplement
or waiver authorized pursuant to this Article Ten; provided
--------
that the Trustee may, but shall not be obligated to, execute
any such amendment, supplement or waiver which affects the
Trustee's own rights, duties or immunities under this
Indenture. The Trustee shall be entitled to receive, and shall
be fully protected in relying upon, an Opinion of Counsel
stating that the execution of any amendment, supplement or
waiver
<PAGE>
-95-
authorized pursuant to this Article Ten is authorized or
permitted by this Indenture.
ARTICLE ELEVEN
GUARANTEE
SECTION 11.01. Unconditional Guarantee.
-----------------------
Each Guarantor shall guarantee, subject to Article
Twelve, to each Holder of a Security authenticated and
delivered by the Trustee and to the Trustee and its successors
and assigns, the Securities or the obligations of the Company
hereunder or thereunder, that: (i) the principal of and
interest on the Securities will be promptly paid in full when
due, subject to any applicable grace period, whether at
maturity, by acceleration or otherwise and interest on the
overdue principal, if any, and interest on any interest, to the
extent lawful, of the Securities and all other obligations of
the Company to the Holders or the Trustee hereunder or
thereunder will be promptly paid in full or performed, all in
accordance with the terms hereof and thereof; and (ii) in case
of any extension of time of payment or renewal of any
Securities or of any such other obligations, the same will be
promptly paid in full when due or performed in accordance with
the terms of the extension or renewal, subject to any
applicable grace period, whether at stated maturity, by
acceleration or otherwise, subject, however, in the case of
clauses (i) and (ii) above, to the limitations set forth in
Section 11.05. Each Guarantor's obligations hereunder shall be
unconditional, irrespective of the validity, regularity or
enforceability of the Securities or this Indenture, the absence
of any action to enforce the same, any waiver or consent by any
Holder of the Securities with respect to any provisions hereof
or thereof, the recovery of any judgment against the Company,
any action to enforce the same or any other circumstance which
might otherwise constitute a legal or equitable discharge or
defense of a guarantor. Each Guarantor shall waive diligence,
presentment, demand of payment, filing of claims with a court
in the event of insolvency or bankruptcy of the Company, any
right to require a proceeding first against the Company,
protest, notice and all demands whatsoever and covenants that
this Guarantee will not be discharged except by complete
performance of the obligations contained in the Securities,
this Indenture and in this Guarantee. If any Holder or the
Trustee is required by any court or otherwise to return to
<PAGE>
-96-
the Company, any Guarantor, or any custodian, trustee, liquidator
or other similar official acting in relation to the Company or
any Guarantor, any amount paid by the Company or any Guarantor to
the Trustee or such Holder, this Guarantee, to the extent
theretofore discharged, shall be reinstated in full force and
effect. Each Guarantor shall further agree that, as between each
Guarantor, on the one hand, and the Holders and the Trustee, on
the other hand, (x) the maturity of the obligations guaranteed
hereby may be accelerated as provided in Article Seven for the
purposes of this Guarantee, notwithstanding any stay, injunction
or other prohibition preventing such acceleration in respect of
the obligations guaranteed hereby, and (y) in the event of any
acceleration of such obligations as provided in Article Seven,
such obligations (whether or not due and payable) shall forthwith
become due and payable by each Guarantor for the purpose of this
Guarantee.
SECTION 11.02. Subordination of Guarantee.
--------------------------
The obligations of each Guarantor to the Holders of
Securities pursuant to the Guarantee and this Indenture are
expressly subordinate and subject in right of payment to the
prior payment in full of all Guarantor Senior Indebtedness of
such Guarantor, to the extent and in the manner provided in
Article Twelve.
SECTION 11.03. Severability.
------------
In case any provision of this Guarantee shall be
invalid, illegal or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way
be affected or impaired thereby.
SECTION 11.04. Release of a Guarantor.
----------------------
Upon the sale or disposition (whether by merger,
stock purchase, asset sale or otherwise) of a Guarantor (or all
or substantially all its assets) to an entity which is not a
Subsidiary of the Company and which sale or disposition is
otherwise in compliance with the terms of this Indenture, such
Guarantor shall be deemed released from all obligations under
this Article Eleven without any further action required on the
part of the Trustee or any Holder; provided, however, that any
-------- -------
such termination shall occur only to the extent that all
obligations of such Guarantor under all of its guarantees of,
and under all of its pledges of assets or other security
interests
<PAGE>
-97-
which secure, such Indebtedness of the Company shall also
terminate upon such release, sale or transfer.
The Trustee shall deliver an appropriate instrument
evidencing such release upon receipt of a request by the
Company accompanied by an Officers' Certificate certifying as
to the compliance with this Section 11.04. Any Guarantor not
so released remains liable for the full amount of principal of
and interest on, and all other obligations under, the
Securities as provided in this Article Eleven.
SECTION 11.05. Limitation of Guarantor's Liability.
-----------------------------------
Each Guarantor and by its acceptance hereof each
Holder shall confirm that it is the intention of all such
parties that the guarantee by such Guarantor pursuant to its
Guarantee not constitute a fraudulent transfer or conveyance
for purposes of the Bankruptcy Law, the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any
similar Federal or state law. To effectuate the foregoing
intention, the Holders and such Guarantor shall irrevocably
agree that the obligations of such Guarantor under the
Guarantee shall be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of
such Guarantor and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its
Guarantee or pursuant to Section 11.07, result in the
obligations of such Guarantor under the Guarantee not
constituting such fraudulent transfer or conveyance.
SECTION 11.06. Guarantors May Consolidate,
etc., on Certain Terms.
---------------------------
Nothing contained in this Indenture or in any of the
Securities shall prevent any consolidation or merger of a
Guarantor with or into the Company or another Guarantor or
shall prevent any sale or conveyance of the property of a
Guarantor as an entirety or substantially as an entirety, to
the Company or another Guarantor. Upon any such consolidation,
merger, sale or conveyance, the Guarantee given by such
Guarantor shall no longer have any force or effect.
SECTION 11.07. Contribution.
------------
In order to provide for just and equitable
contribution among the Guarantors, the Guarantors shall agree,
inter
- -----
<PAGE>
-98-
se, that in the event any payment or distribution is made by any
- --
Guarantor (a "Funding Guarantor") under the Guarantee, such
-----------------
Funding Guarantor shall be entitled to a contribution from all
other Guarantors in a pro rata amount based on the relative net
--------
assets of each Guarantor (including the Funding Guarantor) for
all payments, damages and expenses incurred by that Funding
Guarantor in discharging the Company's obligations with respect
to the Securities or any other Guarantor's obligations with
respect to the Guarantee.
SECTION 11.08. Waiver of Subrogation.
---------------------
Each Guarantor shall irrevocably waive any claim or
other rights which it may at any time acquire against the
Company that arise from the existence, payment, performance or
enforcement of such Guarantor's obligations under the Guarantee
and this Indenture, including, without limitation, any right of
subrogation, reimbursement, exoneration, indemnification, and
any right to participate in any claim or remedy of any Holder
of Securities against the Company, whether or not such claim,
remedy or right arises in equity, or under contract, statute or
common law, including, without limitation, the right to take or
receive from the Company, directly or indirectly, in cash or
other property or by set-off or in any other manner, payment or
security on account of such claim or other rights. If any
amount shall be paid to any Guarantor in violation of the
preceding sentence and the Securities shall not have been paid
in full, such amount shall have been deemed to have been paid
to such Guarantor for the benefit of, and held in trust for the
benefit of, the Holders of the Securities, and shall, subject
to the provisions of Section 11.02, Article Four and Article
Twelve, forthwith be paid to the Trustee for the benefit of
such Holders to be credited and applied upon the Securities,
whether matured or unmatured, in accordance with the terms of
this Indenture. Each Guarantor shall acknowledge that it will
receive direct and indirect benefits from the financing
arrangements contemplated by this Indenture and that the waiver
set forth in this Section 11.08 is knowingly made in
contemplation of such benefits.
SECTION 11.09. Execution of Guarantee.
----------------------
To evidence their guarantee to the Holders set forth
in this Article Eleven, the Guarantors shall execute the
Guarantee in substantially the form included in Exhibit A,
which, at any time that a Guarantee Condition shall exist,
shall be endorsed on each Security ordered to be authenticated
and
<PAGE>
-99-
delivered by the Trustee. Each Guarantee set forth in this
Article Eleven shall remain in full force and effect
notwithstanding any failure to endorse on each Security a
notation of such Guarantee. Each such Guarantee shall be signed
on behalf of each Guarantor by two Officers, or an Officer and an
Assistant Secretary or one Officer shall sign and one Officer or
an Assistant Secretary (each of whom shall, in each case, have
been duly authorized by all requisite corporate actions) shall
attest to such Guarantee prior to the authentication of the
Security on which it is endorsed, and the delivery of such
Security by the Trustee, after the authentication thereof
hereunder, shall constitute due delivery of such Guarantee on
behalf of such Guarantor. Such signatures upon the Guarantee may
be by manual or facsimile signature of such officers and may be
imprinted or otherwise reproduced on the Guarantee, and in case
any such officer who shall have signed the Guarantee shall cease
to be such officer before the Security on which such Guarantee is
endorsed shall have been authenticated and delivered by the
Trustee or disposed of by the Company, such Security nevertheless
may be authenticated and delivered or disposed of as though the
person who signed the Guarantee had not ceased to be such officer
of the Guarantor.
SECTION 11.10. Waiver of Stay, Extension or Usury Laws.
---------------------------------------
Each Guarantor shall covenant (to the extent that it
may lawfully do so) that it will not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay or extension law or any usury law or
other law that would prohibit or forgive each such Guarantor
from performing its Guarantee as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this Indenture; and
(to the extent that it may lawfully do so) each such Guarantor
shall expressly waive all benefit or advantage of any such law,
and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will
suffer and permit the execution of every such power as though
no such law had been enacted.
<PAGE>
-100-
ARTICLE TWELVE
SUBORDINATION OF GUARANTEE OBLIGATIONS
SECTION 12.01. Guarantee Obligations Subordinated
to Guarantor Senior Indebtedness.
----------------------------------
Anything herein to the contrary notwithstanding, each
of the Guarantors, for itself and its successors, and each
Holder, by his acceptance of Guarantees, shall agree, that any
payment of Obligations by a Guarantor in respect of its
Guarantee (collectively, as to any Guarantor, its "Guarantee
---------
Obligations") is subordinated, to the extent and in the manner
- -----------
provided in this Article Twelve, to the prior payment in full
in cash or Cash Equivalents of all Guarantor Senior
Indebtedness of such Guarantor whether outstanding on the Issue
Date or thereafter Incurred, including with respect to
Guarantor Senior Indebtedness, any interest accruing subsequent
to a bankruptcy or other similar proceeding whether or not such
interest is an allowed claim enforceable against the Company in
a bankruptcy case under Bankruptcy Law.
This Article Twelve shall constitute a continuing
offer to all persons who become holders of, or continue to
hold, Guarantor Senior Indebtedness, and such provisions are
made for the benefit of the holders of Guarantor Senior
Indebtedness and such holders are made obligees hereunder and
any one or more of them may enforce such provisions.
The obligations of the Guarantors to the Trustee
under Section 8.07 shall not be subject to the provisions of
this Article Twelve.
SECTION 12.02. Suspension of Guarantee Obligations When
Guarantor Senior Indebtedness in Default.
----------------------------------------
(a) Unless Section 12.03 shall be applicable, no
direct or indirect payment (other than payments by a trust
previously established pursuant to Article Nine hereof) by or
on behalf of any Guarantor of Guarantee Obligations on the
Securities whether pursuant to the terms of the Securities or
upon acceleration or otherwise shall be made if, at the time of
such payment, there exists a default in the payment of all or
any portion of principal of, premium, if any, or interest on
(i) any Designated Senior Indebtedness or (ii) Significant
Senior Indebtedness (and the Trustee has received written
notice
<PAGE>
-101-
thereof) and such Designated Senior Indebtedness or Significant
Senior Indebtedness is guaranteed by a Guarantor (which guarantee
constitutes Guarantor Senior Indebtedness of such Guarantor), and
such default shall not have been cured or waived by or on behalf
of the holders of such Guarantor Senior Indebtedness or shall
have ceased to exist, until such default shall have been cured or
waived or shall have ceased to exist or such Guarantor Senior
Indebtedness shall have been discharged or paid in full in cash
or Cash Equivalents, after which the Guarantor shall resume
making any and all required payments in respect of the
obligations under the Guarantee, including any missed payments.
(b) Unless Section 4.03 shall be applicable, during
the continuance of any other event of default with respect to
any Designated Senior Indebtedness and such Designated Senior
Indebtedness is guaranteed by a Guarantor (which guarantee
constitutes Guarantor Senior Indebtedness of such Guarantor)
pursuant to which the maturity thereof may be accelerated, upon
the earliest to occur of (a) receipt by the Trustee of written
notice from the holders of a majority of the outstanding
principal amount of the Guarantor Senior Indebtedness or their
Representative, or (b) if such event of default results from
the acceleration of the Securities, the date of such
acceleration, no such payment (other than payments by a trust
previously established pursuant to Article Nine hereof) may be
made by the Guarantor upon or in respect of the Securities for
a period ("Guarantor Payment Blockage Period") commencing on
---------------------------------
the earlier of the date of receipt of such notice or the date
of such acceleration and ending 179 days thereafter (unless (x)
such Guarantor Payment Blockage Period shall be terminated by
written notice to the Trustee from the holders of a majority of
the outstanding principal amount of such Guarantor Senior
Indebtedness or their representative who delivered such notice
or (y) such default is cured or waived, or ceases to exist or
such Guarantor Senior Indebtedness is discharged or paid in
full in cash or Cash Equivalents), after which the Guarantor
shall resume making any and all required payments in respect of
the obligations under the Guarantee, including any missed
payments. Notwithstanding anything herein to the contrary, in
no event will a Guarantor Payment Blockage Period extend beyond
179 days from the date on which such Guarantor Payment Blockage
Period was commenced. Not more than one Guarantor Payment
Blockage Period may be commenced with respect to the Securities
during any period of 365 consecutive days. No event of default
which existed or was continuing on the date of the commencement
of any Guarantor Payment Blockage Period with respect to the
<PAGE>
-102-
Guarantor Senior Indebtedness initiating such Guarantor Payment
Blockage Period shall be, or be made, the basis for the
commencement of a second Guarantor Payment Blockage Period by
the holders of such Guarantor Senior Indebtedness or their
representative whether or not within a period of 365
consecutive days unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive
days.
(c) In the event that, notwithstanding the
foregoing, the Trustee or the Holder of any Security shall have
received any payment prohibited by the foregoing provisions of
this Section 12.02, then and in such event such payment shall
be paid over and delivered forthwith to the Representatives or
as a court of competent jurisdiction shall direct.
SECTION 12.03. Guarantee Obligations Subordinated
Prior Payment of All Guarantor Senior
Indebtedness on Dissolution, Liquidation
or Reorganization of Such Guarantor.
----------------------------------------
Upon any payment or distribution of assets of any
Guarantor of any kind or character, whether in cash, property
or securities upon any dissolution, winding up, total or
partial liquidation or reorganization of such Guarantor and
whether voluntary or involuntary (including, without
limitation, in bankruptcy, insolvency or receivership
proceedings or upon any assignment for the benefit of creditors
or any other marshalling of assets and liabilities of such
Guarantor and whether voluntary or involuntary):
(a) the holders of all Guarantor Senior Indebtedness
of such Guarantor shall first be entitled to receive
payments in full in cash or Cash Equivalents of all
amounts payable under Guarantor Senior Indebtedness
(including, with respect to Designated Senior Indebtedness
guaranteed by such Guarantor, any interest accruing after
the commencement of any such proceeding at the rate
specified in the applicable Designated Senior Indebtedness
whether or not interest is an allowed claim enforceable
against the Company in any such proceeding) before the
Holders will be entitled to receive any payment with
respect to the Guarantee (excluding Permitted Subordinated
Reorganization Securities), and until all Obligations with
respect to the Guarantor Senior Indebtedness are paid in
full in cash or Cash Equivalents, any distribution to
which the Holders would be entitled (excluding Permitted
Subordinated Reorganization Securities) shall be made to
the holders of
<PAGE>
-103-
Guarantor Senior Indebtedness; provided, however, that no
-------- -------
payment by any other Guarantor or the Company shall
constitute payment on behalf of such Subsidiary Guaranty
for purposes of this Section 12.03(a);
(b) any payment or distribution of assets of such
Guarantor of any kind or character, whether in cash,
property or securities, to which the Holders or the
Trustee on behalf of the Holders would be entitled
(excluding Permitted Subordinated Indebtedness) except for
the provisions of this Article Twelve, shall be paid by
the liquidating trustee or agent or other person making
such a payment or distribution, directly to the holders of
Guarantor Senior Indebtedness of such Guarantor or their
Representative, ratably according to the respective
amounts of such Guarantor Senior Indebtedness remaining
unpaid held or represented by each, until all such
Guarantor Senior Indebtedness remaining unpaid shall have
been paid in full in cash or Cash Equivalents after giving
effect to any concurrent payment or distribution to the
holders of such Guarantor Senior Indebtedness;
(c) in the event that, notwithstanding the
foregoing, any payment or distribution of assets of such
Guarantor of any kind or character, whether in cash,
property or securities, shall be received by the Trustee
or the Holders or any Paying Agent in respect of payment
of the Guarantee before all Guarantor Senior Indebtedness
of such Guarantor is paid in full in cash or Cash
Equivalents, such payment or distribution (subject to the
provisions of Sections 12.06 and 12.07) shall be received,
segregated from other funds, and held in trust by the
Trustee or such Holder or Paying Agent for the benefit of,
and shall immediately be paid over to, the holders of such
Guarantor Senior Indebtedness or their Representative,
ratably according to the respective amounts of such
Guarantor Senior Indebtedness held or represented by each,
until all such Guarantor Senior Indebtedness remaining
unpaid shall have been paid in full in cash or Cash
Equivalents, after giving effect to any concurrent payment
or distribution to the holders of Guarantor Senior
Indebtedness. Notwithstanding anything to the contrary
contained herein, in the absence of its gross negligence
or wilful misconduct, the Trustee shall have no duty to
collect or retrieve monies previously paid by it in good
faith; provided that this sentence shall not affect the
--------
obligation of any other party receiving such payment to
hold such payment for the
<PAGE>
-104-
benefit of, and to pay over such payment over to, the
holders of such Guarantor Senior Indebtedness or their
Representative.
Each Guarantor shall give prompt notice to the
Trustee prior to any dissolution, winding up, total or partial
liquidation or total or reorganization (including, without
limitation, in bankruptcy, insolvency, or receivership
proceedings or upon any assignment for the benefit of creditors
or any other marshalling of such Guarantor's assets and
liabilities).
SECTION 12.04. Holders of Guarantee Obligations To Be
Subrogated to Rights of Holders of
Guarantor Senior Indebtedness.
--------------------------------------
Subject to the payment in full in cash or Cash
Equivalents of all Guarantor Senior Indebtedness, the Holders
of Guarantee Obligations of a Guarantor shall be subrogated to
the rights of the holders of Guarantor Senior Indebtedness of
such Guarantor to receive payments or distributions of assets
of such Guarantor applicable to such Guarantor Senior
Indebtedness until all amounts owing on or in respect of the
Guarantee Obligations shall be paid in full in cash, and for
the purpose of such subrogation no payments or distributions to
the holders of such Guarantor Senior Indebtedness by or on
behalf of such Guarantor, or by or on behalf of the Holders by
virtue of this Article Twelve, which otherwise would have been
made to the Holders, shall, as between such Guarantor and the
Holders, be deemed to be payment by such Guarantor to or on
account of such Guarantor Senior Indebtedness, it being
understood that the provisions of this Article Twelve are and
are intended solely for the purpose of defining the relative
rights of the Holders, on the one hand, and the holders of such
Guarantor Senior Indebtedness, on the other hand.
If any payment or distribution to which the Holders
would otherwise have been entitled but for the provisions of
this Article Twelve shall have been applied, pursuant to the
provisions of this Article Twelve, to the payment of all
amounts payable under such Guarantor Senior Indebtedness, then
the Holders shall be entitled to receive from the holders of
such Guarantor Senior Indebtedness any payments or
distributions received by such holders of such Guarantor Senior
Indebtedness in excess of the amount sufficient to pay all
amounts payable under or in respect of such Guarantor Senior
Indebtedness in full in cash or Cash Equivalents.
<PAGE>
-105-
SECTION 12.05. Obligations of the Subsidiary
Guarantors Unconditional.
-----------------------------
Nothing contained in this Article Twelve or elsewhere
in this Indenture or in the Guarantees is intended to or shall
impair, as between the Guarantors and the Holders, the
obligation of the Guarantors, which is absolute and
unconditional, to pay to the Holders all amounts due and
payable under the Guarantees as and when the same shall become
due and payable in accordance with their terms, or is intended
to or shall affect the relative rights of the Holders and
creditors of the Guarantors other than the holders of the
Guarantor Senior Indebtedness, nor shall anything herein or
therein prevent the Trustee or any Holder from exercising all
remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this
Article Twelve, of the holders of Guarantor Senior Indebtedness
in respect of cash, property or securities of the Guarantors
received upon the exercise of any such remedy. Upon any
payment or distribution of assets of any Guarantor referred to
in this Article Twelve, the Trustee, subject to the provisions
of Sections 8.01 and 8.02, and the Holders shall be entitled to
rely upon any order or decree made by any court of competent
jurisdiction in which any dissolution, winding up, liquidation
or reorganization proceedings are pending, or a certificate of
the receiver, trustee in bankruptcy, liquidating trustee or
agent or other person making any payment or distribution to the
Trustee or to the Holders for the purpose of ascertaining the
persons entitled to participate in such payment or
distribution, the holders of Guarantor Senior Indebtedness and
other Indebtedness of any Guarantor, the amount thereof or
payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this
Article Twelve. Nothing in this Section 12.05 shall apply to
the claims of, or payments to, the Trustee under or pursuant to
Section 8.07.
SECTION 12.06. Trustee Entitled To Assume Payments
Not Prohibited in Absence of Notice.
-----------------------------------
The Trustee shall not at any time be charged with
knowledge of the existence of any facts that would prohibit the
making of any payment to or by the Trustee unless and until the
Trustee or any Paying Agent shall have received notice thereof
from the Company or any Guarantor or from one or more holders
of Guarantor Senior Indebtedness or from any Representative
therefor and, prior to the receipt of any such notice, the
Trustee, subject to the provisions of Sections 8.01 and 8.02,
<PAGE>
-106-
shall be entitled in all respects conclusively to assume that
no such fact exists.
SECTION 12.07. Application by Trustee of Assets Deposited
with It.
------------------------------------------
U.S. Legal Tender or U.S. Government obligations
deposited in trust with the Trustee pursuant to and in
accordance with Sections 9.01 and 9.02 shall be for the sole
benefit of Holders and, to the extent allocated for the payment
of Securities, shall not be subject to the subordination
provisions of this Article Twelve. Otherwise, any deposit of
assets or securities by or on behalf of a Guarantor with the
Trustee or any Paying Agent (whether or not in trust) for
payment of the Guarantee shall be subject to the provisions of
this Article Twelve; provided that if prior to the second
--------
Business Day preceding the date on which by the terms of this
Indenture any such assets may become distributable for any
purpose (including, without limitation, the payment of either
principal of or interest on any Security) the Trustee or such
Paying Agent shall not have received with respect to such
assets the notice provided for in Section 12.06, then the
Trustee or such Paying Agent shall have full power and
authority to receive such assets and to apply the same to the
purpose for which they were received, and shall not be affected
by any notice to the contrary received by it on or after such
date. The foregoing shall not apply to the Paying Agent if the
Company or any Subsidiary or Affiliate of the Company is acting
as Paying Agent. Nothing contained in this Section 12.07 shall
limit the right of the holders of Guarantor Senior Indebtedness
to recover payments as contemplated by this Article Twelve.
SECTION 12.08. No Waiver of Subordination Provisions.
-------------------------------------
(a) No right of any present or future holder of any
Guarantor Senior Indebtedness to enforce subordination as
herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of any
Guarantor or by any act or failure to act, in good faith, by
any such holder, or by any non-compliance by any Guarantor with
the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or
be otherwise charged with.
(b) Without limiting the generality of subsection
(a) of this Section 12.08, the holders of Guarantor Senior
Indebtedness may, at any time and from time to time, without
<PAGE>
-107-
the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of
the Securities and without impairing or releasing the
subordination provided in this Article Twelve or the
obligations hereunder of the Holders of the Securities to the
holders of Guarantor Senior Indebtedness, do any one or more of
the following: (1) change the manner, place or terms of
payment or extend the time of payment of, or renew or alter,
Guarantor Senior Indebtedness or any instrument evidencing the
same or any agreement under which Guarantor Senior Indebtedness
is outstanding; (2) sell, exchange, release or otherwise deal
with any property pledged, mortgaged or otherwise securing
Guarantor Senior Indebtedness; (3) release any person liable in
any manner for the collection or payment of Guarantor Senior
Indebtedness; and (4) exercise or refrain from exercising any
rights against the Company and any other person; provided,
--------
however, that in no event shall any such actions limit the
- -------
right of the Holders of the Securities to take any action to
accelerate the maturity of the Securities pursuant to Article
Seven hereof or to pursue any rights or remedies hereunder or
under applicable laws if the taking of such action does not
otherwise violate the terms of this Indenture.
(c) Each Holder by accepting a Security agrees that
the Representative of any Guarantor Senior Indebtedness, in its
discretion, without notice or demand and without affecting any
rights of any holder of Guarantor Senior Indebtedness under
this Article Twelve, may foreclose any mortgage or deed of
trust covering interests in real property secured thereby, by
judicial or nonjudicial sale; and such Holder hereby waives any
defense to the enforcement by the Representative of any
Guarantor Senior Indebtedness or by any holder of any Guarantor
Senior Indebtedness against such Holder of this Article Twelve
after a judicial or nonjudicial sale or other disposition of
its interests in real property secured by such mortgage or deed
of trust.
SECTION 12.09. Holders Authorize Trustee To Effectuate
Subordination of Guarantee Obligations.
---------------------------------------
Each Holder of the Guarantee Obligations by his
acceptance thereof authorizes and expressly directs the Trustee
on his behalf to take such action as may be necessary or
appropriate to effect the subordination provisions contained in
this Article Twelve, and appoints the Trustee his attorney-in-
fact for such purpose, including, in the event of any
dissolution, winding up, liquidation or reorganization of any
Guarantor
<PAGE>
-108-
(whether in bankruptcy, insolvency or receivership proceedings or
upon an assignment for the benefit of creditors or any other
marshalling of assets and liabilities of any Guarantor) tending
towards liquidation or reorganization of the business and assets
of any Guarantor, the immediate filing of a claim for the unpaid
balance under its or his Guarantee Obligations in the form
required in said proceedings and cause said claim to be approved.
If the Trustee does not file a proper claim or proof of debt in
the form required in such proceeding prior to 30 days before the
expiration of the time to file such claim or claims, then the
holders of the Guarantor Senior Indebtedness or their
Representative is hereby authorized to file an appropriate claim
for and on behalf of the Holders of said Guarantee Obligations.
Nothing herein contained shall be deemed to authorize the Trustee
or the holders of Guarantor Senior Indebtedness or their
Representative to authorize or consent to or accept or adopt on
behalf of any holder of Guarantee Obligations any plan of
reorganization, arrangement, adjustment or composition affecting
the Guarantee Obligations or the rights of any Holder thereof, or
to authorize the Trustee or the holders of Guarantor Senior
Indebtedness or their Representative to vote in respect of the
claim of any holder of Guarantee Obligations in any such
proceeding.
SECTION 12.10. Right of Trustee To Hold Guarantor
Senior Indebtedness.
----------------------------------
The Trustee shall be entitled to all of the rights
set forth in this Article Twelve in respect of any Guarantor
Senior Indebtedness at any time held by it to the same extent
as any other holder of Guarantor Senior Indebtedness, and
nothing in this Indenture shall be construed to deprive the
Trustee of any of its rights as such holder.
SECTION 12.11. No Suspension of Remedies.
-------------------------
The failure to make a payment in respect of the
Guarantees by reason of any provision of this Article Twelve
shall not be construed as preventing the occurrence of a
Default or an Event of Default under Section 7.01.
Nothing contained in this Article Twelve shall limit
the right of the Trustee or the Holders of Securities to take
any action to accelerate the maturity of the Securities
pursuant to Article Seven or to pursue any rights or remedies
hereunder or under applicable law, subject to the rights, if
any,
<PAGE>
-109-
under this Article Twelve of the holders, from time to time, of
Guarantor Senior Indebtedness.
SECTION 12.12. No Fiduciary Duty of Trustee to Holders
of Guarantor Senior Indebtedness.
---------------------------------------
The Trustee shall not be deemed to owe any fiduciary
duty to the holders of Guarantor Senior Indebtedness, and shall
not be liable to any such holders (other than for its willful
misconduct or gross negligence) if it shall in good faith
mistakenly pay over or deliver to the holders of Guarantee
Obligations or the Company or any other person, money or assets
to which any holders of Guarantor Senior Indebtedness shall be
entitled by virtue of this Article Twelve or otherwise.
Nothing in this Section 12.12 shall affect the obligation of
any person other than the Trustee to hold such payment for the
benefit of, and to pay such payment over to, the holders of
Guarantor Senior Indebtedness or their Representative.
ARTICLE THIRTEEN
MISCELLANEOUS
SECTION 13.01. TIA Controls.
------------
If any provision of this Indenture limits, qualifies,
or conflicts with the duties imposed by operation of Section
3.18(c) of the TIA, the imposed duties shall control.
SECTION 13.02. Notices.
-------
Any notices or other communications required or
permitted hereunder shall be in writing, and shall be
sufficiently given if made by hand delivery, by telex, by
telecopier or registered or certified mail, postage prepaid,
return receipt requested, addressed as follows:
if to the Company or any Guarantor:
Smith's Food & Drug Centers, Inc.
1550 S. Redwood Road
Salt Lake City, UT 84104
Attention:
w/a copy to:
<PAGE>
-110-
c/o The Yucaipa Companies
10000 Santa Monica Boulevard
Fifth Floor
Los Angeles, California 90067
Attention:
if to the Trustee:
Attention: Corporate Trust Division
if to the Credit Agent:
Bankers Trust Company
130 Liberty Street, 14th Floor
New York, NY 10006
Attention:
w/a copy to:
Bankers Trust Company
308 S. Grand Avenue, 41st Floor
Los Angeles, CA 90071
Attention:
Each of the Company, the Trustee, the Guarantors and
the Credit Agent by written notice to each other such person
may designate additional or different addresses for notices to
such person. Any notice or communication to the Company, the
Trustee, the Guarantors and the Credit Agent shall be deemed to
have been given or made as of the date so delivered if
personally delivered; when answered back, if telexed; when
receipt is acknowledged, if telecopied; and five (5) calendar
days after mailing if sent by registered or certified mail,
postage prepaid (except that a notice of change of address
shall not be deemed to have been given until actually received
by the addressee).
Any notice or communication mailed to a Holder shall
be mailed to him by first class mail or other equivalent means
at his address as it appears on the registration books of the
Registrar and shall be sufficiently given to him if so mailed
within the time prescribed.
<PAGE>
-111-
Failure to mail a notice or communication to a Holder
or any defect in it shall not affect its sufficiency with
respect to other Holders. If a notice or communication is
mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
SECTION 13.03. Communications by Holders with Other Holders.
--------------------------------------------
Holders may communicate pursuant to TIA (S) 312(b) with
other Holders with respect to their rights under this Indenture
or the Securities. The Company, the Guarantors, the Trustee,
the Registrar and any other person shall have the protection of
TIA (S) 312(c).
SECTION 13.04. Certificate and Opinion as to Conditions
Precedent.
----------------------------------------
Upon any request or application by the Company to the
Trustee to take any action under this Indenture, the Company
shall furnish to the Trustee:
(1) an Officers' Certificate stating that, in the
opinion of the signers, all conditions precedent, if any,
provided for in this Indenture relating to the proposed
action have been complied with; and
(2) an Opinion of Counsel stating that, in the
opinion of such counsel, all such conditions precedent
have been complied with.
SECTION 13.05. Statements Required in Certificate or Opinion.
---------------------------------------------
Each certificate or opinion with respect to
compliance with a condition or covenant provided for in this
Indenture, other than the Officers' Certificate required by
Section 5.07, shall include:
(1) a statement that the person making such
certificate or opinion has read such covenant or
condition;
(2) a brief statement as to the nature and scope of
the examination or investigation upon which the statements
or opinions contained in such certificate or opinion are
based;
(3) a statement that, in the opinion of such person,
he has made such examination or investigation as is
<PAGE>
-112-
necessary to enable him to express an informed opinion as
to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion
of each such person, such condition or covenant has been
complied with; provided, however, that with respect to
-------- -------
matters of fact an Opinion of Counsel may rely on an
Officers' Certificate or certificates of public officials.
SECTION 13.06. Rules by Trustee, Paying Agent, Registrar.
-----------------------------------------
The Trustee may make reasonable rules for action by
or at a meeting of Holders. The Paying Agent or Registrar may
make reasonable rules for its functions.
SECTION 13.07. Legal Holidays.
--------------
A "Legal Holiday" used with respect to a particular
-------------
place of payment is a Saturday, a Sunday or a day on which
banking institutions in New York, New York or at such place of
payment are not required to be open. If a payment date is a
Legal Holiday at such place, payment may be made at such place
on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period.
SECTION 13.08. Governing Law.
-------------
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE
STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW. Each of the parties hereto agrees to submit to the
jurisdiction of the courts of the State of New York in any
action or proceeding arising out of or relating to this
Indenture.
SECTION 13.09. No Adverse Interpretation of Other Agreements.
---------------------------------------------
This Indenture may not be used to interpret another
indenture, loan or debt agreement of any of the Company or any
of its Subsidiaries. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 13.10. No Recourse Against Others.
--------------------------
A director, officer, employee, stockholder or
incorporator, as such, of the Company shall not have any
liability
<PAGE>
-113-
for any obligations of the Company under the Securities or the
Indenture or for any claim based on, in respect of or by reason
of such obligations or their creations. Each Holder by accepting
a Security waives and releases all such liability. Such waiver
and release are part of the consideration for the issuance of the
Securities.
SECTION 13.11. Successors.
----------
All agreements of the Company and each Guarantor in
this Indenture and the Securities shall bind their respective
successors. All agreements of the Trustee in this Indenture
shall bind its successor.
SECTION 13.12. Duplicate Originals.
-------------------
All parties may sign any number of copies of this
Indenture. Each signed copy shall be an original, but all of
them together shall represent the same agreement.
SECTION 13.13. Severability.
------------
In case any one or more of the provisions in this
Indenture or in the Securities shall be held invalid, illegal
or unenforceable, in any respect for any reason, the validity,
legality and enforceability of any such provision in every
other respect and of the remaining provisions shall not in any
way be affected or impaired thereby, it being intended that all
of the provisions hereof shall be enforceable to the full
extent permitted by law.
SECTION 13.14. No Violation.
------------
Notwithstanding the provisions of this Indenture, in
no event shall any transaction, agreement, payment or other
event to be consummated, entered into or made in connection
with the Merger or any financing thereof be considered a
violation of any provision of this Indenture or constitute a
Change of Control hereunder.
<PAGE>
S-1
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused
this Indenture to be duly executed, and their respective
corporate seals to be hereunto affixed and attested, all as of
the date first written above.
SMITH'S FOOD & DRUG CENTERS, INC.
By: ______________________________
Name:
Title:
Attest: ___________________
,
as Trustee
By: ______________________________
Name:
Title:
Attest: ____________________
<PAGE>
EXHIBIT A
---------
[FORM OF NOTE]
SMITH'S FOOD & DRUG CENTERS, INC.
% Senior Subordinated Note
due 2007
No. $
SMITH'S FOOD & DRUG CENTERS, INC., a Delaware
corporation (the "Company", which term includes any successor
corporation), for value received promises to pay to
or registered assigns, the principal sum of Dollars, on
June 15, 2007.
Interest Payment Dates: May 15 and November 15
commencing on November 15, 1996.
Record Dates: May 1 and November 1.
Reference is hereby made to the further provisions of
this Security set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if
set forth at this place.
A-1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this
Security to be signed manually or by facsimile by its duly
authorized officers.
Dated:
SMITH'S FOOD & DRUG CENTERS, INC.
By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
Trustee's Certification of Authentication
This is one of the Sections described in
the within-mentioned Indenture
,
as Trustee
By:____________________________________
Authorized Signatory
A-2
<PAGE>
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This is one of the Securities described in the
within-mentioned Indenture.
,
as Trustee
By__________________________________
Authorized Signatory
A-3
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
% Senior Subordinated Note
due 2007
1. Interest.
--------
SMITH'S FOOD & DRUG CENTERS, INC., a Delaware
corporation (the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown
above. The Company will pay interest semi-annually on each
May 15 and November 15 of each year (the "Interest Payment
Date"), commencing on November 15, 1996, to the Holders of
record on the immediately preceding May 1 and November 1.
Interest on the Securities will accrue from the most recent
date to which interest has been paid or, if no interest has
been paid, from the date of issuance of the Securities.
Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Company shall pay interest on overdue principal
and interest on overdue installments of interest, to the extent
lawful, at a rate equal to the rate of interest otherwise
payable on the Securities.
2. Method of Payment.
-----------------
The Company shall pay interest on the Securities
(except defaulted interest) to the persons who are the
registered Holders at the close of business on the Record Date
immediately preceding the Interest Payment Date even if the
Securities are cancelled on registration of transfer or
registration of exchange after such Record Date. Holders must
surrender Securities to a Paying Agent to collect principal
payments. The Company shall pay principal and interest in
money of the United States that at the time of payment is legal
tender for payment of public and private debts ("U.S. Legal
Tender"). However, the Company may pay principal and interest
by wire transfer of Federal funds, or interest by its check
payable in such U.S. Legal Tender. The Company may deliver any
such interest payment to the Paying Agent or to a Holder at the
Holder's registered address. Notwithstanding the foregoing,
the Company shall pay or cause to be paid all amounts payable
with respect to non-DTC eligible Securities by wire transfer of
Federal funds to the account of the Holders of such Securities.
3. Paying Agent and Registrar.
--------------------------
Initially,
(the "Trustee") will act as Paying Agent and Registrar. The
Company may change any Paying Agent, Registrar or co-Registrar
A-4
<PAGE>
without notice to the Holders. The Company or any of its
Subsidiaries may, subject to certain exceptions, act as Paying
Agent, Registrar or co-Registrar.
4. Indenture.
---------
The Company issued the Securities under an Indenture,
dated as of May , 1996 (the "Indenture"), between the Company
and the Trustee. Capitalized terms herein are used as defined
in the Indenture unless otherwise defined herein. The terms of
the Securities include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture
Act of 1939 (15 U.S. Code (SS) 77aaa-77bbbb) (the "TIA"), as in
effect on the date of the Indenture until such time as the
Indenture is qualified under the TIA, and thereafter as in
effect on the date on which the Indenture is qualified under
the TIA. Notwithstanding anything to the contrary herein, the
Securities are subject to all such terms, and Holders of
Securities are referred to the Indenture and said Act for a
statement of them. The Securities are general unsecured
obligations of the Company limited in aggregate principal
amount to $575,000,000.
5. Optional Redemption.
-------------------
The Securities will be redeemable, at the option of
the Company, in whole at any time or in part from time to time,
on and after May 15, 2001, at the following redemption prices
(expressed as percentages of the principal amount) if redeemed
during the twelve-month period commencing on May 15 of the year
set forth below, plus, in each case, accrued and unpaid
interest to the date of redemption:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2001...................................... %
2002...................................... %
2003...................................... %
2004 and thereafter....................... 100.0%
</TABLE>
In addition, on or prior to May 15, 1999, the Company
may, at its option, use the Net Cash Proceeds of one or more
Public Equity Offerings to redeem up to an aggregate of 35% of
the principal amount of the Securities originally issued, at
the following redemption prices (expressed as percentages of
the principal amount) if redeemed during the 12 months
commencing on May 15 of the year set forth below, plus, in each
case, accrued and unpaid interest, if any, to the date of
redemption (provided that the redemption notice shall have been
sent not
A-5
<PAGE>
later than 60 days after the consummation of such Public Equity
Offering):
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1996...................................... %
1997...................................... %
1998...................................... %
</TABLE>
The documents evidencing Senior Indebtedness will
restrict the Company's ability to optionally redeem the
Securities.
6. Notice of Redemption.
--------------------
Notice of redemption will be mailed at least 30 days
but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at such Holder's registered
address. In order to effect a redemption with the proceeds of
a Public Equity Offering, the Company shall send the redemption
notice not later than 60 days after the consummation of such
Public Equity Offering. Securities in denominations larger
than $1,000 may be redeemed in part.
Except as set forth in the Indenture, from and after
any Redemption Date, if monies for the redemption of the
Securities called for redemption shall have been deposited with
the Paying Agent for redemption on such Redemption Date and
payment of the Securities called for redemption is not
prohibited under Article Four or Article Twelve of the
Indenture, then, unless the Company defaults in the payment of
such Redemption Price, the Securities called for redemption
will cease to bear interest and the only right of the Holders
of such Securities will be to receive payment of the Redemption
Price.
7. Change of Control Offer.
-----------------------
Upon the occurrence of a Change of Control, each
Holder shall have the right to require the repurchase of such
Holder's Securities pursuant to a Change of Control Offer at a
purchase price equal to 101% of the principal amount thereof
plus accrued interest, if any, to the date of purchase. The
Company shall not be required to repurchase Securities until it
has complied with its covenants to repay in full all
Indebtedness of the Company and its Subsidiaries under the Credit
Agreement or offer to repay in full all such Indebtedness and
repay the Indebtedness of each lender who has accepted its offer
to repay such Indebtedness or to obtain the requisite
A-6
<PAGE>
consent under the Credit Agreement to permit the repurchase of
the Securities pursuant to a Change of Control Offer.
8. Limitation on Asset Sales.
-------------------------
Under certain circumstances the Company is required
to apply the net proceeds from Asset Sales to the repayment of
Pari Passu Indebtedness or Senior Indebtedness, to make Related
Business Investments, an investment in properties and assets
that replace the properties and assets that are the subject of
such Asset Sale, an investment in properties and assets that
will be used in the business of the Company and its
Subsidiaries existing on the Issue Date or in a business
reasonably related thereto or to purchase in a Net Proceeds
Offer (at a price equal to 100% of the aggregate principal
amount thereof, plus accrued interest to the date of purchase)
such aggregate principal amount of Securities which, when added
to the accrued interest thereon, shall be equal to the net
proceeds required to be applied thereto.
9. Denominations; Transfer; Exchange.
---------------------------------
The Securities are in registered form, without
coupons, in denominations of $1,000 and integral multiples of
$1,000. A Holder shall register the transfer of or exchange
Securities in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay certain transfer
taxes or similar governmental charges payable in connection
therewith as permitted by the Indenture. The Registrar need
not register the transfer of or exchange any Securities or
portions thereof selected for redemption.
10. Persons Deemed Owners.
---------------------
The registered Holder of a Security shall be treated
as the owner of it for all purposes.
11. Unclaimed Money.
---------------
If money for the payment of principal or interest
remains unclaimed for two years, the Trustee and the Paying
Agents will pay the money back to the Company at its request.
After that, all liability of the Trustee and such Paying Agents
with respect to such money shall cease.
12. Discharge Prior to Redemption or Maturity.
-----------------------------------------
If the Company at any time deposits with the Trustee
U.S. Legal Tender or U.S. Government Obligations sufficient to
pay the principal of and interest on the Securities to
A-7
<PAGE>
redemption or maturity and complies with the other provisions
of the Indenture relating thereto, the Company will be
discharged from certain provisions of the Indenture and the
Securities (including the financial covenants, but excluding
its obligation to pay the principal of and interest on the
Securities).
13. Amendment; Supplement; Waiver.
-----------------------------
Subject to certain exceptions, the Indenture, the
Securities and, if applicable, the Guarantees may be amended or
supplemented with the written consent of the Holders of at
least a majority in aggregate principal amount of the
Securities then outstanding, and any existing Default or Event
of Default or compliance with any provision may be waived with
the consent of the Holders of a majority in aggregate principal
amount of the Securities then outstanding. Without notice to
or consent of any Holder, the parties thereto may amend or
supplement the Indenture or the Securities to, among other
things, cure any ambiguity, defect or inconsistency, provide
for uncertificated Securities in addition to or in place of
certificated Securities, comply with Article Six or Section
11.06 of the Indenture, or comply with any requirements of the
SEC in connection with the qualification of the Indenture under
the TIA, or make any other change that does not adversely
affect the rights of any Holder of a Security.
14. Restrictive Covenants.
---------------------
The Indenture imposes certain limitations on the
ability of the Company and its Subsidiaries to, among other
things, incur additional Indebtedness or Liens, make payments
in respect of its Capital Stock and merge or consolidate with
any other person and sell, lease, transfer or otherwise dispose
of substantially all of its properties or assets. The
limitations are subject to a number of important qualifications
and exceptions. The Company must annually report to the
Trustee on compliance with such limitations.
15. Subordination.
-------------
The Securities will be subordinated in right of
payment to the prior payment in full of all Senior Indebtedness
(as defined in the Indenture) of the Company. The guarantees
are subordinated in right to payment, in the manner and to the
extent set forth in the Indenture, to the prior payment in full
of Guaranteed Senior Indebtedness (as defined in the indenture)
To the extent and in the manner provided in the Indenture,
Senior Indebtedness, and in the case of payment by a Guarantor,
Guarantor Subsidiary Indebtedness, must be paid before any
payment may be made to any Holder of this Security. Any Holder
by
A-8
<PAGE>
accepting this Security agrees to the subordination and
authorizes the Trustee to give it effect.
16. Successors.
----------
When a successor assumes all the obligations of its
predecessor under the Securities and the Indenture, the
predecessor will be released from those obligations.
17. Defaults and Remedies.
---------------------
If an Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in aggregate principal
amount of Securities then outstanding may declare all the
Securities to be due and payable immediately in the manner and
with the effect provided in the Indenture. Holders of
Securities may not enforce the Indenture or the Securities
except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture
or the Securities. Subject to certain limitations, Holders of
a majority in aggregate principal amount of the Securities then
outstanding may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from Holders of Securities
notice of any continuing Default or Event of Default (except a
Default in payment of principal or interest) if it determines
that withholding notice is in their interest.
18. Trustee Dealings with Company.
-----------------------------
The Trustee under the Indenture, in its individual or
any other capacity, may become the owner or pledgee of
Securities and may otherwise deal with the Company, its
Subsidiaries or their respective Affiliates as if it were not
the Trustee.
19. No Recourse Against Others.
--------------------------
No stockholder, director, officer, employee or
incorporator, as such, of the Company shall have any liability
for any obligation of the Company under the Securities or the
Indenture or for any claim based on, in respect of or by reason
of, such obligations or their creation. Each Holder of a
Security by accepting a Security waives and releases all such
liability. The waiver and release are part of the
consideration for the issuance of the Securities.
20. Authentication.
--------------
This Security shall not be valid until the Trustee or
authenticating agent manually signs the certificate of
authentication on this Security.
A-9
<PAGE>
21. Abbreviations and Defined Terms.
-------------------------------
Customary abbreviations may be used in the name of a
Holder of a Security or an assignee, such as: TEN COM (= tenants
in common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common),
CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
22. CUSIP Numbers.
-------------
Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the
Company will cause CUSIP numbers to be printed on the
Securities immediately prior to the qualification of the
Indenture under the TIA as a convenience to the Holders of the
Securities. No representation is made as to the accuracy of
such numbers as printed on the Securities and reliance may be
placed only on the other identification numbers printed hereon.
The Company will furnish to any Holder of a Security
upon written request and without charge a copy of the
Indenture. Requests may be made to:
Smith's Food & Drug Centers, Inc.
1550 S. Redwood Road
Salt Lake City, UT 84104
Attention: Corporate Secretary
A-10
<PAGE>
[FORM OF NOTATION ON NOTE RELATING TO GUARANTEE]
GUARANTEE
The Guarantors (as defined in the Indenture (the
"Indenture") referred to in the Security upon which this
notation is endorsed and each hereinafter referred to as a
"Guarantor," which term includes any successor person under the
Indenture) have unconditionally guaranteed on a senior
subordinated basis (such guarantee by each Guarantor being
referred to herein as the "Guarantee") (i) the due and punctual
payment of the principal of and interest on the Securities,
whether at maturity, by acceleration or otherwise, the due and
punctual payment of interest on the overdue principal and
interest, if any, on the Securities, to the extent lawful, and
the due and punctual performance of all other obligations of
the Company to the Holders or the Trustee all in accordance
with the terms set forth in Article Eleven and Article Twelve
of the Indenture and (ii) in case of any extension of time of
payment or renewal of any Securities or any of such other
obligations, that the same will be promptly paid in full when
due or performed in accordance with the terms of the extension
or renewal, whether at stated maturity, by acceleration or
otherwise.
The obligations of each Guarantor to the Holders of
Securities and to the Trustee pursuant to the Guarantee and the
Indenture are expressly set forth and are expressly
subordinated and subject in right of payment to the prior
payment in full of all Guarantor Senior Indebtedness of such
Guarantor, to the extent and in the manner provided, in Article
Eleven and Article Twelve of the Indenture, and reference is
hereby made to such Indenture for the precise terms of the
Guarantee therein made.
No stockholder, officer, director or incorporator, as
such, past, present or future, of any Guarantor shall have any
liability under the Guarantee by reason of his or its status as
such stockholder, officer, director or incorporator.
A-11
<PAGE>
The Guarantee shall not be valid or obligatory for
any purpose until the certificate of authentication on the
Securities upon which the Guarantee is noted shall have been
executed by the Trustee under the Indenture by the manual
signature of one of its authorized officers.
GUARANTORS:
A-12
<PAGE>
[FORM OF ASSIGNMENT]
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
(Print or type assignee's name, address and zip code)
Please insert Social Security or other
identifying number of assignee
_______________________________________
and irrevocably appoint _______________________ agent to
transfer this Security on the books of the Company. The agent
may substitute another to act for him.
Dated:____________________ Signature:_________________________
______________________________________________________________
(Sign exactly as your name appears on
the face of this Security)
Signature Guarantee:__________________________________________
A-13
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased
by the Company pursuant to Section 5.15 or Section 5.16 of the
Indenture, as the case may be, check the appropriate box below:
Section 5.15 [ ] Section 5.16 [ ]
If you want to elect to have only part of this
Security purchased by the Company pursuant to Section 5.15 or
Section 5.16 of the Indenture, as the case may be, state the
amount you want to be purchased:
$
Date:__________ Signature:____________________________
(Sign exactly as your name
appears on the face of
this Security)
Signature Guarantee:______________________________________
A-14
<PAGE>
Schedule 1.01
-------------
A-15
<PAGE>
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)
<TABLE>
<CAPTION>
PRO FORMA
SMITH'S FOR PRO
CALIFORNIA FORMA
1991 1992 1993 1994 1995 DIVESTITURE COMBINED
-------- -------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 (File
No. 333-01601) of our report dated October 3, 1995, except for Note 18 for
which the date is January 29, 1996, on our audits of the financial statements
of Smitty's Supermarkets, Inc. and subsidiaries and the Predecessor. We also
consent to the reference to our firm under the captions "Selected Historical
Financial Data of Smitty's" and "Experts."
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
May 6, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and in
headnotes and to the use of our report dated January 29, 1996, in Amendment
No. 3 to the Registration Statement (Form S-3, No. 333-01601) and related
Prospectus of Smith's Food & Drug Centers, Inc. dated May 6, 1996.
ERNST & YOUNG LLP
Salt Lake City, Utah
May 3, 1996
