<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
ADVANCE PARADIGM, INC.
(Name of Registrant As Specified in Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$__________ (aggregate amount to be distributed to security
holders)
4) Proposed maximum aggregate value of transaction:
$__________ (aggregate amount to be distributed to security
holders)
5) Total fee paid:
$__________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------
3) Filing Party:
------------------------------------------------------
4) Date Filed:
------------------------------------------------------
<PAGE>
[LOGO OF ADVANCE PARADIGM]
5215 North O'Connor Boulevard, Suite 1600
Irving, Texas 75039
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
December 7, 2000
To the Stockholders of Advance Paradigm, Inc.
The 2000 Annual Meeting of Stockholders (the "Annual Meeting") of Advance
Paradigm, Inc., a Delaware corporation (the "Company"), will be held on December
7, 2000 at 2:00 p.m., local time, at the Hotel Crescent Court, 400 Crescent
Court, Dallas, Texas, for the following purposes:
1. To elect three directors to serve until our Annual Meeting of
Stockholders in 2003;
2. To consider and vote upon a proposal to amend and restate our
certificate of incorporation to, among other things, change our name
to "AdvancePCS," create classes of common stock to be denominated
Class A, Class B-1 and Class B-2, reclassify the existing common stock
as Class A Common Stock, increase the number of authorized shares of
common stock and change the governance structure of our board of
directors;
3. To consider and vote upon a proposal to approve the issuance of shares
of Class B-1 Common Stock and Class B-2 Common Stock upon conversion
of Series A Preferred Stock recently issued by us in connection with
our acquisition of PCS Holding Corporation;
4. To consider and vote upon a proposal to amend our Amended and Restated
1993 Incentive Stock Option Plan (the "Incentive Plan") to increase
the number of shares available for issuance from 6,718,000 to
9,718,000;
5. To ratify the selection of Arthur Andersen, LLP as our independent
auditors for the fiscal year ending March 31, 2001; and
6. To transact all other business that may properly come before such
meeting or any adjournment(s) thereof.
The close of business on October 10, 2000, has been fixed as the record date
for the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournment(s) thereof. Only holders of record of common
stock at the close of business on the record date are entitled to notice of, and
to vote at, the Annual Meeting. Our stock transfer books will not be closed. A
complete list of stockholders entitled to vote at the Annual Meeting will be
available for examination by any of our stockholders at our headquarters, 5215
North O'Connor Boulevard, Suite 1600, Irving, Texas 75039, for purposes
pertaining to the Annual Meeting, during normal business hours for a period of
10 days prior to the Annual Meeting, and at the time and place of the Annual
Meeting.
You are cordially invited to attend the Annual Meeting. Whether or not you
expect to attend in person, you are urged to sign, date and mail the enclosed
proxy card as soon as possible so that your shares may be represented and voted
at the Annual Meeting. A self-addressed, postage prepaid envelope is enclosed
for your convenience. You may revoke your proxy by following the procedures set
forth in the accompanying Proxy Statement.
By order of the Board of Directors
ADVANCE PARADIGM, INC.
Laura I. Johansen
Secretary
November __, 2000
<PAGE>
[LOGO OF ADVANCE PARADIGM]
5215 North O'Connor Boulevard, Suite 1600
Irving, Texas 75039
(469) 420-6000
____________________
PROXY STATEMENT
____________________
SOLICITATION AND REVOCABILITY OF PROXIES
The enclosed proxy is solicited by and on behalf of our Board of Directors for
use at the Annual Meeting to be held on December 7, 2000, at 2:00 p.m., local
time, at the Hotel Crescent Court, 400 Crescent Court, Dallas, Texas, or at any
adjournment(s) thereof. Innisfree M & A Incorporated has been retained to assist
us in the solicitation of proxies in connection with the Annual Meeting for a
fee of approximately $10,000, plus out-of-pocket expenses. In addition, our
officers, directors and employees may solicit proxies personally or by
telephone, telegram, electronic mail or other forms of wire or facsimile
communication. These persons will receive no special compensation for any
solicitation activities. We will, upon request, reimburse brokers, custodians,
nominees and fiduciaries for reasonable expenses incurred by them in forwarding
proxy materials to beneficial owners of common stock. We will bear the costs of
the solicitation. This proxy statement and the form of proxy were first mailed
to our stockholders on or about November __, 2000.
The enclosed proxy, although executed and returned, may be revoked at any time
prior to the voting of the proxy (a) by the execution and submission of a
revised proxy bearing a later date, (b) by written notice of revocation to our
secretary at the address set forth above, or (c) by voting in person at the
Annual Meeting. In the absence of such revocation, shares represented by the
proxies will be voted at the Annual Meeting.
RECORD DATE AND VOTING
Record Date
Our Board of Directors has established the close of business on October 10,
2000, as the record date for determining the holders of voting securities
entitled to notice of, and to vote at, the Annual Meeting. On October 10, 2000,
we had outstanding and entitled to vote 29,372,232 shares of common stock and
six shares of Series B Preferred Stock.
Voting Rights, Quorum, Required Vote and Voting Agreements
Voting Rights. Only common stockholders are entitled to vote on the election
of directors and the amendment and restatement of our certificate of
incorporation. With respect to all other matters to be presented at the Annual
Meeting, the holders of common stock and Series B Preferred Stock are entitled
to vote together as a single class. Each share of common stock is entitled to
one vote and each share of Series B Preferred Stock is entitled to 50 votes.
Consequently, a total of 29,372,232 votes may be cast by our common stockholders
and a total of 300 votes may be cast by the holder of our Series B Preferred
Stock.
<PAGE>
Quorum. A majority of the outstanding shares of common stock, represented in
person or by proxy, will constitute a quorum for purposes of electing directors
and voting on the amendment and restatement of our certificate of incorporation.
With respect to all other matters to be presented at the meeting, stockholders
holding shares representing a majority of the votes entitled to be cast thereon
will constitute a quorum.
Shares that are represented at the Annual Meeting but abstain from voting on
any or all matters and shares that are "broker non-votes" (i.e., shares held by
brokers or nominees which are represented at the meeting but with respect to
which the broker or nominee does not have discretionary power to vote on a
particular matter and has received no instructions from the beneficial owners
thereof or persons entitled to vote thereon) will be counted in determining
whether a quorum is present at the Annual Meeting.
Required Vote for Election of Directors (Proposal 1). Directors will be
elected by a plurality of votes cast that are entitled to vote on the election
of directors. Abstentions and broker non-votes will be disregarded and will
have no effect on the outcome of the election of directors. Stockholders may
not cumulate their votes in the election of directors.
Required Vote for the Amendment and Restatement of our Certificate of
Incorporation (Proposal 2). The favorable vote of a majority of the outstanding
shares of common stock entitled to vote on this matter is required to approve
this proposal. Consequently, abstentions and broker non-votes will have the
effect of a negative vote on this proposal.
Required Vote for Proposals 3 through 5. The favorable vote of a majority of
the total votes represented by the shares of common stock and Series B Preferred
Stock present in person or by proxy and entitled to vote is required to approve
Proposals 3 through 5. Consequently, an abstention from voting on any such
proposal will have the effect of a negative vote with respect to such proposal.
Broker non-votes will be treated as not present and not entitled to vote with
respect to Proposals 3 through 5 and will have no effect on the outcome of the
vote on such proposals.
Voting Agreements. As of the record date, Joseph Littlejohn & Levy Fund III
LP ("JLL") and certain other investors (collectively, the "JLL Investors") held
4,207,000 shares of common stock and JLL held six shares of Series B Preferred
Stock. The JLL Investors have agreed with the Company to cause their shares to
be present at the Annual Meeting for purposes of determining a quorum, but that
they will not vote their shares of common stock in the election of directors.
As a result, their non-vote will have no effect on the outcome of the election
of directors. The JLL Investors have also agreed with the Company that they
will vote all shares of common stock and Series B Preferred Stock held by them
in favor of Proposals 2 and 3. In connection with our acquisition of PCS
Holding Corporation, various stockholders (other than the JLL Investors)
holding an aggregate of 5,403,832 shares of common stock entered into voting
agreements whereby the stockholders agreed to vote their shares in favor of
Proposals 2 and 3. Consequently, stockholders holding approximately 32.7% of
the outstanding shares entitled to vote on Proposals 2 and 3 have agreed to vote
their shares in favor of such proposals.
PROPOSAL 1. ELECTION OF DIRECTORS
Three directors are to be elected at the Annual Meeting. David A. George,
Jeffrey R. Jay and Jean-Pierre Millon have been nominated to serve as directors
and, if elected, will serve until our Annual Meeting of Stockholders in 2003 and
until their respective successors shall have been duly elected and qualified or
until their earlier death, resignation, disqualification or removal from office.
However, if Proposals 2 and 3 are approved, the term of office of these nominees
will be changed in accordance with the Second Amended and Restated Certificate
of Incorporation. For additional information, refer to the information under
the caption "Who will the directors be if the proposed Second Amended and
Restated Certificate is approved?" on page 32. Each of these nominees for
director currently serves as a director on our board of directors.
Unless otherwise instructed or unless authority to vote is withheld, the
enclosed proxy, if signed and returned, will be voted for the election of the
below-listed nominees. Although the board of directors does not contemplate
that any of the nominees will be unable to serve, if such a situation arises
prior to the Annual Meeting, the persons
2
<PAGE>
named in the enclosed proxy will vote for the election of such other person(s)
as may be nominated by our board of directors.
The board of directors recommends the election of David A. George, Jeffrey R.
Jay and Jean-Pierre Millon to the board of directors.
The following table sets forth certain information regarding the director
nominees and the other directors serving on our board of directors:
<TABLE>
<CAPTION>
Served as Director's
Name Age Position Director Since Term Ending
---- --- -------- -------------- -----------
<S> <C> <C> <C> <C>
David D. Halbert...... 44 Chairman of the Board 1986 2001
and Chief Executive
Officer
Jon S. Halbert........ 40 Vice Chairman, e-Business 1988 2001
and Technology and
Director
David A. George....... 44 President and Director 1998 2000
Ramsey A. Frank(1).... 39 Director 2000 2002
Stephen L. Green...... 49 Director 1993 2002
Jeffrey R. Jay, M.D... 42 Director 1993 2000
David R. Jessick(2)... 47 Director 2000 2002
Paul S. Levy(1)....... 53 Director 2000 2001
Robert G. Miller(2)... 56 Director 2000 2001
Jean-Pierre Millon.... 50 Director 2000 2000
Michael D. Ware....... 54 Director 1993 2002
</TABLE>
---------------
(1) This director was elected pursuant to the terms of the Certificate of
Designations for Series B Convertible Preferred Stock.
(2) This director was elected pursuant to the terms of the Certificate of
Designations for Series A-2 11% Preferred Stock.
David D. Halbert founded the Company in 1986 and has continuously served as
our Chairman of the Board and Chief Executive Officer. David D. Halbert is the
brother of Jon S. Halbert.
Jon S. Halbert joined the Company in January 1988 and has continuously served
as a director and as an executive officer of the Company since that date. Mr.
Halbert currently serves as our Vice Chairman, e-Business and Technology. Jon
S. Halbert is the brother of David D. Halbert. Before joining the Company, Mr.
Halbert served as an executive officer and/or director for several organizations
engaged in various health care, as well as non-health care, related industries.
Mr. Halbert also worked as a registered representative of the National
Association of Securities Dealers for Bear, Stearns & Co.
David A. George has served as a director of the Company since November 1998
and has served as an executive officer of the Company since March 1999. Mr.
George currently serves as our President. From October 1995 to November 1998,
Mr. George served as Executive Vice President of United HealthCare Corporation.
Before United HealthCare, Mr. George was Executive Vice President of MetraHealth
Corporation, also known as MetraHealth, from December 1994 to October 1995.
MetraHealth merged with United HealthCare Corporation in October 1995. Prior to
joining MetraHealth, Mr. George was president of Southern Group Operations for
The Prudential Healthcare System.
Ramsey A. Frank has served as a director of the Company since October 2000.
Mr. Frank is a Senior Managing Director of Joseph Littlejohn & Levy, Inc., which
he joined in 1999. From 1993 to 1999, Mr. Frank was a
3
<PAGE>
Managing Director of Donaldson, Lufkin & Jenrette, where he headed the
restructuring group and was a senior member of the leveraged finance group. Mr.
Frank also serves as a director of IASIS Healthcare Corporation.
Stephen L. Green has served as a director of the Company since August 1993.
Mr. Green currently serves as a General Partner of Canaan Partners, a venture
capital firm. Prior to joining Canaan Partners in November 1991, Mr. Green
served as Managing Director in GE Capital's Corporate Finance Group for more
than five years. Mr. Green currently serves on the board of directors of each
of Mortgage.com, Inc. and Suiza Foods Corporation.
Jeffrey R. Jay, M.D., has served as a director of the Company since August
1993. Since September 1993, he has been a General Partner of J. H. Whitney &
Co., a venture capital firm. Dr. Jay currently is a national advisory member of
the American Medical Association's Physician Capital Source Committee. Dr. Jay
serves as a director on the board of directors of each of NMT Medical, Inc. and
CareScience, Inc.
David R. Jessick has served as a director of the Company since October 2000.
Mr. Jessick has been Senior Executive Vice President and Chief Administrative
Officer of Rite Aid since December 5, 1999. From 1997 to July 1999, Mr. Jessick
served as executive vice president of finance and investor relations of Fred
Meyer, Inc. From 1979 to 1997, Mr. Jessick held several senior management
positions at Thrifty PayLess Holdings, Inc., a west coast-based drugstore chain
which had annual sales of $5.0 billion before being acquired by Rite Aid in
1996. Mr. Jessick was executive vice president and chief financial officer of
Thrifty PayLess Holdings, Inc. before Thrifty PayLess was acquired by Rite Aid.
Paul S. Levy has served as a director of the Company since October 2000. Mr.
Levy is a Senior Managing Director of Joseph Littlejohn & Levy, Inc., which he
founded in 1988. Mr. Levy serves as a director of several companies, including
IASIS Healthcare Corporation, Motor Coach Industries International Inc., Hayes
Lemmerz International Inc., Builders FirstSource, Inc., Fairfield Manufacturing
Company, Inc. and New World Pasta Company.
Robert G. Miller has served as a director of the Company since October 2000.
Mr. Miller has been Chairman and Chief Executive Officer and a director of Rite
Aid since December 5, 1999. Previously, Mr. Miller served as vice chairman and
chief operating officer of The Kroger Company, a retail food company. Mr.
Miller joined Kroger in May, 1999, when The Kroger Company acquired Fred Meyer,
Inc., a food, drug and general merchandise chain. From 1991 until the
acquisition, he served as chief executive officer of Fred Meyer, Inc. Mr.
Miller is a director of Pathmark Stores, Inc., Scottish Power plc and Harrah's
Entertainment, Inc.
Jean-Pierre Millon has served as a director of the Company since October 2000.
Since October 2, 2000, Mr. Millon has served as a consultant to the Company.
Mr. Millon joined PCS Health Systems Inc. in 1995, where he served as its
president and chief executive officer from June 1996 to September 2000. Prior
to joining PCS Health Systems, Mr. Millon served as an executive and held
several leadership positions with Eli Lilly and Company, the former parent
company of PCS Health Systems, Inc.
Michael D. Ware has served as a director of the Company since July 1993. Mr.
Ware is a co-founder of Advance Capital Markets, Inc., a private investment
firm, and has served as its managing director since January 1989. Prior to
founding Advance Capital Markets, Inc., Mr. Ware was the president of Reliance
Energy Services, Inc.
Rogers K. Coleman, M.D., whose term as director was scheduled to expire in
2001, resigned from our board of directors effective July 31, 2000. Dr. Coleman
had served as a director of the Company since 1996.
The following table sets forth information regarding the executive officers of
the Company who are not directors of the Company:
4
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
T. Danny Phillips............. 41 Chief Financial Officer and Executive Vice President
Tom J. Garrity................ 51 Executive Vice President, Financial Operations
Susan S. de Mars.............. 40 Senior Vice President and General Counsel
Jeffrey G. Sanders............ 42 Senior Vice President, Strategic Initiatives
Joseph J. Filipek, Jr., P.D... 45 Executive Vice President, Client Management
Andrew C. Garling, M.D........ 55 Senior Vice President, Clinical Operations
Laura I. Johansen............. 35 Senior Vice President, Corporate Affairs and Secretary
Rudy Mladenovic............... 42 Senior Vice President, Pharma Relations
John H. Sattler, R.Ph......... 48 Senior Vice President, Sales
Ken Zadoorian................. 48 Senior Vice President, Chief Human Resources Officer
</TABLE>
T. Danny Phillips joined the Company in February 1992 and currently serves as
Chief Financial Officer and Executive Vice President of the Company. Prior to
joining the Company, Mr. Phillips served as chief financial officer of Aloha
Petroleum, Ltd., a retail gasoline company, from April 1991 to February 1992.
Tom J. Garrity joined the Company in October 2000 upon the acquisition of PCS
Holding Corporation and currently serves as Executive Vice President, Financial
Operations. Mr. Garrity joined PCS Health Systems, Inc. in November 1994, at
the time of its acquisition by Eli Lilly and Company and served as its chief
financial officer from November 1994 to October 2000. Mr. Garrity joined Eli
Lilly and Company in 1979 as a financial associate, and subsequently held
various positions in international operations, business planning, market
research and market planning.
Susan S. de Mars joined the Company in October 2000 upon the acquisition of
PCS Holding Corporation and currently serves as Senior Vice President and
General Counsel. Ms. de Mars joined PCS Health Systems, Inc. in 1995 as
assistant general counsel and served as its general counsel from January 1999 to
October 2000.
Jeffrey G. Sanders joined the Company in October 2000 upon the acquisition of
PCS Holding Corporation and currently serves as Senior Vice President, Strategic
Initiatives. Before joining PCS Health Systems, Inc. in 1993, Mr. Sanders
served three years as director of the Office of Legislation and Policy of the
Health Care Financing Administration in Washington, D.C. Mr. Sanders also held
positions with the United States Budget Committee and the Office of Management
and Budget.
Joseph J. Filipek, Jr., P.D. joined the Company in December 1993 and currently
serves as an Executive Vice President, Client Management of the Company. Prior
to joining the Company, Dr. Filipek founded Advance Paradigm Clinical Services,
Inc. ("Advance Clinical"), which was acquired by the Company in 1993 from Blue
Cross & Blue Shield of Maryland, Inc.
Andrew C. Garling, M.D. joined the Company in August 1999 and currently serves
as Senior Vice President, Clinical Operations. Prior to joining the Company,
from 1997 to 1999, Dr. Garling served as Chief Medical Officer and Senior Vice
President of the Payor Solutions Group at McKesson HBOC. From 1995 to 1997, Dr.
Garling served as Vice President and Chief Medical Officer of Advanced Health
Inc., a physician practice management company. Prior to 1995, Dr. Garling served
as Chief Information Officer of the Southern Group Operations of Prudential
Healthcare Systems Inc.
Laura I. Johansen joined the Company in February 1995, and currently serves as
Senior Vice President, Corporate Affairs and Secretary of the Company. Ms.
Johansen served as Senior Vice President, General Counsel of the Company from
February 1995 until August 1999 and as Senior Vice President, Office of the CEO
from August 1999 until October 2000. Prior to joining the Company, Ms. Johansen
served as an attorney in the corporate/securities section of Akin, Gump,
Strauss, Hauer & Feld, L.L.P.
Rudy Mladenovic joined the Company in December 1999 and currently serves as
Senior Vice President, Pharma Relations. Prior to joining the Company, Mr.
Mladenovic served as the Executive Director of Anthem Blue Cross & Blue Shield
Midwest, a four million member division of Anthem, Inc. Prior to joining Anthem
Blue
5
<PAGE>
Cross & Blue Shield Midwest, he was the Vice President and Executive Director of
Anthem Prescription Management, Inc., a wholly owned subsidiary of Anthem, Inc.
From 1993 to 1995, he served as Vice President Sales for Athena of North
America, Inc., and Acordia Health Industry Services, Inc., each a wholly owned
subsidiary of Anthem, Inc.
John H. Sattler, R.Ph., joined the Company in 1994 and currently serves as
Senior Vice President, Sales of the Company. Prior to joining the Company, Mr.
Sattler served as Vice President, Sales and Marketing for Health Care Pharmacy
Providers, Inc. from September 1992 to November 1994. Prior to 1992, he served
as manager of Third Party Marketing for American Drug Stores, Inc.
Ken Zadoorian joined the Company in October 2000 upon the acquisition of PCS
Holding Corporation and currently serves as Senior Vice President and Chief
Human Resources Officer. Prior to joining PCS Health Systems, Inc. in 1995, Mr.
Zadoorian served for 21 years at Eli Lilly and Company in a variety of human
resources, engineering, manufacturing and systems positions with the parent
company and its medical device subsidiaries.
Directors' Meetings and Committees of the Board of Directors
The board of directors held six meetings during fiscal year 2000. Each of the
directors attended at least 75% of the aggregate total meetings of the board of
directors.
The board of directors had two standing committees during the last fiscal
year, the Compensation Committee and the Audit Committee. The Compensation
Committee, which currently consists of Messrs. Ware, Green, Jessick and Frank
and Dr. Jay, meets periodically to review executive compensation and approve
grants of options to our officers and employees, as well as to renew, approve
and recommend to the board of directors the terms and conditions of all stock
option plans or changes to stock option plans. The Compensation Committee met
one time during fiscal 2000 and each member attended the meeting. The Audit
Committee, which currently consists of Messrs. Ware, Green, Miller and Frank and
Dr. Jay, recommends to the board of directors (for ratification by the
stockholders) a public accounting firm to conduct the annual audit of our
accounts and reviews and recommends potential investment opportunities for our
excess cash. The Audit Committee also meets with our chief financial officer
and the accounting firm at the conclusion of the annual audit to review the
audited financial statements and to discuss the results of the audit, any
significant recommendations by the accounting firm for improvement of our
accounting systems and controls, and the quality and depth of staffing in our
accounting and financial departments. The Audit Committee met one time during
fiscal 2000 and all members attended this meeting.
In connection with our acquisition of PCS Holding Corporation on October 2,
2000, we established various nominating committees for the nomination of persons
to serve as directors of the Company. For additional information, refer to the
information under the caption "Corporate Governance" on page 27.
Compensation of Directors
Each non-officer director received $2,000 per meeting attended and $1,000 per
committee meeting attended during the year ended March 31, 2000. We reimburse
directors for out-of-pocket expenses incurred in connection with attending board
and committee meetings. Directors are eligible to receive nonstatutory stock
options under our Nonstatutory Plan. See "Executive Compensation -- Stock
Option Plans" on page 10 for a description of such plan.
Executive Compensation
Amounts and prices related to shares of common stock have been adjusted to
give effect to a two-for-one stock split of the common stock, effected in the
form of a stock dividend paid on November 30, 1999. The following table sets
forth information with respect to the compensation we paid or awarded to our
chief executive officer and the four most highly compensated executive officers
whose cash compensation exceeded $100,000, also known as our named executives,
for services rendered in all capacities for fiscal years 2000, 1999 and 1998.
6
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
-------------
Annual Compensation Securities
------------------- Underlying All Other
Name and Office Year Salary ($) Bonus ($) Options (#) Compensation
--------------- ---- -------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
David D. Halbert 2000 $501,923 $482,692 150,000 --
Chairman of the Board and 1999 383,333 383,333 150,000 --
Chief Executive Officer 1998 308,654 172,500 -- --
Jon S. Halbert 2000 352,692 175,000 100,000 --
Vice Chairman, e-Business 1999 266,667 186,667 100,000 --
and Technology 1998 216,731 113,620 __ --
David A. George (1) 2000 262,199 175,000 100,000 --
President 1999 9,615 14,583 150,000 --
1998 -- -- -- --
T. Danny Phillips 2000 258,076 149,077 80,000 --
Chief Financial Officer and 1999 196,667 118,000 80,000 --
Executive Vice President 1998 168,846 81,290 __ --
Joseph J. Filipek, Jr. 2000 231,223 107,115 25,000 --
Executive Vice President, 1999 199,277 95,439 80,000 --
Client Management 1998 175,898 84,845 __ --
</TABLE>
---------------
(1) Mr. George joined us in March 1999.
The following table sets forth information regarding the stock option grants
we made to our named executives during fiscal year 2000. In addition, in
accordance with the regulations of the Securities and Exchange Commission,
hypothetical gains or "option spreads" that would exist for the respective
options are shown. These gains are based on assumed rates of annual stock price
appreciation of 5% and 10% from the date the options were granted.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Total Annual Rates of
Number of Options Stock Price
Securities Granted to Appreciation For
Underlying Employees Exercise of Option Term(2)
Options in Fiscal Base Price Expiration ----------------------
Name Granted(1) Year ($/Sh) Date 5%($) 10%($)
---- ---------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
David D. Halbert (3)........ 150,000 10.6% $18.67 1/28/10 1,761,000 4,464,000
Jon S. Halbert (3).......... 100,000 7.1 18.67 1/28/10 1,174,000 2,976,000
David A. George (3)......... 100,000 7.1 18.67 1/28/10 1,174,000 2,976,000
T. Danny Phillips (3)....... 80,000 5.6 18.67 1/28/10 939,200 2,380,800
Joseph J. Filipek, Jr. (3).. 25,000 1.8 18.67 1/28/10 293,500 744,000
</TABLE>
7
<PAGE>
---------------
(1) The options reflected in this table were all granted under our Incentive
Plan. The date of grant was January 28, 2000.
(2) These amounts represent only certain assumed rates of appreciation based on
the grant date value in accordance with the Securities and Exchange
Commission's executive compensation rules. Actual gains, if any, on stock
option exercises will depend on future performance of the common stock. No
assurance can be given that the values reflected in these columns will be
achieved.
(3) The options vest and become exercisable in cumulative installments of one-
fifth of the number of shares of common stock upon the first five
anniversaries of the date of grant so long as the officer remains an
employee of us or our affiliates on such anniversaries.
The following table summarizes pertinent information concerning the number and
value of any options held by the named executives at March 31, 2000.
Aggregated Option Exercises in the Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares Fiscal Year-End (#) Fiscal Year-End ($)
Acquired on Value -------------------------------- ----------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable (1) Exercisable (2) Unexercisable (2)
---- ------------ ------------ ------------ ------------------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
David D. Halbert....... 10,000 204,788 659,996 320,000 6,147,856 368,750
Jon S. Halbert......... -- -- 695,500 230,000 6,665,592 368,750
David A. George........ -- -- 40,000 210,000 0 0
T. Danny Phillips...... 4,000 79,850 148,500 167,000 1,075,387 169,625
Joseph J. Filipek, Jr.. 12,500 342,500 168,500 119,000 1,250,437 221,250
</TABLE>
_______________
(1) Upon the consummation of a sale of substantially all of our common stock or
assets or a merger in which we are not the surviving corporation, the
options will vest immediately prior to such transaction.
(2) The value of the options is based upon the difference between the March 31,
2000 market value of $11 7/8 per share and the exercise price. The market
value of our common stock on October 10, 2000, the record date, was $40.25
per share.
Employment Agreements
Effective October 2, 2000, we entered into an employment agreement with David
D. Halbert pursuant to which Mr. D. Halbert serves as our chairman of the board
and chief executive officer. The agreement has a three year term and
automatically renews for one year periods until terminated pursuant to the terms
of the agreement or upon written notice given by either party 60 days prior to
the end of the then-current term. Mr. D. Halbert is entitled to a base salary
that shall not be less than $1 million per year and a target bonus of 100% of
his base salary. Mr. D. Halbert is also entitled to an automobile allowance,
membership dues of a social or professional club in Dallas, Texas, Baltimore,
Maryland, and Phoenix, Arizona, reimbursement for reasonable Company-related
travel and entertainment expenses, reimbursement for costs of participation in
Company benefit plans, including a term life insurance policy in an amount not
less than $5 million and a disability policy that would pay at least 80% of his
base salary and reimbursement of $25,000 for legal fees incurred in connection
with negotiating this agreement. Further, the agreement provides for the grant
of options to purchase one million shares of our common stock at an exercise
price of $20.00 per share vesting over a four-year period. If this agreement is
terminated by the Company without good cause or by Mr. D. Halbert for good
reason, the Company shall pay to Mr. D. Halbert three times his then current
combined annual base salary and target bonus. In addition, Mr. D. Halbert and
his family shall be entitled to benefits under the Company's benefit plans for a
period of 12 months after the termination of the agreement. Further, all stock
options granted to Mr. D. Halbert shall become immediately vested and remain
exercisable for a
8
<PAGE>
period of one year from the date of termination. If the Company terminates the
agreement for good cause, the Company shall not have any obligations to Mr. D.
Halbert other than stock options vested on the termination date shall be
exercisable for a period of 90 days following the termination date. Should Mr.
D. Halbert unilaterally terminate the agreement without good reason, such
termination will be treated as a termination by the Company for good cause. The
agreement also contains confidentiality provisions and contains non-competition
and non-solicitation provisions effective during the term of employment and for
a two year and one year period thereafter, respectively.
In connection with our acquisition of PCS Holding Corporation, we entered into
employment agreements with certain executive officers effective October 2, 2000.
The agreements contain a three year term, provide that the employee shall be
entitled to participate in any bonus and insurance plans generally available to
our employees, contain confidentiality provisions and contain non-competition
and non-solicitation provisions effective during the term of employment and for
a one-year period thereafter. The agreements are terminable by the employee for
good reason upon 30 days written notice. In general, good reason is defined as:
. an assignment to the employee of duties materially inconsistent with
his position and resulting in a significant diminution in such,
. failure of the Company to comply with its obligations under the
compensation section of the agreement,
. being required to relocate to a principal place of employment more than
25 miles from his current location, or
. any purported termination of the employee by the Company, except as
permitted by the agreement.
If the employee terminates the agreement for good reason or if the Company
terminates the agreement without cause, we are required to pay the employee his
base salary through the end of the term, but in no event less than one year, and
his target bonus for the fiscal year during which the termination occurs or, if
greater, the amount of his most recent bonus payment, multiplied by the number
of years remaining in the term. In addition, all obligations and benefits
earned as of the termination date shall be received by the employee, all
benefits shall continue to the employee and his family for the remainder of the
term, or longer if the plan so provides, including health and life insurance and
certain stock options which would have been granted or vested prior to the end
of the term, shall become immediately granted and vested. Further details of
the individual employment agreements are as follows:
We have employed David A. George as the president of the company. Mr. George
is entitled to a base salary of $500,000 and has a target bonus of 75% of his
base salary. Further, Mr. George shall receive a leased automobile and a golf
club membership. The Company shall reimburse Mr. George for certain relocation
expenses in connection with his relocation to Phoenix, Arizona, including a no-
interest loan of up to $500,000 to be applied to the purchase of a home. The
Company shall reduce the principal amount of this loan by 20% per year over a
five year period; provided that the current balance of this loan shall become
immediately due and payable upon termination of Mr. George's employment either
by the Company for cause or by Mr. George without good reason.
We have employed Jon S. Halbert as Vice Chairman, e-business & Technology of
the Company. Mr. J. Halbert is entitled to a base salary of $500,000 and has a
target bonus of 75% of his base salary. Further, Mr. J. Halbert shall receive a
leased automobile and a golf club membership.
We have employed T. Danny Phillips as Executive Vice President and Chief
Financial Officer of the Company. Mr. Phillips is entitled to a base salary of
$325,000 and has a target bonus of 60% of his base salary. Further, Mr.
Phillips shall receive a leased automobile and a golf club membership.
We have employed Joseph J. Filipek, Jr. as Executive Vice President, Client
Management of the Company. Mr. Filipek is entitled to a base salary of
$215,000, which is subject to a target annual increase of $15,000. Further, Mr.
Filipek shall receive a car allowance.
9
<PAGE>
Stock Option Plans
Incentive Plan. On July 30, 1993, our board of directors and stockholders
adopted the Incentive Plan which provides for the grant of qualified stock
options to our officers and key employees. The purpose of the Incentive Plan is
to assist us in attracting and retaining key employees. A total of 6,718,000
shares of common stock has been reserved for issuance under the Incentive Plan.
At the Annual Meeting, the stockholders are being asked to approve an amendment
to the Incentive Plan increasing the number of shares reserved for issuance
under the Incentive Plan from 6,718,000 to 9,718,000. As of September 30, 2000,
655,056 shares of common stock remained available for future grants under the
Incentive Plan. The options granted under the Incentive Plan are incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
In connection with the merger of Advance Health Care, Inc. ("Advance Health
Care") with and into the Company, the Incentive Plan was amended to increase the
number of shares reserved for issuance thereunder to 3,719,000, and the Advance
Health Care incentive stock option plan was merged with and into the Incentive
Plan. Holders of options under the Advance Health Care incentive stock option
plan received options to purchase common stock under the Incentive Plan. The
459,500 options granted under the Advance Health Care incentive stock option
plan expire or must be exercised in 2001. On October 29, 1998, our stockholders
approved an amendment to the Incentive Plan, which increased the number of
shares reserved for issuance under the Incentive Plan to 4,718,000. On November
10, 1999, our stockholders approved an amendment to the Incentive Plan, which
increased the number of shares reserved for issuance under the Incentive Plan to
6,718,000.
The Incentive Plan is administered by the Compensation Committee of the board
of directors, which is comprised of directors who are not participants in the
Incentive Plan. Subject to the provisions of the Incentive Plan, the
Compensation Committee has the authority to administer the Incentive Plan and
determine, among other things, the interpretation of any provision of the
Incentive Plan, the eligible employees who are to be granted stock options, the
number of shares which may be issued and the option exercise price. In no event
will options be granted at prices less than the fair market value of the common
stock on the date of grant. No option can be granted for a term of more than
ten years.
Options granted under the Incentive Plan are not transferable other than by
will or under the laws of descent and distribution, and are exercisable during
the lifetime of the optionee or his guardian or legal representative. Upon
termination of the optionee's employment with the Company, the period of time
during which the stock options are exercisable is restricted to 90 days. Our
board of directors has the right to amend, suspend or terminate the Incentive
Plan at any time, but no such action can affect or impair the rights of any
optionee under any options granted prior to such action. Certain amendments
must be approved by the holders of common stock.
Advance Clinical Plan. On December 1, 1993, in connection with the Advance
Clinical acquisition, our board of directors adopted a second incentive stock
option plan (the "Advance Clinical Plan"), the terms and provisions of which are
identical to those of the Incentive Plan. A total of 357,500 shares of common
stock were reserved for issuance under this second incentive stock option plan,
all of which were issued to employees of Advance Clinical.
Nonstatutory Plan. On May 1, 1997, our board of directors and stockholders
adopted the Amended and Restated 1997 Nonstatutory Stock Option Plan (the
"Nonstatutory Plan"), which provides for the grant of stock options to our
directors, officers, consultants, advisors and employees. The purpose of the
Nonstatutory Plan is to advance our interests by encouraging stock ownership on
the part of certain directors, officers, consultants, advisors and employees, by
enabling us to secure and retain the services of highly qualified persons, and
by providing such persons with an additional incentive to advance our success.
A total of 600,000 shares of common stock has been reserved for issuance under
the Nonstatutory Plan. As of September 30, 2000, options to purchase 472,790
shares of common stock have been granted thereunder.
The Nonstatutory Plan is administered by the Compensation Committee of the
board of directors. Subject to the provisions of the Nonstatutory Plan, the
Compensation Committee has the authority to administer the Nonstatutory Plan and
determine, among other things, the interpretation of any provision of the
Nonstatutory Plan, the eligible directors, officers, consultants, advisors and
employees who are to be granted stock options and the
10
<PAGE>
number of shares which may be issued. Except as otherwise provided in an
optionee's nonstatutory stock option agreement, the exercise price for each
option share will be determined by the Compensation Committee. No option can be
granted for a term of more than ten years.
Options granted under the Nonstatutory Plan may be transferred by the
optionee, provided that there is no consideration for such transfer, the
optionee remains responsible for employment tax and other withholding taxes
associated with the exercise of the options, the optionee notifies us in writing
that such transfer has occurred and we approve the transfer documents (which our
approval will not be unreasonably withheld). Upon termination of the optionee's
service relationship with us, the period of time during which the stock options
are exercisable is restricted to 90 days. Our board of directors has the right
to alter, amend, suspend or discontinue the Nonstatutory Plan, or alter or amend
any and all option agreements granted thereunder.
Incentive Compensation Plan
Our employees who hold director-level positions or higher are eligible to
receive annual incentive-based bonus payments if we meet or exceed certain
predetermined annual performance goals. The bonuses payable under the incentive
compensation plan are based on a percentage of each participating employee's
salary. One-half of the bonus is payable upon us meeting the predetermined
performance goals, with the other one-half subject to the satisfaction of
certain performance goals as determined by management for such individual
participant.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan, or
401(k) plan. All employees who have been employed by us for at least six months
are eligible to participate. Employees may contribute to the 401(k) Plan
subject to a statutory annual limit. We are required to make contributions to
the 401(k) Plan of at least 50% of the first 6% of salary deferral contributed
by each participant. For the fiscal year ended March 31, 2000, we contributed
an aggregate of $623,000 to the 401(k) Plan.
Compensation Committee Interlocks and Insider Participation
In fiscal year 2000, decisions with respect to the compensation of our
executive officers and other employees were made by a Compensation Committee
consisting of Dr. Coleman and Messrs. Green and Ware. Dr. Coleman resigned from
the board of directors effective July 31, 2000. None of the members of the
Compensation Committee is an officer of the Company.
THE FOLLOWING REPORTS OF THE COMPENSATION COMMITTEE AND THE AUDIT COMMITTEE
AND THE STOCKHOLDER RETURN PERFORMANCE PRESENTATION THAT APPEARS IMMEDIATELY
AFTER SUCH REPORTS SHALL NOT BE DEEMED TO BE SOLICITING MATERIAL OR TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT") OR INCORPORATED BY REFERENCE IN ANY DOCUMENT SO
FILED.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the board of directors administers the Company's
compensation plans, including its stock option plans. The Compensation Committee
has established compensation policies and made the compensation decisions
described herein for the years presented. The Compensation Committee's
compensation policies were applied to each of the named executives, including
the chief executive officer, in the same manner.
The Compensation Committee believes that in order for the Company to succeed
it must be able to attract and retain qualified executives. The objectives of
the Compensation Committee in determining the type and amount of executive
officer compensation are (i) to provide a compensation package consisting of a
base salary, bonus and
11
<PAGE>
long term incentives in the form of stock options, in the aggregate, competitive
with the median range for peer group companies and (ii) to allow the Company to
attract and retain talented executive officers and to align their interests with
those of the stockholders.
Cash Compensation
The Company's cash compensation policy for its executive officers, including
the chief executive officer, is to provide short-term compensation consisting of
two components, a base annual salary that does not fluctuate and a cash bonus
awarded based upon specific short-term financial goals of the Company.
Base Salary
In fiscal year 2000, the Company engaged an outside consultant to determine
the extent to which the Company's policy on cash compensation was being met with
respect to all of its executive officers. Overall, it was the Compensation
Committee's intent that the salaries of the Company's officers be competitive
with those of executives with like responsibilities in companies within the peer
group. The chief executive officer's base salary was determined in this manner,
as reflected in the summary compensation table.
Bonus
Annual incentive bonuses are intended to reflect the Compensation Committee's
belief that a significant portion of the annual compensation of each executive
officer should be contingent upon the performance of the Company, as well as the
individual contribution of each officer. Accordingly, the Company's executive
officers, including the CEO, participated in an annual executive bonus plan that
provides for cash bonuses based upon the Company's overall financial performance
and the achievement of certain specified levels of profitability for the fiscal
year 2000. The Compensation Committee annually establishes targeted
profitability levels for the ensuing fiscal year in conjunction with the
Company's annual financial plan. The purpose of the bonus plan is to reward and
reinforce management's commitment to achieve levels of annual profitability and
returns consistent with increasing stockholder value.
The Compensation Committee annually determines in advance each executive's
participation level in the bonus plan. The Compensation Committee takes into
account various qualitative and quantitative factors that reflect the
executive's position, longevity in office, level of responsibility, and ability
to impact the Company's profitability and financial success. For fiscal year
2000 (as compared to fiscal year 1999), the Company increased revenues by 154%
and net income by 62%, both of which were in excess of the Company's financial
plan. Cash bonuses earned under the bonus plan are paid each year upon
completion of the Company's annual audit of the results of operations for the
previous fiscal year by the Company's outside auditors. The chief executive
officer's bonus was determined in this manner, as reflected in the summary
compensation table.
Long-term Incentive Compensation
Long-term incentive compensation is in the form of the Company's stock option
plans, which are designed to align the executive's incentive compensation more
directly with stockholder value by linking compensation to the long-term
performance of the Company's stock. Long-term compensation is also designed to
encourage executives to make career commitments to the Company. The size of an
executive's stock option award is based upon management's and the Compensation
Committee's subjective evaluation of the contribution an executive can and has
made to overall growth and profitability of the Company and the number of shares
available for award under the stock option plan.
Stock options are granted with an exercise price equal to the market value on
the date of grant and constitute compensation only if the Company's stock price
increases thereafter. The Compensation Committee has discretion to determine the
vesting schedule for each option grant and generally has made grants which
become exercisable in equal amounts over three or five years. Executives must be
employed by the Company at the time of vesting in order to exercise their
options.
12
<PAGE>
Compensation Committee
Michael D. Ware
Stephen L. Green
AUDIT COMMITTEE REPORT
The Audit Committee of the board of directors (the "Audit Committee") is
currently comprised of three of the Company's directors, Messrs. Ware and Green
and Dr. Jay. Each member of the Audit Committee is "independent" as defined
under the National Association of Securities Dealers' listing standards. The
Audit Committee operates pursuant to an Audit Committee Charter, which was
approved and adopted by the board of directors and is attached to this Proxy
Statement as Appendix A. According to the Audit Committee Charter, the Audit
----------
Committee is responsible for, among other things: monitoring the Company's
financial reporting process and internal control system, reviewing the Company's
annual financial statements and other relevant financial reports, recommending
engagement of the Company's independent auditor, reviewing and appraising the
audit performance of the independent auditor, and providing an open avenue of
communication between the independent auditor and the board of directors.
The Audit Committee has reviewed and discussed with management the Company's
audited consolidated financial statements for the fiscal year ended March 31,
2000. Further, the Audit Committee has discussed with the Company's independent
auditor the matters required to be discussed by Auditing Standards Board
Statement on Auditing Standards No. 61, as amended. Finally, the Audit Committee
has received and reviewed the written disclosures and the letter from the
independent auditor required by the Independence Standards Board Independence
Standard No. 1, as amended, and has discussed the auditor's independence with
the auditor.
Based on its review, the Audit Committee has recommended to the board of
directors that the audited financial statements for fiscal year 2000 be included
in the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2000. Further, the Audit Committee recommends that the board of directors
engage Arthur Andersen, LLP as the Company's independent auditor for the fiscal
year ending March 31, 2001.
Audit Committee
Michael D. Ware, Chairman
Jeffrey R. Jay, M.D.
Stephen L. Green
13
<PAGE>
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the cumulative stockholder return of
our common stock with the cumulative total return of the CRSP Total Return Index
for the Nasdaq National Market (U.S. Companies) and the CRSP Total Return
Industry Index for Nasdaq Health Services Stocks for the period commencing on
October 8, 1996(1) and ending on March 31, 2000.
[PERFORMANCE GRAPH]
On October 10, 2000, the record date, the cumulative stockholder return of our
common stock was $894.40.
Comparison of Cumulative Total Return from
October 8, 1996 through March 31, 2000(2)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Advance Paradigm, Inc. NASDAQ N-Health Services
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
October 1996 100.0 100.0 100.0
-------------------------------------------------------------------------------------------------------------------
March 1997 147.2 98.2 83.9
-------------------------------------------------------------------------------------------------------------------
March 1998 440.3 149.0 101.1
-------------------------------------------------------------------------------------------------------------------
March 1999 702.1 201.2 70.0
-------------------------------------------------------------------------------------------------------------------
March 2000 263.9 374.2 66.6
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The closing sales price of our common stock on October 10, 2000, the record
date, was $40.25 per share.
_______________
(1) For purposes of this presentation, we have used a per share price of $4.50
(adjusted to give effect to a two-for-one stock split effected on
November 30, 1999), which was the closing sales price of our common stock
on October 8, 1996. Trading in our common stock commenced on October 8,
1996, and our fiscal year ends on March 31.
(2) Assumes that $100.00 was invested in October 8, 1996 in our common stock at
a price of $4.50 per share (adjusted to give effect to a two-for-one stock
split effected on November 30, 1999) and at the closing sales price for
each index on that date and that all dividends were reinvested. No cash
dividends have been declared on our common stock. Stockholder returns over
the indicated period should not be considered indicative of future
stockholder returns.
14
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Registration Rights
On June 25, 1996, we entered into a stock purchase agreement with Blue Cross &
Blue Shield of Texas, a predecessor of Health Care Service Corporation, pursuant
to which Blue Cross & Blue Shield of Texas was granted certain registration
rights with respect to shares of our stock purchased thereunder. Dr. Coleman,
one of our directors until his resignation effective July 31, 2000, has been
employed by Blue Cross & Blue Shield of Texas since 1976, and currently serves
as its president.
Agreements in connection with our acquisition of PCS Holding Corporation
Consulting Agreement. In connection with our acquisition of PCS Holding
Corporation and in consideration for the commitment of Jean-Pierre Millon to
assist us during the transitional period, we have entered into a consulting
agreement with Mr. Millon effective October 2, 2000. The consulting agreement
is for a six month term and entitles Mr. Millon to compensation in the amount of
$490,000 in addition to benefits received by our other non-employee directors.
In addition, the Company must pay Mr. Millon an amount of $7,155,894 in order to
fulfill the requirements under his former employment agreement with PCS Health
Systems, Inc. Mr. Millon and his family are entitled to benefits under our
employee benefit plans through January 22, 2002. The consulting agreement
contains non-competition provisions effective for the term of the consulting
agreement and for a period of one year thereafter.
Stockholders' Agreement. On October 2, 2000, we entered into a Stockholders'
Agreement with Rite Aid and the JLL Investors, which, among other things,
contains certain registration rights, "standstill" provisions and agreements
relating to our corporate governance. For information on this agreement, see
"What are the terms of the Stockholders' Agreement?" on page 26.
Registration Rights Agreement. On October 2, 2000, we entered into a
registration rights agreement with Rite Aid in connection with the Rite Aid
Notes and the Rite Aid Warrants (defined below). Pursuant to this agreement, we
have agreed to use our reasonable best efforts to prepare and file a shelf
registration statement with the Securities and Exchange Commission to register
the Rite Aid Notes, the Rite Aid Warrants and the shares of common stock
issuable upon exercise of the Rite Aid Warrants no later than December 16, 2000.
The holders of the Rite Aid Warrants and the shares of common stock issuable
upon exercise of the Rite Aid Warrants also have unlimited piggyback
registration rights.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of our common stock, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of our common stock and other equity securities.
Officers, directors and greater than 10% stockholders are required by Securities
and Exchange Commission regulations to furnish us with copies of all Section
16(a) reports they file. To our knowledge and based solely on review of the
copies of such reports furnished to us during the period commencing April 1,
1999 and ending March 31, 2000, our officers, directors and greater than 10%
stockholders had complied with all applicable Section 16(a) filing requirements,
except for a late filing of a Form 4 due in January 2000 with respect to T.
Danny Phillips.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS
AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership
of our common stock as of October 10, 2000 with respect to:
. each person known by us to own beneficially more than five percent of
our voting stock;
. each of our directors and named executive officers; and
15
<PAGE>
. all directors and executive officers as a group.
Pursuant to the rules of the Securities and Exchange Commission, in calculating
percentage ownership, shares issuable upon exercise of options or warrants or
conversion of convertible securities are deemed to be outstanding for the
purpose of computing the percentage ownership of persons beneficially owning
such securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. In addition to our
common stock, we currently have one other class of voting stock consisting of
the Series B Preferred Stock. As of October 10, 2000, there were six shares of
Series B Preferred Stock outstanding, all of which were owned by JLL. The
following table does not include 65,854 shares of Series A-1 11% Preferred Stock
issued to the JLL Investors and 125,000 shares of Series A-2 11% Preferred Stock
issued to Rite Aid in connection with our acquisition of PCS Holding
Corporation. If Proposals 2 and 3 are approved, the Series A-1 11% Preferred
Stock will be convertible into 3,292,700 shares of Class B-1 Common Stock and
the Series A-2 11% Preferred Stock will be convertible into 6,250,000 shares of
Class B-2 Common Stock. If Proposals 2 and 3 are approved, pursuant to the
rules of the Securities and Exchange Commission, the JLL Investors would be
deemed to beneficially own approximately 23.0% of our common stock and Rite Aid
would be deemed to beneficially own 17.5% of our common stock.
<TABLE>
<CAPTION>
Common Stock
----------------------------------
Number of Percent of
Beneficial Owner Shares Class
--------------- -------------- -----------
<S> <C> <C>
Joseph Littlejohn & Levy Fund III, L.P. and certain JLL Investors (1) 4,179,250 14.2%
450 Lexington Avenue, Suite 3350
New York, NY 10017
Health Care Service Corporation (2).................................. 2,182,222 7.4
300 E. Randolph Drive, 15th Floor
Chicago, IL 60601
Credit Suisse Asset Management L.L.C. (3)............................ 1,513,708 5.2
466 Lexington Avenue
New York, New York 10017
Pilgrim Baxter & Associates, Ltd. (4)................................ 1,664,800 5.7
825 Duportail Road
Wayne, PA 19087
David D. Halbert (5)................................................. 1,396,837 4.6
5215 North O'Connor Boulevard, Suite 1600,
Irving, TX 75039
Jon S. Halbert (6)................................................... 905,884 3.0
T. Danny Phillips (7)................................................ 224,500 *
Joseph J. Filipek (8)................................................ 196,500 *
David A. George (9).................................................. 53,000 *
Stephen L. Green (10)................................................ 30,000 *
Jeffrey R. Jay, M.D. (11)............................................ 20,000 *
Michael D. Ware (12)................................................. 75,000 *
Jean-Pierre Millon................................................... 2,800 *
Paul Levy (13)....................................................... 4,179,250 14.2
Ramsey Frank (14).................................................... 4,179,250 14.2
Robert Miller........................................................ 2,800 *
David Jessick........................................................ 2,800 *
All directors and executive officers
as a group (21 persons) (15)....................................... 7,212,694 22.9%
</TABLE>
_______________
*Less than 1%.
(1) Based upon information filed by Joseph Littlejohn & Levy Fund III, L.P., JLL
Associates III, L.L.C., Paul S. Levy, David Y. Ying, Anthony Grillo, Ramsey
A. Frank and Jeffrey C. Lightcap with the Securities
16
<PAGE>
and Exchange Commission on Schedule 13D on October 12, 2000. Includes
4,178,950 shares of common stock and 300 shares of common stock issuable
upon conversion of six shares of Series B Preferred Stock.
(2) Based upon information filed by Health Care Service Corporation with the
Securities and Exchange Commission on Schedule 13G on February 16, 1999 and
on information obtained from Health Care Service Corporation and our
transfer agent. These shares represent shares issued in April 1998 upon the
conversion of the Series B Preferred Stock held by Blue Cross & Blue Shield
of Texas, a predecessor of Health Care Service Corporation. Dr. Coleman, a
former director of the Company, is an officer of Blue Cross & Blue Shield
of Texas.
(3) Based upon information obtained from our transfer agent.
(4) Based upon information filed by Pilgrim Baxter & Associates, Ltd. with the
Securities and Exchange Commission on Schedule 13G filed January 7, 2000.
(5) Includes 684,996 shares issuable pursuant to options exercisable within 60
days of October 10, 2000. Includes 39,184 shares held by Halbert &
Associates, Inc. David D. Halbert may be deemed to beneficially own all of
the shares held by Halbert & Associates, Inc. Also includes 63,792 shares
of common stock held for the benefit of Mr. D. Halbert's minor children, as
to which Mr. D. Halbert disclaims beneficial ownership.
(6) Includes 740,500 shares issuable pursuant to options exercisable within 60
days of October 10, 2000. Includes 39,184 shares held by Halbert &
Associates, Inc. Jon S. Halbert may be deemed to beneficially own all of
the shares held by Halbert & Associates, Inc. Also includes 57,660 shares
of common stock held for the benefit of Mr. J. Halbert's minor children, as
to which Mr. J. Halbert disclaims beneficial ownership.
(7) Includes 176,000 shares issuable pursuant to options exercisable within 60
days of October 10, 2000. Also includes 7,500 shares of common stock held
for the benefit of Mr. Phillips' minor children.
(8) Includes 196,500 shares issuable pursuant to options exercisable within 60
days of October 10, 2000.
(9) Includes 50,000 shares issuable pursuant to options exercisable within 60
days of October 10, 2000.
(10) Includes 30,000 shares issuable pursuant to options exercisable within 60
days of October 10, 2000.
(11) Includes 10,000 shares issuable pursuant to options exercisable within 60
days of October 10, 2000. Also includes 10,000 shares of common stock
owned by J.H. Whitney & Co. of which Dr. Jay is the general partner. Dr.
Jay is a managing member of Whitney General Partner, L.L.C., which is also
a general partner of J.H. Whitney & Co. Dr. Jay may be deemed to share
voting and dispositive power with respect to such shares. Dr. Jay
disclaims beneficial ownership of such shares except to the extent of his
proportionate interest.
(12) Includes 30,000 shares issuable pursuant to options exercisable within 60
days of October 10, 2000.
(13) Mr. Levy may be deemed to share beneficial ownership of the shares owned of
record by JLL by virtue of his status as a managing member of the general
partner of JLL. Mr. Levy shares investment and voting power along with the
other managing members with respect to securities owned by JLL, but
disclaims beneficial ownership of such securities except to the extent of
his pecuniary interest therein.
(14) Mr. Frank may be deemed to share beneficial ownership of the shares owned
of record by JLL by virtue of his status as a managing member of the
general partner of JLL. Mr. Frank shares investment and voting power along
with the other managing members with respect to securities owned by JLL,
but disclaims beneficial ownership of such securities except to the extent
of his pecuniary interest therein.
(15) Includes 4,228,734 shares beneficially held by entities affiliated with
certain directors and includes 2,071,863 shares subject to stock options
held by officers and directors exercisable within 60 days of October 10,
2000.
PROPOSAL 2. ADOPTION OF SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
PROPOSAL 3. APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION OF THE SERIES A PREFERRED STOCK
Introduction
On October 2, 2000, we acquired PCS Holding Corporation ("PCS"), a subsidiary
of Rite Aid (the "PCS Transaction"). PCS provides computer-based prescription
drug claims processing, pharmacy benefit administration and management services,
mail order pharmacy services, data management and disease-management services to
health plan sponsors. We believe that the acquisition of PCS enhances our
competitive position in the industry and provides opportunities for continued
growth. Among other things, we believe that the PCS Transaction will give us
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greater purchasing power, broader product offerings, increased strength in our
health information and data mining, enhanced clinical management capabilities
and critical mass in our mail services operations. PCS was acquired pursuant to
a Stock Purchase Agreement dated July 11, 2000 by and between us and Rite Aid
(the "PCS Purchase Agreement").
Pursuant to the PCS Purchase Agreement, we paid to Rite Aid as consideration
for PCS an aggregate purchase price of (i) $675 million in cash, (ii) 125,000
shares of our Series A-2 11% Preferred Stock (the "Series A-2 Preferred Stock"),
(iii) $200 million aggregate principal amount of our senior subordinated notes
(the "Rite Aid Notes") and (iv) warrants to purchase 780,000 shares of our
common stock, which become exercisable in two years unless we have repaid the
Rite Aid Notes (the "Rite Aid Warrants"). The number of shares of common stock
issuable upon exercise of the Rite Aid Warrants shall be reduced if the Rite Aid
Notes have been redeemed in part, up to a maximum of $75.0 million, on or before
October 2, 2002. The exercise price of the Rite Aid Warrants is $20.00 per
share, subject to certain adjustments. The exercise price may be paid in cash
or pursuant to a cashless exercise formula. The Rite Aid Warrants terminate on
October 2, 2010.
The consideration paid by the Company for PCS was determined pursuant to arms'
length negotiations and took into account various factors concerning the
valuation of the business of PCS. Further, the price for the common stock and
preferred stock issued in connection with the PCS Transaction was determined at
the time of entering into the transaction and was based on the fair market value
of our common stock at that time.
In connection with the acquisition of PCS, we also entered into a Securities
Purchase Agreement dated as of July 11, 2000 with JLL (the "JLL Purchase
Agreement"), which originally provided for the Company to issue to the JLL
Investors at the time of consummation of the PCS Transaction (i) 65,854 shares
of Series A-1 11% Preferred Stock (the "Series A-1 Preferred Stock," together
with the Series A-2 Preferred Stock, the "Series A Preferred Stock') for an
aggregate purchase price of $65,854,000 and (ii) 84,146 shares of Series B
Convertible Preferred Stock (the "Series B Preferred Stock") for an aggregate
purchase price of $84,146,000. The JLL Purchase Agreement was amended by an
Exchange Agreement dated as of October 2, 2000 (the "Exchange Agreement").
Pursuant to the Exchange Agreement, in lieu of issuing the 84,146 shares of
Series B Preferred Stock, we issued to the JLL Investors on October 2, 2000, six
shares of Series B Preferred Stock and 4,207,000 shares of common stock for an
aggregate consideration of $84,146,000. On that date, we also issued to the JLL
Investors the 65,854 shares of Series A-1 Preferred Stock as originally provided
in the JLL Purchase Agreement. The JLL Investors may at any time prior to
October 2, 2002 exchange the shares of common stock issued to them for an
aggregate of 84,140 shares of Series B Preferred Stock. In addition, the shares
of common stock issued to the JLL Investors will be automatically exchanged for
Series B Preferred Stock upon stockholder approval of the matters set forth in
Proposals 2 and 3 in this Proxy Statement. Each share of Series B Preferred
Stock is currently convertible into 50 shares of our common stock.
If stockholder approval of Proposals 2 and 3 is obtained, the Series B
Preferred Stock will automatically be converted into Class B-1 Common Stock of
the Company ("Class B-1 Common Stock"), the Series A-1 Preferred Stock will be
convertible into Class B-1 Common Stock and the Series A-2 Preferred Stock will
be convertible into Class B-2 Common Stock of the Company ("Class B-2 Common
Stock," together with the Class B-1 Common Stock, the "Class B Common Stock").
The holders of Class B Common Stock will have the right to convert their Class B
Common Stock into our existing common stock, which will be reclassified as
"Class A Common Stock."
Because the issuance of Class B Common Stock upon conversion of the Series A
Preferred Stock, when aggregated with the common stock issued to the JLL
Investors and the common stock issuable upon exercise of the Rite Aid Warrants
and upon conversion of the Series B Preferred Stock, exceeds 20% of our common
stock outstanding, pursuant to corporate governance requirements of the Nasdaq
National Market, our stockholders are being asked at the Annual Meeting to
approve the issuance of Class B Common Stock upon conversion of the Series A
Preferred Stock. In addition, our stockholders are being asked to approve the
Second Amended and Restated Certificate of Incorporation ("Second Amended and
Restated Certificate") to, among other things, create classes of common stock
designated as Class A, Class B-1 and Class B-2 Common Stock. If stockholder
approval is not obtained for Proposals 2 and 3, the Series A Preferred Stock
will not be convertible into Class B Common Stock and, among other things, we
will be required to pay dividends on the Series A Preferred Stock at an
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increasing dividend rate as set forth below. We will not be required to pay
these dividends if Proposals 2 and 3 are approved. Pursuant to the PCS Purchase
Agreement and the JLL Purchase Agreement, we have agreed to use our best efforts
to solicit stockholder approval of Proposals 2 and 3.
What are we asking you to approve?
We are asking you to approve both the adoption of the proposed Second Amended
and Restated Certificate and the issuance of Class B Common Stock upon the
conversion of the Series A Preferred Stock. We have attached a copy of the
proposed Second Amended and Restated Certificate as Appendix B. Among other
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things, the proposed Second Amended and Restated Certificate would:
. change our name to "AdvancePCS";
. increase the authorized number of shares of our common stock from 50
million to 100 million, which will include 13,750,000 shares of Class
B Common Stock, as well as 13,750,000 shares of Class A Common Stock
that must be reserved for issuance upon the conversion of the Class B
Common Stock;
. create classes of common stock to be designated as Class A, Class B-1
and Class B-2 Common Stock;
. reclassify our existing common stock into Class A Common Stock; and
. change the structure and composition of our board of directors.
The approval of the Second Amended and Restated Certificate is necessary for
the issuance of Class B Common Stock upon the conversion of Series A Preferred
Stock because the Second Amended and Restated Certificate creates the necessary
Class B-1 and Class B-2 Common Stock. Therefore, Proposals 2 and 3 should be
considered together. If you do not approve Proposal 2, the issuance of stock
described in Proposal 3 will not occur.
What does the board of directors recommend?
The board of directors has unanimously approved the adoption of the proposed
Second Amended and Restated Certificate and the proposed issuance of Class B
Common Stock upon conversion of the Series A Preferred Stock. The board of
directors believes that Proposals 2 and 3 are in the best interests of the
Company and its stockholders and recommends that you vote "FOR" the approval of
Proposals 2 and 3.
What are the positive effects of the approval of Proposals 2 and 3?
Dividends. If Proposals 2 and 3 are not approved, we will be required to pay
dividends on the Series A Preferred Stock at an increasing dividend rate.
Pursuant to the terms of the Series A Preferred Stock, if Proposals 2 and 3 are
not approved:
. dividends will accrue at an annual rate of 11% per annum beginning on
January 30, 2001;
. the dividend rate will increase to 13% per annum on October 1, 2001;
and
. the dividend rate will further increase to 16% per annum on April 1,
2002.
These dividends are payable in additional shares of Series A Preferred Stock,
and any additional shares of Series A Preferred Stock issued as dividends on
existing shares will be entitled to dividends as well. Because the dividend
rate does not begin to accrue until January 30, 2001, if stockholder approval is
obtained now, we will not have to pay these dividends. If stockholder approval
is not obtained, the dividends that the Company will be required to pay on
Series A Preferred Stock as well as additional shares of Series A Preferred
Stock issued as dividends will negatively affect our capital structure by
reducing our stockholders' equity. The reduction in our equity could adversely
affect our ability to obtain debt or equity financing, thereby limiting our
flexibility in responding to new opportunities and favorable or unfavorable
developments. Since the dividend rate will increase over time, if Proposals 2
and 3 are approved at this time, the holders of our common stock may experience
less dilution than if Proposals 2 and 3 are approved at a later date.
Redemption. If the Second Amended and Restated Certificate is not approved,
we will be required to redeem all of the Series A Preferred Stock for cash
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. on October 2, 2011; or
. in the event of a change of control of the Company if holders of a
majority of the outstanding shares of the respective series of Series
A Preferred Stock elect to require redemption.
The redemption price will be $1,000 per share plus any accumulated and unpaid
dividends or distributions, which could be substantial based on the increasing
dividend rate of the Series A Preferred Stock. Our redemption obligation
terminates upon the effectiveness of the Second Amended and Restated
Certificate.
The redemption obligation resulting from a change of control may make any
attempt to acquire control of us more difficult and costly and therefore
discourage attempts to acquire us. In addition, since a change of control is
defined to include the acquisition by any person or group of more than 40% of
our outstanding common stock, the redemption obligation may make it more
difficult and costly to pursue a strategic transaction that would be in the
interests of our common stockholders.
We will be required to redeem all outstanding shares of Series A Preferred
Stock for cash on October 2, 2011. If all shares of Series A Preferred Stock
are outstanding at that time, given the 16% dividend rate that would have been
accruing as of April 2002 and the "payment-in-kind" feature of this dividend, we
will need $971.8 million to meet our redemption obligation. This contingent
obligation may adversely affect our financial condition and ability to obtain
equity or debt financing.
Standstill. Pursuant to the Stockholders' Agreement, Rite Aid and the JLL
Investors and certain related parties and permitted transferees are subject to
standstill provisions designed to protect the Company from such parties, among
other things, increasing their ownership percentage and participating in proxy
contests. For additional information, see "What are the terms of the
Stockholders' Agreement?" on page 26. However, if stockholder approval for
Proposals 2 and 3 is not obtained by January 30, 2001, these parties will be
released from the standstill restrictions beginning on March 31, 2001 and
extending until the date such approval is obtained and the Second Amended and
Restated Certificate is effective.
Voting Rights. The holders of Series B Preferred Stock have certain rights
requiring a majority approval of the Series B Preferred Stock before the Company
can take certain actions. If stockholder approval of Proposals 2 and 3 is
obtained, upon the effectiveness of the Second Amended and Restated Certificate
the Series B Preferred Stock will automatically be converted into Class B-1
Common Stock and these voting rights will terminate.
The holders of Series B Preferred Stock have veto rights over, among other
things:
. creating or issuing any class of stock that ranks senior to or on a
parity with the Series B Preferred Stock;
. reclassifying any shares of junior stock into shares of senior stock
or parity stock; and
. repurchasing or redeeming capital stock of the Company.
Because of these veto rights, we may not be able to take a number of actions
that we may otherwise believe to be in the best interests of our company. For
example, without the consent of the Series B Holders:
. We cannot issue any preferred stock that ranks senior to or on a
parity with the Series B Preferred Stock. As a result, our
flexibility in raising capital may be restricted.
. We cannot purchase our common stock on the open market or otherwise.
Therefore, without the consent of the holders of Series B Preferred
Stock, we will not be able to increase stockholder value by using
excess cash to repurchase our common stock.
It should be noted, however, that the holders of Series A-1 Preferred Stock
have voting rights that are substantially the same as the voting rights of the
holders of Series B Preferred Stock. For example, without the majority approval
of the Series A-1 Preferred Stock, we cannot issue any preferred stock, nor can
we repurchase our common stock. Consequently, even if stockholder approval of
Proposals 2 and 3 is obtained and the voting rights of the holders of Series B
Preferred Stock terminate, the Company will still be restricted from taking
various actions
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that we believe may be in the best interests of the Company unless the holders
of the Series A-1 Preferred Stock approve the action, or the Series A-1
Preferred Stock is converted into shares of Class B-1 Common Stock. JLL
currently holds all of the Series A-1 Preferred Stock and Series B Preferred
Stock.
Preemptive Rights of the Preferred Stock. The holders of Series A Preferred
Stock and Series B Preferred Stock have preemptive rights to participate in
future issuances of equity securities (subject to certain exceptions) to enable
them to maintain their then current fully-diluted percentage ownership in the
Company. So long as Proposals 2 and 3 are not approved by our stockholders,
they have these rights even in the case of equity issuances for non-cash
consideration. The preemptive rights of the holders of Series A Preferred Stock
and Series B Preferred Stock will make it difficult for us to issue equity
securities for acquisitions or other strategic transactions, even if we believe
they are in the best interests of our company. If stockholder approval of
Proposals 2 and 3 is obtained, the holders of Series A Preferred Stock will
continue to have preemptive rights to participate in future issuances of equity
securities for cash. In addition, holders of Class B Common Stock (into which
the Series B Preferred Stock will be converted and the Series A Preferred Stock
will become convertible) will also have preemptive rights to participate in
future issuances of equity securities for cash.
What are the negative effects of approval of Proposals 2 and 3?
Dilution. If Proposals 2 and 3 are approved, the issuance of Class B Common
Stock upon conversion of the Series A Preferred Stock will cause substantial
dilution of the equity interests and voting power of our common stockholders.
If all shares of Series A Preferred Stock are so converted at the current
conversion price, 9,542,700 shares of common stock would be issued representing
approximately 24.5% of our common stock after such issuance. These shares,
together with the common stock and Series B Preferred Stock issued to the JLL
Investors in connection with the PCS Transaction, will result in JLL and Rite
Aid beneficially owning an aggregate of approximately 35.3% of our common stock.
An increase in authorized common stock could have anti-takeover implications.
Although not a factor in our board of directors' decision to propose an increase
in the authorized common stock, one of the effects of such increase may be to
enable the board of directors to render more difficult or to discourage an
attempt to obtain control of the Company, since additional shares of common
stock could be issued to purchasers who support our board of directors and are
opposed to a takeover or could be used to dilute the stock ownership of persons
seeking to obtain control or otherwise increase the cost of obtaining control of
the Company.
Directors. All of our stockholders are currently entitled to vote for the
seven directors not elected by holders of preferred stock. If the Second
Amended and Restated Certificate is approved, our common stockholders will
continue to be able to elect six of these seven directors and the remaining
director will be elected by the holders of Class A and Class B Common Stock
voting together.
We have agreed to use our best efforts to comply with the corporate governance
provisions contained in the Stockholders' Agreement among the Company, Rite Aid
and the JLL Investors pending the approval of the Second Amended and Restated
Certificate. Once approved, our charter will establish classes of directors and
provisions regarding the nomination and election of directors for each class.
For additional information, see the information under the caption "Corporate
Governance" on page 27.
What are the terms of the Series A Preferred Stock?
Pursuant to the PCS Transaction, we issued 65,854 shares of Series A-1
Preferred Stock, all of which is held by JLL, and 125,000 shares of Series A-2
Preferred Stock, all of which is held by Rite Aid. The terms of the Series A-1
Preferred Stock and the Series A-2 Preferred Stock are identical except for
provisions relating to conversion, voting rights and the board of directors.
The following section sets forth the terms of the Series A Preferred Stock both
prior to receiving stockholder approval and after receiving stockholder
approval. The full text of the terms of the Series A-1 and Series A-2 Preferred
Stock is included as Exhibits A and B, respectively, to the Second Amended and
Restated Certificate that we have included as Appendix B to this Proxy
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Statement.
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Prior to stockholder approval of Proposals 2 and 3.
Conversion. The Series A Preferred Stock is not convertible into Class B
Common Stock prior to stockholder approval of Proposals 2 and 3.
Voting Rights-Series A-1 Preferred Stock. The Series A-1 Preferred Stock does
not have any voting rights, except as provided by law and except that so long as
the number of outstanding shares of Series A-1 Preferred Stock equals 10% or
more of the Series A-1 Preferred Stock issued on October 2, 2000 (the "Initial
Series A-1 Amount"), the approval of a majority of the holders of Series A-1
Preferred Stock (the "Series A-1 Holders"), voting as a separate class, will be
required before we can take certain actions, including:
. amending or repealing certain provisions of our certificate of
incorporation or bylaws;
. amending or repealing any provision of the certificates of
designations for the Series A-1, Series A-2 or Series B Preferred
Stock;
. creating or issuing any class of senior stock or parity stock;
. reclassifying any shares of junior stock into shares of senior stock
or parity stock;
. repurchasing or redeeming capital stock of the Company;
. incurring certain indebtedness;
. voluntarily filing for bankruptcy;
. increasing the number of directors to more than 11, except in certain
circumstances;
. having fewer than three Company officers or employees serve as
directors; and
. entering into agreements with affiliates involving over $5 million.
Voting Rights-Series A-2 Preferred Stock. The Series A-2 Preferred Stock does
not have any voting rights except as provided by law and except that the holders
of Series A-2 Preferred Stock (the "Series A-2 Holders") may initially elect two
directors to our board of directors and shall be so entitled until October 2,
2002, and thereafter as long as the number of outstanding shares of Series A-2
Preferred Stock is equal to or greater than 50% of the number of shares of
Series A-2 Preferred Stock issued on October 2, 2000 (the "Initial Series A-2
Amount"). If after October 2, 2002 the number of outstanding shares is less
than 50% but equal to or greater than 10% of the Initial Series A-2 Amount, the
Series A-2 Holders will be entitled to elect only one director. The Series A-2
Holders will not be entitled to elect any directors after October 2, 2002 if the
number of outstanding shares of Series A-2 Preferred Stock is less than 10% of
the Initial Series A-2 Amount. If the Company violates any voting rights of the
Series B Preferred Stock, the Series A-2 Holders shall be entitled to elect one
additional director.
Dividends. Unless stockholder approval of Proposals 2 and 3 is obtained prior
to January 30, 2001, dividends will begin to accrue on the Series A Preferred
Stock at an annual rate of 11% per annum on January 30, 2001 payable quarterly
in arrears and payable solely in additional shares of Series A Preferred Stock.
Unless stockholder approval is obtained, the dividend rate will increase to 13%
on October 1, 2001 and to 16% on April 1, 2002. As described below, such
dividends will not accrue if stockholder approval is obtained at this time and
will stop accruing as soon as such approval is obtained.
Rank. Prior to stockholder approval, the Series A Preferred Stock ranks pari
passu in right of payment to the Series B Preferred Stock and senior in right of
payment to all of our other equity securities for purposes of dividends and
distributions and upon our liquidation, dissolution or winding up.
Liquidation Rights. In the event of our liquidation, dissolution or winding
up, the Series A Holders will be entitled to receive the greater of (i) $1,000
per share of Series A Preferred Stock, plus all accrued, unpaid dividends and
(ii) the securities and property that would be received upon such liquidation,
dissolution or winding up by the holders of the number of shares of common stock
issuable upon the conversion of all of the Series A Preferred Stock (assuming
that the Series A Preferred Stock was so convertible and assuming conversion of
all outstanding shares of Series B Preferred Stock). A consolidation, merger,
recapitalization or sale of all or substantially all of our assets will be
deemed a liquidation, dissolution or winding up at the election of the holders
of a majority of the shares of the respective series of preferred stock, each
voting separately as a single class.
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Redemption. The Company is required to redeem the Series A Preferred Stock
for cash at the liquidation preference, which is equal to $1,000 per share plus
any accumulated and unpaid dividends or distributions, (i) on October 2, 2011 or
(ii) upon a change in control of the Company if holders of a majority of the
shares of the respective series so elect. The Company is not required to
establish a sinking fund for the redemption of the Series A Preferred Stock. In
determining whether funds are legally available for redemption, the Company may
set aside funds necessary to repay any indebtedness that becomes due. If we have
insufficient funds to redeem all of the Series A Preferred Stock, we must pay
interest on any unpaid portion at the rate of 2% per annum.
Preemptive Rights. The Series A Holders will be offered the right to
participate in future issuances of equity securities, subject to certain
exceptions, to enable them to maintain their then current fully diluted
percentage ownership of the Company. These preemptive rights apply whether or
not the equity issuance is for cash.
Transfers. Until January 30, 2001 and following stockholder approval and
filing of the Second Amended and Restated Certificate, shares of Series A
Preferred Stock may only be transferred to certain permitted transferees.
Permitted transferees of Series A-1 Preferred Stock (the "JLL Permitted
Transferees") include subsidiaries of JLL, investment funds managed by JLL's
parent, anyone who is or becomes an investor in such funds and certain
individuals and related parties. Permitted transferees of Series A-2 Preferred
Stock (the "Rite Aid Permitted Transferees" and together with the JLL Permitted
Transferees, the "Permitted Transferees") include Rite Aid, subsidiaries of Rite
Aid and institutional lenders of Rite Aid or its subsidiaries acquiring such
shares as security for indebtedness.
After stockholder approval of Proposals 2 and 3.
Dividends. Any dividends of additional shares then accruing as described
above stop accruing once stockholder approval of Proposals 2 and 3 is obtained,
and thereafter any dividend or distribution on shares of common stock will be
payable on the Series A Preferred Stock on an "as-if-converted" basis at the
time of such dividend or distribution.
Rank. Upon stockholder approval, the Series A Preferred Stock will rank
senior in right of payment to all classes of common stock and junior in right of
payment to all of our other equity securities for purposes of dividends and
distributions and upon our liquidation, dissolution or winding up.
Liquidation Rights. The liquidation rights after stockholder approval are the
same as the liquidation rights prior to stockholder approval described above.
Redemption. The Company's redemption obligation terminates upon the
effectiveness of the Second Amended and Restated Certificate.
Preemptive Rights. The Series A Holders will only be offered the right to
participate in future issuances of equity securities for cash to enable them to
maintain their then current fully diluted percentage ownership of the Company.
Transfers. Following stockholder approval, shares of each series of Series A
Preferred Stock may be transferred only to the respective Permitted Transferees
of such series.
Conversion. The Series A Preferred Stock is convertible into Class B Common
Stock only following the approval by our stockholders of Proposals 2 and 3. If
stockholder approval is obtained for Proposals 2 and 3, the holders of Series A
Preferred Stock (the "Series A Holders") may at any time convert the Series A-1
Preferred Stock into Class B-1 Common Stock and the Series A-2 Preferred Stock
into Class B-2 Common Stock. If any shares of Series A-1 Preferred Stock or
Series A-2 Preferred Stock are converted, all shares of that series will be
automatically converted. Each share of Series A Preferred Stock may be
converted into that number of shares of Class B Common Stock determined:
. by dividing $1,000 by the conversion price then in effect (which is
initially $20.00 and is subject to certain adjustments) if
stockholder approval is obtained prior to January 30, 2001 and
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. by dividing $1,000 plus accrued, unpaid dividends by the conversion
price then in effect if stockholder approval is obtained on or after
January 30, 2001.
Voting Rights-Series A-1 Preferred Stock. The voting rights after stockholder
approval are the same as the voting rights prior to stockholder approval
described above. In addition, if at any time after stockholder approval of
Proposals 2 and 3 is obtained and the Second Amended and Restated Certificate
has become effective, so long as the number of outstanding shares of Series A-1
Preferred Stock is equal to or greater than 25% of the Initial Series A-1
Amount, we may not, without the approval of at least a majority of the
outstanding shares of Series A-1 Preferred Stock voting separately as a single
class undertake any transaction whereby the Company:
. consolidates or merges into another entity,
. permits another entity to consolidate or merge into the Company
whereby our common stock is changed or our voting stock represents
less than 50% of the voting power of the Company after the
transaction,
. transfers all or substantially all of its assets to another entity
other than a wholly-owned subsidiary or
. causes a change of control to be effected.
Voting Rights-Series A-2 Preferred Stock. The voting rights after stockholder
approval are the same as the voting rights prior to stockholder approval
described above.
What are the terms of the Series B Preferred Stock?
Pursuant to the PCS Transaction, we issued six shares of Series B Preferred
Stock to JLL. We also issued to the JLL Investors 4,207,000 shares of common
stock that can be exchanged into 84,140 shares of Series B Preferred Stock at
any time prior to October 2, 2002. If Proposals 2 and 3 are approved, such
shares of common stock will automatically be exchanged for Series B Preferred
Stock and upon effectiveness of the Second Amended and Restated Certificate,
such shares of Series B Preferred Stock will automatically convert into Class B-
1 Common Stock. Therefore, upon stockholder approval of Proposals 2 and 3 and
the effectiveness of the Second Amended and Restated Certificate, no shares of
Series B Preferred Stock will be outstanding and none of the following terms or
restrictions will apply to the Company. The full text of the terms of the Series
B Preferred Stock is included as Exhibit C to the Second Amended and Restated
Certificate that we have included as Appendix B to this Proxy Statement.
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Conversion. The holders of Series B Preferred Stock (the "Series B Holders")
may at any time convert each share of the Series B Preferred Stock into that
number of shares of common stock determined by dividing $1,000 by the conversion
price then in effect (which is initially $20.00 and is subject to certain
adjustments). If stockholder approval is obtained and upon the effectiveness of
the Second Amended and Restated Certificate, the Series B Preferred Stock will
be converted into Class B-1 Common Stock at the conversion price then in effect.
Voting Rights. The Series B Preferred Stock votes as a single class with the
common stock on an "as-if-converted" basis on all matters as to which holders of
common stock are entitled to vote, other than (i) the election or removal of
directors and (ii) matters for which applicable law requires the vote or consent
of holders of common stock as a separate class. However, so long as the total
number of shares of Series B Preferred Stock outstanding together with the
number of shares of Series B Preferred Stock issuable pursuant to the Exchange
Agreement (the "Current Series B Amount") equals 10% or more of the Series B
Preferred Stock issued on October 2, 2000 and issuable on such date pursuant to
the Exchange Agreement (the "Initial Series B Amount"), the approval of a
majority of the Series B Holders, voting as a separate class, will be required
before we can take certain actions, including:
. amending or repealing certain provisions of our certificate of
incorporation or bylaws;
. amending or repealing any provision of the certificate of
designations for the Series A-1, Series A-2 and Series B Preferred
Stock;
. authorizing or issuing any additional shares of Series B Preferred
Stock, other than pursuant to the Exchange Agreement;
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. creating or issuing any class of senior stock or parity stock;
. reclassifying any shares of junior stock into shares of senior stock
or parity stock;
. repurchasing or redeeming capital stock of the Company;
. incurring certain indebtedness;
. voluntarily filing for bankruptcy;
. increasing the number of directors to more than 11, except in certain
circumstances ;
. having fewer than three Company officers or employees serve as
directors; and
. entering into any agreement with an affiliate involving over $5
million.
In addition, so long as the Current Series B Amount is equal to or greater than
25% of the Initial Series B Amount, we may not, without the approval of at least
a majority of the outstanding shares of Series B Preferred Stock voting
separately as a single class, undertake, effect or consummate any transaction
whereby the Company (i) consolidates or merges into another entity, (ii) permits
another entity to consolidate or merge into the Company whereby our common stock
is changed or our voting stock does not represent at least 50% of the voting
power of the Company after the transaction, (iii) transfers all or substantially
all of its assets to another entity other than a wholly-owned subsidiary or (iv)
causes a change of control to be effected.
The Series B Holders may initially elect two directors to our board of
directors and shall be so entitled as long as the Current Series B Amount is
equal to or greater than 50% of the Initial Series B Amount. If the Current
Series B Amount is less than 50% but equal to or greater than 10% of the Initial
Series B Amount, the Series B Holders will be entitled to elect only one
director. The Series B Holders will not be entitled to elect any directors if
the Current Series B Amount is less than 10% of the Initial Series B Amount. If
the Company violates any voting rights of the Series B Preferred Stock, the
Series B Holders shall be entitled to elect one additional director.
Dividends. Any dividend or distribution on shares of common stock are payable
on the Series B Preferred Stock on an "as-if-converted" basis.
Rank. The Series B Preferred Stock ranks (i) pari passu in right of payment
to the Series A Preferred Stock, (ii) senior in right of payment to our common
stock and each other class or series of capital stock created after October 2,
2000 that does not provide that it ranks senior to the Series B Preferred Stock,
and (iii) junior to each series or class of preferred stock created after
October 2, 2000 that provides that it ranks senior to the Series B Preferred
Stock, for purposes of dividends and distributions and upon our liquidation,
dissolution or winding up.
Liquidation Rights. In the event of our liquidation, dissolution or winding
up, the Series B Holders will be entitled to receive the greater of (i) $1,000
per share of Series B Preferred Stock and (ii) the securities and property that
would be received upon such liquidation, dissolution or winding up by the
holders of the number of shares of common stock issuable upon the conversion of
all of the Series B Preferred Stock (assuming conversion of all outstanding
shares of Series A Preferred Stock). A consolidation, merger, recapitalization
or sale of all or substantially all of our assets will be deemed a liquidation,
dissolution or winding up at the election of a majority of the Series B Holders,
voting separately as a single class.
Redemption. The Company is required to redeem the Series B Preferred Stock
for cash at the liquidation preference, which is equal to $1,000 per share plus
any accumulated and unpaid dividends or distributions, (i) on October 2, 2011 or
(ii) in the event of a change in control of the Company if holders of a majority
of the shares of Series B Preferred Stock elect to require redemption. The
Company is not required to establish a sinking fund for the redemption of the
Series B Preferred Stock. In determining whether funds are legally available for
redemption, the Company may set aside funds necessary to repay any indebtedness
that becomes due. If we have insufficient funds to redeem all of the Series B
Preferred Stock, we must pay interest on any unpaid portion at the rate of 10%
per annum.
Preemptive Rights. The Series B Holders will be offered the right to
participate in future issuances of equity securities, subject to certain
exceptions, to enable them to maintain their then current fully diluted
percentage ownership of the Company. These preemptive rights apply whether or
not the equity issuance is for cash.
Transfers. Any transfer of Series B Preferred Stock prior to January 30, 2001
other than to a JLL Permitted Transferee will result in the automatic conversion
of such shares into our existing common stock.
25
<PAGE>
What are the terms of the Stockholders' Agreement?
In connection with the PCS Transaction, the Company, Rite Aid and the JLL
Investors entered into a Stockholders' Agreement that contains certain
provisions, including those set forth below, relating to such parties' ownership
of our stock. For the full text of such provisions, you should review the
Stockholders' Agreement, which we have filed with the Securities and Exchange
Commission.
Standstill. Until October 2, 2004, Rite Aid, the JLL Investors, the Permitted
Transferees and certain related parties are subject to standstill provisions,
prohibiting them from, among other things, purchasing additional shares of
common stock resulting in an increase in such holders' ownership percentage of
the Company, participating in proxy contests and making any public announcement
or proposal, or soliciting a third party to do the same, with respect to a
merger, sale or other corporate transaction that would result in a change of
control of the Company. This standstill covenant terminates:
. if our board of directors approves a transaction resulting in the
acquisition by any person or group (other than the persons and
entities subject to the standstill) of beneficial ownership of 35% of
our common stock, determined on a fully diluted basis;
. upon a merger of the Company;
. upon a transfer of all or substantially all of the Company's
properties or assets;
. upon any person or group becoming the beneficial owner of more than
35% of our common stock, determined on a fully diluted basis
(provided that such 35% shall be increased by any shares transferred
by the persons and entities subject to the standstill to an acquiror
after it has announced an intention to engage in any of the
transactions reportable under Item 4 of Schedule 13D);
. if the amount of shares held by Rite Aid, JLL and certain transferees
represents less than 10% of all shares initially issued to these
parties pursuant to the PCS Transaction.
Further, if stockholder approval of Proposals 2 and 3 is not obtained by January
30, 2001, Rite Aid and the JLL Investors will not be subject to the standstill
restrictions from March 31, 2001 to the date such approval is obtained and the
Second Amended and Restated Certificate becomes effective.
Registration Rights. The shares of stock issued in connection with the PCS
Transaction have registration rights as set forth below.
. Series A Holders. Commencing on June 29, 2001, the holders of Series
A-1 Preferred Stock and holders of Series A-2 Preferred Stock each
will have two demand long form registration rights and unlimited
short form registration and piggyback registration rights. If
stockholder approval of Proposals 2 and 3 is obtained, the demand
registration rights will terminate.
. Common stock issued to the JLL Investors and common stock issuable
upon conversion of the Series B Preferred Stock. The shares of common
stock issued to the JLL Investors pursuant to the Exchange Agreement
and the shares of common stock issuable upon conversion of the Series
B Preferred Stock have two demand registration rights and unlimited
piggyback registration rights. These registration rights terminate
upon stockholder approval of Proposals 2 and 3 and the effectiveness
of the Second Amended and Restated Certificate with the State of
Delaware.
. Class A Common Stock issuable upon conversion of the Class B-1 Common
Stock and Class B-2 Common Stock. The holders of the Class A Common
Stock issuable upon conversion of the Class B-1 Common Stock and the
holders of the Class A Common Stock issuable upon conversion of the
Class B-2 Common Stock each have two demand registration rights and
unlimited piggyback registration rights. The request for registration
may be submitted on the later to occur of (i) April 2, 2001 and (ii)
the approval of Proposals 2 and 3 and the effectiveness of the Second
Amended and Restated Certificate with the State of Delaware.
26
<PAGE>
Corporate Governance. The Stockholders' Agreement provides that prior to
stockholder approval of Proposals 2 and 3, the parties shall use their
reasonable best efforts to cause our board of directors to be composed of (i)
three directors who are employees or officers of the Company, designated as
Class A Directors, (ii) two directors designated as Class B-1 Directors (which
are elected by the holders of the Series B Preferred Stock), (iii) two directors
designated as Class B-2 Directors (which are elected by the holders of the
Series A-2 Preferred Stock), (iv) three directors who qualify as "independent"
directors within the meaning of the rules of the Nasdaq National Market and (v)
one director designated as the Class D Director. The parties to the
Stockholders' Agreement agree to use their reasonable efforts to cause the
election, appointment and filling of vacancies of directors that are nominated
as set forth below:
. Class A Directors. A majority of the Class A and Class C Directors
shall nominate Class A Directors.
. Class B-1 Directors. The election, filling of vacancies and removal
of Class B-1 Directors is governed by the Series B Certificate of
Designations.
. Class B-2 Directors. The election, filling of vacancies and removal
of Class B-2 Directors is governed by the Series A-2 Certificate of
Designations.
. Class C Directors. A majority of the Class A and Class C Directors
shall nominate Class C Directors.
. Class D Director. The initial Class D Director is Mr. Millon. A
majority of the Class A Directors shall designate an individual to
fill any vacancy of the Class D Director and all of the Class B
Directors shall approve such designation, such approval not to be
unreasonably withheld. On the Class D Termination Date, the Class D
Directorship will terminate, the number of Class C Directors will
increase by one and the Class D Director will become a Class C
Director. The Class D Termination Date is the later of (i) October 2,
2002 and (ii) the earlier to occur of (x) the holders of the Series
A-2 Preferred Stock, Series B Preferred Stock and Class B Common
Stock having the right to designate, in the aggregate two or fewer
Class B Directors and (y) the amount of shares held by Rite Aid, JLL
and the Permitted Transferees representing less than 50% of all
shares initially issued to these parties pursuant to the PCS
Transaction.
Pursuant to the Stockholders Agreement, our board of directors has designated
Jon S. Halbert, David D. Halbert and David A. George as the Class A Directors,
Stephen L. Green, Michael D. Ware and Jeffery R. Joy, M.D., as the Class C
Directors and Jean-Pierre Millon as the Class D Director. The Class B-1
Directors designated by the Series B Holders are Paul S. Levy and Ramsey A.
Frank. The Class B-2 Directors designated by the Series A-2 Holders are Robert
G. Miller and David R. Jessick.
Consistent with the Stockholders' Agreement, we have amended our bylaws to
establish nominating committees for the Company's nominees for director:
<TABLE>
<CAPTION>
Committee Membership Function
<S> <C> <C>
Class A Nominating Committee All Class A and Class C Directors Nominates Class A Directors, who must
be employees or officers of the
Company
Class B-1 Nominating Committee All Class B-1 Directors Nominates Class B-1 Directors, who
are elected by the Series B Holders
Class B-2 Nominating Committee All Class B-2 Directors Nominates Class B-2 Directors, who
are elected by the Series A-2 Holders
Class C Nominating Committee All Class A and Class C Directors Nominates Class C Directors, who must
be independent directors within the
meaning of the rules of the Nasdaq
National Market
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Class D Director All Class A Directors Nominates Class D Director, subject
to approval by all Class B Directors
then in office, such approval not to
be unreasonably withheld
</TABLE>
In addition, the Company has agreed in the Stockholders' Agreement that (i)
the affirmative vote of a majority of the non-Class A Directors is required for
any decision regarding the appointment, removal or compensation of our chief
executive officer, (ii) our board of directors shall meet no less than once in
every calendar quarter, (iii) each committee of our board of directors shall
have a proportional number of Class B-1 Directors and Class B-2 Directors and
(iv) except as otherwise specified, all powers and rights of Class B-1
Directors, Class B-2 Directors and non-Class B Directors, in their capacity as
directors, shall be identical in all respects.
Why are we proposing to change our name?
Our board of directors believes that the name "AdvancePCS" is a better
reflection of the Company as it exists after the PCS Transaction. By
identifying both the Company and PCS, the board of directors believes that the
adoption of this new name will result in improved corporate name recognition and
will be beneficial in marketing to our customers and potential customers.
Why does the proposed Second Amended and Restated Certificate increase the
number of authorized shares of common stock?
Our current certificate of incorporation authorizes the issuance of 50,000,000
shares of our common stock. As of the record date, 29,372,232 shares of our
common stock were outstanding and 11,150,694 shares were reserved for issuance
upon exercise of outstanding options, warrants and options granted contingent
upon stockholder approval of Proposal 4, leaving 9,477,074 shares available for
issuance for other purposes.
Our board of directors has adopted a proposed Second Amended and Restated
Certificate that, subject to stockholder approval, increases the authorized
number of shares of our common stock to 100,000,000, consisting of 86,250,000
shares of Class A Common Stock, 7,500,000 shares of Class B-1 Common Stock and
6,250,000 shares of Class B-2 Common Stock. Pursuant to the Second Amended and
Restated Certificate, our existing common stock will be reclassified as Class A
Common Stock. As discussed above, as of the record date, a total of 40,522,926
shares of common stock were outstanding or reserved for issuance upon exercise
of options, warrants and options granted contingent upon stockholder approval of
Proposal 4. In addition, we will reserve 13,750,000 shares of Class A Common
Stock for issuance upon conversion of the Class B Common Stock. Consequently,
we will have 31,977,074 shares of Class A Common Stock available for other
purposes.
Our board of directors believes that the authorization of the additional
shares of common stock will give us added flexibility to address future capital
and financing needs, stock distributions and stock splits, business
acquisitions, management incentive and employee benefit plans and other general
corporate purposes. By increasing the number of authorized shares of common
stock now, our board of directors may issue additional shares of our common
stock in the future without further stockholder approval, subject to applicable
laws and regulatory requirements. Our board of directors believes that the
availability of the additional shares of common stock would enable us to act
promptly to take advantage of corporate opportunities as such opportunities
arise without the delay or cost of calling a special meeting of stockholders.
Why does the proposed Second Amended and Restated Certificate create Class A
Common Stock, Class B-1 Common Stock and Class B-2 Common Stock?
As described above, if Proposals 2 and 3 are approved,
. our existing common stock will be reclassified as Class A Common
Stock,
28
<PAGE>
. the Class B-1 Common Stock will be issuable upon conversion of the
Series A-1 Preferred Stock and Series B Preferred Stock (including
the Series B Preferred Stock issued upon exchange of the common stock
held by the JLL Investors), and
. the Class B-2 Common Stock will be issuable upon conversion of the
Series A-2 Preferred Stock.
If the Second Amended and Restated Certificate is approved, holders of our
existing common stock will be entitled, but will not be required, to surrender
to our transfer agent the certificates representing such shares and to receive
in exchange new certificates representing Class A Common Stock. Until such
surrender and exchange is made, stock certificates representing our existing
common stock shall be deemed for all corporate purposes to evidence ownership of
shares of Class A Common Stock into which the shares of our existing common
stock have been reclassified.
You should read the following sections for more information on the Class A,
Class B-1 and Class B-2 Common Stock.
What are the terms of the Class A Common Stock, Class B-1 Common Stock and Class
B-2 Common Stock?
The following summarizes important terms of the proposed Second Amended and
Restated Certificate, a copy of which is attached as Appendix B. This
----------
discussion is not complete, and you should read it together with the proposed
Second Amended and Restated Certificate.
The proposed Second Amended and Restated Certificate creates new classes of
common stock designated as Class A Common Stock, Class B-1 Common Stock and
Class B-2 Common Stock. Except as described below, all shares of Class A Common
Stock and Class B Common Stock will be identical and will entitle the holders of
the Class A Common Stock and Class B Common Stock to the same rights and
privileges.
Voting Rights. The Class B Common Stock will vote as a single class with the
Class A Common Stock on an "as-if-converted" basis, except for the election of
directors. Further, the approval of the holders of at least two-thirds of the
then outstanding shares of Class B Common Stock, voting or consenting separately
as a single class, is required before the Company can take certain actions,
including:
. amending or repealing our certificate of incorporation or bylaws to
adversely affect the rights of the Class B Common Stock;
. amending or repealing the certificates of designation for the Series
A Preferred Stock;
. authorizing any issuances of Class B Common Stock, other than upon
the conversion of the Series A or Series B Preferred Stock ;
. incurring certain indebtedness;
. voluntarily filing for bankruptcy, liquidation, dissolution or
winding up of the Company;
. increasing the number of directors on the board of directors to more
than 11, unless such increase is allowed pursuant to the Second
Amended and Restated Certificate or the certificate of designation of
the Series A Preferred Stock;
. having fewer than three of our employees or officers serve as
directors on the board of directors;
. modifying or repealing any provisions of our bylaws (i) requiring
that the board of directors meet no less frequently than once in
every calendar quarter (ii) requiring each committee of the board of
directors to have a proportional number of Class B-1 Directors and
Class B-2 Directors, subject to certain limitations, or (iii)
relating to the number, election, powers or rights of directors; and
. entering into any agreement with an affiliate involving amounts in
excess of $5 million.
The Second Amended and Restated Certificate also provides that the affirmative
vote of a majority of the directors who are not Class A Directors is required
for any decision regarding the appointment, removal or compensation of our chief
executive officer or any transaction between us and our chief executive officer.
In addition, provided the number of outstanding shares of Class B Common Stock
plus the number of shares of Class B Common Stock issuable upon conversion of
the Series A Preferred Stock (the "Current Class B Amount") is equal to or
greater than 25% of the total number of shares of Class B Common Stock that
would have been issuable to Rite Aid and the
29
<PAGE>
JLL Investors on October 2, 2000 had the Series A and Series B Preferred Stock
(including shares of Series B Preferred Stock issuable pursuant to the Exchange
Agreement) been convertible into Class B Common Stock on such date (the "Initial
Class B Amount") and greater than 5% of the total issued and outstanding shares
of common stock, we may not, without the approval of at least two-thirds of the
then outstanding shares of Class B Common Stock voting or consenting separately
as a single class, undertake, effect or consummate any merger, consolidation,
other business combination or any sale of all or substantially all of our assets
or other transaction through which we cause a change in control of the Company
to be effected. If the Company violates any of the voting rights of the Class B
Common Stock, the holders of the Class B-1 Common Stock and Class B-2 Common
Stock shall each be entitled to elect one additional director.
Dividend Rights. Subject to the rights of holders of preferred stock, holders
of common stock will be entitled to receive dividends and other distributions in
cash, stock or property of the Company as determined by the board of directors
from time to time. The holders of the Class A Common Stock and the Class B
Common Stock will be entitled to receive, and generally to share equally and
ratably, such dividends. However, if dividends are payable in shares of Class A
Common Stock or Class B Common Stock, the dividends will be declared at the same
rate on each class of stock, and the dividends payable to holders of Class A
Common Stock will be paid in Class A Common Stock and the dividends payable to
holders of Class B Common Stock will be paid in Class B Common Stock.
Liquidation Rights. Upon the voluntary or involuntary liquidation,
dissolution, or winding up of the affairs of the Company, after payment or
provision for payment of all our debts and other liabilities of the Company and
distribution in full of preferential amounts, if any, to be distributed to the
holders of shares of preferred stock or any other class or series of stock
having a preference as to liquidating distributions over the common stock, the
holders of Class A Common Stock and Class B Common Stock will be entitled to
share equally, on a share for share basis, in our remaining net assets.
Voluntary Conversion of Class B Common Stock into Class A Common Stock. The
holders of Class B Common Stock may, at any time and from time to time, convert
any or all outstanding shares of Class B Common Stock into shares of Class A
Common Stock on a one-for-one basis, subject to certain adjustments.
Automatic Conversion of Class B Common Stock into Class A Common Stock. Upon
the occurrence of any transfer not permitted under the Second Amended and
Restated Certificate, the shares of Class B Common Stock being transferred will
automatically convert into shares of Class A Common Stock. In addition, all
outstanding shares of Class B Common Stock will automatically convert into
shares of Class A Common Stock if (a) the Current Class B Amount is less than
10% of the Initial Class B Amount and (b) the holders of Class B Common Stock
are no longer entitled to elect a director to the board of directors.
Preemptive Rights. The holders of Class B Common Stock will be offered the
right to participate in future issuances of equity securities for cash, subject
to certain exceptions, to enable them to maintain their then current fully
diluted percentage ownership of the Company.
Transfers. If shares of Class B-1 Common Stock are transferred other than to
a JLL Permitted Transferee, the shares so transferred will automatically convert
into Class A Common Stock. If shares of Class B-2 Common Stock are transferred
other than to a Rite Aid Permitted Transferee, the shares so transferred will
automatically convert into Class A Common Stock.
Board of Directors. The holders of Class B-1 Common Stock may initially
designate two Class B-1 Directors to our board of directors. If at any time,
the number of shares of Class B-1 Common Stock outstanding plus the number of
shares of Class B-1 Common Stock issuable upon conversion of the Series A-1
Preferred Stock outstanding (the "Current Class B-1 Amount") represents less
than 50% of the number of shares issuable upon the conversion of the 65,584
shares of Series A-1 Preferred Stock and 84,146 shares of Series B Preferred
Stock (the "Initial Class B-1 Amount"), then the holders of Class B-1 Common
Stock will be entitled to elect only one director. The holders of Class B-1
Common Stock will not be entitled to elect any directors if the Current Class B-
1 Amount is less than 10% of the Initial Class B-1 Amount.
30
<PAGE>
The holders of Class B-2 Common Stock may initially designate two Class B-2
Directors to our board of directors. If at any time after October 2, 2002, the
number of shares of Class B-2 Common Stock outstanding or, if Series A-2
Preferred Stock is outstanding, the number of shares of Class B-2 Common Stock
issuable upon conversion of the Series A-2 Preferred Stock (the "Current Class
B-2 Amount") represents less than 50% of the number of shares issuable upon the
conversion of the 125,000 shares of Series A-2 Preferred Stock (the "Initial
Class B-2 Amount"), then the holders of Class B-2 Common Stock will be entitled
to elect only one director. The holders of Class B-2 Common Stock will not be
entitled to elect any directors if the Current Class B-2 Amount is less than 10%
of the Initial Class B-2 Amount.
How will the proposed Second Amended and Restated Certificate change the
composition of our board of directors?
The proposed Second Amended and Restated Certificate will initially fix the
number of directors at 11 and establish who may nominate individuals to be
elected to each class of directors and who may vote for individuals to be
members of each class. Of the 11 directors, the Second Amended and Restated
Certificate designates three Class A Directors, two Class B-1 Directors, two
Class B-2 Directors, three Class C Directors and one Class D Director. Class A
Directors must be officers or employees of the Company or its subsidiaries.
Class C Directors must be "independent" directors within the meaning of the
rules of the Nasdaq National Market. The Class D Director will initially be
Jean-Pierre Millon and any replacement will be nominated as set forth below.
Directors will continue to be elected to staggered three-year terms. The number
of directors may only be increased (i) if the holders of Class B Common Stock
are entitled to elect additional directors because their voting rights were
violated, (ii) pursuant to the terms of any preferred stock that we issue with
the approval of a majority of the Class A Directors, a majority of the Class C
Directors, and all of the Class B Directors, or (iii) as otherwise may be
determined by the unanimous approval of the Board.
Pursuant to the Stockholders' Agreement, we have agreed to use our best
efforts to comply with a corporate governance structure that is similar to the
structure set forth in the Second Amended and Restated Certificate. If the
Second Amended and Restated Certificate is approved, this structure will be set
forth in our charter and thus may only be changed by a subsequent amendment to
the charter. In addition, our existing common stockholders are currently
entitled to elect all directors other than those designated by preferred
stockholders. There are currently seven directors elected by the common
stockholders. If the Second Amended and Restated Certificate is approved, our
common stockholders (who then will hold Class A Common Stock) will still be
entitled to elect six of these seven directors and the remaining director (the
Class D Director) will be elected by the holders of Class A and Class B Common
Stock voting together.
Beginning with the Company's 2001 annual meeting of stockholders, who may
select nominees on behalf of the Company and who may vote for individuals to
serve as directors will be determined as follows:
Class A Directors. Our nominees for Class A Directors standing for election
at an annual meeting of stockholders will be nominated by a majority of the
Class A and Class C Directors then in office. The Class A Directors shall be
elected by plurality vote of the holders of the shares of Class A Common Stock.
Class B-1 Directors. Our nominees for Class B-1 Directors standing for
election at an annual meeting of stockholders will be nominated by a majority of
the Class B-1 Directors then in office. The Class B-1 Directors shall be
elected by plurality vote of the holders of the shares of Class B-1 Common
Stock.
Class B-2 Directors. Our nominees for Class B-2 Directors standing for
election at an annual meeting of stockholders will be nominated by a majority of
the Class B-2 Directors then in office. The Class B-2 Directors shall be
elected by plurality vote of the holders of the shares of Series A-2 Preferred
Stock, or the shares of Class B-2 Common Stock if the Series A-2 Preferred Stock
has been converted.
Class C Directors. Our nominees for Class C Directors standing for election
at an annual meeting of stockholders will be nominated by a majority of the
Class A and Class C Directors then in office. The Class C Directors shall be
elected by plurality vote of the holders of the Class A Common Stock.
31
<PAGE>
Class D Director. Our nominee for the Class D Director standing for election
at an annual meeting of stockholders will be nominated by a majority of the
Class A Directors then in office and approved by all the Class B Directors then
in office, such approval not to be unreasonably withheld. The Class D Director
shall be elected by plurality vote of the holders of the shares of Class A,
Class B-1 and Class B-2 Common Stock, voting together as a single class. On the
Class D Termination Date, the Class D Directorship will terminate, the number of
Class C Directors will be increased by one and the Class D Director will become
a Class C Director.
Who will the directors be if the proposed Second Amended and Restated
Certificate is approved?
Class A Directors
Three of the Company's 11 directors will be Class A Directors. We expect the
following individuals will be the initial Class A Directors:
Jon S. Halbert - term expiring in 2001
David D. Halbert - term expiring in 2002
David A. George - term expiring in 2003
Class B-1 Directors
Two of the Company's 11 directors will be Class B-1 Directors. The number of
Class B-1 Directors will decrease when the investors no longer own specified
percentages of the Initial Class B-1 Amount. The JLL Investors have informed us
that they expect the following individuals to be the initial Class B-1
Directors:
Paul S. Levy - term expiring in 2001
Ramsey A. Frank - term expiring in 2002
Class B-2 Directors
Two of the Company's 11 directors will be Class B-2 Directors. The number of
Class B-2 Directors will decrease when the investors no longer own specified
percentages of the Initial Class B-2 Amount. Rite Aid has informed us that it
expects the following individuals to be the initial Class B-2 Directors:
Robert G. Miller - term expiring in 2001
David R. Jessick - term expiring in 2002
Class C Directors
Three of the Company's 11 directors will be Class C Directors. We expect the
following individuals will be the initial Class C Directors:
Stephen L. Green - term expiring in 2001
Michael D. Ware - term expiring in 2002
Jeffrey R. Jay, M.D. - term expiring in 2003
Class D Director
One of the Company's 11 directors will be the Class D Director. Pursuant to
the PCS Transaction, the following individual will be the initial Class D
Director:
Jean-Pierre Millon - term expiring in 2003
32
<PAGE>
What vote is required for the approval of Proposals 2 and 3?
Proposal 2. Approval of the proposed Second Amended and Restated Certificate
requires the affirmative vote of the holders of a majority of the shares of
common stock entitled to vote on this matter. If the Second Amended and
Restated Certificate is approved by our stockholders, it will become effective
when we file the Second Amended and Restated Certificate with the Secretary of
State of the State of Delaware. We anticipate filing the Second Amended and
Restated Certificate with the Secretary of State of Delaware shortly after the
Annual Meeting, if Proposals 2 and 3 are approved by our stockholders.
Proposal 3. Approval of the issuance of the Class B Common Stock upon
conversion of the Series A Preferred Stock requires the affirmative vote of a
majority of the total votes represented by the shares of common stock and Series
B Preferred Stock present in person or by proxy and entitled to vote on this
proposal.
As discussed above, approval of Proposal 2 is conditioned on the approval of
Proposal 3 and therefore, Proposals 2 and 3 should be considered together. The
approval of the Second Amended and Restated Certificate is necessary for the
issuance of Class B Common Stock upon the conversion of Series A Preferred
Stock because the Second Amended and Restated Certificate creates the necessary
Class B-1 Common Stock and Class B-2 Common Stock. If you do not approve
Proposal 2, the issuance of stock in Proposal 3 will not occur.
PROPOSAL 4. APPROVAL OF AN AMENDMENT TO THE
AMENDED AND RESTATED 1993 INCENTIVE STOCK OPTION PLAN
The purpose of the Incentive Plan is to provide a means by which certain
employees of us and our affiliates may be given an opportunity to purchase
common stock and to qualify such options as "Incentive Stock Options" as such
term is defined in Section 422 of the Code. The Incentive Plan is intended to
advance our interests by encouraging stock ownership on the part of certain
employees, by enabling us (and our affiliates) to secure and retain services of
highly qualified persons, and by providing employees with an additional
incentive to advance the success of the Company (and our affiliates).
The Incentive Plan currently authorizes the issuance of up to 6,718,000 shares
of common stock pursuant to options granted under the Incentive Plan. Seven
percent (7%) of the shares available for issuance under the Incentive Plan were
issued in 1991 or earlier under the Advance Health Care incentive stock option
plan. This plan was merged into the Incentive Plan in 1996 in connection with
the merger of Advance Health Care with and into the Company.
As of October 10, 2000, no shares of common stock remained available for
future grants under the Incentive Plan, and options to acquire 2,692,694 shares,
including 1,182,750 shares for the management of PCS, have been contingently
granted under the Incentive Plan, subject to approval by the stockholders at the
Annual Meeting of an increase in the aggregate number of shares available for
issuance under the Incentive Plan as described below. The board of directors
has determined that it would be desirable to have an additional 3,000,000 shares
available for the contingent grants, as well as future grants under the
Incentive Plan, in order to have available appropriate long-term incentives and
competitive compensation opportunities for our employees. Accordingly, subject
to stockholder approval, the board of directors has adopted an amendment to the
Incentive Plan providing for an increase in the aggregate number of shares of
common stock available for issuance under the Incentive Plan from 6,718,000 to
9,718,000. This increase of three million shares represents the same
proportional percentage of shares issued to the JLL Investors and Rite Aid on a
fully diluted basis that the total option pool represents to the current issued
and outstanding shares on a fully diluted basis.
Approval of the amendment to the Incentive Plan will require the affirmative
vote of the holders of a majority of the shares of common stock present and
entitled to vote on this matter.
The Board of Directors recommends a vote "FOR" this proposal.
General. In July 1993, our board of directors adopted the Incentive Plan.
The Incentive Plan is currently administered by the Compensation Committee.
Subject to the express provisions of the Incentive Plan, the
33
<PAGE>
Compensation Committee may, from time to time, determine the persons that will
be granted options under the Incentive Plan, the number of shares of common
stock subject to each option and the exercise price, and the time or times when
such options shall be granted and may be exercised. Unless otherwise provided in
the optionee's stock option agreement, all of the options granted to date under
the Incentive Plan are exercisable over a five-year period. On each of September
5, 1997, July 20, 1999 and January 28, 2000, we filed with the Securities and
Exchange Commission a registration statement on Form S-8 under the Securities
Act of 1933 registering the shares of common stock underlying the options
offered under the Incentive Plan.
Employees Who May Participate in the Incentive Plan. All employees of us and
our affiliates may be granted options under the Incentive Plan. A director who
is not otherwise employed by us or an affiliate may not be granted an option.
Exercise. Shares of common stock purchased upon exercise of options, also
known as option shares, shall at the time of purchase be paid for in full. To
the extent that the right to purchase shares has accrued under the Incentive
Plan, options may be exercised from time to time by written notice to us stating
the full number of shares with respect to which the option is being exercised,
accompanied by full payment for the shares by cash, check or surrender of other
shares of common stock having a fair market value on the date of surrender equal
to the aggregate exercise price of the shares as to which the option is being
exercised, or such other consideration and method of payment for the issuance of
option shares as is permitted under Delaware General Corporation Law.
The exercise price of option shares granted under the Incentive Plan may not
be less than 100% of the fair market value of the common stock on the date of
grant (110% in the case of option shares granted to a holder of more than 10% of
the total voting power of all classes of our capital stock on the date of the
grant). The Compensation Committee will determine the fair market value of the
common stock on the date the option is granted.
Non-Assignability. No option shall be assignable or transferable otherwise
than by will or by the laws of descent and distribution. During the lifetime of
an optionee, the option is exercisable only by the optionee.
Term. Unless otherwise provided in an optionee's written agreement under the
Incentive Plan, each option granted thereunder will expire not more than ten
years from the date the option is granted. However, in the event of the
proposed dissolution or liquidation of the Company, the options may expire and
terminate at an earlier date.
The Incentive Plan will terminate on August 1, 2003, but the board of
directors may terminate the Incentive Plan at any time prior thereto.
Termination of the Incentive Plan will not alter or impair, without the consent
of the optionee, any of the rights or obligations of any optionee and any option
previously granted under the Incentive Plan.
Termination of Employment. In the event that an optionee's employment by us
and our affiliates is terminated for any reason, the options granted to optionee
pursuant to the Incentive Plan will terminate 90 days after such termination.
Adjustments to Options. In the event of an increase or decrease in the number
of outstanding shares of common stock as a result of a recapitalization, stock
dividend or other event, which increase or decrease is effected without our
receipt of consideration, the number of shares for which options may be granted
under the Incentive Plan, the number of shares covered by each outstanding
option and the exercise price thereof shall be proportionately adjusted.
In the event of the proposed dissolution or liquidation of the Company, all
vested options under the Incentive Plan will terminate as of a date to be fixed
by the Compensation Committee, provided that the optionee will be given at least
30 days notice and the optionee will have the right during that 30 days to
exercise his option.
Rights as a Stockholder. The optionee will have no rights as a stockholder
with respect to any shares of our common stock held under option until the date
of issuance of the stock certificates to him for such shares.
Amendments. The board of directors may, from time to time, alter, amend,
suspend, or discontinue the Incentive Plan, or alter or amend any and all option
agreements granted thereunder; provided, however, that no such action of the
board of directors, without the approval of our stockholders, may alter the
provisions of the Incentive Plan so as to
34
<PAGE>
decrease the minimum option price; extend the term of the Incentive Plan beyond
ten years or the maximum term of the options granted beyond ten years; alter any
outstanding option agreement to the detriment of the optionee without his
consent; or decrease, directly or indirectly (by cancellation and substitution
of options or otherwise), the option price applicable to any option granted
under the Incentive Plan.
Federal Income Tax Aspects. The Incentive Plan is intended to qualify as a
stock option plan under Section 422 of the Code. If the Incentive Plan
qualifies as such, an employee who receives an incentive stock option under the
Incentive Plan will not be deemed to recognize income either at the time of the
grant of the option or, assuming that the optionee has been an employee at all
times during the period beginning on the date of the grant and ending three
months prior to the date of exercise, at the time of exercise of the option.
Gain or loss from the sale or exchange of stock acquired upon such exercise will
generally be treated as long-term capital gain or loss, provided that such sale
or exchange of the shares does not occur within either the two-year period after
the date of the granting of the option or the one-year period after the date
such shares were acquired upon exercise. Under these circumstances, no
deduction will be allowable to us in connection with either the grant of such
options or the issuance of shares upon exercise thereof.
If a disposition (as that term is defined in Section 424(c) of the Code) of
shares acquired pursuant to the exercise of an incentive stock option is made
within either the two-year period after the date of granting of the option or
the one-year period after the date the shares were acquired (a "disqualifying
disposition"), the optionee will generally recognize compensation income at the
time of disposition equal to the excess of the fair market value of the shares
at the time of exercise over the option price (limited to the difference between
the amount realized by the employee on the sale of such shares and the exercise
price). Any such compensation income recognized as described in this paragraph
will increase the optionee's tax basis in his shares. If a disposition
described in this paragraph occurs in a taxable transaction, any gain in excess
of compensation income recognized on the disposition will be capital gain, and
any loss will be capital loss. Such capital gain or loss will be long-term
capital gain or loss, depending on the holding period of the shares. If an
optionee recognizes compensation income as the result of a disposition as
described in this paragraph, the Company will be entitled to a corresponding
income tax deduction for its taxable year in which or with which ends the
taxable year of the employee in which the amount of compensation income is
included in such employee's gross income. The employee will be deemed to have
included such compensation income in gross income if we satisfy in a timely
manner the applicable Form W-2 or Form 1099 reporting requirements under Section
6041 or Section 6041A of the Code, whichever is applicable, and the Treasury
regulations thereunder.
Upon the exercise of an incentive stock option, the excess of the fair market
value of the shares at the time of exercise over the option price will be an
item of tax preference subject to the alternative minimum tax provisions, unless
the optionee makes a disqualifying disposition of such shares as described in
the preceding paragraph.
In the event that options granted under the Incentive Plan do not qualify as
incentive stock options, the employee will recognize compensation income upon
the receipt of such option if the option has a readily ascertainable fair market
value at the time of the grant, in the amount of the fair market value of the
option. If the nonstatutory stock options do not have a readily ascertainable
fair market value, the employee will not recognize income upon grant of the
nonstatutory stock options, but will recognize compensation income upon the
exercise of the nonstatutory stock options if the shares issued pursuant to such
exercise are either transferable or not subject to substantial risk of
forfeiture. The amount of the income will be measured by the excess, if any, of
the fair market value of the shares at the time of exercise (determined without
regard to any restrictions other than a restriction which, by its terms, will
never lapse) over the amount paid as the exercise price of the nonstatutory
stock options. If, however, the employee is subject to certain restrictions
with respect to the shares received upon the exercise of the nonstatutory stock
options, then the taxable income realized by the employee will be deferred and
will be measured based on the fair market value of the shares at the time the
restrictions lapse. Gain or loss on the subsequent sale or exchange of such
shares will be capital gain or loss if the shares are a capital asset in the
hands of the employee. Such capital gain or loss will be long-term capital gain
or loss depending on the holding period. An employee may elect, pursuant to
Section 83(b) of the Code, to be taxed in the taxable year in which a
nonstatutory stock option is exercised on the difference between the fair market
value of our common stock on the date of exercise and the exercise price.
In the case of compensation income recognized by an employee as described
above in connection with the exercise of an option, we will be entitled to a
corresponding income tax deduction for its taxable year in which or with which
35
<PAGE>
ends the taxable year of the employee in which the amount of compensation income
is included in such employee's gross income. The employee will be deemed to
have included such compensation income in gross income if the Company satisfies
in a timely manner the applicable Form W-2 or Form 1099 reporting requirements
under Section 6041 or Section 6041A of the Code, whichever is applicable, and
the Treasury regulations thereunder.
Stock Option Awards
The following table shows options which have been granted under the Incentive
Plan as of October 10, 2000, to certain persons or groups (including options
that have been exercised).
1993 Incentive Stock Option Plan
<TABLE>
<CAPTION>
Name and Position Number of Shares Exercise Price Per Share(1)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David D. Halbert 2,031,000(2) $13.09
Chairman of the Board and Chief Executive
Officer
-----------------------------------------------------------------------------------------------------------------------
Jon S. Halbert 1,181,500 8.40
Vice Chairman, e-Business and Technology
-----------------------------------------------------------------------------------------------------------------------
David A. George 470,000 19.18
President
-----------------------------------------------------------------------------------------------------------------------
T. Danny Phillips 513,000 10.56
Chief Financial Officer and Executive Vice
President
-----------------------------------------------------------------------------------------------------------------------
Joseph J. Filipek, Jr. 410,000 9.06
Executive Vice President - Client
Management
-----------------------------------------------------------------------------------------------------------------------
Executive Officers Group (13 persons) 5,421,500(3) 13.19
-----------------------------------------------------------------------------------------------------------------------
Non-Executive Officer Employee Group (302 4,788,000(4) 18.55
persons)
-----------------------------------------------------------------------------------------------------------------------
Non-Executive Officer Director Group (8 persons) 0 --
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________
(1) Exercise prices shown are weighted averages of the actual exercise prices
for stock options granted to the individuals or the groups, as applicable.
(2) Includes options to acquire 994,944 shares that have been contingently
granted, subject to stockholder approval of Proposal 4.
(3) Includes options to acquire 1,354,944 shares that have been contingently
granted, subject to stockholder approval of Proposal 4.
(4) Includes options to acquire 1,337,750 shares that have been contingently
granted, subject to stockholder approval of Proposal 4.
PROPOSAL 5. RATIFICATION OF THE APPOINTMENT OF AUDITORS
The board of directors has appointed the firm of Arthur Andersen, LLP, which
has served as our independent auditors since 1992, as independent auditors of
the Company for the fiscal year ending March 31, 2001, and recommends
ratification by our stockholders of such appointment. Such ratification
requires the affirmative vote of the holders of a majority of our common stock
entitled to vote on this matter and represented in person or by proxy at the
Annual Meeting. Accordingly, under our Bylaws and in accordance with Delaware
law, an abstention would have the same legal effect as a vote against this
proposal, but a broker non-vote would not be counted for purposes of determining
whether a majority had been achieved. The persons named in the accompanying
proxy intend to vote for ratification of such appointment unless instructed
otherwise on the proxy.
36
<PAGE>
The Board of Directors recommends a vote "FOR" this proposal.
In the event the appointment is not ratified, the board of directors will
consider the appointment of other independent auditors. The board of directors
may terminate the appointment of Arthur Andersen, LLP as our independent
auditors without the approval of our stockholders whenever the board of
directors deems such termination necessary or appropriate. A representative of
Arthur Andersen, LLP is expected to attend the Annual Meeting and will have the
opportunity to make a statement, if such representative desires to do so, and
will be available to respond to appropriate questions.
ANNUAL REPORT
Our 2000 Annual Report, including financial statements, accompanies this Proxy
Statement.
STOCKHOLDER PROPOSALS
Any stockholder who wishes to submit a proposal for inclusion in the proxy
material and for presentation at our 2001 Annual Meeting of Stockholders must
forward such proposal to our secretary at the address indicated on the first
page of this Proxy Statement, so our secretary receives it no later than
_______________. Pursuant to Rule 14a-4(c)(1) under the Exchange Act, if any
stockholder proposal intended to be presented at the 2001 annual meeting without
inclusion in our proxy statement for such meeting is received at our principal
office after ____________, 2001, then a proxy will have the ability to confer
discretionary authority to vote on such proposal.
FORM 10-K
COPIES OF OUR ANNUAL REPORT ON FORM 10-K, AS AMENDED, FOR THE YEAR ENDED MARCH
31, 2000, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, EXCLUDING
EXHIBITS, ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO ADVANCEPCS, 5215
North O'Connor Boulevard, Suite 1600, IRVING, TEXAS 75039, ATTENTION: LAURA I.
JOHANSEN, SECRETARY. COPIES OF EXHIBITS ARE AVAILABLE UPON PAYMENT OF $25.00 TO
COVER THE COSTS OF REPRODUCTION.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by reference"
the information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this proxy statement, and
information that we file later with the Securities and Exchange Commission will
automatically update and supersede previously filed information, including
information contained in this document.
We incorporated by reference the documents listed below and any future filings
we will make with the Securities and Exchange Commission under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended:
. The following sections of our Annual Report on Form 10-K for the fiscal year
ended March 31, 2000 as filed with the Securities and Exchange Commission on
June 29, 2000 and as amended on July 28, 2000:
- Item 6 "Selected Consolidated Financial Data" beginning on page 28;
- Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 29; and
- Item 8 "Financial Statements and Supplementary Data" on pages F-1
through F-21.
37
<PAGE>
- Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
as filed with the Securities and Exchange Commission on August 14,
2000;
- Our Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 19, 2000 and as amended on September 18,
2000 and October 26, 2000;
- Our Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 31, 2000; and
- Our Current Report on Form 8-K as filed with the Securities and
Exchange Commission on October 16, 2000 and as amended on October 26,
2000.
You may request free copies of these filings by writing or telephoning us at
the following address:
AdvancePCS
Attn: Legal Department
5215 North O'Connor Blvd., Suite 1600
Irving, Texas 75039
(469) 420-6000
OTHER MATTERS
The board of directors does not know of any other matters that are to be
presented for action at the Annual Meeting. However, if any other matters
properly come before the Annual Meeting or any adjournment(s) thereof, it is
intended that the enclosed proxy will be voted in accordance with the judgment
of the persons voting the proxy.
By Order of the Board of Directors,
Laura I. Johansen
Secretary
November ___, 2000
38
<PAGE>
APPENDIX A
AUDIT COMMITTEE CHARTER
ADVANCE PARADIGM, INC.
I. PURPOSE
The primary function of the Audit Committee (the "Committee") is to assist the
Board of Directors (the "Board") of Advance Paradigm, Inc. (the "Company") in
fulfilling its oversight responsibilities by reviewing: the financial reports
and other financial information provided by the Company to any governmental body
or the public; the Company's systems of internal controls regarding finance,
accounting, legal compliance and ethics that management and the Board have
established; and the Company's auditing, accounting and financial reporting
processes generally. Consistent with this function, the Committee should
encourage continuous improvement of, and should foster adherence to, the
Company's policies, procedures and practices at all levels. The Committee's
primary duties and responsibilities are to:
. Serve as an independent and objective party to monitor the Company's
financial reporting process and internal control system.
. Review and appraise the audit efforts of the Company's independent
accountant.
. Provide an open avenue of communication among the independent
accountant, financial and senior management and the Board.
The Committee will primarily fulfill these responsibilities by carrying out the
activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Committee shall be comprised of three or more directors as determined by
the Board, each of whom shall be independent directors, and free from any
relationship that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the Committee. The
independence of each member of the Committee shall be further evaluated in light
of Nasdaq's Marketplace Rules, or the rules of any other exchange or inter-
dealer quotation system as the Company's securities may be listed on or quoted
on from time to time. All members of the Committee shall have a working
familiarity with basic finance and accounting practices, and at least one member
of the Committee shall have accounting or related financial management
expertise. Committee members may enhance their familiarity with finance and
accounting by participating in educational programs conducted by the Company or
an outside consultant.
The members of the Committee shall be elected by the Board. Unless a Chair is
elected by the full Board, the members of the Committee may designate a Chair by
majority vote of the full Committee membership.
III. MEETINGS
The Committee shall hold regular meetings as may be necessary and special
meetings when circumstances dictate. As part of its job to foster open
communication, the Committee should meet at least annually with management and
the independent accountant in separate executive sessions to discuss any matters
that the Committee or each of these groups believe should be discussed
privately. In addition, the Committee or at least its Chair should meet with the
independent accountant and management quarterly to review the Company's
financial statements.
<PAGE>
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Committee shall:
Documents/Reports Review
------------------------
1. Review and update this Charter periodically, at least annually, as
conditions dictate.
2. Review the organization's annual financial statements and any reports or
other financial information submitted to any governmental body, or the
public, including any certification, report, opinion, or review rendered by
the independent accountant.
3. Review with financial management and the independent accountant the 10-Q
prior to its filing or prior to the release of earnings. The Chair may
represent the entire Committee for purposes of this review.
Independent Accountant
----------------------
4. Recommend to the Board the selection of an independent accountant, which
firm is ultimately accountable to the Committee and the Board.
5. Require that the independent accountant submit a formal written statement
regarding relationships and services which may affect the accountant's
objectivity and independence (consistent with Independent Standards Board
Standard No. 1, Independence Discussions with Audit Committees), discuss any
relevant matters with the independent accountant, and if so determined by
the Committee, recommend that the Board take appropriate action to address
the independence of the accountant. In making this determination, the
Committee shall consider not only auditing and other traditional accounting
functions performed by the independent accountant, but also consulting,
legal and other professional services rendered by the independent accountant
and its affiliates.
6. Maintain an ongoing dialogue with the independent accountant regarding the
status of independence.
7. Review the performance of the independent accountant and approve any
proposed discharge of the independent accountant when circumstances warrant.
8. Periodically consult with the independent accountant out of the presence of
management about internal controls and the fairness and accuracy of the
organization's financial statements.
9. Prepare the report required by Item 306 of Regulations S-K and S-B and Item
7(e)(3) (or their respective successor items) of Schedule 14A of the
Securities and Exchange Commission to be included in the Company's annual
proxy statement, to help inform stockholders of the Committee's oversight
with respect to the Company's financial reporting.
Financial Reporting Process
---------------------------
10. In consultation with the independent accountant, review the integrity of the
organization's financial reporting processes, both internal and external.
11. Consider the independent accountant's judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
12. Consider and approve, if appropriate, major changes to the Company's
auditing and accounting principles and practices as suggested by the
independent accountant or management.
2
<PAGE>
Process Improvement
-------------------
13. Establish regular and separate systems of reporting to the Committee by
each of management and the independent accountant regarding any significant
judgments made in management's preparation of the financial statements and
the view of each as to appropriateness of such judgments.
14. Following completion of the annual audit, review separately with each of
management and the independent accountant any significant difficulties
encountered during the course of the audit, including any restrictions on
the scope of work or access to required information.
15. Review any significant disagreement among management and the independent
accountant in connection with the preparation of the financial statements.
16. Review with the independent accountant and management the extent to which
changes or improvements in financial or accounting practices, as approved
by the Committee, have been implemented. (This review should be conducted
at an appropriate time subsequent to implementation of changes or
improvements, as decided by the Committee.)
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to plan and conduct audits or to
determine that the Company's financial statements are complete and accurate or
are in accordance with generally accepted accounting principles. These are the
responsibilities of the independent accountant and management, respectively. Nor
is it the duty of the Committee to conduct investigations, to resolve
disagreements, if any, between management and the independent accountant or to
assure compliance with laws and regulations and the Company's policies.
3
<PAGE>
APPENDIX B
----------
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ADVANCE PARADIGM, INC.
ADVANCE PARADIGM, INC. a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Advance Paradigm, Inc. The Corporation
was originally incorporated under the name "Advance Pharmacy Services,
Inc." and filed its original Certificate of Incorporation (the
"Original Certificate") with the Secretary of State of the State of
Delaware on July 27, 1993. An Amended and Restated Certificate of
Incorporation was filed with the Secretary of State of the State of
Delaware on October 7, 1996. A Certificate of Merger, whereby Advance
Health Care, Inc. merged with and into the Corporation, was filed with
the Secretary of State of the State of Delaware on October 11, 1996.
A first Certificate of Amendment to the Amended and Restated
Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on October 11, 1996. A second Certificate of
Amendment to the Amended and Restated Certificate of Incorporation was
filed with the Secretary of State of the State of Delaware on November
12, 1999 (the Amended and Restated Certificate of Incorporation, as so
amended by the first and second Certificate of Amendment, the "First
Certificate"). A Certificate of Designations of Series A-1 11%
Preferred Stock, a Certificate of Designations of Series A-2 11%
Preferred Stock, and a Certificate of Designations of Series B
Convertible Preferred Stock were filed with the Secretary of State of
the State of Delaware on October 2, 2000.
2. This Second Amended and Restated Certificate of Incorporation (this
"Certificate"), which amends, restates and supersedes the provisions
of the First Certificate as originally filed and thereafter amended as
described in paragraph 1 above, was duly adopted by the Board of
Directors of the Corporation in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of
Delaware, as amended from time to time (the "DGCL"), and was duly
adopted by the stockholders of the Corporation in accordance with the
applicable provisions of Sections 242 and 245 of the DGCL.
<PAGE>
3. Capitalized terms used in this Certificate shall have the meaning
given to such terms in Article IV.
4. The text of the First Certificate, as amended, is hereby amended,
restated and superseded to read in its entirety as follows:
ARTICLE I
NAME
----
The name of the Corporation is AdvancePCS.
ARTICLE II
REGISTERED OFFICE
-----------------
The address of the registered office of the Corporation in the State of
Delaware is 2711 Fentonville Road, Suite 400,Wilmington. The name of its
registered agent is Prentiss-Hall Corporation System, Inc.
ARTICLE III
PURPOSES
--------
The purpose for which the Corporation is organized is the transaction of
any or all lawful acts and activities for which corporations may be incorporated
under the DGCL.
ARTICLE IV
DEFINITIONS
-----------
The capitalized terms used in any exhibit hereto shall have the meanings
given to them in such exhibit. The following terms, as used in this
Certificate, shall have the following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock
---------------------------------
issued or sold by the Corporation after the Effective Date, whether or not
subsequently reacquired or retired by the Corporation, other than shares of
Common Stock: (i) issued upon the conversion or exchange of any series or
class of Capital Stock issued and outstanding on the Effective Date into
another series or class of Capital Stock of the Corporation without any
additional consideration to the Corporation by the holder thereof,
including shares of Common Stock issued upon conversion of any shares of
Series A Preferred Stock into any class or
2
<PAGE>
series of Common Stock; (ii) issued upon conversion of Class B-1 Common
Stock or Class B-2 Common Stock into Class A Common Stock; (iii) issued
upon exercise of options granted to employees, consultants, officers or
directors of the Corporation pursuant to any stock option plan, in effect
on the Effective Date; (iv) issued upon exercise of the Senior Subordinated
Notes Warrants; and (v) issued upon the exercise of the Management Options.
"Affiliate" means, with respect to any specified Person, any other
---------
Person which, directly or indirectly, controls, is controlled by or is
under direct or indirect common control with, such specified Person.
Control of any Person shall consist of the power to direct the management
and policies of such Person (whether through the ownership of voting
securities, by contract, as trustee or otherwise) and shall be deemed to
exist upon the ownership of securities entitling the holder thereof to
exercise more than 20% of the voting power in the election of directors of
such Person (or other persons or bodies performing similar functions).
"Board of Directors" means the board of directors of the Corporation.
------------------
"Business Day" means any day except Saturday, Sunday and any day on
------------
which banking institutions in New York City, New York generally are
authorized or required by law or other governmental action to be closed.
"By-Laws" means the by-laws of the Corporation as in effect from time
-------
to time.
"Capital Stock" means (i) all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of the Corporation,
including each class or series of Common Stock or Preferred Stock, and (ii)
any option, warrant or other arrangement representing the right to purchase
or otherwise acquire any of the foregoing, including any securities
convertible or exchangeable into any of the foregoing.
"Certificate" has the meaning given in paragraph 2 of the
-----------
Introduction.
"Class A Common Stock" has the meaning given in Section 5.1.
--------------------
"Class A Directors" means those persons designated as the initial
-----------------
Class A Directors as contemplated by the Stockholders Agreement and such
other persons elected as Class A Directors pursuant to Article VIII. Only
a person who is an officer or employee of the Corporation or its
Subsidiaries shall be qualified for election as, and to serve as, a Class A
Director.
3
<PAGE>
"Class B Common Stock" means the Class B-1 Common Stock and the Class
--------------------
B-2 Common Stock.
"Class B-1 Common Stock" has the meaning given in Section 5.1.
----------------------
"Class B-2 Common Stock" has the meaning given in Section 5.1.
----------------------
"Class B Directors" means the Class B-1 Directors and the Class B-2
-----------------
Directors.
"Class B-1 Directors" means those persons serving as Class B-1
-------------------
Directors on the Effective Date pursuant to Section 10(f) of the Series B
Certificate of Designations and such other persons elected by holders of
Class B-1 Common Stock pursuant to Article VIII.
"Class B-2 Directors" means (i) so long as shares of Series A-2
-------------------
Preferred Stock are outstanding, those persons serving as Class B-2
Directors pursuant to Section 10(c) of the Series A-2 Certificate of
Designations and (ii) following the conversion of Series A-2 Preferred
Stock into Class B-2 Common Stock, such other persons elected by holders of
Class B-2 Common Stock pursuant to Article VIII.
"Class C Directors" means those persons designated as the initial
-----------------
Class C Directors as contemplated by the Stockholders Agreement and such
other persons elected as Class C Directors pursuant to Article VIII. Only
a person who qualifies as an independent director of the Corporation shall
be qualified for election as, and to serve as, a Class C Director.
Independent director shall have the meaning given to it, (i) if the Nasdaq
National Market is the principal national securities market or quotation
system on which the Class A Common Stock is listed, authorized for trading
or quoted, in the rules of the Nasdaq National Market as in effect from
time to time, or (ii) if the Nasdaq National Market is not the principal
national securities exchange or quotation system on which the Class A
Common Stock is listed, authorized for trading or quoted, in the rules or
regulations of the national securities exchange or quotation system on
which the Class A Common Stock is listed, authorized for trading or quoted.
"Class D Director" means the person designated as the initial Class D
----------------
Director as contemplated by the Stockholders Agreement and such other
persons elected as the Class D Director pursuant to Article VIII.
"Class D Termination Date" means the later of (a) October 2, 2002 and
------------------------
(b) the earlier to occur of (i) the holders of Series A-2 Preferred Stock
and Class B Common Stock having the right to elect or designate, in the
aggregate, two or less Class B Directors pursuant to Article VIII and the
Series A-2 Certificate of
4
<PAGE>
Designations and (ii) the sum of the Current Class B-1 Amount and the
Current Class B-2 Amount, representing, in the aggregate, less than 50% of
the Initial Class B Amount.
"Common Stock" means the Class A Common Stock, the Class B-1 Common
------------
Stock and the Class B-2 Common Stock.
"Consolidated Cash Flow" has the meaning given to such term in the
----------------------
indenture for the Senior Subordinated Notes.
"Consolidated Interest Expense" means, with respect to any specified
-----------------------------
Person for any period, the sum, without duplication, of (i) the
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued, including original issue discount, non-
cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with capital
lease obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings
and net of the effect of all payments made or received pursuant to hedging
obligations and excluding amortization of deferred financing costs, plus
(ii) the consolidated interest of such Person and its Subsidiaries that was
capitalized during such period, plus (iii) any interest expense on
Indebtedness of another Person that is guaranteed by that Person or any of
its Subsidiaries or secured by a mortgage, lien, pledge, charge,
encumbrance or other security interests on assets of such Person or any of
its Subsidiaries.
"Conversion" means a Mandatory Conversion or an Optional Conversion.
----------
"Conversion Date" means (i) in the case of an Optional Conversion, the
---------------
date on which the certificates for shares of Class B Common Stock to be
converted in such Optional Conversion are surrendered to the Corporation
and (ii) in the case of a Mandatory Conversion, the date on which the
Prohibited Transfer resulting in such Mandatory Conversion or the Mandatory
Conversion Event occurs.
"Conversion Ratio" has the meaning given in Section 5.3.7(c).
----------------
"Convertible Securities" means any evidences of indebtedness, shares
----------------------
(other than shares of Common Stock) or other securities that, by their
terms, are directly or indirectly convertible into or exchangeable for
Additional Shares of Common Stock.
"Corporation" has the meaning given in the Introduction.
-----------
5
<PAGE>
"Current Class B-1 Amount" means, as of any date of determination, (i)
------------------------
the number of shares of Class B-1 Common Stock issued and outstanding on
such date; plus (ii) the number of shares of Class B-1 Common Stock
issuable upon the conversion on such date of all of the shares of Series
A-1 Preferred Stock issued and outstanding on such date pursuant to the
Series A-1 Certificate of Designations.
"Current Class B-2 Amount" means, as of any date of determination, (i)
------------------------
if shares of Series A-2 Preferred Stock are issued and outstanding as of
such date, the number of shares of Class B-2 Common Stock issuable upon the
conversion on such date of all of the shares of Series A-2 Preferred Stock
issued and outstanding on such date pursuant to the Series A-2 Certificate
of Designations, and (ii) otherwise, the number of shares of Class B-2
Common Stock issued and outstanding on such date.
"Current Market Price" means, as of any date, the average of the daily
--------------------
Market Prices of the Class A Common Stock for twenty consecutive trading
days immediate-ly preceding such date.
"DGCL" has the meaning given in paragraph 2 of the Introduction.
----
"Director" means a member of the Board of Directors.
--------
"Effective Date" means the date of the filing of this Certificate with
--------------
the Secretary of State of the State of Delaware.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"First Certificate" has the meaning given in paragraph 1 of the
-----------------
Introduction.
"GAAP" means accounting principles and practices generally accepted
----
from time to time in the United States as in effect on the Effective Date.
"Indebtedness" has the meaning given to such term in the Senior
------------
Subordinated Notes Indenture.
"Initial Class B Amount" means the Initial Class B-1 Amount plus the
----------------------
Initial Class B-2 Amount.
"Initial Class B-1 Amount" means, as of any date of determination, the
------------------------
number of shares of Class B-1 Common Stock issuable upon the conversion of
65,854 shares of Series A-1 Preferred Stock and 84,146 shares of Series B
6
<PAGE>
Preferred Stock pursuant to the Series A-1 Certificate of Designations and
the Series B Certificate of Designations, respectively, at the respective
conversion ratios therefor in effect on the date of the initial filing of
such certificates of designations with the Secretary of State of the State
of Delaware pursuant to the DGCL (regardless of the number of shares of
Series B Preferred Stock issued and outstanding on such date and assuming
that this Certificate was in full force and effect on such date), in each
case as adjusted for stock dividends and distributions, and subdivisions,
combinations or consolidations of stock on or prior to such date of
determination.
"Initial Class B-2 Amount" means, as of any date of determination, the
------------------------
number of shares of Class B-2 Common Stock issuable upon the conversion of
125,000 shares of Series A-2 Preferred Stock pursuant to the Series A-2
Certificate of Designations at the conversion ratio therefor in effect on
the date of the initial filing of the Series A-2 Certificate of
Designations with the Secretary of State of the State of Delaware pursuant
to the DGCL (assuming that this Certificate was in full force and effect on
such date), in each case as adjusted for stock dividends and distributions,
and subdivisions, combinations or consolidations of stock on or prior to
such date of determination.
"Interest Coverage Ratio" means, as of any date of determination, the
-----------------------
ratio of Consolidated Cash Flow to Consolidated Interest Expense during the
four-quarter period of the most recent four consecutive fiscal quarters
ending prior to such determination date. In the event of any incurrence,
assumption, guarantee, repayment, repurchase or redemption of any
Indebtedness (other than ordinary working capital borrowings, excluding
borrowings under the Senior Credit Facility) subsequent to the commencement
of the period for which the Interest Coverage Ratio is being calculated and
on or prior to the date or event for which the calculation of the Interest
Coverage Ratio is made (the "Calculation Date"), then the Interest Coverage
Ratio shall be calculated giving effect to the incurrence, assumption,
guarantee, repayment, repurchase or redemption of such Indebtedness, and
the use of the proceeds therefrom, as if the same had occurred at the
beginning of the applicable four-quarter period.
"JLL" has the meaning given in Section 5.3.11.
---
"Management Options" means options to purchase up to an aggregate of
------------------
1,790,000 shares of Common Stock at an initial exercise price of $20 per
share issued to officers and employees on or before October 2, 2000.
"Mandatory Conversion" has the meaning set forth in Section 5.3.7(b).
--------------------
7
<PAGE>
"Mandatory Conversion Event" means the occurrence of both of the
--------------------------
following: (i) the sum of the Current Class B-1 Amount and the Current
Class B-2 Amount representing less than 10% of the Initial Class B Amount;
and (ii) neither the holders of Class B Common Stock nor the holders of
Series A-2 Preferred Stock being entitled to elect a Director pursuant to
Article VIII or the Series A-2 Certificate of Designations, as the case may
be.
"Market Price" means: (a) with respect to any security, on any given
------------
day, (i) if such security is listed or authorized for trading on a national
securities exchange, the last sale price of such security, regular way, on
such date, or if no such sale takes place on such date, the average of the
closing bid and asked prices thereof, on such date, in each case as
officially reported on the principal national securities exchange on which
such security is listed or authorized for trading, (ii) if such security is
not listed or authorized for trading on a national securities exchange but
is quoted on the Nasdaq National Market, (A) the price of the last trade,
as reported on the Nasdaq National Market, not identified as having been
reported late to such system, or (B) if such security is so traded, but no
such last trade information is so reported, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market,
(iii) if such security is not listed or authorized for trading on a
national securities exchange or the Nasdaq National Market or any
comparable system but has a nationally recognized existing trading market,
the average of the closing bid and asked prices as furnished by two members
of the National Association of Securities Dealers, Inc. selected from time
to time by the Corporation for that purpose or (iv) if such security is not
listed or authorized for trading on a national securities exchange or the
Nasdaq National Market or any comparable system and does not have a
nationally recognized existing trading market, the fair value of such
security as (A) determined by an agreement between the Corporation and the
holders of a majority of the outstanding shares of Class B Common Stock or
(B) if the Corporation and such holders fail to agree, determined jointly
by an independent investment banking firm retained by the Corporation and
by an independent investment banking firm retained by such holders, or (C)
if the Corporation or such holders shall fail so to retain an independent
investment banking firm within five Business Days of the retention of such
firm by the Corporation or such holders, as the case may be, determined
solely by the firm so retained or (D) if the firms so retained by the
Corporation and by such holders shall be unable to reach a joint
determination within 15 Business Days of the retention of the last firm so
retained, determined by another independent investment banking firm chosen
by the first two such firms; and (b) with respect to any other asset or
property, the fair market value of such asset or property as (i) determined
by an agreement between the Corporation and the holders of a majority of
the outstanding shares of Class B Common Stock or (ii) if the Corporation
and such holders fail to agree, determined jointly by an independent
8
<PAGE>
investment banking firm retained by the Corporation and by an independent
investment banking firm retained by such holders, or (iii) if the
Corporation or such holders shall fail so to retain an independent
investment banking firm within five Business Days of the retention of such
firm by the Corporation or such holders, as the case may be, determined
solely by the firm so retained or (iv) if the firms so retained by the
Corporation and by such holders shall be unable to reach a joint
determination within 15 Business Days of the retention of the last firm so
retained, determined by another independent investment banking firm chosen
by the first two such firms.
"New Securities" means any Capital Stock issued after the Effective
--------------
Date by the Corporation for cash consideration, other than: (i) Capital
Stock issued upon the conversion or exchange of any series or class of
Capital Stock issued and outstanding on the Effective Date into another
series or class of Capital Stock of the Corporation without any additional
consideration to the Corporation by the holder thereof; (ii) shares of
Class B Common Stock issued upon conversion of any shares of Series A
Preferred Stock or Series B Preferred Stock into Class B Common Stock;
(iii) Capital Stock issued upon conversion of any Class B Common Stock into
Class A Common Stock; (iv) dividends or distributions payable in Capital
Stock effected in accordance with Section 5.3.3; (v) Capital Stock issued
upon the exercise of options or warrants that have been issued prior to,
and are outstanding as of, the Effective Date, including the Management
Options and the Senior Subordinated Notes Warrants; (vi) Capital Stock
issued to employees, consultants, officers or directors of the Corporation
pursuant to any stock option plan in effect on October 2, 2000 and
consistent with past practice or adopted after October 2, 2000; (vii)
Capital Stock issued to holders of Series A Preferred Stock pursuant to the
exercise by such holders of their preemptive rights contained in the
applicable Series A Certificate of Designations; and (viii) Capital Stock
issued to customers in the ordinary course of business consistent with past
practice, subject to a maximum amount in any fiscal year of the
Corporation, equal or equivalent to (A) 0.5% of the weighted average number
of issued and outstanding shares of Common Stock during such fiscal year
plus (B) the number of shares permitted under clause (A) for any fiscal
year ending after October 2, 2000 but not previously expended.
"Non-Class B Directors" means any Director who is neither a Class B-1
---------------------
Director nor a Class B-2 Director.
"Optional Conversion" has the meaning set forth in Section 5.3.7(a).
-------------------
"Options" means rights, options or warrants to subscribe for, purchase
-------
or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities. For avoidance of doubt, it is stipulated that
rights, options or warrants
9
<PAGE>
to subscribe for, purchase or otherwise acquire the shares of Common Stock
referred to in clause (iii) of the definition of Additional Shares of
Common Stock are not Options.
"Original Certificate" has the meaning given in paragraph 1 of the
--------------------
Introduction.
"Permitted Transferee" has the meaning set forth in Section 5.3.11.
--------------------
"Person" means any corporation, limited liability company,
------
partnership, trust, organization, association, other entity or individual.
"Preemptive Rights Notice" has the meaning given in Section 5.3.9(a).
------------------------
"Preemptive Rights Portion" has the meaning given in Section 5.3.9(a).
-------------------------
"Preferred Stock" has the meaning given in Section 5.2.
---------------
"Prohibited Transfer" means any Transfer of shares of Class B Common
-------------------
Stock not permitted by Section 5.3.11.
"Restricted Holder" means a record holder of shares of Class B-1
-----------------
Common Stock or Class B-2 Common Stock.
"Senior Credit Facility" means the credit facilities evidenced by, and
----------------------
the loans and borrowings extended to the Corporation pursuant to the $825
million Senior Credit Agreement, dated as of October 2, 2000, among the
Corporation, as borrower, the subsidiary guarantors parties thereto as
subsidiary guarantors, the initial lenders, initial issuing bank and swing
line bank named therein, Bank of America, N.A., as Collateral Agent and
Administrative Agent, Bank One, N.A., as Documentation Agent, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Book-Runner, Lead Arranger
and Syndication Agent, and Bank of America Securities LLC, as Joint Book-
Runner and Joint Lead Arranger, and any one or more deferrals, renewals,
extensions, replacements, refinancings or refundings thereof, or
amendments, modifications or supplements thereto or replacements thereof
(including, without limitation, any amendment increasing the amount that
may be borrowed thereunder) and any agreement providing therefor whether by
or with respect to the same or any other agents, lenders, creditors or
group of creditors (or any combination thereof) and including related
notes, guarantee agreements, security agreements and other instruments
executed in connection therewith.
"Senior Subordinated Notes" means the Corporation's Senior
-------------------------
Subordinated Notes due 2010 issued October 2, 2000 in the initial principal
10
<PAGE>
amount of $200,000,000 (the "initial notes") and any notes registered under
the Securities Act that are issued in exchange for such notes, and any
deferrals, renewals, extensions, replacements, refinancings or refundings
thereof, or amendments, modifications or supplements thereto or
replacements thereof.
"Senior Subordinated Notes Indenture" means the Indenture, dated as of
-----------------------------------
October 2, 2000, between the Corporation and U.S. Trust of Texas. N.A., as
trustee pursuant to which the Corporation's Senior Subordinated Notes due
2010 in the principal amount of $200,000,000 were issued, as the same may
be amended from time to time.
"Senior Subordinated Notes Warrants" means the warrants to purchase
----------------------------------
Class A Common Stock issued on October 2, 2000 to Rite Aid Corporation.
"Series A Certificates of Designations" means the Series A-1
-------------------------------------
Certificate of Designations and the Series A-2 Certificate of Designations.
"Series A-1 Certificate of Designations" means (i) prior to the
--------------------------------------
Effective Date, the Certificate of Designations for the Series A-1
Preferred Stock filed pursuant to the DGCL with the Secretary of State of
the State of Delaware on October 2, 2000, and (ii) following the Effective
Date, Exhibit A hereto, in each case as amended, supplemented or restated
from time to time.
"Series A-2 Certificate of Designations" means (i) prior to the
--------------------------------------
Effective Date, the Certificate of Designations for the Series A-2
Preferred Stock filed pursuant to the DGCL with the Secretary of State of
the State of Delaware on October 2, 2000, and (ii) following the Effective
Date, Exhibit B hereto, in each case amended, supplemented or restated from
time to time.
"Series A Preferred Stock" means the Series A-1 Preferred Stock and
------------------------
the Series A-2 Preferred Stock.
"Series A-1 Preferred Stock" means the Preferred Stock designated by
--------------------------
the Board of Directors as Series A-1 11% Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series A-1 Certificate of Designations.
"Series A-2 Preferred Stock" means the Preferred Stock designated by
--------------------------
the Board of Directors as Series A-2 11% Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series A-2 Certificate of Designations.
11
<PAGE>
"Series B Certificate of Designations" means (i) prior to the
------------------------------------
Effective Date, the Certificate of Designations for the Series B Preferred
Stock filed pursuant to the DGCL with the Secretary of State of the State
of Delaware on October 2, 2000, and (ii) following the Effective Date,
Exhibit C hereto, in each case as amended, supplemented or restated from
time to time.
"Series B Preferred Stock" means the Preferred Stock designated by the
------------------------
Board of Directors as Series B Convertible Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series B Certificate of Designations. For
avoidance of doubt, it is expressly stipulated that all issued and
outstanding shares of Series B Preferred Stock will automatically be
converted into Class B-1 Common Stock on the Effective Date, and thereafter
such converted shares of Series B Preferred Stock shall have the status of
authorized but unissued shares of Preferred Stock and the Series B
Preferred Stock shall no longer be a designated series of Preferred Stock.
"Stockholders' Agreement" means the Stockholders' Agreement, dated as
-----------------------
of October 2, 2000, among the Corporation, Joseph Littlejohn & Levy Fund
III, L.P., Rite Aid Corporation and the other Persons named therein, as the
same may be amended, supplemented or restated from time to time.
"Subsidiary" means, with respect to any specified Person: (i) any
----------
corporation, association or other business entity of which more than 50% of
the total voting power of shares of capital stock or other equity interests
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by a Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and (ii)
any partnership (A) the sole general partner or the managing general
partner of which is the Person or a Subsidiary of that Person or (B) the
only general partners of which are the Person or one or more Subsidiaries
of that Person (or any combination thereof).
"Transfer" means any direct or indirect (including, without
--------
limitation, through the transfer of a controlling interest in a transferee)
sale, transfer, assignment, grant of participation interest in, option,
pledge, hypothecation, encumbrance or other disposition.
"Voting Default" means the taking of any of the actions set forth in
--------------
clauses (i) through (ix) of Section 5.3.10(b) or any of the actions set
forth in Section 5.3.10(c) in violation of the provisions of such sections.
12
<PAGE>
"Voting Stock" means, with respect to any Person, the Capital Stock of
------------
any class or kind ordinarily having the power to vote generally for the
election of directors (or other persons or bodies performing similar
functions) of such Person.
ARTICLE V
CAPITAL STOCK
-------------
Section 5.1 Authorized Capital Stock. The aggregate number of shares of
------------------------
capital stock that the Corporation is authorized to issue is 105,000,000 shares,
consisting of (a) 86,250,000 shares of Class A Common Stock, par value $.01 per
share (the "Class A Common Stock"), (b) 7,500,000 shares of Class B-1 Common
Stock, par value $.01 per share (the "Class B-1 Common Stock"), (c) 6,250,000
shares of Class B-2 Common Stock, par value $.01 per share (the "Class B-2
Common Stock"), and (d) 5,000,000 shares of preferred stock, par value $.01 per
share (the "Preferred Stock").
Upon the effectiveness of this Certificate pursuant to the DGCL (the
"Effective Time"), each share of common stock, par value $0.01 per share, of the
Corporation issued and outstanding immediately prior to the Effective Time shall
be reclassified, changed, converted and exchanged into one share of Class A
Common Stock. From and after the Effective Time, stock certificates that
immediately prior to the Effective Time represented such shares of common stock
shall automatically and without the necessity of presenting the same for
exchange, represent shares of Class A Common Stock.
Section 5.2 Preferred Stock. Of the authorized Preferred Stock, 65,854
---------------
shares are designated Series A-1 11% Preferred Stock (the "Series A-1 Preferred
Stock"), 125,000 shares are designated Series A-2 11% Preferred Stock (the
"Series A-2 Preferred Stock"), and 84,146 shares are designated Series B
Convertible Preferred Stock (the "Series B Preferred Stock"). The respective
rights, preferences and powers, and the restrictions, qualifications and
limitations thereon, granted to and imposed on the Series A-1 Preferred Stock,
Series A-2 Preferred Stock and Series B Preferred Stock are set forth in
Exhibits A, B and C, respectively, to this Certificate and incorporated herein
by reference. Except for the Series A-1 Preferred Stock, Series A-2 Preferred
Stock and Series B Preferred Stock, all shares of Preferred Stock may be issued,
from time to time, with such powers, designations, preferences and relative,
participating, optional or other special rights, including voting rights, and
qualifications, limitations or restrictions thereof as shall be stated and
expressed in the resolution or resolutions providing for the issue of such
series adopted by the Board of Directors in accordance with this Certificate and
the DGCL.
13
<PAGE>
Section 5.3 Common Stock.
------------
5.3.1 Generally. Except as otherwise provided in this Certificate or as
---------
required by the DGCL, all shares of Class A Common Stock, Class B-1 Common Stock
and Class B-2 Common Stock shall be identical in all respects and shall entitle
the holders thereof to the same rights, powers and preferences.
5.3.2 Issuance of Class B Common Stock. Shares of Class B-1 Common Stock
--------------------------------
and Class B-2 Common Stock may only be issued upon the conversion of Series A-1
Preferred Stock, Series A-2 Preferred Stock or Series B Preferred Stock, as
applicable, into Class B-1 Common or Class B-2 Common Stock, as applicable, in
accordance with the applicable Series A Certificate of Designations or the
Series B Certificate of Designations, as the case may be, or in accordance with
this Section 5.3, and may not be issued for any other purpose.
5.3.3 Dividends and Distributions. Subject to the rights of holders of
---------------------------
Preferred Stock, holders of Common Stock shall be entitled to receive such
dividends and other distributions in cash, stock or property of the Company as
may be declared and paid thereon by the Board of Directors from time to time.
The holders of the Class A Common Stock, the Class B-1 Common Stock and the
Class B-2 Common Stock shall be entitled to receive and to share equally and
ratably, share and share alike, any such dividends and other distributions,
subject to the following:
(i) if the Conversion Ratio on the record date for payment of
any such dividend or distribution is other than one, then the amount of
such dividend or distribution allocated between the shares of Class A
Common Stock, on the one hand, and the shares of Class B Common Stock, on
the other hand, shall be adjusted to be proportionate based on the
Conversion Ratio then in effect; and
(ii) if the dividends or distributions that are declared are
payable in shares of Common Stock, such dividends or distributions will be
declared at the same rate on each such class of Common Stock, and the
dividends or distributions payable to holders of Class A Common Stock will
be paid in Class A Common Stock, the dividends or distributions payable to
holders of Class B-1 Common Stock will be paid in Class B-1 Common Stock
and the dividends or distributions payable to holders of Class B-2 Common
Stock will be paid in Class B-2 Common Stock.
5.3.4 Liquidation. In the event of any voluntary or involuntary
-----------
liquidation, dissolution or winding up of the affairs of the Corporation, after
payment or provision for payment of the debts and other liabilities of the
Corporation and distribution in full of preferential amounts (if any) to be
distributed to the holders of shares of Preferred Stock, the holders of shares
of Class A Common Stock, Class B-1 Common Stock and Class B-2
14
<PAGE>
Common Stock shall be entitled to share equally, on a share for share basis, in
the remaining net assets of the Corporation available for distribution to the
stockholders of the Corporation. Notwithstanding anything in the foregoing to
the contrary, if the Conversion Ratio at the time of the liquidation,
dissolution or winding up of the affairs of the Corporation is other than one,
then the net assets of the Corporation allocated between the shares of Class A
Common Stock, on the one hand, and the shares of Class B Common Stock, on the
other hand, shall be adjusted to be proportionate based on the Conversion Ratio
then in effect. Neither the consolidation nor the merger of the Corporation with
or into any other Person, nor the sale, transfer or lease of all or
substantially all of the assets of the Corporation shall itself be deemed to be
a liquidation, dissolution or winding up of the affairs of the Corporation
within the meaning of this Section 5.3.4.
5.3.5 Subdivisions, Combinations or Consolidations of Common Stock. The
------------------------------------------------------------
Corporation may not subdivide, combine, consolidate or reclassify any class of
Common Stock without subdividing, combining, consolidating or reclassifying each
other class of Common Stock on an equal per share basis. Without limiting the
generality of the foregoing:
(i) in the event the outstanding shares of any class of Common
Stock are subdivided or reclassified into a greater number of shares of
Common Stock, then and in each such case the Corporation shall effect a
corresponding subdivision or reclassification of the outstanding shares of
each other class of Common Stock into a greater number of shares of each
such class on an equal and proportionate basis; and
(ii) in the event the outstanding shares of any class of Common
Stock are combined, consolidated or reclassified into a lesser number of
shares of such Common Stock, then and in each such case the Corporation
shall effect a corresponding combination, consolidation or reclassification
of the outstanding shares of each other class of Common Stock into a lesser
number of shares of each such class on an equal and proportionate basis.
5.3.6 Consolidation Merger, Sale of Assets, etc. In the event the
------------------------------------------
Corporation (i) consolidates with or merges into any other corporation or entity
and is not the continuing or surviving corporation or entity of such
consolidation or merger, (ii) permits any other corporation or entity to
consolidate with or merge into the Corporation and the Corporation is the
continuing or surviving corporation but, in connection with such consolidation
or merger, the shares of any class of Common Stock are changed into or exchanged
for stock or other securities of any other Person or cash or any other property,
or (iii) transfers all or substantially all of its properties or assets,
directly or indirectly, to any other corporation or entity (other than to a
wholly owned Subsidiary of the Corporation if such Subsidiary remains wholly
owned by the Corporation after such
15
<PAGE>
transfer or any transaction or series of transactions related to such transfer),
then, and in each such event, holders of each class of Common Stock shall be
entitled to receive the stock and other securities, cash and property, if any,
to be received as a result of any such transaction on an equal per share basis
with the holders of each other class of Common Stock, except that if the
Conversion Ratio at the time of any such transaction is other than one, then the
stock and other securities, cash and property, to be allocated between the
shares of Class A Common Stock, on the one hand, and shares of Class B Common
Stock, on the other hand, shall be adjusted to be proportionate based on the
Conversion Ratio then in effect.
5.3.7 Conversion of Class B Common Stock.
----------------------------------
(a) Optional Conversion. Subject to and in compliance with the
-------------------
provisions of this Section 5.3.7, each holder of shares of Class B Common Stock
may, at any time and from time to time, at such holder's election, convert any
or all outstanding shares of Class B Common Stock of such holder into shares of
Class A Common Stock (such conversion, an "Optional Conversion").
(b) Mandatory Conversion. Subject to the provisions of this Section
--------------------
5.3.7, (i) upon the occurrence of a Prohibited Transfer, all of the outstanding
shares of Class B Common Stock being Transferred in such Prohibited Transfer
shall automatically convert into shares of Class A Common Stock, and (ii) upon
the occurrence of a Mandatory Conversion Event, all of the outstanding shares of
Class B Common Stock shall automatically convert into shares of Class A Common
Stock (any such conversion, a "Mandatory Conversion").
(c) Conversion Ratio. Upon any Optional Conversion or a Mandatory
----------------
Conversion, the holder of the shares of Class B Common Stock being converted
shall receive a number of shares of Class A Common Stock equal to the product of
(A) the number of shares of Class B Common Stock being converted and (B) the
Conversion Ratio then in effect. The "Conversion Ratio" shall initially be one,
and shall be subject to adjustment from time to time pursuant to Section 5.3.8.
(d) Conversion Mechanics.
--------------------
(i) In the case of an Optional Conversion, the holder of the
shares of Class B Common Stock to be converted shall surrender the
certificate representing such shares at the principal office of the
Corporation, with a written notice of election to convert completed and
signed, specifying the number of shares to be converted. Unless the shares
issuable on such Optional Conversion are to be issued in the same name as
the name in which such shares of Class B Common Stock are registered, each
share surrendered for such Optional Conversion shall be accompanied by
instruments of transfer, in form satisfactory
16
<PAGE>
to the Corporation, duly executed by the holder or the holder's duly
authorized attorney. The Corporation shall not be obligated to issue
certificates for shares of Class A Common Stock in any name other than the
name or names set forth on the certificates for the shares of Class B
Common Stock unless the requirements of the Stockholders' Agreement
relating to the transfer of shares of Class B Common Stock have been
complied with or waived by the Corporation.
(ii) In the event of a Mandatory Conversion, (A) if such
Mandatory Conversion is pursuant to clause (i) of Section 5.3.7(b), all
shares of Class B Common Stock Transferred in the related Prohibited
Transfer, and (B) if such Mandatory Conversion is pursuant to clause (ii)
of Section 5.3.7(b), all outstanding shares of Class B Common Stock, shall
be converted automatically without any further action by the holder or
holders thereof and whether or not the certificates representing such
shares are surrendered at the office of the Corporation. The Corporation
shall issue certificates representing the shares of Class A Common Stock
issuable upon such Mandatory Conversion upon the surrender of certificates
representing the corresponding shares of Class B Common Stock, in the same
name as the name in which such shares of Class B Common Stock are
registered.
(iii) Notwithstanding clause (i) or (ii) of this Section 5.3.7(d),
if the holder of any share or shares of Class B Common Stock certifies to
the Corporation that the certificates representing such share or shares
have been lost, stolen or destroyed and executes an agreement satisfactory
to the Corporation to indemnify the Corporation from any loss incurred by
it in connection with such lost, stolen or destroyed certificates (and, if
requested by the Corporation, posts a customary bond reasonably
satisfactory to the Corporation to cover such loss), then the Corporation
shall issue certificates representing the Class A Common Stock issuable
upon any Optional Conversion or Mandatory Conversion, as the case may be,
in the name of such holder.
(iv) In connection with any Conversion, as promptly as
practicable after the delivery by a holder of shares of Class B Common
Stock of the certificates for shares of Class B Common Stock (or in the
case of a lost certificate, the certification, the agreement and, if
requested, posting of the bond described in clause (iii) of this Section
5.3.7(d)), the Corporation shall issue and shall deliver to such holder,
or, on the holder's written order, to the holder's transferee, (A) a
certificate or certificates for the whole number of shares of Class A
Common Stock issuable upon the Conversion of such shares in accordance with
the provisions of this Section 5.3.7, (B) any cash adjustment required
pursuant to Section 5.3.7(g), and (C) in the event of an Optional
Conversion in part, a certificate or certificates for the whole number of
shares of Class B Common Stock not being so converted.
17
<PAGE>
(v) Each Conversion shall be deemed to have been effected
immediately prior to the close of business on the applicable Conversion
Date. The Person in whose name or names any certificate or certificates for
shares of Class A Common Stock shall be issuable upon such Conversion shall
be deemed to have become the holder of record of the shares of Class A
Common Stock represented thereby at such time on the applicable Conversion
Date and such Conversion shall be into a number of whole shares of Class A
Common Stock equal to the product of the number of shares of Class B Common
Stock surrendered multiplied by the Conversion Ratio in effect on the
applicable Conversion Date. All shares of Class A Common Stock delivered
upon conversion of the Class B Common Stock will upon delivery be duly and
validly issued and fully paid and non-assessable, free of all liens,
pledges and other security interests and not subject to any preemptive
rights. As of the effective time of such Conversion, the shares of Class B
Common Stock to be so converted will no longer be deemed to be outstanding
and all rights of a holder with respect to such shares so converted shall
immediately terminate, except the right to receive the Class A Common Stock
and other amounts payable pursuant to this Section 5.3.7 and, in the event
of an Optional Conversion in part, a certificate or certificates
representing the shares of Class B Common Stock not converted.
(e) Reservation of Shares; Compliance with Laws. The Corporation covenants
-------------------------------------------
that it will at all times reserve and keep available, free from preemptive
rights, such number of its authorized but unissued shares of Class A Common
Stock as shall be required for the purpose of effecting Conversions of Class B
Common Stock (including the Conversion of all shares of Class B Common Stock
issuable from time to time upon conversion of shares of Series A-1 Preferred
Stock or Series A-2 Preferred Stock). Prior to the delivery of any Class A
Common Stock that the Corporation is obligated to deliver upon an Optional
Conversion or Mandatory Conversion, the Corporation shall comply with all
applicable federal and state laws and regulations which require action to be
taken by the Corporation.
(f) Transfer Taxes, etc. The Corporation will pay any and all documentary
-------------------
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Class A Common Stock upon any Conversion, other than any
tax payable in respect of any transfer involved in the issue or delivery of
shares of Class A Common Stock in a name other than that of the holder of the
Class B Common Stock to be converted. The Corporation shall have the right not
to issue or deliver any shares of Class A Common Stock in a name other than that
of the holder of the Class B Common Stock to be converted unless and until the
Person requesting such issuance or delivery has paid to the Corporation the
amount of any such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid.
18
<PAGE>
(g) No Fractional Shares. No fractions of shares of Class A Common Stock
--------------------
shall be required to be issued to a holder in connection with a Conversion. In
lieu thereof, the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied by
the Current Market Price per share of Class A Common Stock on the Conversion
Date.
(h) No Impairment. The Corporation will not, through any reorganization,
-------------
transfer of assets, consolidation, merger, dissolution, issuance or sale of
securities or any other voluntary action, avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 5.3.7 and in the taking of all such action as may be necessary
or appropriate in order to protect the Conversion rights of the holders of the
Class B Common Stock against impairment. Without limiting the generality of the
foregoing, the Corporation (i) will take all such action as may be necessary or
appropriate in order that the Corporation may validly and legally issue fully
paid nonassessable shares of Class A Common Stock on any Conversion, free of all
preemptive rights, and (ii) will not take any action which results in any
adjustment of the applicable Conversion Ratio if the total number of shares of
Class A Common Stock issuable after the action upon the Conversion of all of the
Class B Common Stock (including the Conversion of all shares of Class B Common
Stock issuable from time to time upon conversion of shares of Series A-1
Preferred Stock or Series A-2 Preferred Stock) will exceed the total number of
shares of Class A Common Stock then authorized by this Certificate of
Incorporation and available for the purpose of issuance upon such Conversion.
5.3.8 Adjustments to Conversion Ratio.
-------------------------------
(a) Adjustment of Conversion Ratio Upon Issuance of Additional Shares of
--------------------------------------------------------------------
Common Stock. In the event the Corporation, at any time after the Effective
------------
Date, issues or sells Additional Shares of Common Stock for a consideration per
share less than the Current Market Price in effect immediately prior to such
issuance or sale, then and in each such event, the Conversion Ratio shall be
adjusted, concurrently with such issue or sale, by multiplying the Conversion
Ratio then in effect by a fraction, (i) the numerator of which shall be (A) the
number of shares of Common Stock outstanding immediately prior to such issuance
or sale plus (B) the number of shares of Additional Shares of Common Stock so
issued or sold, and (ii) the denominator of which shall be (A) the number of
shares of Common Stock outstanding immediately prior to such issue or sale plus
(B) the number of shares of Common Stock that the aggregate consideration
received by the Corporation for the total number of Additional Shares of Common
Stock so issued or sold would purchase at the Current Market Price in effect
immediately prior to such issuance or sale. The provisions of this Section
5.3.8(a) shall not apply to any issuance or sale of Additional Shares of Common
Stock subject to the provisions of Sections 5.3.3 or 5.3.5.
19
<PAGE>
(b) Issuances of Securities Deemed Issuances of Additional Shares of
----------------------------------------------------------------
Common Stock. In the event (x) the Corporation at any time after the Effective
------------
Date shall issue, sell or grant any Options or Convertible Securities, or shall
fix a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities and (y) the
consideration per share for the Additional Shares of Common Stock issuable upon
the exercise of such Options, or in the case of Convertible Securities, the
conversion or exchange of such Convertible Securities shall be less than the
Current Market Price in effect immediately prior to such issue, sale or grant,
or such record date, as the case may be, then, and in each such case, (A) the
maximum number of shares of Common Stock (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a
subsequent adjustment of such number) issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the conversion
or exchange of such Convertible Securities, shall be deemed to be issuances of
Additional Shares of Common Stock issued as of the time of such issue, sale or
grant or, in case such a record date shall have been fixed, as of the close of
business on such record date, and (B) the Conversion Ratio shall be adjusted in
accordance with Section 5.3.8(a) on the date of and immediately prior to such
issue, sale or grant, or the record date, as the case may be. In any such case
in which Additional Shares of Common Stock are deemed to be issued or sold
pursuant to this Section 5.3.8(b):
(1) no further adjustment in the applicable Conversion Ratio shall
be made upon the subsequent issuance of Convertible Securities or Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Corporation, or increase in the number of
Additional Shares of Common Stock issuable, upon the exercise, conversion
or exchange thereof, the adjustments to the Conversion Ratio computed upon
the original issue, sale, grant or assumption thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such decrease or increase
becoming effective, be recomputed (and the Conversion Ratio shall
automatically be adjusted as so recomputed) to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities which are outstanding at such
time; and
(3) no readjustment pursuant to the preceding clause (2) shall have
the effect of decreasing the applicable Conversion Ratio to an amount which
is less than the higher of (A) the applicable Conversion Ratio on the
original adjustment date and (B) the applicable Conversion Ratio that would
have resulted from any
20
<PAGE>
issuance of Additional Shares of Common Stock between the original
adjustment date and such readjustment date.
The consideration per share deemed to be received by the Corporation for
Additional Shares of Common Stock relating to Options and Convertible
Securities, shall be determined by dividing (x) the total amount, if any,
actually received by the Corporation as consideration for the issuance, sale,
grant or assumption of such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the instruments
relating to such Options or Convertible Securities without regard to any
provision contained therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise in full of such Options or the
conversion or exchange in full of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise in full of such Options for
Convertible Securities and the conversion or exchange in full of such
Convertible Securities, by (y) the maximum number of Additional Shares of Common
Stock (as set forth in the instruments relating to such Options or Convertible
Securities, without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(c) Certificate as to Adjustments. Upon the occurrence of each adjustment
-----------------------------
or readjustment of the applicable Conversion Ratio pursuant to this Section
5.3.8, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
shares of Series A Preferred Stock and Class B Common Stock a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based, including a statement of
(i) the consideration received or to be received by the Corporation for any
Additional Shares of Common Stock, or any Options or Convertible Securities, as
the case may be, issued or sold or deemed to have been issued, (ii) the number
of shares of Common Stock outstanding or deemed to be outstanding, and (iii) the
applicable Conversion Ratio in effect immediately prior to such issue or sale
and as adjusted and readjusted on account thereof. The Corporation shall, upon
the written request at any time of any holder of shares of Series A Preferred
Stock or Class B Common Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (i) the applicable Conversion Ratio at the time
in effect, and showing how it was calculated, and (ii) the number of shares of
Class A Common Stock and the amount, if any, of other property which at the time
would be received upon a Conversion. At the request of the holders of a majority
of the then outstanding Class B Common Stock, the Corporation will have the
certificates referred to in this Section 5.3.8(c) prepared and delivered by an
internationally recognized independent accounting firm.
21
<PAGE>
5.3.9 Preemptive Rights.
-----------------
(a) The Corporation shall provide each holder of Class B Common Stock
with a written notice (a "Preemptive Rights Notice") of any proposed issuance by
the Corporation of any New Securities at least 30 days prior to the proposed
issuance date. Such notice shall specify the price at which the New Securities
are to be issued and the other material terms of the issuance. Each holder of
Class B Common Stock shall be entitled to purchase, at the price and on the
terms at which such New Securities are proposed to be issued and specified in
such Preemptive Rights Notice, such holder's Preemptive Rights Portion of such
class of the New Securities proposed to be issued. "Preemptive Rights Portion"
means the pro rata portion of New Securities proposed to be issued by the
Corporation, which amount shall, for each holder of Class B Common Stock, be
based upon the ratio of (i) the number of shares of Class A Common Stock into
which such holder's Class B Common Stock would be convertible immediately prior
to the issuance of the New Securities to (ii) the total number of issued and
outstanding shares of Common Stock immediately prior to the issuance of the New
Securities (assuming the conversion of all securities convertible into, and the
exercise of all options, warrants or other arrangements representing the right
to purchase or otherwise acquire any shares of Common Stock).
(b) A holder of Class B Common Stock may exercise its rights under this
Section 5.3.9 by delivering written notice of its election to purchase New
Securities to the Corporation within 15 days of receipt of the Preemptive Rights
Notice. A delivery of such a written notice (which notice shall specify the
amount of New Securities to be purchased by the holder submitting such notice)
by such holder shall constitute a binding agreement of such holder to purchase,
at the price and on the terms specified in the Preemptive Rights Notice, the
number of New Securities specified in such holder's written notice.
(c) In the case of any issuance of New Securities, the Corporation shall
have 90 days from the date of the Preemptive Rights Notice to consummate the
proposed issuance of any or all of such New Securities which the holders of
Class B Common Stock have not elected to purchase at the price and upon terms
that are not materially less favorable to the Corporation than those specified
in the Preemptive Rights Notice. At the consummation of such issuance, the
Corporation shall issue certificates representing the New Securities to be
purchased by each holder of Class B Common Stock exercising preemptive rights
pursuant to this Section 5.3.9 registered in the name of such holder, against
payment by such holder of the purchase price for such New Securities. If the
Corporation proposes to issue such New Securities after such 90-day period, it
shall again comply with the procedures set forth in this Section 5.3.9.
(d) Other than as provided in this Certificate with respect to the Class
B Common Stock or Series A Preferred Stock or as specifically authorized in the
certificate
22
<PAGE>
of designation establishing the terms of any other series of Preferred Stock or
in an agreement approved by the Board of Directors, no holder of shares of any
class or series of capital stock shall be entitled to any preemptive or
preferential right to purchase or subscribe to the Capital Stock.
5.3.10 Voting Rights.
-------------
(a) General. Except as otherwise provided in this Certificate or
-------
required by law, (i) the holders of the Common Stock shall be entitled to vote
on all matters requiring stockholder action, each outstanding share of Class A
Common Stock shall entitle the holder thereof to one vote on each matter
properly submitted to the stockholders of the Corporation for their vote and
each share of Class B Common Stock shall entitle the holder thereof to a number
of votes equal to the number of votes which could be cast in such vote by a
holder of the shares of Class A Common Stock into which such share of Class B
Common Stock is convertible on the record date for such vote, and (ii) the
holders of the Class A Common Stock, Class B-1 Common Stock and Class B-2 Common
Stock shall vote together as one class on all such matters. Notwithstanding the
foregoing, unless otherwise required by law, (i) except as set forth in Sections
5.3.10(b) and 5.3.10(c) with respect to holders of Class B Common Stock, holders
of Common Stock, as such, shall not be entitled to vote on any amendment to this
Certificate (or on any amendment to a certificate of designations of any series
of Preferred Stock) that only alters or changes the powers, preferences, rights
or other terms of one or more outstanding series or class of Preferred Stock if
the holders of such series or class of Preferred Stock are entitled to vote or
consent, either separately or together with the holders of one or more other
such series or classes of Preferred Stock, on such amendment pursuant to this
Certificate (or pursuant to a certificate of designations of any series of
Preferred Stock) or pursuant to the DGCL, (ii) holders of Class A Common Stock,
as such, shall not be entitled to vote on any matter submitted to a vote of the
holders of Class B Common Stock pursuant to Sections 5.3.10(b) and 5.3.10(c),
(iii) holders of Class A Common Stock and Class B Common Stock shall be entitled
to vote for Directors only as set forth in Article VIII below, and (iv) holders
of Common Stock, as such, shall not be entitled to vote on or consent to any
matter submitted to a vote of any series of Preferred Stock in which the holders
of such series of Preferred Stock, either separately or together with any other
series of Preferred Stock, are entitled to vote pursuant to this Certificate or
a certificate of designations of a series of Preferred Stock, unless otherwise
provided in such certificate of designations.
(b) Matters Subject to Approval of Holders of Class B Common Stock. In
--------------------------------------------------------------
addition to any other voting rights provided in this Certificate or required by
law, the affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Class B-1 Common Stock and Class B-2 Common Stock voting
or consenting, as the case may be, together as a separate class shall be
required for the Corporation to:
23
<PAGE>
(i) amend or repeal any provision of, or add any provision to,
this Certificate or the By-Laws so as to affect adversely the powers,
rights, preferences including, without limitation, the conversion rights
(including the Conversion Ratio) or voting rights, of the shares of Class
B-1 Common Stock or Class B-2 Common Stock;
(ii) amend or repeal any provision of, or add any provision to,
either of the Series A Certificates of Designations;
(iii) authorize the issuance of or issue any additional shares of
Class B-1 Common Stock or Class B-2 Common Stock, other than upon the
conversion of the Series A-1 Preferred Stock, Series A-2 Preferred Stock
and Series B Preferred Stock, or pursuant to the provisions of Section
5.3.3. or Section 5.3.5;
(iv) incur, or permit any of its Subsidiaries to incur, any
Indebtedness (other than any Indebtedness under the Senior Credit Facility
or the Senior Subordinated Notes) that would result in the Corporation
having an Interest Coverage Ratio of less than 1.50:1.00; provided that
such incurrence shall not constitute a violation of this clause (iv) unless
the Indebtedness so incurred remains outstanding for at least 30
consecutive days following the initial incurrence thereof;
(v) voluntarily file for bankruptcy, liquidation, dissolution or
winding up of the Corporation;
(vi) increase the number of Directors to more than eleven, unless
(A) the holders of Class B-1 Common Stock are entitled to elect an
additional Class B-1 Director pursuant to Section 8.4, (B) the holders of
Class B-2 Common Stock are entitled to elect an additional Class B-2
Director pursuant to Section 8.4, (C) the holders of Series A-2 Preferred
Stock are entitled to elect an additional Class B-2 Director pursuant to
the Series A-2 Certificate of Designations, in which case the number of
Directors may be increased by the number of such additional Directors as
provided in this Certificate, or (D) such increase is otherwise permitted
in this Certificate;
(vii) have less than three employees or officers of the
Corporation or its Subsidiaries serve as Directors (and in the event of any
vacancy resulting from the death, disability, resignation, disqualification
or removal of such a Director, not have another employee or officer
promptly elected or appointed as a Director to fill such vacancy) as
provided in this Certificate;
24
<PAGE>
(viii) modify or repeal any of the provisions of the By-Laws (A)
requiring that the Board of Directors meet no less frequently than once in
every calendar quarter, or (B) requiring that each committee of the Board
of Directors (including any audit or compensation committee, but excluding
any nominating committees for the nomination of Directors) have, as
members, a proportional number of Class B-1 Directors and Class B-2
Directors, as a group (in relation to the total number of Directors),
unless (1) such representation is prohibited-by applicable law or rules of
the Nasdaq National Market or such other national securities exchange upon
which the Corporation's securities may be listed for trading from time to
time, in which case such committees shall have, as members, the maximum
number of Class B-1 Directors and Class B-2 Directors permitted by
applicable law and rules of the Nasdaq National Market or such national
securities exchange, or (2) the Class B-1 Directors and Class B-2 Directors
elect not to serve on any such committee or (C) relating to the number,
election, powers or rights of Class B-1 Directors, Class B-2 Directors or
Non-Class B Directors; or
(ix) enter into any agreement with any Affiliate of the
Corporation (other than Subsidiaries of the Corporation) involving amounts
in excess of $5 million.
(c) So long as the sum of the Current Class B-1 Amount and the Current
Class B-2 Amount is equal to or greater than 25% of the Initial Class B Amount
and equal to or greater than 5% of the total issued and outstanding shares of
Common Stock (assuming the conversion of all securities convertible into, and
the exercise of all options, warrants or other arrangements representing the
right to purchase or otherwise acquire, any shares of Common Stock), in addition
to any other voting rights provided in this Certificate or required by law, the
affirmative vote of the holders of at least two-thirds of the then outstanding
shares of Class B-1 Common Stock and Class B-2 Common Stock voting or
consenting, as the case may be, together as a separate class, shall be required
for the Corporation to undertake, effect or consummate any transaction or series
of transactions (i) described in clauses (i) through (iii) of Section 5.3.6,
(ii) involving a merger or consolidation of the Corporation with or into any
Person, other than a merger or consolidation which would result in the Voting
Stock of the Corporation outstanding immediately prior to such merger or
consolidation continuing to represent more than 50% of the combined voting power
of the Voting Stock of the Corporation or the surviving entity or parent thereof
outstanding immediately after such merger or consolidation or (iii) through
which the Corporation causes a Change of Control to be effected.
5.3.11 Transfer Restrictions. Any Transfer of shares of Class B Common
---------------------
Stock by a Restricted Holder to a Person other than a Permitted Transferee shall
result in the automatic conversion (pursuant to Section 5.3.7(b)) into shares of
Class A Common Stock of the shares of Class B Common Stock of such Restricted
Holder so transferred.
25
<PAGE>
The Corporation may, at its discretion, as a condition to the transfer or
registration of transfer of Class B Common Stock to a purported Permitted
Transferee, require the furnishing of affidavits or other proof as it deems
reasonably necessary to establish that the proposed transferee is a Permitted
Transferee. The term "Permitted Transferee" means, (a) with respect to a holder
of Class B-1 Common Stock, (i) any direct or indirect Subsidiary of any Person
who was a record holder of Series B Preferred Stock on the date of the initial
filing of the Series B Certificate of Designations, (ii) any investment fund
managed by Joseph Littlejohn & Levy, Inc., a Delaware corporation ("JLL"), (iii)
any Person who is or becomes an investor in a fund managed by JLL including
Joseph Littlejohn & Levy Fund III, L.P., a Delaware limited partnership, (iv)
the heirs, executors, administrators, testamentary trustees or legatees of any
individual who was a record holder of Series A-1 Preferred Stock or Series B
Preferred Stock, (v) the spouses and the lineal descendants of any individual
who owned shares of Series A-1 Preferred Stock or Series B Preferred Stock on
the date of the initial filing of the Series A-1 Certificate of Designations and
the Series B Certificate of Designations, and (vi) any trust, the beneficiaries
of which, or any corporation, limited liability company or partnership, the
stockholders, members or general or limited partners of which include only (A)
an individual who was a holder of Series A-1 Preferred Stock or Series B
Preferred Stock on the date of the initial filing of the Series A-1 Certificate
of Designations and the Series B Certificate of Designations, and (B) the
Persons referred to in clause (v), and (b) with respect to a holder of Class B-2
Common Stock, (i) any Subsidiary of such holder, (ii) Rite Aid Corporation, a
Delaware corporation, and any direct or indirect Subsidiary of Rite Aid
Corporation, and (iii) any Person who is an institutional lender acquiring such
shares of Class B-2 Common Stock or a security interest therein or pledge
thereof from any Person referred to in clause (ii) as security for Indebtedness
of such Person referred to in clause (ii) (including any such acquisition upon
foreclosure).
ARTICLE VI
TERM
----
The Corporation is to have perpetual existence.
ARTICLE VII
WINDING UP; RECEIVERSHIP
------------------------
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation
26
<PAGE>
under the provisions of Section 291 of the DGCL, or on the application of
trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of the DGCL, order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE VIII
BOARD OF DIRECTORS; BY-LAWS
---------------------------
Section 8.1 General Powers. Except as otherwise expressly provided in
--------------
this Certificate, the property, affairs and business of the Corporation shall be
managed under the direction of the Board of Directors and, except as otherwise
expressly provided by the DGCL, this Certificate or the By-Laws, all of the
powers of the Corporation shall be vested in the Board of Directors.
Section 8.2 Number of Directors. The number of Directors of the
-------------------
Corporation shall initially be 11 and shall initially consist of three Class A
Directors, two Class B-1 Directors, two Class B-2 Directors, three Class C
Directors and one Class D Director. The number of Directors shall be subject to
increase or decrease (i) as provided in this Certificate, (ii) pursuant to the
terms of any Preferred Stock issued by the Corporation with the approval of a
majority of the Class A Directors, a majority of the Class C Directors, and all
of the Class B Directors, or (iii) as otherwise may be determined by the
unanimous approval of the Board.
Section 8.3 Reduction in Number of Class B Directors.
----------------------------------------
8.3.1 Reduction in Class B-1 Directors. Notwithstanding Section 8.2, if,
--------------------------------
at any time, (i) the Current Class B-1 Amount shall represent less than 50% of
the Initial Class B-1 Amount, then the number of Class B-1 Directors shall be
reduced by one and the term of the Class B-1-II Director shall automatically
terminate, and (ii) the Current Class B-1 Amount shall represent less than 10%
of the Initial Class B-1 Amount, then the number of Class B-1 Directors shall be
reduced to zero Class B-1 Directors and the term of the Class B-1-I Director
shall automatically terminate.
27
<PAGE>
8.3.2 Reduction in Class B-2 Directors. Notwithstanding Section 8.2, if,
--------------------------------
at any time after the second anniversary of the Effective Date, (i) the Current
Class B-2 Amount shall represent less than 50% of the Initial Class B-2 Amount,
then the number of Class B-2 Directors shall be reduced by one and the term of
the Class B-2-II Director shall automatically terminate, and (ii) the Current
Class B-2 Amount shall represent less than 10% of the Initial Class B-2 Amount,
then the number of Class B-2 Directors shall be reduced to zero Class B-2
Directors and the term of the Class B-2-I Director shall automatically
terminate.
8.3.3 Reduction in Total Directors. Upon any reduction in the number of
Class B-1 Directors or Class B-2 Directors pursuant to the terms of this
Certificate, the total number of total Directors shall automatically be reduced
by the number of the reduction in the number of Class B-1 Directors or Class B-2
Directors, as applicable.
Section 8.4 Right of Holders to Elect Additional Directors.
----------------------------------------------
Notwithstanding Sections 8.2 or 8.3, if a Voting Default shall occur after the
Effective Date and:
(i) if there are shares of Class B-1 Common Stock issued and
outstanding at the time of such Voting Default, then the total number of
Directors shall be increased by one additional Director, which is hereby
deemed to be a Class B-1 Director, and the total number of Directors
constituting the Class B-1 Directors shall be automatically increased by
one and (A) prior to the first annual meeting of stockholders after such
Voting Default, such additional Director shall be designated by the Class
B-1 Directors, and (B) at and following the first annual meeting of
stockholders after the date of such Voting Default, such additional
Director shall be elected by the holders of shares of Class B-1 Common
Stock, voting or consenting separately as a single class; and
(ii) if there are shares of Class B-2 Common Stock issued and
outstanding at the time of such Voting Default, then the total number of
Directors shall be increased by one additional Director, which is hereby
deemed to be a Class B-2 Director, and the total number of Directors
constituting the Class B-2 Directors shall be automatically increased by
one and (A) prior to the first annual meeting of stockholders after such
Voting Default, such additional Director shall be designated by the Class
B-2 Directors, and (B) following the first annual meeting of stockholders
after the date of such Voting Default, such additional Director shall be
elected by the holders of shares of Class B-2 Common Stock voting or
consenting separately as a single class.
Any additional Directors elected pursuant to this Section 8.4 shall not be
divided into classes pursuant to Section 8.5.6, the term of any such Director
elected by holders of Class B-1 Common Stock shall automatically terminate when
the number of Class B-1 Directors is reduced to zero pursuant to Section 8.3.1,
and the term of any such Director
28
<PAGE>
elected by holders of Class B-2 Common Stock shall automatically terminate when
the number of Class B-2 Directors is reduced to zero pursuant to Section 8.3.2.
Section 8.5 Election of Directors.
---------------------
8.5.1 Class A Directors. Prior to each annual meeting of stockholders,
-----------------
the Corporation's nominees for Class A Directors standing for election at such
meeting shall be nominated by a majority of the Class A and Class C Directors
then in office. The Class A Directors shall be elected by plurality vote of the
holders of the shares of Class A Common Stock, voting or consenting (as the case
may be) separately as a single class. Each Class A Director so elected shall at
the time of such election be designated as a Class A-I Director, a Class A-II
Director or a Class A-III Director, as applicable, and shall hold office as set
forth in Section 8.5.6.
8.5.2 Class B-1 Directors. Prior to each annual meeting of stockholders,
-------------------
the Corporation's nominees for Class B-1 Directors standing for election at such
meeting shall be nominated by a majority of the Class B-1 Directors then in
office. The Class B-1 Directors shall be elected by plurality vote of the
holders of the shares of Class B-1 Common Stock, voting or consenting (as the
case may be) separately as a single class. Other than the Class B-1 Director
elected or appointed pursuant to Section 8.4, each Class B-1 Director so
elected, shall at the time of such election be designated as a Class B-1-I
Director or a Class B-1-II Director, as applicable, and shall hold office as set
forth in Section 8.5.6.
8.5.3 Class B-2 Directors. Prior to each annual meeting of stockholders,
-------------------
the Corporation's nominees for Class B-2 Directors standing for election at such
meeting shall be nominated by a majority of the Class B-2 Directors then in
office. So long as there are any outstanding shares of Series A-2 Preferred
Stock, the Class B-2 Directors shall be elected by holders of Series A-2
Preferred Stock pursuant to the Series A-2 Certificate of Designations. From and
after the conversion of the Series A-2 Preferred Stock into Class B-2 Common
Stock, the Class B-2 Directors shall be elected by plurality vote of the holders
of the shares of Class B-2 Common Stock, voting or consenting (as the case may
be) separately as a single class, present in person or by proxy at such meeting
and entitled to vote on the election of Class B-2 Directors. Other than the
Class B-2 Director elected or appointed pursuant to Section 8.4, each Class B-2
Director so elected shall at the time of such election be designated as a Class
B-2-I Director or a Class B-2-II Director, as applicable, and shall hold office
as set forth in Section 8.5.6.
8.5.4 Class C Directors. Prior to each annual meeting of stockholders,
-----------------
the Corporation's nominees for Class C Directors standing for election at such
meeting shall be nominated by vote of a majority of the Class A and Class C
Directors then in office. The Class C Directors shall be elected by plurality
vote of the holders of the shares of Class A Common Stock, voting or consenting
(as the case may be) separately as a single
29
<PAGE>
class. Each Class C Director so elected shall at the time of such election be
designated as a Class C-I Director, a Class C-II Director or a Class C-III
Director, as applicable, and shall hold office as set forth in Section 8.5.6.
8.5.5 Class D Director. Prior to each annual meeting of stockholders the
----------------
record date for which is prior to the Class D Termination Date, the
Corporation's nominee for the Class D Director shall be an individual designated
by vote of (i) a majority of the Class A Directors then in office, and (ii)
approved by all of the Class B Directors then in office, such approval not to be
unreasonably withheld. The Class D Director shall be elected by plurality vote
of the holders of the shares of Common Stock, voting together as a single class.
Following the Class D Termination Date, the class of Class C Directors shall
increase by one, the Class D Director then in office shall become a Class C
Director and the class of Class D Director shall cease to exist.
8.5.6 Classification by Term of Office. The Class A Directors shall be
--------------------------------
divided into three classes, designated Class A-I, Class A-II and Class A-III,
with one Class A-I Director, one Class A-II Director and one Class A-III
Director. The Class B-1 Directors shall be divided into two classes, designated
Class B-1-I, and Class B-1-II, with one Class B-1-I and one Class B-1-II
Director. The Class B-2 Directors shall be divided into two classes, designated
Class B-2-I and B-2-II, with one Class B-2-I Director and one Class B-2-II
Director. The Class C Directors shall be divided into three classes, designated
Class C-I, Class C-II and Class C-III, with one Class C-I Director, one Class C-
II Director and one Class C-III Director. The term of the initial Class A-I,
Class B-1-I, Class B-2-I and Class C-I Directors shall terminate on the first
annual meeting of stockholders of the Corporation following the Effective Date,
the term of the initial Class A-II, Class B-1-II, Class B-2-II and Class C-II
Directors shall terminate on the second annual meeting of stockholders of the
Corporation following the Effective Date, and the term of the initial Class A-
III, Class C-III Director and Class D Director shall terminate on the third
annual meeting of stockholders of the Corporation following the Effective Date.
At each annual meeting of stockholders of the Corporation, successors to the
Directors whose terms expire at that annual meeting shall be elected for a term
of office to expire at the third succeeding annual meeting of stockholders after
their election. Except as otherwise provided herein, a Director shall hold
office until the annual meeting of stockholders for the year in which his term
expires and until his successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office.
Section 8.6 Directors Elected by Holders of Preferred Stock.
-----------------------------------------------
Notwithstanding anything in the foregoing to the contrary, except as provided
herein with respect to the Class B-2 Directors elected by the holders of Series
A-2 Preferred Stock pursuant to Section 8.5.3, the holders of any one or more
series of Preferred Stock may have the right to elect Directors if the creation
of such series of Preferred Stock was authorized by a majority of the Class A
Directors, a majority of the Class C Directors and all of the Class
30
<PAGE>
B Directors. The election, term of office, filling of vacancies and other
features of such directorships shall be governed by the terms of any certificate
of designations applicable thereto (authorized in accordance with the preceding
sentence), and the Directors so elected shall not be divided into classes
pursuant to Section 8.5.6.
During any period when the holders of any series of Preferred Stock have
the right to elect additional Directors as provided for or fixed pursuant to the
terms of such series of Preferred Stock, then upon commencement and for the
duration of the period during which such right continues: (i) the then
otherwise total authorized number of Directors of the Corporation shall
automatically be increased by such specified number of Directors, and the
holders of such Preferred Stock shall be entitled to elect the additional
Directors so provided for or fixed pursuant to said provisions and (ii) each
such additional Director shall serve until such Director's successor shall have
been duly elected and qualified, or until such Director's right to hold such
office terminates pursuant to said provisions, whichever occurs earlier, subject
to such Director's earlier death, disqualification, resignation or removal.
Except as otherwise provided by the Board of Directors in the resolution or
resolutions establishing such series, whenever the holders of any series of
Preferred Stock having such right to elect additional Directors are divested of
such right pursuant to the provisions of such stock, the terms of office of all
such additional Directors elected by the holders of such stock, or elected to
fill any vacancies resulting from the death, resignation, disqualification or
removal of such additional Directors, shall forthwith terminate and the total
and authorized number of Directors of the Corporation shall be reduced
accordingly.
Section 8.7 Removal of Directors; Qualification. Subject to the rights,
-----------------------------------
if any, of any class or series of Preferred Stock to elect Directors and to
remove any Director whom the holders of any such stock have the right to elect,
any Director (including persons elected by Directors to fill vacancies in the
Board of Directors) may be removed from office without cause only by the
affirmative vote or consent of the holders of at least a majority of the votes
represented by the shares then entitled to vote in the election of such
Director.
Section 8.8 Vacancies.
---------
(a) Except as otherwise provided in this Certificate with respect to the
right of the holders of any class or series of Preferred Stock to elect
Directors and to fill vacancies in the Board of Directors relating thereto, any
and all vacancies in the Board of Directors, however occurring, including by
reason of an increase in the size of the Board of Directors, or the death,
resignation, disqualification or removal of a Director, shall be filled:
(i) in the case of the Class A Directors, either (A) by the
nomination by a majority of the remaining Class A and Class C Directors and
election by the
31
<PAGE>
same stockholder vote as is required for the election of Class A and Class
C Directors or (B) by the vote of a majority of the remaining Class A and
Class C Directors then in office,
(ii) in the case of the Class B-1 Directors, either (A) by the
nomination by all of the remaining Class B-1 Directors and election by the
same stockholder vote as is required for the election of Class B-1
Directors or (B) by the vote of all of the remaining Class B-1 Directors
then in office,
(iii) in the case of the Class B-2 Directors, either (A) by the
nomination by all of the remaining Class B-2 Directors and election by the
same stockholder vote as is required for the election of the Class B-2
Directors or (B) by the vote of all of the remaining Class B-2 Directors
then in office,
(iv) in the case of the Class C Directors, either (A) by the
nomination by a majority of the remaining Class A and Class C Directors and
election by the same stockholder vote as is required for the election of
Class C Directors or (B) by the vote of the remaining Class A and Class C
Directors then in office, and
(v) in the case of the Class D Director (A) by the nomination by
a majority of the Class A Directors, and approved by all of the Class B
Directors then in office (such approval not to be unreasonably withheld),
and election by the same stockholder vote as is required by the election of
the Class D Director, or (B) by the vote of a majority of the Class A
Directors, and approved by all of the Class B Directors then in office
(such approval not to be unreasonably withheld).
(b) Except as otherwise provided in this Certificate, any Director elected
in accordance with Section 8.8(a) shall hold office for the remainder of the
full term of the class of Directors in which the new directorship was created or
the vacancy occurred and until such Director's successor shall have been duly
elected and qualified or until such Director's earlier resignation or removal.
Except as otherwise provided in this Certificate and subject to the rights (if
any) of the holders of any series of Preferred Stock, when the number of
Directors is increased or decreased, the Board of Directors shall determine the
class or classes to which the increased or decreased number of Directors shall
be apportioned; provided that no decrease in the number of Directors may shorten
the term of any incumbent Director (except as otherwise provided in Sections
8.3, 8.4, 8.5.5 and 8.6).
(c) In the event of a vacancy in the Board of Directors, the remaining
Directors, except as otherwise provided by law, may exercise the powers of
the full Board of Directors until such vacancy is filled.
32
<PAGE>
Section 8.9 By-Laws. Subject to applicable law and the right of the
-------
stockholders of the Corporation to adopt, amend or repeal the By-Laws of the
Corporation the power to adopt, amend, or repeal the By-Laws of the Corporation
shall be exercised by the Board of Directors of the Corporation.
Section 8.10 Pertaining to the Chief Executive Officer. In addition to any
-----------------------------------------
other vote required by law, the affirmative vote of a majority of the Directors
who are not Class A Directors shall be required for any decision of the
Corporation regarding the appointment, removal or compensation of the
Corporation's Chief Executive Officer, or any transaction between the
Corporation (or any of its Subsidiaries) and the Corporation's Chief Executive
Officer (or his or her Affiliates).
ARTICLE IX
DIRECTORS' LIABILITY
--------------------
To the fullest extent permitted by the DGCL, a Director of the Corporation
shall not be liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director. Any repeal or amendment of this
Article IX by the stockholders of the Corporation or by changes in applicable
law shall, to the extent permitted by applicable law, be prospective only, and
shall not adversely affect any limitation on the personal liability of any
director of the Corporation at the time of such repeal or amendment.
ARTICLE X
INDEMNIFICATION OF DIRECTORS, OFFICERS, ETC.
--------------------------------------------
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit or proceeding and any inquiry
or investigation that could lead to such an action, suit or proceeding (whether
or not by or in the right of the Corporation), by reason of the fact that such
person is or was a Director, officer, employee or agent of the Corporation or is
or was serving at the request of the Corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another corporation, partnership, joint venture, sole proprietorship, trust,
nonprofit entity, employee benefit plan or other enterprise, against all
judgments, penalties (including excise and similar taxes), fines, settlements
and expenses (including attorneys' fees and court costs) actually and reasonably
incurred by such person in connection with such action, suit or proceeding to
the fullest extent permitted by any applicable law, and such indemnity shall
inure to the benefit of the heirs, executors and administrators of any such
person so indemnified pursuant to this Article X. The right to indemnification
under this
33
<PAGE>
Article X shall be a contract right and shall include, with respect to directors
and officers, the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its disposition; provided, however,
that, if the DGCL requires, the payment of such expenses incurred by a director
or officer in advance of the final disposition of a proceeding shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article X or otherwise. The Corporation may, by action of its Board of
Directors, pay such expenses incurred by employees and agents of the Corporation
upon such terms as the Board of Directors deems appropriate. The indemnification
and advancement of expenses provided by, or granted pursuant to, this Article X
shall not be deemed exclusive of any other right to which those seeking
indemnification may be entitled under any law, by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office. Any repeal or amendment of this Article X by the stockholders of the
Corporation or by changes in applicable law shall, to the extent permitted by
applicable law, be prospective only, and not adversely affect the
indemnification of any person who may be indemnified at the time of such repeal
or amendment.
ARTICLE XI
AMENDMENTS
----------
From time to time any of the provisions of this Certificate may be amended,
altered or repealed, and other provisions authorized by the laws of the State of
Delaware at the time in force may be added or inserted in the manner and at the
time prescribed by said laws and the provisions of this Certificate, and all
rights at any time conferred upon the stockholders of the Corporation by this
certificate of incorporation are granted subject to the provisions of this
Article XI.
34
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by [_______], its [_______], this ____
day of ________________, ____.
ADVANCE PARADIGM, INC.
By:
----------------------------
Name:
Title:
35
<PAGE>
EXHIBIT A
---------
SERIES A-1 11% PREFERRED STOCK
OF
ADVANCE PARADIGM, INC.
Set forth below are the powers, designations, preferences and relative,
participating, optional and other special rights, including voting rights, and
qualifications, limitations and restrictions of the Series A-1 11% Preferred
Stock of Advance Paradigm, Inc., a Delaware corporation (the "Corporation").
Such series of preferred stock, par value $0.01 per share, of the Corporation
(the "Preferred Stock"), was initially created by the Board of Directors of the
Corporation (the "Board of Directors") pursuant to the Amended and Restated
Certificate of Incorporation of the Corporation (as may be amended from time to
time, the "Certificate of Incorporation") and such series is now expressly
incorporated by reference into Section 5.2 of the Second Amended and Restated
Certificate of Incorporation of the Corporation.
Section 1. Designation and Number.
----------------------
(a) Such series of Preferred Stock is designated as Series A-1 11%
Preferred Stock (the "Series A-1 Preferred Stock"), and the number of shares
constituting such series is 517,573 shares. A total of 65,854 shares of Series
A-1 Preferred Stock shall be initially issued, and 451,719 shares of Series A-1
Preferred Stock shall be reserved for issuance in accordance with Section 4(a)
and may not be issued for any other purpose.
(b) Shares of Series A-1 Preferred Stock issued and reacquired in any
manner by the Corporation, including by purchase or redemption, shall (upon
compliance with any applicable provisions of DGCL) have the status of authorized
and unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock other than as
Series A-1 Preferred Stock.
Section 2. Definitions. The following terms, as used in this Certificate
-----------
of Designations, shall have the following meanings:
"Additional Series A-1 Shares" has the meaning set forth in Section
----------------------------
4(a)(i).
"Additional Shares of Common Stock" means all shares of Common Stock
---------------------------------
issued or sold by the Corporation after the Issue Date, whether or not
subsequently reacquired or retired by the Corporation, other than shares of
Common Stock: (i) issued upon the conversion or exchange of any series or
class of Capital Stock issued and outstanding on the Issue Date into
another series or class of Capital Stock of the Corporation without any
additional consideration to the Corporation by the holder thereof; (ii)
issued upon conversion of any shares of Series A Preferred Stock or Series
B Preferred Stock into any class or series of Common Stock; (iii) issued
upon conversion of any shares of Class B Common Stock into Regular Common
Stock; (iv) issued upon the exercise of options or warrants that have been
issued prior to, and are outstanding as of, the Issue Date; (v) issued upon
exercise of options granted prior to the 120th day following the Issue Date
to employees, consultants, officers or directors of the Corporation
pursuant to any stock
<PAGE>
option plan in effect on the Issue Date and consistent with past practice,
but in any event not in excess of 25,000 shares of Common Stock during such
120-day period; (vi) issued prior to the 120th day following the Issue Date
to customers in the ordinary course of business consistent with past
practice, but in any event not in excess of 25,000 shares of Common Stock
during such 120-day period; (vii) issued upon exercise of the Senior
Subordinated Notes Warrants; and (viii) issued upon exercise of the
Management Options.
"Affiliate" means, with respect to any specified Person, any other
---------
Person which, directly or indirectly, controls, is controlled by or is
under direct or indirect common control with, such specified Person.
Control of any Person shall consist of the power to direct the management
and policies of such Person (whether through the ownership of voting
securities, by contract, as trustee or otherwise) and shall be deemed to
exist upon the ownership of securities entitling the holder thereof to
exercise more than 20% of the voting power in the election of directors of
such Person (or other persons or bodies performing similar functions).
"Board of Directors" has the meaning set forth in the Preamble hereto.
------------------
"Business Day" means any day except Saturday, Sunday and any day on
------------
which banking institutions in New York City, New York generally are
authorized or required by law or other governmental action to be closed.
"Capital Stock" means (i) all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of the Corporation,
including each class or series of Common Stock or Preferred Stock, and (ii)
any option, warrant or other arrangement representing the right to purchase
or otherwise acquire any of the foregoing, including any securities
convertible or exchangeable into any of the foregoing.
"Certificate of Incorporation" has the meaning set forth in the
----------------------------
Preamble hereto.
"Change of Control" means the occurrence of either of the following:
-----------------
(i) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than the Excluded Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 40% of the total issued Common
Stock or total issued Voting Stock of the Corporation; or (ii) during any
period of two consecutive years, individuals who at the beginning of such
period constituted the Class A and Class C Directors (together with any new
Class A or Class C Directors whose election by the Board of Directors or
whose nomination for election by the stockholders of the Corporation was
approved by a vote of a majority of the Class A and Class C Directors then
still in office who were either Class A or Class C Directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease to constitute a majority of the Class A and
Class C Directors then in office.
2
<PAGE>
"Class A Directors" means (i) prior to the Restated Charter
-----------------
Effectiveness, the Directors referred to as "Class A Directors" in the
Stockholders' Agreement, and (ii) following the Restated Charter
Effectiveness, the Directors referred to as "Class A Directors" in the
Restated Certificate of Incorporation.
"Class B Common Stock" means the Class B-1 Common Stock and the Class
--------------------
B-2 Common Stock.
"Class B-1 Common Stock" means the Class B-1 Common Stock to be
----------------------
created as a separate class of Common Stock upon the Restated Charter
Effectiveness pursuant to the Restated Certificate of Incorporation.
"Class B-1 Directors" means the Directors (i) designated initially by
-------------------
holders of Series B Preferred Stock pursuant to the Series B Certificate of
Designations and (ii) following the Restated Charter Effectiveness, elected
of Incorporation.
"Class B-2 Common Stock" means the Class B-2 Common Stock to be
----------------------
created as a separate class of Common Stock upon the Restated Charter
Effectiveness pursuant to the Restated Certificate of Incorporation.
"Class B-2 Directors" means the Directors (i) designated initially by
-------------------
holders of Series A-2 Preferred Stock pursuant to the Series A-2
Certificate of Designations and (ii) following the Restated Charter
Effectiveness, elected by holders of Class B-2 Common Stock pursuant to the
Restated Certificate of Incorporation.
"Class C Directors" means (i) prior to the Restated Charter
-----------------
Effectiveness, the Directors referred to as "Class C Directors" in the
Stockholders' Agreement and (ii) following the Restated Charter
Effectiveness, the Directors referred to as "Class C Directors" in the
Restated Certificate of Incorporation.
"Common Stock" means the common stock, par value $0.01 per share, of
------------
the Corporation, whether voting or non-voting, of any series or class
(including Regular Common Stock and, following the Restated Charter
Effectiveness, the Class B Common Stock).
"Consolidated Cash Flow" has the meaning given to such term in the
----------------------
Senior Subordinated Notes Indenture.
"Consolidated Interest Expense" means, with respect to any specified
-----------------------------
Person for any period, the sum, without duplication, of: (i) the
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued, including original issue discount, non-
cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with capital
lease obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings
and net of the effect of all payments made or received pursuant to hedging
obligations and excluding amortization of deferred financing costs, plus
(ii) the consolidated interest of such Person and its Subsidiaries that
3
<PAGE>
was capitalized during such period, plus (iii) any interest expense on
Indebtedness of another Person that is guaranteed by that Person or any of
its Subsidiaries or secured by a mortgage, lien, pledge, charge,
encumbrance or other security interests on assets of such Person or any of
its Subsidiaries.
"Conversion" has the meaning set forth in Section 7(a).
----------
"Conversion Date" means the first date on which any certificates for
---------------
shares of Series A-1 Preferred Stock are surrendered by the Electing Holder
to the Corporation for conversion into Class B-1 Common Stock.
"Conversion Price" has the meaning set forth in Section 7(b).
----------------
"Conversion Ratio" has the meaning set forth in Section 7(b).
----------------
"Convertible Securities" means any evidences of indebtedness, shares
----------------------
(other than shares of Regular Common Stock) or other securities that, by
their terms, are directly or indirectly convertible into or exchangeable
for Additional Shares of Common Stock. For avoidance of doubt, it is
stipulated that the following are not Convertible Securities: (i) shares
of Series A Preferred Stock issued as a dividend on shares of Series A
Preferred Stock; and (ii) shares of Series B Preferred Stock issued in
accordance with the JLL Exchange Agreement.
"Corporation" has the meaning set forth in the Preamble hereto.
-----------
"Current Market Price" means, as of any date, the average of the daily
--------------------
Market Prices of the Regular Common Stock for twenty consecutive trading
days immediately preceding such date.
"DGCL" means the General Corporation Law of the State of Delaware.
----
"Director" means a member of the Board of Directors.
--------
"Dividend Payment Date" means March 31st, June 30th, September 30th
---------------------
and December 31st of each year, unless such day is not a Business Day, in
which case Dividend Payment Date shall be the next succeeding Business Day.
"Dividend Period" means (i) the period beginning on the Dividend Start
---------------
Date and ending on the first Dividend Payment Date, and (ii) thereafter,
the quarterly periods from (and including) the first day of a Dividend
Period until the end of such period.
"Dividend Rate" means, with respect to any share of Series A-1
-------------
Preferred Stock, (i) from (and including) the Dividend Start Date to (and
including) September 30, 2001, a rate per annum equal to 11% of the
Liquidation Preference for such share as of the first day of the applicable
Dividend Period, (ii) from (and including) October 1, 2001 to (and
including) March 31, 2002, a rate per annum equal to thirteen percent (13%)
of the Liquidation Preference for such share as of the first day of the
applicable Dividend Period, and (iii) from (and including) and after April
1, 2002, a rate per annum equal to
4
<PAGE>
16% of the Liquidation Preference for such share as of the first day of the
applicable Dividend Period.
"Dividend Start Date" means the 120th day following the Issue Date.
-------------------
"Electing Holder" has the meaning given in Section 7(a).
---------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"Excluded Holders" means (i) the Corporation and its Subsidiaries,
----------------
(ii) the Principals and the Related Parties of the Principals, (iii) the
Permitted Transferees, and the Affiliates of Permitted Transferees, (iv)
the holders of shares of Series A-2 Preferred Stock and Series B Preferred
Stock on the Issue Date and the "Permitted Transferees" (as defined in the
Series A-2 Certificate of Designations or the Series B Certificate of
Designations, as the case may be) and the Affiliates of the Persons
referred in this clause (iv), and (v) any Person permitted or required to
receive shares of Series B Preferred Stock pursuant to the JLL Exchange
Agreement, the "Permitted Transferees" (as defined in the Series B
Certificate of Designations) of such Persons (assuming that they are
holders of Series B Preferred Stock), and the Affiliates of the Persons
referred to in this clause (v).
"GAAP" means accounting principles and practices generally accepted
----
from time to time in the United States as in effect on the Issue Date.
"Holder" means a record holder of shares of Series A-1 Preferred
------
Stock.
"Indebtedness" has the meaning given to such term in the Senior
------------
Subordinated Notes Indenture.
"Interest Coverage Ratio" means, as of any determination date, the
-----------------------
ratio of Consolidated Cash Flow to Consolidated Interest Expense during the
four-quarter period of the most recent four consecutive fiscal quarters
ending prior to such determination date. In the event of any incurrence,
assumption, guarantee, repayment, repurchase or redemption of any
Indebtedness (other than ordinary working capital borrowings, excluding
borrowings under the Senior Credit Facility) subsequent to the commencement
of the period for which the Interest Coverage Ratio is being calculated and
on or prior to the date or event for which the calculation of the Interest
Coverage Ratio is made (the "Calculation Date"), then the Interest Coverage
Ratio shall be calculated giving effect to the incurrence, assumption,
guarantee, repayment, repurchase or redemption of such Indebtedness, and
the use of the proceeds therefrom, as if the same had occurred at the
beginning of the applicable four-quarter period.
"Issue Date" means the original date of issuance of shares of Series
----------
A-1 Preferred Stock.
"JLL" has the meaning set forth in Section 12.
---
5
<PAGE>
"JLL Exchange Agreement" means the Exchange Agreement dated as of the
----------------------
Issue Date between the Corporation and Joseph Littlejohn & Levy Fund III,
L.P., a Delaware limited partnership, relating to the exchange of shares of
Regular Common Stock into shares of Series B Preferred Stock, as the same
may be amended, supplemented or restated from time to time.
"Junior Stock" means (i) prior to the Restated Charter Effectiveness,
------------
the securities referred to in clause (i) of Section 3(a), and (ii)
following the Restated Charter Effectiveness, the securities referred to in
clause (i) of Section 3(b), in each case subject to Section 3(c).
"Liquidation Event" means any voluntary or involuntary liquidation,
-----------------
dissolution or winding up of the affairs of the Corporation.
"Liquidation Preference" means, for each share of Series A-1 Preferred
----------------------
Stock as of any date, (i) $1,000, plus (ii) in the case of any accumulated
and unpaid dividends or distributions on such share as of such date payable
in Additional Series A-1 Shares, (A) the number of such Additional Series
A-1 Shares times $1,000 plus (B) the amounts referred to in clauses (iii)
and (iv) of this definition for the accumulated and unpaid dividends
thereon, (iii) all accumulated and unpaid cash dividends and distributions
on such share as of such date, plus (iv) the Market Price of all other
accumulated and unpaid dividends and distributions on such share as of such
date (including an amount equal to a prorated dividend for the period from
the last Dividend Payment Date to the date fixed for redemption,
liquidation, dissolution or winding up, if any).
"Management Options" means options to purchase up to an aggregate of
------------------
1,790,000 shares of Common Stock at an initial exercise price of $20 per
share issued to officers and employees on or before the Issue Date. For
purposes of this Certificate of Designations, the Management Options shall
be deemed issued before the Issue Date.
"Mandatory Redemption Obligation" means the Corporation's redemption
-------------------------------
obligation set forth in Section 6.
"Mandatory Redemption Price" has the meaning set forth in Section
--------------------------
6(a).
"Market Price" means: (a) with respect to any security, on any given
------------
day, (i) if such security is listed or authorized for trading on a national
securities exchange, the last sale price of such security, regular way, on
such date, or if no such sale takes place on such date, the average of the
closing bid and asked prices thereof, on such date, in each case as
officially reported on the principal national securities exchange on which
such security is listed or authorized for trading, (ii) if such security is
not listed or authorized for trading on a national securities exchange but
is quoted on the Nasdaq National Market, (A) the price of the last trade,
as reported on the Nasdaq National Market, not identified as having been
reported late to such system, or (B) if such security is so traded, but no
such last trade information is reported, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market,
(iii) if such security is not listed or authorized for trading on a
national securities exchange or the Nasdaq National
6
<PAGE>
Market or any comparable system but has a nationally recognized existing
trading market, the average of the closing bid and asked prices as
furnished by two members of the National Association of Securities Dealers,
Inc. selected from time to time by the Corporation for that purpose or (iv)
if such security is not listed or authorized for trading on a national
securities exchange or the Nasdaq National Market or any comparable system
and does not have a nationally recognized existing trading market, the fair
value of such security as (A) determined by an agreement between the
Corporation and the Holders of a majority of the outstanding shares of
Series A-1 Preferred Stock or (B) if the Corporation and such Holders fail
to agree, determined jointly by an independent investment banking firm
retained by the Corporation and by an independent investment banking firm
retained by such Holders, or (C) if the Corporation or such Holders shall
fail so to retain an independent investment banking firm within five
Business Days of the retention of such firm by the Corporation or such
Holders, as the case may be, determined solely by the firm so retained or
(D) if the firms so retained by the Corporation and by such Holders shall
be unable to reach a joint determination within 15 Business Days of the
retention of the last firm so retained, determined by another independent
investment banking firm chosen by the first two such firms; and (b) with
respect to any other asset or property, the fair market value of such asset
or property as (i) determined by an agreement between the Corporation and
the Holders of a majority of the outstanding shares of Series A-1 Preferred
Stock or (ii) if the Corporation and such Holders fail to agree, determined
jointly by an independent investment banking firm retained by the
Corporation and by an independent investment banking firm retained by such
Holders, or (iii) if the Corporation or such Holders shall fail so to
retain an independent investment banking firm within five Business Days of
the retention of such firm by the Corporation or such Holders, as the case
may be, determined solely by the firm so retained or (iv) if the firms so
retained by the Corporation and by such Holders shall be unable to reach a
joint determination within 15 Business Days of the retention of the last
firm so retained, determined by another independent investment banking firm
chosen by the first two such firms.
"New Securities" means (a) prior to the Restated Charter
--------------
Effectiveness, any Capital Stock issued after the Issue Date, and (b) after
the Restated Charter Effectiveness, any Capital Stock issued after such
effectiveness by the Corporation for cash consideration, in each case other
than (i) Capital Stock issued upon the conversion or exchange of any series
or class of Capital Stock issued and outstanding on the Issue Date into
another series or class of Capital Stock of the Corporation without any
additional consideration to the Corporation by the holder thereof; (ii)
Capital Stock issued upon conversion of any shares of Series A Preferred
Stock or Series B Preferred Stock into any class or series of Common Stock;
(iii) Regular Common Stock issued upon conversion of Class B Common Stock;
(iv) shares of Series A Preferred Stock issued as a dividend on shares of
Series A Preferred Stock; (v) dividends or distributions payable in shares
of Capital Stock effected in accordance with Section 4(b) or 8(a); (vi)
Capital Stock issued upon the exercise of options or warrants that have
been issued prior to, and are outstanding as of, the Issue Date; (vii)
Capital Stock issued to employees, consultants, officers or directors of
the Corporation pursuant to any stock option plan in effect on the Issue
Date and consistent with past practice or pursuant to a stock option plan
adopted after the Issue Date; (viii) Capital Stock issued to holders of
Series A-2 Preferred Stock
7
<PAGE>
or Series B Preferred Stock pursuant to the exercise by such holders of
their preemptive rights contained in the Series A-2 Certificate of
Designations or the Series B Certificate of Designations, as the case may
be; (ix) Capital Stock issued upon exercise of the Senior Subordinated
Notes Warrants; (x) Common Stock issued upon the exercise of Management
Options; (xi) Capital Stock issued to customers in the ordinary course of
business consistent with past practice, subject to a maximum amount, in any
fiscal year of the Corporation, equal or equivalent to (A) 0.5% of the
weighted average number of issued and outstanding shares of Common Stock
during such fiscal year plus (B) the number of shares permitted under
clause (A) for any fiscal year ending after the Issue Date but not
previously expended; and (xii) shares of Series B Preferred Stock issued in
accordance with the JLL Exchange Agreement.
"Non-Class B Director" means any Director who is neither a Class B-1
--------------------
Director nor a Class B-2 Director.
"Options" means rights, options or warrants to subscribe for, purchase
-------
or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities. For avoidance of doubt, it is expressly stipulated
that the following are not Options: (i) any rights, options or warrants to
subscribe for, purchase or otherwise acquire shares of Common Stock
referred to in clause (v) or (vi) of the definition of Additional Shares of
Common Stock; and (ii) any right or option to acquire shares of Series B
Preferred Stock pursuant to the JLL Exchange Agreement.
"Parity Stock" means (i) prior to the Restated Charter Effectiveness,
------------
the securities referred to in clause (ii) of Section 3(a) and (ii)
following the Restated Charter Effectiveness, the securities referred to in
clause (ii) of Section 3(b), in each case subject to Section 3(c).
"Permitted Transferee" has the meaning set forth in Section 12.
--------------------
"Person" means any corporation, limited liability company,
------
partnership, trust, organization, association, other entity or individual.
"Preemptive Rights Notice" has the meaning given in Section 9(a).
------------------------
"Preemptive Rights Portion" has the meaning given in Section 9(a).
-------------------------
"Preferred Stock" has the meaning set forth in the Preamble hereto.
---------------
"Principals" has the meaning given to such term in the Senior
----------
Subordinated Notes Indenture.
"Record Date" means, with respect to a dividend payable on March 31,
-----------
June 30, September 30 and December 31 of each year, 5:00 p.m. (Eastern
Standard Time) on the preceding March 15, June 15, September 15 and
December 15, respectively.
"Redemption Date" has the meaning given in Section 6(b).
---------------
8
<PAGE>
"Redemption Notice" has the meaning set forth in Section 6(b).
-----------------
"Related Parties" has the meaning given to such term in the Senior
---------------
Subordinated Notes Indenture.
"Regular Common Stock" means (i) initially, the class of Common Stock
--------------------
existing on the Issue Date, and (ii) upon the Restated Charter
Effectiveness, the Class A Common Stock created as a separate class of
Common Stock pursuant to the Restated Certificate of Incorporation.
"Restated Certificate of Incorporation" means the Second Amended and
-------------------------------------
Restated Certificate of Incorporation of the Corporation in the form
attached as Exhibit B to the Stockholders' Agreement (as the same may from
time to time be amended (x) prior to the Restated Charter Effectiveness,
pursuant to the Stockholders' Agreement, and (y) after the Restated Charter
Effectiveness, pursuant to such Restated Certificate of Incorporation and
the DGCL), to be submitted for Stockholder Approval and following
Stockholder Approval filed according to the DGCL with the Secretary of
State of the State of Delaware.
"Restated Charter Effectiveness" means the date of the filing of the
------------------------------
Restated Certificate of Incorporation with the Secretary of State of the
State of Delaware in accordance with the DGCL following Stockholder
Approval.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Senior Credit Facility" means the credit facilities evidenced by, and
----------------------
the loans and borrowings extended to the Corporation pursuant to the $825
million Senior Credit Agreement, dated on or about the Issue Date, among
the Corporation, as borrower the subsidiary guarantors parties thereto, the
initial lenders, initial issuing bank and swing line bank named therein,
Bank of America, N.A., as Collateral Agent and Administrative Agent, Bank
One, N.A., as Documentation Agent, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Book-Runner, Lead Arranger and Syndication Agent, and Bank
of America Securities LLC, as Joint Book-Runner and Joint Lead Arranger,
and any one or more deferrals, renewals, extensions, replacements,
refinancings or refundings thereof, or amendments, modifications or
supplements thereto or replacements thereof (including, without limitation,
any amendment increasing the amount that may be borrowed thereunder) and
any agreement providing therefor whether by or with respect to the same or
any other agents, lenders, creditors or group of creditors (or any
combination thereof) and including related notes, guarantee agreements,
security agreements and other instruments executed in connection therewith.
"Senior Stock" means the securities referred to in clause (iii) of
------------
Section 3(b), subject to Section 3(c).
"Senior Subordinated Notes" means the Corporation's Senior
-------------------------
Subordinated Notes due 2010 issued on or about the Issue Date in the
initial principal amount of $200,000,000 (the "initial notes") and any
notes registered under the Securities Act that
9
<PAGE>
are issued in exchange for such notes and any deferrals, renewals,
extensions, replacements, refinancings or refundings thereof, or amendments
or supplements thereto or replacements thereof.
"Senior Subordinated Notes Indenture" means the Indenture, dated as of
-----------------------------------
October 2, 2000, between the Corporation and U.S. Trust of Texas, N.A., as
trustee pursuant to which the Corporation's Senior Subordinated Notes due
2010 in the initial principal amount of $200,000,000 are issued, as the
same may be amended from time to time.
"Senior Subordinated Notes Warrants" means the warrants to purchase
----------------------------------
Regular Common Stock issued on or about the Issue Date to Rite Aid
Corporation. For purposes of this Certificate of Designations, the Senior
Subordinated Notes Warrants shall be deemed to have been issued before the
Issue Date.
"Series A Preferred Stock" means the Series A-2 Preferred Stock and
------------------------
Series A-1 Preferred Stock.
"Series A Certificates of Designations" means the Series A-2
-------------------------------------
Certificate of Designations and this Certificate of Designations.
"Series A-2 Certificate of Designations" means (i) initially, the
--------------------------------------
Certificate of Designations for the Series A-2 Preferred Stock filed
pursuant to the DGCL with the Secretary of State of the State of Delaware
on or about the Issue Date, and (ii) following the Restated Charter
Effectiveness, Exhibit A to the Restated Certificate of Incorporation, in
each case, as amended, supplemented or restated from time to time.
"Series A-2 Preferred Stock" means the Preferred Stock designated by
--------------------------
the Board of Directors as Series A-2 11% Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series A-2 Certificate of Designations.
"Series A-1 Preferred Stock" has the meaning set forth in Section 1.
--------------------------
"Series B Certificate of Designations" means (i) initially the
------------------------------------
Certificate of Designations for the Series B Preferred Stock filed pursuant
to the DGCL with the Secretary of State of the State of Delaware on or
about the Issue Date, and (ii) following the Restated Charter
Effectiveness, Exhibit C to the Restated Certificate of Incorporation, in
each case, as amended, supplemented or restated from time to time.
"Series B Preferred Stock" means the Preferred Stock designated by the
------------------------
Board of Directors as Series B Convertible Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series B Certificate of Designations.
10
<PAGE>
"Stockholder Approval" means the approval by the stockholders of the
--------------------
Corporation of the adoption of the Restated Certificate of Incorporation
and of the authorization and issuance of the Class B Common Stock to be
issued to the Holders and the holders of the Series A-2 Preferred Stock and
Series B Preferred Stock in accordance with the terms of this Certificate
of Designations, the Series A-2 Certificate of Designations and the Series
B Certificate of Designations.
"Stockholders' Agreement" means the Stockholders' Agreement, dated on
-----------------------
or about the Issue Date, among the Corporation, Joseph Littlejohn & Levy
Fund III, L.P., Rite Aid Corporation and the other Persons named therein,
as the same may be amended, supplemented or restated from time to time
"Subsidiary" means, with respect to any specified Person: (i) any
----------
corporation, association or other business entity of which more than 50% of
the total voting power of shares of capital stock or other equity interests
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by a Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and (ii)
any partnership (A) the sole general partner or the managing general
partner of which is the Person or a Subsidiary of that Person or (B) the
only general partners of which are the Person or one or more Subsidiaries
of that Person (or any combination thereof).
"Transfer" means any direct or indirect (including, without
--------
limitation, through the transfer of a controlling interest in a Permitted
Transferee) sale, transfer, assignment, grant of participation interest in,
option, pledge, hypothecation, encumbrance or other disposition.
"Voting Stock" means, with respect to any Person, the Capital Stock of
------------
any class or kind ordinarily having the power to vote generally for the
election of directors (or other persons or bodies performing similar
functions) of such Person.
Section 3. Rank.
----
(a) Prior to the Restated Charter Effectiveness. Prior to and until the
-------------------------------------------
Restated Charter Effectiveness, the Series A-1 Preferred Stock shall, with
respect to dividends and distributions and upon a Liquidation Event, rank:
(i) senior to (A) all classes or series of Common Stock and (B) each
other class or series of Capital Stock of the Corporation created after the
Issue Date and prior to the Restated Charter Effectiveness; and
(ii) on a parity with the Series A-2 Preferred Stock and the Series B
Preferred Stock.
(b) Following the Restated Charter Effectiveness. Upon and following the
--------------------------------------------
Restated Charter Effectiveness, the Series A-1 Preferred Stock shall, with
respect to dividends and distributions and upon a Liquidation Event, rank:
11
<PAGE>
(i) senior to all classes or series of Common Stock;
(ii) on a parity with the Series A-2 Preferred Stock;
(iii) junior to each series or class of Preferred Stock created after
the Restated Charter Effectiveness.
(c) The respective definitions of Junior Stock, Parity Stock and Senior
Stock shall also include any options, warrants or other rights exercisable or
exchangeable for or convertible into any of the Junior Stock, Parity Stock or
Senior Stock, as the case may be.
Section 4. Dividends.
---------
(a) Prior to the Restated Charter Effectiveness. Prior to and until the
-------------------------------------------
Restated Charter Effectiveness:
(i) Beginning on the Dividend Start Date, the Holders of outstanding
shares of Series A-1 Preferred Stock shall be entitled to receive (if and
to the extent of surplus legally available therefor), dividends at the
Dividend Rate payable solely in additional shares of Series A-1 Preferred
Stock ("Additional Series A-1 Shares") in accordance with the terms of this
Section 4. Following the Dividend Start Date, such dividends shall be
payable quarterly in arrears on each Dividend Payment Date for the Dividend
Period ending on such Dividend Payment Date. Dividends on the Series A-1
Preferred Stock shall accrue (whether or not declared) and be cumulative
from (and including) the first day of each Dividend Period in which
dividends may be payable, and accrued dividends for each Dividend Period
shall accumulate to the extent not paid on the Dividend Payment Date for
such Dividend Period; provided that dividends on Additional Series A-1
Shares shall accrue from (and including) the date such Additional Series A-
1 Shares are issued pursuant to this Section 4(a), whether or not in any
Dividend Period there shall be surplus of the Corporation legally available
for the payment of such dividends. Each such dividend shall be payable to
the Holders of shares of Series A-1 Preferred Stock on the corresponding
Record Date.
(ii) The amount of dividends payable for each full Dividend Period for
the Series A-1 Preferred Stock shall be computed by dividing the applicable
Dividend Rate by four. The amount of dividends payable for any period
shorter or longer than a full Dividend Period, shall be computed on the
basis of twelve 30-day months and a 360-day year. Holders of shares of
Series A-1 Preferred Stock shall not be entitled to any dividends, whether
payable in cash, property or stock, in excess of cumulative dividends as
herein provided. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment on the Series A-1 Preferred
Stock that may be in arrears; except that if dividends are not paid in full
on any Dividend Payment Date, dividends will cumulate as if the unpaid
dividends were payable in cash and the Liquidation Preference had been
increased by the amount of unpaid dividends until paid.
(iii) Dividends on the shares of Series A-1 Preferred Stock pursuant
to this Section 4(a) shall continue to accrue and accumulate until full
cumulative dividends (including an amount equal to a prorated dividend for
the period from the last Dividend
12
<PAGE>
Payment Date to (but not including) the date of the Restated Charter
Effectiveness) have been declared and paid on the Series A-1 Preferred
Stock for all Dividends Periods terminating prior to the date of the
Restated Charter Effectiveness; provided that such dividends shall cease to
accrue or accumulate on (but not including) the date of the Restated
Charter Effectiveness.
(iv) The number of Additional Series A-1 Shares to be issued as
dividends pursuant to this Section 4(a) will equal the cash amount of the
dividend that would have been payable on a share of Series A-1 Preferred
Stock if dividends were payable in cash, divided by $1,000, rounded to the
nearest full share, up or down, after taking into account all shares of
Series A-1 Preferred Stock owned by the Holder thereof, provided that if
the resulting fractional share held by such Holder equals one-half of a
share of Series A-1 Preferred Stock, such fractional share shall be rounded
up to the nearest full share.
(v) Accrued dividends for any past Dividend Periods may be declared
and paid on any subsequent Dividend Payment Date or any other date
established by the Board.
(b) Following the Restated Charter Effectiveness. Upon and following the
--------------------------------------------
Restated Charter Effectiveness, in the event the Corporation at any time or from
time to time makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, any dividend or distribution on shares of any
class or series of Common Stock (other than any dividend or distribution payable
in shares of Common Stock effected in accordance with Section 8(a)), then and in
each such event each Holder shall be entitled to receive the amount of such
dividend or distribution that such Holder would have received had its shares of
Series A-1 Preferred Stock been converted into Class B Common Stock pursuant to
Section 7 immediately prior to the record date for such dividend or
distribution.
(c) Dividends or Distributions on Parity Stock. So long as any shares of
------------------------------------------
the Series A-1 Preferred Stock are outstanding, (i) no dividend or distribution
may be declared or paid or set apart for payment on any Parity Stock by the
Corporation, directly or indirectly, unless (A) such dividend or distribution is
required by the terms of such Parity Stock pursuant to the certificate of
designations for such Parity Stock (or other instrument pursuant to which such
Parity Stock was created and setting forth the powers, designations, preferences
and other special rights and qualifications, limitations and restrictions of
such Parity Stock) as in effect on the initial issuance of such Parity Stock,
and (B) all accumulated and unpaid dividends and distributions due to be paid on
the Series A-1 Preferred Stock, and any redemption payments required by Section
6, have been or are contemporaneously paid or are being paid on a pro rata basis
with any such Parity Stock, and (ii) except as otherwise provided in Section
6(f), no Parity Stock may be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available to a sinking fund for
the redemption of any shares of such stock) by the Corporation directly or
indirectly, unless (A) all accumulated and unpaid dividends and distributions
due to be paid on the Series A-1 Preferred Stock, and any redemption payments
required by Section 6, have been or are contemporaneously paid, and (B) such
redemption, purchase or acquisition is required by the certificate of
designations for such Parity Stock (or other instrument pursuant to which such
Parity Stock was created and setting forth the powers,
13
<PAGE>
designations, preferences and other special rights and qualifications,
limitations and restrictions of such Parity Stock) as in effect on the initial
issuance of such Parity Stock.
(d) Dividends or Distributions on Junior Stock. So long as any shares of
------------------------------------------
Series A-1 Preferred Stock are outstanding, no dividends or other distribution
may be declared or paid or set apart for payment on any Junior Stock, nor may
any Junior Stock be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly, other than (i) a redemption, purchase or other acquisition of shares
of Common Stock made solely pursuant to the terms of an employee incentive or
benefit plan of the Corporation or its Subsidiaries, (ii) dividends or
distributions on shares of Common Stock effected solely in accordance with
Section 4(b) or 8(g), and (iii) dividends or distributions made solely in Junior
Stock effected in accordance with Section 8(a).
Section 5. Liquidation Rights.
------------------
(a) Upon the occurrence of a Liquidation Event, subject to the rights of
holders of Senior Stock and Parity Stock, each Holder shall be entitled to be
paid, before any distribution is made on any Junior Stock, out of the assets of
the Corporation available for distribution to its stockholders an amount per
share in cash equal to the greater of (i) the Liquidation Preference, as of the
date fixed for the Liquidation Event, for each outstanding share of Series A-1
Preferred Stock held by such Holder and (ii) the amount such Holder would have
received upon such final distribution if all outstanding shares of Series A-1
Preferred Stock had been converted into shares of Common Stock pursuant to
Section 7 (assuming that (A) the Restated Charter Effectiveness has occurred and
(B) all outstanding shares of Series A-2 Preferred Stock and Series B Preferred
Stock had been converted into shares of Common Stock pursuant to the Series A-2
Certificate of Designations and the Series B Certificate of Designations,
respectively, immediately prior to such Liquidation Event).
(b) If the assets distributable in any such Liquidation Event to the
Holders and to the holders of outstanding shares of all Parity Stock are
insufficient to permit the payment to such holders of the full preferential
amounts to which they may be entitled, such assets shall be distributed ratably
among the holders of the outstanding shares of Series A-1 Preferred Stock and
Parity Stock in proportion to the full preferential amount each such holder
would otherwise be entitled to receive.
(c) For purposes of this Section 5, a Liquidation Event shall, at the
election of the Holders of a majority of the outstanding shares of Series A-1
Preferred Stock, voting separately as a single class, include (i) the
consolidation or merger of the Corporation into any other corporation or entity
if the Corporation is not the continuing or surviving corporation or entity of
such consolidation or merger, (ii) the consolidation or merger of any other
corporation or entity into the Corporation with the Corporation being the
continuing or surviving corporation if, in connection with such consolidation or
merger, the shares of Common Stock are changed into or exchanged for stock or
other securities of any other Person or cash or any other property, and (iii)
the transfer by the Corporation of all or substantially all of its properties or
assets to any other corporation or entity (other than to a wholly-owned
Subsidiary of the Corporation if such
14
<PAGE>
Subsidiary remains wholly owned by the Corporation after such transfer or any
other transaction or series of transactions related to such transfer).
(d) After payment of the full preferential amount to which the Holders are
entitled pursuant to this Section 5, the Holders shall not be entitled to any
further participation in any distribution of assets of the Corporation, and all
rights of the Holders with respect to their shares of Series A-1 Preferred Stock
shall terminate.
Section 6. Redemption.
----------
(a) Unless the Restated Charter Effectiveness shall have occurred prior to
the occurrence of the event described in clause (i) or (ii) of this Section
6(a), the Corporation shall redeem, to the extent of funds legally available
therefor (determined pursuant to Section 6(e)), in the manner provided for in
this Section 6 all of the then outstanding shares of Series A-1 Preferred Stock
at the Liquidation Preference as of the Redemption Date (the "Mandatory
Redemption Price") on (i) the eleventh anniversary of the Issue Date or (ii) in
the event a Change of Control of the Corporation has occurred, upon receipt of
notice (no later than 30 days following the later of the occurrence of such
Change of Control or public announcement of the occurrence of such Change of
Control) from the Holders of a majority of the outstanding shares of Series A-1
Preferred Stock demanding a redemption of the outstanding shares of Series A-1
Preferred Stock. The Corporation shall pay the Mandatory Redemption Price in
cash. The date for any such redemption (the "Redemption Date") shall be (A) in
the case of a redemption occurring pursuant to clause (i) of this Section 6(a),
the date of the eleventh anniversary of the Issue Date, or if such date is not a
Business Day, the first Business Day following such date, and (B) in the case of
a redemption occurring pursuant to clause (ii) of this Section 6(a), a date to
be fixed by the Corporation that is a Business Day no earlier than 30 days and
no later than 60 days following the notice referred to in clause (ii) of this
Section 6(a).
(b) No later than 20 days and no earlier than 60 days prior to the
Redemption Date, the Corporation shall give written notice (the "Redemption
Notice") to each Holder at such Holder's address as it appears on the stock
books of the Corporation. The Redemption Notice shall state:
(i) whether the redemption is pursuant to clause (i) or (ii) of
Section 6(a);
(ii) the Mandatory Redemption Price;
(iii) Redemption Date; and
(iv) the location (which shall be in New York City, New York) at which
the Holder is to surrender to the Corporation (or its agent), for
redemption, its certificate or certificates representing its shares of
Series A-1 Preferred Stock, and the manner for the surrender of such
certificate or certificates.
(c) Each Holder shall surrender the certificate or certificates
representing its shares of Series A-1 Preferred Stock to the Corporation, duly
endorsed (or otherwise in proper form for transfer, as determined by the
Corporation), in the manner and at the place designated in the Redemption
Notice. On the Redemption Date, the Corporation shall pay, or cause to be paid,
the
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<PAGE>
full Mandatory Redemption Price for the shares so surrendered in cash (i) to the
Person whose name appears on such certificate or certificates as the owner
thereof, and, upon such payment, each surrendered certificate shall be canceled
and retired and (ii) if such certificate is not surrendered by a Holder but the
Holder certifies to the Corporation that the certificate or certificates
representing its shares of Series A-1 Preferred Stock have been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such lost,
stolen or destroyed certificates (and, if requested by the Corporation, posts a
customary bond reasonably satisfactory to the Corporation to cover such loss),
to such Holder.
(d) Unless the Corporation defaults in the payment of the applicable
Mandatory Redemption Price, dividends on the shares of Series A-1 Preferred
Stock shall cease to accumulate on the Redemption Date, and all rights of the
Holders with respect to their Series A-1 Preferred Stock, other than the right
to receive the Mandatory Redemption Price, shall terminate on the Redemption
Date.
(e) For the purpose of determining whether funds are legally available for
redemption of Series A-1 Preferred Stock pursuant to this Section 6, (i) the
Corporation shall value its assets at the highest amount permissible under
applicable law, (ii) if the redemption is pursuant to clause (ii) of Section
6(a), the Corporation may, at its option, set aside the funds necessary to
prepay, redeem or offer to purchase any Indebtedness of the Corporation or its
Subsidiaries that, by its terms, has to be prepaid or redeemed, or requires that
the Corporation or its Subsidiaries extend to the holders thereof an offer to
purchase such Indebtedness, including the Senior Credit Facility and the Senior
Subordinated Notes, and (iii) the Corporation may, at its option, set aside the
funds necessary to satisfy any dividend, redemption or other obligations with
respect to any Senior Stock or Parity Stock required by the certificate of
designations for such Senior Stock or Parity Stock (or other instrument pursuant
to which such Senior Stock or Parity Stock was created and setting forth the
powers, designations, preferences and other special rights and qualifications,
limitations and restrictions of such Senior Stock or Parity Stock).
(f) If on the Redemption Date funds of the Corporation legally available
therefor are insufficient to pay the Mandatory Redemption Price in full for all
the shares of Series A-1 Preferred Stock, (i) the Corporation shall use funds to
the extent legally available for such purpose, (ii) the Corporation shall effect
the Mandatory Redemption Obligation pro rata according to the number of shares
of Series A-1 Preferred Stock held by each holder and (iii) the Dividend Rate on
any unpaid portion of the Mandatory Redemption Price shall be increased by 2%.
If the Corporation is unable or fails to discharge its Mandatory Redemption
Obligation, the Mandatory Redemption Obligation shall be discharged as soon as
the Corporation is able to discharge the Mandatory Redemption Obligation. If and
so long as the Mandatory Redemption Obligation is not fully discharged, the
Corporation may not, directly or indirectly, (A) redeem, purchase, or otherwise
acquire any Parity Stock or Junior Stock or discharge any mandatory or optional
redemption, sinking fund or other similar obligation in respect of any Parity
Stock or Junior Stock (except in connection with a redemption, sinking fund or
other similar obligation regarding Parity Stock being satisfied on a pro rata
basis) or (B) declare or make any dividend or distribution in respect of any
Junior Stock.
16
<PAGE>
(g) Notwithstanding the foregoing, any Holder may, at any time prior to
the close of business on the Business Day immediately preceding the Redemption
Date, elect to convert, pursuant to Section 7(a), its shares of Series A-1
Preferred Stock into Common Stock in lieu of any redemption of its Series A-1
Preferred Stock. Upon such Conversion, the Holders shall no longer be entitled
to any payment in connection with the redemption for the Series A-1 Preferred
Stock.
(h) The Corporation need not establish any sinking fund for the Mandatory
Redemption Obligation.
Section 7. Conversion.
----------
(a) Conversion Right. At any time following the Restated Charter
----------------
Effectiveness, subject to and in compliance with the provisions of this Section
7, any Holder may, at such Holder's election, convert all, but not less than
all, of such Holder's shares of Series A-1 Preferred Stock into shares of Class
B-1 Common Stock (the "Electing Holder"), and upon any such conversion, all
other outstanding shares of Series A-1 Preferred Stock shall automatically
convert into shares of Class B-1 Common Stock (the "Conversion").
Notwithstanding any call for redemption pursuant to Section 6, the right to
convert shares pursuant to this Section 7 shall terminate at the close of
business on the Business Day immediately preceding the Redemption Date, unless
the Corporation defaults in making payment of the Mandatory Redemption Price in
full on the Redemption Date.
(b) Conversion Ratio. The number of shares of Class B-1 Common Stock
----------------
deliverable upon Conversion of one share of Series A-1 Preferred Stock, adjusted
as provided in Section 8, is referred to in this Certificate of Designations as
the "Conversion Ratio." The Conversion Ratio, as of any date, shall be an amount
equal to the Liquidation Preference as of such date divided by the Conversion
Price. The "Conversion Price" will initially be $20.00, subject to adjustment
from time to time pursuant to Section 8.
(c) Conversion Mechanics.
--------------------
(i) The Electing Holder shall surrender the certificate representing
its shares of Series A-1 Preferred Stock at the principal office of the
Corporation, with a written notice of election to convert completed and
signed.
(ii) On the Conversion Date, all outstanding shares of Series A-1
Preferred Stock shall be converted automatically without any further action
by the Holders (and whether or not the certificates representing such
shares are surrendered at the office of the Corporation). The Corporation
shall issue certificates representing shares of Class B-1 Common Stock
issuable upon the Conversion upon surrender of certificates representing
the corresponding shares of Series A-1 Preferred Stock. Unless the shares
issuable on Conversion by the Holder are to be issued in the same name as
the name in which such shares of Series A-1 Preferred Stock are registered,
each share surrendered shall be accompanied by instruments of transfer, in
form satisfactory to the Corporation, duly executed by the Holder or the
Holder's duly authorized attorney. The Corporation shall not be obligated
to issue certificates for shares of Class B-1 Common Stock in any name
17
<PAGE>
other than the name or names set forth on the certificates for the shares
of Series A-1 Preferred Stock unless the requirements of the Stockholders'
Agreement relating to the transfer of shares of Series A-1 Preferred Stock
have been complied with or waived by the Corporation.
(iii) Notwithstanding clause (i) or (ii) of this Section 7(c), if the
Holder of any share or shares of Series A-1 Preferred Stock certifies to
the Corporation that the certificates representing such share or shares
have been lost, stolen or destroyed and executes an agreement satisfactory
to the Corporation to indemnify the Corporation from any loss incurred by
it in connection with such lost, stolen or destroyed certificates (and, if
requested by the Corporation, posts a customary bond reasonably
satisfactory to the Corporation to cover such loss), then the Corporation
shall issue certificates representing the Class B-1 Common Stock issuable
upon the Conversion in the name of such holder.
(iv) As promptly as practicable after the delivery by the Holder of
the certificates for shares of Series A-1 Preferred Stock (or in the case
of a lost certificate, the certification, the agreement and, if requested,
the posting of the bond described in clause (iii) of this Section 7(c)),
the Corporation shall issue and shall deliver to such Holder, or, subject
to compliance with the provisions Section 12 and the Stockholders'
Agreement relating to the transfer of shares of Series A-1 Preferred Stock,
on the Holder's written order to the Holder's transferee, (A) a certificate
or certificates for the whole number of shares of Class B-1 Common Stock
issuable upon the Conversion of such shares in accordance with the
provisions of this Section 7, and (B) any cash adjustment required pursuant
to Section 7(f).
(v) The Conversion shall be deemed to have been effected immediately
prior to the close of business on the Conversion Date. The Person in whose
name or names any certificate or certificates for shares of Class B-1
Common Stock shall be issuable upon such Conversion shall be deemed to have
become the holder of record of the shares of Class B-1 Common Stock
represented thereby at such time on the Conversion Date and the Conversion
shall be into a number of whole shares of Class B-1 Common Stock equal to
the product of the number of shares of Series A-1 Preferred Stock
surrendered multiplied by the Conversion Ratio in effect on the applicable
Conversion Date. All shares of Class B-1 Common Stock delivered upon
conversion of the Series A-1 Preferred Stock will upon delivery be duly and
validly issued and fully paid and non-assessable, free of all liens,
pledges and other security interests and not subject to any preemptive
rights. As of the effective time of the Conversion, the shares of Series A-
1 Preferred Stock so converted will no longer be deemed to be outstanding
and all rights of a holder with respect to such shares so converted shall
immediately terminate except the right to receive the Class B-1 Common
Stock and other amounts payable pursuant to this Section 7.
(d) Reservation of Shares; Compliance with Laws. The Corporation covenants
-------------------------------------------
that it will at all times following the Restated Charter Effectiveness reserve
and keep available, free from preemptive rights, such number of its authorized
but unissued shares of Class B-1 Common Stock as shall be required for the
purpose of effecting the Conversion of the Series A-1 Preferred Stock. Promptly
(and in any event no later than two Business Days) following receipt of
18
<PAGE>
Stockholder Approval, the Corporation shall file the Restated Certificate of
Incorporation pursuant to the DGCL with the Secretary of State of the State of
Delaware. Prior to the delivery of any Common Stock that the Corporation is
obligated to deliver upon the Conversion, the Corporation shall comply with all
applicable federal and state laws and regulations which require action to be
taken by the Corporation.
(e) Transfer Taxes, etc. The Corporation will pay any and all documentary
-------------------
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Class B-1 Common Stock upon the Conversion, other than any
tax payable in respect of any transfer involved in the issue or delivery of
shares of Class B-1 Common Stock in a name other than that of the Holder of the
Series A-1 Preferred Stock to be converted. The Corporation shall have the right
not to issue or deliver any shares of Class B-1 Common Stock in a name other
than that of the Holder of the Series A-1 Preferred Stock to be converted unless
and until the Person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(f) No Fractional Shares. No fractions of shares of Class B-1 Common Stock
--------------------
shall be required to be issued to a Holder in connection with the Conversion. In
lieu thereof, the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied by
the Current Market Price per share of Regular Common Stock on the Conversion
Date.
(g) No Impairment. The Corporation will not, through any reorganization,
-------------
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 7 and in the taking of all such action as may be necessary or
appropriate following the Restated Charter Effectiveness in order to protect the
conversion rights of the holders of the Series A-1 Preferred Stock against
impairment. Without limiting the generality of the foregoing, following the
Restated Charter Effectiveness, the Corporation (i) will take all such action as
may be necessary or appropriate in order that the Corporation may validly and
legally issue fully paid nonassessable shares of Class B-1 Common Stock on the
Conversion, free of all preemptive rights, and (ii) will not take any action
which results in any adjustment of the applicable Conversion Price if the total
number of shares of Class B-1 Common Stock issuable after the action upon the
Conversion of all of the Series A-1 Preferred Stock will exceed the total number
of shares of Class B-1 Common Stock then authorized by the Corporation's
Certificate of Incorporation and available for the purpose of issue upon such
Conversion.
Section 8. Adjustments to Conversion Price.
-------------------------------
(a) Adjustment for Stock Dividends, Distributions and Subdivisions. In the
event the Corporation shall declare or pay any dividend or make any other
distribution on the Common Stock payable in shares of Common Stock, or shall
effect a subdivision of the outstanding Common Stock, into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock), then and in each such case the applicable
Conversion Price in effect immediately prior to such stock dividend,
distribution or subdivision shall, concurrently with the effectiveness of such
stock dividend,
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<PAGE>
distribution or subdivision, be proportionately decreased, subject to the
following qualifications: (i) in the event such issuance is declared but not
effected, the applicable Conversion Price shall be readjusted as if such
issuance was not declared; and (ii) no adjustment in the Conversion Price shall
be made in the event the Holders simultaneously receive a dividend or other
distribution of such securities in an amount equal to the amount of such
securities as they would have received had (assuming that the Restated Charter
Effectiveness has occurred) the Series A-1 Preferred Stock been converted into
Class B-1 Common Stock pursuant to Section 7 immediately prior to such event
(or, if applicable, the record date for such event).
(b) Adjustments for Combinations or Consolidation of Common Stock. In the
-------------------------------------------------------------
event the outstanding Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then and in each such case the applicable Conversion Price in effect immediately
prior to such combination or consolidation shall, concurrently with the
effectiveness of such combination or consolidation, be proportionately
increased.
(c) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization,
----------------------------------------------------------------------
etc. In the event the Corporation (i) consolidates with or merges into any other
---
corporation or entity and is not the continuing or surviving corporation or
entity of such consolidation or merger, (ii) permits any other corporation or
entity to consolidate with or merge into the Corporation and the Corporation is
the continuing or surviving corporation but, in connection with such
consolidation or merger, the shares of Common Stock are changed into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (iii) transfers all or substantially all of its properties or
assets, directly or indirectly, to any other corporation or entity (other than
to a wholly owned Subsidiary of the Corporation if such Subsidiary remains
wholly owned by the Corporation after such transfer or any other transaction or
series of transactions related to such transfer), then, and in each such event,
proper provision shall be made so that, upon the basis and the terms and in the
manner provided in this Section 8(c), each Holder, upon the Conversion at any
time after the consummation of such consolidation, merger or transfer, shall be
entitled to receive, in lieu of the shares of Common Stock issuable upon the
Conversion prior to such consummation, the stock and other securities, cash and
property to which such Holder would have been entitled upon such consummation if
such Holder (assuming that the Restated Charter Effectiveness has occurred) had
converted its Series A-1 Preferred Stock pursuant to Section 7 immediately prior
to such consummation (or, if applicable, any record date with respect to such
transaction), subject to adjustments (subsequent to such corporate action) as
nearly equivalent as possible to the adjustments provided for in this Section
8(c). Notwithstanding anything contained herein to the contrary, (A) the
Corporation will not effect any of the transactions described in the clauses (i)
through (iii) of this Section 8 unless, prior to the consummation thereof, each
corporation (other than the Corporation) which may be required to deliver any
stock, securities, cash or property upon the conversion of Series A-1 Preferred
Stock shall assume, by written instrument, a copy of which shall be delivered to
each Holder, the obligation to deliver to such Holder such shares of stock,
securities, cash or property as such holder may be entitled to receive upon such
conversion, and (B) in the event the Holders of a majority of the outstanding
shares of Series A-1 Preferred Stock, voting separately as a single class, elect
to declare that any of the transactions described in clauses (i) through (iii)
constitute a Liquidation Event, then the provisions of this Section 8(c) shall
not apply to such transaction
20
<PAGE>
and, in lieu thereof, the Holders shall be entitled to the amounts set forth in
Section 5 with respect to such Liquidation Event.
(d) Adjustments for Reclassification, Exchange and Substitution. If the
-----------------------------------------------------------
Common Stock is changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision, combination or
consolidation of shares, or merger, consolidation or asset sale, provided for in
Sections 8(a), 8(b) and 8(c) or any reclassification resulting from the adoption
of the Restated Certificate of Incorporation), then and in each such case the
applicable Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately
adjusted such that the Series A-1 Preferred Stock shall be convertible into, in
lieu of the number of shares of Class B-1 Common Stock which the Holders would
otherwise have been entitled to receive (assuming that the Restated Charter
Effectiveness has occurred), a number of shares of such other class or classes
of stock equivalent to the number of shares of Class B-1 Common Stock that would
have been subject to receipt by the Holders upon any Conversion (assuming that
the Restated Charter Effectiveness has occurred) immediately before that change.
No class or series of Common Stock shall be so changed into shares of any other
class or series of stock unless a proportional and equivalent change is made
with respect to all other classes or series of Common Stock. For avoidance of
doubt, it is stipulated that the provisions of this Section 8(d) shall not apply
to any exchange of shares of Common Stock into shares of Series B Preferred
Stock pursuant to the JLL Exchange Agreement.
(e) Adjustment of Conversion Price Upon Issuance of Additional Shares of
--------------------------------------------------------------------
Common Stock. In the event the Corporation, at any time after the Issue Date and
------------
prior to the Restated Charter Effectiveness, issues or sells Additional Shares
of Common Stock for a consideration per share less than the Current Market Price
in effect immediately prior to such issuance or sale, then and in each such
event, the applicable Conversion Price shall be reduced, concurrently with such
issue or sale, to a price (calculated to the nearest cent) determined by
multiplying the applicable Conversion Price by a fraction (i) the numerator of
which shall be (A) the number of shares of Common Stock outstanding immediately
prior to such issue or sale, plus (B) the number of shares of Common Stock which
the aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued or sold would purchase at the
Current Market Price in effect immediately prior to such issuance or sale, and
(ii) the denominator of which shall be (A) the number of shares of Common Stock
outstanding immediately prior to such issue or sale plus (B) the number of
Additional Shares of Common Stock so issued or sold. The provisions of this
Section 8(e) shall not apply to any issuance or sale of Additional Shares of
Common Stock for which an adjustment is provided under Section 8(a).
(f) Issue of Securities Deemed Issue of Additional Shares of Common Stock.
---------------------------------------------------------------------
In the event (i) the Corporation, at any time after the Issue Date and prior to
the Restated Charter Effectiveness, issues, sells or grants any Options or
Convertible Securities, or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options or
Convertible Securities and (ii) the consideration per share for the Additional
Shares of Common Stock issuable upon the exercise of such Options, or in the
case of Convertible Securities, the conversion or exchange of such Convertible
Securities shall be less than the Current Market Price in effect immediately
prior to such issue, sale or grant, or such record date,
21
<PAGE>
as the case may be, then, and in each such case, (A) the maximum number of
shares of Common Stock (as set forth in the instrument relating thereto without
regard to any provisions contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be issuances of Additional Shares of
Common Stock issued as of the time of such issue, sale or grant or, in case such
a record date shall have been fixed, as of the close of business on such record
date, and (B) the Conversion Price shall be adjusted in accordance with Section
8(e) on the date of and immediately prior to such issue, sale or grant, or the
record date, as the case may be. In any such case in which Additional Shares of
Common Stock are deemed to be issued or sold pursuant to this Section 8(f):
(1) no further adjustment in the applicable Conversion Price shall be
made upon the subsequent issue of Convertible Securities or Common Stock
upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any decrease in the
consideration payable to the Corporation, or increase in the number of
Additional Shares of Common Stock issuable, upon the exercise, conversion
or exchange thereof, the adjustments to the Conversion Price computed upon
the original issue, sale, grant or assumption thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such decrease or increase
becoming effective, be recomputed (and the Conversion Price shall
automatically be adjusted as so recomputed) to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities which are outstanding at such
time; and
(3) no readjustment pursuant to the preceding clause (2) shall have
the effect of increasing the applicable Conversion Price to an amount which
exceeds the lower of (A) the applicable Conversion Price on the original
adjustment date and (B) the applicable Conversion Price that would have
resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
The consideration per share deemed to be received by the Corporation for
Additional Shares of Common Stock relating to Options and Convertible
Securities, shall be determined by dividing (x) the total amount, if any,
actually received by the Corporation as consideration for the issue, sale, grant
or assumption of such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the instruments
relating to such Options or Convertible Securities without regard to any
provision contained therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise in full of such Options or the
conversion or exchange in full of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise in full of such Options for
Convertible Securities and the conversion or exchange in full of such
Convertible Securities, by (y) the maximum number of Additional Shares of Common
Stock (as set forth in the instruments relating to such Options or Convertible
Securities, without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
22
<PAGE>
(g) Certain Payments in Lieu of Dividends. In case the Corporation, at any
-------------------------------------
time on or after the Issue Date and prior to the Restated Charter Effectiveness,
shall, by dividend or otherwise, distribute to all holders of its Regular Common
Stock evidences of its indebtedness or assets (including securities other than
dividends and distributions paid pursuant to Section 8(a)), then the Conversion
Price shall be adjusted by multiplying the Conversion Price then in effect by a
fraction (i) the numerator of which shall be (A) the Current Market Price of a
share of Regular Common Stock on the record date fixed for such distribution
minus (B) the Market Value of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of Regular Common Stock and
(ii) the denominator of which shall be the Current Market Price of a share of
Regular Common Stock on the record date fixed for such distribution.
(h) Certificate as to Adjustments. Upon the occurrence of each adjustment
-----------------------------
or readjustment of the applicable Conversion Price pursuant to this Section 8,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each Holder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (i) the consideration received or to be received by the Corporation
for any Additional Shares of Common Stock, or any Options or Convertible
Securities, as the case may be, issued or sold or deemed to have been issued,
(ii) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (iii) the applicable Conversion Price in effect immediately
prior to such issue or sale and as adjusted and readjusted on account thereof.
The Corporation shall, upon the written request at any time of any Holder,
furnish or cause to be furnished to such Holder a like certificate setting forth
(i) the applicable Conversion Price at the time in effect, and showing how it
was calculated, and (ii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon a Conversion. At
the request of the Holders of a majority of the then outstanding Series A-1
Preferred Stock, the Corporation will have the certificates referred to in this
Section 8(h) prepared and delivered by an internationally recognized independent
accounting firm.
Section 9. Preemptive Rights.
-----------------
(a) The Corporation shall provide each Holder with a written notice (a
"Preemptive Rights Notice") of any proposed issuance by the Corporation of any
New Securities at least 30 days prior to the proposed issuance date. Such notice
shall specify the price at which the New Securities are to be issued and the
other material terms of the issuance. Each Holder shall be entitled to purchase,
at the price and on the terms at which such New Securities are proposed to be
issued and specified in such Preemptive Rights Notice, such Holder's Preemptive
Rights Portion of such class of the New Securities proposed to be issued.
"Preemptive Rights Portion" means the pro rata portion of New Securities
proposed to be issued by the Corporation, which amount shall, for each Holder,
be based upon the ratio of (i) the number of shares of Class B-1 Common Stock
that such Holder would receive upon the Conversion of its shares of Series A-1
Preferred Stock into Class B-1 Common Stock pursuant to Section 7 immediately
prior to the issuance of the New Securities (assuming that the Restated Charter
Effectiveness had occurred) to (ii) the total number of issued and outstanding
shares of Common Stock immediately prior to the issuance of the New Securities
(assuming (A) that the Restated Charter Effectiveness has occurred and (B) the
conversion of all securities convertible into, and the exercise of all options,
23
<PAGE>
warrants or other arrangements representing the right to purchase or otherwise
acquire any shares of Common Stock).
(b) A Holder may exercise its rights under this Section 9 by delivering
written notice of its election to purchase New Securities to the Corporation
within 15 days of receipt of the Preemptive Rights Notice. A delivery of such a
written notice (which notice shall specify the amount of New Securities to be
purchased by the Shareholder submitting such notice) by such Holder shall
constitute a binding agreement of such Holder to purchase, at the price and on
the terms specified in the Preemptive Rights Notice, the number of New
Securities specified in such Holder's written notice.
(c) In the case of any issuance of New Securities, the Corporation shall
have 90 days from the date of the Preemptive Rights Notice to consummate the
proposed issuance of any or all of such New Securities which the Holders have
not elected to purchase at the price and upon terms that are not materially less
favorable to the Corporation than those specified in the Preemptive Rights
Notice. At the consummation of such issuance, the Corporation shall issue
certificates representing the New Securities to be purchased by each Holder
exercising preemptive rights pursuant to this Section 9 registered in the name
of such Holder, against payment by such Holder of the purchase price for such
New Securities. If the Corporation proposes to issue such New Securities after
such 90-day period, it shall again comply with the procedures set forth in this
Section. 9.
Section 10. Voting Rights.
-------------
(a) The Holders shall not be entitled to any voting rights, except as
hereinafter provided in this Section 10 or as otherwise provided by DGCL or
other applicable law.
(b) So long as the number of outstanding shares of Series A-1 Preferred
Stock is equal to or greater than 10% of the number of shares of Series A-1
Preferred Stock issued on the Issue Date (subject to adjustments for stock
dividends or distributions and subdivisions, combinations or consolidation of
stock), the affirmative vote of the Holders of at least a majority of the then
outstanding shares of Series A-1 Preferred Stock voting or consenting, as the
case may be, separately as a single class shall be required for the Corporation
to:
(i) amend or repeal any provision of, or add any provision to, the
Corporation's certificate of incorporation or by-laws so as to affect
adversely the powers, rights, preferences (including, without limitation,
liquidation preferences, conversion price and redemption provisions) or
voting rights of the shares of Series A-1 Preferred Stock; provided that
the filing of the Restated Certificate of Incorporation pursuant to the
DGCL with the Secretary of State of the State of Delaware shall not require
prior approval of the Holders pursuant to this Section 10(c);
(ii) amend or repeal any provision of, or add any provision to, this
Certificate of Designations, the Series A-2 Certificate of Designations or
the Series B Certificate of Designations;
(iii) authorize or create any class or series of Senior Stock or
Parity Stock, or issue any shares of Senior Stock or Parity Stock, except
in either case for the
24
<PAGE>
authorization and creation of the Series A-2 Preferred Stock and the Series
B Preferred Stock, the issuance of shares of Series B Preferred Stock
pursuant to the Series B Certificate of Designations, and the issuance of
shares of Series A-2 Preferred Stock (including issuances of shares of
Series A-2 Preferred Stock as a dividend on the Series A-2 Preferred Stock
in accordance with the Series A-2 Certificate of Designations) in
accordance with the Series A-2 Certificate of Designations;
(iv) reclassify any shares of Junior Stock into shares of Parity Stock
or Senior Stock, or any shares of Parity Stock into shares of Senior Stock,
for avoidance of doubt it being stipulated that any exchange of shares of
Regular Common Stock into shares of Series B Preferred Stock shall not be
deemed a reclassification of such stock or require approval of the Holders
pursuant to this Section 10(c);
(v) repurchase or redeem any Capital Stock of the Corporation, other
than (A) the Series A-2 Preferred Stock issued on the Issue Date or issued
as a dividend on the Series A-2 Preferred Stock in accordance with the
Series A-2 Certificate of Designations and (B) the Series B Preferred Stock
issued pursuant to the Series B Certificate of Designations, for avoidance
of doubt it being stipulated that any exchange of shares of Regular Common
Stock into shares of Series B Preferred Stock shall not be deemed a
redemption or repurchase of such stock or require approval of the Holders
pursuant to this Section 10(c);
(vi) incur, or permit any of its Subsidiaries to incur, any
Indebtedness (other than any Indebtedness under the Senior Credit Facility
or the Senior Subordinated Notes) that would result in the Corporation
having an Interest Coverage Ratio of less than 1.50:1.00; provided that
such incurrence shall not constitute a violation of this clause (vii)
unless the Indebtedness so incurred remains outstanding for at least 30
consecutive days following the initial incurrence thereof;
(vii) voluntarily file for bankruptcy, liquidation, dissolution or
winding up of the Corporation;
(viii) increase the number of Directors to more than eleven, unless
the holders of Series B Preferred Stock or Class B-1 Common Stock are
entitled to elect an additional Class B-1 Director pursuant to the Series B
Certificate of Designations or the Restated Certificate of Incorporation,
or the holders of Series A-2 Preferred Stock or Class B-2 Common Stock are
entitled to elect an additional Class B-2 Director pursuant to the Series
A-2 Certificate of Designations or the Restated Certificate of
Incorporation, in which case the number of Directors may be increased by
the number of such additional Directors;
(ix) have less than three of the employees or officers of the
Corporation or its Subsidiaries serve as Directors (and in the event of any
vacancy resulting from the death, disability, resignation or removal of
such a Director, not have another employee or officer of the Corporation or
its Subsidiaries elected or appointed promptly as a Director to fill such
vacancy);
25
<PAGE>
(x) modify or repeal any of the provisions of the By-Laws (A)
requiring that, the Board of Directors meet no less frequently than once in
every calendar quarter, (B) requiring that each committee of the Board of
Directors (including any audit or compensation committee, but excluding any
nominating committees for the nomination of Directors) have, as members, a
proportional number of Class B-1 Directors and Class B-2 Directors, as a
group (in relation to the total number of Directors), unless (1) such
representation is prohibited by applicable law or rules of the Nasdaq
National Market, in which case such committees shall have, as members, the
maximum number of Class B-1 Directors and Class B-2 Directors permitted by
applicable law and rules of the Nasdaq National Market, or (2) the Class B-
1 Directors and Class B-2 Directors elect not to serve on any such
committee, or (C) relating to the number, election, powers or rights of
Class B-1 Directors, Class B-2 Directors or Non-Class B Directors; or
(xi) enter into any agreement with any Affiliate of the Corporation
(other than Subsidiaries of the Corporation) involving amounts in excess of
$5 million.
(c) From and after the Restated Charter Effectiveness, so long as the
number of outstanding shares of Series A-1 Preferred Stock is equal to or
greater than 25% of the number of shares of Series A-1 Preferred Stock issued on
the Issue Date (in each case, as adjusted for stock dividends or distributions
and subdivisions, combinations or consolidation of stock), the Corporation may
not, without the approval of Holders of at least a majority of the then
outstanding shares of Series A-1 Preferred Stock voting or consenting, as the
case may be, separately as a single class, undertake, effect or consummate any
transaction or series of transactions (i) described in clauses (i) through (iii)
of Section 8(c), (ii) involving a merger or consolidation, other than a merger
or consolidation which would result in the Voting Stock of the Corporation
outstanding immediately prior to such merger or consolidation continuing to
represent more than 50% of the combined voting power of the Voting Stock of the
Corporation or the surviving entity or parent thereof outstanding immediately
after such merger or consolidation or (iii) through which the Corporation causes
a Change of Control to be effected.
(d) In addition to any other vote required by law, the affirmative vote of
a majority of the Directors that are not employees or officers of the
Corporation or its Subsidiaries shall be required for any decision by the
Corporation regarding the appointment, removal or compensation of the
Corporation's Chief Executive Officer, or any transaction between the
Corporation (or any of its Subsidiaries) and the Corporation's Chief Executive
Officer (or his or her Affiliates).
(e) The approval of Holders of at least 75% of the then outstanding shares
of Series A-1 Preferred Stock voting or consenting, as the case may be, shall be
required for any amendment to this Certificate of Designations that reduces the
Liquidation Preference or the Mandatory Redemption Obligation or amends the
provisions of Section 3, 10(b) or 10(c) or this Section 10(e).
Section 11. Reports and Notices.
-------------------
(a) The Corporation will provide the Holders, at the Corporation's
expense, with the following:
26
<PAGE>
(i) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Corporation,
and in any event within 45 days thereafter, a consolidated balance sheet of
the Corporation and its Subsidiaries, as of the end of each such quarterly
period, and consolidated statements of income and sources and applications
of funds of the Corporation and its Subsidiaries for such period and for
the current fiscal year to date, prepared in accordance with generally
accepted accounting principles in the United States consistently applied
and setting forth in comparative form the figures for the corresponding
periods of the previous fiscal year, subject to changes resulting from year
end audit adjustments and the absence of notes, together with a
management's discussion and analysis thereof, all in reasonable detail and
certified by the principal financial or accounting officer of the
Corporation.
(ii) As soon as practicable after the end of each fiscal year of the
Corporation, and in any event within 90 days thereafter, a consolidated
balance sheet of the Corporation and its Subsidiaries, as at the end of
such fiscal year, and consolidated statements of income and sources and
applications of funds of the Corporation and its Subsidiaries, for such
year, prepared in accordance with generally accepted accounting principles
in the United States consistently applied and setting forth in each case in
comparative form the figures for the previous fiscal year, together with a
management's discussion and analysis thereof, all in reasonable detail and
certified with an unqualified audit opinion by independent public
accountants of recognized national standing selected by the Corporation.
So long as the Corporation is subject to the reporting requirements of the
Exchange Act, the Corporation's obligations to provide the information required
pursuant to clauses (i) and (ii) of this Section 11(a) shall be satisfied by the
filing by the Corporation of its quarterly reports on Form 10-Q and its annual
reports on Form 10-K, respectively, or any successor forms thereto, in
accordance with the Exchange Act.
(b) In the event that at any time after the date hereof, (i) the
Corporation shall adopt a dividend policy, change a previously adopted dividend
policy, or declare a dividend in the absence of, or in conflict with, a dividend
policy or declare any distribution with respect to the Common Stock, or (ii) the
Corporation shall declare any stock split, stock dividend, subdivision,
combination, or similar distribution with respect to the Common Stock,
regardless of the effect of any such event on the outstanding number of shares
of Common Stock (either such event hereinafter being referred to as a
"Notification Event"), then and in such case the Corporation shall cause to be
mailed to the Holders, not later than the earlier of the date public
announcement of the Notification Event is first made or the date ten days prior
to the record date, if any, in connection with such Notification Event, written
notice specifying the nature of such event and the effective date of, or the
date on which the books of the Corporation shall close or a record shall be
taken with respect to, such event. Such notice shall also set forth facts
indicating the effect of such action (to the extent such effect may be known at
the date of such notice) on the Conversion Price and the kind and amount of the
shares of stock or other securities or property issuable or distributable with
respect to the Series A-1 Preferred Stock.
27
<PAGE>
(c) The Corporation shall deliver to the Holders all notices and other
reports delivered to holders of Regular Common Stock, including all notices and
reports required by DGCL or other applicable laws.
Section 12. Transfer Restrictions. Until the 120th day following the Issue
---------------------
Date and following the Restated Charter Effectiveness, any transfer of shares of
Series A-1 Preferred Stock by a Holder to a Person other than a Permitted
Transferee shall be null and void and of no force and effect . The Corporation
may, at its discretion, as a condition to the transfer or registration of
transfer of Series A-1 Preferred Stock to a purported Permitted Transferee,
require the furnishing of affidavits or other proof as it deems reasonably
necessary to establish that the proposed transferee is a Permitted Transferee.
The term "Permitted Transferee" of a Holder shall be (i) any direct or indirect
Subsidiary of any Person who was a Holder on the Issue Date, (ii) any investment
fund managed by Joseph Littlejohn & Levy, Inc., a Delaware corporation ("JLL"),
(iii) any Person who is or becomes an investor in a fund managed by JLL,
including Joseph Littlejohn & Levy Fund III, L.P., a Delaware limited
partnership, (iv) the heirs, executors, administrators, testamentary trustees or
legatees of any Holder who is an individual, (v) the spouses and the lineal
descendants of any individual who is a Holder on the Issue Date, and (vi) any
trust, the beneficiaries of which, or any corporation, limited liability company
or partnership, the stockholders, members or general or limited partners of
which include only an individual who was a Holder on the Issue Date and the
Persons referred to in clause (v).
28
<PAGE>
EXHIBIT B
---------
SERIES A-2 11% PREFERRED STOCK
OF
ADVANCE PARADIGM, INC.
Set forth below are the powers, designations, preferences and relative,
participating, optional and other special rights, including voting rights, and
qualifications, limitations and restrictions of the Series A-2 11% Preferred
Stock of Advance Paradigm, Inc., a Delaware corporation (the "Corporation").
Such series of preferred stock, par value $0.01 per share, of the Corporation
(the "Preferred Stock"), was initially created by the Board of Directors of the
Corporation (the "Board of Directors") pursuant to the Amended and Restated
Certificate of Incorporation of the Corporation (as may be amended from time to
time, the "Certificate of Incorporation") and such series is now expressly
incorporated by reference into Section 5.2 of the Second Amended and Restated
Certificate of Incorporation of the Corporation.
Section 1. Designation and Number.
----------------------
(a) Such series of Preferred Stock is designated as Series A-2 11%
Preferred Stock (the "Series A-2 Preferred Stock"), and the number of shares
constituting such series is 982,427 shares. A total of 125,000 shares of Series
A-2 Preferred Stock shall be initially issued, and 857,427 shares of Series A-2
Preferred Stock shall be reserved for issuance in accordance with Section 4(a)
and may not be issued for any other purpose.
(b) Shares of Series A-2 Preferred Stock issued and reacquired in any
manner by the Corporation, including by purchase or redemption, shall (upon
compliance with any applicable provisions of DGCL) have the status of authorized
and unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock other than as
Series A-2 Preferred Stock.
Section 2. Definitions. The following terms, as used in this Certificate of
-----------
Designations, shall have the following meanings:
"Additional Series A-2 Shares" has the meaning set forth in Section
----------------------------
4(a)(i).
"Additional Shares of Common Stock" means all shares of Common Stock
---------------------------------
issued or sold by the Corporation after the Issue Date, whether or not
subsequently reacquired or retired by the Corporation, other than shares of
Common Stock: (i) issued upon the conversion or exchange of any series or
class of Capital Stock issued and outstanding on the Issue Date into
another series or class of Capital Stock of the Corporation without any
additional consideration to the Corporation by the holder thereof; (ii)
issued upon conversion of any shares of Series A Preferred Stock or Series
B Preferred Stock into any class or series of Common Stock; (iii) issued
upon conversion of any shares of Class B Common Stock into Regular Common
Stock; (iv) issued upon the exercise of options or warrants that have been
issued prior to, and are outstanding as of, the Issue Date; (v) issued upon
exercise of options granted prior to the 120th day following the Issue Date
to employees, consultants, officers or directors of the Corporation
pursuant to any stock
<PAGE>
option plan in effect on the Issue Date and consistent with past practice,
but in any event not in excess of 25,000 shares of Common Stock during such
120-day period; (vi) issued prior to the 120th day following the Issue Date
to customers in the ordinary course of business consistent with past
practice, but in any event not in excess of 25,000 shares of Common Stock
during such 120-day period; (vii) issued upon exercise of the Senior
Subordinated Notes Warrants; and (viii) issued upon exercise of the
Management Options.
"Affiliate" means, with respect to any specified Person, any other
---------
Person which, directly or indirectly, controls, is controlled by or is
under direct or indirect common control with, such specified Person.
Control of any Person shall consist of the power to direct the management
and policies of such Person (whether through the ownership of voting
securities, by contract, as trustee or otherwise) and shall be deemed to
exist upon the ownership of securities entitling the holder thereof to
exercise more than 20% of the voting power in the election of directors of
such Person (or other persons or bodies performing similar functions).
"Board of Directors" has the meaning set forth in the Preamble hereto.
------------------
"Business Day" means any day except Saturday, Sunday and any day on
------------
which banking institutions in New York City, New York generally are
authorized or required by law or other governmental action to be closed.
"Capital Stock" means (i) all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of the Corporation,
including each class or series of Common Stock or Preferred Stock, and (ii)
any option, warrant or other arrangement representing the right to purchase
or otherwise acquire any of the foregoing, including any securities
convertible or exchangeable into any of the foregoing.
"Certificate of Incorporation" has the meaning set forth in the
----------------------------
Preamble hereto.
"Change of Control" means the occurrence of either of the following:
-----------------
(i) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than the Excluded Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 40% of the total issued Common
Stock or total issued Voting Stock of the Corporation; or (ii) during any
period of two consecutive years, individuals who at the beginning of such
period constituted the Class A and Class C Directors (together with any new
Class A or Class C Directors whose election by the Board of Directors or
whose nomination for election by the stockholders of the Corporation was
approved by a vote of a majority of the Class A and Class C Directors then
still in office who were either Class A or Class C Directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease to constitute a majority of the Class A and
Class C Directors then in office.
2
<PAGE>
"Class A Directors" means (i) prior to the Restated Charter
-----------------
Effectiveness, the Directors referred to as "Class A Directors" in the
Stockholders' Agreement, and (ii) following the Restated Charter
Effectiveness, the Directors referred to as "Class A Directors" in the
Restated Certificate of Incorporation.
"Class B Common Stock" means the Class B-1 Common Stock and the Class
--------------------
B-2 Common Stock.
"Class B-1 Common Stock" means the Class B-1 Common Stock to be
----------------------
created as a separate class of Common Stock upon the Restated Charter
Effectiveness pursuant to the Restated Certificate of Incorporation.
"Class B-1 Directors" means the Directors (i) designated initially by
-------------------
holders of Series B Preferred Stock pursuant to the Series B Certificate of
Designations and (ii) following the Restated Charter Effectiveness, elected
by holders of Class B-1 Common Stock pursuant to the Restated Certificate
of Incorporation.
"Class B-2 Common Stock" means the Class B-2 Common Stock to be
----------------------
created as a separate class of Common Stock upon the Restated Charter
Effectiveness pursuant to the Restated Certificate of Incorporation.
"Class B-2 Directors" has the meaning set forth in Section 10(c).
-------------------
"Class C Directors" means (i) prior to the Restated Charter
-----------------
Effectiveness, the Directors referred to as "Class C Directors" in the
Stockholders' Agreement and (ii) following the Restated Charter
Effectiveness, the Directors referred to as "Class C Directors" in the
Restated Certificate of Incorporation.
"Common Stock" means the common stock, par value $0.01 per share, of
------------
the Corporation, whether voting or non-voting, of any series or class
(including Regular Common Stock and, following the Restated Charter
Effectiveness, the Class B Common Stock).
"Conversion" has the meaning set forth in Section 7(a).
----------
"Conversion Date" means the first date on which any certificates for
---------------
shares of Series A-2 Preferred Stock are surrendered by the Electing Holder
to the Corporation for conversion into Class B-2 Common Stock.
"Conversion Price" has the meaning set forth in Section 7(b).
----------------
"Conversion Ratio" has the meaning set forth in Section 7(b).
----------------
"Convertible Securities" means any evidences of indebtedness, shares
----------------------
(other than shares of Regular Common Stock) or other securities that, by
their terms, are directly or indirectly convertible into or exchangeable
for Additional Shares of Common Stock. For avoidance of doubt, it is
stipulated that the following are not Convertible Securities: (i) shares
of Series A Preferred Stock issued as a dividend on shares of Series A
Preferred
3
<PAGE>
Stock; and (ii) shares of Series B Preferred Stock issued in accordance
with the JLL Exchange Agreement.
"Corporation" has the meaning set forth in the Preamble hereto.
-----------
"Current Market Price" means, as of any date, the average of the daily
--------------------
Market Prices of the Regular Common Stock for twenty consecutive trading
days immediately preceding such date.
"DGCL" means the General Corporation Law of the State of Delaware.
----
"Director" means a member of the Board of Directors.
--------
"Dividend Payment Date" means March 31st, June 30th, September 30th
---------------------
and December 31st of each year, unless such day is not a Business Day, in
which case Dividend Payment Date shall be the next succeeding Business Day.
"Dividend Period" means (i) the period beginning on the Dividend Start
---------------
Date and ending on the first Dividend Payment Date, and (ii) thereafter,
the quarterly periods from (and including) the first day of a Dividend
Period until the end of such period.
"Dividend Rate" means, with respect to any share of Series A-2
-------------
Preferred Stock, (i) from (and including) the Dividend Start Date to (and
including) September 30, 2001, a rate per annum equal to 11% of the
Liquidation Preference for such share as of the first day of the applicable
Dividend Period, (ii) from (and including) October 1, 2001 to (and
including) March 31, 2002, a rate per annum equal to thirteen percent (13%)
of the Liquidation Preference for such share as of the first day of the
applicable Dividend Period, and (iii) from (and including) and after April
1, 2002, a rate per annum equal to 16% of the Liquidation Preference for
such share as of the first day of the applicable Dividend Period.
"Dividend Start Date" means the 120th day following the Issue Date.
-------------------
"Electing Holder" has the meaning given in Section 7(a).
---------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"Excluded Holders" means (i) the Corporation and its Subsidiaries,
----------------
(ii) the Principals and the Related Parties of the Principals, (iii) the
Permitted Transferees, and the Affiliates of Permitted Transferees, (iv)
the holders of shares of Series A-1 Preferred Stock and Series B Preferred
Stock on the Issue Date and the "Permitted Transferees" (as defined in the
Series A-1 Certificate of Designations or the Series B Certificate of
Designations, as the case may be) and the Affiliates of the Persons
referred to in this clause (iv), and (v) any Person permitted or required
to receive shares of Series B Preferred Stock pursuant to the Exchange
Agreement, the "Permitted Transferees" (as defined in the Series B
Certificate of Designations) of such Persons (assuming that they
4
<PAGE>
are holders of Series B Preferred Stock), and the Affiliates of the Persons
referred to in this clause (v).
"GAAP" means accounting principles and practices generally accepted
----
from time to time in the United States as in effect on the Issue Date.
"Holder" means a record holder of shares of Series A-2 Preferred
------
Stock.
"Indebtedness" has the meaning given to such term in the Senior
------------
Subordinated Notes Indenture.
"Issue Date" means the original date of issuance of shares of Series
----------
A-2 Preferred Stock.
"JLL Exchange Agreement" means the Exchange Agreement dated as of the
----------------------
Issue Date between the Corporation and Joseph Littlejohn & Levy Fund III,
L.P., a Delaware limited partnership, relating to the exchange of shares of
Regular Common Stock into shares of Series B Preferred Stock, as the same
may be amended, supplemented or restated from time to time.
"Junior Stock" means (i) prior to the Restated Charter Effectiveness,
------------
the securities referred to in clause (i) of Section 3(a), and (ii)
following the Restated Charter Effectiveness, the securities referred to in
clause (i) of Section 3(b), in each case subject to Section 3(c).
"Liquidation Event" means any voluntary or involuntary liquidation,
-----------------
dissolution or winding up of the affairs of the Corporation.
"Liquidation Preference" means, for each share of Series A-2 Preferred
----------------------
Stock as of any date, (i) $1,000, plus (ii) in the case of any accumulated
and unpaid dividends or distributions on such share as of such date payable
in Additional Series A-2 Shares, (A) the number of such Additional Series
A-2 Shares times $1,000 plus (B) the amounts referred to in clauses (iii)
and (iv) of this definition for the accumulated and unpaid dividends
thereon, (iii) all accumulated and unpaid cash dividends and distributions
on such share as of such date, plus (iv) the Market Price of all other
accumulated and unpaid dividends and distributions on such share as of such
date (including an amount equal to a prorated dividend for the period from
the last Dividend Payment Date to the date fixed for redemption,
liquidation, dissolution or winding up, if any).
"Management Options" means options to purchase up to an aggregate of
------------------
1,790,000 shares of Common Stock at an initial exercise price of $20 per
share issued to officers and employees on or before the Issue Date. For
purposes of this Certificate of Designations, the Management Options shall
be deemed issued before the Issue Date.
"Mandatory Redemption Obligation" means the Corporation's redemption
-------------------------------
obligation set forth in Section 6.
"Mandatory Redemption Price" has the meaning set forth in Section
--------------------------
6(a).
5
<PAGE>
"Market Price" means: (a) with respect to any security, on any given
------------
day, (i) if such security is listed or authorized for trading on a national
securities exchange, the last sale price of such security, regular way, on
such date, or if no such sale takes place on such date, the average of the
closing bid and asked prices thereof, on such date, in each case as
officially reported on the principal national securities exchange on which
such security is listed or authorized for trading, (ii) if such security is
not listed or authorized for trading on a national securities exchange but
is quoted on the Nasdaq National Market, (A) the price of the last trade,
as reported on the Nasdaq National Market, not identified as having been
reported late to such system, or (B) if such security is so traded, but no
such last trade information is reported, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market,
(iii) if such security is not listed or authorized for trading on a
national securities exchange or the Nasdaq National Market or any
comparable system but has a nationally recognized existing trading market,
the average of the closing bid and asked prices as furnished by two members
of the National Association of Securities Dealers, Inc. selected from time
to time by the Corporation for that purpose or (iv) if such security is not
listed or authorized for trading on a national securities exchange or the
Nasdaq National Market or any comparable system and does not have a
nationally recognized existing trading market, the fair value of such
security as (A) determined by an agreement between the Corporation and the
Holders of a majority of the outstanding shares of Series A-2 Preferred
Stock or (B) if the Corporation and such Holders fail to agree, determined
jointly by an independent investment banking firm retained by the
Corporation and by an independent investment banking firm retained by such
Holders, or (C) if the Corporation or such Holders shall fail so to retain
an independent investment banking firm within five Business Days of the
retention of such firm by the Corporation or such Holders, as the case may
be, determined solely by the firm so retained or (D) if the firms so
retained by the Corporation and by such Holders shall be unable to reach a
joint determination within 15 Business Days of the retention of the last
firm so retained, determined by another independent investment banking firm
chosen by the first two such firms; and (b) with respect to any other asset
or property, the fair market value of such asset or property as (i)
determined by an agreement between the Corporation and the Holders of a
majority of the outstanding shares of Series A-2 Preferred Stock or (ii) if
the Corporation and such Holders fail to agree, determined jointly by an
independent investment banking firm retained by the Corporation and by an
independent investment banking firm retained by such Holders, or (iii) if
the Corporation or such Holders shall fail so to retain an independent
investment banking firm within five Business Days of the retention of such
firm by the Corporation or such Holders, as the case may be, determined
solely by the firm so retained or (iv) if the firms so retained by the
Corporation and by such Holders shall be unable to reach a joint
determination within 15 Business Days of the retention of the last firm so
retained, determined by another independent investment banking firm chosen
by the first two such firms.
"New Securities" means (a) prior to the Restated Charter
--------------
Effectiveness, any Capital Stock issued after the Issue Date, and (b) after
the Restated Charter Effectiveness, any Capital Stock issued after such
effectiveness by the Corporation for cash consideration, in each case other
than (i) Capital Stock issued upon the conversion or exchange of any series
or class of Capital Stock issued and outstanding on the Issue Date
6
<PAGE>
into another series or class of Capital Stock of the Corporation without
any additional consideration to the Corporation by the holder thereof; (ii)
Capital Stock issued upon conversion of any shares of Series A Preferred
Stock or Series B Preferred Stock into any class or series of Common Stock;
(iii) Regular Common Stock issued upon conversion of Class B Common Stock;
(iv) shares of Series A Preferred Stock issued as a dividend on shares of
Series A Preferred Stock; (v) dividends or distributions payable in shares
of Capital Stock effected in accordance with Section 4(b) or 8(a); (vi)
Capital Stock issued upon the exercise of options or warrants that have
been issued prior to, and are outstanding as of, the Issue Date; (vii)
Capital Stock issued to employees, consultants, officers or directors of
the Corporation pursuant to any stock option plan in effect on the Issue
Date and consistent with past practice or pursuant to a stock option plan
adopted after the Issue Date; (viii) Capital Stock issued to holders of
Series A-1 Preferred Stock or Series B Preferred Stock pursuant to the
exercise by such holders of their preemptive rights contained in the Series
A-1 Certificate of Designations or the Series B Certificate of
Designations, as the case may be; (ix) Capital Stock issued upon exercise
of the Senior Subordinated Notes Warrants; (x) Common Stock issued upon the
exercise of Management Options; (xi) Capital Stock issued to customers in
the ordinary course of business consistent with past practice, subject to a
maximum amount, in any fiscal year of the Corporation, equal or equivalent
to (A) 0.5% of the weighted average number of issued and outstanding shares
of Common Stock during such fiscal year plus (B) the number of shares
permitted under clause (A) for any fiscal year ending after the Issue Date
but not previously expended; and (xii) shares of Series B Preferred Stock
issued in accordance with the JLL Exchange Agreement.
"Non-Class B Director" means any Director who is neither a Class B-1
--------------------
Director nor a Class B-2 Director.
"Options" means rights, options or warrants to subscribe for, purchase
-------
or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities. For avoidance of doubt, it is expressly stipulated
that the following are not Options: (i) any rights, options or warrants to
subscribe for, purchase or otherwise acquire shares of Common Stock
referred to in clause (v) or (vi) of the definition of Additional Shares of
Common Stock; and (ii) any right or option to acquire shares of Series B
Preferred Stock pursuant to the JLL Exchange Agreement.
"Parity Stock" means (i) prior to the Restated Charter Effectiveness,
------------
the securities referred to in clause (ii) of Section 3(a) and (ii)
following the Restated Charter Effectiveness, the securities referred to in
clause (ii) of Section 3(b), in each case subject to Section 3(c).
"Permitted Transferee" has the meaning set forth in Section 12.
--------------------
"Person" means any corporation, limited liability company,
------
partnership, trust, organization, association, other entity or individual.
"Preemptive Rights Notice" has the meaning given in Section 9(a).
------------------------
7
<PAGE>
"Preemptive Rights Portion" has the meaning given in Section 9(a).
-------------------------
"Preferred Stock" has the meaning set forth in the Preamble hereto.
---------------
"Principals" has the meaning given to such term in the Senior
----------
Subordinated Notes Indenture.
"Record Date" means, with respect to a dividend payable on March 31,
-----------
June 30, September 30 and December 31 of each year, 5:00 p.m. (Eastern
Standard Time) on the preceding March 15, June 15, September 15 and
December 15, respectively.
"Redemption Date" has the meaning given in Section 6(b).
---------------
"Redemption Notice" has the meaning set forth in Section 6(b).
-----------------
"Related Parties" has the meaning given to such term in the Senior
---------------
Subordinated Notes Indenture.
"Regular Common Stock" means (i) initially, the class of Common Stock
--------------------
existing on the Issue Date, and (ii) upon the Restated Charter
Effectiveness, the Class A Common Stock created as a separate class of
Common Stock pursuant to the Restated Certificate of Incorporation.
"Restated Certificate of Incorporation" means the Second Amended and
-------------------------------------
Restated Certificate of Incorporation of the Corporation in the form
attached as Exhibit B to the Stockholders' Agreement (as the same may from
time to time be amended (x) prior to the Restated Charter Effectiveness,
pursuant to the Stockholders' Agreement, and (y) after the Restated Charter
Effectiveness, pursuant to such Restated Certificate of Incorporation and
the DGCL), to be submitted for Stockholder Approval and, following
Stockholder Approval, filed according to the DGCL with the Secretary of
State of the State of Delaware.
"Restated Charter Effectiveness" means the date of the filing of the
------------------------------
Restated Certificate of Incorporation with the Secretary of State of the
State of Delaware in accordance with the DGCL following Stockholder
Approval.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Senior Credit Facility" means the credit facilities evidenced by, and
----------------------
the loans and borrowings extended to the Corporation pursuant to the $825
million Senior Credit Agreement, dated on or about the Issue Date, among
the Corporation, as borrower the subsidiary guarantors parties thereto, the
initial lenders, initial issuing bank and swing line bank named therein,
Bank of America, N.A., as Collateral Agent and Administrative Agent, Bank
One, N.A., as Documentation Agent, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Book-Runner, Lead Arranger and Syndication Agent, and Bank
of America Securities LLC, as Joint Book-Runner and Joint Lead Arranger,
and any one or more deferrals, renewals, extensions, replacements,
refinancings or refundings thereof, or
8
<PAGE>
amendments, modifications or supplements thereto or replacements thereof
(including, without limitation, any amendment increasing the amount that
may be borrowed thereunder) and any agreement providing therefor whether by
or with respect to the same or any other agents, lenders, creditors or
group of creditors (or any combination thereof) and including related
notes, guarantee agreements, security agreements and other instruments
executed in connection therewith.
"Senior Stock" means the securities referred to in clause (iii) of
------------
Section 3(b), subject to Section 3(c).
"Senior Subordinated Notes" means the Corporation's Senior
-------------------------
Subordinated Notes due 2010 issued on or about the Issue Date in the
initial principal amount of $200,000,000 (the "initial notes") and any
notes registered under the Securities Act that are issued in exchange for
such notes and any deferrals, renewals, extensions, replacements,
refinancings or refundings thereof, or amendments or supplements thereto or
replacements thereof.
"Senior Subordinated Notes Indenture" means the Indenture, dated as of
-----------------------------------
October 2, 2000, between the Corporation and U.S. Trust of Texas, N.A., as
trustee pursuant to which the Corporation's Senior Subordinated Notes due
2010 in the initial principal amount of $200,000,000 are issued, as the
same may be amended from time to time.
"Senior Subordinated Notes Warrants" means the warrants to purchase
----------------------------------
Regular Common Stock issued on or about the Issue Date to Rite Aid
Corporation. For purposes of this Certificate of Designations, the Senior
Subordinated Notes Warrants shall be deemed to have been issued before the
Issue Date.
"Series A Preferred Stock" means the Series A-1 and Series A-2
------------------------
Preferred Stock.
"Series A Certificates of Designations" means the Series A-1
-------------------------------------
Certificate of Designations and this Certificate of Designations.
"Series A-1 Certificate of Designations" means (i) initially, the
--------------------------------------
Certificate of Designations for the Series A-1 Preferred Stock filed
pursuant to the DGCL with the Secretary of State of the State of Delaware
on or about the Issue Date, and (ii) following the Restated Charter
Effectiveness, Exhibit A to the Restated Certificate of Incorporation, in
each case, as amended, supplemented or restated from time to time.
"Series A-1 Preferred Stock" means the Preferred Stock designated by
--------------------------
the Board of Directors as Series A-1 11% Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series A-1 Certificate of Designations.
"Series A-2 Preferred Stock" has the meaning set forth in Section 1.
--------------------------
9
<PAGE>
"Series B Certificate of Designations" means (i) initially the
------------------------------------
Certificate of Designations for the Series B Preferred Stock filed pursuant
to the DGCL with the Secretary of State of the State of Delaware on or
about the Issue Date, and (ii) following the Restated Charter
Effectiveness, Exhibit C to the Restated Certificate of Incorporation, in
each case, as amended, supplemented or restated from time to time.
"Series B Preferred Stock" means the Preferred Stock designated by the
------------------------
Board of Directors as Series B Convertible Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series B Certificate of Designations.
"Stockholder Approval" means the approval by the stockholders of the
--------------------
Corporation of the adoption of the Restated Certificate of Incorporation
and of the authorization and issuance of the Class B Common Stock to be
issued to the Holders and the holders of the Series A-1 Preferred Stock and
Series B Preferred Stock in accordance with the terms of this Certificate
of Designations, the Series A-1 Certificate of Designations and the Series
B Certificate of Designations.
"Stockholders' Agreement" means the Stockholders' Agreement, dated on
-----------------------
or about the Issue Date, among the Corporation, Joseph Littlejohn & Levy
Fund III, L.P., Rite Aid Corporation and the other Persons named therein,
as the same may be amended, supplemented or restated from time to time
"Subsidiary" means, with respect to any specified Person: (i) any
----------
corporation, association or other business entity of which more than 50% of
the total voting power of shares of capital stock or other equity interests
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by a Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and (ii)
any partnership (A) the sole general partner or the managing general
partner of which is the Person or a Subsidiary of that Person or (B) the
only general partners of which are the Person or one or more Subsidiaries
of that Person (or any combination thereof).
"Transfer" means any direct or indirect (including, without
--------
limitation, through the transfer of a controlling interest in a Permitted
Transferee) sale, transfer, assignment, grant of participation interest in,
option, pledge, hypothecation, encumbrance or other disposition.
"Voting Default" has the meaning given to such term in the Series B
--------------
Certificate of Designations.
"Voting Stock" means, with respect to any Person, the Capital Stock of
------------
any class or kind ordinarily having the power to vote generally for the
election of directors (or other persons or bodies performing similar
functions) of such Person.
10
<PAGE>
Section 3. Rank.
----
(a) Prior to the Restated Charter Effectiveness. Prior to and until the
-------------------------------------------
Restated Charter Effectiveness, the Series A-2 Preferred Stock shall, with
respect to dividends and distributions and upon a Liquidation Event, rank:
(i) senior to (A) all classes or series of Common Stock and (B) each
other class or series of Capital Stock of the Corporation created after the
Issue Date and prior to the Restated Charter Effectiveness; and
(ii) on a parity with the Series A-1 Preferred Stock and the Series B
Preferred Stock.
(b) Following the Restated Charter Effectiveness. Upon and following the
--------------------------------------------
Restated Charter Effectiveness, the Series A-2 Preferred Stock shall, with
respect to dividends and distributions and upon a Liquidation Event, rank:
(i) senior to all classes or series of Common Stock;
(ii) on a parity with the Series A-1 Preferred Stock;
(iii) junior to each series or class of Preferred Stock created after
the Restated Charter Effectiveness.
(c) The respective definitions of Junior Stock, Parity Stock and Senior
Stock shall also include any options, warrants or other rights exercisable or
exchangeable for or convertible into any of the Junior Stock, Parity Stock or
Senior Stock, as the case may be.
Section 4. Dividends.
---------
(a) Prior to the Restated Charter Effectiveness. Prior to and until the
-------------------------------------------
Restated Charter Effectiveness:
(i) Beginning on the Dividend Start Date, the Holders of outstanding
shares of Series A-2 Preferred Stock shall be entitled to receive (if and
to the extent of surplus legally available therefor), dividends at the
Dividend Rate payable solely in additional shares of Series A-2 Preferred
Stock ("Additional Series A-2 Shares") in accordance with the terms of this
Section 4. Following the Dividend Start Date, such dividends shall be
payable quarterly in arrears on each Dividend Payment Date for the Dividend
Period ending on such Dividend Payment Date. Dividends on the Series A-2
Preferred Stock shall accrue (whether or not declared) and be cumulative
from (and including) the first day of each Dividend Period in which
dividends may be payable, and accrued dividends for each Dividend Period
shall accumulate to the extent not paid on the Dividend Payment Date for
such Dividend Period; provided that dividends on Additional Series A-2
Shares shall accrue from (and including) the date such Additional Series A-
2 Shares are issued pursuant to this Section 4(a), whether or not in any
Dividend Period there shall be surplus of the Corporation legally available
for the payment of such dividends. Each
11
<PAGE>
such dividend shall be payable to the Holders of shares of Series A-2
Preferred Stock on the corresponding Record Date.
(ii) The amount of dividends payable for each full Dividend Period
for the Series A-2 Preferred Stock shall be computed by dividing the
applicable Dividend Rate by four. The amount of dividends payable for any
period shorter or longer than a full Dividend Period, shall be computed on
the basis of twelve 30-day months and a 360-day year. Holders of shares of
Series A-2 Preferred Stock shall not be entitled to any dividends, whether
payable in cash, property or stock, in excess of cumulative dividends as
herein provided. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment on the Series A-2 Preferred
Stock that may be in arrears; except that if dividends are not paid in full
on any Dividend Payment Date, dividends will cumulate as if the unpaid
dividends were payable in cash and the Liquidation Preference had been
increased by the amount of unpaid dividends until paid.
(iii) Dividends on the shares of Series A-2 Preferred Stock pursuant
to this Section 4(a) shall continue to accrue and accumulate until full
cumulative dividends (including an amount equal to a prorated dividend for
the period from the last Dividend Payment Date to (but not including) the
date of the Restated Charter Effectiveness) have been declared and paid on
the Series A-2 Preferred Stock for all Dividend Periods terminating prior
to the date of the Restated Charter Effectiveness; provided that such
dividends shall cease to accrue or accumulate on (but not including) the
date of the Restated Charter Effectiveness.
(iv) The number of Additional Series A-2 Shares to be issued as
dividends pursuant to this Section 4(a) will equal the cash amount of the
dividend that would have been payable on a share of Series A-2 Preferred
Stock if dividends were payable in cash, divided by $1,000, rounded to the
nearest full share, up or down, after taking into account all shares of
Series A-2 Preferred Stock owned by the Holder thereof, provided that if
the resulting fractional share held by such Holder equals one-half of a
share of Series A-2 Preferred Stock, such fractional share shall be rounded
up to the nearest full share.
(v) Accrued dividends for any past Dividend Periods may be declared
and paid on any subsequent Dividend Payment Date or any other date
established by the Board.
(b) Following the Restated Charter Effectiveness. Upon and following the
--------------------------------------------
Restated Charter Effectiveness, in the event the Corporation at any time or from
time to time makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, any dividend or distribution on shares of any
class or series of Common Stock (other than any dividend or distribution payable
in shares of Common Stock effected in accordance with Section 8(a)), then and in
each such event each Holder shall be entitled to receive the amount of such
dividend or distribution that such Holder would have received had its shares of
Series A-2 Preferred Stock been converted into Class B Common Stock pursuant to
Section 7 immediately prior to the record date for such dividend or
distribution.
12
<PAGE>
(c) Dividends or Distributions on Parity Stock. So long as any shares of
------------------------------------------
the Series A-2 Preferred Stock are outstanding, (i) no dividend or distribution
may be declared or paid or set apart for payment on any Parity Stock by the
Corporation, directly or indirectly, unless (A) such dividend or distribution is
required by the terms of such Parity Stock pursuant to the certificate of
designations for such Parity Stock (or other instrument pursuant to which such
Parity Stock was created and setting forth the powers, designations, preferences
and other special rights and qualifications, limitations and restrictions of
such Parity Stock) as in effect on the initial issuance of such Parity Stock,
and (B) all accumulated and unpaid dividends and distributions due to be paid on
the Series A-2 Preferred Stock, and any redemption payments required by Section
6, have been or are contemporaneously paid or are being paid on a pro rata basis
with any such Parity Stock, and (ii) except as otherwise provided in Section
6(f), no Parity Stock may be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available to a sinking fund for
the redemption of any shares of such stock) by the Corporation directly or
indirectly, unless (A) all accumulated and unpaid dividends and distributions
due to be paid on the Series A-2 Preferred Stock, and any redemption payments
required by Section 6, have been or are contemporaneously paid, and (B) such
redemption, purchase or acquisition is required by the certificate of
designations for such Parity Stock (or other instrument pursuant to which such
Parity Stock was created and setting forth the powers, designations, preferences
and other special rights and qualifications, limitations and restrictions of
such Parity Stock) as in effect on the initial issuance of such Parity Stock.
(d) Dividends or Distributions on Junior Stock. So long as any shares of
------------------------------------------
Series A-2 Preferred Stock are outstanding, no dividends or other distribution
may be declared or paid or set apart for payment on any Junior Stock, nor may
any Junior Stock be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly, other than (i) a redemption, purchase or other acquisition of shares
of Common Stock made solely pursuant to the terms of an employee incentive or
benefit plan of the Corporation or its Subsidiaries, (ii) dividends or
distributions on shares of Common Stock effected solely in accordance with
Section 4(b) or 8(g), and (iii) dividends or distributions made solely in Junior
Stock effected in accordance with Section 8(a).
Section 5. Liquidation Rights.
------------------
(a) Upon the occurrence of a Liquidation Event, subject to the rights of
holders of Senior Stock and Parity Stock, each Holder shall be entitled to be
paid, before any distribution is made on any Junior Stock, out of the assets of
the Corporation available for distribution to its stockholders an amount per
share in cash equal to the greater of (i) the Liquidation Preference, as of the
date fixed for the Liquidation Event, for each outstanding share of Series A-2
Preferred Stock held by such Holder and (ii) the amount such Holder would have
received upon such final distribution if all outstanding shares of Series A-2
Preferred Stock had been converted into shares of Common Stock pursuant to
Section 7 (assuming that (A) the Restated Charter Effectiveness has occurred and
(B) all outstanding shares of Series A-1 Preferred Stock and Series B Preferred
Stock had been converted into shares of Common Stock pursuant to the Series A-1
Certificate of Designations and the Series B Certificate of Designations,
respectively, immediately prior to such Liquidation Event).
13
<PAGE>
(b) If the assets distributable in any such Liquidation Event to the
Holders and to the holders of outstanding shares of all Parity Stock are
insufficient to permit the payment to such holders of the full preferential
amounts to which they may be entitled, such assets shall be distributed ratably
among the holders of the outstanding shares of Series A-2 Preferred Stock and
Parity Stock in proportion to the full preferential amount each such holder
would otherwise be entitled to receive.
(c) For purposes of this Section 5, a Liquidation Event shall, at the
election of the Holders of a majority of the outstanding shares of Series A-2
Preferred Stock, voting separately as a single class, include (i) the
consolidation or merger of the Corporation into any other corporation or entity
if the Corporation is not the continuing or surviving corporation or entity of
such consolidation or merger, (ii) the consolidation or merger of any other
corporation or entity into the Corporation with the Corporation being the
continuing or surviving corporation if, in connection with such consolidation or
merger, the shares of Common Stock are changed into or exchanged for stock or
other securities of any other Person or cash or any other property, and (iii)
the transfer by the Corporation of all or substantially all of its properties or
assets to any other corporation or entity (other than to a wholly-owned
Subsidiary of the Corporation if such Subsidiary remains wholly owned by the
Corporation after such transfer or any other transaction or series of
transactions related to such transfer).
(d) After payment of the full preferential amount to which the Holders are
entitled pursuant to this Section 5, the Holders shall not be entitled to any
further participation in any distribution of assets of the Corporation, and all
rights of the Holders with respect to their shares of Series A-2 Preferred Stock
shall terminate.
Section 6. Redemption.
----------
(a) Unless the Restated Charter Effectiveness shall have occurred prior to
the occurrence of the event described in clause (i) or (ii) of this Section
6(a), the Corporation shall redeem, to the extent of funds legally available
therefor (determined pursuant to Section 6(e)), in the manner provided for in
this Section 6 all of the then outstanding shares of Series A-2 Preferred Stock
at the Liquidation Preference as of the Redemption Date (the "Mandatory
Redemption Price") on (i) the eleventh anniversary of the Issue Date or (ii) in
the event a Change of Control of the Corporation has occurred, upon receipt of
notice (no later than 30 days following the later of the occurrence of such
Change of Control or public announcement of the occurrence of such Change of
Control) from the Holders of a majority of the outstanding shares of Series A-2
Preferred Stock demanding a redemption of the outstanding shares of Series A-2
Preferred Stock. The Corporation shall pay the Mandatory Redemption Price in
cash. The date for any such redemption (the "Redemption Date") shall be (A) in
the case of a redemption occurring pursuant to clause (i) of this Section 6(a),
the date of the eleventh anniversary of the Issue Date, or if such date is not a
Business Day, the first Business Day following such date, and (B) in the case of
a redemption occurring pursuant to clause (ii) of this Section 6(a), a date to
be fixed by the Corporation that is a Business Day no earlier than 30 days and
no later than 60 days following the notice referred to in clause (ii) of this
Section 6(a).
(b) No later than 20 days and no earlier than 60 days prior to the
Redemption Date, the Corporation shall give written notice (the "Redemption
Notice") to each Holder at such
14
<PAGE>
Holder's address as it appears on the stock books of the Corporation. The
Redemption Notice shall state:
(i) whether the redemption is pursuant to clause (i) or (ii) of
Section 6(a);
(ii) the Mandatory Redemption Price;
(iii) Redemption Date; and
(iv) the location (which shall be in New York City, New York) at
which the Holder is to surrender to the Corporation (or its agent), for
redemption, its certificate or certificates representing its shares of
Series A-2 Preferred Stock, and the manner for the surrender of such
certificate or certificates.
(c) Each Holder shall surrender the certificate or certificates
representing its shares of Series A-2 Preferred Stock to the Corporation, duly
endorsed (or otherwise in proper form for transfer, as determined by the
Corporation), in the manner and at the place designated in the Redemption
Notice. On the Redemption Date, the Corporation shall pay, or cause to be paid,
the full Mandatory Redemption Price for the shares so surrendered in cash (i) to
the Person whose name appears on such certificate or certificates as the owner
thereof, and, upon such payment, each surrendered certificate shall be canceled
and retired and (ii) if such certificate is not surrendered by a Holder but the
Holder certifies to the Corporation that the certificate or certificates
representing its shares of Series A-2 Preferred Stock have been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such lost,
stolen or destroyed certificates (and, if requested by the Corporation, posts a
customary bond reasonably satisfactory to the Corporation to cover such loss),
to such Holder.
(d) Unless the Corporation defaults in the payment of the applicable
Mandatory Redemption Price, dividends on the shares of Series A-2 Preferred
Stock shall cease to accumulate on the Redemption Date, and all rights of the
Holders with respect to their Series A-2 Preferred Stock, other than the right
to receive the Mandatory Redemption Price, shall terminate on the Redemption
Date.
(e) For the purpose of determining whether funds are legally available for
redemption of Series A-2 Preferred Stock pursuant to this Section 6, (i) the
Corporation shall value its assets at the highest amount permissible under
applicable law, (ii) if the redemption is pursuant to clause (ii) of Section
6(a), the Corporation may, at its option, set aside the funds necessary to
prepay, redeem or offer to purchase any Indebtedness of the Corporation or its
Subsidiaries that, by its terms, has to be prepaid or redeemed, or requires that
the Corporation or its Subsidiaries extend to the holders thereof an offer to
purchase such Indebtedness, including the Senior Credit Facility and the Senior
Subordinated Notes, and (iii) the Corporation may, at its option, set aside the
funds necessary to satisfy any dividend, redemption or other obligations with
respect to any Senior Stock or Parity Stock required by the certificate of
designations for such Senior Stock or Parity Stock (or other instrument pursuant
to which such Senior Stock or Parity Stock was created and setting forth the
powers, designations, preferences and other special rights and qualifications,
limitations and restrictions of such Senior Stock or Parity Stock).
15
<PAGE>
(f) If on the Redemption Date funds of the Corporation legally available
therefor are insufficient to pay the Mandatory Redemption Price in full for all
the shares of Series A-2 Preferred Stock, (i) the Corporation shall use funds to
the extent legally available for such purpose, (ii) the Corporation shall effect
the Mandatory Redemption Obligation pro rata according to the number of shares
of Series A-2 Preferred Stock held by each holder and (iii) the Dividend Rate on
any unpaid portion of the Mandatory Redemption Price shall be increased by 2%.
If the Corporation is unable or fails to discharge its Mandatory Redemption
Obligation, the Mandatory Redemption Obligation shall be discharged as soon as
the Corporation is able to discharge the Mandatory Redemption Obligation. If and
so long as the Mandatory Redemption Obligation is not fully discharged, the
Corporation may not, directly or indirectly, (A) redeem, purchase, or otherwise
acquire any Parity Stock or Junior Stock or discharge any mandatory or optional
redemption, sinking fund or other similar obligation in respect of any Parity
Stock or Junior Stock (except in connection with a redemption, sinking fund or
other similar obligation regarding Parity Stock being satisfied on a pro rata
basis) or (B) declare or make any dividend or distribution in respect of any
Junior Stock.
(g) Notwithstanding the foregoing, any Holder may, at any time prior to
the close of business on the Business Day immediately preceding the Redemption
Date, elect to convert, pursuant to Section 7(a), its shares of Series A-2
Preferred Stock into Common Stock in lieu of any redemption of its Series A-2
Preferred Stock. Upon such Conversion, the Holders shall no longer be entitled
to any payment in connection with the redemption for the Series A-2 Preferred
Stock.
(h) The Corporation need not establish any sinking fund for the Mandatory
Redemption Obligation.
Section 7. Conversion.
----------
(a) Conversion Right. At any time following the Restated Charter
----------------
Effectiveness, subject to and in compliance with the provisions of this Section
7, any Holder may, at such Holder's election, convert all, but not less than
all, of such Holder's shares of Series A-2 Preferred Stock into shares of Class
B-2 Common Stock (the "Electing Holder"), and upon any such conversion, all
other outstanding shares of Series A-2 Preferred Stock shall automatically
convert into shares of Class B-2 Common Stock (the "Conversion").
Notwithstanding any call for redemption pursuant to Section 6, the right to
convert shares pursuant to this Section 7 shall terminate at the close of
business on the Business Day immediately preceding the Redemption Date, unless
the Corporation defaults in making payment of the Mandatory Redemption Price in
full on the Redemption Date.
(b) Conversion Ratio. The number of shares of Class B-2 Common Stock
----------------
deliverable upon Conversion of one share of Series A-2 Preferred Stock, adjusted
as provided in Section 8, is referred to in this Certificate of Designations as
the "Conversion Ratio." The Conversion Ratio, as of any date, shall be an amount
equal to the Liquidation Preference as of such date divided by the Conversion
Price. The "Conversion Price" will initially be $20.00, subject to adjustment
from time to time pursuant to Section 8.
16
<PAGE>
(c) Conversion Mechanics.
--------------------
(i) The Electing Holder shall surrender the certificate representing
its shares of Series A-2 Preferred Stock at the principal office of the
Corporation, with a written notice of election to convert completed and
signed.
(ii) On the Conversion Date, all outstanding shares of Series A-2
Preferred Stock shall be converted automatically without any further action
by the Holders (and whether or not the certificates representing such
shares are surrendered at the office of the Corporation). The Corporation
shall issue certificates representing shares of Class B-2 Common Stock
issuable upon the Conversion upon surrender of certificates representing
the corresponding shares of Series A-2 Preferred Stock. Unless the shares
issuable on Conversion by the Holder are to be issued in the same name as
the name in which such shares of Series A-2 Preferred Stock are registered,
each share surrendered shall be accompanied by instruments of transfer, in
form satisfactory to the Corporation, duly executed by the Holder or the
Holder's duly authorized attorney. The Corporation shall not be obligated
to issue certificates for shares of Class B-2 Common Stock in any name
other than the name or names set forth on the certificates for the shares
of Series A-2 Preferred Stock unless the requirements of the Stockholders'
Agreement relating to the transfer of shares of Series A-2 Preferred Stock
have been complied with or waived by the Corporation.
(iii) Notwithstanding clause (i) or (ii) of this Section 7(c), if the
Holder of any share or shares of Series A-2 Preferred Stock certifies to
the Corporation that the certificates representing such share or shares
have been lost, stolen or destroyed and executes an agreement satisfactory
to the Corporation to indemnify the Corporation from any loss incurred by
it in connection with such lost, stolen or destroyed certificates (and, if
requested by the Corporation, posts a customary bond reasonably
satisfactory to the Corporation to cover such loss), then the Corporation
shall issue certificates representing the Class B-2 Common Stock issuable
upon the Conversion in the name of such holder.
(iv) As promptly as practicable after the delivery by the Holder of
the certificates for shares of Series A-2 Preferred Stock (or in the case
of a lost certificate, the certification, the agreement and, if requested,
the posting of the bond described in clause (iii) of this Section 7(c)),
the Corporation shall issue and shall deliver to such Holder, or, subject
to compliance with the provisions Section 12 and the Stockholders'
Agreement relating to the transfer of shares of Series A-2 Preferred Stock,
on the Holder's written order to the Holder's transferee, (A) a certificate
or certificates for the whole number of shares of Class B-2 Common Stock
issuable upon the Conversion of such shares in accordance with the
provisions of this Section 7, and (B) any cash adjustment required pursuant
to Section 7(f).
(v) The Conversion shall be deemed to have been effected immediately
prior to the close of business on the Conversion Date. The Person in whose
name or names any certificate or certificates for shares of Class B-2
Common Stock shall be issuable upon such Conversion shall be deemed to have
become the holder of record of the shares of Class B-2 Common Stock
represented thereby at such time on the Conversion Date and
17
<PAGE>
the Conversion shall be into a number of whole shares of Class B-2 Common
Stock equal to the product of the number of shares of Series A-2 Preferred
Stock surrendered multiplied by the Conversion Ratio in effect on the
applicable Conversion Date. All shares of Class B-2 Common Stock delivered
upon conversion of the Series A-2 Preferred Stock will upon delivery be
duly and validly issued and fully paid and non-assessable, free of all
liens, pledges and other security interests and not subject to any
preemptive rights. As of the effective time of the Conversion, the shares
of Series A-2 Preferred Stock so converted will no longer be deemed to be
outstanding and all rights of a holder with respect to such shares so
converted shall immediately terminate except the right to receive the Class
B-2 Common Stock and other amounts payable pursuant to this Section 7.
(d) Reservation of Shares; Compliance with Laws. The Corporation covenants
-------------------------------------------
that it will at all times following the Restated Charter Effectiveness reserve
and keep available, free from preemptive rights, such number of its authorized
but unissued shares of Class B-2 Common Stock as shall be required for the
purpose of effecting the Conversion of the Series A-2 Preferred Stock. Promptly
(and in any event no later than two Business Days) following receipt of
Stockholder Approval, the Corporation shall file the Restated Certificate of
Incorporation pursuant to the DGCL with the Secretary of State of the State of
Delaware. Prior to the delivery of any Common Stock that the Corporation is
obligated to deliver upon the Conversion, the Corporation shall comply with all
applicable federal and state laws and regulations which require action to be
taken by the Corporation.
(e) Transfer Taxes, etc. The Corporation will pay any and all documentary
--------------------
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Class B-2 Common Stock upon the Conversion, other than any
tax payable in respect of any transfer involved in the issue or delivery of
shares of Class B-2 Common Stock in a name other than that of the Holder of the
Series A-2 Preferred Stock to be converted. The Corporation shall have the right
not to issue or deliver any shares of Class B-2 Common Stock in a name other
than that of the Holder of the Series A-2 Preferred Stock to be converted unless
and until the Person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(f) No Fractional Shares. No fractions of shares of Class B-2 Common Stock
--------------------
shall be required to be issued to a Holder in connection with the Conversion. In
lieu thereof, the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied by
the Current Market Price per share of Regular Common Stock on the Conversion
Date.
(g) No Impairment. The Corporation will not, through any reorganization,
-------------
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 7 and in the taking of all such action as may be necessary or
appropriate following the Restated Charter Effectiveness in order to protect the
conversion rights of the holders of the Series A-2 Preferred Stock against
impairment. Without limiting the generality of the foregoing, following the
Restated Charter Effectiveness, the Corporation (i) will
18
<PAGE>
take all such action as may be necessary or appropriate in order that the
Corporation may validly and legally issue fully paid nonassessable shares of
Class B-2 Common Stock on the Conversion, free of all preemptive rights, and
(ii) will not take any if the total number of shares of Class B-2 Common Stock
issuable after the action upon the Conversion of all of the Series A-2 Preferred
Stock will exceed the total number of shares of Class B-2 Common Stock then
authorized by the Corporation's Certificate of Incorporation and available for
the purpose of issue upon such Conversion.
Section 8. Adjustments to Conversion Price.
-------------------------------
(a) Adjustment for Stock Dividends, Distributions and Subdivisions. In the
event the Corporation shall declare or pay any dividend or make any other
distribution on the Common Stock payable in shares of Common Stock, or shall
effect a subdivision of the outstanding Common Stock, into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock), then and in each such case the applicable
Conversion Price in effect immediately prior to such stock dividend,
distribution or subdivision shall, concurrently with the effectiveness of such
stock dividend, distribution or subdivision, be proportionately decreased,
subject to the following qualifications: (i) in the event such issuance is
declared but not effected, the applicable Conversion Price shall be readjusted
as if such issuance was not declared; and (ii) no adjustment in the Conversion
Price shall be made in the event the Holders simultaneously receive a dividend
or other distribution of such securities in an amount equal to the amount of
such securities as they would have received had (assuming that the Restated
Charter Effectiveness has occurred) the Series A-2 Preferred Stock been
converted into Class B-2 Common Stock pursuant to Section 7 immediately prior to
such event (or, if applicable, the record date for such event).
(b) Adjustments for Combinations or Consolidation of Common Stock. In the
-------------------------------------------------------------
event the outstanding Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then and in each such case the applicable Conversion Price in effect immediately
prior to such combination or consolidation shall, concurrently with the
effectiveness of such combination or consolidation, be proportionately
increased.
(c) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization,
----------------------------------------------------------------------
etc. In the event the Corporation (i) consolidates with or merges into any other
---
corporation or entity and is not the continuing or surviving corporation or
entity of such consolidation or merger, (ii) permits any other corporation or
entity to consolidate with or merge into the Corporation and the Corporation is
the continuing or surviving corporation but, in connection with such
consolidation or merger, the shares of Common Stock are changed into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (iii) transfers all or substantially all of its properties or
assets, directly or indirectly, to any other corporation or entity (other than
to a wholly owned Subsidiary of the Corporation if such Subsidiary remains
wholly owned by the Corporation after such transfer or any other transaction or
series of transactions related to such transfer), then, and in each such event,
proper provision shall be made so that, upon the basis and the terms and in the
manner provided in this Section 8(c), each Holder, upon the Conversion at any
time after the consummation of such consolidation, merger or transfer, shall be
entitled to receive, in lieu of the shares of Common Stock issuable upon the
Conversion prior
19
<PAGE>
to such consummation, the stock and other securities, cash and property to which
such Holder would have been entitled upon such consummation if such Holder
(assuming that the Restated Charter Effectiveness has occurred) had converted
its Series A-2 Preferred Stock pursuant to Section 7 immediately prior to such
consummation (or, if applicable, any record date with respect to such
transaction), subject to adjustments (subsequent to such corporate action) as
nearly equivalent as possible to the adjustments provided for in this Section
8(c). Notwithstanding anything contained herein to the contrary, (A) the
Corporation will not effect any of the transactions described in the clauses (i)
through (iii) of this Section 8 unless, prior to the consummation thereof, each
corporation (other than the Corporation) which may be required to deliver any
stock, securities, cash or property upon the conversion of Series A-2 Preferred
Stock shall assume, by written instrument, a copy of which shall be delivered to
each Holder, the obligation to deliver to such Holder such shares of stock,
securities, cash or property as such holder may be entitled to receive upon such
conversion, and (B) in the event the Holders of a majority of the outstanding
shares of Series A-2 Preferred Stock, voting separately as a single class, elect
to declare that any of the transactions described in clauses (i) through (iii)
constitute a Liquidation Event, then the provisions of this Section 8(c) shall
not apply to such transaction and, in lieu thereof, the Holders shall be
entitled to the amounts set forth in Section 5 with respect to such Liquidation
Event.
(d) Adjustments for Reclassification, Exchange and Substitution. If the
-----------------------------------------------------------
Common Stock is changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision, combination or
consolidation of shares, or merger, consolidation or asset sale, provided for in
Sections 8(a), 8(b) and 8(c) or any reclassification resulting from the adoption
of the Restated Certificate of Incorporation), then and in each such case the
applicable Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately
adjusted such that the Series A-2 Preferred Stock shall be convertible into, in
lieu of the number of shares of Class B-2 Common Stock which the Holders would
otherwise have been entitled to receive (assuming that the Restated Charter
Effectiveness has occurred), a number of shares of such other class or classes
of stock equivalent to the number of shares of Class B-2 Common Stock that would
have been subject to receipt by the Holders upon any Conversion (assuming that
the Restated Charter Effectiveness has occurred) immediately before that change.
No class or series of Common Stock shall be so changed into shares of any other
class or series of stock unless a proportional and equivalent change is made
with respect to all other classes or series of Common Stock. For avoidance of
doubt, it is stipulated that the provisions of this Section 8(d) shall not apply
to any exchange of shares of Common Stock into shares of Series B Preferred
Stock pursuant to the JLL Exchange Agreement.
(e) Adjustment of Conversion Price Upon Issuance of Additional Shares of
--------------------------------------------------------------------
Common Stock. In the event the Corporation, at any time after the Issue Date and
------------
prior to the Restated Charter Effectiveness, issues or sells Additional Shares
of Common Stock for a consideration per share less than the Current Market Price
in effect immediately prior to such issuance or sale, then and in each such
event, the applicable Conversion Price shall be reduced, concurrently with such
issue or sale, to a price (calculated to the nearest cent) determined by
multiplying the applicable Conversion Price by a fraction (i) the numerator of
which shall be (A) the number of shares of Common Stock outstanding immediately
prior to such issue or sale, plus (B) the number of shares of Common Stock which
the aggregate consideration received by the Corporation for the
20
<PAGE>
total number of Additional Shares of Common Stock so issued or sold would
purchase at the Current Market Price in effect immediately prior to such
issuance or sale, and (ii) the denominator of which shall be (A) the number of
shares of Common Stock outstanding immediately prior to such issue or sale plus
(B) the number of Additional Shares of Common Stock so issued or sold. The
provisions of this Section 8(e) shall not apply to any issuance or sale of
Additional Shares of Common Stock for which an adjustment is provided under
Section 8(a).
(f) Issue of Securities Deemed Issue of Additional Shares of Common Stock.
---------------------------------------------------------------------
In the event (i) the Corporation, at any time after the Issue Date and prior to
the Restated Charter Effectiveness, issues, sells or grants any Options or
Convertible Securities, or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options or
Convertible Securities and (ii) the consideration per share for the Additional
Shares of Common Stock issuable upon the exercise of such Options, or in the
case of Convertible Securities, the conversion or exchange of such Convertible
Securities shall be less than the Current Market Price in effect immediately
prior to such issue, sale or grant, or such record date, as the case may be,
then, and in each such case, (A) the maximum number of shares of Common Stock
(as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be issuances of Additional Shares of Common Stock
issued as of the time of such issue, sale or grant or, in case such a record
date shall have been fixed, as of the close of business on such record date, and
(B) the Conversion Price shall be adjusted in accordance with Section 8(e) on
the date of and immediately prior to such issue, sale or grant, or the record
date, as the case may be. In any such case in which Additional Shares of Common
Stock are deemed to be issued or sold pursuant to this Section 8(f):
(1) no further adjustment in the applicable Conversion Price shall
be made upon the subsequent issue of Convertible Securities or Common Stock
upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Corporation, or increase in the number of
Additional Shares of Common Stock issuable, upon the exercise, conversion
or exchange thereof, the adjustments to the Conversion Price computed upon
the original issue, sale, grant or assumption thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such decrease or increase
becoming effective, be recomputed (and the Conversion Price shall
automatically be adjusted as so recomputed) to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities which are outstanding at such
time; and
(3) no readjustment pursuant to the preceding clause (2) shall have
the effect of increasing the applicable Conversion Price to an amount which
exceeds the lower of (A) the applicable Conversion Price on the original
adjustment date and (B) the applicable Conversion Price that would have
resulted from any issuance of Additional
21
<PAGE>
Shares of Common Stock between the original adjustment date and such
readjustment date.
The consideration per share deemed to be received by the Corporation for
Additional Shares of Common Stock relating to Options and Convertible
Securities, shall be determined by dividing (x) the total amount, if any,
actually received by the Corporation as consideration for the issue, sale, grant
or assumption of such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the instruments
relating to such Options or Convertible Securities without regard to any
provision contained therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise in full of such Options or the
conversion or exchange in full of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise in full of such Options for
Convertible Securities and the conversion or exchange in full of such
Convertible Securities, by (y) the maximum number of Additional Shares of Common
Stock (as set forth in the instruments relating to such Options or Convertible
Securities, without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(g) Certain Payments in Lieu of Dividends. In case the Corporation, at any
-------------------------------------
time on or after the Issue Date and prior to the Restated Charter Effectiveness,
shall, by dividend or otherwise, distribute to all holders of its Regular Common
Stock evidences of its indebtedness or assets (including securities other than
dividends and distributions paid pursuant to Section 8(a)), then the Conversion
Price shall be adjusted by multiplying the Conversion Price then in effect by a
fraction (i) the numerator of which shall be (A) the Current Market Price of a
share of Regular Common Stock on the record date fixed for such distribution
minus (B) the Market Value of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of Regular Common Stock and
(ii) the denominator of which shall be the Current Market Price of a share of
Regular Common Stock on the record date fixed for such distribution.
(h) Certificate as to Adjustments. Upon the occurrence of each adjustment
-----------------------------
or readjustment of the applicable Conversion Price pursuant to this Section 8,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each Holder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (i) the consideration received or to be received by the Corporation
for any Additional Shares of Common Stock, or any Options or Convertible
Securities, as the case may be, issued or sold or deemed to have been issued,
(ii) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (iii) the applicable Conversion Price in effect immediately
prior to such issue or sale and as adjusted and readjusted on account thereof.
The Corporation shall, upon the written request at any time of any Holder,
furnish or cause to be furnished to such Holder a like certificate setting forth
(i) the applicable Conversion Price at the time in effect, and showing how it
was calculated, and (ii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon a Conversion. At
the request of the Holders of a majority of the then outstanding Series A-2
Preferred Stock, the Corporation will have the certificates referred to in this
Section 8(h) prepared and delivered by an internationally recognized independent
accounting firm.
22
<PAGE>
Section 9. Preemptive Rights.
-----------------
(a) The Corporation shall provide each Holder with a written notice (a
"Preemptive Rights Notice") of any proposed issuance by the Corporation of any
New Securities at least 30 days prior to the proposed issuance date. Such notice
shall specify the price at which the New Securities are to be issued and the
other material terms of the issuance. Each Holder shall be entitled to purchase,
at the price and on the terms at which such New Securities are proposed to be
issued and specified in such Preemptive Rights Notice, such Holder's Preemptive
Rights Portion of such class of the New Securities proposed to be issued.
"Preemptive Rights Portion" means the pro rata portion of New Securities
proposed to be issued by the Corporation, which amount shall, for each Holder,
be based upon the ratio of (i) the number of shares of Class B-2 Common Stock
that such Holder would receive upon the Conversion of its shares of Series A-2
Preferred Stock into Class B-2 Common Stock pursuant to Section 7 immediately
prior to the issuance of the New Securities (assuming that the Restated Charter
Effectiveness had occurred) to (ii) the total number of issued and outstanding
shares of Common Stock immediately prior to the issuance of the New Securities
(assuming (A) that the Restated Charter Effectiveness has occurred and (B) the
conversion of all securities convertible into, and the exercise of all options,
warrants or other arrangements representing the right to purchase or otherwise
acquire, any shares of Common Stock).
(b) A Holder may exercise its rights under this Section 9 by delivering
written notice of its election to purchase New Securities to the Corporation
within 15 days of receipt of the Preemptive Rights Notice. A delivery of such a
written notice (which notice shall specify the amount of New Securities to be
purchased by the Shareholder submitting such notice) by such Holder shall
constitute a binding agreement of such Holder to purchase, at the price and on
the terms specified in the Preemptive Rights Notice, the number of New
Securities specified in such Holder's written notice.
(c) In the case of any issuance of New Securities, the Corporation shall
have 90 days from the date of the Preemptive Rights Notice to consummate the
proposed issuance of any or all of such New Securities which the Holders have
not elected to purchase at the price and upon terms that are not materially less
favorable to the Corporation than those specified in the Preemptive Rights
Notice. At the consummation of such issuance, the Corporation shall issue
certificates representing the New Securities to be purchased by each Holder
exercising preemptive rights pursuant to this Section 9 registered in the name
of such Holder, against payment by such Holder of the purchase price for such
New Securities. If the Corporation proposes to issue such New Securities after
such 90-day period, it shall again comply with the procedures set forth in this
Section 9.
Section 10. Voting Rights.
-------------
(a) The Holders shall not be entitled to any voting rights, except as
hereinafter provided in this Section 10 or as otherwise provided by DGCL or
other applicable law.
(b) The approval of Holders of at least a majority of the then outstanding
shares of Series A-2 Preferred Stock voting or consenting, as the case may be,
separately as a class, shall
23
<PAGE>
be required to amend or repeal any provision of, or add any provision to, this
Certificate of Designations.
(c) The Holders voting or consenting, as the case may be, separately as a
single class, shall be entitled to elect Directors (the Directors so elected,
the "Class B-2 Directors") as follows:
(i) On the Issue Date, two individuals designated by the holders of
shares of Series A-2 Preferred Stock shall be elected as Class B-2
Directors. The Holders shall be entitled to elect, voting or consenting as
a separate class, two Class B-2 Directors until the second anniversary of
the Issue Date which number may only be reduced pursuant to clause (ii),
(iii) or (iv) of this Section 10(c) only after such second anniversary.
(ii) So long as the number of outstanding shares of Series A-2
Preferred Stock is equal to or greater than 50% of the number of shares of
Series A-2 Preferred Stock issued on the Issue Date (in each case, as
adjusted for stock dividends or distributions and subdivisions,
combinations or consolidations of stock), the Holders shall be entitled to
elect, voting or consenting as a separate class, two Class B-2 Directors.
(iii) So long as the number of outstanding shares of Series A-2
Preferred Stock is less than 50% but equal to or greater than 10% of the
number of shares of Series A-2 Preferred Stock issued on the Issue Date (in
each case, as adjusted for stock dividends or distributions and
subdivisions, combinations or consolidations of stock), the Holders shall
be entitled to elect, voting or consenting as a separate class, one Class
B-2 Director.
(iv) The Holders shall not be entitled to elect any Director pursuant
to this Section 10(c) after the second anniversary of the Issue Date when
the number of outstanding shares of Series A-2 Preferred Stock is less than
10% of the number of shares of Series A-2 Preferred Stock issued on the
Issue Date (in each case, as adjusted for stock dividends or distributions
and subdivisions, combinations or consolidations of stock).
(v) In addition to the number of Class B-2 Directors provided in the
preceding clauses (ii) and (iii), if at any time a Voting Default shall
have occurred, the Holders shall be entitled, voting or consenting as a
separate class, to elect one additional Class B-2 Director.
(vi) Upon any increase or decrease in the total number of Class B-2
Directors pursuant to this Section 10(c), there shall be a corresponding
and equal increase or decrease in the total number of Directors.
(vii) So long as the Holders of shares of Series A-2 Preferred Stock
are entitled to elect Class B-2 Directors under this Section 10(d), at any
annual meeting of stockholders, or special meeting held in place thereof,
the holders of shares of Series A-2 Preferred Stock, voting or consenting
(as the case may be separately) as a single class, shall be entitled to
elect any Class B-2 Directors due to be elected at such meeting pursuant to
the terms of this Certificate of Designations. Any vacancy occurring
because of the death, disability, resignation or removal of a Class B-2
Director shall be filled by the vote or consent of the Holders. A Class B-2
Director may be removed without cause
24
<PAGE>
only by the vote or consent of the Holders of a majority of the outstanding
shares of Series A-2 Preferred Stock.
(d) Upon and following the Restated Charter Effectiveness, the Class B-2
Directors shall be classified as set forth in Restated Certificate of
Incorporation.
(e) In addition to any other vote required by law, the affirmative vote of
a majority of the Directors that are not employees or officers of the
Corporation or its Subsidiaries shall be required for any decision by the
Corporation regarding the appointment, removal or compensation of the
Corporation's Chief Executive Officer, or any transaction between the
Corporation (or any of its Subsidiaries) and the Corporation's Chief Executive
Officer (or his or her Affiliates).
Section 11. Reports and Notices.
-------------------
(a) The Corporation will provide the Holders, at the Corporation's
expense, with the following:
(i) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Corporation,
and in any event within 45 days thereafter, a consolidated balance sheet of
the Corporation and its Subsidiaries, as of the end of each such quarterly
period, and consolidated statements of income and sources and applications
of funds of the Corporation and its Subsidiaries for such period and for
the current fiscal year to date, prepared in accordance with generally
accepted accounting principles in the United States consistently applied
and setting forth in comparative form the figures for the corresponding
periods of the previous fiscal year, subject to changes resulting from year
end audit adjustments and the absence of notes, together with a
management's discussion and analysis thereof, all in reasonable detail and
certified by the principal financial or accounting officer of the
Corporation.
(ii) As soon as practicable after the end of each fiscal year of the
Corporation, and in any event within 90 days thereafter, a consolidated
balance sheet of the Corporation and its Subsidiaries, as at the end of
such fiscal year, and consolidated statements of income and sources and
applications of funds of the Corporation and its Subsidiaries, for such
year, prepared in accordance with generally accepted accounting principles
in the United States consistently applied and setting forth in each case in
comparative form the figures for the previous fiscal year, together with a
management's discussion and analysis thereof, all in reasonable detail and
certified with an unqualified audit opinion by independent public
accountants of recognized national standing selected by the Corporation.
So long as the Corporation is subject to the reporting requirements of the
Exchange Act, the Corporation's obligations to provide the information required
pursuant to clauses (i) and (ii) of this Section 11(a) shall be satisfied by the
filing by the Corporation of its quarterly reports on Form 10-Q and its annual
reports on Form 10-K, respectively, or any successor forms thereto, in
accordance with the Exchange Act.
25
<PAGE>
(b) In the event that at any time after the date hereof, (i) the
Corporation shall adopt a dividend policy, change a previously adopted dividend
policy, or declare a dividend in the absence of, or in conflict with, a dividend
policy or declare any distribution with respect to the Common Stock, or (ii) the
Corporation shall declare any stock split, stock dividend, subdivision,
combination, or similar distribution with respect to the Common Stock,
regardless of the effect of any such event on the outstanding number of shares
of Common Stock (either such event hereinafter being referred to as a
"Notification Event"), then and in such case the Corporation shall cause to be
mailed to the Holders, not later than the earlier of the date public
announcement of the Notification Event is first made or the date ten days prior
to the record date, if any, in connection with such Notification Event, written
notice specifying the nature of such event and the effective date of, or the
date on which the books of the Corporation shall close or a record shall be
taken with respect to, such event. Such notice shall also set forth facts
indicating the effect of such action (to the extent such effect may be known at
the date of such notice) on the Conversion Price and the kind and amount of the
shares of stock or other securities or property issuable or distributable with
respect to the Series A-2 Preferred Stock.
(c) The Corporation shall deliver to the Holders all notices and other
reports delivered to holders of Regular Common Stock, including all notices and
reports required by DGCL or other applicable laws.
Section 12. Transfer Restrictions. Until the 120th day following the Issue
---------------------
Date and following the Restated Charter Effectiveness, any transfer of shares of
Series A-2 Preferred Stock by a Holder to a Person other than a Permitted
Transferee shall be null and void and of no force and effect . The Corporation
may, at its discretion, as a condition to the transfer or registration of
transfer of Series A-2 Preferred Stock to a purported Permitted Transferee,
require the furnishing of affidavits or other proof as it deems reasonably
necessary to establish that the proposed transferee is a Permitted Transferee.
The term "Permitted Transferee" of a Holder shall be (i) any Subsidiary of such
Holder, (ii) Rite Aid Corporation, a Delaware corporation, and any direct or
indirect Subsidiary of Rite Aid Corporation, and (iii) any Person who is an
institutional lender acquiring such shares of Series A-2 Preferred Stock or a
security interest therein or pledge thereof from any Person referred to in
clause (ii) as security for Indebtedness of such Person referred to in clause
(ii) (including any such acquisition upon foreclosure).
26
<PAGE>
EXHIBIT C
---------
SERIES B CONVERTIBLE PREFERRED STOCK
OF
ADVANCE PARADIGM, INC.
Set forth below are the powers, designations, preferences and relative,
participating, optional and other special rights, including voting rights, and
qualifications, limitations and restrictions of the Series B Preferred Stock of
Advance Paradigm, Inc., a Delaware corporation (the "Corporation"). Such series
of preferred stock, par value $0.01 per share, of the Corporation (the
"Preferred Stock"), was initially created by the Board of Directors of the
Corporation (the "Board of Directors") pursuant to the Amended and Restated
Certificate of Incorporation of the Corporation (as may be amended from time to
time, the "Certificate of Incorporation") and such series is now expressly
incorporated by reference into Section 5.2 of the Second Amended and Restated
Certificate of Incorporation of the Corporation.
Section 1. Designation and Number.
----------------------
(a) Such series of Preferred Stock is designated as Series B Convertible
Preferred Stock (the "Series B Preferred Stock"), and the number of shares
constituting such series is 84,146 shares. A total of six shares of Series B-1
Preferred Stock shall be initially issued, and 84,140 shares of Series B
Preferred Stock shall be reserved for issuance pursuant to the JLL Exchange
Agreement and may not be issued for any other purpose.
(b) Shares of Series B Preferred Stock issued and reacquired in any manner
by the Corporation, including by purchase or redemption, shall (upon compliance
with any applicable provisions of DGCL) have the status of authorized and
unissued shares of the class of Preferred Stock undesignated as to series and
may be redesignated and reissued as part of any series of Preferred Stock other
than as Series B Preferred Stock.
Section 2. Definitions. The following terms, as used in this Certificate
-----------
of Designations, shall have the following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock
---------------------------------
issued or sold by the Corporation after the Issue Date, whether or not
subsequently reacquired or retired by the Corporation, other than shares of
Common Stock: (i) issued upon the conversion or exchange of any series or
class of Capital Stock issued and outstanding on the Issue Date into
another series or class of Capital Stock of the Corporation without any
additional consideration to the Corporation by the holder thereof; (ii)
issued upon conversion of any shares of Series A Preferred Stock or Series
B Preferred Stock into any class or series of Common Stock; (iii) issued
upon the exercise of options or warrants that have been issued prior to,
and are outstanding as of, the Issue Date; (iv) issued upon exercise of
options granted prior to the 120th day following the Issue Date to
employees, consultants, officers or directors of the Corporation pursuant
to any stock option plan in effect on the Issue Date and consistent with
past practice, but in any event not in excess of 25,000 shares of Common
Stock during such 120-day period; (v) issued prior to the 120th day
following the Issue Date to customers in the ordinary course of business
<PAGE>
consistent with past practice, but in any event not in excess of 25,000
shares of Common Stock during such 120-day period; (vi) issued upon
exercise of the Senior Subordinated Notes Warrants; and (vii) issued upon
the exercise of the Management Options.
"Affiliate" means, with respect to any specified Person, any other
---------
Person which, directly or indirectly, controls, is controlled by or is
under direct or indirect common control with, such specified Person.
Control of any Person shall consist of the power to direct the management
and policies of such Person (whether through the ownership of voting
securities, by contract, as trustee or otherwise) and shall be deemed to
exist upon the ownership of securities entitling the holder thereof to
exercise more than 20% of the voting power in the election of directors of
such Person (or other persons or bodies performing similar functions).
"Board of Directors" has the meaning set forth in the Preamble hereto.
------------------
"Business Day" means any day except Saturday, Sunday and any day on
------------
which banking institutions in New York City, New York generally are
authorized or required by law or other governmental action to be closed.
"Capital Stock" means (i) all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of the Corporation,
including each class or series of Common Stock or Preferred Stock, and (ii)
any option, warrant or other arrangement representing the right to purchase
or otherwise acquire any of the foregoing, including any securities
convertible or exchangeable into any of the foregoing.
"Certificate of Incorporation" has the meaning set forth in the
----------------------------
Preamble hereto.
"Change of Control" means the occurrence of either of the following:
-----------------
(i) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than the Excluded Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 40% of the total issued Common
Stock or total issued Voting Stock of the Corporation; or (ii) during any
period of two consecutive years, individuals who at the beginning of such
period constituted the Class A and Class C Directors (together with any new
Class A or Class C Directors whose election by the Board of Directors or
whose nomination for election by the stockholders of the Corporation was
approved by a vote of a majority of the Class A and Class C Directors then
still in office who were either Class A or Class C Directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease to constitute a majority of the Class A and
Class C Directors then in office.
"Class A Directors" has the meaning given to it in the Stockholders'
-----------------
Agreement.
"Class B Common Stock" means the Class B-1 Common Stock and the Class
--------------------
B-2 Common Stock.
2
<PAGE>
"Class B-1 Common Stock" means the Class B-1 Common Stock to be
----------------------
created as a separate class of Common Stock following Stockholder Approval
pursuant to the Restated Certificate of Incorporation.
"Class B-1 Directors" has the meaning set forth in Section 10(f).
-------------------
"Class B-2 Common Stock" means the Class B-2 Common Stock to be
----------------------
created as a separate class of Common Stock following Stockholder Approval
pursuant to the Restated Certificate of Incorporation.
"Class B-2 Directors" means the Directors designated by holders of
-------------------
Series A-2 Preferred Stock pursuant to the Series A-2 Certificate of
Designations.
"Class C Directors" has the meaning given to it in the Stockholders'
-----------------
Agreement.
"Common Stock" means the common stock, par value $0.01 per share, of
------------
the Corporation, whether voting or non-voting, of any series or class
(including Regular Common Stock and, following Stockholder Approval, the
Class B Common Stock).
"Consolidated Cash Flow" has the meaning given to such term in the
----------------------
Senior Subordinated Notes Indenture.
"Consolidated Interest Expense" means, with respect to any specified
-----------------------------
Person for any period, the sum, without duplication, of: (i) the
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued, including original issue discount, non-
cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with capital
lease obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings
and net of the effect of all payments made or received pursuant to hedging
obligations and excluding amortization of deferred financing costs, plus
(ii) the consolidated interest of such Person and its Subsidiaries that was
capitalized during such period, plus (iii) any interest expense on
Indebtedness of another Person that is guaranteed by that Person or any of
its Subsidiaries or secured by a mortgage, lien, pledge, charge,
encumbrance or other security interests on assets of such Person or any of
its Subsidiaries.
"Conversion" means a Mandatory Conversion or an Optional Conversion.
----------
"Conversion Date" means, (i) in the case of Optional Conversions, the
---------------
date on which the certificates for shares of Series B Preferred Stock to be
converted are surrendered to the Corporation and, (ii) in the case of a
Mandatory Conversion, the date of filing of the Restated Certificate of
Incorporation pursuant to the DGCL with the Secretary of State of the State
of Delaware following receipt of Stockholder Approval.
"Conversion Price" has the meaning set forth in Section 7(c).
----------------
"Conversion Ratio" has the meaning set forth in Section 7(c).
----------------
3
<PAGE>
"Convertible Securities" means any evidences of indebtedness, shares
----------------------
(other than shares of Regular Common Stock) or other securities that, by
their terms, are directly or indirectly convertible into or exchangeable
for Additional Shares of Common Stock. For avoidance of doubt, it is
stipulated that the following are not Convertible Securities: (i) shares
of Series A Preferred Stock issued as a dividend on shares of Series A
Preferred Stock; and (ii) shares of Series B Preferred Stock issued in
accordance with the JLL Exchange Agreement.
"Corporation" has the meaning set forth in the Preamble hereto.
-----------
"Current Market Price" means, as of any date, the average of the daily
--------------------
Market Prices of the Regular Common Stock for twenty consecutive trading
days immediately preceding such date.
"Current Series B Amount" means, as of any date of determination, (i)
-----------------------
the number of shares of Series B Preferred Stock issued and outstanding on
such date, plus (ii) the number of shares of Series B Preferred Stock
issuable on such date under the JLL Exchange Agreement upon the exchange
into Series B Preferred Stock of all shares of Regular Common Stock that
may be so exchanged pursuant to the JLL Exchange Agreement on such date.
"DGCL" means the General Corporation Law of the State of Delaware.
----
"Director" means a member of the Board of Directors.
--------
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"Excluded Holders" means (i) the Corporation and its Subsidiaries,
----------------
(ii) the Principals and the Related Parties of the Principals, (iii) the
Permitted Transferees, and the Affiliates of Permitted Transferees, and
(iv) the holders of shares of Series A-1 Preferred Stock and Series A-2
Preferred Stock on the Issue Date and the "Permitted Transferees" (as
defined in the Series A-1 Certificate of Designations or the Series A-2
Certificate of Designations, as the case may be) and the Affiliates of the
Persons referred in this clause (iv), and (v) any Person permitted or
required to receive shares of Series B Preferred Stock pursuant to the JLL
Exchange Agreement, the Permitted Transferees of such Persons (assuming
that such Persons are Holders) and the Affiliates of the Persons referred
to in this clause (v).
"GAAP" means accounting principles and practices generally accepted
----
from time to time in the United States as in effect on the Issue Date.
"Holder" means a record holder of shares of Series B Preferred Stock.
------
"Indebtedness" has the meaning given to such term in the Senior
------------
Subordinated Notes Indenture.
4
<PAGE>
"Interest Coverage Ratio" means, as of any determination date, the
-----------------------
ratio of Consolidated Cash Flow to Consolidated Interest Expense during the
four-quarter period of the most recent four consecutive fiscal quarters
ending prior to such determination date. In the event of any incurrence,
assumption, guarantee, repayment, repurchase or redemption of any
Indebtedness (other than ordinary working capital borrowings, excluding
borrowings under the Senior Credit Facility) subsequent to the commencement
of the period for which the Interest Coverage Ratio is being calculated and
on or prior to the date or event for which the calculation of the Interest
Coverage Ratio is made (the "Calculation Date"), then the Interest Coverage
Ratio shall be calculated giving effect to the incurrence, assumption,
guarantee, repayment, repurchase or redemption of such Indebtedness, and
the use of the proceeds therefrom, as if the same had occurred at the
beginning of the applicable four-quarter period.
"Initial Series B Amount" means, as of any date of determination, (i)
-----------------------
the number of shares of Series B Preferred Stock issued on the Issue Date
plus (ii) the number of shares of Series B Preferred Stock issuable on the
Issue Date under the JLL Exchange Agreement upon the exchange into Series B
Preferred Stock of all shares of Regular Common Stock that may be so
exchanged pursuant to the JLL Exchange Agreement, in each case as adjusted
for stock dividends or distributions and subdivisions, combinations or
consolidations of stock on or prior to such date of determination. For
avoidance of doubt, it is stipulated that the Initial Series B Amount on
the Issue Date is 84,146.
"Issue Date" means the date of the filing of this Certificate of
----------
Designations according to the DGCL with the Secretary of State of the State
of Delaware.
"JLL" has the meaning set forth in Section 12.
---
"JLL Exchange Agreement" means the Exchange Agreement dated as of the
----------------------
Issue Date between the Corporation and Joseph Littlejohn & Levy Fund III,
L.P., a Delaware limited partnership, relating to the exchange of shares of
Regular Common Stock into shares of Series B Preferred Stock, as the same
may be amended, supplemented or restated from time to time.
"Junior Stock" has the meaning set forth in Section 3(a).
------------
"Liquidation Event" means any voluntary or involuntary liquidation,
-----------------
dissolution or winding up of the affairs of the Corporation.
"Liquidation Preference" means, for each share of Series B Preferred
----------------------
Stock as of any date, (i) $1,000, plus (ii) all accumulated and unpaid cash
dividends and distributions on such share as of such date, plus (iii) the
Market Price of all other accumulated and unpaid dividends and
distributions on such share as of such date.
"Management Options" means options to purchase up to an aggregate of
------------------
1,790,000 shares of Common Stock at an initial exercise price of $20 per
share issued to officers and employees on or before the Issue Date. For
purposes of this Certificate of Designations, the Management Options shall
be deemed issued before the Issue Date.
5
<PAGE>
"Mandatory Conversion" has the meaning set forth in Section 7(b).
--------------------
"Mandatory Redemption Obligation" means the Corporation's redemption
-------------------------------
obligation set forth in Section 6.
"Mandatory Redemption Price" has the meaning set forth in Section
--------------------------
6(a).
"Market Price" means: (a) with respect to any security, on any given
------------
day, (i) if such security is listed or authorized for trading on a national
securities exchange, the last sale price of such security, regular way, on
such date, or if no such sale takes place on such date, the average of the
closing bid and asked prices thereof, on such date, in each case as
officially reported on the principal national securities exchange on which
such security is listed or authorized for trading, (ii) if such security is
not listed or authorized for trading on a national securities exchange but
is quoted on the Nasdaq National Market, (A) the price of the last trade,
as reported on the Nasdaq National Market, not identified as having been
reported late to such system, or (B) if such security is so traded, but no
such last trade information is so reported, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market,
(iii) if such security is not listed or authorized for trading on a
national securities exchange or the Nasdaq National Market or any
comparable system but has a nationally recognized existing trading market,
the average of the closing bid and asked prices as furnished by two members
of the National Association of Securities Dealers, Inc. selected from time
to time by the Corporation for that purpose or (iv) if such security is not
listed or authorized for trading on a national securities exchange or the
Nasdaq National Market or any comparable system and does not have a
nationally recognized existing trading market, the fair value of such
security as (A) determined by an agreement between the Corporation and the
Holders of a majority of the outstanding shares of Series B Preferred Stock
or (B) if the Corporation and such Holders fail to agree, determined
jointly by an independent investment banking firm retained by the
Corporation and by an independent investment banking firm retained by such
Holders, or (C) if the Corporation or such Holders shall fail so to retain
an independent investment banking firm within five Business Days of the
retention of such firm by the Corporation or such Holders, as the case may
be, determined solely by the firm so retained or (D) if the firms so
retained by the Corporation and by such Holders shall be unable to reach a
joint determination within 15 Business Days of the retention of the last
firm so retained, determined by another independent investment banking firm
chosen by the first two such firms; and (b) with respect to any other asset
or property, the fair market value of such asset or property as (i)
determined by an agreement between the Corporation and the Holders of a
majority of the outstanding shares of Series B Preferred Stock or (ii) if
the Corporation and such Holders fail to agree, determined jointly by an
independent investment banking firm retained by the Corporation and by an
independent investment banking firm retained by such Holders, or (iii) if
the Corporation or such Holders shall fail so to retain an independent
investment banking firm within five Business Days of the retention of such
firm by the Corporation or such Holders, as the case may be, determined
solely by the firm so retained or (iv) if the firms so retained by the
Corporation and by such Holders shall be unable to reach a joint
determination within 15 Business Days of the retention of
6
<PAGE>
the last firm so retained, determined by another independent investment
banking firm chosen by the first two such firms.
"New Securities" means any Capital Stock issued after the Issue Date,
--------------
other than (i) Capital Stock issued upon the conversion or exchange of any
series or class of Capital Stock issued and outstanding on the Issue Date
into another series or class of Capital Stock of the Corporation without
any additional consideration to the Corporation by the holder thereof; (ii)
Capital Stock issued upon conversion of any shares of Series A Preferred
Stock or Series B Preferred Stock into any class or series of Common Stock;
(iii) shares of Series A Preferred Stock issued as a dividend on any shares
of Series A Preferred Stock; (iv) dividends or distributions payable in
shares of Capital Stock effected in accordance with Section 8(a); (v)
Capital Stock issued upon the exercise of options or warrants that have
been issued prior to, and are outstanding as of, the Issue Date; (vi)
Capital Stock issued to employees, consultants, officers or directors of
the Corporation pursuant to any stock option plan in effect on the Issue
Date and consistent with past practice or pursuant to a stock option plan
adopted after the Issue Date; (vii) Capital Stock issued to holders of
Series A Preferred Stock pursuant to the exercise by such holders of their
preemptive rights contained in the applicable Series A Certificate of
Designations; (viii) Capital Stock issued upon exercise of the Senior
Subordinated Notes Warrants; (ix) Common Stock issued upon exercise of the
Management Options; (x) Capital Stock issued to customers in the ordinary
course of business consistent with past practice, subject to a maximum
amount, in any fiscal year of the Corporation, equal or equivalent to (A)
0.5% of the weighted average number of issued and outstanding shares of
Common Stock during such fiscal year plus (B) the number of shares
permitted under clause (A) for any fiscal year ending after the Issue Date
but not previously expended in prior fiscal years; and (xi) shares of
Series B Preferred Stock issued in accordance with the JLL Exchange
Agreement.
"Non-Class B Director" means any Director who is neither a Class B-1
--------------------
Director nor a Class B-2 Director.
"Options" means rights, options or warrants to subscribe for, purchase
-------
or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities. For avoidance of doubt, it is stipulated that the
following are not Options: (i) any rights, options or warrants to
subscribe for, purchase or otherwise acquire the shares of Common Stock
referred to in clause (iv) or (v) of the definition of Additional Shares of
Common Stock; and (ii) any right or option to acquire shares of Series B
Preferred Stock pursuant to the JLL Exchange Agreement.
"Optional Conversion" has the meaning set forth in Section 7(a).
-------------------
"Parity Stock" has the meaning set forth in Section 3(a).
------------
"Permitted Transferee" has the meaning set forth in Section 12.
--------------------
"Person" means any corporation, limited liability company,
------
partnership, trust, organization, association, other entity or individual.
7
<PAGE>
"Preemptive Rights Notice" has the meaning given in Section 9(a).
------------------------
"Preemptive Rights Portion" has the meaning given in Section 9(a).
-------------------------
"Preferred Stock" has the meaning set forth in the Preamble hereto.
---------------
"Principals" has the meaning given to such term in the Senior
----------
Subordinated Notes Indenture.
"Redemption Date" has the meaning given in Section 6(b).
---------------
"Redemption Notice" has the meaning set forth in Section 6(b).
-----------------
"Related Parties" has the meaning given to such term in the Senior
---------------
Subordinated Notes Indenture.
"Regular Common Stock" means the class of Common Stock existing on the
--------------------
Issue Date.
"Restated Certificate of Incorporation" means the Second Amended and
-------------------------------------
Restated Certificate of Incorporation of the Corporation in the form
attached as Exhibit B to the Stockholders' Agreement (as the same may from
time to time be amended (x) prior to Stockholder Approval, pursuant to the
Stockholders' Agreement, and (y) after Stockholder Approval, pursuant to
such Restated Certificate of Incorporation and the DGCL), to be submitted
for Stockholder Approval and following Stockholder Approval filed according
to the DGCL with the Secretary of State of the State of Delaware.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Senior Credit Facility" means the credit facilities evidenced by, and
----------------------
the loans and borrowings extended to the Corporation pursuant to the $825
million Senior Credit Agreement, dated on or about the Issue Date, among
the Corporation, as borrower the subsidiary guarantors parties thereto, the
initial lenders, initial issuing bank and swing line bank named therein,
Bank of America, N.A., as Collateral Agent and Administrative Agent, Bank
One, N.A., as Documentation Agent, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Book-Runner, Lead Arranger and Syndication Agent, and Bank
of America Securities LLC, as Joint Book-Runner and Joint Lead Arranger,
and any one or more deferrals, renewals, extensions, replacements,
refinancings or refundings thereof, or amendments, modifications or
supplements thereto or replacements thereof (including, without limitation,
any amendment increasing the amount that may be borrowed thereunder) and
any agreement providing therefor whether by or with respect to the same or
any other agents, lenders, creditors or group of creditors (or any
combination thereof) and including related notes, guarantee agreements,
security agreements and other instruments executed in connection therewith.
"Senior Stock" has the meaning given in Section 3(a).
------------
8
<PAGE>
"Senior Subordinated Notes" means the Corporation's Senior
-------------------------
Subordinated Notes due 2010 issued on or about the Issue Date in the
initial principal amount of $200,000,000 (the "initial notes") and any
notes registered under the Securities Act that are issued in exchange for
such notes, and any deferrals, renewals, extensions, replacements,
refinancings or refundings thereof, or amendments or supplements thereto or
replacements thereof.
"Senior Subordinated Notes Indenture" means the Indenture, dated as of
-----------------------------------
October 2, 2000, between the Corporation and U.S. Trust of Texas, N.A., as
trustee pursuant to which the Corporation's Senior Subordinated Notes due
2010 in the initial principal amount of $200,000,000 are issued, as the
same may be amended from time to time.
"Senior Subordinated Notes Warrants" means the warrants to purchase
----------------------------------
Regular Common Stock issued on or about the Issue Date to Rite Aid
Corporation. For purposes of this Certificate of Designations, the Senior
Subordinated Notes Warrants shall be deemed to have been issued before the
Issue Date.
"Series A Preferred Stock" means the Series A-1 and Series A-2
------------------------
Preferred Stock.
"Series A Certificates of Designations" means the Series A-1
-------------------------------------
Certificate of Designations and the Series A-2 Certificate of Designations.
"Series A-1 Certificate of Designations" means the Certificate of
--------------------------------------
Designations for the Series A-1 Preferred Stock filed pursuant to the DGCL
with the Secretary of State of the State of Delaware on or about the Issue
Date, and as amended, supplemented or restated from time to time.
"Series A-2 Certificate of Designations" means the Certificate of
--------------------------------------
Designations for the Series A-2 Preferred Stock filed pursuant to the DGCL
with the Secretary of State of the State of Delaware on or about the Issue
Date, and as amended, supplemented or restated from time to time.
"Series A-1 Preferred Stock" means the Preferred Stock designated by
--------------------------
the Board of Directors as Series A-1 11% Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series A-1 Certificate of Designations.
"Series A-2 Preferred Stock" means the Preferred Stock designated by
--------------------------
the Board of Directors as Series A-2 11% Preferred Stock and having the
powers, designations, preferences, and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions set forth in the Series A-2 Certificate of Designations.
"Series B Preferred Stock" has the meaning set forth in Section 1.
------------------------
9
<PAGE>
"Stockholder Approval" means the approval by the stockholders of the
--------------------
Corporation of the adoption of the Restated Certificate of Incorporation
and of the authorization and issuance of the Class B Common Stock to be
issued to the Holders and the holders of the Series A Preferred Stock in
accordance with the terms of this Certificate of Designations and the
Series A Certificates of Designations.
"Stockholders' Agreement" means the Stockholders' Agreement, dated on
-----------------------
or about the Issue Date, among the Corporation, Joseph, Littlejohn & Levy
Fund III, L.P., Rite Aid Corporation and the other Persons named therein,
as the same may be amended, supplemented or restated from time to time
"Subsidiary" means, with respect to any specified Person: (i) any
----------
corporation, association or other business entity of which more than 50% of
the total voting power of shares of capital stock or other equity interests
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by a Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and (ii)
any partnership (A) the sole general partner or the managing general
partner of which is the Person or a Subsidiary of that Person or (B) the
only general partners of which are the Person or one or more Subsidiaries
of that Person (or any combination thereof).
"Transfer" means any direct or indirect (including, without
--------
limitation, through the transfer of a controlling interest in a Permitted
Transferee) sale, transfer, assignment, grant of participation interest in,
option, pledge, hypothecation, encumbrance or other disposition.
"Voting Default" means the taking of (i) any of the actions set forth
--------------
in clauses (i) through (xii) of Section 10(c) in violation of the
provisions of Section 10(c) or (ii) any of the actions set forth in Section
10(d) in violation of the provisions Section 10(d).
"Voting Stock" means, with respect to any Person, the Capital Stock of
------------
any class or kind ordinarily having the power to vote generally for the
election of directors (or other persons or bodies performing similar
functions) of such Person.
Section 3. Rank.
----
(a) The Series B Preferred Stock shall, with respect to dividends and
distributions and upon a Liquidation Event, rank:
(i) senior to (A) all classes or series of Common Stock and (B) each
other class or series of Capital Stock of the Corporation hereafter created
the terms of which do not expressly provide that it ranks senior to, or on
a parity with, the Series B Preferred Stock as to dividends and
distributions and upon a Liquidation Event (all of the foregoing
collectively referred to as "Junior Stock");
(ii) on a parity with (A) the Series A Preferred Stock and (B) each
other series of Preferred Stock hereafter created the terms of which
expressly provide that such class or series ranks on a parity with the
Series B Preferred Stock as to dividends and
10
<PAGE>
distributions and upon a Liquidation Event (collectively referred to as
"Parity Stock"); and
(iii) junior to each series or class of Preferred Stock hereafter
created the terms of which expressly provide that such class or series
ranks senior to the Series B Preferred Stock as to dividends and
distributions and upon a Liquidation Event (collectively referred to as
"Senior Stock").
(b) The respective definitions of Junior Stock, Parity Stock and Senior
Stock shall also include any options, warrants or other rights exercisable or
exchangeable for or convertible into any of the Junior Stock, Parity Stock or
Senior Stock, as the case may be.
Section 4. Dividends.
---------
(a) In the event the Corporation at any time or from time to time makes,
or fixes a record date for the determination of holders of Common Stock entitled
to receive, any dividend or distribution on shares of any class or series of
Common Stock (other than any dividend or distribution payable in shares of
Common Stock effected in accordance with Section 8(a)), then and in each such
event each Holder shall be entitled to receive the amount of such dividend or
distribution that such Holder would have received had its shares of Series B
Preferred Stock been converted into Common Stock pursuant to Section 7
immediately prior to the record date for such dividend or distribution.
(b) So long as any shares of the Series B Preferred Stock are outstanding:
(i) No dividend or distribution (other than dividends on Series A
Preferred Stock payable solely in shares of Series A Preferred Stock paid
in accordance with the applicable Series A Certificate of Designations) may
be declared or paid or set apart for payment on any Parity Stock by the
Corporation, directly or indirectly, unless in each case (A) such dividend
or distribution is required by the terms of such Parity Stock pursuant to
the certificate of designations for such Parity Stock (or other instrument
pursuant to which such Parity Stock was created and setting forth the
powers, designations, preferences and other special rights and
qualifications, limitations and restrictions of such Parity Stock) as in
effect on the initial issuance of such Parity Stock and (B) all accumulated
and unpaid dividends and distributions due to be paid on the Series B
Preferred Stock have been or contemporaneously are paid or are being paid
on a pro rata basis with any such Parity Stock.
(ii) Except to the extent otherwise provided in Section 6(f), no
Parity Stock may be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available to a sinking fund
for the redemption of any shares of such stock) by the Corporation,
directly or indirectly, unless (x) all accumulated and unpaid dividends and
distributions due to be paid on the Series B Preferred Stock, or the
redemption payments required by Section 6, have been or are
contemporaneously are paid, and (y) (A) such redemption, purchase or
acquisition is required by the certificate of designations for such Parity
Stock (or other instrument pursuant to which such Parity Stock was created
and setting forth the powers, designations, preferences and other
11
<PAGE>
special rights and qualifications, limitations and restrictions of such
Parity Stock) as in effect on the initial issuance of such Parity Stock and
the issuance of such Parity Stock was approved by the Holders in accordance
with Section 10(c)(iv) or (B) such redemption, purchase or acquisition is
made with the approval of the Holders in accordance with Section 10(c)(vi).
(c) So long as any shares of the Series B Preferred Stock are outstanding,
no dividends or other distribution may be declared or paid or set apart for
payment on any Junior Stock by the Corporation, directly or indirectly, nor may
any Junior Stock be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly, other than (i) a redemption, purchase or other acquisition of shares
of Common Stock made solely pursuant to the terms of an employee incentive or
benefit plan of the Corporation or its Subsidiaries, (ii) a dividend or other
distribution on shares of Common Stock effected in accordance with Section 4(a)
or 8(a), and (iii) dividends or distributions made solely in Junior Stock
effected in accordance with Section 8(a).
Section 5. Liquidation Rights.
------------------
(a) Upon the occurrence of a Liquidation Event, subject to the rights of
holders of Senior Stock and Parity Stock, each Holder shall be entitled to be
paid, before any distribution is made on any Junior Stock, out of the assets of
the Corporation available for distribution to its stockholders an amount per
share in cash equal to the greater of (i) the Liquidation Preference, as of the
date fixed for the Liquidation Event, for each outstanding share of Series B
Preferred Stock held by such Holder and (ii) the amount such Holder would have
received upon such final distribution if all outstanding shares of Series B
Preferred Stock had been converted into shares of Common Stock pursuant to
Section 7 and all outstanding shares of Series A Preferred Stock had been
converted into shares of Common Stock pursuant to the Series A Certificates of
Designations immediately prior to such Liquidation Event (assuming such
conversion is permissible under the terms thereof).
(b) If the assets distributable in any such Liquidation Event to the
Holders and to the holders of outstanding shares of all Parity Stock are
insufficient to permit the payment to such holders of the full preferential
amounts to which they may be entitled, such assets shall be distributed ratably
among the holders of the outstanding shares of Series B Preferred Stock and
Parity Stock in proportion to the full preferential amount each such holder
would otherwise be entitled to receive.
(c) For purposes of this Section 5, a Liquidation Event shall, at the
election of the Holders of a majority of the outstanding shares of Series B
Preferred Stock, voting separately as a single class, include (i) the
consolidation or merger of the Corporation into any other corporation or entity
if the Corporation is not the continuing or surviving corporation or entity of
such consolidation or merger, (ii) the consolidation or merger of any other
corporation or entity into the Corporation with the Corporation being the
continuing or surviving corporation if, in connection with such consolidation or
merger, the shares of Common Stock are changed into or exchanged for stock or
other securities of any other Person or cash or any other property, and (iii)
the transfer by the Corporation of all or substantially all of its properties or
assets to any
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<PAGE>
other corporation or entity (other than to a wholly-owned Subsidiary of the
Corporation if such Subsidiary remains wholly owned by the Corporation after
such transfer or any other transaction or series of transactions related to such
transfer).
(d) After payment of the full preferential amount to which the Holders are
entitled pursuant to this Section 5, the Holders shall not be entitled to any
further participation in any distribution of assets of the Corporation, and all
rights of the Holders with respect to their Series B Preferred Stock shall
terminate.
Section 6. Redemption.
----------
(a) The Corporation shall redeem, to the extent of funds legally available
therefor (determined pursuant to Section 6(e)), in the manner provided for in
this Section 6 all of the then outstanding shares of Series B Preferred Stock at
the Liquidation Preference as of the Redemption Date (the "Mandatory Redemption
Price") on (i) the eleventh anniversary of the Issue Date or (ii) in the event a
Change of Control of the Corporation has occurred, upon receipt of notice (no
later than 30 days following the later of the occurrence of such Change of
Control or public announcement of the occurrence of such Change of Control) from
the Holders of a majority of the outstanding shares of Series B Preferred Stock
demanding a redemption of the outstanding shares of Series B Preferred Stock.
The Corporation shall pay the Mandatory Redemption Price in cash. The date for
any such redemption (the "Redemption Date") shall be (A) in the case of a
redemption occurring pursuant to clause (i) of this Section 6(a), the date of
the eleventh anniversary of the Issue Date, or if such date is not a Business
Day, the first Business Day following such date, and (B) in the case of a
redemption occurring pursuant to clause (ii) of this Section 6(a), a date to be
fixed by the Corporation that is a Business Day no earlier than the 30 days and
no later than 60 days following the notice referred to in clause (ii) of this
Section 6(a).
(b) No later than 20 days and no earlier than 60 days prior to the
Redemption Date, the Corporation shall give written notice (the "Redemption
Notice") to each Holder at such Holder's address as it appears on the stock
books of the Corporation. The Redemption Notice shall state:
(i) whether the redemption is pursuant to clause (i) or (ii) of
Section 6(a);
(ii) the Mandatory Redemption Price;
(iii) Redemption Date; and
(iv) the location (which shall be in New York City, New York) at
which the Holder is to surrender to the Corporation (or its agent), for
redemption, its certificate or certificates representing its shares of
Series B Preferred Stock, and the manner for the surrender of such
certificate or certificates.
(c) Each Holder shall surrender the certificate or certificates
representing its shares of Series B Preferred Stock to the Corporation, duly
endorsed (or otherwise in proper form for transfer, as determined by the
Corporation), in the manner and at the place designated in the Redemption
Notice. On the Redemption Date, the Corporation shall pay, or cause to be paid,
the
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<PAGE>
full Mandatory Redemption Price for the shares so surrendered in cash (i) to the
Person whose name appears on such certificate or certificates as the owner
thereof, and, upon such payment, each surrendered certificate shall be canceled
and retired and (ii) if such certificate is not surrendered by a Holder but the
Holder certifies to the Corporation that the certificate or certificates
representing its shares of Series B Preferred Stock have been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such lost,
stolen or destroyed certificates (and, if requested by the Corporation, posts a
customary bond reasonably satisfactory to the Corporation to cover such loss),
to such Holder.
(d) Unless the Corporation defaults in the payment of the applicable
Mandatory Redemption Price, all rights of the Holders with respect to their
Series B Preferred Stock, other than the right to receive the Mandatory
Redemption Price, shall terminate on the Redemption Date.
(e) For the purpose of determining whether funds are legally available for
redemption of Series B Preferred Stock pursuant to this Section 6, (i) the
Corporation shall value its assets at the highest amount permissible under
applicable law, (ii) if the redemption is pursuant to clause (ii) of Section
6(a), the Corporation may, at its option, set aside the funds necessary to
prepay, redeem or offer to purchase any Indebtedness of the Corporation or its
Subsidiaries that, by its terms, has to be prepaid or redeemed, or requires that
the Corporation or its Subsidiaries extend to the holders thereof an offer to
purchase such Indebtedness, including the Senior Credit Facility and the Senior
Subordinated Notes, and (iii) the Corporation may, at its option, set aside the
funds necessary to satisfy any dividend, redemption or other obligations with
respect to any Senior Stock or Parity Stock required by the certificate of
designations for such Senior Stock or Parity Stock (or other instrument pursuant
to which such Senior Stock or Parity Stock was created and setting forth the
powers, designations, preferences and other special rights and qualifications,
limitations and restrictions of such Senior Stock or Parity Stock).
(f) If on the Redemption Date funds of the Corporation legally available
therefor are insufficient to pay the Mandatory Redemption Price in full for all
the shares of Series B Preferred Stock, the Corporation shall (i) use funds to
the extent legally available for such purpose, (ii) effect the Mandatory
Redemption Obligation pro rata according to the number of shares of Series B
Preferred Stock held by each holder and (iii) pay interest at the rate of 10%
per annum on any unpaid portion of the Mandatory Redemption Price on a quarterly
basis. If the Corporation is unable or fails to discharge its Mandatory
Redemption Obligation, the Mandatory Redemption Obligation shall be discharged
as soon as the Corporation is able to discharge the Mandatory Redemption
Obligation. If and so long as the Mandatory Redemption Obligation is not fully
discharged, the Corporation may not, directly or indirectly, (A) redeem,
purchase, or otherwise acquire any Parity Stock or Junior Stock or discharge any
mandatory or optional redemption, sinking fund or other similar obligation in
respect of any Parity Stock or Junior Stock (except in connection with a
redemption, sinking fund or other similar obligation regarding Parity Stock
(including the Series A Preferred Stock) being satisfied on a pro rata basis) or
(B) declare or make any dividend or distribution in respect of any Junior Stock.
(g) Notwithstanding the foregoing, each Holder may, at any time prior to
the close of business on the Business Day immediately preceding the Redemption
Date, elect to convert,
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<PAGE>
pursuant to Section 7(a), all or any portion of its shares of Series B Preferred
Stock into Common Stock in lieu of any redemption of its Series B Preferred
Stock. Upon such Optional Conversion, such Holder shall no longer be entitled to
any payment in connection with the redemption for the Series B Preferred Stock
so converted.
(h) The Corporation need not establish any sinking fund for the Mandatory
Redemption Obligation.
Section 7. Conversion.
----------
(a) Optional Conversion. Subject to and in compliance with the provisions
-------------------
of this Section 7, each Holder may, at any time and from time to time, at such
Holder's election, convert any or all outstanding shares of Series B Preferred
Stock of such Holder into shares of Regular Common Stock (such conversion, an
"Optional Conversion"). Notwithstanding any call for redemption pursuant to
Section 6, the right to convert shares pursuant to the Optional Conversion shall
terminate at the close of business on the Business Day immediately preceding the
Redemption Date, unless the Corporation defaults in making payment of the
Mandatory Redemption Price in full on the Redemption Date.
(b) Mandatory Conversion. Subject to the provisions of this Section 7,
--------------------
upon the occurrence of the Stockholder Approval and the filing of the Restated
Certificate of Incorporation pursuant to the DGCL with the Secretary of State of
the State of Delaware, all of the outstanding shares of Series B Preferred Stock
shall automatically convert into shares of Class B-1 Common Stock (such
conversion, a "Mandatory Conversion").
(c) Conversion Ratio. The number of shares of Regular or Class B-1 Common
----------------
Stock deliverable upon Conversion of one share of Series B Preferred Stock,
adjusted as provided in Section 8, is referred to in this Certificate of
Designations as the "Conversion Ratio." The Conversion Ratio as of any date
shall be an amount equal to the Liquidation Preference as of such date divided
by the Conversion Price. The "Conversion Price" will initially be $20.00,
subject to adjustment from time to time pursuant to Section 8.
(d) Conversion Mechanics.
--------------------
(i) In the case of an Optional Conversion, the Holder of the shares
of Series B Preferred Stock to be converted shall surrender the certificate
representing such shares at the principal office of the Corporation, with a
written notice of election to convert completed and signed, specifying the
number of shares to be converted. Unless the shares issuable on such
Optional Conversion are to be issued in the same name as the name in which
such shares of Series B Preferred Stock are registered, each share
surrendered for such Optional Conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly
executed by the Holder or the Holder's duly authorized attorney. The
Corporation shall not be obligated to issue certificates for shares of
Common Stock in any name other than the name or names set forth on the
certificates for the shares of Series B Preferred Stock unless the
requirements of the Stockholders' Agreement relating to the transfer of
shares of Series B Preferred Stock have been complied with or waived by the
Corporation.
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<PAGE>
(ii) In the event of a Mandatory Conversion, the outstanding shares
of Series B Preferred Stock shall be converted automatically without any
further action by the Holders and whether or not the certificates
representing such shares are surrendered at the office of the Corporation.
The Corporation shall issue certificates representing the shares of Class
B-1 Common Stock issuable upon such Mandatory Conversion upon the surrender
of certificates representing the corresponding shares of Series B Preferred
Stock, in the same name as the name in which such shares of Series B
Preferred Stock are registered.
(iii) Notwithstanding clause (i) or (ii) of this Section 7(d), if the
Holder of any share or shares of Series B Preferred Stock certifies to the
Corporation that the certificates representing such share or shares have
been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it
in connection with such lost, stolen or destroyed certificates (and, if
requested by the Corporation, posts a customary bond reasonably
satisfactory to the Corporation to cover such loss), then the Corporation
shall issue certificates representing the Regular Common Stock or Class B-1
Common Stock issuable upon any Optional Conversion or Mandatory Conversion,
as the case may be, in the name of such holder.
(iv) As promptly as practicable after the delivery by the Holder of
the certificates for shares of Series B Preferred Stock (or in the case of
a lost certificate, the certification, the agreement and, if requested,
posting of the bond described in clause (iii) of this Section 7(d)), the
Corporation shall issue and shall deliver to such Holder, or, subject to
compliance with the provisions Section 12 and the Stockholders' Agreement
relating to the transfer of shares of Series B Preferred Stock, on the
Holder's written order to the Holder's transferee, (A) a certificate or
certificates for the whole number of shares of Regular or Class B-1 Common
Stock issuable upon the Conversion of such shares in accordance with the
provisions of this Section 7, (B) any cash adjustment required pursuant to
Section 7(g), and (C) in the event of an Optional Conversion in part, a
certificate or certificates for the whole number of shares of Series B
Preferred Stock not being so converted.
(v) Each Conversion shall be deemed to have been effected
immediately prior to the close of business on the applicable Conversion
Date. The Person in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such Conversion shall be
deemed to have become the holder of record of the shares of Common Stock
represented thereby at such time on the applicable Conversion Date and such
Conversion shall be into a number of whole shares of Common Stock equal to
the product of the number of shares of Series B Preferred Stock surrendered
multiplied by the Conversion Ratio in effect on the applicable Conversion
Date. All shares of Common Stock delivered upon conversion of the Series B
Preferred Stock will upon delivery be duly and validly issued and fully
paid and non-assessable, free of all liens, pledges and other security
interests and not subject to any preemptive rights. As of the effective
time of such Conversion, the shares of Series B Preferred Stock to be so
converted will no longer be deemed to be outstanding and all rights of a
holder with respect to such shares so converted shall immediately terminate
except the right to receive the Common Stock and other amounts payable
pursuant to this Section 7 and, in the event of an Optional
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<PAGE>
Conversion in part, a certificate or certificates representing the shares
of Series B Preferred Stock not converted.
(e) Reservation of Shares; Compliance with Laws. The Corporation covenants
-------------------------------------------
that it will at all times reserve and keep available, free from preemptive
rights, such number of its authorized but unissued shares of Regular Common
Stock as shall be required for the purpose of effecting Optional Conversions of
the Series B Preferred Stock. Promptly (and in any event no later than two
Business Days) following receipt of Stockholder Approval, the Corporation shall
file the Restated Certificate of Incorporation pursuant to the DGCL with the
Secretary of State of the State of Delaware. Prior to the delivery of any Common
Stock that the Corporation is obligated to deliver upon an Optional Conversion
or Mandatory Conversion, the Corporation shall comply with all applicable
federal and state laws and regulations which require action to be taken by the
Corporation.
(f) Transfer Taxes, etc. The Corporation will pay any and all documentary
-------------------
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock upon any Conversion, other than any tax
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the Holder of the Series B
Preferred Stock to be converted. The Corporation shall have the right not to
issue or deliver any shares of Common Stock in a name other than that of the
Holder of the Series B Preferred Stock to be converted unless and until the
Person requesting such issue or delivery has paid to the Corporation the amount
of any such tax or has established, to the satisfaction of the Corporation, that
such tax has been paid.
(g) No Fractional Shares. No fractions of shares of Common Stock shall be
--------------------
required to be issued to a Holder in connection with a Conversion. In lieu
thereof, the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied by
the Current Market Price per share of Regular Common Stock on the Conversion
Date.
(h) No Impairment. The Corporation will not, through any reorganization,
-------------
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series B Preferred Stock against impairment. Without limiting the generality of
the foregoing, the Corporation (i) will take all such action as may be necessary
or appropriate in order that the Corporation may validly and legally issue fully
paid nonassessable shares of Common Stock on any Conversion, free of all
preemptive rights, and (ii) will not take any action which results in any
adjustment of the applicable Conversion Price if the total number of shares of
Common Stock issuable after the action upon the Conversion of all of the Series
B Preferred Stock will exceed the total number of shares of Common Stock then
authorized by the Corporation's Certificate of Incorporation and available for
the purpose of issue upon such Conversion.
Section 8. Adjustments to Conversion Price.
-------------------------------
17
<PAGE>
(a) Adjustment for Stock Dividends, Distributions and Subdivisions. In the
--------------------------------------------------------------
event the Corporation shall declare or pay any dividend or make any other
distribution on the Common Stock payable in shares of Common Stock, or shall
effect a subdivision of the outstanding Common Stock, into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock), then and in each such case the applicable
Conversion Price in effect immediately prior to such stock dividend,
distribution or subdivision shall, concurrently with the effectiveness of such
stock dividend, distribution or subdivision, be proportionately decreased,
subject to the following qualifications: (i) in the event such issuance is
declared but not effected, the applicable Conversion Price shall be readjusted
as if such issuance was not declared; and (ii) no adjustment in the Conversion
Price shall be made in the event the Holders simultaneously receive a dividend
or other distribution of such securities in an amount equal to the amount of
such securities as they would have received had the Series B Preferred Stock
been converted into Common Stock pursuant to Section 7 immediately prior to such
event (or, if applicable, the record date for such event).
(b) Adjustments for Combinations or Consolidation of Common Stock. In the
-------------------------------------------------------------
event the outstanding Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then and in each such case the applicable Conversion Price in effect immediately
prior to such combination or consolidation shall, concurrently with the
effectiveness of such combination or consolidation, be proportionately
increased.
(c) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization,
----------------------------------------------------------------------
etc. In the event the Corporation (i) consolidates with or merges into any other
----
corporation or entity and is not the continuing or surviving corporation or
entity of such consolidation or merger, (ii) permits any other corporation or
entity to consolidate with or merge into the Corporation and the Corporation is
the continuing or surviving corporation but, in connection with such
consolidation or merger, the shares of Common Stock are changed into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (iii) transfers all or substantially all of its properties or
assets, directly or indirectly, to any other corporation or entity (other than
to a wholly owned Subsidiary of the Corporation if such Subsidiary remains
wholly owned by the Corporation after such transfer or any other transaction or
series of transactions related to such transfer), then, and in each such event,
proper provision shall be made so that, upon the basis and the terms and in the
manner provided in this Section 8(c), each Holder, upon any Conversion at any
time after the consummation of such consolidation, merger or transfer, shall be
entitled to receive, in lieu of the shares of Common Stock issuable upon any
Conversion prior to such consummation, the stock and other securities, cash and
property to which such Holder would have been entitled upon such consummation if
such Holder had converted its Series B Preferred Stock pursuant to Section 7
immediately prior to such consummation (or, if applicable, any record date with
respect to such transaction), subject to adjustments (subsequent to such
corporate action) as nearly equivalent as possible to the adjustments provided
for in this Section 8(c). Notwithstanding anything contained herein to the
contrary, (A) the Corporation will not effect any of the transactions described
in the clauses (i) through (iii) of this Section 8 unless, prior to the
consummation thereof, each corporation (other than the Corporation) which may be
required to deliver any stock, securities, cash or property upon the conversion
of Series B Preferred Stock shall assume, by written instrument, a copy of which
shall be delivered to each Holder, the obligation to deliver to such Holder such
shares of stock, securities, cash or property
18
<PAGE>
as such holder may be entitled to receive upon such conversion, and (B) in the
event the Holders of a majority of the outstanding shares of Series B Preferred
Stock, voting separately as a single class, elect to declare that any of the
transactions described in clauses (i) through (iii) constitute a Liquidation
Event, then the provisions of this Section 8(c) shall not apply to such
transaction and, in lieu thereof, the Holders shall be entitled to the amounts
set forth in Section 5 with respect to such Liquidation Event.
(d) Adjustments for Reclassification, Exchange and Substitution. If the
-----------------------------------------------------------
Common Stock issuable upon any Conversion is changed into the same or a
different number of shares of any other class or classes of stock, whether by
capital reorganization, reclassification or otherwise (other than a subdivision,
combination or consolidation of shares, or merger, consolidation or asset sale,
provided for in Sections 8(a), 8(b) and 8(c) or any reclassification resulting
from the adoption of the Restated Certificate of Incorporation), then and in
each such case the applicable Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the Series B Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
Holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the Holders upon any
Conversion immediately before that change. No class or series of Common Stock
shall be so changed into shares of any other class or series of stock unless a
proportional and equivalent change is made with respect to all other classes or
series of Common Stock. For avoidance of doubt, it is stipulated that the
provisions of this Section 8(d) shall not apply to any exchange of shares of
Common Stock into shares of Series B Preferred Stock pursuant to the JLL
Exchange Agreement.
(e) Adjustment of Conversion Price Upon Issuance of Additional Shares of
--------------------------------------------------------------------
Common Stock. In the event the Corporation, at any time after the Issue Date,
------------
issues or sells Additional Shares of Common Stock for a consideration per share
less than the Current Market Price in effect immediately prior to such issuance
or sale, then and in each such event, the applicable Conversion Price shall be
reduced, concurrently with such issue or sale, to a price (calculated to the
nearest cent) determined by multiplying the applicable Conversion Price by a
fraction (i) the numerator of which shall be (A) the number of shares of Common
Stock outstanding immediately prior to such issue or sale, plus (B) the number
of shares of Common Stock which the aggregate consideration received by the
Corporation for the total number of Additional Shares of Common Stock so issued
or sold would purchase at the Current Market Price in effect immediately prior
to such issuance or sale, and (ii) the denominator of which shall be (A) the
number of shares of Common Stock outstanding immediately prior to such issue or
sale plus (B) the number of Additional Shares of Common Stock so issued or sold.
The provisions of this Section 8(e) shall not apply to any issuance or sale of
Additional Shares of Common Stock for which an adjustment is provided under
Section 8(a).
(f) Issue of Securities Deemed Issue of Additional Shares of Common Stock.
---------------------------------------------------------------------
In the event (i) the Corporation at any time after the Issue Date shall issue,
sell or grant any Options or Convertible Securities, or shall fix a record date
for the determination of holders of any class of securities entitled to receive
any such Options or Convertible Securities and (ii) the consideration per share
for the Additional Shares of Common Stock issuable upon the exercise of such
Options, or in the case of Convertible Securities, the conversion or exchange of
such Convertible
19
<PAGE>
Securities shall be less than the Current Market Price in effect immediately
prior to such issue, sale or grant, or such record date, as the case may be,
then, and in each such case, (A) the maximum number of shares of Common Stock
(as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be issuances of Additional Shares of Common Stock
issued as of the time of such issue, sale or grant or, in case such a record
date shall have been fixed, as of the close of business on such record date, and
(B) the Conversion Price shall be adjusted in accordance with Section 8(e) on
the date of and immediately prior to such issue, sale or grant, or the record
date, as the case may be. In any such case in which Additional Shares of Common
Stock are deemed to be issued or sold pursuant to this Section 8(f):
(1) no further adjustment in the applicable Conversion Price shall
be made upon the subsequent issue of Convertible Securities or Common Stock
upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Corporation, or increase in the number of
Additional Shares of Common Stock issuable, upon the exercise, conversion
or exchange thereof, the adjustments to the Conversion Price computed upon
the original issue, sale, grant or assumption thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such decrease or increase
becoming effective, be recomputed (and the Conversion Price shall
automatically be adjusted as so recomputed) to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities which are outstanding at such
time; and
(3) no readjustment pursuant to the preceding clause (2) shall have
the effect of increasing the applicable Conversion Price to an amount which
exceeds the lower of (A) the applicable Conversion Price on the original
adjustment date and (B) the applicable Conversion Price that would have
resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
The consideration per share deemed to be received by the Corporation for
Additional Shares of Common Stock relating to Options and Convertible
Securities, shall be determined by dividing (x) the total amount, if any,
actually received by the Corporation as consideration for the issue, sale, grant
or assumption of such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the instruments
relating to such Options or Convertible Securities without regard to any
provision contained therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise in full of such Options or the
conversion or exchange in full of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise in full of such Options for
Convertible Securities and the conversion or exchange in full of such
Convertible Securities, by (y) the maximum number of Additional Shares of Common
Stock (as set forth in the instruments relating to such Options or Convertible
Securities, without regard to any provision contained therein for a
20
<PAGE>
subsequent adjustment of such number) issuable upon the exercise of such Options
or the conversion or exchange of such Convertible Securities.
(g) Certificate as to Adjustments. Upon the occurrence of each adjustment
-----------------------------
or readjustment of the applicable Conversion Price pursuant to this Section 8,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each Holder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (i) the consideration received or to be received by the Corporation
for any Additional Shares of Common Stock, or any Options or Convertible
Securities, as the case may be, issued or sold or deemed to have been issued,
(ii) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (iii) the applicable Conversion Price in effect immediately
prior to such issue or sale and as adjusted and readjusted on account thereof.
The Corporation shall, upon the written request at any time of any Holder,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) the applicable Conversion Price at the time in effect, and showing how it
was calculated, and (ii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon a Conversion. At
the request of the Holders of a majority of the then outstanding Series B
Preferred Stock, the Corporation will have the certificates referred to in this
Section 8(g) prepared and delivered by an internationally recognized independent
accounting firm.
Section 9. Preemptive Rights.
-----------------
(a) The Corporation shall provide each Holder with a written notice (a
"Preemptive Rights Notice") of any proposed issuance by the Corporation of any
New Securities at least 30 days prior to the proposed issuance date. Such notice
shall specify the price at which the New Securities are to be issued and the
other material terms of the issuance. Each Holder shall be entitled to purchase,
at the price and on the terms at which such New Securities are proposed to be
issued and specified in such Preemptive Rights Notice, such Holder's Preemptive
Rights Portion of such class of the New Securities proposed to be issued.
"Preemptive Rights Portion" means the pro rata portion of New Securities
proposed to be issued by the Corporation, which amount shall, for each Holder,
be based upon the ratio of (i) the number of shares of Common Stock that such
Holder would receive upon the Conversion of its shares of Series B Preferred
Stock into Common Stock pursuant to Section 7 immediately prior to the issuance
of the New Securities to (ii) the total number of issued and outstanding shares
of Common Stock immediately prior to the issuance of the New Securities
(assuming (A) the conversion of all securities convertible into, and the
exercise of all options, warrants or other arrangements representing the right
to purchase or otherwise acquire any shares of Common Stock and (B) the receipt
of Stockholder Approval and the filing of the Restated Certificate of
Incorporation according to the DGCL with the Secretary of State of the State of
Delaware).
(b) A Holder may exercise its rights under this Section 9 by delivering
written notice of its election to purchase New Securities to the Corporation
within 15 days of receipt of the Preemptive Rights Notice. A delivery of such a
written notice (which notice shall specify the amount of New Securities to be
purchased by the Shareholder submitting such notice) by such Holder shall
constitute a binding agreement of such Holder to purchase, at the price and on
the
21
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terms specified in the Preemptive Rights Notice, the number of New Securities
specified in such Holder's written notice.
(c) In the case of any issuance of New Securities, the Corporation shall
have 90 days from the date of the Preemptive Rights Notice to consummate the
proposed issuance of any or all of such New Securities which the Holders have
not elected to purchase at the price and upon terms that are not materially less
favorable to the Corporation than those specified in the Preemptive Rights
Notice. At the consummation of such issuance, the Corporation shall issue
certificates representing the New Securities to be purchased by each Holder
exercising preemptive rights pursuant to this Section 9 registered in the name
of such Holder, against payment by such Holder of the purchase price for such
New Securities. If the Corporation proposes to issue such New Securities after
such 90-day period, it shall again comply with the procedures set forth in this
Section 9.
Section 10. Voting Rights.
-------------
(a) The Holders shall not be entitled to any voting rights, except as
hereinafter provided in this Section 10 or as otherwise provided by DGCL or
other applicable law.
(b) Except as otherwise required by law, each share of Series B Preferred
Stock shall entitle the Holder thereof to vote on all matters submitted to a
vote of the holders of the Regular Common Stock, voting together with the
holders of the Regular Common Stock (and any other shares of Capital Stock which
by its terms is entitled to vote together with the Regular Common Stock as a
single class) on all matters as to which the holders of the Regular Common Stock
shall be entitled to vote, other than (i) the election or removal of Directors
and (ii) for matters for which applicable law requires the vote or consent of
the holders of the Regular Common Stock as a separate class. With respect to any
such vote, each share of Series B Preferred Stock shall entitle the Holder
thereof to cast the number of votes equal to the number of votes which could be
cast in such vote by a holder of the shares of Regular Common Stock into which
such share of Series B Preferred Stock is convertible on the record date for
such vote or, if no such record date is established, on the date of any written
consent of stockholders. Notwithstanding anything to the contrary contained
herein, except as otherwise required by law, any action required or permitted to
be taken by the Holders of Series B Preferred Stock at any meeting of the
Holders of Series B Preferred Stock may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by Holders who would have been entitled to cast
the minimum number of votes which would be necessary to authorize such action at
a meeting at which all Holders of Series B Preferred Stock entitled to vote
thereon were present and voting.
(c) So long as the Current Series B Amount is equal to or greater than 10%
of the Initial Series B Amount, the affirmative vote of the Holders of at least
a majority of the then outstanding shares of Series B Preferred Stock voting or
consenting, as the case may be, separately as a single class shall be required
for the Corporation to:
(i) amend or repeal any provision of, or add any provision to, the
Corporation's certificate of incorporation or by-laws so as to affect
adversely the powers, rights, preferences (including, without limitation,
liquidation preferences, conversion
22
<PAGE>
price and redemption provisions) or voting rights of the shares of Series B
Preferred Stock; provided that the filing of the Restated Certificate of
Incorporation pursuant to the DGCL with the Secretary of State of the State
of Delaware shall not require prior approval of the Holders pursuant to
this Section 10(c);
(ii) amend or repeal any provision of, or add any provision to, this
Certificate of Designations or either of the Series A Certificates of
Designations;
(iii) authorize or issue any additional shares of Series B Preferred
Stock, other than pursuant to the JLL Exchange Agreement;
(iv) authorize or create any class or series of Senior Stock or
Parity Stock, or issue any shares of Senior Stock or Parity Stock, except
in either case for the authorization and creation of the Series A Preferred
Stock and the issuance of shares of Series A Preferred Stock (including
issuances of shares of Series A Preferred Stock as a dividend on the Series
A Preferred Stock in accordance with the applicable Series A Certificate of
Designations) in accordance with the Series A Certificates of Designations;
(v) reclassify any shares of Junior Stock into shares of Parity
Stock or Senior Stock, or any shares of Parity Stock into shares of Senior
Stock, for avoidance of doubt it being stipulated that any exchange of
shares of Regular Common Stock into shares of Series B Preferred Stock
shall not be deemed a reclassification of such stock or require the
approval of the Holders pursuant to this Section 10(c);
(vi) repurchase or redeem any Capital Stock of the Corporation,
other than (A) the Series A Preferred Stock issued on the Issue Date or
issued as a dividend on the Series A Preferred Stock in accordance with the
applicable Series A Certificates of Designations and (B) the redemption of
the Series B Preferred Stock pursuant to Section 6, for avoidance of doubt
it being stipulated that any exchange of shares of Regular Common Stock
into shares of Series B Preferred Stock shall not be deemed a redemption or
repurchase of such stock or require the approval of the Holders pursuant to
this Section 10(c);
(vii) incur, or permit any of its Subsidiaries to incur, any
Indebtedness (other than any Indebtedness under the Senior Credit Facility
or the Senior Subordinated Notes) that would result in the Corporation
having an Interest Coverage Ratio of less than 1.50:1.00; provided that
such incurrence shall not constitute a violation of this clause (vii)
unless the Indebtedness so incurred remains outstanding for at least 30
consecutive days following the initial incurrence thereof;
(viii) voluntarily file for bankruptcy, liquidation, dissolution or
winding up of the Corporation;
(ix) increase the number of Directors to more than eleven, unless
the Holders are entitled to elect an additional Class B-1 Director pursuant
to clause (v) of Section 10(f), or the holders of Series A-2 Preferred
Stock are entitled to elect an additional Class B-2 Director pursuant to
the Series A-2 Certificate of Designations, in which case the number of
Directors may be increased by the number of such additional Directors;
23
<PAGE>
(x) have less than three of the employees or officers of the
Corporation or its Subsidiaries serve as Directors (and in the event of any
vacancy resulting from the death, disability, resignation or removal of
such a Director, not have another employee or officer of the Corporation or
its Subsidiaries elected or appointed promptly as a Director to fill such
vacancy);
(xi) modify or repeal any of the provisions of the By-Laws (A)
requiring that, the Board of Directors meet no less frequently than once in
every calendar quarter, (B) requiring that each committee of the Board of
Directors (including any audit or compensation committee, but excluding any
nominating committees for the nomination of Directors) have, as members, a
proportional number of Class B-1 Directors and Class B-2 Directors, as a
group (in relation to the total number of Directors), unless (1) such
representation is prohibited by applicable law or rules of the Nasdaq
National Market, in which case such committees shall have, as members, the
maximum number of Class B-1 Directors and Class B-2 Directors permitted by
applicable law and rules of the Nasdaq National Market, or (2) the Class
B-1 Directors and Class B-2 Directors elect not to serve on any such
committee, or (C) relating to the number, election, powers or rights of
Class B-1 Directors, Class B-2 Directors or Non-Class B Directors; or
(xii) enter into any agreement with any Affiliate of the Corporation
(other than Subsidiaries of the Corporation) involving amounts in excess of
$5 million.
(d) So long as the Current Series B Amount is equal to or greater than 25%
of the Initial Series B Amount, the Corporation may not, without the approval of
Holders of at least a majority of the then outstanding shares of Series B
Preferred Stock voting or consenting, as the case may be, separately as a single
class, undertake, effect or consummate any transaction or series of transactions
(i) described in clauses (i) through (iii) of Section 8(c), (ii) involving a
merger or consolidation, other than a merger or consolidation which would result
in the Voting Stock of the Corporation outstanding immediately prior to such
merger or consolidation continuing to represent more than 50% of the combined
voting power of the Voting Stock of the Corporation or the surviving entity or
parent thereof outstanding immediately after such merger or consolidation or
(iii) through which the Corporation causes a Change of Control to be effected.
(e) The approval of Holders of at least 75% of the then outstanding shares
of Series B Preferred Stock voting or consenting, as the case may be, shall be
required for any amendment to this Certificate of Designations that reduces the
Liquidation Preference or the Mandatory Redemption Obligation or amends the
provisions of Section 3, 10(c) or 10(d) or this Section 10(e).
(f) The Holders voting or consenting, as the case may be, separately as a
single class, shall be entitled to elect Directors (the Directors so elected,
the "Class B-1 Directors") as follows:
(i) On the Issue Date, two individuals designated by the holders of
shares of Series B Preferred Stock shall be elected as Class B-1 Directors.
24
<PAGE>
(ii) So long as the Current Series B Amount is equal to or greater
than 50% of the Initial Series B Amount, the Holders shall be entitled to
elect, voting as a separate class, two Class B-1 Directors.
(iii) So long as the Current Series B Amount is less than 50% but
equal to or greater than 10% of the Initial Series B Amount, the Holders
shall be entitled to elect, voting as a separate class, one Class B-1
Director.
(iv) The Holders shall not be entitled to elect any Director
pursuant to this Section 10(f) when the Current Series B Amount is less
than 10% of the Initial Series B Amount.
(v) In addition to the number of Class B-1 Directors provided in
the preceding clauses (ii) and (iii), if at any time a Voting Default shall
have occurred, the Holders shall be entitled, voting as a separate class,
to elect one additional Class B-1 Director.
(vi) Upon any increase or decrease in the total number of Class B-1
Directors pursuant to this Section 10(f), there shall be a corresponding
and equal increase or decrease in the total number of Directors.
(vii) So long as the Holders of shares of Series B Preferred Stock
are entitled to elect Class B-1 Directors under this Section 10(f), at any
annual meeting of stockholders, or special meeting held in place thereof,
the holders of shares of Series B Preferred Stock, voting or consenting (as
the case may be separately) as a single class, shall be entitled to elect
any Class B-1 Directors due to be elected at such meeting pursuant to the
terms of this Certificate of Designations. Any vacancy occurring because of
the death, disability, resignation or removal of a Class B-1 Director shall
be filled by the vote or consent of the Holders. A Class B-1 Director may
be removed without cause only by the vote or consent of the Holders of a
majority of the outstanding shares of Series B Preferred Stock.
(g) In addition to any other vote required by law, the affirmative vote of
a majority of the Directors that are not employees or officers of the
Corporation or its Subsidiaries shall be required for any decision of the
Corporation regarding the appointment, removal or compensation of the
Corporation's Chief Executive Officer , or any transaction between the
Corporation (or any of its Subsidiaries) and the Corporation's Chief Executive
Officer (or his or her Affiliates).
Section 11. Reports and Notices.
-------------------
(a) The Corporation will provide the Holders, at the Corporation's
expense, with the following:
(i) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Corporation,
and in any event within 45 days thereafter, a consolidated balance sheet of
the Corporation and its Subsidiaries, as of the end of each such quarterly
period, and consolidated statements of income and sources and applications
of funds of the Corporation and its Subsidiaries for such period and for
the
25
<PAGE>
current fiscal year to date, prepared in accordance with generally accepted
accounting principles in the United States consistently applied and setting
forth in comparative form the figures for the corresponding periods of the
previous fiscal year, subject to changes resulting from year end audit
adjustments and the absence of notes, together with a management's
discussion and analysis thereof, all in reasonable detail and certified by
the principal financial or accounting officer of the Corporation.
(ii) As soon as practicable after the end of each fiscal year of the
Corporation, and in any event within 90 days thereafter, a consolidated
balance sheet of the Corporation and its Subsidiaries, as at the end of
such fiscal year, and consolidated statements of income and sources and
applications of funds of the Corporation and its Subsidiaries, for such
year, prepared in accordance with generally accepted accounting principles
in the United States consistently applied and setting forth in each case in
comparative form the figures for the previous fiscal year, together with a
management's discussion and analysis thereof, all in reasonable detail and
certified with an unqualified audit opinion by independent public
accountants of recognized national standing selected by the Corporation.
So long as the Corporation is subject to the reporting requirements of the
Exchange Act, the Corporation's obligations to provide the information required
pursuant to clauses (i) and (ii) of this Section 11(a) shall be satisfied by the
filing by the Corporation of its quarterly reports on Form 10-Q and its annual
reports on Form 10-K, respectively, or any successor forms thereto, in
accordance with the Exchange Act.
(b) In the event that at any time after the date hereof, (i) the
Corporation shall adopt a dividend policy, change a previously adopted dividend
policy, or declare a dividend in the absence of, or in conflict with, a dividend
policy or declare any distribution with respect to the Common Stock, or (ii) the
Corporation shall declare any stock split, stock dividend, subdivision,
combination, or similar distribution with respect to the Common Stock,
regardless of the effect of any such event on the outstanding number of shares
of Common Stock (either such event hereinafter being referred to as a
"Notification Event"), then and in such case the Corporation shall cause to be
mailed to the Holders, not later than the earlier of the date public
announcement of the Notification Event is first made or the date ten days prior
to the record date, if any, in connection with such Notification Event, written
notice specifying the nature of such event and the effective date of, or the
date on which the books of the Corporation shall close or a record shall be
taken with respect to, such event. Such notice shall also set forth facts
indicating the effect of such action (to the extent such effect may be known at
the date of such notice) on the Conversion Price and the kind and amount of the
shares of stock or other securities or property issuable or distributable with
respect to the Series B Preferred Stock.
(c) The Corporation shall deliver to the Holders all notices and other
reports delivered to holders of Regular Common Stock, including all notices and
reports required by DGCL or other applicable laws.
Section 12. Transfer Restrictions. Any Transfer of shares of Series B
---------------------
Preferred Stock prior to the 120th day following the Issue Date by a Holder to a
Person other than a Permitted Transferee shall result in the automatic
conversion of the transferee's shares of Series B
26
<PAGE>
Preferred Stock into shares of Regular Common Stock pursuant to Section 7,
effective as of the date on which certificates representing the shares of Series
B Preferred Stock are presented for transfer on the stock transfer record books
of the Corporation. The Corporation may, at its discretion, as a condition to
the transfer or registration of transfer of Series B Preferred Stock to a
purported Permitted Transferee, require the furnishing of affidavits or other
proof as it deems reasonably necessary to establish that the proposed transferee
is a Permitted Transferee. The term "Permitted Transferee" of a Holder shall be
(i) any direct or indirect Subsidiary of any Person who was a Holder on the
Issue Date, (ii) any investment fund managed by Joseph Littlejohn & Levy, Inc.,
a Delaware corporation ("JLL"), (iii) any Person who is or becomes an investor
in a fund managed by JLL, including Joseph Littlejohn & Levy Fund III, L.P., a
Delaware limited partnership, (iv) the heirs, executors, administrators,
testamentary trustees or legatees of any Holder who is an individual, (v) the
spouses and the lineal descendants of any individual who is a Holder on the
Issue Date, and (vi) any trust, the beneficiaries of which, or any corporation,
limited liability company or partnership, the stockholders, members or general
or limited partners of which include only the Persons referred to in clause (v).
27
<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ADVANCE PARADIGM, INC.
The undersigned hereby appoints T. Danny Phillips and David D. Halbert
proxies, with power to act without the other and with power of substitution, and
hereby authorizes them to represent and vote, as designated on the other side,
all the shares of stock of Advance Paradigm, Inc. standing in the name of the
undersigned with all powers which the undersigned would possess if present at
the Annual Meeting of Stockholders of the Company to be held December 7, 2000 or
any adjournment thereof.
(Continued, and to be marked, dated and signed, on the other side)
<PAGE>
Please mark your vote
as indicated in this example:
/X/
<TABLE>
<CAPTION>
<S> <C> <C> <C><C>
ITEM 1. Election of directors duly nominated: ITEM 3. Proposal to approve the issuance of shares
David A. George, Jeffrey R. Jay and of Class B Common Stock issuable upon
Jean-Pierre Millon. conversion of the Series A Preferred
Stock.
WITHHELD
FOR for all FOR AGAINST ABSTAIN
/ / / / / / / / / /
(INSTRUCTION: To withhold authority to vote
for any individual nominee, write that nominee's ITEM 4. Proposal to approve an amendment to the
name in the space provided below): Incentive Plan.
---------------------------------------------------
ITEM 2. Proposal to approve the Second Amended FOR AGAINST ABSTAIN
and Restated Certificate of Incorporation. / / / / / /
FOR AGAINST ABSTAIN
/ / / / / / ITEM 5. Proposal to ratify the selection of Arthur
Andersen, LLP as independent auditors of
the Company.
FOR AGAINST ABSTAIN
/ / / / / /
ITEM 6. In their discretion, the Proxies are authorized
to vote upon such other business as may
properly come before the meeting.
-------------------------------------------------
This proxy when properly executed will be voted in
the manner directed herein by the undersigned
stockholder. If no direction is made, this proxy
will be voted "FOR" Proposals 1, 2, 3, 4 and 5.
A vote "FOR" Proposals 1, 2, 3, 4 and 5 is
recommended by the Board of Directors.
Please sign exactly as name appears below. When
shares are held by joint tenants, both should
sign. When signing as an attorney, as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by President or other
authorized officer. If a partnership, please sign
in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
Signature(s) Dated , 2000
---------------------------------- -----------
* FOLD AND DETACH HERE *
</TABLE>
