<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1998
REGISTRATION NO. 333-43313
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DUANE READE INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 04-3164702 5912
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification No.) Classification Code Number)
</TABLE>
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<S> <C> <C>
DRI I INC.* DELAWARE 04-3166107
DUANE READE* NEW YORK 11-2731721
(exact name of registrant as (State or other jurisdiction (I.R.S. Employer
specified in its charter) of incorporation or organization) Identification No.)
</TABLE>
*GUARANTORS
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
TELEPHONE: 212-273-5700
(Address, including zip code, and telephone number, including area code,
of registrants' principal executive offices)
MR. ANTHONY J. CUTI
DUANE READE INC.
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
TELEPHONE: 212-273-5700
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
Steven Della Rocca, Esq. Stephen M. Besen, Esq.
Latham & Watkins Weil, Gotshal & Manges LLP
885 Third Avenue, Suite 1000 767 Fifth Avenue
New York, New York 10022 New York, New York 10153
Telephone: 212-906-1200 Telephone: 212-310-8000
Telecopy: 212-751-4864 Telecopy: 212-310-8007
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to the offering
(the "Offering") of $80,000,000 aggregate principal amount of % Senior
Subordinated Notes due 2008 (the "New Senior Subordinated Notes") by Duane
Reade Inc., together with separate Prospectus pages relating to certain
market-making transactions in the New Senior Subordinated Notes. The complete
Prospectus for the Offering follows immediately after this Explanatory Note.
Following such Prospectus are certain portions of the Prospectus relating to
the market-making transactions, which include an alternate front cover page,
a new paragraph captioned "Trading Market for the New Senior Subordinated
Notes" to be inserted in the section captioned "Risk Factors" in lieu of the
paragraph captioned "Absence of Public Market for the New Senior Subordinated
Notes," an alternate "Use of Proceeds" section, a section entitled "Plan of
Distribution" to be inserted in lieu of the section entitled "Underwriting,"
and an alternate "Legal Matters" section. All other sections of the
Prospectus for the initial sale of the New Senior Subordinated Notes
(including the Prospectus Summary) are to be used in the Prospectus relating
to the market-making transactions. In order to register under Rule 415 of the
Securities Act of 1933, as amended, those New Senior Subordinated Notes that
will be offered and sold in market-making transactions, the appropriate box
on the cover page of the Registration Statement has been checked, and the
undertakings required by Item 512(a) of the Regulation S-K have been included
in Item 17 of Part II.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1998
PROSPECTUS
February , 1998
$80,000,000
["DUANEREADE" LOGO]
% SENIOR SUBORDINATED NOTES DUE 2008
The % Senior Subordinated Notes due 2008 (the "New Senior Subordinated
Notes") are being offered hereby (the "Offering") by Duane Reade Inc., a
Delaware corporation ("Duane Reade" or the "Company"). The Offering is part
of the Refinancing Plan (as defined herein) of the Company. See "Prospectus
Summary--Refinancing Plan" and "Use of Proceeds."
The New Senior Subordinated Notes will mature on , 2008. Interest on
the New Senior Subordinated Notes will be payable semi-annually on and
of each year, commencing on , 1998. The New Senior Subordinated
Notes will be redeemable at the option of the Company, in whole or in part,
at any time on or after , 2003, in cash at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, thereon to the
redemption date. In addition, at any time prior to , 2001, the Company
may, at its option, redeem up to 35% of the aggregate principal amount of the
New Senior Subordinated Notes originally issued at a redemption price equal
to % of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the redemption date, with the net proceeds of
offerings of equity securities by the Company; provided that at least 65% of
the original aggregate principal amount of the New Senior Subordinated Notes
will remain outstanding immediately following such redemption. Upon the
occurrence of a Change of Control (as defined herein), each holder of New
Senior Subordinated Notes will have the right to require the Company to
repurchase such holder's New Senior Subordinated Notes at a price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of repurchase. The New Credit
Agreement (as defined herein) will prohibit the Company from purchasing the
New Senior Subordinated Notes upon a Change of Control and will not permit
any other redemptions of the New Senior Subordinated Notes prior to the
maturity of the New Credit Agreement. See "Description of New Senior
Subordinated Notes--Repurchase at the Option of the Holders--Change of
Control."
The New Senior Subordinated Notes will be general unsecured obligations of
the Company and will be subordinated in right of payment to all existing and
future Senior Debt (as defined herein) of the Company, including indebtedness
pursuant to the New Credit Agreement. The New Senior Subordinated Notes will
rank pari passu with any future senior subordinated indebtedness of the
Company and will rank senior to all subordinated indebtedness of the Company.
The New Senior Subordinated Notes will be guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on a senior subordinated basis by all of
the Company's subsidiaries (the "Subsidiary Guarantors"). The Subsidiary
Guarantees will be subordinated in right of payment to all existing and
future Senior Debt (including the guarantees under the New Credit Agreement)
of the Subsidiary Guarantors. On a pro forma basis after giving effect to the
Refinancing Plan, including consummation of the Offering and the Common Stock
Offering (as defined herein) and the application of the proceeds thereof, as
of September 27, 1997, the Company would have had outstanding approximately
$130.0 million of Senior Debt and the Company and its subsidiaries would have
had approximately $262.6 million of aggregate outstanding liabilities,
including trade payables and the New Senior Subordinated Notes.
Consummation of the Offering will occur concurrently with and is
conditioned upon consummation of the Refinancing Plan. As part of the
Refinancing Plan, the Company is offering (the "Common Stock Offering")
6,700,000 shares of its common stock, $.01 par value per share (the "Common
Stock"), for estimated net proceeds of $92.5 million. See "Prospectus
Summary--Refinancing Plan" and "Use of Proceeds."
SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
NEW SENIOR SUBORDINATED NOTES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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UNDERWRITING PROCEEDS
PRICE TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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Per Senior Subordinated Note .... % % %
Total............................. $ $ $
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(1) Plus accrued interest, if any, from the date of issuance.
(2) For information regarding indemnification of the Underwriter, see
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $500,000.
The New Senior Subordinated Notes are being offered by the Underwriter,
subject to prior sale, when, as and if delivered to and accepted by it,
subject to various prior conditions. The Underwriter reserves the right to
reject any order in whole or in part. It is expected that delivery of the New
Senior Subordinated Notes will be made in book entry form through the
facilities of The Depository Trust Company against payment therefor in
immediately available funds in New York, New York on or about February , 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE>
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NEW SENIOR
SUBORDINATED NOTES, INCLUDING STABILIZING TRANSACTIONS, SYNDICATE COVERING
TRANSACTIONS, AND THE IMPOSITION OF PENALTY BIDS. SPECIFICALLY, THE
UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND
PURCHASE THE NEW SENIOR SUBORDINATED NOTES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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[DUANE READE INC. LOGO]
[PHOTO]
With 58 drugstores in Manhattan, four in Brooklyn, two in the Bronx, two
in Queens, and one in Newark, Duane Reade enjoys the largest share of drugstore
sale in the New York metropolitan market.
FLAGS APPROXIMATE STORE LOCATIONS.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto included elsewhere in
this Prospectus. The share data set forth in this Prospectus reflects a
reclassification of the Company's capital stock, pursuant to which each
holder of shares of class B common stock, $.01 par value per share ("Class B
Common Stock"), is entitled to receive one share of Common Stock for
approximately 8.326 shares of Class B Common Stock (the "Reclassification").
Unless otherwise stated in this Prospectus, references to the "Company" or
"Duane Reade" shall mean Duane Reade Inc. (formerly known as Duane Reade
Holding Corp.), its consolidated subsidiaries and their respective
predecessors. The fiscal year of the Company ends on the last Saturday in
December. Fiscal years 1992 through 1996 each consisted of 52 weeks. All data
regarding the number of the Company's stores is as of November 25, 1997,
unless otherwise specified.
The Company
Duane Reade is the largest drugstore chain in New York City, based on
sales volume, with 58 of its 67 stores located in Manhattan's high-traffic
business and residential districts. The Company operates almost twice as many
stores in Manhattan as its next largest competitor. Since opening its first
store in 1960, the Company has successfully executed a marketing and
operating strategy tailored to the unique characteristics of New York City,
the largest and most densely populated market in the United States. According
to Drug Store News, Duane Reade is the leading drugstore chain in the United
States in terms of sales per square foot, at $956 per square foot in 1996,
which was more than two times the national average for drugstore chains. For
the fiscal year ended December 28, 1996, the Company had sales of $381.5
million and EBITDA (as defined herein) of $35.3 million, increases of 13.2%
and 28.6%, respectively, over the 1995 fiscal year. For the 39 weeks ended
September 27, 1997, the Company had sales of $313.8 million and EBITDA of
$29.7 million, increases of 11.6% and 24.9%, respectively, over the
comparable 1996 period. For the fiscal year ended December 28, 1996 and the
39 week period ended September 27, 1997, the Company had net losses of $17.9
million and $14.2 million, respectively, and, on a pro forma basis, after
giving effect to the Offering and the Refinancing Plan, the Company would
have had net losses of $5.7 million and $3.9 million, respectively, for such
periods.
The Company enjoys strong brand name recognition in New York City, which
it believes results from the Company's many locations in high-traffic areas
of Manhattan and the 30 million shopping bags with the distinctive Duane
Reade logo that the Company distributes annually. Independent surveys
conducted in 1996 indicated that approximately 84% of the people who live or
work in Manhattan recognize the Duane Reade name, and seven out of ten
shopped at a Duane Reade store in the past twelve months. The Company was
also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug
Store News.
The Company has developed an operating strategy designed to capitalize on
the unique characteristics of the New York City market, which include
high-traffic volume, complex distribution logistics and high costs of
occupancy, media advertising and personnel. The key elements of the Company's
operating strategy are its (i) everyday low price format and broad product
offering, (ii) low cost operating structure supported by its high volume
stores and low advertising and distribution costs and (iii) ability to design
and operate its stores in a wide variety of sizes and layouts.
The Company believes that its everyday low price format and broad product
offerings provide value and convenience for its customers and build customer
loyalty. The Company's everyday low price format results in prices that the
Company believes are, on average, lower than the prices offered by its
competitors.
The Company is able to keep its operating costs relatively low due to its
high per store sales volume, low warehouse and distribution costs and low
advertising expenditures. The Company's high volume stores allow it to
effectively leverage occupancy costs, payroll and other store operating
expenses. The Company's two primary distribution facilities are located
within five miles of all but one of its 67 stores and, combined with the
rapid turnover of inventory in Duane Reade's stores, result in relatively low
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warehouse and distribution costs. The Company's strong brand name recognition
in New York City and everyday low price format allow the Company to minimize
its use of costly media and print advertising and to rely instead on
in-window displays and other less expensive promotional activities.
The Company has demonstrated its ability to successfully operate stores
using a wide variety of store configurations and sizes, which the Company
believes is necessary to succeed in the New York City market. For example,
the size of the Company's stores ranges from 2,600 to 12,300 square feet, and
it operates 29 bi-level stores. The Company believes that its flexibility in
configuring stores provides it with a competitive advantage in securing
locations for its new stores, as many of its competitors target more
standarized spaces for their stores, which are more difficult to find in New
York City. In addition, the Company's management team has extensive
experience and knowledge of the New York City real estate market, allowing it
to aggressively pursue attractive real estate opportunities.
The Company was founded in 1960. In 1992, Bain Capital acquired the
Company from its founders and, in June 1997, investment funds affiliated with
DLJ Merchant Banking Partners II, L.P. ("DLJMBPII") acquired approximately
91.5% of the outstanding capital stock of the Company from Bain Capital and
certain other selling securityholders (the "Recapitalization"). Since the
1992 acquisition, the Company has incurred net losses in each fiscal year.
In 1994 and 1995, the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several measures to improve operations, including
improving inventory controls and decreasing out-of-stock occurrences,
creating a loss prevention function to control inventory shrink and
continuing to invest in management information systems ("MIS"). In 1997, the
Company resumed its store expansion program, opening seven stores. During Mr.
Cuti's tenure at the Company, EBITDA has increased by 53.2% from $26.9
million for the 52 weeks ended March 29, 1996 to $41.2 million for the 52
weeks ended September 27, 1997.
The Company was incorporated in Delaware in 1992. The Company's principal
executive offices are located at 440 Ninth Avenue, New York, New York 10001,
and its phone number is (212) 273-5700.
Growth Strategy
The Company believes that, as a result of its successful operating history
and market position in New York City, it is well positioned to capitalize on
the growth opportunities in its market. The Company's strategy for continued
growth is to (i) open additional stores in Manhattan and the surrounding
boroughs, (ii) continue to capitalize on favorable pharmacy trends, (iii)
make opportunistic acquisitions of independent drugstores and pharmacy files
and (iv) continue to implement merchandising initiatives in non-pharmacy
areas.
OPEN ADDITIONAL STORES. The Company believes that the New York City
drugstore market remains underpenetrated by drugstore chains, with only 50%
of the estimated $2.65 billion in annual drugstore-related sales controlled
by chains, compared to approximately 74% controlled by chains nationally.
This provides significant opportunities for the Company to open additional
stores in Manhattan as well as in the densely populated areas of the
surrounding boroughs. Some of the Company's most successful stores have been
opened in areas new to the Company, such as the residential areas of the
Upper East and West sides of Manhattan, Brooklyn, the Bronx and Queens. The
Company believes that its long-standing presence in, and knowledge of, the
New York City real estate market, combined with the use of a proprietary site
selection model that considers numerous demographic and traffic flow
variables, have allowed it to identify attractive store locations. Since
1993, all of the Company's new stores have become profitable on an operating
basis (i.e., prior to allocation of corporate expenses, goodwill
amortization, interest expense and income taxes) within the first full year
of operation. Over the next two years, the Company plans to open
approximately 30 to 40 stores, primarily in New York City.
CONTINUE TO CAPITALIZE ON FAVORABLE PHARMACY TRENDS. Sales of prescription
and over-the-counter ("OTC") drugs have been growing rapidly throughout the
drugstore industry. The Company expects
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demographic trends, such as the aging of the U.S. population, and industry
changes, such as growth of managed care organizations, insurance companies,
employers and other third-party payors (collectively, "Third Party Plans"),
to continue to drive increases in the prescription and OTC drug businesses.
Since 1994, the Company has focused on increasing its pharmacy sales by
entering into agreements to service Third Party Plans and by upgrading the
appearance and service level of its store pharmacies. While sales to
customers covered by Third Party Plans generally result in lower gross profit
margins due to competitive pricing, the Company believes that such lower
margins are offset by the increased volume of pharmacy sales and the
opportunity to leverage fixed expenses. The Company believes that its
initiatives, which are designed to capitalize on industry trends, have
resulted in the Company's pharmacy sales growing at an annual rate of
approximately 30% since 1994. Although these initiatives have helped increase
the average number of prescriptions filled by Duane Reade per store per week
from 640 in 1994 to 865 during 1997, the Company's average remains well below
the national industry chain store average of approximately 1,200, providing
significant opportunity for continued pharmacy growth. The Company believes
that continued pharmacy growth will increase overall customer traffic,
thereby also benefitting its non-pharmacy sales.
MAKE OPPORTUNISTIC ACQUISITIONS OF INDEPENDENT DRUGSTORES AND PHARMACY
FILES. The Company believes that the growth of Third Party Plans and the
continued penetration of chain drugstores such as Duane Reade have put
increasing pressure on the approximately 1,400 independent drugstores in New
York City. When appropriate, the Company considers acquiring small local
chains or independent drugstores. The Company also pursues the purchase of
pharmacy files of independent drugstores when such purchases are economically
attractive to the Company. The pharmacy files of independent pharmacists tend
to have a higher proportion of prescriptions not covered by Third Party
Plans, which generate incremental revenue and higher margins. When
appropriate, the Company retains the services of the pharmacist, whose
personal relationship with the customers generally maximizes the retention
rate of the purchased file. In 1997, the Company acquired one independent
drugstore and seven such pharmacy files and intends to aggressively pursue
additional purchases.
CONTINUE TO IMPLEMENT MERCHANDISING INITIATIVES IN NON-PHARMACY
AREAS. Management has recently undertaken a number of merchandising
initiatives, including the expansion of certain high-margin categories such
as greeting cards, cosmetics, vitamins, photofinishing and photo supplies and
an expanded seasonal merchandising program. The Company also continues to
focus on category management, which it believes will improve gross margins
and increase non-pharmacy sales. For example, in 1997 the Company introduced
one-hour photofinishing service in three of its stores and intends to
introduce one-hour photofinishing service in approximately seven to ten
additional stores in 1998. The Company has also increased its emphasis on the
sale of its own private label products, which it believes provide a
high-quality, lower priced alternative to name brand products while
generating higher gross profit margins than name brand products. In addition,
in the fourth quarter of 1997, Duane Reade completed installation of Point of
Sale ("POS") scanners in all of its stores and, by the end of the first
quarter of 1998, will have completed its "planogramming" (space management
system) initiative in all of its stores. These systems and initiatives will
allow the Company to better analyze sales trends and merchandise its stores
more effectively, which the Company believes will ultimately increase its
sales and profitability.
The success of the Company's growth strategy is dependent on a number of
factors, many of which are beyond the Company's control. The Company's
ability to continue to successfully execute its new store opening program is
subject to a number of factors, including the availability and cost of
attractive new store locations, continued favorable retail and pharmacy
trends, competition, the general economic environment and the ability of
management to successfully oversee the Company's expanded operations. Due to
the above factors, there can be no assurance that the Company will be
successful in implementing the above growth strategy.
Recent Developments
The Company's 1997 fiscal year ended on December 27, 1997. While the final
results for the year ended December 27, 1997 are not yet available, the
Company currently estimates that net sales for the full 1997 fiscal year were
approximately $429.8 million, including approximately $107.8 million from
pharmacy sales.
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The information above is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements and to completion of the audit
of the Company's financial statements for the fiscal year ended December 27,
1997.
Refinancing Plan
The Offering is part of a plan to refinance all of the Company's existing
indebtedness (the "Refinancing Plan") in order to enhance the Company's
financial flexibility to pursue growth opportunities and implement capital
improvements. The successful consummation of the Refinancing Plan will reduce
the Company's overall indebtedness, simplify the Company's capital structure
and provide access to additional borrowings. The principal components of the
Refinancing Plan are: (i) the sale by the Company of 6,700,000 shares of
Common Stock in the Common Stock Offering for estimated net proceeds of $92.5
million; (ii) the execution of a new secured credit agreement (the "New
Credit Agreement"), which will provide for borrowings of up to approximately
$160.0 million; (iii) the issuance of the New Senior Subordinated Notes for
estimated net proceeds of $77.1 million; (iv) the repayment of all
outstanding borrowings under the Company's existing credit agreement (the
"Existing Credit Agreement"), the outstanding principal amount of which was
$89.8 million as of December 27, 1997; (v) the redemption of the Company's
outstanding 15% Senior Subordinated Zero Coupon Notes due 2004 (the "Zero
Coupon Notes") for $99.8 million (including a redemption premium of $7.0
million); (vi) the redemption of the Company's outstanding 12% Senior Notes
due 2002 (the "Senior Notes") for $93.9 million (including a redemption
premium of $4.0 million); and (vii) the merger of Daboco, Inc., a direct
wholly-owned subsidiary of the Company, with and into the Company (the
"Merger"). The Company believes that the Refinancing Plan will result in a
reduction in overall interest expense because total interest expense
associated with the New Credit Agreement and the Offering will be less than
the total interest expense currently associated with the Senior Notes and the
Zero Coupon Notes. See "Selected Consolidated Historical Financial and
Operating Data." The Company expects that interest rates under the New Credit
Agreement will be approximately the same as interest rates under the Existing
Credit Agreement. See "Description of Certain Indebtedness--New Credit
Agreement." The Company expects that total fees and expenses associated with
the Refinancing Plan will be approximately $13.3 million. See "Use of
Proceeds." The consummation of the Offering will be conditional upon the
other components of the Refinancing Plan.
The Offering
Securities Offered ............ $80.0 million aggregate principal amount of
% Senior Subordinated Notes due 2008.
Maturity Date ................. , 2008.
Interest Payment Dates ........ and , commencing , 1998.
Mandatory Redemption .......... The Company will not be required to make
mandatory redemption of, or sinking fund
payments with respect to, the New Senior
Subordinated Notes except as described below
under "--Change of Control" and in the case
of certain Asset Sales. See "Description of
New Senior Subordinated Notes--Repurchase at
the Option of Holders--Assets Sales."
Optional Redemption ........... The New Senior Subordinated Notes will be
redeemable, in whole or in part, at any time
on or after , 2003, in cash at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, thereon
to the redemption date. In
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addition, at any time on or prior to ,
2001, the Company may, at its option, redeem
up to 35% of the aggregate principal amount
of the New Senior Subordinated Notes
originally issued at a redemption price
equal to % of the aggregate principal
amount thereof, plus accrued and unpaid
interest, if any, thereon to the redemption
date, with the net proceeds from offerings
of Equity Interests (other than Disqualified
Stock) of the Company; provided that at
least 65% of the original aggregate
principal amount of the New Senior
Subordinated Notes will remain outstanding
immediately following each redemption. See
"Description of New Senior Subordinated
Notes--Optional Redemption."
Change of Control ............. Upon the occurrence of a Change of Control,
each holder of New Senior Subordinated Notes
will have the right to require the Company
to offer to repurchase such holder's New
Senior Subordinated Notes in cash at a price
equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of
repurchase. The New Credit Agreement will
prohibit the Company from purchasing the New
Senior Subordinated Notes and will also
provide that certain change of control
events with respect to the Company will
constitute a default thereunder. Any future
credit agreements or other agreements
relating to Senior Debt to which the Company
becomes a party may contain similar
restrictions and provisions. In the event a
Change of Control occurs at a time when the
Company is prohibited from purchasing the
New Senior Subordinated Notes, the Company
could seek the consent of its lenders to the
purchase of the New Senior Subordinated
Notes or could attempt to refinance the
borrowings that contain such prohibition. If
the Company does not obtain such consent or
repay such borrowings, the Company will
remain prohibited from purchasing the New
Senior Subordinated Notes by the relevant
Senior Debt. In such case, the Company's
failure to purchase the tendered New Senior
Subordinated Notes would constitute an Event
of Default under the indenture pursuant to
which the New Senior Subordinated Notes will
be issued (the "New Senior Subordinated Note
Indenture"), which would, in turn,
constitute a default under the New Credit
Agreement and could constitute a default
under other Senior Debt. In such
circumstances, the subordination provisions
in the New Senior Subordinated Note
Indenture would likely restrict the payments
to the holders of the New Senior
Subordinated Notes. Furthermore, no
assurance can be given that the Company will
have sufficient resources to satisfy its
repurchase obligation with respect to the
New Senior Subordinated Notes following a
Change of Control. In addition, the
definition of Change of Control only
provides protection to the holders of New
Senior Subordinated Notes in the event of
certain changes in the equity ownership
and/or the composition of the board of
directors of the Company and, as a result,
the Company may, under certain
circumstances, incur substantial additional
indebt-
7
<PAGE>
edness or undergo restructuring or other
corporate changes without triggering a
Change of Control. See "Risk
Factors--Possible Inability to Repurchase
New Senior Subordinated Notes upon a Change
of Control" and "Description of New Senior
Subordinated Notes--Redemption at the Option
of Holders--Change of Control."
Ranking ....................... The New Senior Subordinated Notes will be
general unsecured obligations of the Company
and will be subordinated in right of payment
to all existing and future Senior Debt of
the Company, including indebtedness pursuant
to the New Credit Agreement. The New Senior
Subordinated Notes will rank pari passu with
any future senior subordinated indebtedness
of the Company and will rank senior to all
subordinated indebtedness of the Company.
The New Senior Subordinated Notes will be
guaranteed, jointly and severally, on a
senior subordinated basis by the Subsidiary
Guarantors. The Subsidiary Guarantees will
be subordinated in right of payment to all
existing and future Senior Debt (including
the guarantees under the New Credit
Agreement) of the Subsidiary Guarantors. On
a pro forma basis after giving effect to the
Refinancing Plan and the application of the
proceeds therefrom, as of September 27,
1997, the Company would have had outstanding
approximately $130.0 million of Senior Debt,
and the Company's and its subsidiaries would
have had approximately $262.6 million of
outstanding liabilities, including trade
payables and the New Senior Subordinated
Notes.
Subsidiary Guarantees ......... The New Senior Subordinated Notes will be
guaranteed, jointly and severally, on a
senior subordinated basis by each of the
Subsidiary Guarantors. The Subsidiary
Guarantees will be subordinated in right of
payment to all existing and future Senior
Debt of the Subsidiary Guarantors, including
the New Credit Agreement.
Certain Covenants ............. The New Senior Subordinated Note Indenture
will contain certain covenants that, among
other things, limit the ability of the
Company to: incur indebtedness and issue
preferred stock, repurchase Capital Stock
(as defined) and subordinated indebtedness,
engage in transactions with affiliates,
engage in sale and leaseback transactions,
incur or suffer to exist certain liens, pay
dividends or other distributions, make
investments, sell assets and engage in
certain mergers and consolidations.
Use of Proceeds ............... The net proceeds from the Offering, together
with borrowings under the New Credit
Agreement and the net proceeds from the
Common Stock Offering, will be used to
complete the Refinancing Plan. See
"Prospectus Summary--Refinancing Plan" and
"Use of Proceeds."
8
<PAGE>
Summary Historical
Financial and Operating Data
(In thousands, except percentages and store data)
The following table sets forth summary consolidated historical financial
data for the fiscal years ended December 31, 1994, December 30, 1995 and
December 28, 1996 and for the 39 week periods ended September 28, 1996 and
September 27, 1997. This data should be read in conjunction with the
consolidated historical financial statements of the Company, together with
the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
------------------------------------------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
---------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $281,103 $336,922 $381,466 $281,093 $313,796
Gross profit .............................. 71,425 77,095 92,961 65,296 77,383
Nonrecurring charges (1) .................. -- -- -- -- 10,887
Operating income .......................... 11,042 12,166 14,542 11,849 11,268
Net interest expense ...................... 27,480 30,224 32,396 24,334 25,433
Net loss .................................. (16,438) (18,058) (17,854) (12,485) (14,165)
OPERATING AND OTHER DATA:
EBITDA (2)................................. $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
EBITDA as a percentage of net sales ...... 11.1% 8.2% 9.3% 8.5% 9.5%
Capital expenditures....................... 9,947 6,868 1,247 913 4,931
Number of stores at end of period ........ 51 59 60 60 65
Same store sales growth (3) ............... 1.6% (3.5)% 8.3% 7.8% 7.9%
Pharmacy same store sales growth (3) ..... 14.2% 7.0% 25.5% 25.1% 25.4%
Average store size (square feet) at end of
period ................................... 6,596 6,712 6,733 6,733 6,832
Sales per square foot (4).................. $ 970 $ 898 $ 956 $ 708 $ 751
Pharmacy sales as a % of net sales ....... 17.6% 19.0% 21.8% 21.5% 24.8%
Third-Party Plan sales as a % of pharmacy
sales .................................... 45.7% 58.2% 64.4% 63.3% 72.9%
PRO FORMA DATA:
Cash interest expense (net)(5)............. $ 19,104 $ 12,493 $ 12,423
Ratio of EBITDA to cash interest expense .. 1.8x 1.9x 2.4x
Ratio of net debt to EBITDA (6)(7) ....... 4.7x
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 28, 1996 SEPTEMBER 27, 1997
----------------- -------------------------------
(ACTUAL) (AS ADJUSTED)(8)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .......................... $ 9,917 $ 29,849 $ 43,968
Total assets ............................. 222,476 239,520 257,860
Total debt and capital lease obligations 245,657 262,649 212,187
Stockholders' deficiency ................. (59,396) (73,561) (4,734)
</TABLE>
(footnotes on next page)
9
<PAGE>
(footnotes to Summary Historical Financial and Operating Data appearing on
the preceding page)
- ------------
(1) During the first quarter of fiscal 1997, the Company considered a
public offering of its common stock and took certain steps in
connection with these plans. Such plans were abandoned upon
consummation of the Recapitalization discussed in Note 10 of the Notes
to Consolidated Financial Statements (Unaudited) for the 39 weeks ended
September 27, 1997. Costs and expenses incurred in connection with the
abandoned public offering, the Recapitalization and the repurchase
offers referred to in Note 10 of the Notes to Consolidated Financial
Statements (Unaudited) aggregated approximately $10.9 million, including
investment banking fees of $7.7 million (including $3.5 million to an
affiliate of DLJMBPII and $0.6 million to certain affiliates of Bain
Capital), legal and accounting fees of $1.6 million, stand-by commitment
fees relating to certain change of control offers of $1.2 million to an
affiliate of DLJMBPII, and other costs of $0.4 million, which the
Company has treated as a non-recurring expense because such expenses are
related to financing activities in connection with the Recapitalization
and related events, which the Company does not expect to repeat.
(2) As used herein, "EBITDA" means net income (loss) plus nonrecurring
costs, interest, income taxes, depreciation, amortization and other
non-cash items (primarily deferred rents). Management believes that
EBITDA, as presented, represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of
certain non-cash charges. Targets and positive trends in EBITDA are
used as the performance measure for determining management's bonus
compensation; EBITDA is also utilized by the Company's creditors in
assessing debt covenant compliance. The Company understands that, while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the
method of calculation. EBITDA is not intended as an alternative to cash
flow from operating activities as a measure of liquidity, nor an
alternative to net income as an indicator of the Company's operating
performance nor any other measure of performance in conformity with
generally accepted accounting principles ("GAAP").
A reconciliation of net loss to EBITDA for each period included above is
set forth below (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
------------------------------------ --------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
----------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net loss ............. $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
Net interest expense 27,480 30,224 32,396 24,334 25,433
Amortization ......... 18,238 11,579 16,217 8,514 3,826
Depreciation ......... 1,184 1,929 3,015 2,295 2,584
Nonrecurring charges -- -- -- -- 10,887
Other non-cash item . 724 1,769 1,526 1,156 1,182
----------- ----------- ----------- --------------- ---------------
EBITDA ............... $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
=========== =========== =========== =============== ===============
</TABLE>
(3) Same store sales figures include stores that have been in operation for
at least 13 months.
(4) The Company experienced a decline in sales per square foot from 1993
through 1995 as a result of the opening of additional stores in
connection with the Company's expansion. The opening of such additional
stores resulted in a decline in sales per square foot principally
because (i) the average square footage for the new stores was greater
than that of the existing store base and (ii) new stores generally take
some time to reach a mature level of sales. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General."
(5) Cash interest expense (net) represents net interest expense less
amortization of deferred financing costs and other non-cash interest
charges for the year ended December 28, 1996 and the 39 week periods
ended September 28, 1996 and September 27, 1997 on a pro forma basis
giving effect to the Refinancing Plan, including the consummation of
the Offering, the Common Stock Offering and the application of the net
proceeds therefrom as set forth under "Use of Proceeds," as if such
transactions had occurred at December 31, 1995.
(6) Net debt represents total debt and capital lease obligations less cash,
on a pro forma basis after giving effect to the Offering, the Common
Stock Offering and the application of the net proceeds therefrom.
(7) For purposes of this ratio, EBITDA represents historical EBITDA for the
52 weeks ended September 27, 1997, which was approximately $41,233.
(8) Adjusted to give effect to (i) the Refinancing Plan, including the
consummation of the Offering, and the Common Stock Offering and the
application of the net proceeds therefrom as set forth under "Use of
Proceeds," as if all such transactions had occurred at September 27,
1997, (ii) a provision of $75,000 for compensation expense related to
previously issued stock options and (iii) an extraordinary loss of
$23.6 million for the 39 weeks ended September 27, 1997 arising from
the redemption of the Senior Notes and the Zero Coupon Notes and the
write-off of the related unamortized deferred financing fees, as if all
such transactions had occurred at September 27, 1997. See "Use of
Proceeds" and "Capitalization."
10
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before making an investment in the New Senior Subordinated Notes offered
hereby.
RISKS ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS
After the Offering, the Company will have a substantial amount of
outstanding indebtedness. As of September 27, 1997, on a pro forma basis
giving effect to the Refinancing Plan, including the Offering and the Common
Stock Offering and the application of the net proceeds therefrom, the
consolidated indebtedness of the Company would have been approximately $212.2
million (excluding trade payables, accrued expenses and other non-current
liabilities). In addition, the Company's earnings have historically been
insufficient to cover fixed charges and were insufficient by $17.9 million
and $14.2 million for the fiscal year ended December 28, 1996 and the 39 week
period ended September 27, 1997, respectively. Subject to certain limitations
contained in its outstanding debt instruments, the Company or its
subsidiaries may incur additional indebtedness to finance working capital,
capital expenditures or acquisitions or for general corporate purposes. The
Company's level of indebtedness could have important consequences to the
holders of New Senior Subordinated Notes, including the following: (i) the
Company's ability to obtain additional capital for acquisitions, capital
expenditures, working capital or general corporate or other purposes may be
limited and (ii) the Company's level of indebtedness may reduce the Company's
flexibility to respond to changing business and economic conditions.
Substantially all of the Company's indebtedness under the New Credit
Agreement is expected to be subject to variable interest rates that fluctuate
in accordance with changes in the market rate to be specified in the New
Credit Agreement. Fluctuations in such interest rates may occur at any time
in response to changing economic conditions and other factors beyond the
Company's control, and there can be no assurance with respect to how long
such rates will remain at their current levels. Although the Company expects
to enter into hedging agreements to limit its exposure to interest rate
fluctuations, a significant rise in interest rates could have a material
adverse effect on the Company. To date, the Company has not entered into any
such hedging arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company's ability to pay principal of and interest on the New Senior
Subordinated Notes and to service its remaining indebtedness will be
dependent on its future performance, which will be affected by prevailing
economic, financial, business, competitive, legislative, regulatory and other
conditions, certain of which are beyond the Company's control. The Company
believes that, based upon current levels of operations and anticipated
growth, it should be able to meet its debt service obligations when due for
the foreseeable future. If, however, the Company becomes unable to service
its indebtedness, it will be forced to pursue one or more alternative
strategies such as selling assets, restructuring or refinancing its
indebtedness or seeking additional equity capital, which actions are
restricted, to some extent, under the terms of the New Credit Agreement and
the New Senior Subordinated Notes. There can be no assurance that any of
these strategies could be effected on satisfactory terms, if at all.
The New Senior Subordinated Note Indenture will contain certain covenants
which, among other things, will restrict the ability of the Company and its
subsidiaries to incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, make certain restricted payments,
create certain liens, sell assets, enter into certain transactions with
affiliates, enter into certain mergers or consolidations or sell or issue
capital stock of the Company's subsidiaries. In addition, the New Credit
Agreement contains other and more restrictive covenants, including those
requiring the Company to maintain specified financial ratios and satisfy
certain tests relating to its financial condition, and prohibits the Company
from repaying its other indebtedness (including the New Senior Subordinated
Notes) prior to the maturity of the New Credit Agreement. The Company's
ability to comply with the covenants in the New Credit Agreement and/or the
New Senior Subordinated Note Indenture may be affected by events beyond its
control, including prevailing economic, financial, business, competitive,
legislative, regulatory and other conditions. The breach of any such
covenants or restrictions could result in a default under the New Credit
Agreement and/or the New Senior Subordinated Note Indenture. Upon the
occurrence of an
11
<PAGE>
event of default under the New Credit Agreement, the lenders thereunder could
elect to declare all amounts borrowed thereunder to be immediately due and
payable, together with accrued and unpaid interest, and terminate the
commitments of the lenders to make further extensions of credit under the New
Credit Agreement. If the Company were unable to repay its indebtedness to its
lenders under the New Credit Agreement, such lenders could proceed against
any or all of the collateral securing the indebtedness under the New Credit
Agreement, which collateral is expected to consist of substantially all of
the assets of the Company and the capital stock and substantially all of the
assets of its subsidiaries. See "Description of Certain Indebtedness."
SUBORDINATION
The New Senior Subordinated Notes will be general unsecured obligations of
the Company and will be subordinated in right of payment to all existing and
future Senior Debt of the Company, including indebtedness under the New
Credit Agreement. Furthermore, any payment with respect to a Subsidiary
Guarantee also will be subordinated to the payment of Senior Debt of that
Subsidiary Guarantor, including such Subsidiary Guarantor's obligations under
the New Credit Agreement. As of September 27, 1997, on a pro forma basis
after giving effect to the Refinancing Plan, including consummation of the
Offering and the Common Stock Offering and the application of the net
proceeds thereof, the Company would have had approximately $130.0 million of
Senior Debt, all of which would have been secured borrowings under the New
Credit Agreement. By reason of such subordination, in the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of
the Company or upon a default in payment with respect to, or the acceleration
of, any Senior Debt, the holders of such Senior Debt and any other creditors
who are holders of Senior Debt or creditors of subsidiaries must be paid in
full before the holders of the New Senior Subordinated Notes may be paid. If
the Company incurs an additional pari passu debt, the holders of such debt
would be entitled to share ratably with the holders of the New Senior
Subordinated Notes in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of
the Company. This may have the effect of reducing the amount of proceeds paid
to holders of the New Senior Subordinated Notes. In addition, no cash
payments may be made with respect to the New Senior Subordinated Notes during
the continuance of a payment default with respect to Senior Debt and, under
certain circumstances, no payments may be made with respect to the New Senior
Subordinated Notes for a period of up to 179 days if a non-payment default
exists with respect to Senior Debt. In addition, holders of indebtedness and
other liabilities of the Company's subsidiaries will have claims that are
effectively senior to the New Senior Subordinated Notes, except to the extent
of the Subsidiary Guarantees. See "--Enforceability of Subsidiary Guarantees"
and "Description of New Senior Subordinated Notes--Subordination."
HOLDING COMPANY STRUCTURE
The Company is a holding company and does not have any material operations
or assets other than ownership of the 99% of the general partnership interest
of Duane Reade, a New York general partnership ("DR"), and 100% of the
outstanding common stock of DRI I Inc. ("DRI"). DRI owns the remaining 1%
general partnership interest in DR. The Company is dependent on the cash flow
of its subsidiaries and distributions from its subsidiaries in order to meet
its debt service obligations.
Any right of the Company to participate in any distribution of the assets
of any of its subsidiaries upon liquidation, reorganization or insolvency of
any such subsidiary (and the consequent right of the holders of the New
Senior Subordinated Notes to participate in distribution of those assets)
will be subject to the prior claims of such subsidiary's creditors. All
obligations of DR under the New Credit Agreement will be secured by
substantially all of the assets of the Company, DRI and DR.
COMPETITION
The markets in which the Company operates are highly competitive. In the
New York City area, the Company competes against national, regional and local
drugstore chains, discount drugstores, supermarkets, combination food and
drugstores, discount general merchandise stores, mass merchandisers,
independent drugstores and local merchants. Major chain competitors in the
New York City market
12
<PAGE>
include Rite-Aid, Genovese and CVS. Many of the Company's competitors are
larger and have greater financial resources than the Company. In addition to
competition from the foregoing, the Company's pharmacy departments also
compete with hospitals, health maintenance organizations ("HMOs") and mail
order prescription drug providers. The Company's drugstores compete, among
other things, on the basis of convenience of location and store layout,
product mix, selection, customer service and price. There can be no assurance
that such competition will not adversely affect the Company's results of
operations or financial condition. See "Business--Competition."
NET LOSSES; INTANGIBLE ASSETS
The Company has experienced net losses of $24.4 million, $16.4 million,
$18.1 million, $17.9 million and $14.2 million for the prior four fiscal
years and the 39 weeks ended September 27, 1997, respectively. The net
proceeds from the Offering, the Common Stock Offering and the New Credit
Agreement will be used to reduce overall indebtedness of the Company and
associated interest expense. The Company's results of operations will
continue to be affected by events and conditions both within and beyond its
control, including the successful implementation of the Company's growth
strategy, continued performance of existing stores, competition and economic,
financial, business and other conditions. Therefore, there can be no
assurance that the Company will not continue to incur net losses in the
future. The Company also expects to realize an extraordinary loss of
approximately $23.5 million in the first quarter of 1998 as a result of the
early retirement of the Senior Notes, the Zero Coupon Notes and the Existing
Credit Agreement.
Of the Company's total assets at December 28, 1996, approximately $142.4
million (or 64.0% of total assets) represented goodwill, net of amortization
and other intangible assets arising principally from the acquisition of the
Company's predecessor by Bain Capital in 1992. It is possible that no cash
would be recoverable from the voluntary or involuntary sale of the intangible
assets of the Company, including its goodwill.
ECONOMIC CONDITIONS AND REGIONAL CONCENTRATION
Substantially all of the Company's stores are located in the New York City
area. As a result, the Company is sensitive to economic and competitive
conditions, the regulatory environment and the availability of labor in that
area. The success of the Company's future operations will be substantially
affected by its ability to compete effectively in the New York City area, and
no prediction can be made as to economic conditions in this region.
UNCERTAINTY OF LEASE RENEWALS
All of the Company's stores are leased, with the leases expiring at
various dates from May 1998 to December 2022 (assuming renewal options are
exercised). Leases for eight stores that generated approximately 12.8% of the
Company's net sales for the 39 week period ended September 27, 1997 are
scheduled to expire before the end of 2000. Although the Company has
historically been successful in renewing most of its store leases when they
have expired, there can be no assurance that the Company will continue to be
able to do so on acceptable terms or at all. If the Company is unable to
renew the leases for the Company's store locations as they expire, or find
other favorable locations at acceptable lease rates, there can be no
assurance that such failures will not have a material adverse effect on the
Company's financial condition and results of operations. See
"Business--Properties; Leases."
RISKS ASSOCIATED WITH FUTURE GROWTH
The Company is experiencing a period of rapid expansion, which the Company
believes will continue for the foreseeable future. The operating complexity
of the Company's business, as well as the responsibilities of management
personnel, have increased as a result of this expansion. The Company's
ability to manage such growth effectively will require it to continue to
expand and improve its operating and financial systems and to expand, train
and manage its employee base. In addition, as the Company opens new stores,
there can be no assurance that a sufficient number of qualified personnel
will be
13
<PAGE>
available to manage such expanded operations or that such operations will be
successfully integrated into the Company. The Company's inability to manage
its expansion effectively, including the hiring of additional personnel,
could have a material adverse effect on its business and results of
operations. The Company's expansion prospects are also dependent on a number
of other factors, including, among other things, economic conditions,
competition, consumer preferences, financing and working capital needs, the
ability of the Company to negotiate store leases on favorable terms and the
availability of additional warehouse space and new store locations. In
addition, as the Company continues with its plans to open additional stores
in the New York City area, sales at existing stores may decrease as customers
shop at the Company's newer stores. There can be no assurance that the
Company will be able to effectively realize its plans for future expansion.
See "Business."
RISKS ASSOCIATED WITH REGULATORY AND OTHER CHANGES IN THE HEALTH CARE
INDUSTRY
Pharmacy sales accounted for approximately 22% of the Company's total
sales for 1996 and 25% of the Company's total sales for the 39 week period
ended September 27, 1997. Pharmacy sales to Third Party Plans accounted for
approximately 64% of the Company's total pharmacy sales for 1996 and
approximately 73% of the Company's total pharmacy sales for the 39 week
period ended September 27, 1997. The efforts of Third Party Plans to contain
costs have placed downward pressures on gross profit margins from sales of
prescription drugs. However, management believes that the penetration of
Third Party Plans in the New York City market will continue, and the
resulting increase in volume should help to mitigate the decrease in gross
profit margins. See "Business--The Drugstore Industry."
The Company's revenues from prescription drug sales may also be affected
by health care reform initiatives of federal and state governments, including
proposals designed to significantly reduce spending on Medicare, Medicaid and
other government programs, changes in programs providing for reimbursement
for the cost of prescription drugs by Third Party Plans and regulatory
changes relating to the approval process for prescription drugs. Such
initiatives could lead to the enactment of federal and state regulations that
may adversely impact the Company's prescription drug sales and, accordingly,
its results of operations.
REGULATORY MATTERS
The Company's business is subject to various federal and state
regulations. For example, pursuant to the Omnibus Budget Reconciliation Act
of 1990 ("OBRA") and comparable state regulations, the Company's pharmacists
are required to offer counseling, without additional charge, to their
customers about medication, dosage, delivery systems, common side effects and
other information deemed significant by the pharmacists and may have a duty
to warn customers regarding any potential adverse effects of a prescription
drug if the warning could reduce or negate such effects. The Company is also
subject to federal, state and local licensing and registration regulations
with respect to, among other things, its pharmacy operations. The Company
believes that it has satisfied all of its licensing and registration
requirements and continues to actively monitor its compliance with such
requirements. However, violations of any such regulations could result in
various penalties, including suspension or revocation of the Company's
licenses or registrations or monetary fines, which could adversely effect the
Company's operations. Additionally, the Company is subject to federal Drug
Enforcement Agency ("DEA") regulations relative to its pharmacy operations,
including purchasing, storing and dispensing of controlled substances.
The Company is also subject to laws governing its relationship with
employees, including minimum wage requirements, overtime and working
conditions. Increases in the federal minimum wage rate, employee benefit
costs or other costs associated with employees could adversely affect the
Company's results of operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends to a large extent on its executive
management team. Although the Company has entered into employment agreements
with each of the Company's executive officers, it
14
<PAGE>
is possible that members of executive management may leave the Company, and
such departures could have a negative impact on the business of the Company.
The Company does not maintain key-man life insurance on any of its executive
officers. See "Management."
CONTINUED INFLUENCE OF PRINCIPAL STOCKHOLDERS
Upon consummation of the Common Stock Offering, investment funds
affiliated with DLJMPBII, an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), the Underwriter for the Offering, and certain
of its affiliates will beneficially own an aggregate of approximately 52.4%
of the fully diluted outstanding Common Stock (46.8% if the overallotment
option granted to the underwriters in the Common Stock Offering is exercised
in full). In addition, two of the Company's four directors are Managing
Directors of DLJ Merchant Banking II, Inc. ("DLJMB"), a general partner of
DLJMBPII, and one director is a Managing Director of DLJ. In connection with
the consummation of the Offering and the Common Stock Offering, the Company
expects to add two independent directors to the Board of Directors. See
"Management" and "Principal Stockholders." Under Delaware law and the
Company's Amended and Restated Certificate of Incorporation, owners of a
majority of the Company's outstanding Common Stock are able to elect all of
the Company's directors and approve significant corporate transactions
without the approval or consent of the other shareholders. As a result,
DLJMBPII will continue to have the ability (either alone or together with a
small percentage of other shareholders) to elect all of the Company's
directors and to control the vote on all matters submitted to a vote of the
holders of the Common Stock, including any going private transaction, merger,
consolidation or sale of all or substantially all of the Company's assets.
The Company's Amended and Restated Certificate of Incorporation provides that
any action that can be taken by a meeting of the shareholders may be taken by
written consent in lieu of a meeting.
COLLECTIVE BARGAINING AGREEMENTS
As of September 27, 1997, approximately 1,800 of the Company's
approximately 2,000 employees were represented by various labor unions and
were covered by collective bargaining agreements. The Company's distribution
facility employees are represented by the International Brotherhood of
Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815, and
all store employees are represented by the Allied Trade Council. The
Company's three-year contracts with these two unions expire on August 31,
1999 and August 31, 1998, respectively. The Company has not experienced any
material business interruption as a result of labor disputes within the past
15 years, and the Company considers its employee relations to be good.
However, there can be no assurance that, upon the expiration of any of the
Company's collective bargaining agreements, the Company will be able to
negotiate new collective bargaining agreements on terms favorable to the
Company or that the Company's business operations will not be interrupted as
a result of labor disputes or difficulties or delays in the process of
renegotiating its collective bargaining agreements. In such events, the
Company's results of operations could be materially adversely affected. See
"Business--Employees."
POSSIBLE INABILITY TO REPURCHASE NEW SENIOR SUBORDINATED NOTES UPON CHANGE OF
CONTROL
The New Credit Agreement will prohibit the Company from purchasing the New
Senior Subordinated Notes and will also provide that certain change of
control events with respect to the Company will constitute a default
thereunder. Any future credit agreements or other agreements relating to
Senior Debt to which the Company becomes a party may contain similar
restrictions and provisions. In the event that a Change of Control occurs at
a time when the Company is prohibited from purchasing the New Senior
Subordinated Notes, the Company could seek the consent of its lenders to the
purchase of the New Senior Subordinated Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such consent or repay such borrowings, the Company will remain prohibited
from purchasing the New Senior Subordinated Notes by the relevant Senior
Debt. In such case, the Company's failure to purchase the tendered New Senior
Subordinated Notes would constitute an event of default under the New Senior
Subordinated Note Indenture which would, in turn, constitute a default under
the New Credit Agreement and could constitute a default under other Senior
Debt. In such
15
<PAGE>
circumstances, the subordination provisions in the New Senior Subordinated
Note Indenture would likely restrict payments to the holders of the New
Senior Subordinated Notes. Furthermore, no assurance can be given that the
Company will have sufficient resources to satisfy its repurchase obligations
with respect to the New Senior Subordinated Notes following a Change of
Control.
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence by the Company of indebtedness such as the New Senior
Subordinated Notes to effect the Refinancing Plan may be subject to review
under relevant state and federal fraudulent conveyance laws if a bankruptcy
case or lawsuit is commenced by or on behalf of unpaid creditors of the
Company. The Company believes that the indebtedness represented by the New
Senior Subordinated Notes is being incurred for proper purposes and in good
faith and that, based on forecasts, asset valuations and other financial
information, the Company, after giving effect to the Refinancing Plan,
including the consummation of the Offering and the Common Stock Offering,
will be solvent, will have sufficient capital for carrying on its business
and will be able to pay its debts as they mature. Notwithstanding the
Company's belief, however, if a court of competent jurisdiction in a suit by
an unpaid creditor or representative of creditors (such as a trustee in
bankruptcy or debtor-in-possession) were to find that, at the time of the
issuance of the New Senior Subordinated Notes, the Company was insolvent, was
rendered insolvent by reason of such incurrence, was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature, or intended to hinder, delay or
defraud its creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things: (i)
void all or a portion of the Company's obligations to the holders of the New
Senior Subordinated Notes, the effect of which would be that the holders of
the New Senior Subordinated Notes may not be repaid in full or at all, and/or
(ii) subordinate the Company's obligations to the holders of the New Senior
Subordinated Notes to other existing and future indebtedness of the Company,
the effect of which would be to entitle such other creditors to be paid in
full before any payment could be made on the New Senior Subordinated Notes.
ENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Company's obligations under the New Senior Subordinated Notes will be
guaranteed, jointly and severally, on a senior subordinated basis by each of
the Subsidiary Guarantors. The Company believes that the Subsidiary
Guarantees are being incurred for proper purposes and in good faith and that,
based on forecasts, asset valuations and other financial information, the
Subsidiary Guarantors, after giving effect to the Refinancing Plan, including
the consummation of the Offering and the Common Stock Offering, will be
solvent, will have sufficient capital for carrying on their respective
businesses and will be able to pay their debts as they mature.
Notwithstanding the Company's belief however, if a court of competent
jurisdiction in a suit by an unpaid creditor or representative of creditors
(such as a trustee in bankruptcy or debtor-in-possession) were to find that,
at the time of incurrence of a Subsidiary Guarantee, a Subsidiary Guarantor
was insolvent, was rendered insolvent by reason of such issuance, was engaged
in a business or transaction for which its remaining assets constituted
unreasonably small capital, intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, or
intended to hinder, delay or defraud its creditors, and that the indebtedness
was incurred for less than reasonably equivalent value, then such court
could, among other things: (i) void all or a portion of such Subsidiary
Guarantor's obligations to the holders of the New Senior Subordinated Notes,
the effect of which would be that the holders of the New Senior Subordinated
Notes may not be repaid in full or at all, and/or (ii) subordinate such
Subsidiary Guarantor's obligations to the holders of the New Senior
Subordinated Notes to other existing and future indebtedness of such
Subsidiary Guarantor, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the New
Senior Subordinated Notes. Among other things, a legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds may focus on the
benefits, if any, realized by the Subsidiary Guarantor as a result of the
issuance by the Company of the New Senior Subordinated Notes.
16
<PAGE>
ABSENCE OF PUBLIC MARKET
The New Senior Notes are a new security for which no public market exists.
The New Senior Subordinated Notes will not be listed on a securities
exchange. There can be no assurance that an active public market will develop
or be sustained upon completion of the Offering or at what prices holders of
the New Senior Subordinated Notes would be able to sell such securities, if
at all. In addition, prevailing interest rate levels, market fluctuations and
general economic and political conditions may adversely affect the liquidity
and the market price of the New Senior Subordinated Notes, regardless of the
Company's financial and operating performance. The market for "high yield"
securities, such as the New Senior Subordinated Notes, is volatile and
unpredictable, which may have an adverse effect on the liquidity of, and
prices for, such securities. The Company has been advised by the Underwriter
that it currently intends to make a market in the New Senior Subordinated
Notes after consummation of the Offering as permitted by applicable laws and
regulations; however, the Underwriter is not obligated to do so and may
discontinue doing so without notice at any time. Accordingly, no assurance
can be given that a liquid trading market of the New Senior Subordinated
Notes will develop or be sustained. In addition, because the Underwriter may
be deemed to be an affiliate of the Company, the Underwriter will be required
to deliver a current "market-maker" prospectus and otherwise to comply with
the registration requirements of the Securities Act in connection with any
secondary market sale of the New Senior Subordinated Notes, which may affect
its ability to continue market-making activities. The Underwriter's ability
to engage in market-making transactions will therefore be subject to the
availability of a current "market-maker" prospectus. For so long as any of
the New Senior Subordinated Notes are outstanding and, in the reasonable
judgment of the Underwriter and its counsel, the Underwriter or any of its
affiliates is required to deliver a prospectus in connection with the sale of
the New Senior Subordinated Notes, the Company has agreed to make a
"market-maker" prospectus available to the Underwriter to permit it to engage
in market-making transactions.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors
include, but are not limited to, the competitive environment in the drugstore
industry in general and in the Company's specific market area; inflation;
changes in costs of goods and services; economic conditions in general and in
the Company's specific market areas; demographic changes; changes in
prevailing interest rates and the availability of and terms of financing to
fund the anticipated growth of the Company's business; liability and other
claims asserted against the Company; changes in operating strategy or
development plans; the ability to attract and retain qualified personnel; the
significant indebtedness of the Company; labor disturbances; changes in the
Company's acquisition and capital expenditure plans; and other factors
referenced herein. In addition, such forward-looking statements are
necessarily dependent upon assumptions, estimates and dates that may be
incorrect or imprecise and involve known and unknown risks, uncertainties and
other factors. Accordingly, any forward-looking statements included herein do
not purport to be predictions of future events or circumstances and may not
be realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," "intends" or
the negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligations to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting the
estimated underwriting discount and estimated general offering expenses) are
estimated to be approximately $77.1 million. The Company intends to use such
net proceeds, together with estimated net proceeds from the Common Stock
Offering of approximately $92.5 million and net borrowings under the New
Credit Agreement of approximately $127.6 million, to complete the Refinancing
Plan, which is expected to consist of: (i) the redemption of all of the Zero
Coupon Notes for $99.8 million (including a redemption premium of $7.0
million), (ii) the redemption of all of the Senior Notes for $93.9 million
(including a redemption premium of $4.0 million), (iii) the repayment of all
outstanding term loan indebtedness under the Existing Credit Agreement, the
outstanding principal amount of which was $65.3 million as of December 27,
1997, (iv) the repayment of all outstanding revolving indebtedness under the
Existing Credit Agreement, the outstanding principal amount of which was
$24.5 million as of December 27, 1997, and (v) the payment of fees and
expenses incurred in connection with the Refinancing Plan. The Company plans
to use the proceeds of the Offering, the Common Stock Offering and a portion
of the proceeds from the New Credit Agreement to fund the redemption of the
Zero Coupon Notes and the Senior Notes. Accordingly, the proceeds from the
Offering and the Common Stock Offering will be used to defease the Zero
Coupon Notes and the Senior Notes pending such redemptions, which the Company
currently expects to occur approximately 30 days after the closing of the
Offering.
The term loan indebtedness under the Existing Credit Agreement has a
maturity date of June 2002 and currently bears interest at an annual rate of
LIBOR plus 3.0%, which, as of September 30, 1997, equaled approximately
8.625%. The revolving loan indebtedness under the Existing Credit Agreement
has a maturity date of June 2001 and currently bears interest at an annual
rate of LIBOR plus 2.5%, which, as of September 30, 1997, equaled
approximately 8.125%, and provides for a commitment fee ranging from 0.375%
to 0.5% per annum on the unused portion of the facility, depending on the
Company's ratio of consolidated debt to EBITDA (as defined in the Existing
Credit Agreement). The Zero Coupon Notes have a maturity date of September
2004 and accrete at a fixed rate of 15% per annum compounded semiannually,
with cash interest payments commencing in March 2000 at a fixed rate of 15%
per annum. The Senior Notes have a maturity date of September 2002 and bear
interest at a fixed rate of 12% per annum.
18
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of September 27, 1997 and the pro forma capitalization as adjusted to give
effect to the Refinancing Plan (assuming consummation of the redemption of
the Senior Notes and the Zero Coupon Notes), including the sale by the
Company of the New Senior Subordinated Notes offered hereby. See "Use of
Proceeds." This table should be read in conjunction with the unaudited
consolidated financial statements of the Company, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Credit agreement(2) ......................... $ 81,475 $ --
New Credit Agreement(3) ..................... -- 130,000
Senior Notes(4) ............................. 89,893 --
Zero Coupon Notes(5) ........................ 89,094 --
% New Senior Subordinated Notes.............. -- 80,000
Capital lease obligations ................... 2,187 2,187
---------- --------------
Total long-term debt ...................... 262,649 212,187
---------- --------------
Stockholders' equity (deficiency):
Common stock and additional paid-in capital 24,665 117,165
Preferred stock.............................. -- --
Accumulated deficit ......................... (98,226) (121,899)
---------- --------------
Total stockholders' equity (deficiency) .. (73,561) (4,734)
---------- --------------
Total capitalization .......................... $189,088 $ 207,453
========== ==============
</TABLE>
- ------------
(1) Gives pro forma effect to the Refinancing Plan, including the
consummation of the Offering and the Common Stock Offering and the
application of the net proceeds therefrom as set forth under "Use of
Proceeds," as if all such transactions had occurred at September 27,
1997.
(2) Reflects outstanding balance under the Company's credit agreement in
effect on September 27, 1997, which was replaced in the Existing Credit
Agreement on September 30, 1997.
(3) Does not include $30.0 million of borrowing availability under the
revolving portion of the New Credit Agreement.
(4) Pursuant to the terms of the Indenture relating to the Senior Notes,
the Company has the right to call the Senior Notes at a price equal to
104.5% of the principal amount thereof (a premium of approximately $4.0
million). Concurrently with closing of the Offering and the Common
Stock Offering, the Company will call the Senior Notes (the "Senior
Notes Redemption") and currently expects that the Senior Notes
Redemption will occur approximately 30 days after the closing of the
Offering.
(5) Pursuant to the terms of the Indenture relating to the Zero Coupon
Notes, the Company has the right to call the Zero Coupon Notes at a
price equal to 107.5% of the accreted value thereof (a premium of
approximately $7.0 million). Concurrently with the closing of the
Offering and the Common Stock Offering, the Company will call the Zero
Coupon Notes (the "Zero Coupon Notes Redemption") and currently expects
that the Zero Coupon Notes Redemption will occur approximately 30 days
after the closing of the Offering.
19
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the unaudited consolidated financial statements
included elsewhere in this Prospectus, adjusted to give effect to the
Refinancing Plan.
The unaudited pro forma statements of operations data are derived from the
consolidated statements of operations for the fiscal year ended December 28,
1996 and the 39 week period ended September 27, 1997, included elsewhere in
this Prospectus, and assume that the Refinancing Plan was consummated as of
December 31, 1995. The unaudited pro forma condensed consolidated balance
sheet data are derived from the unaudited consolidated balance sheet of the
Company as of September 27, 1997, included elsewhere in this Prospectus, and
assume that the Refinancing Plan was consummated on September 27, 1997. The
unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements of the
Company, included elsewhere in this Prospectus.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of the results that would actually have been
obtained if the Refinancing Plan had occurred on the dates indicated or of
the results that may be obtained in the future. The unaudited pro forma
condensed consolidated financial statements are presented for comparative
purposes only. The pro forma adjustments, as described in the accompanying
data, are based on available information and certain assumptions that
management believes are reasonable.
20
<PAGE>
DUANE READE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash........................................................ $ 218 $ 19,159 (1) $ 19,377
Receivables................................................. 9,084 9,084
Inventories................................................. 65,872 65,872
Prepaid expense ............................................ 1,371 1,371
------------ ------------- -----------
TOTAL CURRENT ASSETS ...................................... 76,545 19,159 95,704
Property and equipment, net ................................. 24,918 24,918
Goodwill, net ............................................... 121,757 121,757
Other assets, net............................................ 16,300 2,425 (1) 15,481
2,900 (1)
2,700 (2)
(8,844)(5)
------------ ------------- -----------
Total assets .............................................. $239,520 $ 18,340 $ 257,860
============ ============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable ........................................... $ 30,710 $ $ 30,710
Accrued interest ........................................... 623 (600)(1) 23
Accrued expenses ........................................... 13,193 (2,200)(1) 13,693
2,700 (2)
Current portion of senior debt ............................. 660 5,800 (1) 5,800
(660)(1)
Current portion of capital lease obligations................ 1,510 1,510
------------ ------------- -----------
TOTAL CURRENT LIABILITIES ................................. 46,696 5,040 51,736
Senior debt, less current portion ........................... 170,708 124,200 (1) 204,200
80,000 (1)
(80,815)(1)
(93,938)(1)
4,045 (4)
Zero Coupon Notes, net....................................... 89,094 (99,803)(1) --
3,746 (3)
6,963 (4)
Capital lease obligations less current portion............... 677 677
Other non-current liabilities................................ 5,906 75 (6) 5,981
------------ ------------- -----------
TOTAL LIABILITIES ......................................... 313,081 (50,487) 262,594
------------ ------------- -----------
Stockholders' deficiency:
Common stock, $0.01 par; authorized 30,000,000 shares;
issued and outstanding 10,257,832 shares and 16,957,832
shares, respectively ....................................... 103 67 (1) 170
Paid-in capital............................................. 24,562 100,433 (1) 116,995
(8,000)(1)
Accumulated deficit ........................................ (98,226) (3,746)(3) (121,899)
(11,008)(4)
(8,844)(5)
(75)(6)
------------ ------------- -----------
TOTAL STOCKHOLDERS' DEFICIENCY ............................ (73,561) 68,827 (4,734)
------------ ------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY ........... $239,520 $ 18,340 $ 257,860
============ ============= ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) The net effect on cash of the transactions and the application of
proceeds thereof, as of September 27, 1997, is as follows:
<TABLE>
<CAPTION>
<S> <C>
TOTAL SOURCES:
Proceeds from the Common Stock Offering ............. $100,500
New Credit Agreement:
Current portion..................................... 5,800
Non-current portion................................. 124,200
New Senior Subordinated Notes........................ 80,000
----------
Total sources...................................... $310,500
==========
TOTAL USES:
Existing Credit Agreement
Current portion..................................... $ 660
Non-current portion................................. 80,815
Senior Notes, including redemption premium .......... 93,938
Zero Coupon Notes, including redemption premium ..... 99,803
Offering fees and expenses........................... 8,000
New Credit Agreement fees and expenses............... 2,425
New Senior Subordinated Notes fees and expenses ..... 2,900
Accelerated payment of previously incurred
liability........................................... 2,200
Accrued interest..................................... 600
Cash................................................. 19,159
----------
Total uses......................................... $310,500
==========
</TABLE>
(2) Represents fees and expenses related to the Existing Credit Agreement.
(3) Represents adjustment of the Zero Coupon Notes to accreted value in
accordance with the Zero Coupon Notes Indenture.
(4) Represents accrual of redemption premiums on the Senior Notes and the
Zero Coupon Notes.
(5) Represents a write-off of unamortized deferred financing costs related
to the Company's previously outstanding debt, including (i) $6,144
relating to the bank credit agreement of the Company that existed prior
to the Existing Credit Agreement, the Senior Notes and the Zero Coupon
Notes and (ii) $2,700 relating to the Existing Credit Agreement.
(6) Represents compensation expense in connection with stock options
granted.
22
<PAGE>
DUANE READE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- ------------
<S> <C> <C> <C>
Net sales .................................... $313,796 $ 313,796
Cost of sales................................. 236,413 236,413
------------ ------------- ------------
Gross profit.................................. 77,383 -- 77,383
------------ ------------- ------------
Selling, general and administrative expenses 48,218 75 (2) 48,293
Amortization ................................. 3,826 3,826
Depreciation ................................. 2,584 2,584
Store pre-opening expenses.................... 600 600
Nonrecurring charges.......................... 10,887 10,887
------------ ------------- ------------
66,115 75 66,190
------------ ------------- ------------
Operating income ............................. 11,268 (75) 11,193
Interest expense, net ........................ 25,433 (10,341)(1) 15,092
------------ ------------- ------------
Loss before income taxes...................... (14,165) 10,266 (3,899)(3)
Income taxes.................................. -- -- --
------------ ------------- ------------
Net loss..................................... $(14,165) $ 10,266 $ (3,899)
============ ============= ============
Net loss per common share.................... $ (1.34) $ (0.23)
============ ============
Weighted average common shares outstanding .. 10,600 17,300
============ ============
</TABLE>
FOR THE 52 WEEKS ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
<S> <C> <C> <C>
Net sales..................................... $381,466 $ 381,466
Cost of sales ................................ 288,505 288,505
------------ ------------- -----------
Gross profit ................................. 92,961 -- 92,961
------------ ------------- -----------
Selling, general and administrative expenses 59,048 59,048
Amortization.................................. 16,217 16,217
Depreciation.................................. 3,015 3,015
Store pre-opening expenses ................... 139 139
------------ ------------- -----------
78,419 -- 78,419
------------ ------------- -----------
Operating income.............................. 14,542 -- 14,542
Interest expense, net......................... 32,396 (12,167)(4) 20,229
------------ ------------- -----------
Loss before income taxes...................... (17,854) (12,167) (5,687)
Income taxes.................................. -- -- --
------------ ------------- -----------
Net loss..................................... $(17,854) $(12,167) $ (5,687)
============ ============= ===========
Net loss per common share.................... $ (1.69) $ (0.33)
============ ===========
Weighted average common shares outstanding ... 10,575 17,289
============ ===========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
reflect the following as if all transactions had occurred on December 31,
1995:
(1) For the 39 weeks ended September 27, 1997:
<TABLE>
<CAPTION>
<S> <C>
Interest expense related to the New Senior Subordinated Notes (at
an assumed interest rate of 9.75%) (a) ............................ $ 5,850
Interest expense related to the New Credit Agreement (at an assumed
weighted average interest rate of 8.53%)(b) ....................... 7,812
Amortization of deferred financing costs related to the New Credit
Agreement and New Senior Subordinated Notes ....................... 685
Elimination of interest expense and amortization of deferred
financing costs related to the Company's previously outstanding
debt .............................................................. (24,688)
----------
$(10,341)
==========
</TABLE>
(2) Reflects a provision for compensation expense in connection with stock
options issued.
(3) Upon the early retirement of the Senior Notes, the Zero Coupon Notes
and the Existing Credit Agreement as a consequence of the consummation
of the Refinancing Plan, the Company expects to realize an
extraordinary loss, which on a pro forma basis for the 39 weeks ended
September 27, 1997 would be approximately $23,598, comprised of:
<TABLE>
<CAPTION>
<S> <C>
Redemption premium on Senior Notes.............................. $ 4,045
Redemption premium on Zero Coupon Notes......................... 6,963
Adjustment of Zero Coupon Notes to accreted value in accordance
with the Zero Coupon Note Indenture............................ 3,746
Write-off of unamortized deferred financing costs related to
the Company's previously outstanding debt...................... 8,844
--------
Pro forma extraordinary loss (tax effect: none)................. $23,598
========
</TABLE>
(4) For the 52 weeks ended December 28, 1996:
<TABLE>
<CAPTION>
<S> <C>
Interest expense related to the New Senior Subordinated Notes (at
an assumed interest rate of 9.75%) (a)............................. $ 7,800
Interest expense related to the New Credit Agreement (at an assumed
weighted average interest rate of 8.33%)(c) ....................... 10,642
Amortization of deferred financing costs related to the New Credit
Agreement and New Senior Subordinated Notes ....................... 1,093
Elimination of interest expense and amortization of deferred
financing costs related to the Company's previously outstanding
debt .............................................................. (31,702)
----------
$(12,167)
==========
</TABLE>
- ------------
(a) A 25 basis point (0.25%) increase or decrease in the assumed interest
rate would result in a change in interest expense of $150 for
the 39 weeks ended September 27, 1997 and $200 for the 52 weeks ended
December 28, 1996.
(b) A 25 basis point (0.25%) increase or decrease in the assumed interest
rate would result in a $228 change in interest expense.
(c) A 25 basis point (0.25%) increase or decrease in the assumed interest
rate would result in a $319 change in interest expense.
24
<PAGE>
SELECTED CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA
(In thousands, except per share amounts, percentages and store data)
The data set forth below as of December 31, 1992 and for the period
September 26, 1992 through December 31, 1992, and as of January 1, 1994,
December 31, 1994, December 30, 1995, December 28, 1996 and for each of the
52 week periods then ended was derived from the consolidated financial
statements of the Company. As used below, the term "Predecessor" refers to
the operations of Duane Reade prior to the acquisition thereof by Bain
Capital in September 1992. The basis of accounting as of September 25, 1992
and for the period January 1, 1992 through September 25, 1992 reflects the
historical basis of accounting of the Predecessor prior to the acquisition
thereof by Bain Capital and such data was derived from the consolidated
financial statements of the Predecessor. The data presented below for the 39
weeks ended September 28, 1996 and September 27, 1997 and as of September 27,
1997 have been derived from the Company's unaudited consolidated financial
statements and, in the opinion of the Company's management, reflect and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such results. The results of operations
for the 39 weeks ended September 27, 1997 are not necessarily indicative of
the results that may be expected for a full fiscal year. This information
should be read in conjunction with the historical consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
-------------
PERIOD
JANUARY 1
TO
SEPTEMBER 25,
1992
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $167,634
Cost of sales ......................... 124,637
-------------
Gross profit .......................... 42,997
Selling, general and administrative
expenses ............................. 22,636
Amortization .......................... 0
Depreciation .......................... 723
Store pre-opening expenses ............ --
Nonrecurring charges (1) .............. --
-------------
Operating income (loss) ............... 19,638
Net interest expense .................. 3,298
-------------
Income (loss) before income tax ...... 16,340
Provision for taxes ................... 620
-------------
Net income (loss) ..................... $ 15,720
=============
Earnings (loss) per common share .....
Ratio of earnings to fixed charges
(2)................................... 3.41x
Deficiency of earnings to fixed
charges (2)........................... $ --
Pro forma (deficiency) of earnings to
fixed charges (3) ....................
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ....... 22,505
Net cash (used in) provided by
investing activities.................. (114)
Net cash (used in) provided by
financing activities.................. (21,618)
OPERATING AND OTHER DATA:
EBITDA (4) ............................ $ 20,380
EBITDA as a percentage of sales ...... 12.2%
Number of stores at end of period .... 37
Same store sales growth (5) ........... --
Pharmacy same store sales
growth (5)(8).........................
Average store size (square feet) at
end of period......................... --
Sales per square foot (7) ............. --
Pharmacy sales as a % of net sales
(8)................................... --
Third-Party Plan sales as a % of
pharmacy sales (9) ...................
Capital expenditures .................. $ 114
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ....................... $ 13,943
Total assets .......................... 264,355
Total debt and capital lease
obligations (10) ..................... 221,471
Stockholders' equity (deficiency) .... (35,622)
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------------------------------
PERIOD
SEPTEMBER 26 39 WEEKS ENDED
TO FISCAL YEAR ----------------------------
DECEMBER 31, ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27,
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $60,785 $241,474 $281,103 $336,922 $381,466 $281,093 $313,796
Cost of sales ......................... 45,560 181,566 209,678 259,827 288,505 215,797 236,413
------------ --------- --------- --------- --------- ------------- -------------
Gross profit .......................... 15,225 59,908 71,425 77,095 92,961 65,296 77,383
Selling, general and administrative
expenses ............................. 8,019 29,666 39,741 50,326 59,048 42,499 48,218
Amortization .......................... 7,344 27,432 18,238 11,579 16,217 8,514 3,826
Depreciation .......................... 166 729 1,184 1,929 3,015 2,295 2,584
Store pre-opening expenses ............ -- 300 1,220 1,095 139 139 600
Nonrecurring charges (1) .............. -- -- -- -- -- -- 10,887
------------ --------- --------- --------- --------- ------------- -------------
Operating income (loss) ............... (304) 1,781 11,042 12,166 14,542 11,849 11,268
Net interest expense .................. 6,989 26,199 27,480 30,224 32,396 24,334 25,433
------------ --------- --------- --------- --------- ------------- -------------
Income (loss) before income tax ...... (7,293) (24,418) (16,438) (18,058) (17,854) (12,485) (14,165)
Provision for taxes ................... -- -- -- -- -- -- --
------------ --------- --------- --------- --------- ------------- -------------
Net income (loss) ..................... $(7,293) $(24,418) $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
============ ========= ========= ========= ========= ============= =============
Earnings (loss) per common share ..... $ (0.73) $ (2.34) $ (1.55) $ (1.70) $ (1.69) $ (1.18) $ (1.34)
============ ========= ========= ========= ========= ============= =============
<PAGE>
COMPANY
------------------------------------------------------------------------------------
PERIOD
SEPTEMBER 26 39 WEEKS ENDED
TO FISCAL YEAR ----------------------------
DECEMBER 31, ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27,
1992 1993 1994 1995 1996 1996 1997
Ratio of earnings to fixed charges
(2)................................... -- -- -- -- -- -- --
Deficiency of earnings to fixed
charges (2)........................... $ (7,293) $(24,418) $(16,630) $(18,905) $(17,854) $(12,485) $(14,165)
Pro forma (deficiency) of earnings to
fixed charges (3) .................... (5,687) (3,899)
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ....... 1,532 7,021 15,297 6,734 12,595 6,656 (3,203)
Net cash (used in) provided by
investing activities.................. (174,825) (874) (11,238) (12,754) (3,769) (2,937) (3,856)
Net cash (used in) provided by
financing activities.................. 175,534 (6,138) (2,940) 4,784 (10,743) (5,609) 7,061
OPERATING AND OTHER DATA:
EBITDA (4) ............................ $ 7,206 $ 29,975 $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
EBITDA as a percentage of sales ...... 11.9% 12.4% 11.1% 8.2% 9.3% 8.5% 9.5%
Number of stores at end of period .... 37 40 51 59 60 60 65
Same store sales growth (5) ........... 2.4%(6) 3.3% 1.6% (3.5)% 8.3% 7.8% 7.9%
Pharmacy same store sales
growth (5)(8)......................... -- -- 14.2% 7.0% 25.5% 25.1% 25.4%
Average store size (square feet) at
end of period......................... 6,166(6) 6,172 6,596 6,712 6,733 6,733 6,832
Sales per square foot (7) ............. $ 1,001(6)$ 1,022 $ 970 $ 898 $ 956 $ 708 $ 751
Pharmacy sales as a % of net sales
(8)................................... -- 16.6% 17.6% 19.0% 21.8% 21.5% 24.8%
Third-Party Plan sales as a % of
pharmacy sales (9) ................... 45.7% 58.2% 64.4% 63.3% 72.9%
Capital expenditures .................. $ 950 $ 1,838 $ 9,947 $ 6,868 $ 1,247 $ 913 $ 4,931
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ....................... $ 13,722 $ 14,285 $ 20,152 $ 13,699 $ 9,917 $ 8,220 $ 29,849
Total assets .......................... 260,674 234,430 229,699 235,860 222,476 226,060 239,520
Total debt and capital lease
obligations (10) ..................... 221,815 223,422 228,764 244,104 245,657 247,570 262,649
Stockholders' equity (deficiency) .... 16,236 (6,757) (23,170) (41,196) (59,396) (54,027) (73,561)
</TABLE>
25
<PAGE>
- ------------
(1) During the first quarter of fiscal 1997, the Company considered a
public offering of its common stock and took certain steps in
connection with these plans. Such plans were abandoned upon
consummation of the Recapitalization discussed in Note 10 of the Notes
to Consolidated Financial Statements (Unaudited) for the 39 weeks ended
September 27, 1997. Costs and expenses incurred in connection with the
abandoned public offering, the Recapitalization and the exchange offers
referred to in Note 10 of the Notes to Consolidated Financial
Statements (Unaudited) aggregated approximately $10.9 million, including
investment banking fees of $7.7 million (including $3.5 million to an
affiliate of DLJMBPII and $0.6 million to certain affiliates of Bain
Capital), legal and accounting fees of $1.6 million, stand-by commitment
fees relating to certain change of control offers of $1.2 million to an
affiliate of DLJMBPII, and other costs of $0.4 million, which the
Company has treated as a non-recurring expense because such expenses
related to financing activities in connection with the Recapitalization
and related events, which the Company does not expect to repeat.
(2) The ratio of earnings to fixed charges is computed by dividing (i)
income (loss) before interest expense, other fixed charges and
extraordinary items by (ii) fixed charges, including capitalized
interest, interest expense, amortization of deferred financing costs
and the portion of rent expense which represents interest (assumed to
be one-third). For the period September 26, 1992 to December 31, 1992,
fiscal years 1993, 1994, 1995 and 1996 and the 39 weeks ended September
28, 1996 and September 27, 1997, earnings were insufficient to cover
fixed charges. Included in the loss before extraordinary items for the
39 weeks ended September 27, 1997 was a nonrecurring charge of $10,887,
as disclosed in Note 11 to the Company's consolidated financial
statements. If such charge had not been incurred, earnings would have
been insufficient to cover fixed charges by $3,278.
(3) On a pro forma basis, after giving effect to the Offering, earnings for
fiscal year 1996 and the 39 weeks ended September 27, 1997 would have
been insufficient to cover fixed charges. Included in the loss before
extraordinary items for the 39 weeks ended September 27, 1997 was a
nonrecurring charge of $10,887 as disclosed in Note 11 to the Company's
consolidated financial statements. If such charge had not been
incurred, on a pro forma basis, after giving effect to the Offering,
the ratio of earnings to fixed charges would have been 1.3.
(4) As used herein, "EBITDA" means net income (loss) plus nonrecurring
charges, interest, income taxes, depreciation, amortization and other
non-cash items (primarily deferred rents). Management believes that
EBITDA, as presented, represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of
certain non-cash charges. Targets and positive trends in EBITDA are
used as the performance measure for determining management's bonus
compensation; EBITDA is also utilized by the Company's creditors in
assessing debt covenant compliance. The Company understands that, while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the
method of calculation. EBITDA is not intended as an alternative to cash
flow from operating activities as a measure of liquidity, nor an
alternative to net income as an indicator of the Company's operating
performance nor any other measure of performance in conformity with
GAAP.
A reconciliation of net income (loss) to EBITDA for each period
included above is set forth below (dollars in thousands):
<TABLE>
<CAPTION>
JAN. 1 SEPT. 26 FISCAL YEAR 39 WEEKS ENDED
TO TO ------------------------------------------------- ------------------------
SEPT. 25, DEC. 31, SEPT. 28, SEPT. 27,
1992 1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) .... $15,720 $(7,293) $(24,418) $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
Net interest expense 3,298 6,989 26,199 27,480 30,224 32,396 24,334 25,433
Amortization ......... -- 7,344 27,432 18,238 11,579 16,217 8,514 3,826
Depreciation ......... 723 166 729 1,184 1,929 3,015 2,295 2,584
Nonrecurring charges -- -- -- -- -- -- -- 10,887
Other non-cash items 639 -- 33 724 1,769 1,526 1,156 1,182
----------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
EBITDA ............... $20,380 $ 7,206 $ 29,975 $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
=========== ========== =========== =========== =========== =========== =========== ===========
</TABLE>
(5) Same store sales figures include stores that have been in operation for
at least 13 months.
(6) For the year ended December 31, 1992.
(7) The Company experienced a decline in sales per square foot from 1993
through 1995 as a result of the opening of additional stores in
connection with the Company's expansion. The opening of such additional
stores resulted in a decline in sales per square foot principally
because (i) the average square footage for the new stores was greater
than that of the existing store base and (ii) new stores generally take
some time to reach a mature level of sales. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General."
(8) Prior to 1993, the Company did not separately track pharmacy sales.
(9) Prior to fiscal year 1994, the Company's pharmacy system did not
separately track third-party sales.
(10) Excludes deferred rent obligations of approximately $4.0 million and
$5.4 million at December 28, 1996 and at September 27, 1997,
respectively.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in connection with the consolidated financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus.
GENERAL
The Company generates revenues primarily through sales of OTC drugs and
prescription pharmaceutical products, health and beauty aids, food and
beverage items, tobacco products, cosmetics, housewares, hosiery, greeting
cards, photofinishing, photo supplies and seasonal merchandise. Health and
beauty products, including OTC drugs, represent the largest of the Company's
product categories. The Company's primary costs and expenses consist of (i)
inventory costs, (ii) labor expenses and (iii) occupancy costs.
In 1994 and 1995, the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several measures to improve operations such as
decreasing out-of-stock occurrences, creating a loss prevention function to
control inventory shrink and continuing to invest in MIS.
The Company had sales per square foot of $956 and approximately $1,054 in
fiscal 1996 and fiscal 1997, respectively. The Company believes that sales
per square foot are a useful measure of comparing the Company's performance
to that of its competitors because it is a measure of a store's sales
productivity. The Company experienced a decline in sales per square foot from
1993 through 1995 as a result of the opening of additional stores in
connection with the Company's expansion plans during that period. The opening
of such additional stores resulted in a decline in sales per square foot
principally because (i) the average square footage for the new stores was
greater than that of the existing store based and (ii) new stores generally
take some time to reach a mature level of sales. The Company currently
expects that its sales per square foot may decline as it embarks on its plan
to increase new store openings during 1998 and 1999. The Company believes
that its competitors in the industry experience increases and decreases in
sales per square foot for similar reasons.
In 1997, the Company resumed its store expansion program, opening seven
stores in 1997. Generally a new Duane Reade store requires an initial
investment of approximately $1.1 million in capital expenditures and working
capital. Since 1993, all of the Company's new stores have become profitable
on an operating basis within the first full year of operation. Over the next
two years, the Company plans to open approximately 30 to 40 stores, primarily
in New York City.
Over the past two years, Third Party Plans, including managed care
providers and insurance companies, have comprised an increasing percentage of
the Company's pharmacy business as the health care industry shifts to managed
care. While sales to customers covered by Third Party Plans result in lower
gross profit rates due to competitive pricing, the Company believes that such
lower rates are offset by increased volume of pharmacy sales and the
opportunity to leverage fixed expenses.
The Company includes stores that have been in operation for at least 13
months for purposes of calculating comparable store sales figures.
The Company's predecessor was founded in 1960. In 1992, Bain Capital
formed the Company to acquire the Company's predecessor from its founders
through a leveraged buyout, financed primarily with the proceeds from the
Zero Coupon Notes and the Senior Notes. In June 1997, investment funds
affiliated with DLJMBPII (the "DLJMB Entities"), an affiliate of DLJ, the
Underwriter, acquired approximately 91.5% of the outstanding capital stock of
the Company from Bain Capital and certain other selling securityholders, for
approximately $78.7 million in cash, pursuant to a Recapitalization
Agreement, dated June 18, 1997 (the "Recapitalization Agreement"). Upon
consummation of such purchase, the Company
27
<PAGE>
reclassified all of its outstanding capital stock (then consisting of four
classes) into one class of common stock, $0.01 par value per share. Upon
consummation of the Common Stock Offering, assuming no exercise of the
underwriters' overallotment option, the DLJMB Entities will hold
approximately 52.4% of the Common Stock. See "Principal Stockholders."
Prior to the consummation of the Offering, the Company's primary asset is
all of the outstanding common stock of Daboco, Inc., a New York corporation
("Daboco"), with Daboco and DRI, a direct wholly-owned subsidiary of Daboco,
together owning all of the outstanding partnership interests of Duane Reade,
a New York general partnership ("DR") (Daboco owns a 99% partnership interest
and DRI owns the remaining 1% partnership interest). Substantially all of the
operations of the Company are conducted through DR. Concurrently with the
consummation of the Offering, Daboco will be merged with and into the Company
(the "Merger"), resulting in the Company directly owning 99% of the
partnership interests of DR (the "Partnership Interest") and DRI continuing
to own a 1% partnership interest. Following the consummation of the Merger,
the primary assets of the Company will be the Partnership Interest and 100%
of the outstanding common stock of DRI.
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of
sales for the periods indicated.
<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------------
FISCAL YEAR SEPTEMBER 28, SEPTEMBER 27,
----------------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Net sales .................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .............. 74.6 77.1 75.6 76.8 75.3
-------- -------- -------- --------------- ---------------
Gross profit ............... 25.4 22.9 24.4 23.2 24.7
-------- -------- -------- --------------- ---------------
Selling, general and
administrative expenses .. 14.1 14.9 15.5 15.1 15.4
Amortization ............... 6.5 3.5 4.3 3.0 1.2
Depreciation ............... 0.4 0.6 0.8 0.8 0.8
Store pre-opening expenses 0.4 0.3 0.0 0.1 0.2
Nonrecurring charges ....... -- -- -- -- 3.5
-------- -------- -------- --------------- ---------------
Operating income ........... 4.0 3.6 3.8 4.2 3.6
Net interest expense ....... 9.8 9.0 8.5 8.6 8.1
-------- -------- -------- --------------- ---------------
Net loss ................... (5.8)% (5.4)% (4.7)% (4.4)% (4.5)%
======== ======== ======== =============== ===============
</TABLE>
39 WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO 39 WEEKS ENDED SEPTEMBER 28,
1996
Net sales in the 39 weeks ended September 27, 1997 were $313.8 million, an
increase of 11.6% over net sales of $281.1 million for the 39 weeks ended
September 28, 1996. The increase was attributable to increased comparable
store sales of 7.9% and the inclusion of one new store opened during the 39
weeks ended September 28, 1996 for the entire 1997 period and five new stores
opened in 1997.
Cost of sales as a percentage of net sales decreased to 75.3% for the 39
weeks ended September 27, 1997 from 76.8% for the 39 weeks ended September
28, 1996, resulting in an increase in gross profit margin to 24.7% for the
1997 period from 23.2% during the same period in 1996. The increase in gross
margin resulted from a number of factors including (i) increased contribution
from the sale of higher margin merchandise such as cosmetics, vitamins,
general merchandise, generic drugs and private label products, (ii) higher
promotional allowances received from vendors and (iii) lower occupancy costs
that increased at a lesser rate than the rate at which sales increased.
Selling, general and administrative expenses represented 15.4% and 15.1%
of net sales in the 39 weeks ended September 27, 1997 and September 28, 1996,
respectively. The percentage increase in 1997
28
<PAGE>
compared to 1996 resulted principally from higher selling and administrative
expenses including (i) higher store salaries as a percentage of net sales
(principally from new stores during the early months of operation) and (ii)
operating costs related to the Company's management information systems
department, partially offset by elimination of agreements requiring the
annual payment of $1.0 million in management fees to Bain Capital. Such
agreements were terminated as a result of the Recapitalization. The Company
believes that as the Company's new stores mature, salaries will increase at a
lesser rate than store sales.
Amortization of goodwill and other intangibles in the 39 weeks ended
September 27, 1997 and September 28, 1996 was $3.8 million and $8.5 million,
respectively. The decrease in amortization is principally a result of the
completion in 1996 of amortization of covenants not to compete and the
related write-off of the balance of such amounts during the fourth quarter of
1996.
Depreciation was $2.6 million and $2.3 million in the 39 weeks ended
September 27, 1997 and September 28, 1996, respectively.
Store pre-opening expenses increased from $0.1 million in the 39 weeks
ended September 28, 1996 to $0.6 million in the 39 weeks ended September 27,
1997 due to the opening of five new store locations in 1997 compared to one
in 1996.
Net interest expense was $25.4 million in the 39 weeks ended September 27,
1997 compared to $24.3 million in the 39 weeks ended September 28, 1996. The
increase in interest expense was principally due to (i) higher non-cash
accretion of the Zero Coupon Notes, (ii) interest related to financing of
third party accounts receivable and (iii) increased interest on borrowings
under the revolving credit facility, partially offset by (a) reduced interest
on term loan borrowings caused by the decrease in average balance from $72.8
million for the 39 weeks ended September 28, 1996 to $66.5 million for the 39
weeks ended September 27, 1997 and a decrease in the average interest rate
from 9.1% for the 39 weeks ended September 28, 1996 to 8.8% for the 39 weeks
ended September 27, 1997 and (b) reduced interest on capital lease
obligations.
The net loss for the Company increased by $1.7 million from $12.5 million
in the 39 weeks ended September 28, 1996 to $14.2 million in the 39 weeks
ended September 27, 1997 primarily as a result of nonrecurring charges (see
Note 11 of Notes to Consolidated Financial Statements (Unaudited)) and
increases in selling, general and administrative expenses and interest
expense, partially offset by increased sales and gross profit margin and
lower amortization of intangibles. The Company's EBITDA improved by $5.9
million or 24.9% to $29.7 million in the 39 weeks ended September 27, 1997
compared to $23.8 million in the 39 weeks ended September 28, 1996. EBITDA as
a percentage of sales increased to 9.5% in the 39 weeks ended September 27,
1997 from 8.5% in the 39 weeks ended September 28, 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in 1996 were $381.5 million, an increase of 13.2% over 1995 net
sales of $336.9 million. The increase was due to increased comparable store
sales of 8.3% and the inclusion of eight stores opened during 1995 for the
entire 1996 period and of one store opened in 1996. The increase in
comparable store sales was primarily attributable to increased pharmacy
sales, which increased to 21.8% of total sales in 1996 compared to 19.0% of
total sales in 1995.
Cost of sales as a percentage of net sales decreased to 75.6% for 1996
from 77.1% for 1995, resulting in an increase in gross profit margin to 24.4%
for 1996 from 22.9% for 1995. The increase in gross margin resulted from a
number of factors including (i) lower inventory shrink losses, (ii) increased
contributions from the sale of generic drugs and private label products,
(iii) less promotional activity and (iv) lower rent-to-sales ratios in stores
opened during 1995 and 1994. The increases were partially offset by lower
gross margins resulting from sales to customers covered by Third Party Plans.
Selling, general and administrative expenses were $59.0 million or 15.5%
of net sales and $50.3 million or 14.9% of net sales in 1996 and 1995,
respectively. The percentage increase in 1996 compared to 1995 resulted
principally from higher administrative expenses, including (i) operating
costs related to the Company's management information systems department,
(ii) administrative salaries and
29
<PAGE>
one time executive search and severance expenses and (iii) professional and
consulting fees principally for the warehouse and loss prevention areas. The
increases were partially offset by lower store operating expenses as a
percentage of net sales primarily due to a higher volume of pharmacy sales,
which allows the Company to leverage other fixed store operating expenses.
Amortization of goodwill and other intangibles in 1995 and 1996 was $11.6
million and $16.2 million, respectively. The increase in amortization was
caused by an increase in the amortization of covenants not to compete from
$8.1 million in 1995 to $11.4 million in 1996 and amortization of systems
installation and integration costs in an amount of $1.4 million in 1996. The
increase in amortization of covenants not to compete was caused by the
write-off of the balance of such intangibles in 1996 resulting from the
termination of the related agreements. Amortization of systems installation
and integration costs began in 1996.
The increase in depreciation from $1.9 million in 1995 to $3.0 million in
1996 resulted principally from (i) depreciation of data processing equipment
which began in 1996 and (ii) a full year's depreciation in 1996 of assets of
eight stores that were opened in 1995.
Store pre-opening expenses decreased from $1.1 million in 1995 to $0.1
million in 1996 due to the opening of one new store location in 1996 compared
to eight in 1995.
Net interest expense increased 7.2% to $32.4 million in 1996 from $30.2
million in 1995. The increase in interest expense was principally due to the
higher non-cash accretion of the Zero Coupon Notes offset, in part, by
reduced interest on term loan borrowings resulting from the decrease in
average outstanding balance from $75.1 million to $72.0 million and a
decrease in the average interest rate from 9.5% to 9.1%.
The net loss for the Company decreased by $0.2 million or 1.1% from $18.1
million in 1995 to $17.9 million in 1996 primarily as a result of increased
sales and gross profit margin offset, in part, by increases in selling,
general and administrative expenses and amortization of intangibles. The
Company's EBITDA increased by $7.9 million or 28.6% to $35.3 million in 1996
compared to $27.4 million in 1995. EBITDA as a percentage of sales increased
to 9.3% in 1996 from 8.2% in 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales in 1995 were $336.9 million, an increase of 19.9% over 1994 net
sales of $281.1 million. The increase was primarily due to the inclusion of
11 new stores opened during 1994 for the entire 1995 period and of eight
stores opened during 1995, partially offset by a decrease in comparable store
sales of 3.5%.
Cost of sales as a percentage of net sales increased to 77.1% for 1995
from 74.6% for 1994. The increase in cost of sales resulted from a number of
factors, including: (i) increased inventory losses arising from inventory
shrink and from difficulties encountered in implementing new warehousing and
merchandising systems, (ii) delays in implementation of normal price
increases, (iii) increased promotional activity, primarily in the last
quarter of 1995, and (iv) increased occupancy expense as a percentage of
sales in 1995 as compared with 1994. These changes were partially offset by a
decline in amortization of certain acquisition costs, which amortization was
completed in the third quarter of 1994.
Selling, general and administrative expenses for 1995 increased to $50.3
million from $39.7 million for 1994, representing 14.9% and 14.1% of sales in
1995 and 1994, respectively. Such percentage increase in 1995 resulted
principally from additional costs from operating new stores and the
implementation of new MIS.
Amortization of goodwill and other intangibles decreased from $18.2
million in 1994 to $11.6 million in 1995. This decrease was primarily
attributable to a decrease in amortization of covenants not to compete from
$13.0 million in 1994 to $8.1 million in 1995. The decrease in amortization
of covenants not to compete in 1995 as compared to 1994 is a result of the
double declining balance method of amortization for such intangibles.
Amortization of customer files in connection with the acquisition of the
Company by Bain Capital in September 1992, which amounted to $1.7 million in
1994, was completed in the third quarter of 1994.
Depreciation charges in 1995 and 1994 were $1.9 million and $1.2 million,
respectively. The increase in 1995 resulted principally from (i) depreciation
in 1995 of assets of eight new store locations opened and
30
<PAGE>
(ii) a full year's depreciation in 1995 of assets of 11 store locations that
were opened in 1994 as compared to one-half year's depreciation of such
assets in 1994.
Store pre-opening expenses of $1.1 million and $1.2 million in 1995 and
1994, respectively, relate principally to eight new store locations opened in
1995 and 11 new store locations opened in 1994.
Net interest expense increased from $27.5 million in 1994 to $30.2 million
in 1995. This increase was principally due to an increase in the non-cash
accretion of the Zero Coupon Notes of $1.2 million and higher interest on
term loan borrowings resulting from a higher average interest rate of 9.5%
for 1995 as compared to 7.8% for 1994.
The net loss for the Company increased by $1.6 million or 9.8% from $16.4
million in 1994 to $18.1 million in 1995 primarily as a result of a decrease
in gross profit and an increase in selling, general and administrative
expenses offset, in part, by a decrease in amortization expense. The
Company's EBITDA decreased by $3.8 million or 12.2% to $27.4 million in 1995
compared to $31.2 million in 1994. EBITDA as a percentage of sales declined
to 8.2% in 1995 from 11.1% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1997, the Company entered into the Existing Credit
Agreement, which provides for, among other things, $65.5 million of term
loans and up to $30.0 million of revolving loans. As of October 25, 1997,
outstanding balances thereunder totaled $91.5 million. The Company utilizes
cash flow from operations, together with borrowings under the revolving
portion of the Existing Credit Agreement, to fund working capital needs,
investing activities (consisting primarily of capital expenditures) and
financing activities (normal debt service requirements, interest payments and
repayment of term and revolving loans outstanding). Concurrently with the
consummation of the Refinancing Plan, the Company expects to refinance and
replace the Existing Credit Agreement with the New Credit Agreement. See
"Description of Certain Indebtedness--New Credit Agreement."
Working capital was $9.9 million and $13.7 million as of December 28, 1996
and December 30, 1995, respectively, and $29.8 million on September 27, 1997.
The Company's capital requirements primarily result from opening and stocking
new stores and from the continuing development of new MIS. The Company's
ability to open stores in 1996 was limited to a certain degree by liquidity
considerations. The Company believes that there are significant opportunities
to open additional stores, and currently plans to open 30 to 40 stores in the
next two years. The Company expects to spend approximately $16 million in
1998 on capital expenditures primarily for new and replacement stores.
Working capital is also required to support inventory for the Company's
existing stores. Historically, the Company has been able to lease its store
locations. The Company has experienced a significant increase in accounts
receivable due to increased pharmacy sales in connection with Third Party
Plans, as compared to non-Third Party Plan sales which are generally paid by
cash or credit card. However, the Company believes that it has adequately
provided for liquidity by entering into a non-recourse factoring arrangement
whereby the Company sells accounts receivable associated with Third Party
Plans.
For the fiscal year ended December 28, 1996, net cash provided by
operating activities was $12.6 million, compared to $6.7 million for the
fiscal year ended December 30, 1995. The primary reasons for this increase
relate to an increase in operating earnings before the amortization of
goodwill and other intangibles, depreciation and amortization of property and
equipment and interest expense, partially offset by a decrease in working
capital primarily due to a decrease in accounts payable. For the fiscal year
ended December 28, 1996, net cash used in investing activities was $3.8
million, compared to $12.8 million for the fiscal year ended December 30,
1995. This reduction primarily resulted from a decrease in capital
expenditures and a decrease in systems development costs. For the fiscal year
ended December 28, 1996, net cash used in financing activities was $10.7
million, compared to $4.8 million provided by financing activities for the
fiscal year ended December 30, 1995. This reduction primarily resulted from
decreased borrowings under the Company's then existing credit facility and a
decrease in capital lease financing.
For the 39 weeks ended September 27, 1997 net cash used in operating
activities was $3.2 million, compared to $6.7 million provided by operating
activities during the 39 weeks ended September 28, 1996. The primary reasons
for this decrease are (i) an increase in inventory and accounts
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payable during the 1997 period, partially offset by an increase in operating
earnings. The Company's significant increase in inventory resulted from
management's decision to take advantage of a number of forward purchasing
opportunities, accumulate inventory in advance of additional store openings
and seasonal inventory buildup during the 1997 period. The Company believes that
the activities did not and will not materially adversely affect the Company's
liquidity. For the 39 weeks ended September 27, 1997, net cash used in investing
activities was $3.9 million, compared to $2.9 million for the 39 weeks ended
September 28, 1996. This increase primarily resulted from an increase in capital
expenditures during the 1997 period, partially offset by a decrease in the
capitalization of systems development costs. For the 39 weeks ended September
27, 1997, net cash provided by financing activities was $7.1 million, compared
to $5.6 million used in financing activities for the 39 weeks ended September
28, 1996. This increase primarily resulted from increased borrowings under the
revolving portion of the Existing Credit Agreement.
Leases for eight of the Company's stores that generated approximately
12.8% of the Company's net sales for the 39 week period ended September 27,
1997 are scheduled to expire before the end of the year 2000. The Company
believes that it will be able to renew such leases on economically favorable
terms or, alternatively, find other economically attractive locations to
lease. See "Risk Factors--Uncertainty of Lease Renewals."
As of September 27, 1997, approximately 1,800 of the Company's
approximately 2,000 employees were represented by various labor unions and
were covered by collective bargaining agreements. Pursuant to the terms of
such collective bargaining agreements, the Company is required to pay certain
annual increases in salary and benefits to such employees. The Company does
not believe that such increases will have a material impact on the Company's
liquidity or results of operations. See "Risk Factors--Collective Bargaining
Agreements" and "Business--Employees."
The net proceeds received by the Company from the Offering, together with
the net proceeds received by the Company from the Common Stock Offering and
borrowings under the New Credit Agreement, will be used to complete the
Refinancing Plan. See "Use of Proceeds." The Refinancing Plan is designed to
enhance the Company's financial flexibility and enable it to pursue growth
opportunities and implement capital improvements. The Company expects that
the Refinancing Plan will reduce the Company's overall level of indebtedness,
simplify the Company's capital structure and provide it with access to
additional borrowings. See "Prospectus Summary--Refinancing Plan."
Following the implementation of the Refinancing Plan, the Company believes
that, based on current levels of operations and anticipated growth, cash flow
from operations, together with other available sources of funds, including
borrowings under the New Credit Agreement, will be adequate for at least the
next two years to make required payments of principal and interest on the
Company's indebtedness (including the New Senior Subordinated Notes), to fund
anticipated capital expenditures and working capital requirements and to
comply with the terms of its debt agreements. The ability of the Company to
meet its debt service obligations and reduce its total debt will be dependent
upon the future performance of the Company and its subsidiaries which, in
turn, will be subject to general economic, financial, business, competitive,
legislative, regulatory and other conditions, certain of which are beyond the
Company's control. In addition, there can be no assurance that the Company's
operating results, cash flow and capital resources will be sufficient for
payment of its indebtedness in the future. The Company expects that
substantially all of its borrowings under the New Credit Agreement will bear
interest at floating rates; therefore, the Company's financial condition will
be affected by the changes in prevailing interest rates. The Company expects
to enter into interest rate protection agreements to minimize the impact from
a rise in interest rates. See "Risk Factors--Risks Associated with
Substantial Indebtedness."
TAX BENEFITS FROM NET OPERATING LOSSES
At September 27, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $71.0 million, which are due to expire in the years
2007 through 2012. These NOLs may be used to offset future taxable income
through 2012 and thereby reduce or eliminate the Company's federal income
taxes otherwise payable. The Internal Revenue Code of 1986, as amended (the
"Code"), imposes significant limitations on the utilization of NOLs in the
event of an "ownership change," as defined in section 382 of the Code (the
"Section 382 Limitation"). The Section 382 Limitation is an annual limitation
on the amount of pre-ownership change NOLs that a corporation may use to
offset its post-ownership
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change income. The Section 382 Limitation is calculated by multiplying the
value of a corporation's stock immediately before an ownership change by the
long-term tax-exempt rate (as published by the Internal Revenue Service).
Generally, an ownership change occurs with respect to a corporation if the
aggregate increase in the percentage of stock ownership (by value) of that
corporation by one or more 5% shareholders (including certain groups of
shareholders who in the aggregate own at least 5% of that corporation's
stock) exceeds 50 percentage points over a three-year testing period. The
Recapitalization caused the Company to experience an ownership change. As a
result, the Company currently is subject to an annual Section 382 Limitation
of approximately $5.0 million on the amount of NOLs generated prior to the
Recapitalization that the Company may utilize to offset future taxable
income. In addition, the Company believes that it will generate approximately
$42.0 million of NOLs in connection with the Refinancing Plan. Such NOLs will
not be subject to the Section 382 Limitation and may be utilized to offset
future taxable income. However, there can be no assurance that any NOLs will
be able to be utilized by the Company to offset future taxable income or that
such NOLs will not become subject to limitation due to future ownership
changes. The Company does not believe that the Common Stock Offering will
result in an ownership change.
YEAR 2000 COMPLIANCE
The Company has several computer software systems which will require
modification or upgrading to accomodate the year 2000 and thereafter. The
Company believes that all systems can be changed by the end of 1999 and does
not expect the cost of the changes to be material to the Company's financial
condition or results of operations.
SEASONALITY
In general, sales of drugstore items such as prescription drugs, OTC drugs
and health and beauty care products exhibit limited seasonality in the
aggregate, but do vary by product category. Quarterly results are primarily
affected by the timing of new store openings and the sale of seasonal
products. In view of the Company's recent expansion of seasonal
merchandising, the Company expects slightly greater revenue sensitivity
relating to seasonality in the future.
INFLATION
The Company believes that inflation has not had a material impact on
results of operations for the Company during the three years ended December
28, 1996 and the 39 weeks ended September 27, 1997.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which requires the presentation of basic and
diluted earnings per share in a company's financial statements for reporting
periods ending subsequent to December 15, 1997. Early adoption of SFAS No.
128 is not permitted. The adoption of SFAS No. 128 is not expected to have a
material impact on the Company's consolidated financial statements.
As of September 27, 1997, there were outstanding options to purchase an
aggregate of 1,628,441 shares of Common Stock, which shares are not included
in the calculation of earnings per share for the 39 weeks ended September 27,
1997 and would not be included in such calculation under the guidance
prescribed by SFAS No. 128 because of the anti-dilutive nature of these
instruments.
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BUSINESS
THE DRUGSTORE INDUSTRY
The U.S. drugstore industry generated approximately $91 billion of retail
sales in 1996 according to Drug Store News. The industry has experienced
strong and steady growth, having expanded at a 6.2% compound annual rate over
the ten years through 1996. The industry is expected to continue to grow as
the aging of the population drives long-term demand growth for prescription
drugs. The Company believes that prescription drug use generally rises with
age. In addition to these positive demographic trends, the shift to
increasing use of Third Party Plans is increasing overall prescription drug
usage. Third Party Plans tend to favor lower cost drug therapies over
alternative treatment methods such as surgery or in-hospital treatment.
Additionally, by reducing the out-of-pocket expense to the consumer and by
improving patients' compliance for prescription drug use, Third Party Plans
have helped increase unit growth in prescription drugs.
In recent years, the drugstore industry has experienced significant
consolidation, as national chains have gained market share from independent
operators. According to Drug Store News, the number of drugstores has fallen
from approximately 54,000 in 1990 to approximately 40,000 in 1996. The share
of industry sales represented by independent drugstores (i.e., operators of
less than four stores) has fallen from 35% in 1991 to 24% in 1996. Over the
last ten years, sales at chain drugstores such as Duane Reade have grown at a
compound annual rate of 8.4% compared to the industry average of 6.2%.
The increased role of Third Party Plans has contributed significantly to
industry consolidation. According to IMS America, pharmacy business
attributable to Third Party Plans as a percentage of total pharmacy sales has
risen to 67% in 1996 from 37% in 1990. Third Party Plans typically require
drugstores to enter into contracts with third party payors (such as insurance
plans, HMOs, preferred-provider organizations ("PPOs") and other managed care
providers) to provide prescription drugs at specified rates of reimbursement
for their membership. Although sales to customers covered by Third Party
Plans typically result in lower gross margins compared to cash sales,
management believes that the lower gross margins are offset by the increased
volume of pharmacy sales generated by such Third Party Plans. Drugstore
chains such as the Company, which have high penetration within their markets
and are able to handle the payment processing of such Third Party Plans, are
better able to service the customers of the Third Party Plans and are
therefore gaining market share in the sale of prescription drugs from
independent drugstores and small chains.
Third Party Plans typically seek to form alliances with drugstore chains
in order to benefit from the chains' multiple locations and to take advantage
of on-line management information systems that facilitate claims processing.
Management believes that penetration of Third Party Plans in Manhattan has
historically lagged behind the penetration of such Third Party Plans in the
rest of the United States because until 1994, neither Duane Reade nor most of
Manhattan's independent drugstores aggressively pursued alliances with Third
Party Plans. The Company believes that its extensive network of conveniently
located stores, strong local market position, pricing policies and reputation
for high quality health care products and services provide Duane Reade with a
competitive advantage in attracting business from individual customers as
well as Third Party Plans. While management believes that Third Party Plans
have grown significantly in Manhattan since 1994, it still remains relatively
less penetrated than the rest of the country. The Company believes that as
Third Party Plans continue to penetrate the Manhattan market, the number of
independent drugstores will decline due to competitive pressures.
GENERAL
Duane Reade is the largest drugstore chain in New York City, based on
sales volume, with 58 of its 67 stores located in Manhattan's high-traffic
business and residential districts. The Company operates almost twice as many
stores in Manhattan as its next largest competitor. Since opening its first
store in 1960, the Company has successfully executed a marketing and
operating strategy tailored to the unique characteristics of New York City,
the largest and most densely populated market in the United States. According
to Drug Store News, Duane Reade is the leading drugstore chain in the United
States in terms
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of sales per square foot, at $956 per square foot in 1996, which was more
than two times the national average for drugstore chains. For the fiscal year
ended December 28, 1996, the Company had sales of $381.5 million and EBITDA
of $35.3 million, increases of 13.2% and 28.6%, respectively, over the 1995
fiscal year. For the 39 weeks ended September 27, 1997, the Company had sales
of $313.8 million and EBITDA of $29.7 million, increases of 11.6% and 24.9%,
respectively, over the comparable 1996 period. For the fiscal year ended
December 28, 1996 and the 39 week period ended September 27, 1997, the
Company had net losses of $17.9 million and $14.2 million, respectively and,
on a pro forma basis, after giving effect to the Offering and the Refinancing
Plan, would have had net losses of $5.7 million and $3.9 million,
respectively, for such periods.
The Company enjoys strong brand name recognition in New York City, which
it believes results from the Company's many locations in high-traffic areas
of Manhattan and the 30 million shopping bags with the distinctive Duane
Reade logo that the Company distributes annually. An independent survey
conducted in 1996 indicated that approximately 84% of the people who live or
work in Manhattan recognize the Duane Reade name, and seven out of ten
shopped at a Duane Reade store in the past twelve months. The Company was
also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug
Store News.
The Company has developed an operating strategy designed to capitalize on
the unique characteristics of the New York City market, which include
high-traffic volume, complex distribution logistics and high costs of
occupancy, media advertising and personnel. The key elements of the Company's
operating strategy are its (i) everyday low price format and broad product
offering, (ii) low cost operating structure supported by its high volume
stores and low advertising and distribution costs and (iii) ability to design
and operate its stores in a wide variety of sizes and layouts.
The Company believes that its everyday low price format and broad product
offerings provide value and convenience for its customers and build customer
loyalty. The Company's everyday low price format results in prices that the
Company believes are, on average, lower than the prices offered by its
competitors.
The Company is able to keep its operating costs relatively low due to its
high per store sales volume, low warehouse and distribution costs and low
advertising expenditures. The Company's high volume stores allow it to
effectively leverage occupancy costs, payroll and other store operating
expenses. The Company's two primary distribution facilities are located
within five miles of all but one of its 67 stores and, combined with the
rapid turnover of inventory in Duane Reade's stores, result in relatively low
warehouse and distribution costs. The Company's strong brand name recognition
in New York City and everyday low price format allow the Company to minimize
its use of costly media and print advertising and to rely instead on
in-window displays and other less expensive promotional activities.
The Company has demonstrated its ability to successfully operate stores
using a wide variety of store configurations and sizes, which the Company
believes is necessary to succeed in the New York City market. For example,
the size of the Company's stores ranges from 2,600 to 12,300 square feet, and
it operates 29 bi-level stores. The Company believes that its flexibility in
configuring stores provides it with a competitive advantage in securing
locations for its new stores, as many of its competitors target more
standarized spaces for their stores, which are more difficult to find in New
York City. In addition, the Company's management team has extensive
experience and knowledge of the New York City real estate market, allowing it
to aggressively pursue attractive real estate opportunities.
The Company's predecessor was founded in 1960. In 1992, Bain Capital
acquired the Company from its founders and, in June 1997, investment funds
affiliated with DLJMBPII acquired approximately 91.5% of the outstanding
capital stock of the Company from Bain Capital and certain other selling
securityholders. Since the 1992 acquisition, the Company has incurred net
losses in each fiscal year.
In 1994 and 1995 the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several
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measures to improve operations, including improving inventory controls and
decreasing out-of-stock occurrences, creating a loss prevention function to
control inventory shrink and continuing to invest in MIS. In 1997, the
Company resumed its store expansion program, opening seven stores in 1997.
During Mr. Cuti's tenure at the Company, EBITDA has increased by 53.2% from
$26.9 million for the 52 weeks ended March 29, 1996 to $41.2 million for the
52 weeks ended September 27, 1997, and the Company experienced net losses of
$19.8 million and $19.5 million the 52 weeks ended March 29, 1996 and the 52
weeks ended September 27, 1997, respectively. Net loss before non-recurring
charges for the 52 weeks ended September 27, 1997 was $8.6 million.
GROWTH STRATEGY
The Company believes that, as a result of its successful operating history
and market position in New York City, it is well positioned to capitalize on
the growth opportunities in its market. The Company's strategy for continued
growth is to (i) open additional stores in Manhattan and the surrounding
boroughs, (ii) continue to capitalize on favorable pharmacy trends, (iii)
make opportunistic acquisitions of independent drugstores and pharmacy files
and (iv) continue to implement merchandising initiatives in non-pharmacy
areas.
Open Additional Stores. The Company believes that the Manhattan drugstore
market remains underpenetrated by drugstore chains, with only 50% of the
estimated $2.65 billion in annual drugstore-related sales controlled by
regional or national chains, compared to approximately 74% controlled by
chains nationally. This provides significant opportunities for the Company to
open additional stores in Manhattan as well as in the densely populated areas
of the surrounding boroughs. Some of the Company's most successful stores
have been opened in areas new to the Company, such as the residential areas
of the Upper East and West sides of Manhattan, Brooklyn, the Bronx and
Queens. The Company believes that its long-standing presence in, and
knowledge of, the New York City real estate market, combined with the use of
a proprietary site selection model that considers numerous demographic and
traffic flow variables, have allowed it to identify attractive store
locations. Since 1993, all of the Company's new stores have become profitable
on an operating basis (i.e., prior to allocation of corporate expenses,
goodwill amortization, interest expense and income taxes) within the first
full year of operation. Over the next two years, the Company plans to open
approximately 30 to 40 stores, primarily in New York City. See "Risk
Factors--Risks Associated with Future Growth."
Continue to Capitalize on Favorable Pharmacy Trends. Sales of prescription
and OTC drugs have been growing rapidly throughout the drugstore industry.
The Company expects demographic trends, such as the aging of the U.S.
population, and industry changes, such as growth of Third Party Plans, to
continue to drive increases in the prescription and OTC drug businesses.
Since 1994, the Company has focused on increasing its pharmacy sales by
entering into agreements to service Third Party Plans and by upgrading the
appearance and service level of its store pharmacies. While sales to
customers covered by Third Party Plans result in lower gross profit margins
due to competitive pricing, the Company believes that such lower margins are
offset by the increased volume of pharmacy sales and the opportunity to
leverage fixed expenses. The Company believes that its initiatives, which are
designed to capitalize on industry trends, have resulted in the Company's
pharmacy sales growing at an annual rate of approximately 30% since 1994.
Although these initiatives have helped increase the average number of
prescriptions filled by Duane Reade per store per week from 640 in 1994 to
865 during 1997, the Company's average remains well below the national
industry chain store average of approximately 1,200, providing significant
opportunity for continued pharmacy growth. The Company believes that
continued pharmacy growth will increase overall customer traffic, thereby
also benefitting its non-pharmacy sales.
Make Opportunistic Acquisitions of Independent Drugstores and Pharmacy
Files. The Company believes that the growth of Third Party Plans and the
continued penetration of chain drugstores such as Duane Reade have put
increasing pressure on the approximately 1,400 independent drugstores in New
York City. When appropriate, the Company considers acquiring small local
chains or independent drugstores. The Company also pursues the purchase of
pharmacy files of independent drugstores when such purchases are economically
attractive to the Company. The pharmacy files of independent pharmacists tend
to have a higher proportion of prescriptions not covered by Third Party
Plans, which
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generate incremental revenue and higher margins. When appropriate, the
Company retains the services of the pharmacist, whose personal relationship
with the customers generally maximizes the retention rate of the purchased
file. In 1997, the Company acquired one independent drugstore and seven such
pharmacy files and intends to aggressively pursue additional purchases.
Continue to Implement Merchandising Initiatives in Non-Pharmacy
Areas. Management has recently undertaken a number of merchandising
initiatives, including the expansion of certain high-margin categories such
as greeting cards, cosmetics, vitamins, photofinishing and photo supplies and
an expanded seasonal merchandising program. The Company also continues to
focus on category management, which it believes will improve gross margins
and increase non-pharmacy sales. For example, in 1997 the Company introduced
one-hour photofinishing service in three of its stores and intends to
introduce one-hour photofinishing service in approximately seven to ten
additional stores in 1998. The Company has also increased its emphasis on the
sale of its own private label products, which it believes provide a
high-quality, lower priced alternative to name brand products while
generating higher gross profit margins than name brand products. In addition,
in the fourth quarter of 1997, Duane Reade completed its installation of POS
scanners in all of its stores and, by the end of the first quarter of 1998,
will have completed its planogramming initiative in all of its stores. These
systems and initiatives will allow the Company to better analyze sales trends
and merchandise its stores more effectively, which the Company believes will
ultimately increase its sales and profitability.
COMPANY OPERATIONS
Merchandising. Duane Reade's overall merchandising strategy is to provide
the broadest selection of branded and private label drugstore products
available in Manhattan and to sell them at everyday low prices. To further
enhance customer service and loyalty, the Company attempts to maintain a
consistent in-stock position in all merchandise categories. In addition to
prescription and OTC drugs, the Company offers health and beauty aids, food
and beverage items, tobacco products, cosmetics, housewares, hosiery,
greeting cards, photofinishing, photo supplies, seasonal merchandise and
other products. Health and beauty care products, including OTC drugs,
represent the largest of the Company's product categories. Duane Reade
drugstores offer a wide variety of brand name and private label products,
including oral, skin and hair care products, bath supplies, vitamins and
nutritional supplements, feminine hygiene products, family planning products
and baby care products. Popular brands of health and beauty aids are given
ample shelf space, and large sizes are offered, which the Company believes
appeals to the value consciousness of many Manhattan consumers. Convenience
items such as candy, snacks and seasonal goods are positioned near the check
out registers to provide optimum convenience and stimulate impulse purchases
for the customers while allowing the store employees to monitor those product
categories that are particularly susceptible to inventory shrink.
In addition to the wide array of name brand products offered in its
stores, the Company offers its own private label products. Private label
products provide customers with high-quality, lower priced alternatives to
name brand products while generating higher gross profit margins than name
brand products. These offerings also enhance Duane Reade's reputation as a
value-oriented store. The Company currently offers approximately 400 private
label products. In 1996, these private label products accounted for
approximately 4.6% of non-pharmacy sales. The Company believes that its
strong brand image, reputation for quality and reliability in the New York
City market, and its economies of scale in purchasing allow it to
aggressively promote private label goods.
The Company has recently made efforts to increase the sales of certain
high-margin items, such as cosmetics, greeting cards and photofinishing. In
1996, the Company completed the remodeling of the cosmetics sections in 19
stores, which resulted in an approximately 23% increase in cosmetic sales in
those stores with no increase in linear footage. In the greeting cards
category, the Company increased seasonal selection and reformatted the card
section in many of its stores, resulting in a 26% increase in greeting card
sales in 1996 compared to 1995. Other merchandising initiatives completed
during 1996 include an expanded selection of seasonal merchandise, vitamins,
nutrition products and baby accessories, particularly in stores located in
residential areas. The Company believes there are additional opportunities to
continue to refine and improve the merchandise mix in its stores.
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The Company also offers same-day photofinishing services in all of its
stores and has recently introduced one-hour photofinishing in three stores.
In 1998, the Company expects to introduce one-hour photofinishing in seven to
ten additional stores. Management believes that photofinishing services
contribute significantly to sales of other merchandise categories because of
customer traffic increases that result from the customer visiting a store
twice, in order to drop off film and pick up the processed photos.
Pharmacy. The Company believes that its pharmacy business will continue to
contribute significantly to the Company's growth. Management also believes
that a larger and stronger pharmacy business will enhance customer loyalty
and generate incremental customer traffic, which is expected to increase
sales of Duane Reade's wide variety of OTC drugs and other non-pharmacy
merchandise. Duane Reade significantly grew its prescription drug sales in
1996 as reflected by its same-store pharmacy sales increase of 25.5% during
1996 compared to 1995 and an increase of 25.4% for the 39 week period ended
September 27, 1997 compared to the same period in 1996. Sales of prescription
and OTC drugs represented approximately 35% of total sales in 1996 as
compared with 33% of total sales in 1995 and approximately 38% of total sales
for the 39 week period ended September 27, 1997. Although the average number
of prescriptions filled by Duane Reade per store per week has increased from
640 in 1994 to 865 during 1997, the Company's average remains well below the
industry chain store average of approximately 1,200, providing significant
opportunity for continued pharmacy growth. The Company believes that the
average number of prescriptions filled per week by it lags behind the
industry average because of (i) the historically low penetration of Third
Party Plans in the New York City area and (ii) the Company's concentration of
stores in business areas, rather than residential areas. The Company believes
continued pharmacy growth will also increase overall customer traffic and
benefit its non-pharmacy sales.
The Company generally locates the pharmacy at the rear of the store in
order to maximize the pharmacy customer's exposure to other categories of
merchandise in the front of the store. Each pharmacy is staffed with a
registered pharmacist and a drug clerk at all times to ensure quick and high
quality service. Each store carries a complete line of both branded and
generic prescription drugs. In 1996, the Company began a program to upgrade
the quality of its pharmacy service. The Company believes that this
initiative has contributed to its strong growth in pharmacy sales and should
continue to benefit the Company as customer loyalty builds in response to
improved service levels.
In addition to customer service initiatives in its pharmacy business, the
Company has remodeled or redesigned 16 of its pharmacies since the beginning
of 1996. This remodeling, which has primarily involved updating the pharmacy
counter area to allow pharmacists and customers to have more direct contact
and providing a consultation and waiting area for customers, has not resulted
in any significant reduction in total retail selling space. By improving the
store layout and accessibility of the pharmacist and pharmacy area, the
stores that have been remodeled have achieved strong growth in their pharmacy
business. All stores opened since 1995 have the new pharmacy counter area
design. The Company currently operates 24 such stores. The Company has also
launched pharmacy marketing initiatives, such as home delivery and
prescription-by-fax services, which it believes have contributed to the
increased sales and customer loyalty of the pharmacy business.
The Company believes that its extensive network of conveniently located
stores, strong local market position, pricing policies and reputation for
high quality health care products and services provide it with a competitive
advantage in attracting pharmacy business from individual customers as well
as Third Party Plans. The percentage of the Company's total prescription drug
sales attributable to Third Party Plans increased to approximately 64% in
1996 from approximately 58% in 1995, and to approximately 73% for the 39 week
period ended September 27, 1997. Although gross margins on sales to Third
Party Plans are generally lower than other prescription drug sales because of
the highly competitive nature of pricing for this business and the purchasing
power of Third Party Plans, management believes that the lower gross profit
margins are offset by the higher volume of pharmacy sales to Third Party Plan
customers allowing the Company to leverage other fixed store operating
expenses. In addition, the Company believes that Third Party Plans generate
additional general merchandise sales by increasing customer traffic in the
stores. As of September 27, 1997, the Company had contracts with over 100
Third-Party Plans, including every major Third Party Plan in the Company's
market areas.
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Another important component of the Company's pharmacy growth strategy is
the continued acquisition of prescription files from independent pharmacies
in market areas currently served by existing Company stores. In 1997, the
Company purchased the prescription files of eight independent pharmacies for
an aggregate total of $830,000, which generated approximately $7 million in
revenues on an annualized basis. Independent pharmacists tend to have a
higher proportion of customers that are not Third Party Plans, which provide
the Company with incremental revenue and higher margin contribution. When
appropriate, the Company will retain the services of the pharmacist, whose
personal relationship with the customers generally maximizes the retention
rate of the purchased file. Since 1995, the Company has experienced an
estimated 80% customer retention rate with respect to prescription files
acquired. Presently, there are approximately 1,400 independent pharmacies in
New York City, and the Company believes that these stores will provide
additional acquisition opportunities in the future.
The Company's pharmacies employ computer systems that link all of the
Company's pharmacies and enable them to provide customers with a broad range
of services. The Company's pharmacy computer network profiles customer
medical and other relevant information, supplies customers with information
concerning their drug purchases for income tax and insurance purposes and
prepares prescription labels and receipts. The computer network also
expedites transactions with Third Party Plans by electronically transmitting
prescription information directly to the Third Party Plan and providing
on-line adjudication, which confirms at the time of sale customer
eligibility, prescription coverage and pricing and co-payment requirements
and automatically bills the respective plan. On-line adjudication reduces
losses from rejected claims and eliminates a portion of the Company's
paperwork for billing and collection of receivables and costs associated
therewith.
Store Operations. The majority of the Company's stores are located in the
business and residential areas of Manhattan, the most densely populated area
in the United States. The Company's operations have been tailored to handle
high-volume customer traffic. During 1996, an average Duane Reade store
served approximately 2,500 customers per weekday, and 700 customers during
each of the peak lunch and commuting periods of the day. Some of the
Company's stores may operate up to 25 registers during peak demand periods.
Duane Reade stores range in size from 2,600 to 12,300 square feet, with an
average of 6,800 square feet. The Company's stores are designed to facilitate
customer movement and to minimize inventory shrink. The Company believes that
its wide, straight aisles and well-stocked shelves allow customers to find
merchandise easily and allow the store's employees (managers, security
guards, cashiers and stock clerks) to effectively monitor customer behavior.
The Company attempts to group merchandise logically in order to enable
customers to locate items quickly and to stimulate impulse purchases.
In 1996, the Company began planogramming its stores by using a
computerized space management system to design each store's layout and
product displays. The system seeks to maximize productivity per square foot
of selling space, maintain consistency in merchandising and reduce inventory
levels. To date, 34 stores have been designed by the system. Management
believes that the Company's remaining stores will be planogrammed by the end
of the first quarter of 1998. As a result, the Company believes that it has
yet to realize the full benefits from this system.
The Company establishes each store's hours of operations in an attempt to
best serve customer traffic patterns and purchase habits and to optimize
store labor productivity. Stores in Manhattan's business districts are
generally open five days a week. In residential and appropriate
business/shopping districts, stores are open six or seven days a week with a
heavy emphasis on convenient, early morning and late evening openings. In
1997, the Company had seven stores which were open 24 hours a day, 365 days a
year. The Company intends to continue to identify stores in which extended
operating hours would improve customer service and convenience and contribute
to the Company's profitability. Each store is supervised by one store manager
and one or more assistant store managers. Stores are supplied by deliveries
from the Company's warehouses in Queens an average of three times a week,
allowing the stores to maintain a high in-stock position, maximize store
selling space and minimize inventory required to be held on hand.
39
<PAGE>
The Company attempts to mitigate inventory shrink through (i) the
employment of full time security guards in each store, (ii) the use of a
state-of-the-art Electronic Article Surveillance ("EAS") system that detects
unremoved EAS tags on valuable or easily concealed merchandise and (iii)
merchandise delivery and stocking during non-peak hours. Additionally, all
store and warehouse employees are trained to monitor inventory shrink, and
the Company uses outside consulting services to monitor employee behavior.
Recently, the Company hired a full-time team of loss prevention professionals
and established an anonymous call-in line to allow employees to report
instances of theft. The Company also instituted ongoing audits of warehouse
picking and receiving and an anonymous reward line for the reporting of
theft. The Company believes that these programs have enabled it to control
inventory shrink and will enable it to continue to do so.
Purchasing and Distribution. The Company purchases approximately 82% of
its merchandise directly from manufacturers. The Company distributes
approximately 84% of its merchandise through the Company's warehouses and
receives direct-to-store deliveries for approximately 16% of its purchases.
Direct-to-store deliveries are made for pharmaceuticals, greeting cards,
photofinishing, convenience foods and beverages. The Company purchases from
over 1,000 vendors. The Company believes that there are ample sources of
supply for the merchandise currently sold in its stores. The Company manages
its purchasing through a combination of forward buying, national buying and
vendor discount ("deal") buying in ways in which it believes maximizes its
buying power. For example, the Company uses a computerized forecasting and
investment program that is designed to determine optimal forward buying
quantities before an announced or anticipated price increase has been
implemented. By forward buying, the Company stocks up on regularly carried
items when manufacturers temporarily reduce the cost of goods or when a price
increase has been announced or is anticipated.
The Company operates two warehouses, which are located within five miles
of all but one of its stores. The Company's primary warehouse contains
approximately 150,000 square feet devoted to inventory. The Company believes
that the close proximity of the warehouses to the stores allows the Company
to supply the stores frequently, thereby minimizing inventory and maximizing
distribution economies. The Company also owns a fleet of trucks and vans,
which it uses for all deliveries from the warehouses to the stores.
ADVERTISING AND PROMOTION
The Company regularly promotes key items at reduced retail prices during
four-week promotional periods. Store windows and in-store signs are utilized
to communicate savings and value to shoppers. Additionally, over 30 million
bags with the highly recognizable Duane Reade logo are used by its customers
each year, helping to promote the Company's name throughout New York City.
The Company also utilizes full color circulars to announce new stores and
heavily circulates them in local areas to attract customers. Typically, a new
store sells one to two times its regular volume during a grand opening
promotion, which generally lasts two to three weeks. The Company generally
does not rely heavily on the use of print or broadcast media to promote its
stores. Rather, because of its many high-traffic locations, the Company
typically relies on in-window displays as its primary method of advertising.
In 1997, the Company began using radio advertising. The radio advertising
focuses on the Company's pharmacy business, highlighting services enhanced by
the modern pharmacy computer system, pharmacist accessibility and enhanced
convenience.
40
<PAGE>
PROPERTIES; LEASES
As of November 25, 1997, the Company is operating stores in the following
locations:
<TABLE>
<CAPTION>
LOCATION TOTAL
<S> <C>
Manhattan, NY ..... 58
Brooklyn, NY ...... 4
Bronx, NY ......... 2
Queens, NY ........ 2
Newark, NJ ........ 1
---------
Total ........... 67
</TABLE>
Store leases are generally for 15 year terms. The average year of
expiration for all the Company's leases is 2006. Lease rates are generally
subject only to increases based on inflation, real estate tax increases or
maintenance cost increases. The following table sets forth the lease
expiration dates of the Company's leased stores over each of the next five
years and thereafter. Of the stores with leases expiring in the next five
years, four have renewal options. See "Risk Factors--Uncertainty of Lease
Renewals."
<TABLE>
<CAPTION>
NUMBER OF
YEAR LEASES EXPIRING
<S> <C>
1997 ........... 0
1998 ........... 3
1999 ........... 1
2000 ........... 4
2001 ........... 0
Thereafter ..... 59
</TABLE>
The Company owns a distribution facility and related land in Long Island
City, New York. The building contains approximately 150,000 square feet of
space, all of which is used for warehousing and distribution. The Company
also leases a 50,000 square foot distribution facility in Maspeth, New York,
which is only one mile from the Long Island City facility. The Company leases
space for its corporate headquarters, which is located in Manhattan.
MANAGEMENT INFORMATION SYSTEMS
The Company currently has modern pharmacy and inventory management
information systems. In 1996, the Company completed the installation of a
host-based, modern pharmacy information system. The pharmacy information
system (PDX) has reduced the processing time for electronic reimbursement
approval for prescriptions from Third Party Plan providers from 50 seconds to
seven seconds, and the inventory management information systems (JDA
merchandising and E3 replenishment) have allowed the Company to increase
inventory turns in the warehouses from 11 to 13 per year. In early 1997, the
Company began the process of installing POS systems in its stores. The
Company believes that these systems will allow the Company to better control
pricing, inventory and shrink, while maximizing the benefits derived from the
other parts of its systems installation program. POS will also provide sales
analysis that will enable the Company to improve labor scheduling, and will
help optimize planogram design by allowing detailed analysis of
stock-keeping-unit ("SKU") sales. The installation of the Company's POS
systems was completed in December 1997. Additionally, the Company has
upgraded its financial reporting systems and installed local and wide area
networks to facilitate the transfer of data between systems and from the
stores to headquarters.
COMPETITION
The Company's stores compete on the basis of, among other things,
convenience of location and store layout, product mix, selection, customer
service and price. The New York City drugstore market is highly fragmented
due to the complexities and costs of doing business in the most densely
populated area of the country. The diverse labor pool, local customer needs
and complex real estate market in New York City
41
<PAGE>
all favor regional chains and independent drugstores that are familiar with
the market. Duane Reade's store format is designed to meet the unique needs
of the New York City market and has proven successful in both the business
and residential neighborhoods of Manhattan.
Because of the difficulties of operating in a densely populated area, the
New York City drugstore market remains under-penetrated by national chains as
compared to the rest of the country. According to industry sources,
approximately 74% of the nationwide drugstore market was controlled by
chains, while in New York City that number was approximately 50%. There can
be no assurance that such underpenetration will continue.
Duane Reade believes that it has significant competitive advantages over
the approximately 1,400 independent drugstores in New York City, including
purchasing economies of scale, centrally located warehouses that minimize
store inventory and maximize selling space, a full line of in stock, brand
name merchandise and a convenient store format. Major chain competitors in
the New York City market include Rite-Aid, Genovese and CVS. See "Risk
Factors--Competition."
GOVERNMENT REGULATION
Duane Reade's stores and its distribution facilities are registered with
the federal DEA and are subject to various state and local licensing
requirements. Each of Duane Reade's pharmacies and pharmacists located in New
York are licensed by the State of New York. The pharmacy and pharmacists
employed at Duane Reade's store in Newark, New Jersey are licensed by the
State of New Jersey. In addition, Duane Reade has been granted cigarette tax
stamping licenses from the State of New York and from the City of New York,
which permit Duane Reade to buy cigarettes directly from the manufacturers
and stamp the cigarettes themselves. Duane Reade's stores possess cigarette
tax retail dealers licenses issued by the State of New York, the City of New
York and the State of New Jersey. See "Risk Factors--Regulatory Matters."
EMPLOYEES
As of September 27, 1997, Duane Reade had approximately 2,000 employees,
almost all of whom were full-time. Approximately 1,800 of the Company's 2,000
employees are represented by unions. Non-union employees include employees at
corporate headquarters and store management. The Company's distribution
facility employees are represented by the International Brotherhood of
Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815, and
all store employees are represented by the Allied Trade Council. Duane
Reade's three year contracts with these two unions expire on August 31, 1999
and August 31, 1998, respectively. Duane Reade believes that its relations
with its employees are good. See "Risk Factors--Collective Bargaining
Agreements."
TRADEMARKS
The name "Duane Reade" and the "DR" logo are registered trademarks. The
Company believes that it has developed strong brand awareness within the New
York City area. As a result, the Company regards the Duane Reade logo as a
valuable asset.
LEGAL PROCEEDINGS
The Company is a party to certain legal actions arising in the ordinary
course of business. Based on information presently available to the Company,
the Company believes that it has adequate legal defenses or insurance
coverage for these actions and that the ultimate outcome of these actions
will not have a material adverse effect on the Company.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and executive officers of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Anthony J. Cuti .... 51 Chairman, Chief Executive Officer and President
William Tennant .... 50 Senior Vice President and Chief Financial Officer
Gary Charboneau .... 53 Senior Vice President--Sales and Merchandising
Jerry M. Ray ........ 50 Senior Vice President--Store Operations
Nicole S. Arnaboldi 39 Director
David L. Jaffe....... 39 Director
Andrew J. Nathanson . 40 Director
</TABLE>
Two additional directors will be elected by the Board of Directors
following the completion of the Offering.
ANTHONY J. CUTI has been Chairman and Chief Executive Officer of the
Company since April 1996. Prior to joining the Company, Mr. Cuti served as
President and as a member of the Board of Directors of Supermarkets General
and Pathmark from 1993 to 1996 and, prior to being named President of
Supermarkets General and Pathmark, Mr. Cuti was Executive Vice President and
Chief Financial Officer of Supermarkets General. From 1984 to 1990, he was
the Chief Financial Officer of the Bristol-Myers International Group of the
Bristol-Myers Company and prior to that was employed by the Revlon
Corporation.
WILLIAM TENNANT has been Senior Vice President and Chief Financial Officer
of the Company since February 1997. Prior to joining the Company, Mr. Tennant
was Senior Vice President and Chief Financial Officer of Tops Appliance City,
a consumer electronics retailer, from 1993 to 1996. From 1986 to 1993, Mr.
Tennant served as Vice President and Controller for the Great Atlantic &
Pacific Tea Company.
GARY CHARBONEAU has been Senior Vice President in charge of Sales and
Merchandising of the Company since February 1993. Prior to joining the
Company, Mr. Charboneau held various positions at CVS, a retail drugstore
chain, from 1978 to February 1993, most recently as Executive Vice President.
JERRY M. RAY has been Senior Vice President in charge of Store Operations
since July 1996 and served as Vice President of Pharmacy Operations from
April 1995 to June 1996. From 1991 to 1994, Mr. Ray served as President and
CEO of Begley Drugstores, Inc.
NICOLE S. ARNABOLDI has been a Director of the Company since June 1997.
Ms. Arnaboldi is a Managing Director of DLJMB. She joined the DLJ Merchant
Banking Group in March 1993 after six years with The Sprout Group, DLJ's
venture capital affiliate.
DAVID L. JAFFE has been a Director of the Company since June 1997. Mr.
Jaffe is a Managing Director of DLJMB. Mr. Jaffe joined DLJ Merchant Banking
in 1984 and became a Managing Director in 1995. He currently sits on the
Board of Directors of each of EZ Buy and EZ Sell Recycler Corporation, OHA
Financial, Inc., OSF, Inc., Terra Nova Group, Pharmaceutical Fine Chemicals
SA and Brand Scaffold Services, Inc.
ANDREW J. NATHANSON has been a Director of the Company since June 1997.
Mr. Nathanson is a Managing Director of DLJ. Mr. Nathanson joined DLJ in 1989
from Drexel Burnham Lambert, and has been a Managing Director of DLJ since
1991. Mr. Nathanson also serves on the Board of Directors of Specialty Foods,
Inc.
Directors of the Company are currently elected annually by its
stockholders to serve during the ensuing year or until their respective
successors are elected and qualified. Executive officers of the Company are
elected by the Board of Directors to serve until their respective successors
are elected and qualified.
43
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the Offering, the Board of Directors had no formal committees. In
connection with the completion of the Common Stock Offering, the Board of
Directors will establish two committees: (i) an Audit Committee and (ii) a
Compensation Committee.
The Audit Committee will make recommendations to the Board of Directors
regarding the Company's independent auditors, approve the scope of the annual
audit activities of the independent auditors and review audit results. It is
expected that a majority of the directors comprising the Audit Committee will
be directors not otherwise affiliated with the Company or its principal
stockholders.
The duties of the Compensation Committee will be to provide a general
review of the Company's compensation and benefit plans to ensure that they
meet corporate objectives. In addition, the Compensation Committee will
review management's recommendations on (i) compensation of all officers of
the Company and (ii) adopting and changing major Company compensation
policies and practices, and report its recommendations to the entire Board of
Directors for approval and authorization. The Compensation Committee will
administer the Company's stock plans. The Board of Directors may also
establish other committees to assist in the discharge of its
responsibilities.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the principal components of compensation of
the Chief Executive Officer and the other four highest compensated executive
officers of the Company (the "Named Executive Officers") for the fiscal year
ended December 27, 1997. The compensation set forth below fully reflects
compensation for services performed on behalf of the Company and its
subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- --------------
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS (#) COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Cuti............. 1997 $386,000 $-- $-- 496,569 $--
Chief Executive Officer
Gary Charboneau............. 1997 243,000 -- -- 141,877 --
Senior Vice
President--Sales and
Merchandising
Jerry M. Ray................ 1997 200,000 -- -- 118,231 --
Senior Vice
President--Store
Operations
William J. Tennant.......... 1997 151,000(2) -- -- 115,393 --
Senior Vice
President--Chief Financial
Officer
Joseph S. Lacko............. 1997 150,000 -- -- 11,823 --
Vice President--Management
Information Systems
</TABLE>
- ------------
(1) Bonuses for 1997 have not yet been determined. Messrs. Cuti,
Charboneau, Ray and Lacko received bonuses in fiscal 1996 of $340,000,
$120,000, $100,000 and $25,000, respectively.
(2) Reflects Mr. Tennant's salary for the partial year from February 18,
1997 (when he joined the Company) through December 27, 1997.
44
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table discloses options granted during 1997 to the Named
Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS AT
----------------------------------------------------------- ASSUMED RATES OF STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR OPTION
SECURITIES OPTIONS TERM(2)
UNDERLYING GRANTED TO EXERCISE OR ----------------------------
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Cuti........ 496,569 45.5% $ 8.33 6/18/07 $2,602,022 $6,594,436
Gary Charboneau (3) .. 141,877 13.0 8.33 6/18/07 743,435 1,884,127
Jerry M. Ray (3) ...... 118,231 10.8 8.33 6/18/07 619,530 1,570,081
William J. Tennant
(4)................... 115,393 10.6 7.34-8.33 2/18/07-6/18/07 561,964(5) 1,570,108(5)
Joseph L. Lacko ....... 11,823 1.1 8.33 6/18/07 61,953 157,009
</TABLE>
- ------------
(1) All of such options vest fully on the eighth anniversary of the grant
date and may vest sooner based on the Company's achievement of certain
specified financial targets.
(2) Amounts reflect certain assumed rates of appreciation for the term of
the option as set forth in the executive compensation disclosure rules
of the Securities and Exchange Commission and are not intended to
forecast future appreciation of the Common Stock. Actual gains, if any,
on stock option exercises depend on future performance of the Company's
stock and overall market conditions. For each Named Executive Officer
other than Mr. Tennant, at an annual rate of appreciation of 5% per
year for the option term, the price of the Common Stock would be
approximately $13.57 per share as of the expiration date, and for Mr.
Tennant such price would be approximately $12.62 per share. For each
Named Executive Officer other than Mr. Tennant, at an annual rate of
appreciation of 10% per year for the option term, the price of the
Common Stock would be approximately $21.61 per share as of the
expiration date, and for Mr. Tennant such price would be approximately
$20.10 per share.
(3) All of such options were granted under the Company's Equity Plan (as
defined below). The options granted under such plan are subject to
repurchase provisions upon termination of employment. See "--Stock
Options."
(4) 68,101 of Mr. Tennant's options were granted pursuant to a separate
agreement with the Company, and the remaining 47,292 options were
granted pursuant to the Equity Plan.
(5) Amounts for Mr. Tennant are calculated based on a weighted average
exercise price of $7.75 per share.
FISCAL YEAR END OPTION VALUES
The following table summarizes the number and value of all unexercised
options held by the Named Executive Officers at the end of 1997. There were
no options exercised in the Company's last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON OPTIONS AT AT FISCAL YEAR END
NAME EXERCISE VALUE REALIZED FISCAL YEAR END ($)(1)
- ------------------- ------------- -------------- --------------- ---------------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Anthony J. Cuti..... -- -- 364,530/496,569 2,825,108/0
Gary Charboneau..... -- -- 56,013/141,877 306,443/0
Jerry M. Ray........ -- -- 45,032/118,231 285,161/0
William J. Tennant -- -- 68,101/47,292 67,420/0
Joseph S. Lacko ... -- -- 17,025/11,823 131,944/0
</TABLE>
- ------------
(1) Assumes the value of the Common Stock as of December 27, 1997 is equal
to $8.33 per share.
45
<PAGE>
Mr. Weston, the Company's former Chief Executive Officer, resigned from
the Company effective as of February 28, 1997. In connection with Mr.
Weston's severance from the Company and the Recapitalization, Mr. Weston
received approximately $1.6 million from DLJMB and all of his unexercised
options were effectively cancelled. In addition, Mr. Weston received
approximately $412,000 from the Company during 1997, a portion of which was
attributable to his 1995 and 1996 bonus and the remainder of which was
attributable to severance payments.
COMPENSATION OF DIRECTORS
Directors of the Company who are employees of the Company, DLJ or DLJMB or
their respective subsidiaries are not compensated for serving as directors.
Presently, the Company does not have directors who are not employees of the
Company, DLJ or DLJMB ("Non-Employee Directors"). However, the Company plans
to compensate future Non-Employee Directors with option grants for serving in
such capacity and for serving on committees of the Board of Directors and to
reimburse Non-Employee Directors for out-of-pocket expenses incurred in such
capacity.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company did not have a compensation committee.
Instead, compensation decisions regarding the Company's executive officers
were made by the Board of Directors. Each executive officer of the Company
has an employment agreement with the Company that establishes his annual
compensation. See "--Employment Agreements."
EMPLOYMENT AGREEMENTS
Effective June 18, 1997, the Company entered into an employment agreement
with Anthony J. Cuti (the "Cuti Employment Agreement"). Pursuant to the Cuti
Employment Agreement, Mr. Cuti serves as Chairman, President and Chief
Executive Officer of the Company. The Cuti Employment Agreement provides for
(i) a base salary of $425,000 per year, which will increase to $500,000 in
1998 and $550,000 in 1999 if certain EBITDA targets (as defined in the Cuti
Employment Agreement) are met and will increase every 18 months commencing
July 1, 2001 by not less than the percentage increase in a designated
consumer price index for such 18-month period, (ii) an annual incentive bonus
of up to 200% of base salary based on certain EBITDA targets and (iii)
participation in all benefit plans generally available to executive officers
of the Company.
Pursuant to the Cuti Employment Agreement and the Equity Plan described
below, on June 18, 1997, Mr. Cuti was granted non-qualified stock options to
purchase an aggregate of 496,569 shares of Common Stock at an exercise price
of $8.33 per share. Subject to Mr. Cuti's continued employment with the
Company, the options generally will become 100% vested on the eighth
anniversary of the date of grant, but may vest sooner based on the Company's
achievement of certain specified financial targets. Furthermore, the vesting
of options will accelerate upon the occurrence of a Sale of the Company (as
defined in the Cuti Employment Agreement) on or prior to December 30, 2001,
based on the Company's achievement of specified financial targets prior to
the date of any such Sale of the Company.
The Cuti Employment Agreement provides that following the Offering, Mr.
Cuti may generally only transfer up to 10% of his shares of Common Stock in
each calendar year while he is an employee of the Company, except pursuant to
certain rights and obligations (i) to transfer ("put") his shares to the
Company upon termination of employment and (ii) to transfer shares in
connection with certain transfers of Common Stock by DLJMBPII. The Cuti
Employment Agreement also provides that Mr. Cuti will be given the
opportunity to invest additional amounts in stock of the Company in the event
that DLJMBPII invests new equity in the Company or creates an intrument that
may be dilutive to Mr. Cuti's equity position relative to DLJMBPII.
Mr. Cuti's initial term of employment is for three years and, unless
terminated by notice of non-renewal by either the Company or Mr. Cuti, will
continue thereafter for successive one-year periods. Pursuant to the Cuti
Employment Agreement, if the Company terminates Mr. Cuti without "cause" (as
defined in the Cuti Employment Agreement) or by notice of non-renewal or Mr.
Cuti resigns with "good
46
<PAGE>
reason" (as defined in the Cuti Employment Agreement), Mr. Cuti will be
entitled to continued base salary and incentive bonus payments (at the rate
of two times base salary and bonus for the year prior to termination, which
can be increased to three times base salary and bonus upon the occurrence of
certain events, including a Sale of the Company) and employee benefits for a
two year period, which, under certain circumstances, including Mr. Cuti's
termination of employment prior to June 18, 2003 and within one year
following a Sale of the Company, may be extended by one year. Additionally,
the vesting of Mr. Cuti's options may accelerate upon such a termination of
employment, based on the Company's financial performance prior to such
termination and whether a Sale of the Company has occurred. The Cuti
Employment Agreement also contains certain non-compete, non-solicitation and
confidentiality provisions. See also "Certain Relationships and Related
Transactions--Cuti Loan Agreement."
The Company has also entered into agreements with Messrs. Charboneau and
Ray and certain other executives that provide for their initial base salary
as well as annual incentive bonuses based on certain EBITDA targets. Mr.
Charboneau's employment agreement provides for an annual base salary of
$220,000 and for additional increases from time to time as the Company may
determine. Mr. Ray's employment agreement provides for an annual base salary
of $150,000 and for additional increases from time to time as the Company may
determine. Each of Messrs. Charboneau and Ray are entitled to severance
payments equalling 12 months of their respective salaries if they are
terminated without "cause" (as respectively defined in the agreements).
The Company's agreement with Mr. Lacko provides for payment of an annual
base salary of $150,000 as well as for payment of annual incentive bonuses
based upon achievement of certain corporate and financial objectives. Mr.
Lacko's agreement also provides for the grant of stock options to acquire an
aggregate of 6,805 shares of Common Stock. These options vested on June 18,
1997 and have an exercise price of $8.33 per share. In addition, Mr. Lacko's
agreement provides for 12 months of salary continuation in the event Mr.
Lacko is terminated without cause.
The Company's agreement with Mr. Tennant provides for payment of an annual
base salary of $175,000 per year as well as for payment of annual incentive
bonuses based upon achievement of certain financial targets. Mr. Tennant's
agreement also provides for the grant of stock options to acquire an
aggregate of 68,101 shares of Common Stock at an exercise price of $7.34 per
share and for 12 months of salary continuation in the event Mr. Tennant is
terminated without cause.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has established the Supplemental Executive Retirement Plan
("SERP"), an unfunded retirement plan that provides a lump sum benefit equal
to the actuarial present value of a life annuity commencing at the later of
age 65 or termination of employment for any reason other than for "cause."
The SERP benefit is calculated as a percentage of a participant's Final
Average Earnings (defined as the average base salary and bonus for the five
years which produce the greatest amount multiplied by the participant's years
of services with the Company). Currently, Mr. Cuti is the only SERP
participant. Mr. Cuti's estimated SERP benefit, based on his annualized 1996
includable compensation and upon discount rates effective for termination of
employment in December 1997, is estimated to be $619,000, if termination of
employment occurs after 10 years when Mr. Cuti will be age 60 1/2, or
$1,263,000 if termination of employment occurs after 14 1/2 years, when Mr.
Cuti will be age 65. Pursuant to the Cuti Employment Agreement, the Company
is required to set aside funds in a "rabbi trust" to pay Mr. Cuti's SERP
benefit in specified circumstances, including a Sale of the Company,
termination without "cause" and resignation for "good reason" (as
respectively defined in the Cuti Employment Agreement). Furthermore, in the
event of his termination without "cause" or by reason of the Company's
non-renewal, his resignation for "good reason," or his death or disability,
Mr. Cuti's SERP benefit will be calculated on the basis of 20 years of
employment regardless of his actual number of years of employment with the
Company (the present value of which was approximately $680,000 as of
September 27, 1997).
STOCK OPTIONS
1992 STOCK OPTION PLAN. The Board of Directors adopted and the Company's
stockholders approved the 1992 Stock Option Plan (the "1992 Plan") in
September 1992. Under the 1992 Plan, the
47
<PAGE>
Board of Directors may grant to executive and other key employees of the
Company nonqualified stock options to purchase up to an aggregate of 510,757
shares of Common Stock of the Company at exercise prices and terms specified
by the Board of Directors.
At September 27, 1997, there were outstanding nonqualified stock options
issued under the 1992 Plan to purchase up to an aggregate of 281,657 shares
of Common Stock of the Company at exercise prices ranging from $0.58 to
$40.88 per share. The 1992 Plan will be frozen as to the future grants
following the Offering. All options issued under the 1992 Plan are 100%
vested.
1997 EQUITY PARTICIPATION PLAN. As of June 18, 1997, the Board of
Directors and stockholders of the Company approved the 1997 Equity
Participation Plan (the "Equity Plan"). The Equity Plan has been administered
by the Board of Directors and, following consummation of the Offering, will
be administered by the Compensation Committee. The Board of Directors is
authorized under the Equity Plan to select the individuals to whom awards
will be made (the "Participants") and determine the terms and conditions of
the awards under the Equity Plan. The Equity Plan provides that the Board of
Directors may grant or issue stock options, stock appreciation rights,
restricted stock, deferred stock, dividend equivalents, performance awards,
stock payments, and other stock related benefits, or any combination thereof,
to any eligible employee or consultant. Each such award will be set forth in
a separate agreement with the person receiving the award and will indicate
the type, terms and conditions of the award. An aggregate of 1,321,181 shares
of Common Stock of the Company have been reserved for issuance under the
Equity Plan, subject to certain adjustments reflecting changes in the
Company's capitalization. The Equity Plan provides that no Participant may
receive awards relating to more than 480,429 shares of Common Stock per year.
SECTION 162(M) LIMITATION. In general, under Section 162(m) of the Code
("Section 162(m)"), income tax deductions of publicly-held corporations may
be limited to the extent total compensation (including base salary, annual
bonus, stock option exercises and non-qualified benefits) for certain
executive officers exceeds $1 million (less the amount of any "excess
parachute payments" as defined in Section 280G of the Code) in any one year.
Under a Section 162(m) transition rule for compensation plans of corporations
which are privately held and which become publicly held in an initial public
offering, the Equity Plan will not be subject to Section 162(m) until the
"Transition Date" which is defined as the earliest of (i) the material
modification of the Equity Plan; (ii) the issuance of all Common Stock and
other compensation that has been allocated under the Equity Plan; and (iii)
the first meeting of stockholders at which directors are to be elected that
occurs after December 31, 2001. After the Transition Date, rights and awards
granted under the Equity Plan will not qualify as "performance-based
compensation" for purposes of Section 162(m) unless such rights and awards
are granted by an independent compensation committee, and such awards are
granted or vest upon pre-established objective performance goals, the
material terms of which are disclosed to and approved by the stockholders of
the Company. The transition rule will also apply to base salary and bonus
payments made pursuant to employment agreements in effect at the time of the
Offering.
The Board of Directors generally will have the power and authority to
amend the Equity Plan at any time without approval of the Company's
stockholders, subject to applicable federal securities and tax law
limitations (including rules and regulations of the New York Stock Exchange).
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DLJMB RELATIONSHIPS
In connection with the Recapitalization, DLJMBPII and certain of its
affiliates (the "DLJ Entities") purchased an aggregate of 9,383,423 shares of
Common Stock, certain members of management retained an aggregate of 284,832
shares of Common Stock and certain other stockholders retained an aggregate
of 589,577 shares of Common Stock The aggregate purchase price for the shares
acquired by the DLJ Entities was approximately $78.7 million or approximately
$8.33 per share. Each of these shareholders other than members of management
signed the Stockholders and Registration Rights Agreement. See
"--Stockholders and Registration Rights Agreement." Mr. Jaffe and Ms.
Arnaboldi, directors of the Company, are Managing Directors of DLJMB, and Mr.
Nathanson, also a director of the Company, is a Managing Director of DLJ.
On September 30, 1997, the Company entered into the Existing Credit
Agreement in which DLJ Capital Funding, Inc., an affiliate of DLJMBPII, acted
as the arranger and syndication agent. In connection with the Existing Credit
Agreement, DLJ Capital Funding, Inc. received a customary funding fee of
approximately $2.4 million.
DLJ (the Underwriter and an affiliate of DLJMBPII) acted as financial
advisor to the Company in connection with the structuring of the
Recapitalization and received customary fees for such services of
approximately $3.5 million and reimbursement for reasonable out-of-pocket
expenses and affiliates of DLJ received stand-by commitment fees of
approximately $1.2 million in connection with the change of control offers
for Zero Coupon Notes and the Senior Notes, which were required as a result
of the Recapitalization. The Company agreed to indemnify DLJ in connection
with its acting as financial advisor. In addition, DLJ will receive the
underwriting compensation set forth on the cover page of this Prospectus. DLJ
is also serving as lead underwriter in connection with the Common Stock
Offering and will receive its pro rata portion of the underwriting
compensation payable in connection therewith.
CUTI LOAN AGREEMENT
Pursuant to the terms of the Cuti Employment Agreement and a Secured Loan
Agreement and related agreements among Mr. Cuti, the Company and DLJ (the
"Loan Documents"), on November 20, 1997, Mr. Cuti borrowed $1 million from
DLJ (the "Loan"). The Loan is secured by Mr. Cuti's pledge to DLJ of his
options granted under the Equity Plan and his option to purchase 496,553
shares of Common Stock, and all Common Stock and other proceeds payable upon
exercise or other disposition thereof (the "Pledged Security"). The Loan is
subject to interest at the Federal Mid-Term Rate as in effect from time to
time and is generally payable in five equal installments commencing within 30
days after Mr. Cuti has the ability to receive cash in exchange for any of
the Pledged Security. In addition, the Company may apply any amounts to which
Mr. Cuti is entitled upon termination of employment to repayment of the Loan.
The Cuti Employment Agreement and the Loan Documents further provide that in
the event of termination of Mr. Cuti's employment by reason of termination by
the Company without "cause" or the Company's non-renewal or his resignation
with "good reason" (as such terms are defined in the Cuti Employment
Agreement), the Company will reimburse Mr. Cuti for all interest accrued as
of the date of such termination if the Company has achieved certain specified
financial targets for the year prior to termination and the year of such
termination. The Loan Documents permit DLJ to assign the Loan to certain of
its affiliates, including the Company, and the Company is obligated pursuant
to the Cuti Employment Agreement to assume the Loan from DLJ as soon as
practicable after the Company and DLJ agree that the Company may do so.
OTHER RELATIONSHIPS
The Company incurred aggregate fees owing to Credit Suisse First Boston
for financial services rendered from March 1995 through the consummation of
the Recapitalization in the aggregate amount of $3.6 million, of which $1.4
million was paid upon consummation of the Recapitalization and the remaining
$2.2 million will become payable upon consummation of the Common Stock
Offering.
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<PAGE>
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, certain of the shareholders of
the Company (the "Initial Shareholders") entered into a Stockholders and
Registration Rights Agreement, pursuant to which the Company has granted the
Initial Shareholders the right to cause the Company to register shares of
Common Stock (the "registrable securities") under the Securities Act. Upon
consummation of the Common Stock Offering, 10,257,832 outstanding shares of
Common Stock will constitute registrable securities and therefore will be
eligible for registration pursuant to the Stockholders and Registration
Rights Agreement. Under the terms of the Stockholders and Registration Rights
Agreement, at any time after the one year anniversary date of the Common
Stock Offering, (i) the holders of at least a majority of the registrable
securities held by the DLJ Entities can require the Company, subject to
certain limitations, to file a registration statement under the Securities
Act covering all or part of the registrable securities held by the DLJ
Entities and (ii) the remaining Initial Shareholders can require the Company,
subject to certain limitations, to file a registration statement covering all
or part of the registrable securities held by such Initial Shareholders
(each, a "demand registration"). The Company is obligated to pay all
registration expenses (other than underwriting discounts and commissions and
subject to certain limitations) incurred in connection with the demand
registrations. In addition, the Stockholders and Registration Rights
Agreement provides the Initial Shareholders with "piggyback" registration
rights, subject to certain limitations, whenever the Company files a
registration statement on a registration form that can be used to register
securities held by such Initial Shareholders.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership (as defined by the regulations of the Securities and
Exchange Commission) of the Company's Common Stock (which constitutes the
only class of voting capital stock of the Company) by (i) each person known
to the Company to be the beneficial owner of 5% or more of the Common Stock,
(ii) each director, (iii) each Named Executive Officer and (iv) all executive
officers and directors as a group, based on data as of January 15, 1998.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-------------------------------------------
% OF CLASS % OF CLASS
PRIOR TO AFTER
COMMON STOCK COMMON STOCK
NAME SHARES OFFERING OFFERING
- -------------------------------------------------- ----------- -------------- --------------
<S> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P. and related
investors(2)(3)................................... 9,383,423 91.5% 55.32%
Anthony Cuti....................................... 364,530 3.6% 2.1
David Jaffe(4) .................................... -- -- --
Nicole S. Arnaboldi(4)............................. -- -- --
Andrew J. Nathanson(4) ............................ -- -- --
Gary Charboneau ................................... 259,464 2.5% 1.6
Jerry M. Ray ...................................... 85,722 * *
William J. Tennant................................. 68,001 * *
Joseph S. Lacko.................................... 17,025 * *
All executive officers and directors as a group
(11 persons)(4) .................................. 815,996 8.0% 4.9%
</TABLE>
- ------------
* Less than one percent
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any shares that such person has the right to acquire
within 60 days after the date of this Prospectus. For purposes of
calculating the percentage of outstanding shares held by each person
named above, any shares that such person has the right to acquire
within 60 days after the date of this Prospectus are deemed to be
outstanding, but not for the purpose of calculating the percentage
ownership of any other person.
(2) Consists of 9,383,423 shares held directly by the following related
investors, each of whom is affiliated with DLJ: DLJ Merchant Banking
Partners II, L.P. ("DLJMBPII"), 5,910,855 shares; DLJ Merchant Banking
Partners II-A, L.P. ("DLJMBIIA"), 235,398 shares; DLJ Offshore Partners
II, C.V. ("DLJOPII"), 290,665 shares; DLJ Diversified Partners, L.P.
("DLJDP"), 345,575 shares; DLJ Diversified Partners-A, L.P. ("DLJDPA"),
128,335 shares; DLJMB Funding II, Inc. ("DLJMBFII"), 1,049,443 shares;
DLJ Millennium Partners, L.P. ("Millennium"), 95,572 shares; DLJ
Millennium-A, L.P. ("Millennium-A"), 18,640 shares; DLJ EAB Partners,
L.P. ("DLJEAB"), 26,539 shares; UK Investment Plan 1997 Partners ("UK
Investment"), 156,390 shares; and DLJ First ESC L.P. ("DLJ ESC," and
collectively, the "DLJMBPII Entities"), 1,126,011 shares. See "Certain
Relationships and Related Transactions--DLJMB Relationships." The
address of each of DLJMBPII, DLJMBIIA, DLJDP, DLJDPA, DLJMBFII,
Millennium, Millennium-A, DLJEAB, and DLJ ESC is 277 Park Avenue, New
York, New York 10172. The address of DLJOPII is c/o John B. Gorsiraweg,
14 Willemstad, Curacao, Netherlands Antilles. The address of UK
Investment is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los
Angeles, California 90067. As a general partner of each of DLJMBPII,
DLJMBIIA, DLJOPII, DLJDP, DLJDPA, DLJEAB, Millennium and Millennium-A,
DLJMB may be deemed to beneficially own indirectly all of the shares
held directly by DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, DLJEAB,
Millennium and Millennium-A, and as the parent of each of DLJMB,
DLJMBFII and DLJ LBO Plans Management Corporation (the general partner
of DLJ ESC and UK Investment), Donaldson, Lufkin & Jenrette Inc., the
parent of DLJ ("DLJ Inc.") may be deemed to beneficially own indirectly
all of the shares held by DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA,
DLJEAB, Millennium, Millennium-A, DLJMBFII, DLJ ESC and UK Investment.
The address of DLJ Merchant Banking, Inc. is 277 Park Avenue, New York,
New York 10172.
(3) In the event that the underwriters' overallotment option in the Common
Stock Offering is exercised, DLJMBPII Entities will be selling
stockholders in the Common Stock Offering. In the event that the
DLJMBPII Entities sell all of the shares eligible to be sold by them
pursuant the overallotment option, such entities will own approximately
49.7% of the Common Stock outstanding after the Offering.
(4) Mr. Nathanson is a Managing Director of DLJ and as a result may be
deemed to beneficially own the shares of Common Stock owned by the
DLJMBPII entities. Mr. Nathanson expressly disclaims ownership of such
shares of Common Stock. Nicole Arnaboldi and David Jaffe are managing
directors of DLJMB and DLJ Diversified Partners, Inc. ("DLJDPI").
DLJMB is the managing general partner of DLJMBPII, DLJMBIIA, DLJOPII,
Millennium and Millennium-A. DLJDPI is the managing general partner of
DLJDP and DLJDPA. As a result, Ms. Arnaboldi and Mr. Jaffe may be
deemed to beneficially own the shares of Common Stock held
by each of DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, Millennium,
Millennium-A. Ms. Arnaboldi and Mr. Jaffe expressly disclaim beneficial
ownership of such shares of Common Stock.
51
<PAGE>
DESCRIPTION OF NEW SENIOR SUBORDINATED NOTES
GENERAL
The New Senior Subordinated Notes will be issued pursuant to an indenture
(the "New Senior Subordinated Note Indenture") among the Company, the
Subsidiary Guarantors and State Street Bank and Trust Company, as trustee
(the "Trustee"). The terms of the New Senior Subordinated Notes include those
stated in the New Senior Subordinated Note Indenture and those made part of
the New Senior Subordinated Note Indenture by reference to the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The New Senior
Subordinated Notes are subject to all such terms, and prospective investors
are referred to the New Senior Subordinated Note Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the New Senior Subordinated Note Indenture does not purport to
be complete. A copy of the New Senior Subordinated Note Indenture has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The definitions of certain terms used in this Description of
New Senior Subordinated Notes are set forth below under "--Certain
Definitions."
The New Senior Subordinated Notes will be general unsecured obligations of
the Company and will be subordinated in right of payment to all current and
future Senior Debt. In addition, the New Senior Subordinated Notes will be
effectively subordinated to indebtedness of the Company's Subsidiaries. See
"Risk Factors--Holding Company Structure." At September 27, 1997, on a pro
forma basis giving effect to the Offering, the Common Stock Offering and the
consummation of the Refinancing Plan, the Company would have had an aggregate
of $130.0 million of Senior Debt outstanding and the Company and its
Subsidiaries would have had approximately $262.6 million of aggregate
outstanding liabilities, including trade payables and the New Senior
Subordinated Notes. The New Senior Subordinated Note Indenture will permit
the incurrence of additional Senior Debt in the future, subject to certain
conditions.
PRINCIPAL, MATURITY AND INTEREST
The New Senior Subordinated Notes will be limited in aggregate principal
amount to $80.0 million, and will mature on , 2008. Interest on the
New Senior Subordinated Notes will accrue at the rate of % per annum and
will be payable semi-annually in arrears on and (each,
an "Interest Payment Date"), commencing on , 1998, to holders of
record on the immediately preceding and , respectively.
Interest on the New Senior Subordinated Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months. Principal of, and interest
and premium (if any) on, the New Senior Subordinated Notes will be payable at
the office or agency of the Company maintained for such purpose or, at the
option of the Company, payment may be made by check mailed to holders of the
New Senior Subordinated Notes at their respective addresses set forth in the
register of holders; provided, however, that all payments with respect to New
Senior Subordinated Notes the holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the holders thereof.
Until otherwise designated by the Company, the Company's office or agency
will be the office of the Trustee maintained for such purpose. The New Senior
Subordinated Notes will be issued in denominations of $1,000 and integral
multiples thereof.
SUBORDINATION
The payment of principal of, and premium (if any) and interest on the New
Senior Subordinated Notes will be subordinated in right of payment, as set
forth in the New Senior Subordinated Note Indenture, to the prior payment in
full of all Senior Debt, whether outstanding on the date of the New Senior
Subordinated Note Indenture or thereafter incurred. For purposes hereof,
"payment in full," as used with respect to Senior Debt, means payment of
cash.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or
52
<PAGE>
its property, an assignment for the benefit of creditors or any marshalling
of the Company's assets and liabilities, the holders of Senior Debt will be
entitled to receive payment in full of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Debt) before the holders of
New Senior Subordinated Notes will be entitled to receive any payment or
distribution of cash, securities or other property with respect to
Obligations due in respect of the New Senior Subordinated Notes and, until
all Obligations with respect to Senior Debt are paid in full, any payment,
distribution, or other transfer of assets of the Company or any Subsidiary
Guarantor of any kind or character, whether direct or indirect, by set-off or
otherwise, and whether in cash, securities or property, to which the holders
of New Senior Subordinated Notes would be entitled shall be made to the
holders of Senior Debt (except that holders of New Senior Subordinated Notes
may receive Permitted Junior Securities and payments made from the trust
described under "--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the New
Senior Subordinated Notes (except in Permitted Junior Securities or from the
trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of or premium if any, or interest on,
any Designated Senior Debt occurs and is continuing beyond any applicable
period of grace, if any, or (ii) any other default occurs and is continuing
with respect to any Designated Senior Debt that permits holders of the
Designated Senior Debt as to which such default relates to accelerate its
maturity and the Trustee receives a written notice of such default (a
"Payment Blockage Notice") from the Company or the holders of such Designated
Senior Debt (or their representative). Payments on the New Senior
Subordinated Notes may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and (b) in
case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment
blockage may be commenced unless and until 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been cured
or waived for a period of not less than 90 days.
The New Senior Subordinated Note Indenture will further require that the
Company promptly notify holders of Senior Debt (or their representatives) if
payment of the New Senior Subordinated Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, holders of New Senior Subordinated Notes may
recover less ratably than creditors of the Company who are holders of Senior
Debt. As of September 27, 1997, after giving pro forma effect to the
Offering, the Common Stock Offering and consummation of the Refinancing Plan,
the Company would have had approximately $130.0 million of Senior Debt
outstanding. The New Senior Subordinated Note Indenture will limit, subject
to certain conditions, the amount of additional Indebtedness, including
Senior Debt, that the Company and its Subsidiaries can incur. See "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the New Senior Subordinated Notes
will be jointly and severally guaranteed (the "Subsidiary Guarantees") on a
senior subordinated basis by all of the Company's present and future
Subsidiaries (the "Subsidiary Guarantors"). The Subsidiary Guarantee of each
Subsidiary Guarantor will be subordinated to the prior payment in full of all
Senior Debt and any amounts for which such Subsidiary Guarantor will be
liable under guarantees issued from time to time with respect to Senior Debt.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
will be limited to the maximum amount that may be paid thereunder without
resulting in such Subsidiary Guarantee being deemed to constitute a
fraudulent conveyance or a fraudulent transfer under applicable law. See
"Risk Factors--Enforceability of Subsidiary Guarantees."
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<PAGE>
The New Senior Subordinated Note Indenture will provide that no Subsidiary
Guarantor may consolidate with or merge with or into (whether or not such
Subsidiary Guarantor is the surviving Person), or sell all or substantially
all of its assets to, another corporation, Person or entity, whether or not
affiliated with such Subsidiary Guarantor unless (a) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Subsidiary Guarantor)
assumes all of the obligations of such Subsidiary Guarantor, pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Subsidiary Guarantee of such Subsidiary Guarantor and the
New Senior Subordinated Note Indenture; (b) immediately after giving effect
to such transaction, no Default or Event of Default exists; and (c) the
Company would be permitted, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." Notwithstanding the foregoing
provisions of this paragraph, the New Senior Subordinated Note Indenture will
not prohibit the merger of two of the Subsidiary Guarantors or the merger of
a Subsidiary Guarantor into the Company.
The New Senior Subordinated Note Indenture will provide that, in the event
of a sale or other disposition of all of the equity interests of any
Subsidiary Guarantor (including by way of merger or consolidation) or all or
substantially all of the assets of such Subsidiary Guarantor, then such
Subsidiary Guarantor (in the event of a sale or other disposition of all of
the capital stock of such Subsidiary Guarantor) or the corporation acquiring
the property (in the event of a sale or other disposition of all or
substantially all of the assets of such Subsidiary Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied
in accordance with the applicable provisions of the New Senior Subordinated
Note Indenture. See "--Repurchase at Option of Holders--Asset Sales."
OPTIONAL REDEMPTION
The New Senior Subordinated Notes will not be redeemable at the Company's
option prior to , 2003. Thereafter, the New Senior Subordinated
Notes will be subject to redemption at any time at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days prior
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, thereon to
the applicable redemption date, if redeemed during the 12-month period
beginning on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------- --------------
<S> <C>
2003 ................... %
2004 ................... %
2005 ................... %
2006 and thereafter ... 100.000%
</TABLE>
Notwithstanding the foregoing, on or prior to , 2001, the Company
may redeem up to 35% in aggregate principal amount of New Senior Subordinated
Notes at a redemption price of % of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon to the redemption date, with the
net proceeds of one or more Qualified Offerings of the Company; provided that
at least 65% in aggregate principal amount of the New Senior Subordinated
Notes originally issued under the New Senior Subordinated Note Indenture
remain outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption shall occur within 90 days of the
date of the closing of such Qualified Offering.
SELECTION AND NOTICE
If less than all of the New Senior Subordinated Notes are to be redeemed
at any time, selection of New Senior Subordinated Notes for redemption will
be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the New Senior Subordinated
54
<PAGE>
Notes are listed, or, if the New Senior Subordinated Notes are not so listed,
on a pro rata basis, by lot or by such method as the Trustee shall deem fair
and appropriate; provided, however, that no New Senior Subordinated Note
shall be redeemed in a principal amount that is less than $1,000. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each holder of New Senior Subordinated
Notes to be redeemed at its registered address. Notices of redemption may not
be conditional. If any New Senior Subordinated Note is to be redeemed in part
only, the notice of redemption that relates to such New Senior Subordinated
Note shall state the portion of the principal amount thereof to be redeemed
and a new note in principal amount equal to the unredeemed portion of the
original New Senior Subordinated Note shall be issued in the name of the
holder thereof upon cancellation of the original New Senior Subordinated
Note. New Senior Subordinated Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases
to accrue on New Senior Subordinated Notes or portions of them called for
redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders,"
the Company is not required to make any mandatory redemption of, or sinking
fund payments with respect to, the New Senior Subordinated Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, the Company will be required
to make an offer (a "Change of Control Offer") to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of each holder's New Senior
Subordinated Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, thereon
to the date of repurchase (the "Change of Control Payment"). Within 15 days
following a Change of Control, the Company will (or will cause the Trustee
to) mail a notice to each holder of New Senior Subordinated Notes describing
the transaction that constitutes the Change of Control and offering to
repurchase New Senior Subordinated Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the New Senior Subordinated Note
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of New Senior Subordinated Notes
as a result of a Change of Control.
On or before the Change of Control Payment Date, the Company will, to the
extent lawful, (a) accept for payment all New Senior Subordinated Notes or
portions thereof properly tendered pursuant to the Change of Control Offer,
(b) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all New Senior Subordinated Notes or portions thereof
so tendered and (c) deliver or cause to be delivered to the Trustee the New
Senior Subordinated Notes so accepted together with an officer's certificate
stating the aggregate principal amount of New Senior Subordinated Notes or
portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each holder of New Senior Subordinated Notes so tendered the
Change of Control Payment for such New Senior Subordinated Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each holder a new note equal in principal amount to any
unpurchased portion of the New Senior Subordinated Notes surrendered, if any;
provided, however, that each such new note will be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the New
Senior Subordinated Note Indenture does not contain provisions that permit
the holders of the New Senior Subordinated Notes to require that the Company
repurchase or redeem the New Senior Subordinated Notes in the event of a
takeover, recapitalization or similar transaction. In addition, the Company
could enter into certain
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transactions, including acquisitions, refinancings or other
recapitalizations, that could affect the Company's capital structure or the
value of the New Senior Subordinated Notes, but that would not constitute a
Change of Control. The New Credit Agreement will prohibit the Company from
purchasing the New Senior Subordinated Notes (except in certain limited
amounts) and will also provide that certain change of control events with
respect to the Company will constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which the
Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing the New Senior Subordinated Notes, the Company could seek the
consent of its lenders to the purchase of the New Senior Subordinated Notes
or could attempt to refinance the borrowings that contain such prohibition.
If the Company does not obtain such consent or repay such borrowings, the
Company will remain prohibited from purchasing the New Senior Subordinated
Notes by the relevant Senior Debt. In such case, the Company's failure to
purchase the tendered New Senior Subordinated Notes would constitute an event
of default under the New Senior Subordinated Note Indenture which would, in
turn, constitute a default under the New Credit Agreement and could
constitute a default under other Senior Debt. In such circumstances, the
subordination provisions in the New Senior Subordinated Note Indenture would
likely restrict payments to the holders of the New Senior Subordinated Notes.
Furthermore, no assurance can be given that the Company will have sufficient
resources to satisfy its repurchase obligation with respect to the New Senior
Subordinated Notes following a Change of Control. In addition, the Company's
ability to repurchase New Senior Subordinated Notes following a Change of
Control may also be limited by the Company's then existing financial
resources. Moreover, the definition of Change of Control only provides
protection to the holders of New Senior Subordinated Notes in the event of
certain changes in the equity ownership and/or the composition of the board
of directors of the Company and, as a result, the Company may, under certain
circumstances, incur substantial additional indebtedness or undergo
restructuring or other corporate changes without triggering a Change of
Control Offer.
The Company will not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the New Senior Subordinated Note Indenture
applicable to a Change of Control Offer made by the Company and purchases all
New Senior Subordinated Notes validly tendered and not withdrawn under such
Change of Control Offer.
A "Change of Control" will be deemed to have occurred upon the occurrence
of any of the following: (a) the sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the assets of
the Company and its Subsidiaries, taken as a whole, to any "person" or
"group" (as such terms are used in Section 13(d) of the Exchange Act) other
than the Principals, (b) the adoption of a plan relating to the liquidation
or dissolution of the Company, (c) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of
which is that any "person" or "group" (as such terms are used in Section
13(d) of the Exchange Act) other than the Principals becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the
Exchange Act), directly or indirectly through one or more intermediaries, of
more than 50% of the voting power of the outstanding voting stock of the
Company, or (d) the first day on which more than a majority of the members of
the Board of Directors of the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of the Company and its Subsidiaries taken as
a whole. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a holder of New
Senior Subordinated Notes to require the Company to repurchase such New
Senior Subordinated Notes as a result of a sale, lease transfer, conveyance
or other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (a) was a member of the Board of
Directors of the Company on the date
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of original issuance of the New Senior Subordinated Notes or (b) was
nominated for election to the Board of Directors of the Company with the
approval of, or whose election to the Board of Directors of the Company was
ratified by, at least a majority of the Continuing Directors who were members
of the Board of Directors of the Company at the time of such nomination or
election.
Asset Sales
The New Senior Subordinated Note Indenture will provide that the Company
will not, and will not permit any of its Subsidiaries to, consummate an Asset
Sale unless (a) the Company or such Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by a resolution of the Board of Directors of the
Company set forth in an officer's certificate delivered to the Trustee) of
the assets or Equity Interests issued or sold or otherwise disposed of and
(b) at least 75% of the consideration therefor received by the Company or
such Subsidiary is in the form of (I) Cash Equivalents or (II) property or
assets that are used or useful in a Permitted Business, or the Capital Stock
of any Person engaged in a Permitted Business if, as a result of the
acquisition by the Company or any Subsidiary thereof, such Person becomes a
Subsidiary Guarantor; provided, however, that the amount of (i) any
liabilities (as shown on the Company's or such Subsidiary's most recent
balance sheet) of the Company or such Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the New
Senior Subordinated Notes or any Subsidiary Guarantees) that are assumed by
the transferee of any such assets pursuant to a customary novation agreement
that releases the Company or such Subsidiary from further liability and (ii)
any securities, notes or other obligations received by the Company or such
Subsidiary from such transferee that are immediately converted by the Company
or such Subsidiary into cash (to the extent of the cash received) shall be
deemed to be cash for purposes of this provision; provided further, that the
75% limitation referred to in clause (b) will not apply to any Asset Sale in
which the Cash Equivalent portion of the consideration received therefrom,
determined in accordance with the foregoing proviso, is equal to or greater
than what the after-tax proceeds would have been had such Asset Sale complied
with the aforementioned 75% limitation.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or any such Subsidiary shall apply such Net Proceeds at its
option (or to the extent the Company is required to apply such Net Proceeds
pursuant to the terms of the New Credit Agreement), to (a) repay Senior Debt
(and to correspondingly reduce commitments with respect thereto in the case
of revolving borrowings) or (b) repay pari passu Indebtedness of the Company
or any Subsidiary Guarantor (and to correspondingly reduce commitments with
respect thereto), provided that if the Company or any Subsidiary Guarantor
shall so repay pari passu Indebtedness, it will equally and ratably reduce
Indebtedness under the New Senior Subordinated Notes if the New Senior
Subordinated Notes are then redeemable, or if the New Senior Subordinated
Notes may not then be redeemed, the Company shall make an offer (in
accordance with the procedures set forth below for an Asset Sale Offer) to
all holders of New Senior Subordinated Notes to purchase at a price equal to
100% of the principal amount thereof the amount of New Senior Subordinated
Notes that would otherwise be redeemed or (c) an investment in property, the
making of a capital expenditure or the acquisition of other long-term assets,
in each case, of or from an entity that is engaged in a Permitted Business,
and in accordance with the terms of the New Senior Subordinated Note
Indenture. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce Designated Senior Debt or otherwise invest
such Net Proceeds in any manner that is not prohibited by the New Senior
Subordinated Note Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $10.0 million, the Company will be required to make
an offer to all holders of New Senior Subordinated Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of New Senior Subordinated
Notes that may be purchased out of the Excess Proceeds at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest, if any, thereon to the date of purchase, in accordance
with the procedures set forth in the New Senior Subordinated Note Indenture.
To the extent that the aggregate principal amount of New Senior Subordinated
Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of New Senior
Subordinated Notes surrendered by holders
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thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
New Senior Subordinated Notes to be purchased as set forth under "--Selection
and Notice." Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The New Senior Subordinated Note Indenture will provide that the Company
will not, and will not permit any of its Subsidiaries to, directly or
indirectly, (a) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Subsidiaries' Equity
Interests (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of the Company or dividends or distributions
payable to the Company or any Wholly Owned Subsidiary of the Company); (b)
purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company (other than any such Equity Interests owned by the
Company or any Wholly Owned Subsidiary of the Company); (c) make any payment
on or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value, any Indebtedness that is subordinated to the New Senior
Subordinated Notes, except a payment of interest or principal at Stated
Maturity; or (d) make any Restricted Investment (all such payments and other
actions set forth in clauses (a) through (d) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after
giving effect to such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(ii) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(iii) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the New Senior Subordinated Note Indenture, is less than the
sum of (A) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) after the date of the New Senior
Subordinated Note Indenture to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit, less 100% of such deficit); plus (B)
100% of the aggregate net cash proceeds received by the Company from the
issue or sale since the date of the New Senior Subordinated Note Indenture
of Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company to the extent that
they have been converted into such Equity Interests (other than any such
Equity Interests, Disqualified Stock or convertible debt securities sold
to a Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock).
The foregoing provisions will not prohibit (a) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the New
Senior Subordinated Note Indenture; (b) the redemption, repurchase,
retirement, defeasance or other acquisition of any pari passu or subordinated
Indebtedness or Equity Interests of the Company in exchange for, or out of
the net cash proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of, other Equity Interests of the Company (other
than any Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (iii) (B) of
the preceding paragraph; (c) the defeasance, redemption, repurchase,
retirement or other acquisition of subordinated Indebtedness with the net
cash proceeds from an incurrence of, or in exchange for, Permitted
Refinancing Indebtedness; (d) the repurchase, redemption or other acquisition
or retirement for value of any Equity Interests of the Company or any
Subsidiary of the Company held by any member
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of the Company's management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the New
Senior Subordinated Note Indenture; provided, however, that (i) the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $2.0 million in any twelve-month period plus the
aggregate cash proceeds received by the Company during such twelve-month
period from any reissuance of Equity Interests by the Company to members of
management of the Company and its Subsidiaries and (ii) no Default or Event
of Default shall have occurred and be continuing immediately after such
transaction; (e) payments and transactions in connection with the Refinancing
Plan, the New Credit Agreement (including commitment, syndication and
arrangement fees payable thereunder), the Offering and the Common Stock
Offering (including underwriting discounts and commissions in connection
therewith) and the application of the proceeds thereof, and the payment of
the fees and expenses with respect thereto and (f) the declaration and
payment of dividends to holders of any class or series of preferred stock
(other than Disqualified Stock) issued after the date of the New Senior
Subordinated Note Indenture; provided, however, that at the time of such
issuance, after giving effect to such issuance on a pro forma basis, the
Fixed Charge Coverage Ratio for the Company for the most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date of such issuance would have been no less than
2.0 to 1.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors of the Company whose resolution with respect thereto shall
be delivered to the Trustee. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an officer's certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant described in this
section were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The New Senior Subordinated Note Indenture will provide that (i) the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Indebtedness),
(ii) the Company will not permit any of its Subsidiaries to issue any shares
of Disqualified Stock and (iii) the Company will not permit any of its
Subsidiaries that are not Subsidiary Guarantors to issue any shares of
preferred stock; provided, however, that the Company and any Subsidiary
Guarantor may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such shares of Disqualified Stock are
issued would have been at least 2.0 to 1 determined on a consolidated pro
forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
Notwithstanding the foregoing, the Company and, to the extent set forth
below, its Subsidiaries may incur the following:
(a) Indebtedness of the Company under the New Senior Subordinated Notes
and the New Senior Subordinated Note Indenture and Indebtedness of
Subsidiaries under the Subsidiary Guarantees;
(b) Indebtedness under the New Credit Agreement in an aggregate principal
amount not to exceed $160.0 million outstanding at any time;
(c) Existing Indebtedness;
(d) Capital Expenditure Indebtedness, Capitalized Lease Obligations and
purchase money Indebtedness of the Company and its Subsidiaries in an
aggregate principal amount not to exceed $20.0 million at any time
outstanding;
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(e) the incurrence by the Company or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the New Senior Subordinated Note Indenture to be
outstanding;
(f) Indebtedness of the Company representing guarantees of Indebtedness
incurred by one of its Subsidiaries pursuant to, and in compliance with,
another provision of this covenant;
(g) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries; provided, however, that (i) if the Company is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations with
respect to the New Senior Subordinated Notes and (ii) (A) any subsequent
issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Wholly
Owned Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Subsidiary, as the case may be;
(h) any Permitted Refinancing Indebtedness representing a replacement,
renewal, refinancing or extension of Indebtedness permitted under the
first paragraph and clause (c) of this covenant;
(i) Indebtedness arising from agreements of the Company or any
Subsidiary Guarantor providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or Subsidiary for the purpose of
financing such acquisition; provided however, that (1) such Indebtedness
is not reflected on the balance sheet of the Company or any Subsidiary
Guarantor (contingent obligations referred to in a footnote or footnotes
to financial statements and not otherwise reflected on the balance sheet
will not be deemed to be reflected on such balance sheet for purposes of
this clause (1)) and (2) the maximum assumable liability in respect of
such Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any subsequent
changes in value) actually received by the Company and/or the Subsidiary
Guarantors in connection with such disposition; and
(j) additional Indebtedness of the Company and its Subsidiaries in an
aggregate principal amount not to exceed $30.0 million at any time
outstanding.
Liens
The New Senior Subordinated Note Indenture will provide that the Company
will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien that secures
obligations under any pari passu Indebtedness or subordinated Indebtedness on
any asset or property now owned or hereafter acquired by the Company or any
of its Subsidiaries, or any income or profits therefrom or assign or convey
any right to receive income therefrom, unless the New Senior Subordinated
Notes or the Subsidiary Guarantees, as applicable, are equally and ratably
secured with the obligations so secured until such time as such obligations
are not longer secured by a Lien; provided, that in any case involving a Lien
securing subordinated Indebtedness, such Lien is subordinated to the Lien
securing the New Senior Subordinated Notes or the Subsidiary Guarantees, as
applicable, to the same extent that such subordinated Indebtedness is
subordinated to the New Senior Subordinated Notes or the Subsidiary
Guarantees, as applicable.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The New Senior Subordinated Note Indenture will provide that the Company
will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Subsidiary to (a)(i) pay
dividends
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or make any other distributions to the Company or any of its Subsidiaries on
its Capital Stock or with respect to any other interest or participation in,
or measured by, its profits, or (ii) pay any Indebtedness owed to the Company
or any of its Subsidiaries, (b) make loans or advances to the Company or any
of its Subsidiaries or (c) transfer any of its properties or assets to the
Company or any of its Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (i) Existing Indebtedness as in
effect on the date of the New Senior Subordinated Note Indenture, (ii) the
New Credit Agreement as in effect on the date of the New Senior Subordinated
Note Indenture and any refinancings, amendments, restatements, renewals or
replacements thereof, provided, however, that the agreements governing such
refinancings, amendments, restatements, renewals or replacements contain
restrictions are not more restrictive in the aggregate than those contained
in the New Credit Agreement as in effect on the date of the New Senior
Subordinated Note Indenture, (iii) the New Senior Subordinated Note
Indenture, the New Senior Subordinated Notes and the Subsidiary Guarantees,
(iv) applicable law or any applicable rule, regulation or order, (v) any
agreement or other instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness was incurred
in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the New Senior Subordinated Note
Indenture to be incurred, (vi) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (vii) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (c) above on the property so acquired, (viii)
customary provisions in bona fide contracts for the sale of property or
assets, or (ix) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are not more restrictive in the aggregate than those contained
in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation or Sale of Assets
The New Senior Subordinated Note Indenture will provide that the Company
may not consolidate or merge with or into (whether or not the Company is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or
more related transactions, to another corporation, Person or entity unless
(a) the Company is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia, (b) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the New Senior Subordinated Notes and the New Senior Subordinated Note
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, (c) immediately after such transaction no
Default or Event of Default exists, and (d) except in the case of a merger of
the Company with or into a Wholly Owned Subsidiary of the Company, the
Company or the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made will,
at the time of such transaction and after giving pro forma effect thereto as
if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The New Senior Subordinated Note Indenture will provide that the Company
will not, and will not permit any of its Subsidiaries to, make any payment
to, or sell, lease, transfer or otherwise dispose of any of its properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any
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transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate of the Company (each of the
foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction
is on terms that are no less favorable to the Company or the relevant
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Subsidiary with an unrelated Person, and
(b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $1.0 million, either (A) a resolution of the Board
of Directors of the Company set forth in an officer's certificate certifying
that such Affiliate Transaction complies with clause (a) above and that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors of the Company and (ii) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the
fairness to the Company of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment banking firm of
national standing; provided, however, that the following shall be deemed not
to be Affiliate Transactions: (i) customary directors' fees, indemnification
or similar arrangements or any employment agreement or other compensation
plan or arrangement entered into by the Company or any of its Subsidiaries in
the ordinary course of business (including ordinary course loans to employees
not to exceed (A) $3.0 million outstanding in the aggregate at any time and
(B) $1.5 million to any one employee) consistent with the past practice of
the Company or such Subsidiary; (ii) transactions between or among the
Company and/or its Wholly Owned Subsidiaries; (iii) transactions permitted by
the provisions of the New Senior Subordinated Note Indenture described above
under the caption "--Restricted Payments;" (iv) payments of customary fees by
the Company or any of its Subsidiaries to DLJMB and its Affiliates made for
any financial advisory, financing, underwriting or placement services or in
respect of other investment banking activities, including, without
limitation, in connection with acquisitions or divestitures which are
approved by a majority of the Board of Directors of the Company in good
faith; (v) any agreement as in effect on the date of the New Senior
Subordinated Note Indenture or any amendment thereto (so long as such
amendment is not disadvantageous to the holders of the New Senior
Subordinated Notes in any material respect) or any transaction contemplated
thereby; (vi) the existence of, or the performance by the Company of any of
its Subsidiaries of its obligations under the terms of, any stockholders
agreement (including any registration rights agreement or purchase agreement
related thereto) to which it is a party as of the date of the New Senior
Subordinated Note Indenture and any similar agreements which it may enter
into thereafter so long as such similar agreements contain only terms that
are customary of stockholders and registration rights agreements; and (vii)
payments and transactions in connection with the Refinancing Plan, the New
Credit Agreement (including commitment, syndication and arrangement fees
payable thereunder), the Offering and the Common Stock Offering (including
underwriting discounts and commissions in connection therewith) and the
application of the proceeds thereof, and the payment of the fees and expenses
with respect thereto.
Sale and Leaseback Transactions
The New Senior Subordinated Note Indenture will provide that the Company
will not, and will not permit any of its Subsidiaries to, enter into any sale
and leaseback transaction; provided, however, that the Company or any
Subsidiary may enter into a sale and leaseback transaction if (a) the Company
could have (i) incurred Indebtedness in an amount equal to the Attributable
Indebtedness relating to such sale and leaseback transaction pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described under the heading "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and (ii) incurred a Lien to secure such
Indebtedness pursuant to the covenant described above under the heading
"--Liens," (b) the gross cash proceeds of such sale and leaseback transaction
are at least equal to the fair market value (as determined in good faith by
the Board of Directors of the Company and set forth in an officer's
certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (c) the transfer of assets in such
sale and leaseback transaction is permitted by, and the Company applies the
proceeds of such transaction in compliance with, the covenant described under
the heading "--Repurchase at the Option of Holders--Asset Sales."
Issuances and Sales of Capital Stock of Wholly-Owned Subsidiaries
The New Senior Subordinated Note Indenture will provide that the Company
(a) will not permit any Wholly Owned Subsidiary of the Company to issue any
of its Equity Interests to any Person other than
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to the Company or a Wholly Owned Subsidiary of the Company, and (b) will not,
and will not permit any Wholly Owned Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly
Owned Subsidiary of the Company to any Person (other than the Company or any
Wholly Owned Subsidiary of the Company) unless (i) such transfer, conveyance,
sale, lease or other disposition is of all of the Capital Stock of such
Wholly Owned Subsidiary and (ii) the Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
the covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales"; provided that this clause (b) shall not apply to any
pledge of Capital Stock of any Wholly Owned Subsidiary of the Company
securing Indebtedness under the New Credit Agreement.
Additional Subsidiary Guarantees
The New Senior Subordinated Note Indenture will provide that if the
Company or any of its Subsidiaries shall, after the date of the New Senior
Subordinated Note Indenture, acquire or create another Subsidiary, then such
newly acquired, created or designated Subsidiary shall execute a Subsidiary
Guarantee and deliver an opinion of counsel in accordance with the terms of
the New Senior Subordinated Note Indenture.
No Senior Subordinated Debt
The New Senior Subordinated Note Indenture will provide that the Company
will not incur, create, issue, assume, guarantee or otherwise become liable
for any Indebtedness that is subordinate or junior in right of payment to any
Senior Debt and senior in any respect in right of payment to the New Senior
Subordinated Notes.
Reports
The New Senior Subordinated Note Indenture will provide that, whether or
not the Company is required to do so by the rules and regulations of the
Commission, the Company will file with the Commission (unless the Commission
will not accept such a filing) and, within 15 days of filing, or attempting
to file, the same with the Commission, furnish to the holders of the New
Senior Subordinated Notes (a) all quarterly and annual financial and other
information with respect to the Company and its Subsidiaries that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report
thereon by the Company's certified independent accountants, and (b) all
current reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports.
EVENTS OF DEFAULT AND REMEDIES
The New Senior Subordinated Note Indenture will provide that each of the
following constitutes an Event of Default: (a) default for 30 days in the
payment when due of interest on the New Senior Subordinated Notes (whether or
not prohibited by the subordination provisions of the New Senior Subordinated
Note Indenture); (b) default in payment when due of the principal of or
premium (if any) on the New Senior Subordinated Notes (whether or not
prohibited by the subordination provisions of the New Senior Subordinated
Note Indenture); (c) failure by the Company to comply with the provisions
described under the captions "--Repurchase at the Option of Holders--Change
of Control," "--Repurchase at the Option of Holders--Asset Sales," "--Certain
Covenants--Restricted Payments," "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock" or "--Certain
Covenants--Merger, Consolidation or Sale of Assets;" (d) failure by the
Company for 60 days after notice to comply with any of its other agreements
in the New Senior Subordinated Note Indenture or the New Senior Subordinated
Notes; (e) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its
Subsidiaries), whether such Indebtedness or guarantee now exists or is
created after the date of the
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New Senior Subordinated Note Indenture, which default (i) is caused by a
failure to pay principal of or premium (if any) or interest on such
Indebtedness at its final stated maturity prior to the expiration of any
grace period provided in such Indebtedness (a "Payment Default") or (ii)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more; (f) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of
60 days; (g) failure by any Subsidiary Guarantor to perform any covenant set
forth in its Subsidiary Guarantee, or the repudiation by any Subsidiary
Guarantor of its obligations under its Subsidiary Guarantee or the
unenforceability of any Subsidiary Guarantee against a Subsidiary Guarantor
for any reason, unless, in each such case, such Subsidiary Guarantor and its
Subsidiaries have no Indebtedness outstanding at such time or at any time
thereafter; and (h) certain events of bankruptcy or insolvency with respect
to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding New
Senior Subordinated Notes may declare all the New Senior Subordinated Notes
to be due and payable immediately; provided, that so long as any Indebtedness
permitted to be incurred pursuant to the New Credit Agreement shall be
outstanding, such acceleration shall not be effective until the earlier of
(a) any acceleration of any such Indebtedness under the New Credit Agreement
and (b) five business days after receipt by the Company of written notice of
such acceleration. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency with respect
to the Company, any Significant Subsidiary or any group of Subsidiaries that,
taken together, would constitute a Significant Subsidiary, all outstanding
New Senior Subordinated Notes will become due and payable without further
action or notice. Holders of the New Senior Subordinated Notes may not
enforce the New Senior Subordinated Note Indenture or the New Senior
Subordinated Notes except as provided in the New Senior Subordinated Note
Indenture. In the event of a declaration of acceleration of the New Senior
Subordinated Notes because an Event of Default has occurred and is continuing
as a result of the acceleration of any Indebtedness described in clause (e)
of the preceding paragraph, the declaration of acceleration of the New Senior
Subordinated Notes shall be automatically annulled if the holders of any
Indebtedness described in clause (e) have rescinded the declaration of
acceleration in respect of such Indebtedness within 30 days of the date of
such declaration and if (i) the annulment of the acceleration of the New
Senior Subordinated Notes would not conflict with any judgment or decree of a
court of competent jurisdiction, and (ii) all existing Events of Default,
except nonpayment of principal or interest on the New Senior Subordinated
Notes that became due solely because of the acceleration of the New Senior
Subordinated Notes, have been cured or waived.
Subject to certain limitations, holders of a majority in principal amount
of the then outstanding New Senior Subordinated Notes may direct the Trustee
in its exercise of any trust or power. The Trustee may withhold from holders
of the New Senior Subordinated Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the
payment of principal or interest) if it determines that withholding notice is
in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the New Senior
Subordinated Notes pursuant to the optional redemption provisions of the New
Senior Subordinated Note Indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the New Senior Subordinated Notes. If an Event of Default
occurs prior to , 2003 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding the prohibition on redemption of the New Senior Subordinated Notes
prior to such date, then the premium specified in the New Senior Subordinated
Note Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the New Senior Subordinated Notes.
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The holders of a majority in aggregate principal amount of the New Senior
Subordinated Notes then outstanding by notice to the Trustee may on behalf of
the holders of all of the New Senior Subordinated Notes waive any existing
Default or Event of Default and its consequences under the New Senior
Subordinated Note Indenture except a continuing Default or Event of Default
in the payment of the principal of or interest on the New Senior Subordinated
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the New Senior Subordinated Note Indenture, and the
Company is required upon becoming aware of any Default or Event of Default to
deliver to the Trustee a statement specifying such Default or Event of
Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor, as such, shall have any liability for any
obligations of the Company or any Subsidiary Guarantor under the New Senior
Subordinated Notes, the Subsidiary Guarantees or the New Senior Subordinated
Note Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder of New Senior Subordinated
Notes by accepting a New Senior Subordinated Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the New Senior Subordinated Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding New Senior
Subordinated Notes and have each Subsidiary Guarantor's obligations
discharged with respect to its Subsidiary Guarantee ("Legal Defeasance")
except for (a) the rights of holders of outstanding New Senior Subordinated
Notes to receive payments in respect of the principal of and premium (if any)
and interest on such New Senior Subordinated Notes when such payments are due
from the trust referred to below, (b) the Company's obligations with respect
to the New Senior Subordinated Notes concerning issuing temporary New Senior
Subordinated Notes, registration of New Senior Subordinated Notes, mutilated,
destroyed, lost or stolen New Senior Subordinated Notes and the maintenance
of an office or agency for payment and money for security payments held in
trust, (c) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith and (d) the Legal
Defeasance provisions of the New Senior Subordinated Note Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and each Subsidiary Guarantor released with
respect to certain covenants that are described in the New Senior
Subordinated Note Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the New Senior Subordinated Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "--Events of Default and Remedies" will no longer constitute an Event
of Default with respect to the New Senior Subordinated Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the New Senior Subordinated Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of and premium
(if any) and interest on the outstanding New Senior Subordinated Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the New Senior Subordinated Notes are being
defeased to maturity or to a particular redemption date, (ii) in the case of
Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
the New Senior Subordinated Note Indenture, there has been a change
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in the applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the holders of
the outstanding New Senior Subordinated Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the
holders of the outstanding New Senior Subordinated Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred, (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit), (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a
default under, any material agreement or instrument (other than the New
Senior Subordinated Note Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound, (vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that the trust funds will not be subject to the effect
of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally, (vii) the Company must deliver to the
Trustee an officer's certificate stating that the deposit was not made by the
Company with the intent of preferring the holders of New Senior Subordinated
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others and
(viii) the Company must deliver to the Trustee an officer's certificate and
an opinion of counsel, each stating that all conditions precedent provided
for relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
TRANSFER AND EXCHANGE
A holder of New Senior Subordinated Notes may transfer or exchange New
Senior Subordinated Notes in accordance with the New Senior Subordinated Note
Indenture. The registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the New Senior Subordinated Note Indenture. The Company is not
required to transfer or exchange any New Senior Subordinated Note selected
for redemption. Also, the Company is not required to transfer or exchange any
New Senior Subordinated Note for a period of 15 days before a selection of
New Senior Subordinated Notes to be redeemed.
The registered holder of a New Senior Subordinated Note will be treated as
the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the New Senior
Subordinated Note Indenture, the New Senior Subordinated Notes or the
Subsidiary Guarantees may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the New Senior
Subordinated Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, New Senior Subordinated Notes), and any existing default or compliance
with any provision of the New Senior Subordinated Note Indenture, the New
Senior Subordinated Notes or the Subsidiary Guarantees may be waived with the
consent of the holders of a majority in principal amount of the then
outstanding New Senior Subordinated Notes (including consents obtained in
connection with a tender offer or exchange offer for New Senior Subordinated
Notes).
Without the consent of each holder affected, an amendment or waiver may
not (with respect to any New Senior Subordinated Notes held by a
non-consenting holder): (a) reduce the principal amount of New Senior
Subordinated Notes whose holders must consent to an amendment, supplement or
waiver, (b) reduce the principal of or change the fixed maturity of any New
Senior Subordinated Note or alter the
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provisions with respect to the redemption of the New Senior Subordinated
Notes (including as described under the caption "--Repurchase at the Option
of Holders"), (c) reduce the rate of or change the time for payment of
interest on any New Senior Subordinated Note, (d) waive a Default or Event of
Default in the payment of principal of or premium (if any) or interest on the
New Senior Subordinated Notes (except a rescission of acceleration of the New
Senior Subordinated Notes by the holders of at least a majority in aggregate
principal amount of the New Senior Subordinated Notes and a waiver of the
payment default that resulted from such acceleration), (e) make any New
Senior Subordinated Note payable in money other than that stated in the New
Senior Subordinated Notes, (f) make any change in the provisions of the New
Senior Subordinated Note Indenture relating to waivers of past Defaults or
the rights of holders of New Senior Subordinated Notes to receive payments of
principal of and premium (if any) and interest on the New Senior Subordinated
Notes, (g) waive a redemption payment with respect to any New Senior
Subordinated Note (including a payment as described under the caption
"--Repurchase at the Option of Holders"), (h) except as provided under the
caption "--Legal Defeasance and Covenant Defesance" or in accordance with the
terms of any Subsidiary Guarantee, release a Subsidiary Guarantor from its
obligations under its Subsidiary Guarantee or make any change in a Subsidiary
Guarantee that would adversely affect the holders of the New Senior
Subordinated Notes and (i) make any change in the foregoing amendment and
waiver provisions. Notwithstanding the foregoing, any amendment to the
provisions of the Subsidiary Guarantees relating to subordination or Article
10 of the New Senior Subordinated Note Indenture (which relates to
subordination) will require the consent of the holders of at least 75% in
aggregate principal amount of the New Senior Subordinated Notes then
outstanding if such amendment would adversely affect the rights of holders of
New Senior Subordinated Notes.
Notwithstanding the foregoing, without the consent of any holder of New
Senior Subordinated Notes, the Company, a Subsidiary Guarantor (with respect
to a Subsidiary Guarantee or the New Senior Subordinated Note Indenture to
which it is a party) and the Trustee may amend or supplement the New Senior
Subordinated Note Indenture, the New Senior Subordinated Notes or the
Subsidiary Guarantees to cure any ambiguity, defect or inconsistency, to
provide for uncertificated New Senior Subordinated Notes in addition to or in
place of certificated New Senior Subordinated Notes, to provide for the
assumption of the Company's or the Subsidiary Guarantor's obligations to
holders of New Senior Subordinated Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the holders of New Senior Subordinated Notes or that does not
adversely affect the legal rights under the New Senior Subordinated Note
Indenture of any such holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the New Senior
Subordinated Note Indenture under the Trust Indenture Act or to allow any
Subsidiary Guarantor to guarantee the New Senior Subordinated Notes.
CONCERNING THE TRUSTEE
The New Senior Subordinated Note Indenture contains certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee
will be permitted to engage in other transactions; however, if it acquires
any conflicting interest it must eliminate such conflict within 90 days and
apply to the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding New
Senior Subordinated Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The New Senior Subordinated Note
Indenture provides that in case an Event of Default shall occur (which shall
not be cured), the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the New Senior Subordinated Note
Indenture at the request of any holder of New Senior Subordinated Notes,
unless such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the New Senior
Subordinated Note Indenture. Reference is made to the New Senior Subordinated
Note Indenture for a full disclosure of all such terms, as well as any other
capitalized terms used herein for which no definition is provided.
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"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering an asset acquired by such specified Person at the time such asset
is acquired by such specified Person.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect
common control with, such specified Person. For purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of
a Person shall be deemed to be control, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means (a) the sale, lease, conveyance, disposition or other
transfer (a "disposition") of any properties, assets or rights (including,
without limitation, a sale and leaseback transaction) or (b) the issuance,
sale or transfer by the Company of Equity Interests of a Subsidiary, and in
the case of either clause (a) or (b), whether in a single transaction or a
series of related transactions for Net Proceeds in excess of $1.0 million;
provided, however, that the following transactions will be deemed not to be
Asset Sales: (i) sales of inventory in the ordinary course of business; (ii)
a disposition of assets by the Company to a Wholly Owned Subsidiary or by a
Wholly Owned Subsidiary of the Company to the Company or to another Wholly
Owned Subsidiary of the Company; (iii) a disposition of Equity Interests by a
Wholly Owned Subsidiary of the Company to the Company or to another Wholly
Owned Subsidiary of the Company; (iv) the sale and leaseback of any assets
within 90 days of the acquisition of such assets; and (v) a Permitted
Investment or Restricted Payment that is permitted by the New Senior
Subordinated Note Indenture.
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the
rate of interest implicit in such transaction, determined in accordance with
GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
Person to finance the purchase or construction of any property or assets
acquired or constructed by such Person which have a useful life of more than
one year so long as (a) the purchase or construction price for such property
or assets is included in "addition to property, plant or equipment" in
accordance with GAAP, (b) the acquisition or construction of such property or
assets is not part of any acquisition of a Person or line of business and (c)
such Indebtedness is incurred within 90 days of the acquisition or completion
of construction of such property or assets.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (a) in the case of a corporation, corporate stock,
(b) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (c) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited),
and (d) any other interest or participation that confers on a person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means (a) United States dollars, (b) securities issued
or directly and fully guaranteed or insured by the United States government
or any agency or instrumentality thereof having maturities of not more than
six months from the date of acquisition, (c) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any
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domestic commercial bank having capital and surplus in excess of $500.0
million, (d) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (b) and (c) above
entered into with any financial institution meeting the qualifications
specified in clause (c) above, (e) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or Standard & Poor's Rating
Service and in each case maturing within six months after the date of
acquisition and (f) any fund investing exclusively in investments of the
types described in clauses (a) through (e) above.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (a) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (b) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent
that such provision for taxes was included in computing such Consolidated Net
Income, plus (c) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and 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 payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (d) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses (other than deferred rental expense) that were paid in
a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Subsidiaries for such
period to the extent that such depreciation, amortization and other non-cash
expenses were deducted in computing such Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (a) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Wholly Owned Subsidiary thereof, (b)
the Net Income of any Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (c) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, and (d) the
cumulative effect of a change in accounting principles shall be excluded.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Senior Debt" means, with respect to any Person, (i) any
Indebtedness of such Person outstanding under the New Credit Agreement and
thereafter (ii) any other Senior Debt of such Person permitted under the New
Senior Subordinated Note Indenture the principal amount of which is $25
million or more and that has been designated by such Person as "Designated
Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise is
exchangeable for Indebtedness (except to the extent exchangeable at the
option of such Person subject to the terms of any debt instrument to which
such Person is a party) or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the New Senior Subordinated Notes mature; provided, however, that any
Capital Stock that would constitute Disqualified
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Stock solely because the holders thereof have the right to require the
Company to repurchase such Capital Stock upon the occurrence of a Change of
Control or an Asset Sale shall not constitute Disqualified Stock if the terms
of such Capital Stock provide that the Company may not repurchase or redeem
any such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption
"--Certain Covenants--Restricted Payments."
"DLJMB" means DLJ Merchant Banking Partners II, L.P. and its Affiliates.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Agreement) in
existence on the date of the New Senior Subordinated Note Indenture, until
such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (a) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of debt issuance costs and 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 and net payments (if any) pursuant to Hedging Obligations),
and (b) commissions, discounts and other fees and charges incurred with
respect to letters of credit and bankers' acceptances financing, and (c) any
interest expense on Indebtedness of another Person that is guaranteed by such
Person or secured by a Lien on assets of such Person and (d) the product of
(i) all dividend payments on any series of preferred stock of such Person
(other than dividends payable solely in Equity Interests that are not
Disqualified Stock), times (ii) a fraction, the numerator or of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Subsidiaries for such period (exclusive of amounts attributable to
discontinued operations, as determined in accordance with GAAP, or operations
and businesses disposed of prior to the Calculation Date (as defined below))
to the Fixed Charges of such Person for such period (exclusive of amounts
attributable to discontinued operations, as determined in accordance with
GAAP, or operations and businesses disposed of prior to the Calculation Date,
but only to the extent that the obligations giving rise to such Fixed Charges
would no longer be obligations contributing to such Person's Fixed Charges
subsequent to the Calculation Date). In the event that the Company or any of
its Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
(other than revolving credit borrowings) or issues preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio
is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation
Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, assumption, guarantee or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. For purposes of making the computation referred to above,
acquisitions that have been made by the Company or any of its Subsidiaries,
including all mergers and consolidations and any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be calculated
on a pro forma basis and shall be deemed to have occurred on the first day of
such four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated to include the Consolidated Cash Flow of
the acquired entities (adjusted to exclude (x) the cost of any compensation,
remuneration or other benefit paid or provided to any employee, consultant,
Affiliate or equity owner of the acquired entities to the extent such costs
are eliminated and not replaced and (y) the amount of any reduction in
general, administrative or overhead costs of the acquired entities, in each
case, as determined in good faith by an officer of the Company) without
giving effect to clause (c) of the proviso set forth in the definition of
Consolidated Net Income.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which are in effect as of the date of
the New Senior Subordinated Note Indenture.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under interest rate swap agreements, interest rate cap
agreements, interest rate collar agreements and other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as
Indebtedness of others secured by a Lien on any asset of such Person (whether
or not such Indebtedness is assumed by such Person) and, to the extent not
otherwise included, the guarantee by such Person of any Indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (a) the accreted value thereof (together with any interest thereon that is
more than 30 days past due), in the case of any Indebtedness that does not
require current payments of interest, and (b) the principal amount thereof,
in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees by the referent Person of, and Liens on
any assets of the referent Person securing, Indebtedness or other obligations
of other Persons), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells
or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided
in the final paragraph of the covenant described above under the caption
"--Certain Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (a) any gain (but
not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with (i) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (ii)
the disposition of any securities by such Person or any of its Subsidiaries
or the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries, and (b) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
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"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of (without
duplication) (a) the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, sales
commissions, recording fees, title transfer fees, and appraiser fees) and any
relocation expenses incurred as a result thereof, (b) taxes paid or estimated
to be payable as a result thereof (after taking into account any available
tax credits or deductions and any tax sharing arrangements), (c) amounts
required to be applied to the repayment of Indebtedness (other than revolving
credit Indebtedness incurred pursuant to the New Credit Agreement) secured by
a Lien on the asset or assets that were the subject of such Asset Sale, and
(d) any reserve established in accordance with GAAP or any amount placed in
escrow, in either case for adjustment in respect of the sale price of such
asset or assets, until such time as such reserve is reversed or such escrow
arrangement is terminated, in which case Net Proceeds shall include only the
amount of the reserve so reversed or the amount returned to the Company or
its Subsidiaries from such escrow arrangement, as the case may be.
"New Credit Agreement" means the New Credit Agreement, including any
related notes, guarantees, collateral and security documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time,
subject to the terms thereof and of the New Senior Subordinated Note
Indenture.
"Obligations" means any principal, interest, premium, penalties, fees,
indemnification, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business in which the Company or the
Subsidiary Guarantors are engaged on the date of the New Senior Subordinated
Note Indenture or any business reasonably related, incidental or ancillary
thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company, (b) any Investment in cash or Cash
Equivalents, (c) any Investment by the Company or any Subsidiary of the
Company in a Person that is engaged in a Permitted Business if as a result of
such Investment (i) such Person becomes a Wholly Owned Subsidiary of the
Company and a Subsidiary Guarantor or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Subsidiary of the Company, (d) any Investment made as a result
of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales," (e) any
Investment acquired solely in exchange for Equity Interests (other than
Disqualified Stock) of the Company, and (f) other Investments in any Person
that is engaged in a Permitted Business which Investment has a fair market
value (as determined by a resolution of the Board of Directors of the Company
and set forth in an officer's certificate delivered to the Trustee), when
taken together with all other Investments made pursuant to this clause (f)
that are at the time outstanding, not to exceed $10.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or a
Subsidiary Guarantor or debt securities of the Company or a Subsidiary
Guarantor that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or
to a greater extent than, the New Senior Subordinated Notes are subordinated
to Senior Debt.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that (a) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus premium, if any, and accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith),
(b) such Permitted Refinancing Indebtedness has a final maturity date no
earlier than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, (c) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of
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payment to the New Senior Subordinated Notes, such Permitted Refinancing
Indebtedness is subordinated in right of payment to the New Senior
Subordinated Notes on terms at least as favorable, taken as a whole, to the
holders of New Senior Subordinated Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded, and (d) such Indebtedness is incurred either
by the Company or by the Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Principals" means DLJMB.
"Qualified Offering" means (i) any issuance of common stock or preferred
stock by the Company (excluding Disqualified Stock) that is registered
pursuant to the Securities Act, other than issuance registered on Form S-8
and issuances registered on Form S-4, and (ii) any private issuance of common
stock or preferred stock of the Company (excluding Disqualified Stock), other
than issuances of common stock pursuant to employee benefit plans of the
Company or otherwise as compensation of employees of the Company.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Debt" means, with respect to any Person, (a) all Obligations of
such Person outstanding under the New Credit Agreement and all Hedging
Obligations payable to a lender or an Affiliate thereof or to a Person that
was a lender or an Affiliate thereof at the time the contract was entered
into under the New Credit Agreement or any of its Affiliates, including,
without limitation, interest accruing subsequent to the filing of, or which
would have accrued but for the filing of, a petition for bankruptcy, whether
or not such interest is an allowable claim in such bankruptcy proceeding, (b)
any other Indebtedness of such Person unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated in right
of payment to any other Senior Debt of such Person, and (c) all Obligations
with respect to the foregoing. Notwithstanding anything to the contrary in
the foregoing, Senior Debt will not include (i) any liability for federal,
state, local or other taxes, (ii) any Indebtedness of such Person to any of
its Subsidiaries, (iii) any trade payables or (iv) any Indebtedness that is
incurred in violation of the New Senior Subordinated Note Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (a) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock 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 such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (b) any partnership (i) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (ii) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the
sum of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (ii) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by (b) the
then outstanding principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT AGREEMENT
In connection with the Refinancing Plan, the Company will enter into the
New Credit Agreement pursuant to which DLJ Capital Funding, Inc., an
affiliate of DLJ, will act as an arranger and syndication agent, and a
financial institution to be determined will act as administrative agent. The
New Credit Agreement is expected to provide for total lending commitments of
up to $160.0 million. The New Credit Agreement will be comprised of (i) a
Revolving Credit Facility of up to $30.0 million, which includes borrowing
capacity available for letters of credit and for same-day notice swingline
loans in amounts to be agreed upon, (ii) Tranche A Term Loans of up to $50.0
million and (iii) Tranche B Term Loans of up to $80.0 million. Borrowings
under the New Credit Agreement, together with the proceeds of the Offering
and the Common Stock Offering, will be used to repay the Company's existing
indebtedness as described under "Use of Proceeds." The proceeds of loans
under the New Credit Agreement may also be used to fund the Company's working
capital needs, capital expenditures and other general corporate purposes,
including the issuance of letters of credit.
Borrowings under the New Credit Agreement, like the Company's Existing
Credit Agreement, will bear interest annually, at the Company's option, at
the rate based on either (i) an "Alternate Base Rate" (defined as, generally,
the higher of the Federal Funds Rate, as published by the Federal Reserve
Bank of New York, plus 0.5%, or the administrative agent's prime lending
rate) plus (a) in the case of Tranche A Term Loans or revolving credit loans,
1.5% or (b) in the case of Tranche B Term Loans, 2.0% or (ii) a
reserve-adjusted "LIBO" rate, plus (x) in the case of Tranche A Term Loans or
revolving credit loans, 2.5% or (y) in the case of Tranche B Term Loans,
3.0%. Margins set forth for Tranche A Term Loans and revolving credit loans
will be subject to certain performance-based reductions occurring not earlier
than six months from the closing date of the New Credit Agreement. In
addition, the Company must pay a fee on the face amount of each letter of
credit outstanding at a rate equal to the LIBO margin.
It is expected that borrowings under the New Credit Agreement will be
guaranteed by, and secured by a pledge of all of the capital stock and assets
of, the Company's subsidiaries.
The New Credit Agreement will contain various covenants that limit or
restrict, among other things, subject to certain exceptions, the incurrence
of indebtedness, the creation of liens, transactions with affiliates,
restricted payments, investments and acquisitions, mergers, consolidations,
dissolutions, asset sales, dividends, distributions, and certain other
transactions and business activities by the Company.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement (the "Underwriting Agreement") between the Company and DLJ (the
"Underwriter"), the Underwriter has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter, all of the New Senior
Subordinated Notes offered hereby.
The Underwriting Agreement provides that the obligations of the
Underwriter thereunder are subject to certain conditions precedent. The
Underwriting Agreement also provides that the Company will indemnify the
Underwriter against certain liabilities and expenses, including liabilities
under the Securities Act. The nature of the Underwriter's obligation is such
that it is required to purchase all of the New Senior Subordinated Notes if
any New Senior Subordinated Notes are purchased by the Underwriter.
The Underwriter has advised the Company that it proposes initially to
offer the New Senior Subordinated Notes, in part, directly to the public at
the public offering price set forth on the cover of this Prospectus and in
part to selected dealers at such price less a concession not in excess of
% of the aggregate principal amount at stated maturity of the New Senior
Subordinated Notes. The Underwriter may allow, and such dealers may reallow,
a discount not in excess of % of the aggregate principal amount at stated
maturity of the New Senior Subordinated Notes to certain other dealers. After
the initial public offering of the New Senior Subordinated Notes, the
offering price and the other selling terms may be changed by the Underwriter.
The New Senior Subordinated Notes are a new security for which no public
market exists. The New Senior Subordinated Notes will not be listed on any
securities exchange. There can be no assurance that an active public market
will develop or be sustained upon completion of the Offering or at what
prices holders of the New Senior Subordinated Notes would be able to sell
such securities, if at all. In addition, prevailing interest rate levels,
market fluctuations and general economic and political conditions may
adversely affect the liquidity and the market price of the New Senior
Subordinated Notes, regardless of the Company's financial and operating
performance. The market for "high yield" securities, such as the New Senior
Subordinated Notes, is volatile and unpredictable, which may have an adverse
effect on the liquidity of, and prices for, such securities. The Company has
been advised by the Underwriter that it currently intends to make a market in
the New Senior Subordinated Notes after consummation of the Offering as
permitted by applicable laws and regulations; however, the Underwriter is not
obligated to do so and may discontinue doing so without notice at any time.
Accordingly, no assurance can be given that a liquid trading market of the
New Senior Subordinated Notes will develop or be sustained. In addition,
because the Underwriter may be deemed to be an affiliate of the Company, the
Underwriter will be required to deliver a current "market-maker" prospectus
and otherwise to comply with the registration requirements of the Securities
Act in connection with any secondary market sale of the New Senior
Subordinated Notes, which may affect its ability to continue market-making
activities. The Underwriter's ability to engage in market-making transactions
will therefore be subject to the availability of a current "market-maker"
prospectus. For so long as any of the New Senior Subordinated Notes are
outstanding and, in the reasonable judgment of the Underwriter and its
counsel, the Underwriter or any of its affiliates (as defined in the rules
and regulations under the Securities Act) is required to deliver a prospectus
in connection with sales of the New Senior Subordinated Notes, the Company
has agreed to make a "market-maker" prospectus available to the Underwriter
to permit it to engage in market-making transactions.
The Underwriter has informed the Company that it does not intend to
confirm sales of the New Senior Subordinated Notes to any accounts over which
it exercises discretionary authority.
In connection with the Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
New Senior Subordinated Notes. Specifically, the Underwriter may overallot
the Offering, creating a syndicate short position. The Underwriter may bid
for and purchase the New Senior Subordinated Notes in the open market to
cover syndicate short positions. In addition, the Underwriter may bid for and
purchase the New Senior Subordinated Notes in the open market to stabilize
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the price of the New Senior Subordinated Notes. These activities may
stabilize or maintain the market price for the New Senior Subordinated Notes
above independent market levels. The Underwriter is not required to engage in
these activities, and may discontinue these activities at any time.
Under Rule 2720 of the Conduct Rules of the NASD ("Rule 2720"), the
Company is considered an affiliate of DLJ. This Offering is being conducted
in accordance with Rule 2720, which provides that, among other things, when
an NASD member participates in the underwriting of an affiliate's debt
securities, the yield at which such securities are to be distributed to the
public must not be lower than that recommended by a "qualified independent
underwriter" meeting certain standards ("QIU"). In accordance with this
requirement, Goldman, Sachs & Co. has assumed the responsibilities of acting
as QIU and will recommend a minimum yield for the New Senior Subordinated
Notes in compliance with the requirements of Rule 2720. The yield of the New
Senior Subordinated Notes when sold will be no lower than that recommended by
the QIU. In connection with the Offering, Goldman, Sachs & Co. is performing
due diligence investigations and reviewing and participating in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. As compensation for the services of Goldman, Sachs &
Co. as QIU, the Company will agree to pay $125,000 to Goldman, Sachs & Co.
The Underwriter is also acting as one of the underwriters in connection
with the Common Stock Offering and will receive customary discounts and
commissions in connection therewith. DLJ Capital Funding, Inc. is one of the
lenders under the Existing Credit Agreement. The proceeds of the Offering,
together with the proceeds from the Common Stock Offering and the New Credit
Agreement, are being used to effect the Refinancing Plan, including the
repayment of the Existing Credit Agreement. DLJ Capital Funding, Inc., an
affiliate of the Underwriter, is expected to act as syndication agent and be
a lender under the New Credit Agreement. From time to time, the Underwriter
provides investment banking services to the Company, for which it receives
customary compensation. See "Certain Relationships and Related Transactions."
LEGAL MATTERS
The validity of the New Senior Subordinated Notes being offered hereby and
certain other legal matters relating to the Offering will be passed upon for
the Company by Latham & Watkins, New York, New York. Latham & Watkins also
represented DLJMBPII in connection with the Recapitalization. Certain legal
matters relating to the Offering will be passed upon for the Underwriter by
Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 30,
1995 and December 28, 1996 and for each of the 52 week periods ended December
31, 1994, December 30, 1995 and December 28, 1996 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed the Registration Statement on Form S-1 with respect
to the New Senior Subordinated Notes being offered hereby with the Commission
under the Securities Act. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are omitted in accordance with
the rules and regulations of the Commission. Statements contained in this
Prospectus concerning the provisions of documents filed with the Registration
Statement as exhibits are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit to the Registration Statement. The
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; at its Chicago Regional Office, Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and at its New
York Regional Office, Seven World Trade Center, Suite
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1300, New York, New York 10048. Copies of such material can be obtained from
the public reference section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
website on the Internet at http://www.sec.gov that contains reports, proxy
statements and other information with respect to companies that file
documents electronically with the Commission. For further information
pertaining to the Company and the New Senior Subordinated Notes being offered
hereby, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed as a
part thereof.
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INDEX TO FINANCIAL STATEMENTS
DUANE READE HOLDING CORP. AND SUBSIDIARIES
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<S> <C>
Report of Independent Accountants ....................................................... F-2
Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996 .............. F-3
Consolidated Statements of Operations for each of the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for each of the 52 weeks
ended December 31, 1994, December 30, 1995 and December 28, 1996........................ F-5
Consolidated Statements of Cash Flows for each of the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996................................................. F-6
Notes to Consolidated Financial Statements .............................................. F-7
Consolidated Balance Sheet as of September 27, 1997 (Unaudited).......................... F-16
Consolidated Statements of Operations for each of the 39 weeks ended September 28, 1996
and September 27, 1997 (Unaudited)...................................................... F-17
Consolidated Statement of Stockholders' Equity (Deficiency) for the 39 weeks ended
September 27, 1997 (Unaudited).......................................................... F-18
Consolidated Statements of Cash Flows for the 39 weeks ended September 28, 1996 and
September 27, 1997 (Unaudited).......................................................... F-19
Notes to Consolidated Financial Statements (Unaudited) .................................. F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Duane Reade Holding Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows present fairly, in all material respects, the financial position
of Duane Reade Holding Corp. ("Holdings") and its subsidiaries at December
30, 1995 and December 28, 1996 and the results of their operations and their
cash flows for each of the 52 week periods ended December 31, 1994, December
30, 1995 and December 28, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Holdings' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
February 18, 1997, except as to the recapitalization and reverse stock split
described in Note 12 and net loss per common share described in Note 1 which
are as of January 14, 1998
F-2
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash................................................................ $ 2,133 $ 216
Government securities .............................................. 44 --
Receivables ........................................................ 5,740 7,171
Inventories ........................................................ 43,147 47,914
Prepaid expenses ................................................... 1,355 1,165
-------------- --------------
TOTAL CURRENT ASSETS ............................................... 52,419 56,466
Property and equipment, net ......................................... 24,832 23,065
Goodwill, net of accumulated amortization of $11,306 and $14,785 ... 127,848 124,369
Covenants not to compete, net of accumulated amortization of $48,660
and $60,000 ........................................................ 11,340 --
Other assets ........................................................ 19,421 18,576
-------------- --------------
TOTAL ASSETS ...................................................... $235,860 $222,476
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable.................................................... $ 20,427 $ 20,015
Accrued interest ................................................... 3,797 3,873
Other accrued expenses ............................................. 6,102 8,157
Current portion of long-term debt .................................. 5,625 12,000
Current portion of capital lease obligations ....................... 2,769 2,504
-------------- --------------
TOTAL CURRENT LIABILITIES ......................................... 38,720 46,549
Senior debt, less current portion ................................... 163,475 149,975
Subordinated zero coupon debt, net of unamortized discount of
$55,148 and $43,899 ................................................ 68,232 79,481
Capital lease obligations, less current portion ..................... 4,003 1,697
Other non-current liabilities ....................................... 2,626 4,170
-------------- --------------
TOTAL LIABILITIES ................................................. 277,056 281,872
-------------- --------------
Commitments and Contingencies (Note 8)
Stockholders' deficiency
Common stock, $0.01 par; authorized 30,000,000 shares; issued and
outstanding 10,184,565 and 10,062,497 shares ...................... 102 101
Paid-in-capital .................................................... 24,909 24,564
Accumulated deficit ................................................ (66,207) (84,061)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIENCY .................................... (41,196) (59,396)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY .................... $235,860 $222,476
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales .................................... $281,103 $336,922 $381,466
Cost of sales ................................ 209,678 259,827 288,505
-------------- -------------- --------------
Gross profit ................................. 71,425 77,095 92,961
-------------- -------------- --------------
Selling, general and administrative expenses 39,741 50,326 59,048
Amortization ................................. 18,238 11,579 16,217
Depreciation ................................. 1,184 1,929 3,015
Store pre-opening expenses ................... 1,220 1,095 139
-------------- -------------- --------------
60,383 64,929 78,419
-------------- -------------- --------------
Operating income ............................. 11,042 12,166 14,542
Interest expense, net ........................ 27,480 30,224 32,396
-------------- -------------- --------------
Loss before income taxes ..................... (16,438) (18,058) (17,854)
Income taxes ................................. -- -- --
-------------- -------------- --------------
NET LOSS..................................... $(16,438) $(18,058) $(17,854)
============== ============== ==============
NET LOSS PER COMMON SHARE.................... $ (1.55) $ (1.70) $ (1.69)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................. 10,633 10,650 10,575
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ -------- ------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance , January 1, 1994 . 10,154,041 $102 $24,852 $(31,711) $ (6,757)
Sale of common stock to
executives ................ 10,173 -- 25 -- 25
Net loss ................... -- -- -- (16,438) (16,438)
------------ -------- --------- ------------- ----------
Balance, December 31, 1994 10,164,214 102 24,877 (48,149) (23,170)
Sale of common stock to
executives ................ 40,692 -- 100 -- 100
Repurchase of common stock (20,341) -- (68) -- (68)
Net loss ................... -- -- -- (18,058) (18,058)
------------ -------- --------- ------------- ----------
Balance, December 30, 1995 10,184,565 102 24,909 (66,207) (41,196)
Repurchase of common stock (122,068) (1) (345) -- (346)
Net loss ................... -- -- -- (17,854) (17,854)
------------ -------- --------- ------------- ----------
Balance, December 28, 1996 10,062,497 $101 $24,564 $(84,061) $(59,396)
============ ======== ========= ============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(16,438) $(18,058) $(17,854)
Adjustments to reconcile net loss to net
cash provided by operating activities .....
Depreciation and amortization of property
and equipment ............................ 1,184 1,929 3,015
Amortization of goodwill and other
intangibles .............................. 20,646 13,940 18,897
Accretion of principal of zero coupon debt 8,282 9,628 11,249
Other ..................................... 724 1,769 1,526
Changes in operating assets and liabilities
Receivables ............................... (225) (1,962) (1,431)
Inventories ............................... (4,838) (6,745) (4,767)
Accounts payable .......................... 5,716 7,382 (412)
Prepaid and accrued expenses .............. (110) (658) 2,321
Increase in other assets (liabilities)--net 356 (491) 51
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . 15,297 6,734 12,595
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures ........................ (9,947) (6,868) (1,247)
Systems development costs ................... (2,425) (6,268) (2,566)
Sale of government securities--net ......... 1,134 382 44
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES ..... (11,238) (12,754) (3,769)
-------------- -------------- --------------
Cash flows from financing activities:
Financing costs ............................. -- (885) (952)
Repayments of term loan ..................... (8,000) (15,000) (5,625)
Proceeds from issuance of long-term debt ... -- 15,000 --
Net (repayments) borrowings--Revolving
credit ..................................... -- 4,000 (1,500)
Proceeds from issuance of stock ............. -- 25 --
Repurchase of stock ......................... -- (68) (95)
Capital lease financing ..................... 5,492 4,329 274
Repayments of capital lease obligations .... (432) (2,617) (2,845)
-------------- -------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES ................................ (2,940) 4,784 (10,743)
-------------- -------------- --------------
Net increase (decrease) in cash ............. 1,119 (1,236) (1,917)
Cash at beginning of year ................... 2,250 3,369 2,133
-------------- -------------- --------------
Cash at end of year.......................... $ 3,369 $ 2,133 $ 216
============== ============== ==============
Supplementary disclosures of cash flow
information ................................
Cash paid for interest...................... $ 16,969 $ 18,298 $ 18,391
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Duane Reade Holding Corp. ("Holdings") was formed on June 16, 1992 for the
purpose of acquiring Daboco, Inc. ("Daboco"). The acquisition took place on
September 25, 1992. Daboco and Duane Reade Inc. ("DR Inc."), a subsidiary of
Daboco, are general partners in Duane Reade, which operates a chain of retail
drug stores (60 at December 28, 1996) in the New York City area.
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Holdings, Daboco, DR Inc. and Duane Reade (collectively, the
"Company"). All intercompany transactions and balances have been eliminated.
Certain prior period amounts have been reclassified to conform with the
current presentation.
REPORTING YEAR: The fiscal year for the Company is the 52/53 week
reporting period ending on the last Saturday in December.
RECEIVABLES: Receivables consist primarily of amounts due from various
insurance companies and governmental agencies under third party payment plans
for prescription sales and amounts due from vendors, a majority of which
relate to promotional programs. The Company has not provided an allowance for
doubtful accounts as its historical write-offs have been immaterial. The
Company reflects promotional allowances from vendors as income when such
allowances are earned.
INVENTORIES AND COST OF SALES: Substantially all inventories are stated at
the lower of cost, determined pursuant to the last-in, first-out retail
dollar value method (LIFO), or market. When appropriate, provision is made
for obsolete, slow-moving or damaged inventory. If current cost had been
used, inventories at December 30, 1995 and December 28, 1996 would not be
materially different from the amounts reflected on the accompanying balance
sheets. Cost of sales includes distribution and occupancy costs.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method
over estimated useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements ............ 30 years
Furniture, fixtures and equipment .... 5-10 years
Leasehold improvements ................ Life of lease or, if shorter, asset
Property under capital leases.......... 7 years
</TABLE>
OTHER ASSETS: Deferred financing costs arose in connection with borrowings
under the Term Loan and with the issuance of the Senior Notes and the Zero
Coupon Notes and are amortized using the straight-line method, the results of
which are not materially different from the interest method, over the term of
the respective debt issue.
Systems development costs, consisting principally of costs relating to the
new management information systems, are amortized using the straight-line
method commencing in 1996 over a period of seven years.
INTANGIBLE ASSETS: In September 1992, Holdings and Duane Reade entered
into agreements with certain former members of management of Duane Reade,
former shareholders of Daboco and shareholders of former partners of Duane
Reade (collectively, the "Group") precluding such persons from competing with
the operations of Duane Reade for a period of five years. The covenants not
to compete were recorded at acquisition cost and were being amortized over
the period of benefit using an accelerated method. During the first quarter
of 1997, Holdings and Duane Reade entered into agreements
F-7
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in which the Company received consideration from the Group to terminate the
non-compete agreements. In accordance with APB Opinion No. 17, Intangible
Assets, the remaining carrying value of the non-compete agreements of $4.86
million as of December 28, 1996 was written off and has been included in the
accompanying consolidated statement of operations as amortization expense.
Goodwill is amortized on the straight-line method over 40 years. The
carrying value of goodwill is periodically reviewed and evaluated by the
Company based principally on its expected future undiscounted operating cash
flows. Should such evaluation result in the Company concluding that the
carrying amount of goodwill has been impaired, an appropriate write-down
would be made.
PRE-OPENING EXPENSES: Store pre-opening costs, other than capital
expenditures, are expensed when incurred.
INCOME TAXES: Income taxes are accounted for under the liability method
prescribed by Statement of Financial Accounting Standards No. 109.
RECENTLY ISSUED ACCOUNTING STANDARDS: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, Earnings per Share ("FAS 128") which requires the presentation of
basic and diluted earnings per share in a company's financial statements for
reporting periods ending subsequent to December 15, 1997. Early adoption of
FAS 128 is not permitted. The adoption of FAS 128 is not expected to have
material impact on the Company's consolidated financial statements.
ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues, costs
and expenses during the reporting period. Actual results could differ from
those estimates.
NET LOSS PER COMMON SHARE: Net loss per common share is based on the
weighted average shares outstanding during each period (10,632,936 for the 52
weeks ended December 31, 1994, 10,649,895 for the 52 weeks ended December 30,
1995 and 10,575,299 for the 52 weeks ended December 28, 1996). Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, options
granted with exercise prices below the estimated initial public offering
price during the 12 month period preceding the date of the initial filing of
the Registration Statement have been included in the calculation of net loss
per common share, using the treasury stock method based on the estimated
initial public offering price of $15.00 per share, as if the options were
outstanding for all periods presented.
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Land............................................ $ 489 $ 489
Buildings and building improvements ............ 4,514 4,523
Furniture, fixtures and equipment .............. 6,261 6,881
Leasehold improvements ......................... 12,684 13,134
Property under capital leases .................. 4,894 5,063
-------------- --------------
28,842 30,090
Less--Accumulated depreciation and amortization 4,010 7,025
-------------- --------------
$24,832 $23,065
============== ==============
</TABLE>
F-8
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. OTHER ASSETS
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Deferred financing costs (net of accumulated amortization of $7,737
and $10,417)....................................................... $ 9,539 $ 7,811
Systems and integration costs (net of accumulated amortization of
$0 and $1,461) .................................................... 8,693 9,798
Other .............................................................. 1,189 967
-------------- --------------
$19,421 $18,576
============== ==============
</TABLE>
4. DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Senior debt
Term loan facility (A)...................... $ 75,100 $ 69,475
Notes payable bank--revolving credit (A) .. 4,000 2,500
12% Senior Notes due September 15, 2002 (B) 90,000 90,000
Subordinated debt
15% Senior Subordinated Zero Coupon Notes
due
September 15, 2004 (C) .................... 68,232 79,481
-------------- --------------
237,332 241,456
Less--Current portion ...................... 5,625 12,000
-------------- --------------
$231,707 $229,456
============== ==============
</TABLE>
(A) Outstanding balances under a Credit Agreement dated as of September 24,
1992, as amended, with a syndicate of lending institutions bear interest at
floating rates, which at December 28, 1996 averaged 9.0%. In addition to the
term loans, the Credit Agreement provides for a revolving credit facility of
$10.0 million (less amounts of letters of credit issued under the Credit
Agreement) which may be used for general corporate purposes and which expires
on September 30, 1998. As of December 28, 1996, the borrowings outstanding
under the revolving credit facility were $2.5 million (classified as a
noncurrent liability) and $0.2 million in letters of credit had been issued,
leaving $7.3 million available for borrowing.
On March 23, 1995, the Credit Agreement, which provided an A Term loan and
a B Term loan, was amended providing the Company with a new Term loan (the "C
Term Loan") of $15.0 million and increasing the Company's existing capital
expenditure limits for its store expansion program.
The proceeds of such borrowing were used to prepay all amounts due under
the A Term Loan due during 1995 ($13.0 million) and a portion ($2.0 million)
of the payment due under the A Term Loan on March 31, 1996.
In 1996, the Credit Agreement was further amended providing for the
postponement of $2.5 million of principal payments due during 1997 until 1998
and $10.0 million of principal payments due during 1998 until 1999.
F-9
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 28, 1996, the aggregate principal amount of the term loan
matures during the fiscal year as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ... $12,000
1998 ... 17,625
1999 ... 25,150
2000 ... 14,700
2001 ... --
---------
$69,475
=========
</TABLE>
Subject to certain conditions, voluntary prepayments of the Term Loan are
permitted without premium or penalty. Mandatory prepayments are required with
respect to asset sales, permitted issuance of debt or equity and 75% of
excess cash flows, as defined in the Credit Agreement, as amended. For the 52
weeks ended December 31, 1994, December 30, 1995 and December 28, 1996, there
were no voluntary or mandatory prepayments.
Obligations under the Credit Agreement are secured by a pledge of all of
Duane Reade's tangible and intangible assets and are guaranteed by its
partners, Daboco and DR Inc., which have pledged 100% of their partnership
interests in support of such guarantees. The guarantees are joint and several
and full and unconditional. The Credit Agreement contains restrictions on
indebtedness, asset sales, dividends and other distributions, capital
expenditures, transactions with affiliates and other unrelated business
activities. Financial performance covenants include interest coverage,
leverage ratio, minimum earnings and working capital levels. In 1996, the
Company obtained an Amendment revising certain covenant requirements and
limiting capital expenditures. At December 28, 1996, the Company is in
compliance with all of the covenants in the Credit Agreement.
(B) On September 25, 1992, Duane Reade issued $90,000,000 aggregate
principal amount of 12% Senior Notes due September 15, 2002, at face value.
Interest is payable at 12% semiannually. The Senior Notes are guaranteed by
Daboco and DR Inc. All of Daboco's assets are pledged to secure indebtedness
under the Credit Agreement discussed in (A) above. As a result, such
indebtedness will have claim on those assets that is prior to the claim of
holders of the Senior Notes. To the extent that the amount of senior
indebtedness exceeds the value of the collateral securing such indebtedness,
the Senior Notes will rank pari passu with the Term Loans.
Duane Reade is required to make a sinking fund payment on September 15,
2001 sufficient to retire 50% of the aggregate principal amount of Senior
Notes originally issued. The Senior Notes are subject to redemption at the
option of the issuer at 104.5% of par, plus accrued interest, at the end of
1997, declining to par, plus accrued interest, at the end of 2000. In the
event of a change in control, Duane Reade shall be obligated to make an offer
to purchase all outstanding Senior Notes at a repurchase price of 101% of the
principal amount.
(C) On September 25, 1992, Holdings issued $123,380,000 aggregate
principal amount of 15% Senior Subordinated Zero Coupon Notes due September
15, 2004 (the "Zero Coupon Notes"), net of an $81,909,000 discount. The
discount accretes through the Final Accretion Date of September 15, 1999.
Thereafter, cash interest is payable at 15% semi-annually through maturity.
Interest expense is determined using the effective interest method, which
applies a constant yield to carrying value over the life of the Zero Coupon
Notes.
The Credit Agreement and the Senior Note Indenture referred to in (A) and
(B) above provide for subordination of Holdings' debt to partnership debt.
The notes are redeemable at the option of the issuer, in whole or in part,
at 107.5% of Accreted Value (as defined in the Zero Coupon Note Indenture),
plus accrued interest, at the end of 1997 declining to par, plus accrued
interest, at the end of 2002. In the event of a change in control, Holdings
shall be obligated
F-10
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to make an offer to purchase all outstanding Zero Coupon Notes at a
repurchase price of 101% of Accreted Value (as defined in the Indenture) or
principal amount, as applicable. The Accreted Value of the Zero Coupon Notes
was $83,443,000 at December 28, 1996.
Purchasers of the Zero Coupon Notes received 15% of the fully diluted
common stock of Holdings, with registration rights, for aggregate
consideration of $3,529,000 (Note 10).
The Indentures governing the Zero Coupon Notes and the Senior Notes
include certain restrictive covenants. Subject to certain exceptions, the
Indentures restrict transactions with affiliates, the incurrence of
additional indebtedness, the payment of dividends, the creation of liens,
certain asset sales, mergers and consolidations and certain other payments.
The Company's debt is thinly traded in the market place. Accordingly,
management is unable to determine fair market values for such debt at
December 28, 1996.
The Zero Coupon Notes and the Senior Notes were issued pursuant to
Registration Rights Agreements under which Holdings and Duane Reade
consummated registered exchange offers pursuant to which Holdings and Duane
Reade exchanged the Zero Coupon Notes and the Senior Notes, respectively, for
identical notes which have been registered under the Securities Act of 1933,
as amended. Since 1994, the Company has not been required to follow the
periodic reporting requirements of the SEC.
5. CAPITAL LEASE OBLIGATIONS
During 1994, the Company commenced installation of new management
information systems. Capital requirements for hardware, software and
integration costs for the new systems were provided principally by capital
lease financing.
As of December 28, 1996, the present value of capital lease obligations
was $4.2 million (of which $2.5 million was payable during the next twelve
months). Such obligations are payable in monthly installments over three to
five year periods and bear interest at an average rate of 12.2%.
F-11
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between book and tax bases of the respective assets and liabilities at
December 30, 1995 and December 28, 1996 using a 44.7% combined federal, state
and local tax rate in each year and are comprised of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Inventories...................... $ (3,238) $ (3,501)
-------------- --------------
Gross deferred tax liabilities . (3,238) (3,501)
-------------- --------------
Property and equipment .......... 719 955
Covenants not to compete ........ 4,318 1,851
Targeted jobs credit ............ 268 268
Zero Coupon debt discount ...... 9,885 14,041
Other ........................... 1,492 2,335
Net operating loss carryforward 49,217 50,072
-------------- --------------
Gross deferred tax assets ...... 65,899 69,522
-------------- --------------
Net deferred tax assets ......... 62,661 66,021
Valuation allowance ............. (62,661) (66,021)
-------------- --------------
$ -- $ --
============== ==============
</TABLE>
The Company deducted for income tax purposes for the period September 25
to December 31, 1992 approximately $88 million of payments made to former
partners of Duane Reade (the "Retirement Payments"). Approximately $38.5
million of the valuation allowance relates to these Retirement Payments. The
Retirement Payments and other current tax deductions resulted in a net
operating loss of approximately $112.0 million which may be available to
offset future taxable income of the Company through 2011. Due to the nature
of the Retirement Payments, future reductions in that portion of the
valuation allowance related to the Retirement Payments will be credited to
goodwill. Further, certain income tax law provisions may limit the use of the
available net operating loss carryforwards in the event of a significant
change in ownership interest.
The provision for income taxes for the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996 differs from the amounts of income
tax determined by applying the applicable U.S. statutory federal income tax
rate to pretax loss as a result of the following (dollars in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax accounting loss ....... $(16,438) 100.0% $(18,058) 100.0% $(17,854) 100.0%
=========== ======== =========== ======== =========== ========
Statutory rate ............... (5,753) (35.0) (6,320) (35.0) (6,249) (35.0)
State and local taxes, net of
federal tax ................. (1,105) (6.7) (1,233) (6.8) (1,201) (6.7)
Goodwill amortization ........ 1,218 7.4 1,218 6.7 1,218 6.8
Net operating losses not
utilized .................... 5,213 31.7 5,828 32.3 5,534 31.0
Nondeductible interest
expense ..................... 504 3.1 585 3.2 684 3.8
Other ........................ (77) (0.5) (78) (0.4) 14 0.1
----------- -------- ----------- -------- ----------- --------
Effective tax rate ........... $ -- --% $ -- --% $ -- --%
=========== ======== =========== ======== =========== ========
</TABLE>
F-12
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STORE PRE-OPENING EXPENSES
Duane Reade opened eleven new store locations during the 52 weeks ended
December 31, 1994, eight new store locations during the 52 weeks ended
December 30, 1995 and one new store location during the 52 weeks ended
December 28, 1996.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Duane Reade leases most store facilities under operating lease agreements
expiring on various dates through the year 2014. In addition to minimum
rentals, certain leases provide for annual increases based upon real estate
tax increases, maintenance cost increases and inflation. Rent expense for the
52 weeks ended December 31, 1994, December 30, 1995 and December 28, 1996 was
$17,373,000, $22,703,000 and $24,420,000, respectively.
Minimum annual rentals at December 28, 1996 (including obligations under a
new store lease entered into but not opened as of December 28, 1996) are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997................... $ 23,213
1998 .................. 22,879
1999 .................. 22,940
2000 .................. 22,070
2001 .................. 21,739
Remaining lease terms 126,837
----------
Total ................. $239,678
==========
</TABLE>
LITIGATION
The Company from time to time is involved in routine legal matters
incidental to its business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
MANAGEMENT AGREEMENTS
The Company has employment agreements with several of its executives
providing, among other things, for employment terms of up to three years.
Pursuant to the terms of such employment and related agreements, the Company
and various executives entered into agreements pursuant to which (i)
executives' salary and bonuses were established and (ii) executives purchased
shares of Holdings' Class P common stock at a price of $162.00 per share and
shares of Holdings' common stock at a price of $2.00 per share, each
representing original cost. In the event of employment termination, all of
the stock may be repurchased by Holdings. As a result of the recapitalization
and the reverse stock split (Note 12), all outstanding shares were converted
into common stock. As of December 28, 1996, an aggregate 488,283 shares of
common stock are held by employees and former employees.
In addition, the Company has established a Supplemental Executive
Retirement Plan ("SERP") which presently covers only its Chairman. Such SERP
provides for vesting over a twenty year period. However, if the Chairman's
employment is terminated without cause, as defined, or if the Chairman
resigns with cause, as defined, such vesting becomes immediate, in which
event the Company would be liable to the Chairman (in addition to amounts
accrued in the financial statements) in the amount of approximately $650,000.
F-13
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLANS
On October 12, 1992, the Board of Directors of Holdings adopted the 1992
Stock Option Plan of Duane Reade Holding Corp. (the "Plan"). Under the Plan,
a committee designated by the Board of Directors of Holdings to administer
the Plan (the "Committee") may grant, to executive and other key employees of
the Company, nonqualified stock options to purchase up to an aggregate of
510,757 (adjusted for the recapitalization and the reverse stock split--see
Note 12) shares of common stock of Holdings at an exercise price fixed by the
Committee. The options are exercisable at such time or times as the Committee
determines at or subsequent to grant. The term of the options set by the
Committee shall not exceed 10 years.
As permitted, the Company applies Accounting Principles Board Opinion No.
25 and related Interpretations in accounting for its stock-based compensation
plan. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value at the grant dates for awards under
the Plan, consistent with the alternative method of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
effect on the Company's net loss for the 52 weeks ended December 30, 1995 and
December 28, 1996 would have been less than $100,000.
At December 28, 1996, there were outstanding nonqualified stock options to
purchase up to an aggregate of 820,403 (adjusted for the recapitalization and
the reverse stock split--see Note 12) shares of common stock (including
options granted outside the Plan). Options outstanding at each price level
vest over five years at 20% each year that the executive is employed. At
December 28, 1996, there were 102,207 vested share options.
Changes in options outstanding during 1995 and 1996 are summarized as
follows (adjusted for recapitalization--see Note 12):
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
--------------------------------------------- TOTAL
$.58 $7.34 $29.37 $40.86 OPTIONS
---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 31,
1994................................. 91,968 91,968 91,968 91,968 367,872
Options granted....................... 8,539 8,538 8,538 8,538 34,153
Options canceled...................... (60,397) (60,397) (60,397) (60,397) (241,588)
---------- ---------- ---------- ---------- -----------
Options outstanding, December 30,
1995................................. 40,110 40,109 40,109 40,109 (160,437)
Options granted....................... 723,662 2,745 2,745 2,745 731,897
Options canceled...................... (13,728) (13,726) (13,726) (13,726) (54,906)
---------- ---------- ---------- ---------- -----------
Options outstanding, December 28,
1996................................. 750,044 29,128 29,128 29,128 837,428
========== ========== ========== ========== ===========
Weighted average remaining life on
outstanding options.................. 9.2 years 7.1 years 7.1 years 7.1 years 9.0 years
</TABLE>
The Company maintains an employee savings plan pursuant to Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code ("IRC") which covers
substantially all non union employees, excluding in 1996 all key employees as
defined by IRC. Eligible participating employees may contribute up to 10% of
their pretax salaries, subject to certain IRC limitations. The 401(k) Plan,
as amended, provides for employer matching provisions at the discretion of
the Company (to a maximum of 1% of pretax salaries) and has a feature under
which the Company may contribute additional amounts for all eligible
employees. The Company's policy is to fund such costs under the 401(k) Plan
as accrued. For the 52 weeks ended December 31, 1994 and December 30, 1995,
employer contributions to the 401(k) Plan were $158,000 and $166,000,
respectively. There were no employer contributions for the 52 weeks ended
December 28, 1996.
Duane Reade is under contract with local unions to contribute to
multi-employer pension and welfare benefit plans for certain of its
employees. For the 52 weeks ended December 31, 1994, December 30, 1995 and
December 28, 1996, contributions to such plans were $3,899,000, $5,200,000
and $5,783,000, respectively.
F-14
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCKHOLDERS' DEFICIENCY
In September 1992, pursuant to the terms of the Purchase Agreement
governing the Zero Coupon Notes (Note 4), purchasers of such notes received
15% of the fully diluted common stock of the Company for aggregate cash
consideration of $3,529,000.
Distributions made by the Company to the holders of its common stock,
which are restricted by the terms of the Indentures described in Note 4,
shall be made in the following order:
Class P voting and Class P-1 non-voting common stockholders are entitled
to the aggregate unpaid amount of approximately $19,210,000 accruing on
the outstanding shares at an annual rate of 15%, compounded quarterly.
Such holders are then entitled to the aggregate unreturned original cost
($162 per share) of the outstanding shares.
Common stockholders (together as a group, voting and Class A non-voting)
shall then receive an amount equal to the aggregate unreturned original
cost ($2 per share) of outstanding shares.
Final distribution of any remaining portion shall be made to all classes
of outstanding common stock.
In the event of a public offering of stock or a change of control, and
with a written request to the Company, each holder of Class A non-voting
common stock or Class P-1 non-voting common stock is entitled to convert its
stock, on a one-for-one basis, into voting common stock or Class P common
stock, respectively.
As a result of the recapitalization discussed in Note 12, all outstanding
classes of the Company's common stock were converted into a newly designated
class of common stock.
11. RELATED PARTY TRANSACTIONS
In 1992, the Company and its then principal stockholder entered into a
Professional Services Agreement whereby consulting, advisory, financial and
other services were provided at the Company's request, for a five year term.
During each of the 52 weeks ended December 31, 1994, December 30, 1995 and
December 28, 1996, such fees aggregated approximately $1,000,000.
12. SUBSEQUENT EVENTS
During June 1997, the Company entered into a recapitalization agreement
(the "Agreement") with its stockholders ("Stockholders") and certain
investors ("Investors"). The Agreement provided for (i) the purchase by the
Investors from the Stockholders of substantially all their stock holdings in
the Company, (ii) a conversion of all of the outstanding shares of the
Company into a newly authorized class of Class B common stock and (iii) the
creation of a new authorized class of preferred stock which will carry the
rights and preferences granted by the Company's Board of Directors when
issued.
Shares were converted as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PRIOR CLASS CONVERSION RATE
- ------------------------------------ ---------------
<S> <C>
Common and Common Class A ........... 28/1
Common Class P and Common Class P-1 355/1
</TABLE>
Additionally, on January 14, 1998, the Company effected an 8.326 reverse
stock split of the Company's common stock.
All references to common stock amounts, shares and per share data included
in the consolidated financial statements and notes have been adjusted to give
retroactive effect to the above transactions.
F-15
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 27,
1997
---------------
<S> <C>
ASSETS
Current assets ..............................................................
Cash ....................................................................... $ 218
Receivables ................................................................ 9,084
Inventories ................................................................ 65,872
Prepaid expenses ........................................................... 1,371
---------------
TOTAL CURRENT ASSETS ..................................................... 76,545
Property and equipment, net ................................................. 24,918
Goodwill, net of accumulated amortization of $17,397 ........................ 121,757
Other assets, net ........................................................... 16,300
---------------
TOTAL ASSETS ............................................................. $239,520
===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable ........................................................... $ 30,710
Accrued interest ........................................................... 623
Other accrued expenses ..................................................... 13,193
Current portion of senior debt ............................................. 660
Current portion of capital lease obligations ............................... 1,510
---------------
TOTAL CURRENT LIABILITIES ................................................ 46,696
Senior debt, less current portion ........................................... 170,708
Subordinated zero coupon debt, net of unamortized discount of $34,277 ...... 89,094
Capital lease obligations, less current portion ............................. 677
Other non-current liabilities ............................................... 5,906
---------------
TOTAL LIABILITIES ........................................................ 313,081
---------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholders' Deficiency
Preferred stock, $0.01 par; authorized 5,000,000 shares; none issued or
outstanding................................................................ --
Common stock, $0.01 par; authorized 30,000,000 shares; issued and
outstanding 10,257,832 shares ............................................. 103
Paid-in-capital ............................................................ 24,562
Accumulated deficit ........................................................ (98,226)
---------------
TOTAL STOCKHOLDERS' DEFICIENCY ........................................... (73,561)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY ........................... $239,520
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE 39 WEEKS ENDED
--------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
--------------- ---------------
<S> <C> <C>
Net Sales..................................... $281,093 $313,796
Cost of sales ................................ 215,797 236,413
--------------- ---------------
Gross profit ................................. 65,296 77,383
--------------- ---------------
Selling, general and administrative expenses . 42,499 48,218
Amortization ................................. 8,514 3,826
Depreciation ................................. 2,295 2,584
Store pre-opening expenses ................... 139 600
Nonrecurring charges ......................... -- 10,887
--------------- ---------------
53,447 66,115
--------------- ---------------
Operating income ............................. 11,849 11,268
Interest expense, net ........................ 24,334 25,433
--------------- ---------------
Loss before income taxes ..................... (12,485) (14,165)
Income taxes ................................. -- --
--------------- ---------------
NET LOSS .................................. $(12,485) $(14,165)
=============== ===============
NET LOSS PER COMMON SHARE ................. $ (1.18) $ (1.34)
=============== ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 10,589 10,600
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ---------------------- PAID-IN ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- -------- ------------ --------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 28, 1996 . -- -- 10,062,497 $101 $24,564 $(84,061) $(59,396)
Issuance of common stock ... -- -- 195,335 2 (2) -- --
Net loss .................... -- -- -- -- -- (14,165) (14,165)
-------- -------- ------------ -------- --------- ------------- -----------
Balance, September 27, 1997 -- -- 10,257,832 $103 $24,562 $(98,226) $(73,561)
======== ======== ============ ======== ========= ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE 39 WEEKS ENDED
--------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(12,485) $(14,165)
Adjustments to reconcile net loss to net cash provided by/(used
in) operating activities .........................................
Depreciation and amortization of property and equipment ........ 2,295 2,584
Amortization of goodwill and other intangibles .................. 10,505 5,803
Accretion of principal of zero coupon debt ...................... 8,437 9,622
Other............................................................ 1,156 1,182
Changes in operating assets and liabilities:
Receivables .................................................... (385) (1,913)
Inventories .................................................... (1,844) (17,958)
Accounts payable ............................................... 1,546 10,695
Interest payable ............................................... (2,620) (3,250)
Prepaid and accrued expenses and other ......................... 51 4,197
--------------- ---------------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES ............ 6,656 (3,203)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of capital assets ............................. -- 1,075
Capital expenditures ............................................. (913) (4,931)
Systems development costs ........................................ (2,068) --
Sale of government securities .................................... 44 --
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES ........................... (2,937) (3,856)
--------------- ---------------
Cash flows from financing activities:
Deferred financing costs ......................................... (542) (309)
Repayments of senior debt ........................................ (4,625) (6,107)
Repayments of subordinated debt .................................. -- (9)
Proceeds from bank debt, revolving credit--net ................... 1,500 15,500
Capital lease financing .......................................... 274 --
Repayment of capital lease obligations ........................... (2,120) (2,014)
Repurchase of stock .............................................. (96) --
--------------- ---------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ............. (5,609) 7,061
--------------- ---------------
Net (decrease)/increase in cash .................................... (1,890) 2
Cash at beginning of period ........................................ 2,133 216
--------------- ---------------
Cash at end of period............................................... $ 243 $ 218
=============== ===============
Supplementary disclosure of cash flow information:
Cash paid for interest ........................................... $ 16,526 $ 16,541
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings,
Daboco, DR Inc. and Duane Reade (collectively, the "Company"). All
intercompany transactions and balances have been eliminated.
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The results of operations for any interim period should not
necessarily be considered indicative of the results of operations for a full
year.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto for the 52 weeks ended December 28, 1996 included elsewhere in this
prospectus.
RECEIVABLES: Receivables consist primarily of amounts due from vendors, a
majority of which relate to promotional programs. Receivables also arise as a
result of third party payment plans from the sale of prescription drugs;
commencing in May 1997, substantially all such receivables are sold without
recourse to a funding entity. The discount on the sale of such third party
receivables amounted to approximately $381,000 during the 39 weeks ended
September 27, 1997 and is included in interest expense.
INTANGIBLE ASSETS: In September 1992, Holdings and Duane Reade entered
into agreements with certain former members of management of Duane Reade,
former shareholders of Daboco and shareholders of former partners of Duane
Reade (collectively, the "Group") precluding such persons from competing with
the operations of Duane Reade for a period of five years. The covenants not
to compete were recorded at acquisition cost and were being amortized over
the period of benefit using an accelerated method. During the first quarter
of 1997, Holdings and Duane Reade entered into agreements with the Group in
which the Company received consideration from the Group to terminate the
non-compete agreements. In accordance with APB Opinion No. 17, Intangible
Assets, the remaining carrying value of the non-compete agreements of $4.86
million as of December 28, 1996 was written off during the fourth quarter of
1996 and charged to amortization expense.
Goodwill is amortized on the straight-line method over 40 years. The
carrying value of goodwill is periodically reviewed and evaluated by the
Company based on its expected future undiscounted operating cash flows.
Should such evaluation result in the Company concluding that the carrying
amount of goodwill has been impaired, an appropriate write-down would be
made.
NET LOSS PER COMMON SHARE: Net loss per common share is based on the
weighted average shares outstanding during each period: 10,588,862 and
10,599,722 for the 39 weeks ended September 28, 1996 and September 27, 1997,
respectively. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, options granted with exercise prices below the estimated
initial public offering price during the 12 month period preceding the date
of the initial filing of the Registration Statement have been included in the
calculation of net loss per common share, using the treasury stock method
based on the estimated initial public offering price of $15.00 per share, as
if the options were outstanding for all periods presented. Outstanding share
amounts have been restated to give effect to the recapitalization described
in Note 10 and the reverse stock split described in Note 13.
F-20
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Land............................................ $ 312
Buildings and building improvements ............ 4,286
Furniture, fixtures and equipment .............. 9,468
Leasehold improvements ......................... 15,303
Property under capital leases .................. 5,102
------------------
34,471
Less--Accumulated depreciation and amortization (9,553)
------------------
$24,918
==================
</TABLE>
3. OTHER ASSETS
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Deferred financing costs (net of accumulated amortization of
$11,585)..................................................... $ 6,144
Systems and integration costs (net of accumulated
amortization of $2,653) ..................................... 8,364
Other ........................................................ 1,792
------------------
$16,300
==================
</TABLE>
4. DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Senior debt
Term loan facility (A)....................... $ 65,475
Notes payable bank--revolving credit (A) ... 16,000
12% Senior Notes due September 15, 2002 (B) 89,893
Subordinated debt
15% Senior Subordinated Zero Coupon Notes
due September 15, 2004 (C) ................. 89,094
------------------
260,462
Less--Current portion ........................ 660
------------------
$259,802
==================
</TABLE>
(A) Outstanding balances under a Credit Agreement dated as of September
24, 1992, as amended, with a syndicate of lending institutions bear interest
at floating rates, which at September 27, 1997 averaged 10.5%. In addition to
the term loan, the Credit Agreement provides for a revolving credit facility
of $20.0 million (less amounts of letters of credit issued under the Credit
Agreement) which may be used for general corporate purposes and which expires
on September 30, 1998. As of September 27, 1997, the borrowings outstanding
under the revolving credit facility were $16.0 million (classified as a
noncurrent liability) and $0.3 million in letters of credit had been issued.
F-21
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Subject to certain conditions, voluntary prepayments of the Term Loan are
permitted without premium or penalty. Mandatory prepayments are required with
respect to asset sales, permitted issuance of debt or equity and 75% of
excess cash flows, as defined in the Credit Agreement, as amended. For the 39
weeks ended September 27, 1997, there were no voluntary or mandatory
prepayments.
Obligations under the Credit Agreement are secured by a pledge of all of
Duane Reade's tangible and intangible assets and are guaranteed by its
partners, Daboco and DR Inc., which have pledged 100% of their partnership
interests in support of such guarantees. The guarantees are joint and several
and full and unconditional. The Credit Agreement contains restrictions on
indebtedness, asset sales, dividends and other distributions, capital
expenditures, transactions with affiliates and other unrelated business
activities. Financial performance covenants include interest coverage,
leverage ratio, minimum earnings and working capital levels. At September 27,
1997, the Company is in compliance with all of the covenants in the Credit
Agreement. See Note 13.
(B) On September 25, 1992, Duane Reade issued $90,000,000 aggregate
principal amount of 12% Senior Notes due September 15, 2002 (the "Senior
Notes"), at face value. Interest is payable at 12% semiannually. The Senior
Notes are guaranteed by Daboco and DR Inc. All of Daboco's assets are pledged
to secure indebtedness under the Credit Agreement discussed in (A) above. As
a result, such indebtedness will have claim on those assets that is prior to
the claim of holders of the Senior Notes. To the extent that the amount of
senior indebtedness exceeds the value of the collateral securing such
indebtedness, the Senior Notes will rank pari passu with the Term Loans.
Duane Reade is required to make a sinking fund payment on September 15,
2001 sufficient to retire 50% of the aggregate principal amount of Senior
Notes originally issued. The Senior Notes are subject to redemption at the
option of the issuer at 104.5% of par, plus accrued interest, at the end of
1997, declining to par, plus accrued interest, at the end of 2000. In the
event of a change in control, Duane Reade shall be obligated to make an offer
to purchase all outstanding Senior Notes at a repurchase price of 101% of the
principal amount. A change of control did occur in June 1997 (see Note 10).
(C) On September 25, 1992, Holdings issued $123,380,000 aggregate
principal amount of 15% Senior Subordinated Zero Coupon Notes due September
15, 2004 (the "Zero Coupon Notes"), net of an $81,909,000 discount. The
discount accretes through the Final Accretion Date of September 15, 1999.
Thereafter, cash interest is payable at 15% semi-annually through maturity.
Interest expense is determined using the effective interest method, which
applies a constant yield to carrying value over the life of the Zero Coupon
Notes.
The Credit Agreement and the Senior Note Indenture referred to in (A) and
(B) above provide for subordination of Holdings' debt to partnership debt.
The notes are redeemable at the option of the issuer, in whole or in part,
at 107.5% of Accreted Value (as defined in the Zero Coupon Note Indenture),
plus accrued interest, at the end of 1997 declining to par, plus accrued
interest, at the end of 2002. In the event of a change in control, Holdings
shall be obligated to make an offer to purchase all outstanding Zero Coupon
Notes at a repurchase price of 101% of Accreted Value (as defined in the
Indenture) or principal amount, as applicable. A change of control did occur
in June 1997 (see Note 10). The Accreted Value of the Zero Coupon Notes was
$92,840,000 at September 27, 1997.
Purchasers of the Zero Coupon Notes received 15% of the fully diluted
common stock of Holdings, with registration rights, for aggregate
consideration of $3,529,000.
The Indentures governing the Zero Coupon Notes and the Senior Notes
include certain restrictive covenants. Subject to certain exceptions, the
Indentures restrict transactions with affiliates, the incurrence of
additional indebtedness, the payment of dividends, the creation of liens,
certain asset sales, mergers and consolidations and certain other payments.
F-22
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The Company's debt is thinly traded in the market place. Accordingly,
management is unable to determine fair market values for such debt at
September 27, 1997.
The Zero Coupon Notes and the Senior Notes were issued pursuant to
Registration Rights Agreements under which Holdings and Duane Reade
consummated registered exchange offers pursuant to which Holdings and Duane
Reade exchanged the Zero Coupon Notes and the Senior Notes, respectively, for
identical notes which have been registered under the Securities Act of 1933,
as amended.
5. CAPITAL LEASE OBLIGATIONS
As of September 27, 1997, the present value of capital lease obligations
was $2.2 million (of which $1.5 million is payable during the next twelve
months). Such obligations are payable in monthly installments over three to
five year periods and bear interest at an average rate of 12.2%.
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between book and tax bases of the respective assets and liabilities at
September 27, 1997 using a 44.7% combined federal, state and local tax rate
and are comprised of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Inventories .................... $ (3,382)
------------------
Gross deferred tax liabilities (3,382)
------------------
Property and equipment ......... 734
Deferred rent .................. 2,398
Targeted jobs credit ........... 284
Zero Coupon debt discount ..... 17,580
Net operating loss
carryforward................... 31,791
Other .......................... 352
------------------
Gross deferred tax assets ..... 53,139
------------------
Net deferred tax assets ........ 49,757
Valuation allowance............. (49,757)
------------------
$ --
==================
</TABLE>
The Company deducted for income tax purposes for the period September 25
to December 31, 1992 approximately $88 million of payments made to former
partners of Duane Reade (the "Retirement Payments"). Approximately $21
million of the valuation allowance relates to these Retirement Payments. The
Retirement Payments and other current tax deductions resulted in a net
operating loss of approximately $71 million which may be available to offset
future taxable income of the Company through 2012. Due to the nature of the
Retirement Payments, future reductions in that portion of the valuation
allowance related to the Retirement Payments will be credited to goodwill.
Further, due to the change in ownership arising as a result of the
recapitalization (see Note 10), certain income tax law provisions apply that
limit the ability of the Company to utilize the available net operating loss
carryforwards. It is estimated that the annual limitation will be $5.0
million.
F-23
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The provision for income taxes for the 39 weeks ended September 28, 1996
and September 27, 1997 differs from the amounts of income tax determined by
applying the applicable U.S. statutory federal income tax rate to pretax loss
as a result of the following (dollars in thousands):
<TABLE>
<CAPTION>
39 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 28, 1996 SEPTEMBER 27, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Pretax accounting loss .................... $(12,485) 100% $(14,165) 100%
=========== ========= =========== =========
Statutory rate............................. $ (4,370) (35.0)% $ (4,958) (35.0)%
State and local taxes, net of federal tax (837) (6.7) (262) (1.8)
Goodwill amortization ..................... 914 7.3 914 6.5
Net operating losses not utilized ........ 3,870 31.0 1,207 8.5
Nondeductible recapitalization costs ..... -- -- 2,485 17.5
Nondeductible interest expense ............ 513 4.1 596 4.2
Other ..................................... (90) (0.7) 18 0.1
----------- --------- ----------- ---------
Effective tax rate......................... $ -- --% $ -- --%
=========== ========= =========== =========
</TABLE>
7. STORE PRE-OPENING EXPENSES
Duane Reade opened one new store location during the 39 weeks ended
September 28, 1996 and five new stores during the 39 weeks ended September
27, 1997.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Duane Reade leases all of its store facilities under operating lease
agreements expiring on various dates through the year 2014. In addition to
minimum rentals, certain leases provide for annual increases based upon real
estate tax increases, maintenance cost increases and inflation. Rent expense
for the 39 weeks ended September 28, 1996 and September 27, 1997 was
$18,248,000 and $19,572,000, respectively.
Minimum annual rentals at September 27, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
13 weeks ending December 27, 1997 $ 6,074
1998............................... 27,518
1999 .............................. 27,069
2000 .............................. 26,274
2001 .............................. 25,959
2002 .............................. 25,404
Remaining lease terms ............. 135,497
---------
Total.............................. $273,795
=========
</TABLE>
LITIGATION
The Company from time to time is involved in routine legal matters
incidental to its business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
MANAGEMENT AGREEMENTS
Pursuant to the terms of various employment and related agreements, the
Company and various executives entered into agreements pursuant to which (i)
executives' salary and bonuses were established
F-24
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
and (ii) executives purchased shares of Holdings' previously issued Class P
common stock at a price of $162.00 per share and shares of Holdings' common
stock at a price of $2.00 per share, each representing original cost. In the
event of employment termination, all of the stock may be repurchased by
Holdings. As a result of the recapitalization (see Note 10) and the reverse
stock split (see Note 13), all shares were converted into common stock. As of
September 27, 1997, an aggregate of 488,283 shares of common stock are held
by employees and former employees.
COMMITMENTS
At September 27, 1997, the Company had a commitment of approximately $4.0
million in connection with the acquisition and installation of a point of
sale scanning system. The Company intends to finance substantially all of
such acquisition and installation costs through capital lease financing.
The Company has employment agreements with several of its executives
providing, among other things, for employment terms of up to three years. In
addition, the Company has established a Supplemental Executive Retirement
Plan ("SERP") which presently covers only its Chairman. Such SERP provides
for vesting over a twenty year period. However, if the Chairman's employment
is terminated without cause, as defined, or if the Chairman resigns with
cause, as defined, such vesting becomes immediate, in which event the Company
would be liable to the Chairman (in addition to amounts accrued in the
financial statements) in the amount of approximately $680,000.
9. EMPLOYEE BENEFIT PLANS
On October 12, 1992, the Company adopted the 1992 Stock Option Plan of
Duane Reade Holding Corp. (the "Plan"). Under the Plan, a committee
designated by the Board of Directors to administer the Plan (the "Committee")
may grant, to executive and other key employees of the Company, nonqualified
stock options to purchase up to an aggregate of 510,757 (adjusted for the
recapitalization--See Note 10--and the reverse stock split--see Note 13)
shares of common stock of the Company at an exercise price fixed by the
Committee. The options are exercisable at such time or times as the Committee
determines at or subsequent to grant. The term of the options set by the
Committee shall not exceed 10 years.
At September 27, 1997, there were outstanding nonqualified stock options
to purchase up to an aggregate of 646,187 shares of common stock (including
options granted outside the Plan), all of which are vested.
Changes in options outstanding (including options granted outside the
Plan) during the 39 weeks ended September 27, 1997 are summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
----------------------------------------------
TOTAL
$.58 $7.34-$12.77 $29.37 $40.86 OPTIONS
----------- -------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 28, 1996 . 750,044 29,128 29,128 29,128 837,428
Options granted......................... 851 68,953 851 851 71,506
Options canceled........................ (262,747) -- -- -- (262,747)
----------- -------------- -------- -------- -----------
Options outstanding, September 27,
1997................................... 488,148 98,081 29,979 29,979 646,187
=========== ============== ======== ======== ===========
Weighted average remaining life on
outstanding options.................... 8.4 years 8.5 years 6.4 years 6.4 years 8.3 years
</TABLE>
During the second quarter of 1997, the Company adopted an Equity
Participation Plan under which options for a total of 1,321,181 shares of
common stock of the Company may be granted to employees, consultants and
non-employee directors of the Company if the Company meets specific
performance targets. At September 27, 1997, options for 1,005,772 shares have
been granted to employees.
F-25
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Changes in options outstanding under the Equity Participation Plan during
the 39 weeks ended September 27, 1997 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS OPTION PRICE
------------ --------------
<S> <C> <C>
Options outstanding, December 28, 1996 -- --
Options granted ....................... 1,005,772 8.33
------------ --------------
Options outstanding, September 27,
1997.................................. 1,005,772 $8.33
============ ==============
</TABLE>
As permitted, the Company applies Accounting Principles Board Opinion No.
25 and related Interpretations in accounting for its stock-based compensation
plan. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value at the grant dates for awards under
the Plan, consistent with the alternative method of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
effect on the Company's net loss for the 39 weeks ended September 28, 1996
and September 27, 1997 would have been less than $100,000 and $200,000,
respectively.
The Company maintains an employee savings plan pursuant to Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code ("IRC") which covers
substantially all non-union employees other than key employees as defined by
IRC. Eligible participating employees may contribute up to 10% of their
pretax salaries, subject to certain IRC limitations. The 401(k) Plan, as
amended, provides for employer matching provisions at the discretion of the
Company (to a maximum of 1% of pretax salaries) and has a feature under which
the Company may contribute additional amounts for all eligible employees. The
Company's policy is to fund such costs under the 401(k) Plan as accrued.
There were no employer contributions for the 39 weeks ended September 28,
1996 and September 27, 1997.
Duane Reade is under contract with local unions to contribute to
multi-employer pension and welfare benefit plans for certain of its
employees. For the 39 weeks ended September 28, 1996 and September 27, 1997,
contributions to such plans were $4,121,000 and $4,844,000, respectively.
10. RECAPITALIZATION
During June 1997, the Company entered into a recapitalization agreement
(the "Agreement") with its stockholders ("Stockholders") and certain
investors ("Investors"). The Agreement provided for (i) the purchase by
Investors from the Stockholders of substantially all their stock holdings in
the Company, (ii) a conversion of all of the outstanding shares of the
Company into a newly authorized class of Class B Common stock and (iii) the
creation of a new authorized class of preferred stock which will carry the
rights and preferences granted by the Company's Board of Directors when
issued.
Shares were converted as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PRIOR CLASS CONVERSION RATE
- ------------------------------------ ---------------
<S> <C>
Common and Common Class A ........... 28/1
Common Class P and Common Class P-1 355/1
</TABLE>
In addition, because of the change in control, the Company was obligated
to and made offers to repurchase all outstanding Senior Notes and Zero Coupon
Notes at 101% of the principal amount or accreted value thereof,
respectively. Such offers expired on September 12, 1997. The Company
repurchased an aggregate of $107,000 principal amount of Senior Notes and
$9,000 of Zero Coupon Notes pursuant to the offers.
These financial statements do not reflect any adjustments as a result of
the June 1997 change in control.
F-26
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
11. NONRECURRING CHARGES
During the first quarter of 1997, the Company considered a public offering
of its common stock and took certain steps in connection with these plans.
Such plans were abandoned upon consummation of the transaction discussed in
Note 10.
Costs and expenses incurred in connection with the abandoned public
offering and the recapitalization and the exchange offers referred to in Note
10 aggregated approximately $10.9 million, including investment banking fees
of $7.7 million (including $3.5 million to an affiliate of the Investors and
$0.6 million to the Stockholders), legal and accounting fees of $1.6 million,
stand-by commitment fees relating to the exchange offers of $1.2 million to
an affiliate of the Investors, and other costs of $0.4 million. The Company
has treated these expenses as non-recurring because such expenses related to
financing activities in connection with the Recapitalization and related
events, which the Company does not expect to repeat.
12. RELATED PARTY TRANSACTIONS
In 1992, the Company and the then principal stockholder of the Company
(who has subsequently sold most of its shares--see Note 10) entered into a
professional services agreement whereby consulting, advisory, financial and
other services were provided at the Company's request, for a five year term.
During the 39 weeks ended September 28, 1996, such fees aggregated
approximately $742,000. See Note 11.
In addition, the Investors paid an executive approximately $0.8 million
for advisory services rendered and a former executive approximately $1.6
million for the repurchase and cancellation of exercisable stock options. The
accompanying financial statements do not reflect such payments.
13. SUBSEQUENT EVENTS
On September 30, 1997, the Company entered into a credit agreement with an
affiliate of the Investors and various financial institutions providing for a
term loan of $65,475,000 and a revolving credit facility of $30,000,000.
Proceeds of the term loan were used to repay outstanding term loans
($63,475,000) and revolving loans ($2,000,000) pursuant to the Credit
Agreement discussed in Note 4.
The term loan is payable in quarterly installments of $165,000 from
December 1997 through March 2001, $31,000,000 in June 2001, quarterly
installments of $165,000 from September 2001 through March 2002 and
$31,000,000 in June 2002. Outstanding term and revolving loans at September
27, 1997 have been classified in accordance with such repayment terms.
Costs incurred in connection with the refinancing aggregated approximately
$2.7 million (including a funding fee of $2.4 million to an affiliate of the
Investors) and will be amortized over the term of the new credit agreement.
Unamortized deferred financing costs of approximately $1.8 million at
September 27, 1997 relating to the prior credit agreement will be charged to
earnings in the fourth quarter of 1997.
On January 14, 1998, the Company effected an 8.326 reverse stock split of
its common stock. All references to common stock amounts, shares and per
share data included herein have been adjusted to give retroactive effect to
such reverse stock split.
F-27
<PAGE>
[DUANE READE INC. LOGO]
[PHOTO]
[PHOTO]
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
THE NEW SENIOR SUBORDINATED NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 11
Use of Proceeds ............................... 18
Capitalization ................................ 19
Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................... 20
Selected Consolidated Historical Financial and
Operating Data ............................... 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
Business ...................................... 34
Management .................................... 43
Certain Relationship and Related Transactions 49
Principal Stockholders ........................ 51
Description of New Senior Subordinated Notes .. 52
Description of Certain Indebtedness ........... 74
Underwriting .................................. 75
Legal Matters ................................. 76
Experts ....................................... 76
Additional Information ........................ 76
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
$80,000,000
[DUANE READE LOGO]
% SENIOR SUBORDINATED
NOTES DUE 2008
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FEBRUARY , 1998
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
[ALTERNATE COVER PAGE]
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 1998
PROSPECTUS
, 1998
$80,000,000
[DUANE READE LOGO]
% SENIOR SUBORDINATED NOTES DUE 2008
The % Senior Subordinated Notes due 2008 (the "New Senior Subordinated
Notes") offered hereby (the "Offering") by Duane Reade Inc., a Delaware
corporation (the "Company") were originally issued by the Company as part of
the Refinancing Plan (as defined herein) of the Company. See "Prospectus
Summary--Refinancing Plan" and "Use of Proceeds."
The New Senior Subordinated Notes will mature on , 2008. Interest on
the New Senior Subordinated Notes will be payable semi-annually on and
of each year, commencing on , 1998. The New Senior Subordinated
Notes will be redeemable at the option of the Company, in whole or in part,
at any time on or after , 2003, in cash at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, thereon to the
redemption date. In addition, at any time prior to , 2001, the Company
may, at its option, redeem up to 35% of the aggregate principal amount of the
New Senior Subordinated Notes originally issued at a redemption price equal
to % of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the redemption date, with the net proceeds of
offerings of equity securities of the Company; provided that at least 65% of
the original aggregate principal amount of the New Senior Subordinated Notes
will remain outstanding immediately following such redemption. Upon the
occurrence of a Change of Control (as defined herein), each holder of New
Senior Subordinated Notes will have the right to require the Company to
repurchase such holder's New Senior Subordinated Notes at a price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of repurchase. See "Description
of New Senior Subordinated Notes--Repurchase at the Option of the
Holders--Change of Control."
The New Senior Subordinated Notes will be general unsecured obligations of
the Company and will be subordinated in right of payment to all existing and
future Senior Debt (as defined herein) of the Company, including indebtedness
pursuant to the New Credit Agreement (as defined herein). The New Senior
Subordinated Notes will rank pari passu with any future senior subordinated
indebtedness of the Company and will rank senior to all subordinated
indebtedness of the Company. The New Senior Subordinated Notes will be
guaranteed (the "Subsidiary Guarantees"), jointly and severally, on a senior
subordinated basis by all of the Company's subsidiaries (the "Subsidiary
Guarantors"). The Subsidiary Guarantees will be subordinated in right of
payment to all existing and future Senior Debt (including the guarantees
under the New Credit Agreement) of the Subsidiary Guarantors. On a pro forma
basis after giving effect to the Refinancing Plan, including consummation of
the Offering and the Common Stock Offering (as defined herein) and the
application of the proceeds thereof, as of September 27, 1997, the Company
would have had outstanding approximately $130.0 million of Senior Debt and
the Company and its subsidiaries would have had approximately $262.6 million
of aggregate outstanding liabilities, including trade payables and the New
Senior Subordinated Notes.
Consummation of the Offering occurred concurrently with consummation of
the Refinancing Plan. As part of the Refinancing Plan, the Company offered
(the "Common Stock Offering") 6,700,000 shares of its common stock, par value
$.01 per share (the "Common Stock"), for estimated net proceeds of $
million. See "Prospectus Summary--Refinancing Plan" and "Use of Proceeds."
SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NEW
SENIOR SUBORDINATED NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
This Prospectus has been prepared for use by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") in connection with offers and sales of the New
Senior Subordinated Notes that may be made by it from time to time in
market-making transactions at negotiated prices relating to prevailing market
prices at the time of sale. There is currently no public market for the New
Senior Subordinated Notes. The Company has been advised by DLJ that it
intends to make a market for the New Senior Subordinated Notes, however, DLJ
is not obligated to do so. Any market-making may be discontinued at any time,
and there is no assurance that an active public market for the Senior
Subordinated Notes will develop or, that if such market develops, that it
will continue. DLJ may act as principal agent in any such transaction. See
"Plan of Distribution."
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE>
[ALTERNATE RISK FACTOR]
TRADING MARKET FOR THE NOTES
The New Senior Subordinated Notes are not listed for trading on any
securities exchange or on any automated dealer quotation system. The Company
has been advised by DLJ that it intends to make a market in the New Senior
Subordinated Notes; however, DLJ is not obligated to do so. Any market-making
may be discontinued at any time, and there is no assurance that an active
public market for the New Senior Subordinated Notes will develop or, that if
such market develops, that it will continue. Further, the liquidity of, and
trading market for the New Senior Subordinated Notes may be adversely
affected by declines and volatility in the market for high yield securities
generally. The liquidity of and trading market for the New Senior
Subordinated Notes may be adversely affected by any changes in the Company's
financial performance or prospects.
<PAGE>
[ALTERNATE PAGE 18]
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting the
underwriting discount and estimated general offering expenses) were
approximately $ million. Such net proceeds were used, together with net
proceeds from the Common Stock Offering of $ million and net borrowings
under the New Credit Agreement of $ million, to complete the Refinancing
Plan, which consisted of: (i) the redemption of all of the Zero Coupon Notes
for $99.8 million (including a redemption premium of $7.0 million), (ii) the
redemption of all of the Senior Notes for $93.9 million (including a
redemption premium of $4.0 million), (iii) the repayment of all outstanding
term loan indebtedness under the Existing Credit Agreement, the outstanding
principal amount of which was $65.3 million as of December 27, 1997, (iv) the
repayment of all outstanding revolving indebtedness under the Existing Credit
Agreement, the outstanding principal amount of which was $24.5 million as of
December 27, 1997, and (v) the payment of fees and expenses incurred in
connection with the Refinancing Plan. The Company used the proceeds of the
Offering, the Common Stock Offering and a portion of the proceeds from the
New Credit Agreement to fund the redemption of the Zero Coupon Notes and the
Senior Notes. Accordingly, the proceeds from the Offering and the Common
Stock Offering were used to defease the Zero Coupon Notes and the Senior
Notes pending such redemptions, which the Company currently expects to occur
approximately 30 days after the closing of the Offering.
18
<PAGE>
[ALTERNATE PAGES 75 AND 76]
PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by DLJ in connection with offers
and sales of the New Senior Subordinated Notes in market-making transactions
at negotiated prices related to prevailing market prices at the time of the
sale. DLJ may act as principal or agent in such transactions. The Company has
been advised by DLJ that it intends to make a market in the New Senior
Subordinated Notes; however, DLJ is not obligated to do so. Any market-making
may be discontinued at any time, and there is no assurance that an active
public market for the New Senior Subordinated Notes will develop or, that if
such market develops, that it will continue. DLJ served as the underwriter in
the Offering and received total underwriting discounts and commissions of
$ in connection therewith.
DLJ also acted as one of the underwriters in connection with the Common
Stock Offering and received customary discounts and commissions in connection
therewith. DLJ Capital Funding, Inc. is one of the lenders under the Existing
Credit Agreement. The proceeds of the Offering, together with the proceeds
from the Common Stock Offering and the New Credit Agreement, are being used
to effect the Refinancing Plan, including the repayment of the Existing
Credit Agreement. DLJ Capital Funding, Inc., an affiliate of DLJ, is the
syndication agent and a lender under the New Credit Agreement. From time to
time, DLJ provides investment banking services to the Company, for which it
receives customary compensation. See "Certain Relationships and Related
Transactions."
LEGAL MATTERS
The validity of the New Senior Subordinated Notes offered hereby was
passed upon for the Company by Latham & Watkins, New York, New York. Latham &
Watkins also represented DLJMBPII in connection with the Recapitalization.
76
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, DLJ OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY NEW SENIOR
SUBORDINATED NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 11
Use of Proceeds ............................... 18
Capitalization ................................ 19
Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................... 20
Selected Consolidated Historical Financial and
Operating Data ............................... 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
Business ...................................... 34
Management .................................... 43
Certain Relationship and Related Transactions 49
Principal Stockholders ........................ 51
Description of New Senior Subordinated Notes .. 52
Description of Certain Indebtedness ........... 74
Underwriting................................... 75
Plan of Distribution .......................... 75
Legal Matters ................................. 76
Experts ....................................... 76
Additional Information ........................ 76
Index to Financial Statements.................. F-1
</TABLE>
[ALTERNATE BACK COVER]
$80,000,000
[DUANE READE LOGO]
% SENIOR SUBORDINATED
NOTES DUE 2008
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FEBRUARY , 1998
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee .................................... $ 22,125
NASD filing fee ......................................... 8,500
Blue sky fees and expenses (including attorneys' fees
and expenses) .......................................... 10,000
Printing and engraving expenses ......................... 100,000
Trustee and registrar fees and expenses ................. 10,000
Accounting fees and expenses ............................ 135,000
Legal fees and expenses ................................. 200,000
Miscellaneous expenses .................................. 14,375
----------
Total.................................................... $500,000
==========
</TABLE>
- ------------
* To be provided by amendment.
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is,
or is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify any person who is, or is threatened to be made, a
party to any threatened, pending or completed action or suit by or in the
right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Company's Amended and Restated Certificate of Incorporation provides
for the indemnification of directors and officers of the Company to the
fullest extent permitted by Section 145.
In that regard, the Amended and Restated Certificate of Incorporation
provides that the Company 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 or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director
II-1
<PAGE>
or officer of the Company, or is or was serving at the request of the
Company as a director, officer or member of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnification in connection with an
action or suit by or in the right of the Company to procure a judgment in its
favor is limited to payment of settlement of such an action or suit except
that no such indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the indemnifying
corporation unless and only to the extent that the Court of Chancery of
Delaware or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability but in consideration of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding all securities
sold and employee stock options granted by the Company since November 1994.
Further included is the consideration, if any, received by the Company for
such securities, and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), and the rules of the
Securities and Exchange Commission under which exemption from registration
was claimed. All awards of options did not involve any sale under the
Securities Act. No sale of securities involved the use of an underwriter, and
no commissions were paid in connection with the sales of any securities.
(1) On April 10, 1995, the Company issued 5,000 shares of the Company's
common stock (the "Common Stock") and 555.556 shares of the Company's
Class P common stock (the "Class P Stock") to Jerry M. Ray for $100,000,
pursuant to the exemption contained in Section 4(2) of the Securities Act.
(2) On June 9, 1997, the Company issued 9,639 shares of Common Stock to
Bankers Trust New York Corporation for 9,639 shares of the Company's Class
A common stock (the "Class A Stock"), pursuant to the exemption contained
in Section 3(a)(9) of the Securities Act.
(3) On June 18, 1997, in connection with the Recapitalization, the
Company issued to all holders of its then outstanding capital stock (the
"Retired Common Stock") shares of its newly authorized Class B Common
Stock in exchange for such Retired Common Stock. For each share of Common
Stock and Class A Stock, a stockholder received approximately 3 shares of
Class B Common Stock after giving effect to the Reclassification, and for
each share of Class P Stock and the Company's Class P-1 common stock (the
"Class P-1 Stock"), a holder received approximately 43 shares of Class B
Common Stock after giving effect to the Reclassification. In total after
giving effect to the Reclassification, the Company issued an aggregate of
10,257,832 shares of Class B Common Stock to its stockholders for an
aggregate of 1,136,470.5 shares of Common Stock, 100,000 shares of Class A
Stock, 126,274.7 shares of Class P Stock and 11,111.1 shares of Class P-1
Stock. Section3(a)(9) of the Securities Act was relied upon for exemption
of such issuance from registration. Set forth in the table below are (i)
each of the shareholders of the Company, (ii) the number of shares of
Retired Common Stock such shareholder exchanged and (iii) the number of
shares of Class B Common Stock that the Company issued to such
shareholder.
II-2
<PAGE>
<TABLE>
<CAPTION>
SHARES OF RETIRED COMMON STOCK EXCHANGED SHARES OF
---------------------------------------------------------------- COMMON
SHAREHOLDERS CLASS A STOCK CLASS P STOCK CLASS P-1 STOCK COMMON STOCK STOCK ISSUED
- --------------------------------------- --------------- --------------- --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P. 90,361 122,386 11,111.1 943,960 9,383,423
BCIP Associates......................... 2,239.503 3,173.428 18,431
BCIP Trust Associates, L.P.............. 111.614 1,047.855 3,948
Tyler Capital Fund, L.P. ............... 33,021.798 31,072.102 218,239
Tyler International, L.P.-II............ 1,979.812 1,862.888 13,084
Tyler Massachusetts, L.P. .............. 6,765.861 6,366.439 44,715
Jeffrey C. Hammes....................... 104.161 98.039 689
Karl E. Lutz............................ 325.528 306.372 2,152
Pearlman Family Partners................ 390.653 367,647 2,582
Thomas Stemberg ........................ 82.700 282
The Marion Trust........................ 1,686.800 5,744
Bankers Trust New York Corporation .... 9,639 32,821
Sigler & Co. ........................... 2,551 8,688
Muico, Inc.............................. 6,426 21,880
Roton, Inc. ............................ 1,890 6,435
USL Capital Corporation................. 1,890 6,435
Bruce L. Weitz.......................... 2,777.775 25,000 203,451
Gary Charboneau......................... 2,777.775 25,000 203,451
Mike Cirilli............................ 138.889 1,250 10,173
Frank DeMarco........................... 138.889 1,250 10,173
Karen Durham............................ 138.889 1,250 10,173
Hyman Needleman......................... 138.889 1,250 10,173
Jerry M. Ray............................ 555.556 5,000 40,690
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------
<S> <C>
1.1** Form of Underwriting Agreement.
3.1(i) Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1(i) to the Common Stock S-1).
3.1(ii) Form of Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.1(i) to the Common Stock S-1).
3.2(i) Certificate of Incorporation of DRI I Inc.
3.2(ii) By-laws of DRI I Inc.
3.3** Second Amended and Restated Partnership Agreement of Duane Reade.
4.1** Form of Indenture.
5.1** Opinion of Latham & Watkins
10.1 Duane Reade Inc. 1997 Equity Participation Plan (incorporated by reference to Exhibit
10.1 to the Company's Form S-1 Registration Statement (File No. 333-41239), the "Common
Stock S-1").
10.2 Duane Reade Holding Corp. 1992 Stock Incentive Plan (incorporated by reference to Exhibit
10.2 to the Common Stock S-1).
10.3 Employment Agreement, dated as of October 27, 1997, between the Company and Anthony J.
Cuti (incorporated by reference to Exhibit 10.3 to the Common Stock S-1).
10.4 Employment Agreement, dated as of February 22, 1993, as amended, between the Company and
Gary Charboneau (incorporated by reference to Exhibit 10.4 to the Common Stock S-1).
10.5 Employment Agreement, dated as of April 10, 1995, as amended, between Duane Reade and
Jerry M. Ray (incorporated by reference to Exhibit 10.5 to the Common Stock S-1).
II-3
<PAGE>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------
10.6 Employment Letter Agreement, dated as of October 9, 1996, between Duane Reade and Joseph
Lacko (incorporated by reference to Exhibit 10.6 to the Common Stock S-1).
10.7 Employment Letter Agreement, dated as of February 12, 1997, between the Company and
William Tennant (incorporated by reference to Exhibit 10.7 to the Common Stock S-1).
10.8 Agreement, dated as of November 22, 1996, between Duane Reade and Drug, Chemical,
Cosmetic, Plastics and Affiliated Industries Warehouse Employees Local 815 (incorporated
by reference to Exhibit 10.8 to the Common Stock S-1).
10.9 Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied Trades Council
(incorporated by reference to Exhibit 10.9 to the Common Stock S-1).
10.10 Agreement, dated February 4, 1997, as amended, between Duane Reade and The Pharmacy Fund,
Inc. (incorporated by reference to Exhibit 10.10 to the Common Stock S-1).
10.11 Indenture, dated as of September 15, 1992, between Duane Reade Holding Corp. and The
Connecticut National Bank, as trustee (incorporated by reference to Exhibit 10.11 to the
Common Stock S-1).
10.12 Indenture, dated as of September 15, 1992, among Duane Reade, Daboco Inc., Duane Reade
Inc. and The Connecticut National Bank, as trustee (incorporated by reference to Exhibit
10.12 to the Common Stock S-1).
10.13 Stockholders and Registration Rights Agreement, dated as of June 18, 1997, among the
Company, DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Diversified
Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners, II, C.V., DLJ EAB Partners,
L.P., UK Investment Plan 1997 Partners, Bankers Trust New York Corporation, Conac & Co.,
Muico & Co., Roton & Co., Putnam High Yield Trust, PaineWebber Managed Investment Trust
on behalf of PaineWebber High Income Fund, USL Capital Corporation, Pearlman Family
Partners, The Marion Trust, Bruce L. Weitz, BCIP Associates, BCIP Trust Associates, L.P.,
Tyler Capital Fund L.P., Tyler International, L.P.-II, and Tyler Massachusetts, L.P.
(incorporated by reference to Exhibit 10.13 to the Common Stock S-1).
10.14 Credit Agreement, dated as of September 30, 1997, among Duane Reade, Duane Reade Holding
Corp., Daboco Inc., Duane Reade Inc., various financial institutions, as Lenders, DLJ
Capital Funding, Inc., as Syndication Agent, Fleet National Bank, as Administrative
Agent, and Credit Lyonnais New York Branch, as Documentation Agent (incorporated by
reference to Exhibit 10.14 to the Common Stock S-1).
10.15 Partnership Security Agreement, dated as of September 30, 1997, among Daboco Inc., Duane
Reade Inc. and Fleet National Bank, as Administrative Agent (incorporated by reference to
Exhibit 10.14 to the Common Stock S-1).
10.16 Borrower Security Agreement, dated as of September 30, 1997, between Duane Reade and
Fleet National Bank, as Administrative Agent (incorporated by reference to Exhibit 10.15
to the Common Stock S-1).
10.17 Parent Pledge Agreement, dated as of September 30, 1997, among Duane Reade Holding Corp.,
Daboco Inc. and Fleet National Bank, as Administrative Agent (incorporated by reference
to Exhibit 10.17 to the Common Stock S-1).
10.18 Underwriting Agreement among the Company, DLJ, Goldman, Sachs & Co. and Smith Barney Inc.
relating to the Common Stock Offering (incorporated by reference to Exhibit 1.1 to the
Common Stock S-1).
10.19 Form of Irrevocable Trust Agreement with respect to Senior Notes and Zero Coupon Notes
between the Company and State Street Bank and Trust, as Trustee (incorporated by
reference to Exhibit 10.19 to the Common Stock S-1).
12.1** Statement re: Computation of Ratios.
II-4
<PAGE>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 3.1(i) to the Common
Stock S-1. .
23.1** Consent of Price Waterhouse LLP.
23.2** Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
25.1** Statement of Eligibility of Trustee.
27.1** Financial Data Schedule.
</TABLE>
- ------------
** Filed herewith.
(b) Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting
regulations of the Commission are either not required under the related
instructions, are inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements and therefore has
been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 14, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed tobe the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to the registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
II-5
<PAGE>
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
New York, State of New York on February 2, 1998.
DUANE READE INC.
By: /s/ Anthony J. Cuti
-------------------------------
Name: Anthony J. Cuti
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed on February 2, 1998, by the
following persons in the capacities indicated with respect to Duane Reade
Inc.:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------- ------------------------------------------------
<S> <C>
/s/ Anthony J. Cuti Chairman, President, Chief Executive Officer and
------------------------- Director (principal executive officer)
Anthony J. Cuti
* Chief Financial Officer
------------------------- (principal accounting and financial officer)
William J. Tennant
* Director
-------------------------
Nicole S. Arnaboldi
* Director
-------------------------
David L. Jaffe
* Director
-------------------------
Andrew J. Nathanson
By: /s/ Anthony J. Cuti
----------------------
Anthony J. Cuti
Attorney-In-Fact
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
New York, State of New York on February 2, 1998.
DRI I INC.
By: /s/ Anthony J. Cuti
-------------------------------
Name: Anthony J. Cuti
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, Amendment No.
2 to this Registration Statement has been signed on February 2, 1998, by the
following persons in the capacities indicated with respect to DRI I Inc.:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- -------------------------- ------------------------------------------------
<S> <C>
/s/ Anthony J. Cuti President and Chief Executive Officer and
-------------------------- Director (principal executive officer)
Anthony J. Cuti
* Vice President
-------------------------- (principal accounting and financial officer)
William J. Tennant
* Director
--------------------------
Nicole S. Arnaboldi
* Director
--------------------------
David L. Jaffe
* Director
--------------------------
Andrew J. Nathanson
By: /s/ Anthony J. Cuti
-----------------------
Anthony J. Cuti
Attorney-In-Fact
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
New York, State of New York on February 2, 1998.
DUANE READE
By: DRI I Inc., a general partner By: Daboco Inc., a general partner
By: /s/ Anthony J. Cuti
- --------------------------------
Name: Anthony J. Cuti
Title: President and Chief Executive Officer
By: /s/ Anthony J. Cuti
-----------------------------------
Name: Anthony J. Cuti
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed on February 2, 1998, by the
following persons in the capacities indicated with respect to Daboco Inc. and
DRI I Inc., the general partners of Duane Reade on behalf of Duane Reade:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- -------------------------- ---------------------------------------------------
<S> <C>
/s/ Anthony J. Cuti President, Chief Executive Officer and Director
-------------------------- (principal executive officer)
Anthony J. Cuti
* Vice President
-------------------------- (principal accounting and financial officer)
William J. Tennant
* Director
--------------------------
Nicole S. Arnaboldi
* Director
--------------------------
David L. Jaffe
* Director
--------------------------
Andrew J. Nathanson
By: /s/ Anthony J. Cuti
-----------------------
Anthony J. Cuti
Attorney-In-Fact
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
The following documents are the exhibits to this Registration Statement on
Form S-1. For convenient reference, each exhibit is listed according to the
Exhibit Table of Regulation S-K. The page number, if any, listed opposite an
exhibit indicates the page number in the sequential numbering system in the
manually signed original of this Registration Statement on Form S-1 where
such exhibit can be found.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NUMBER EXHIBIT NUMBER
- ----------- -------------------------------------------------------------------------- -------------------
<S> <C> <C>
1.1** Form of Underwriting Agreement.
3.1(i) Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1(i) to the Common Stock S-1).
3.1(ii)Form of Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.1(ii) to the Common Stock S-1).
3.2(i) Certificate of Incorporation of DRI I Inc.
3.2(ii)By-laws of DRI I Inc.
3.3** Second Amended and Restated Partnership Agreement of Duane Reade.
4.1** Form of Indenture.
5.1** Opinion of Latham & Watkins
10.1 Duane Reade Inc. 1997 Equity Participation Plan (incorporated by reference
to Exhibit 10.1 to the Company's Form S-1 Registration Statement (File No.
333-41239), the "Common Stock S-1").
10.2 Duane Reade Holding Corp. 1992 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Common Stock S-1).
10.3 Employment Agreement, dated as of October 27, 1997, between the Company
and Anthony J. Cuti (incorporated by reference to Exhibit 10.3 to the
Common Stock S-1).
10.4 Employment Agreement, dated as of February 22, 1993, as amended, between
the Company and Gary Charboneau (incorporated by reference to Exhibit 10.4
to the Common Stock S-1).
10.5 Employment Agreement, dated as of April 10, 1995, as amended, between
Duane Reade and Jerry M. Ray (incorporated by reference to Exhibit 10.5 to
the Common Stock S-1).
10.6 Employment Letter Agreement, dated as of October 9, 1996, between Duane
Reade and Joseph Lacko (incorporated by reference to Exhibit 10.6 to the
Common Stock S-1).
10.7 Employment Letter Agreement, dated as of February 12, 1997, between the
Company and William Tennant (incorporated by reference to Exhibit 10.7 to
the Common Stock S-1).
10.8 Agreement, dated as of November 22, 1996, between Duane Reade and Drug,
Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse Employees
Local 815 (incorporated by reference to Exhibit 10.8 to the Common Stock
S-1).
10.9 Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied
Trades Council (incorporated by reference to Exhibit 10.9 to the Common
Stock S-1).
10.10 Agreement, dated February 4, 1997, as amended, between Duane Reade and The
Pharmacy Fund, Inc. (incorporated by reference to Exhibit 10.10 to the
Common Stock S-1).
10.11 Indenture, dated as of September 15, 1992, between Duane Reade Holding
Corp. and The Connecticut National Bank, as trustee (incorporated by
reference to Exhibit 10.11 to the Common Stock S-1).
<PAGE>
EXHIBIT SEQUENTIAL PAGE
NUMBER EXHIBIT NUMBER
- ----------- -------------------------------------------------------------------------- -------------------
10.12 Indenture, dated as of September 15, 1992, among Duane Reade, Daboco Inc.,
Duane Reade Inc. and The Connecticut National Bank, as trustee
(incorporated by reference to Exhibit 10.12 to the Common Stock S-1).
10.13 Stockholders and Registration Rights Agreement, dated as of June 18, 1997,
among the Company, DLJMB Funding II, Inc., DLJ Merchant Banking Partners
II, L.P., DLJ Diversified Partners, L.P., DLJ First ESC L.L.C., DLJ
Offshore Partners, II, C.V., DLJ EAB Partners, L.P., UK Investment Plan
1997 Partners, Bankers Trust New York Corporation, Conac & Co., Muico &
Co., Roton & Co., Putnam High Yield Trust, PaineWebber Managed Investment
Trust on behalf of PaineWebber High Income Fund, USL Capital Corporation,
Pearlman Family Partners, The Marion Trust, Bruce L. Weitz, BCIP
Associates, BCIP Trust Associates, L.P., Tyler Capital Fund L.P., Tyler
International, L.P.-II, and Tyler Massachusetts, L.P. (incorporated by
reference to Exhibit 10.13 to the Common Stock S-1).
10.14 Credit Agreement, dated as of September 30, 1997, among Duane Reade, Duane
Reade Holding Corp., Daboco Inc., Duane Reade Inc., various financial
institutions, as Lenders, DLJ Capital Funding, Inc., as Syndication Agent,
Fleet National Bank, as Administrative Agent, and Credit Lyonnais New York
Branch, as Documentation Agent (incorporated by reference to Exhibit 10.14
to the Common Stock S-1).
10.15 Partnership Security Agreement, dated as of September 30, 1997, among
Daboco Inc., Duane Reade Inc. and Fleet National Bank, as Administrative
Agent (incorporated by reference to Exhibit 10.14 to the Common Stock
S-1).
10.16 Borrower Security Agreement, dated as of September 30, 1997, between Duane
Reade and Fleet National Bank, as Administrative Agent (incorporated by
reference to Exhibit 10.15 to the Common Stock S-1).
10.17 Parent Pledge Agreement, dated as of September 30, 1997, among Duane Reade
Holding Corp., Daboco Inc. and Fleet National Bank, as Administrative
Agent (incorporated by reference to Exhibit 10.17 to the Common Stock
S-1).
10.18 Underwriting Agreement among the Company, DLJ, Goldman, Sachs & Co. and
Smith Barney Inc. relating to the Common Stock Offering (incorporated by
reference to Exhibit 1.1 to the Common Stock S-1).
10.19 Form of Irrevocable Trust Agreement with respect to Senior Notes and Zero
Coupon Notes between the Company and State Street Bank and Trust, as
Trustee (incorporated by reference to Exhibit 10.19 to the Common Stock
S-1).
12.1** Statement re: Computation of Ratios.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to
the Common Stock S-1).
23.1** Consent of Price Waterhouse LLP.
23.2** Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
25.1** Statement of Eligibility of Trustee.
27.1** Financial Data Schedule.
</TABLE>
- ------------
** Filed herewith.
<PAGE>
$80,000,000
DUANE READE INC.
___% Senior Subordinated Notes Due 2008
UNDERWRITING AGREEMENT
February __, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
277 Park Avenue
New York, New York 10172
Dear Sirs:
Duane Reade Inc., a Delaware corporation (the "Company"), proposes to
issue and sell $80,000,000 principal amount of its ___% Senior Subordinated
Notes Due 2005 (the "Securities") to Donaldson, Lufkin & Jenrette Securities
Corporation (the "Underwriter" or "DLJ"). The Company's obligations with
respect to the Securities are guaranteed (the "Guarantees") by the Company's
subsidiaries, DRI I, Inc., a Delaware corporation ("DRII"), and Duane Reade, a
New York general partnership ("DR" and, collectively with the Company and DRII,
the "Issuers"). The Securities are to be issued pursuant to the provisions of
an Indenture to be dated as of February __, 1998 (the "Indenture") between the
Issuers and State Street Bank and Trust Company of Connecticut, N.A., as
Trustee (the "Trustee").
The Company is concurrently executing and delivering to DLJ, Goldman,
Sachs & Co. and Smith Barney Inc. an underwriting agreement, dated of even date
herewith (the "Equity Underwriting Agreement"), with respect to the sale by the
Company to the underwriters named therein of an aggregate of 6,700,000 shares
(the "Shares") of common stock, par value $.01 per share, of the Company
("Common Stock"), plus an option to purchase up to an additional 1,005,000
shares of Common Stock to cover over-allotments, if any.
<PAGE>
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission"), in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
prospectus, relating to the Securities. The registration statement, as amended
at the time it became effective, including the information (if any) deemed to
be part of the registration statement at the time of effectiveness pursuant to
Rule 430A under the Act, is hereinafter referred to as the "Registration
Statement"; and the prospectus in the form first used to confirm sales of
Securities is hereinafter referred to as the "Prospectus". If the Company has
filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional ____%
Senior Subordinated Notes Due 2008 (a "Rule 462(b) Registration Statement"),
then, unless otherwise specified, any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462(b)
Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell to the Underwriter,
and the Underwriter agrees to purchase from the Company, $80,000,000 aggregate
principal amount of the Securities at _____% of the principal amount thereof
(the "Purchase Price").
The Company hereby confirms its engagement of Goldman, Sachs
& Co. ("GS&Co.") as, and GS&Co. hereby confirms its agreement with the Company
to render services as, a "qualified independent underwriter", within the
meaning of Section (b)(15) of Rule 2720 of the National Association of
Securities Dealers, Inc. (the "NASD") with respect to the offering and sale of
the Securities. GS&Co., solely in its capacity as the qualified independent
underwriter and not otherwise, is referred to herein as the "QIU". As
compensation for the services of the QIU hereunder, the Company agrees to pay
the QIU $125,000 on the Closing Date. The yield at which the Securities will
be sold to the public shall not be lower than the minimum yield recommended by
the QIU.
SECTION 3. TERMS OF PUBLIC OFFERING. The Company is advised by you
that the Underwriter proposes (i) to make a public offering of the Securities
as soon after the execution and delivery of this Agreement as in your judgment
is advisable and (ii) initially to offer the Securities upon the terms set
forth in the Prospectus.
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SECTION 4. DELIVERY AND PAYMENT. The Securities shall be represented
by definitive certificates and shall be issued in such authorized denominations
and registered in such names as the Underwriter shall request no later than two
business days prior to the Closing Date (as defined below). The Company shall
deliver the Securities, with any transfer taxes thereon duly paid by the
Company, to the Underwriter through the facilities of The Depository Trust
Company ("DTC"), for the account of the Underwriter, against payment to the
Company of the Purchase Price therefore by wire transfer of Federal or other
funds immediately available in New York City. The certificates representing the
Securities shall be made available for inspection not later than 9:30 A.M., New
York City time, on the business day prior to the Closing Date (as defined
below), at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of delivery and payment for the Securities shall be
9:00 A.M., New York City time, on February ___, 1998 or such other time on the
same or such other date as the Underwriter and the Company shall agree in
writing. The time and date of such delivery and payment are hereinafter
referred to as the "Closing Date".
The documents to be delivered on the Closing Date on behalf of the
parties hereto pursuant to Section 9 of this Agreement shall be delivered at
the offices of Latham & Watkins, 885 Third Avenue, New York, New York 10022 and
the Securities shall be delivered at the Designated Office, all on the Closing
Date.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, (iii) when
any amendment to the Registration Statement becomes effective, (iv) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, when the Rule 462(b) Registration Statement
has become effective and (v) of the happening of any event during the period
referred to in Section 5(d) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which requires
any additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
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(b) To furnish to you three signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated
by you such number of conformed copies of the Registration Statement as so
filed and of each amendment to it, without exhibits, as you may reasonably
request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably object after being so advised; and,
during such period, to prepare and file with the Commission, promptly upon your
reasonable request, any amendment to the Registration Statement or amendment or
supplement to the Prospectus which may be necessary or advisable in connection
with the distribution of the Securities by you, and to use its best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriter a prospectus is
required by law to be delivered in connection with sales by the Underwriter or
a dealer, to furnish in New York City to the Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as the Underwriter or such dealer may reasonably request.
(e) If during the period specified in Section 5(d) above, any event
shall occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriter, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if, in the opinion of counsel for the Underwriter, it is necessary to amend
or supplement the Prospectus to comply with applicable law, forthwith to
prepare and file with the Commission an appropriate amendment or supplement to
the Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with applicable
law, and to furnish to the Underwriter and to any dealer as many copies thereof
as the Underwriter or such dealer may reasonably request.
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(f) Prior to any public offering of the Securities, to cooperate with
you and counsel for the Underwriter in connection with the registration or
qualification of the Securities for offer and sale by the Underwriter and by
dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Securities and to file such consents
to service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other
than as to matters and transactions relating to the Prospectus, the
Registration Statement, any preliminary prospectus or the offering or sale of
the Securities, in any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its security holders as
soon as practicable an earnings statement covering the twelve-month period
ending February __, 1999 that shall satisfy the provisions of Section 11(a) of
the Act, and to advise you in writing when such statement has been so made
available.
(h) So long as the Securities are outstanding, (i) to mail and make
generally available as soon as practicable after the end of each fiscal year to
the record holders of the Securities a financial report of the Company and its
subsidiaries on a consolidated basis (and a similar financial report of all
unconsolidated subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
shareholders' equity as of the end of and for such fiscal year, together with
comparable information as of the end of and for the preceding year, certified
by independent public accountants and (ii) to mail and make generally available
as soon as practicable after the end of each quarterly period (except for the
last quarterly period of each fiscal year) to such holders, a consolidated
balance sheet, a consolidated statement of operations and a consolidated
statement of cash flows (and similar financial reports of all unconsolidated
subsidiaries, if any) as of the end of and for such period, and for the period
from the beginning of such year to the close of such quarterly period, together
with comparable information for the corresponding periods of the preceding
year.
(i) So long as the Securities are outstanding, to furnish to you as
soon as available copies of all reports or other communications furnished to
its security holders or furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the Company or
any of its subsidiaries is listed and such other publicly
5
<PAGE>
available information concerning the Company and its subsidiaries as you may
reasonably request.
(j) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the reasonable fees and the disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Securities under the Act and all other fees
and expenses in connection with the preparation, printing, filing and
distribution of the Registration Statement (including financial statements and
exhibits), any preliminary prospectus, the Prospectus and all amendments and
supplements to any of the foregoing, including the mailing and delivering of
copies thereof to the Underwriters and dealers in the quantities specified
herein, (ii) all costs and expenses related to the transfer and delivery of the
Securities to the Underwriter, including any transfer or other taxes payable
thereon, (iii) all costs of printing or producing this Agreement and any other
agreements or documents in connection with the offering, purchase, sale or
delivery of the Securities, (iv) all expenses in connection with the
registration or qualification of the Securities for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriter in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriter in connection with the review and clearance of the offering
of the Securities by the NASD, (vi) all fees and expenses in connection with
the registration of the Securities under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), (vii) the cost of printing certificates
representing the Securities, (viii) the costs and charges of any transfer
agent, registrar and/or depositary (including DTC), (ix) any fees charged by
rating agencies for the rating of the Securities, (x) the fees and expenses of
the Trustee and the Trustee's counsel in connection with the Indenture and the
Securities, (xi) the fees and expenses of the QIU (including the fees and
disbursements of counsel to the QIU), and (xii) all other costs and expenses
incident to the performance of the obligations of the Company hereunder for
which provision is not otherwise made in this Section.
(k) To use its best efforts to list, subject to notice of issuance,
the Common Stock on the New York Stock Exchange (the "NYSE") and to maintain
the listing of the Common Stock on the NYSE for so long as the Securities are
outstanding.
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<PAGE>
(l) During the period beginning on the date hereof and continuing to
and including the Closing Date, not to offer, sell, contract to sell or
otherwise transfer or dispose of any debt securities of the Company or any
warrants, rights or options to purchase or otherwise acquire debt securities of
the Company substantially similar to the Securities (other than (i) the
Securities and (ii) commercial paper issued in the ordinary course of
business), without the prior written consent of DLJ.
(m) Not to voluntarily claim, and to actively resist any attempts to
claim, the benefit of any usury laws against the holders of the Securities.
(n) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company on or
prior to the Closing Date and to satisfy all conditions precedent to the
delivery of the Securities.
(o) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Securities, to file a Rule 462(b)
Registration Statement with the Commission registering the Securities not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on
the date of this Agreement and to pay to the Commission the filing fee for such
Rule 462(b) Registration Statement at the time of the filing thereof or to give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
(p) That it will, for so long as any of the Securities are outstanding
and if, in the reasonable judgment of the Underwriter (after consultation with
counsel), the Underwriter or any of its affiliates (as defined in the Act) is
required by the Act to deliver a prospectus in connection with sales of
Securities, (i) periodically amend the Registration Statement so that the
information contained in the Registration Statement complies with the
requirements of Section 10(a) of the Act, (ii) amend the Registration Statement
or amend or supplement the Prospectus when necessary to reflect any material
changes in the information provided therein and promptly file such amendment or
supplement with the Commission, (iii) provide the Underwriter with copies of
each amendment or supplement so filed and such other documents, including
opinions of counsel and "comfort" letters, as the Underwriter may reasonably
request and (iv) indemnify the Underwriter and if applicable, contribute to any
amount paid or payable by the Underwriter in a manner substantially similar to
that specified in Section 7 hereof (with appropriate modifications).
(q) That it will, on or as soon as practicable following the Closing
Date, apply the proceeds of the offerings contemplated by this Agreement and
the Equity Underwriting Agreement as set forth in the Prospectus under the
caption "Use of Proceeds".
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SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop
order suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (B) will comply in all material respects with the Act and
(iv) the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to the Underwriter furnished to the Company in
writing by the Underwriter expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in any
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preliminary prospectus based upon information relating to the Underwriter
furnished to the Company in writing by the Underwriter expressly for use
therein.
(d) Each of the Company and its subsidiaries has been duly organized
and is validly existing and in good standing under the laws of its jurisdiction
of incorporation or formation, as the case may be, and has the corporate or
partnership, as the case may be, power and authority to carry on its business
as described in the Prospectus and to own, lease and operate its properties,
and each of the Company and the subsidiaries that are corporations is duly
qualified and is in good standing as a foreign corporation, authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole (a "Material Adverse Effect").
The Company has no subsidiaries except as listed on Exhibit 21 to the
Registration Statement.
(e) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights.
(f) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature (each, a
"Lien") except as set forth in the Prospectus. The Company, through its direct
wholly-owned subsidiary Daboco, and Daboco's direct wholly-owned subsidiary
DRII, owns all of the partnership interests in DR, free and clear of any Lien
except as set forth in the Prospectus.
(g) The Indenture has been duly qualified under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), and has been duly
authorized, executed and delivered by the Issuers, and is a valid and binding
agreement of the Issuers, enforceable in accordance with its terms except as
(A) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (B) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
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(h) (i) The Securities have been duly authorized and, on the Closing
Date, will have been validly executed and delivered by the Company. When the
Securities have been executed and authenticated in accordance with the
provisions of the Indenture and delivered to and paid for by the Underwriter in
accordance with the terms of this Agreement, the Securities will be entitled to
the benefits of the Indenture and will be valid and binding obligations of the
Company, enforceable in accordance with their terms except as (A) the
enforceability thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and (B) rights of acceleration and the
availability of equitable remedies may be limited by equitable principles of
general applicability.
(ii) The Guarantees have been duly authorized and, on the Closing
Date, will have been validly executed and delivered by DRII and DR (the
"Guarantors") and, when the Securities have been executed and authenticated in
accordance with the provisions of the Indenture and delivered to and paid for
by the Underwriter in accordance with the terms of this Agreement and the
Guarantees executed and delivered, the Guarantees will be valid and binding
obligations of each of the Guarantors, enforceable against each Guarantor in
accordance with their terms except as (A) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (B) rights of acceleration and the availability of equitable
remedies may be limited by equitable principles of general applicability.
(i) The Securities conform as to legal matters to the description
thereof contained in the Prospectus in all material respects.
(j) Neither the Company nor any of its subsidiaries is in violation of
its respective charter, by-laws or partnership agreement, or, except as could
not reasonably be expected to have a Material Adverse Effect, is in default in
the performance of any obligation, agreement, covenant or condition contained
in any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries or any of their respective property is
bound.
(k) The execution, delivery and performance of this Agreement, the
Indenture, the Securities and the Guarantees by the Issuers, the compliance by
the Issuers with all the provisions hereof and thereof and the consummation of
the transactions contemplated hereby (including application of the proceeds of
the offerings contemplated by this Agreement and the Equity Underwriting
Agreement as set forth in the Prospectus under
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the caption "Use of Proceeds") and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required from the NASD under
the securities or Blue Sky laws of the various states), (ii) conflict with,
constitute a breach of, default under or accelerate the rights of any person or
entity under, any provision of the charter, by-laws or partnership agreement of
the Company or any of its subsidiaries or, except as could not reasonably be
expected to have a Material Adverse Effect or materially adversely effect the
ability of the Company and its subsidiaries to consummate the transactions
contemplated hereby, any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company and its subsidiaries to
which the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries or any of their respective property is bound, (iii)
violate or conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over the Company, any of its subsidiaries or any of their
respective property except as could not reasonably be expected to have a
Material Adverse Effect or materially adversely effect the ability of the
Company and its subsidiaries to consummate the transactions contemplated
hereby, (iv) result in the imposition or creation of (or the obligation to
create or impose) a Lien under any agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective property is bound or (v) result in the
suspension, termination or revocation of any Authorization (as defined below)
of the Company or any of its subsidiaries or any other impairment of the rights
of the holder of any such Authorization except as could not reasonably be
expected to have a Material Adverse Effect or materially adversely effect the
ability of the Company and its subsidiaries to consummate the transactions
contemplated hereby.
(l) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company or any of its
subsidiaries is or is reasonably likely to be a party or to which any of their
respective property is or is reasonably likely to be subject that are required
to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(m) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection
of human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of
the Employee Retirement Income
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Security Act of 1974, as amended, or any provisions of the Foreign Corrupt
Practices Act or the rules and regulations promulgated thereunder, except for
such violations which, singly or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect. There are no costs or liabilities
associated with Environmental Laws (including, without limitation, any capital
or operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any Authorization, any related
constraints on operating activities and any potential liabilities to third
parties) which could, singly or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(n) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "Authorization") of, and has made all filings with and notices to,
all governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease, license and
operate its respective properties and to conduct its business, except where the
failure to have any such Authorization or to make any such filing or notice
could not, singly or in the aggregate, reasonably be expected to have a
Material Adverse Effect. Each such Authorization is valid and in full force and
effect and each of the Company and its subsidiaries is in compliance with all
the terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto; and
no event has occurred (including, without limitation, the receipt of any notice
from any authority or governing body) which allows or, after notice or lapse of
time or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
unreasonably burdensome to the Company or any of its subsidiaries; except where
such failure to be valid and in full force and effect or to be in compliance,
the occurrence of any such event or the presence of any such restriction could
not, singly or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(o) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
together with related schedules and notes, present fairly the consolidated
financial position, results of operations and changes in financial position of
the Company and its subsidiaries on the basis stated therein at the respective
dates or for the respective periods to which they apply; such statements and
related schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved, except as disclosed therein; the supporting schedules, if any,
included in the Registration Statement present fairly in accordance with
generally accepted accounting
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principles the information required to be stated therein; and the other
financial and statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) are, in
all material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company. The
pro forma financial information and data, and the related notes thereto, set
forth in the Registration Statement and the Prospectus (and any supplement or
amendment thereto) are, in all material respects, accurately presented and are
prepared on a basis consistent with the historical financial statements of the
Company and its subsidiaries.
(p) Price Waterhouse LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(q) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of its
subsidiaries on the other hand, which is required by the Act to be described in
the Registration Statement or the Prospectus which is not so described.
(r) The Company is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is defined
in the Investment Company Act of 1940, as amended.
(s) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the
Securities registered pursuant to the Registration Statement.
(t) All indebtedness of the Company and its subsidiaries that will be
repaid with the proceeds of the issuance and sale of the Securities was
incurred, and the indebtedness represented by the Securities is being incurred,
for proper purposes and in good faith and the Company and each of its
subsidiaries was, at the time of the incurrence of such indebtedness that will
be repaid with the proceeds of the issuance and sale of the Securities, and
will be on the Closing Date (after giving effect to the application of the
proceeds from the issuance of the Securities) solvent, and had at the time of
the incurrence of such indebtedness that will be repaid with the proceeds of
the issuance and sale of the Securities and will have on the Closing Date
(after giving effect to the
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application of the proceeds from the issuance of the Securities) sufficient
capital for carrying on its business and was, at the time of the incurrence of
such indebtedness that will be repaid with the proceeds of the issuance and
sale of the Securities, and will be on the Closing Date (after giving effect to
the application of the proceeds from the issuance of the Securities) able to
pay its debts as they mature.
(u) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there has not occurred any material adverse change or any development
involving a prospective material adverse change in the condition, financial or
otherwise, or the earnings, business, management or operations of the Company
and its subsidiaries, taken as a whole, (ii) there has not been any material
adverse change or any development involving a prospective material adverse
change in the capital stock or in the long-term debt of the Company or any of
its subsidiaries and (iii) neither the Company nor any of its subsidiaries has
incurred any material liability or obligation, direct or contingent.
(v) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such as do not
materially interfere with the use made and proposed to be made of such property
by the Company or its subsidiaries, as applicable; and any real property and
buildings held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries, in each case,
except as described in the Prospectus.
(w) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all trademarks, service marks, trade names, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), patents,
patent rights, licenses and inventions (collectively, "intellectual property")
currently employed by them in connection with the business now operated by them
except where the failure to own or possess or otherwise be able to acquire such
intellectual property could not reasonably be expected to, singly or in the
aggregate, have a Material Adverse Effect; and neither the Company nor any of
its subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of such intellectual property
which, singly or
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in the aggregate, if the subject of an unfavorable decision, ruling or finding,
could reasonably be expected to have a Material Adverse Effect.
(x) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or, to the knowledge of the
Company, threatened against the Company or any of its subsidiaries before the
National Labor Relations Board or any state or local labor relations board or
(ii) strike, labor dispute, slowdown or stoppage pending or, to the knowledge
of the Company, threatened against the Company or any of its subsidiaries or,
except for such actions specified in clause (i) or (ii) above, which, singly or
in the aggregate, could not reasonably be expected to have a Material Adverse
Effect.
(y) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
(z) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that could not
reasonably be expected to have a Material Adverse Effect.
(aa) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
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(bb) The Issuers have complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida), or are and at all relevant
times have been duly exempt from complying therewith.
(cc) No "nationally recognized statistical rating organization" as
such term is defined for purposes of Rule 436(g)(2) under the Act has indicated
to the Company or any of its subsidiaries that it is considering (i) the
downgrading, suspension or withdrawal of, or any review for a possible change
that does not indicate the direction of the possible change in, any rating
assigned to the Company or any of its subsidiaries or any securities of the
Company or any of its subsidiaries or (ii) any adverse change in the outlook
for any rating of the Company or any of its subsidiaries or any securities of
the Company or any of its subsidiaries.
(dd) This Agreement and the Equity Underwriting Agreement have each
been duly authorized, executed and delivered by the Company and its
subsidiaries.
(ee) Each certificate signed by any officer of the Company and
delivered to the Underwriter or counsel for the Underwriter shall be deemed to
be a representation and warranty by the Company to the Underwriter as to the
matters covered thereby.
SECTION 7. INDEMNIFICATION. (a) The Issuers hereby jointly and
severally agree to indemnify and hold harmless the Underwriter, its directors,
its officers and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to the Underwriter furnished in writing to the Company by the
Underwriter expressly for use therein.
(b) The Underwriter agrees to indemnify and hold harmless the Company,
its directors, its officers who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20 of the
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Exchange Act, to the same extent as the foregoing indemnity from the Company to
the Underwriter but only with reference to information relating to the
Underwriter furnished in writing to the Company by the Underwriter expressly
for use in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) above
(the "indemnified party"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "indemnifying party") in
writing and the indemnifying party shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to the indemnified
party and the payment of all reasonable fees and expenses of such counsel, as
incurred (except that in the case of any action in respect of which indemnity
may be sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall
not be required to assume the defense of such action pursuant to this Section
7(c), but may employ separate counsel and participate in the defense thereof,
but the fees and expenses of such counsel, except as provided below, shall be
at the expense of the Underwriter). Any indemnified party shall have the right
to employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the indemnified party unless (i) the employment of such counsel shall have been
specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all indemnified
parties and all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by DLJ, in the case of
parties indemnified pursuant to Section 7(a) above, and by the Company, in the
case of parties indemnified pursuant to Section 7(b) above. The indemnifying
party shall indemnify and hold harmless the indemnified party from and against
any and all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into
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more than thirty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the fees and
expenses of counsel (in any case where such fees and expenses are at the
expense of the indemnifying party) and, prior to the date of such settlement,
the indemnifying party shall have failed to comply with such reimbursement
request (or shall have failed to contest, in good faith, all portions of such
fees and expenses not so reimbursed). No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from
all liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriter on the other hand from the offering
of the Securities or (ii) if the allocation provided by clause 7(d)(i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 7(d)(i) above but
also the relative fault of the Company on the one hand and the Underwriter on
the other hand in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriter on the other hand shall be deemed
to be in the same proportion as the total net proceeds from the Offering (after
deducting underwriting discounts and commissions, but before deducting
expenses) received by the Company, and the total underwriting discounts and
commissions received by the Underwriter, bear to the total price to the public
of the Securities, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault of the Company on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by
18
<PAGE>
the Company or the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
indemnified party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 7, the Underwriter shall not be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. INDEMNIFICATION OF QIU. (a) The Issuers hereby jointly and
severally agree to indemnify and hold harmless the QIU, its directors, its
officers and each person, if any, who controls the QIU within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages, liabilities and judgments (including, without
limitation, any legal or other expenses incurred in connection with
investigating or defending any matter, including any action, that could give
rise to any such losses, claims, damages, liabilities or judgments) related to,
based upon or arising out of (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) the QIU's activities as QIU under its
engagement pursuant to Section 2 hereof, except in the case of this clause (ii)
insofar as any such losses, claims, damages, liabilities or judgments are found
in a final
19
<PAGE>
judgment by a court of competent jurisdiction, not subject to further appeal,
to have resulted solely from the willful misconduct or gross negligence of the
QIU.
(b) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) above (the
"QIU Indemnified Party"), the QIU Indemnified Party shall promptly notify the
person against whom such indemnity may be sought (the "QIU Indemnifying Party")
in writing and the QIU Indemnifying Party shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to the QIU
Indemnified Party (which counsel shall not, except with the written consent of
the QIU Indemnified Party, be counsel to the QIU Indemnifying Party) and the
payment of all reasonable fees and expenses of such counsel, as incurred. Any
QIU Indemnified Party shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of the QIU Indemnified Party unless (i)
the employment of such counsel shall have been specifically authorized in
writing by the QIU Indemnifying Party, (ii) the QIU Indemnifying Party shall
have failed to assume the defense of such action or employ counsel reasonably
satisfactory to the QIU Indemnified Party or (iii) the named parties to any
such action (including any impleaded parties) include both the QIU Indemnified
Party and the QIU Indemnifying Party, and the QIU Indemnified Party shall have
been advised by such counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to
the QIU Indemnifying Party (in which case the QIU Indemnifying Party shall not
have the right to assume the defense of such action on behalf of the QIU
Indemnified Party). In any such case, the QIU Indemnifying Party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all QIU Indemnified
Parties, which firm shall be designated by the QIU, and all such fees and
expenses shall be reimbursed as they are incurred. The QIU Indemnifying Parties
shall indemnify and hold harmless the QIU Indemnified Party from and against
any and all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into more than thirty
business days after the QIU Indemnifying Party shall have received a request
from the QIU Indemnified Party for reimbursement for the fees and expenses of
counsel (in any case where such fees and expenses are at the expense of the QIU
Indemnifying Party) and, prior to the date of such settlement, the Company
shall have failed to comply with such reimbursement request (or shall have
failed to contest, in good faith, all portions of such fees and expenses not so
reimbursed). The QIU Indemnifying Party shall not, without the prior written
consent of the QIU Indemnified
20
<PAGE>
Party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the QIU Indemnified Party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the QIU Indemnified
Party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the QIU Indemnified Party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the QIU Indemnified Party.
(c) To the extent the indemnification provided for in this Section 8
is unavailable to a QIU Indemnified Party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then the
QIU Indemnifying Party, in lieu of indemnifying such QIU Indemnified Party,
shall contribute to the amount paid or payable by such QIU Indemnified Party as
a result of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the QIU on the other hand from the offering of the
Securities or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and the QIU on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the QIU on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company as set forth in the table on the cover page
of the Prospectus, and the fee received by the QIU pursuant to Section 2
hereof, bear to the sum of such total net proceeds and such fee. The relative
fault of the Company on the one hand and the QIU on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or the QIU
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission and whether the
QIU's activities as QIU under its engagement pursuant to Section 2 hereof
involved any willful misconduct or gross negligence on the part of the QIU.
The Company and the QIU agree that it would not be just and equitable
if contribution pursuant to this Section 8(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by a
21
<PAGE>
QIU Indemnified Party as a result of the losses, claims, damages, liabilities
or judgments referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses incurred by such QIU Indemnified Party in connection with
investigating or defending any matter, including any action, that could have
given rise to such losses, claims, damages, liabilities or judgments. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
(d) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
QIU Indemnified Party at law or in equity.
SECTION 9. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligation of
the Underwriter to purchase the Securities under this Agreement is subject to
the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or, to the knowledge of the Company, contemplated by the Commission.
(c) On or after the date hereof, (i) there shall not have occurred any
downgrading, suspension or withdrawal of, nor shall any notice have been given
of any potential or intended downgrading, suspension or withdrawal of, or of
any review (or of any potential or intended review) for a possible change that
does not indicate the direction of the possible change in, any rating of the
Company or any of its subsidiaries or any securities of the Company or any of
its subsidiaries (including, without limitation, the placing of any of the
foregoing ratings on credit watch with negative or developing implications or
under review with an uncertain direction) by any "nationally recognized
statistical rating organization" as such term is defined for purposes of Rule
436(g)(2) under the Act, (ii) there shall not have occurred any change, nor
shall any notice have been given of any potential or intended change, in the
outlook for any rating of the Company or any of its
22
<PAGE>
subsidiaries or any securities of the Company or any of its subsidiaries by any
such rating organization and (iii) no such rating organization shall have given
notice that it has assigned (or is considering assigning) a lower rating to the
Securities than that on which the Securities were marketed.
(d) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Anthony J. Cuti and William Tennant, in their
capacities as the President and Chief Executive Officer and Senior Vice
President and Chief Financial Officer, respectively, of the Company, confirming
the matters set forth in Sections 6(u), 9(a), 9(b) and 9(c) and that the
Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
the Company on or prior to the Closing Date.
(e) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken
as a whole, (ii) there shall not have been any change or any development
involving a prospective change in the capital stock or in the long-term debt of
the Company or any of its subsidiaries and (iii) neither the Company nor any of
its subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(e)(i),
9(e)(ii) or 9(e)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Securities on the terms and in
the manner contemplated in the Prospectus.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriter), dated the Closing Date,
of Latham & Watkins, counsel for the Company, to the effect that:
(i) each of the Company and DRII has been duly incorporated
and is validly existing as a corporation, and is in good standing
under the laws of the state of Delaware, with corporate power and
authority to own, lease and operate their respective properties and
conduct their business as described in the Prospectus and DR has been
duly formed as a general partnership under the laws of the state of
New York with the partnership power and authority to own, lease and
operate its properties and conduct its business as described in the
Prospectus;
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(ii) each of the Company and its subsidiaries is duly
qualified and is in good standing as a foreign corporation or
partnership, as the case may be, authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a Material Adverse Effect;
(iii) all the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid, non-assessable and, to the knowledge of such counsel, have not
been issued in violation of any preemptive rights;
(iv) all of the outstanding shares of capital stock of
each of the Company's subsidiaries have been duly authorized and
validly issued and are fully paid and non-assessable, and are owned by
the Company, directly or indirectly through one or more subsidiaries,
free and clear of any Lien, except as disclosed in the Prospectus; and
all of the partnership interests in DR are owned by the Company, free
and clear of any Lien, except as disclosed in the Prospectus;
(v) the Securities have been duly authorized and, when
executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the Underwriter in
accordance with the terms of this Agreement, will be entitled to the
benefits of the Indenture and will be valid and binding obligations of
the Company, enforceable in accordance with their terms except as (A)
the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (B) rights of
acceleration and the availability of equitable remedies may be limited
by equitable principles of general applicability; and the Guarantees
have been duly authorized and, when the Securities have been executed
and authenticated in accordance with the provisions of the Indenture
and delivered to and paid for by the Underwriter in accordance with
the terms of this Agreement and the Guarantees executed and delivered,
the Guarantees will be valid and binding obligations of each of the
Guarantors, enforceable against each Guarantor in accordance with
their terms except as (A) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (B) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability;
(vi) the Indenture has been duly qualified under the
Trust Indenture Act and has been duly authorized, executed and
delivered by each of the Issuers and is
24
<PAGE>
a valid and binding agreement of each of the Issuers, enforceable in
accordance with its terms except as (A) the enforceability thereof may
be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (B) rights of acceleration and the
availability of equitable remedies may be limited by equitable
principles of general applicability;
(vii) this Agreement has been duly authorized, executed
and delivered by each of the Issuers;
(viii) the Registration Statement has become effective
under the Act, and to the knowledge of such counsel no stop order
suspending its effectiveness has been issued under the Act and no
proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before the Commission;
(ix) the statements under the captions "Prospectus
Summary-The Offering", "Risk Factors-Risks Associated With Substantial
Indebtedness", "Risk Factors-Subordination", "Risk Factors-Holding
Company Structure", "Risk Factors-Regulatory Matters", "Risk
Factors-Possible Inability to Repurchase New Senior Subordinated Notes
upon Change of Control", "Risk Factors-Fraudulent Transfer
Considerations", "Risk Factors-Enforceability of Subsidiary
Guarantees", "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Tax Benefits From Net Operating
Losses", "Description of New Senior Subordinated Notes" and
"Underwriting" in the Prospectus and Items 14 and 15 of Part II of the
Registration Statement, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to
therein, are accurate in all material respects;
(x) neither the Company nor any of its subsidiaries is
in violation of its respective charter, by-laws or partnership
agreement and, to the best of such counsel's knowledge after due
inquiry, neither the Company nor any of its subsidiaries is in default
in the performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective property is bound;
(xi) the execution, delivery and performance of this
Agreement, the Indenture, the Securities and the Guarantees by the
Issuers and the consummation of the Refinancing Plan (as such term is
defined in the Prospectus) will not (A)
25
<PAGE>
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except
such as has been obtained or as may be required from the NASD or under
the securities or Blue Sky laws of the various states), (B) violate
the charter or by-laws of the Company or any of its subsidiaries or
the partnership agreement of DR or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries or any of their respective property is
bound, (C) violate or conflict with any applicable federal or New York
statute, law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or any of their respective property,
or (D) result in the imposition or creation of (or the obligation to
create or impose) a Lien under any agreement or instrument to which
the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective property
is bound;
(xii) such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is or could be a party or to which any of
their respective property is or could be subject that are required to
be described in the Registration Statement or the Prospectus and are
not so described, or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required;
(xiii) the Company is not and, after giving effect to the
offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectus, will not be, an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended;
(xiv) to the best of such counsel's knowledge after due
inquiry, except as disclosed in the Registration Statement, there are
no contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with
the Securities registered pursuant to the Registration Statement;
26
<PAGE>
(xv) the Indenture and the Securities conform to the description
thereof in the Registration Statement;
(xvi) the Company has not taken any action of which such counsel is
aware that might cause this Agreement or the issuance and sale of the
Securities to violate Regulations G, T, U or X of the Board of
Governors of the Federal Reserve System; and
(xvii) the Registration Statement and the Prospectus
comply as to form in all material respects with the requirements for
registration statements on Form S-1 under the Act; it being
understood, however, that such counsel expresses no opinion with
respect to (A) the financial data included in the Registration
Statement or the Prospectus and (B) that part of the Registration
Statement that constitutes the Statement of Eligibility (Form T-1)
under the Trust Indenture Act.
In addition, such counsel has participated in conferences
with officers and other representatives of the Company,
representatives of the independent public accountants for the Company,
and your representatives, at which the contents of the Registration
Statement and Prospectus and related matters were discussed and,
although such counsel is not passing upon, and do not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus and
have not made any independent check or verification thereof, during
the course of such participation, no facts came to such counsel's
attention that caused such counsel to believe that the Registration
Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus, as of its date and as
of the Closing Date, contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, it being understood that such counsel need not express
any belief with respect to the financial statements or other financial
data included in the Registration Statement or the Prospectus.
The opinion of Latham & Watkins described in Section 9(f) above shall
be rendered to you at the request of the Company and shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Weil, Gotshal & Manges LLP, counsel for the Underwriter as to
the matters
27
<PAGE>
referred to in Sections 9(f)(v), 9(f)(vi), 9(f)(vii), 9(f)(ix) (but only with
respect to the statements under the caption "Description of New Senior
Subordinated Notes" and "Underwriting") and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f) and 9(g), respectively, Latham & Watkins and Weil, Gotshal & Manges LLP
may state that their opinion and belief are based upon their participation in
the preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof, but
are without independent check or verification except as specified.
(h) Daboco shall have merged with and into the Company.
(i) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Price Waterhouse LLP,
independent public accountants, containing the information and statements of
the type ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus.
(j) The Underwriter shall have received a counterpart, conformed as
executed, of the Indenture which shall have been entered into by the Issuers
and the Trustee.
(k) The Company shall not have failed on or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required
to be performed or complied with by the Company on or prior to the Closing
Date.
(l) The closing under the Equity Underwriting Agreement shall have
occurred and the Company shall have (A) issued and sold to the underwriters
referred to in the Equity Underwriting Agreement, and such underwriters shall
have purchased from the Company, the Shares pursuant to the terms of the Equity
Underwriting Agreement, (B) entered into the New Credit Agreement (as defined
in, and on the terms described in, the Prospectus), and (C) to your reasonable
satisfaction, established the defeasance account and made such arrangements
with respect to the repayment of its outstanding indebtedness with the proceeds
of the sale of the Securities and the Shares as described in the Prospectus
under the caption "Use of Proceeds".
28
<PAGE>
SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Company if any of the following
has occurred: (i) any outbreak or escalation of hostilities or other national
or international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market
the Securities on the terms and in the manner contemplated in the Prospectus,
(ii) the suspension or material limitation of trading in securities or other
instruments on the NYSE, the American Stock Exchange, the Chicago Board of
Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in
the over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in the judgment of the Underwriter
causes, or will cause a Material Adverse Effect, (v) the declaration of a
banking moratorium by either federal or New York State authorities or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
SECTION 11. MISCELLANEOUS. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Duane
Reade Inc., 440 Ninth Avenue, New York, New York 10001, Attention: Chief
Executive Officer, and (ii) if to the Underwriter, to Donaldson, Lufkin &
Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the Underwriter set forth in
or made pursuant to this Agreement shall remain operative and in full force and
effect, and will survive delivery of and payment for the Securities, regardless
of (i) any investigation, or statement as to the results thereof, made by or on
behalf of the Underwriter, the officers or directors of the Underwriter, any
person controlling the Underwriter, any QIU Indemnified Party, the Company, the
officers or directors of the Company or any person controlling the
29
<PAGE>
Company, (ii) acceptance of the Securities and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Securities are not delivered by or on behalf of
the Company as provided herein (other than as a result of any termination of
this Agreement pursuant to Section 10), the Company agrees to reimburse the
Underwriter for all out-of-pocket expenses (including the reasonable fees and
disbursements of counsel) incurred by the Underwriter. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(j) hereof. The Company also
agrees to reimburse the Underwriter, its directors and officers, any persons
controlling the Underwriter, and the QIU Indemnified Parties for any and all
fees and expenses (including, without limitation, the fees disbursements of
counsel) incurred by them in connection with enforcing their rights hereunder
(including, without limitation, pursuant to Sections 7 and 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriter, the Underwriter's directors and officers, any controlling persons
referred to herein, the QIU Indemnified Parties, the Company's directors and
the Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
[signature pages follow]
30
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Issuers and the Underwriter.
Very truly yours,
DUANE READE INC.
By:
-------------------------------
Name:
Title:
DRI I INC.
By:
-------------------------------
Name:
Title:
DUANE READE
By: DRI I Inc., a general partner
By:
-------------------------------
Name:
Title:
31
<PAGE>
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-------------------------------
Name:
Title:
Solely with respect to the second paragraph of Section 2, Section 5(j)(xi),
Section 8 and Section 11:
GOLDMAN, SACHS & CO.
By:
-------------------------------
Name:
Title:
32
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF PARTNERSHIP
OF
DUANE READE
dated as of September 25, 1992
SEE PAGE 13 OF THIS AGREEMENT REGARDING THE PLEDGE OF PARTNERSHIP INTERESTS
HEREIN
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1. DEFINITIONS, ETC. ........................................... 2
1.1 Definitions .................................................. 2
1.2 Accounting Terms and Determinations .......................... 4
1.3 Capital Account Balances ..................................... 4
ARTICLE 2. GENERAL PROVISIONS .......................................... 5
2.1 Existence .................................................... 5
2.2 Name .........................................................
2.3 Partnership Office ........................................... 5
2.4 Term ......................................................... 5
2.5 Certificates; Instruments; Actions ........................... 5
ARTICLE 3. PURPOSES .................................................... 6
ARTICLE 4. CAPITAL CONTRIBUTIONS; PARTNERSHIP INTERESTS ................ 7
4.1 Capital Contributions ........................................ 7
4.2 Partnership Interests ........................................ 8
4.3 No Additional Capital Contributions .......................... 8
4.4 Use of Capital Contributions ................................. 8
ARTICLE 5. MANAGEMENT .................................................. 9
5.1 Management ................................................... 9
5.2 Actions ...................................................... 9
5.3 Expenses ..................................................... 10
5.4 Indemnification .............................................. 11
5.5 Authority .................................................... 11
ARTICLE 6. ALLOCATIONS ................................................. 12
6.1 Allocation of Taxable Income or Loss ......................... 12
6.2 Capital Accounts ............................................. 12
ARTICLE 7. DISTRIBUTIONS .............................................. 12
ARTICLE 8. TRANSFER OF PARTNERSHIP INTERESTS .......................... 13
8.1 No Transfers ................................................ 13
8.2 Certain Successors .......................................... 14
ARTICLE 9. DISSOLUTION AND TERMINATION ................................ 14
9.1 Dissolution; Withdrawal; Right to Continue .................. 14
9.2 Winding Up of Partnership's Business ........................ 16
9.3 Continuation of Indemnification ............................. 17
ARTICLE 10. ACCOUNTING; TAX ............................................ 17
10.1 Books of Accounts ........................................... 17
10.2 Tax Returns ................................................. 17
10.3 Information Required for Tax Returns ........................ 18
ARTICLE 11. GENERAL .................................................... 18
11.1 Amendments .................................................. 18
11.2 Notices and Consents ........................................ 18
11.3 Binding Effects; Benefits ................................... 18
11.4 Modification; Waiver ........................................ 19
11.5 Entire Agreement ............................................ 19
11.6 Severability ................................................ 19
11.7 Headings .................................................... 19
11.8 Counterparts ................................................ 20
11.9 Grammatical Construction .................................... 20
11.10 Governing Law ............................................... 20
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF PARTNERSHIP
OF
DUANE READE
SECOND AMENDED AND RESTATED AGREEMENT OF PARTNERSHIP, dated as of
September 25, 1992, by and between DABOCO INC., a New York corporation
("Daboco") and DUANE READE INC., a Delaware corporation ("DRI")
(individually, a "Partner" and collectively, the "Partners").
WHEREAS, Daboco, together with DLR Inc., a New York corporation ("DLR"),
and Dajaco Inc., a New York corporation ("Dajaco"), and Duane Reade Corp.,
a Delaware corporation (the "Corporation"), entered into an Agreement of
Partnership, dated as of April 24, 1985 (the "Original Agreement");
WHEREAS, as of March 31, 1989, the Partnership redeemed the interest
of the Corporation in the Partnership and the Original Agreement was amended
and restated in its entirety (the "Prior Agreement");
WHEREAS, as of August 3, 1992, the Prior Agreement was amended by
adding a new Section 9.1(d) thereof;
WHEREAS, as of the date and time of this Agreement, Daboco has
contributed one percent (1%) of its interest in the partnership TO DRI, the
Partnership has redeemed the interests of DLR and Dajaco in the Partnership
(the "Redemptions"), and each of DLR and Dajaco has withdrawn as a general
partner of the Partnership under the Original Agreement (the "Withdrawals");
<PAGE>
WHEREAS, as a result of the Redemptions and Withdrawals, the parties
hereto desire to amend and restate the Prior Agreement effective as of the
date hereof.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto hereby agree as follows:
ARTICLE 1. DEFINITIONS, ETC.
1.1 Definitions. For the purposes of this Agreement, the following
terms shall have the meanings set forth in this Section 1.1:
"Agent." As defined in the Credit Agreement.
"Agreement." This Second Amended and Restated Agreement of Partnership,
as amended from time to time as provided herein.
"Capital Accounts." As defined in Section 6.2
"Capital Contributions." As defined in Section 4.1.
"Certificate." As defined in Section 2.5.
"Code." The Internal Revenue Code of 1986, or any successor thereto, as
amended from time to time.
"Collateral Agent." As defined in the Credit Agreement.
"Credit Agreement." The Credit Agreement, dated as of September 24, 1992,
among the Partnership, the Partners, financial institutions from time to
time party thereto (the "Banks") and Bankers Trust Company as Agent for the
Banks, as the
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same may be amended, modified, supplemented or restated from time to time.
"Credit Documents." As defined in the Credit Agreement.
"Event of Dissolution." As defined in Section 9.1.
"Fiscal Year." A taxable year of the Partnership for purposes of the
Code, including a period of less than twelve calendar months which is
considered a taxable year for purposes of the Code. The taxable year of the
Partnership shall end on December 31.
"Founder Employment and Consulting Agreements." The Employment and
Consulting Agreements, dated as of June 18, 1992, by and between the
Partnership and each of Abraham D. Cohen, Eli D. Cohen and Jack D. Cohen.
"Noncompetition Agreements." The noncompetition agreements set forth in
the Withdrawal Agreement and the Founder Employment and Consulting Agreements.
"Partnership." The general partnership continued under this Agreement.
"Partnership Pledge Agreement." The Partnership Pledge and Security
Agreement dated as of September __, 1992, by the Partners in favor of the
Collateral Agent for the benefit of the Secured Creditors (as defined therein),
as the same may be amended, modified, supplemented or restated from time to
time.
"Percentage Interest." As defined in Section 4.2.
"Person." An individual, partnership, corporation, trust, unincorporated
association or other entity or association.
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<PAGE>
"Reserves." Reserve funds which may be established in the sole discretion
of the Partnership for working capital, contingent liabilities, taxes, debt
service, repairs, replacements, renewals, capital expenditures or other
purposes consistent with this Agreement.
"Secured Creditors." As defined in the Credit Documents.
"Senior Note Documents." As defined in the Credit Agreement.
"Taxable Income or Loss." As to any period, the income or loss,
respectively, of the Partnership for such period as determined by the
Partnership for purposes of the Code.
"Withdrawal Agreement." As defined in the Credit Agreement.
1.2 Accounting Terms and Determinations. All accounting terms used herein
and not otherwise defined shall have the meaning accorded to them in
accordance with generally accepted accounting principles as in effect from time
to time, and, except as expressly provided herein, all accounting
determinations shall be made in accordance with generally accepted accounting
principles consistently applied.
1.3 Capital Account Balances. All determinations of capital account
balances shall be made in accordance with Article 6 hereof.
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<PAGE>
ARTICLE 2. GENERAL PROVISIONS
2.1 Existence. Pursuant to the terms of this Agreement, the Partners
hereby continue (without any interruption whatsoever in such continuity)
the Partnership (giving effect to the Redemptions and the Withdrawals
automatically and without further acts) as a general partnership pursuant to
the provisions of the partnership law of the State of New York for the
purposes and the period and upon the terms and conditions hereinafter set
forth.
2.2 Name. The name of the Partnership is Duane Reade. The Partnership
may change its name or adopt such trade or fictitious name for the conduct
of its business and affairs as the Partnership may determine.
2.3 Partnership Office. The Partnership office shall be located at
49-29 30th Place, Long Island City, New York 11101. The Partnership may at
any time change its office to another location within or outside the State of
New York.
2.4 Term. The Partnership shall continue until December 31, 2040, unless
terminated earlier pursuant to Article 9 hereof; provided that the term of
the partnership may be extended at any time and from time to time by written
agreement of the Partners.
2.5 Certificates; Instruments; Actions.
(a) The Partners have heretofore executed Certificates to do Business
(the "Certificates") and, substantially simultaneously with the effectiveness
of this Agreement, have caused these Certificates to be filed for recordness
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<PAGE>
in the office of the County Clerk for each of the following jurisdictions:
New York, Queens, Kings and Bronx Counties in the State of New York and
Essex County in the State of New Jersey.
(b) The Partners shall, and shall cause the Partnership to, execute,
deliver, publish, file and record any and all such further documents (including
any amendments to any of the Certificates) and take any and all further
actions as may be necessary or desirable in connection with the continuation
and operation of the Partnership in accordance with the terms of this Agreement.
ARTICLE 3. PURPOSES
The purposes of the partnership shall include, but shall not be limited
to, the following: (a) to buy and sell health and beauty aids, prescription
drugs, vitamins, cosmetics and fragrances, tobacco products, convenience foods,
hosiery and photo processing services and supplies, and to otherwise carry on
the business of a pharmacy and convenience store, (b) to purchase, lease or
otherwise acquire, mortgage or otherwise encumber, sell or otherwise dispose
of or realize upon and generally deal in real property, interests in real
property and personal property of any kind or description in connection with
the activities described in the preceding clause (a), and (c) to enter into
the Credit Agreement and the Credit Documents and any and all documents
referred to therein or contemplated thereby to which it is a party, including,
but not limited to, the Senior Note Documents and the Withdrawal Agreement and
the
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<PAGE>
Noncompetition Agreements, to perform the obligations of the Partnership
thereunder, and to consummate the transactions consummated thereby. Without
limiting the generality of the foregoing, the Partnership may carry out its
business and accomplish its purposes as principal, whether by or through
trustees or agents, along or with associates or as a member of, or as a
participant in any firm, association, trust, syndicate or other entity.
The Partnership shall have all such powers as are necessary, appropriate or
incidental to the furtherance of the purposes set forth in this Section 3
including, without limitation, the power to incur indebtedness and other
obligations (including, without limitation, pursuant to the Credit Documents)
and to secure the repayment of any such indebtedness and other obligations
with any assets of the Partnership or otherwise and to pay all fees and
expenses in connection therewith. Furthermore, the Partnership may enter into
any and all such other agreements and to execute such other documents,
certificates or instruments and to take any and all further actions which are
necessary, desirable, appropriate or incidental to the purposes set forth
in this Article 3.
ARTICLE 4. CAPITAL CONTRIBUTIONS; PARTNERSHIP INTERESTS
4.1 Capital Contributions. As of the date hereof, each Partner shall be
deemed to have made a capital contribution to the Partnership in the amount
reflected in such Partner's combined equity accounts on the books of the
Partnership, as adjusted through the date and time immediately preceding the
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<PAGE>
Redemptions and Withdrawals under the Prior Agreement (individually, a
"Capital Contribution", and collectively, the "Capital Contribution").
4.2 Partnership Interests. Daboco shall have a ninety-nine percent (99%)
interest in the Partnership, and DRI shall have a one percent (1%) interest in
the Partnership (individually, a "Percentage Interest" and collectively, the
"Percentage Interests").
4.3 No Additional Capital Contributions. Except as otherwise provided in
this Agreement, or as may be necessary to pay expenses as contemplated herein,
or as may be required by any applicable provision of law or the Credit
Agreement, no Partner shall at any time be required to make any additional
contributions to the Partnership or lend funds to the Partnership and no
Partner shall be liable for any assessments by the Partnership. Notwithstanding
the contribution of additional capital by any Partner, unless the Partners
unanimously agree otherwise, there shall be no change in the Percentage
Interest of any Partner pursuant to Section 4.2 above.
4.4 Use of Capital Contributions. The aggregate amount of all the Capital
Contributions shall be available to the Partnership to carry out the purposes
and business of the Partnership, other than to make payments under the
Withdrawal Agreement and Noncompetition Agreements.
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<PAGE>
ARTICLE 5. MANAGEMENT
5.1 Management.
(a) Except as provided in 5.1(b) below, the Partnership and its
business shall be managed by and under the direction of the Partners, who
shall have full and exclusive power and authority to take any and all actions
which are necessary, appropriate or incidental in the judgment of the Partners
to the furtherance of the business and purposes of the Partnership.
(b) Notwithstanding anything herein to the contrary, and in addition
to and without limiting any rights or remedies of the Agent herein, under the
Partnership Pledge Agreement or in any other instrument, during the
continuance of an Event of Default (as defined in the Credit Documents) and
upon request, the Partners shall provide the Agent with access to all
properties of the Partnership and all books and records related to the
business operations of the Partnership. During the continuance of an Event
of Default and, upon request, the Partners shall provide the Agent with copies
of all notices materially related to the business operations of the
Partnership and, if requested by the Agent, the Partnership shall provide a
representative of the Agent access to the main office of the Partnership in
connection with the exercise of the Agent's rights hereunder and under the
Credit Documents.
5.2 Actions.
(a) Except as provided in Section 5.2(b), the vote of the Partners
owning a majority of the Percentage
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<PAGE>
Interests shall be necessary to authorize any action to be taken on behalf of
and in the name of the Partnership and shall be effective to bind the
Partnership for purposes of this Section 5.2.
(b) Subject to the Credit Documents and notwithstanding anything
herein to the contrary, the unanimous consent of the Partners shall be
required for (i) the sale, transfer or other disposition of all or
substantially all of the assets of the Partnership, (ii) the admission of any
new partners and the determination of the Percentage Interest of such
partner following such admission, (iii) any non-cash distribution to the
Partners by the Partnership, (iv) the incurrence of indebtedness for
borrowed money or the guarantee of indebtedness by the Partnership, except
(x) the incurrence of indebtedness or the entering into of guarantees
pursuant to the Credit Agreement and the other Credit Documents and (y) as
such indebtedness is incurred or guaranteed in the ordinary course of the
business of the Partnership or (v) the increase or decrease of the
Percentage Interest of any Partner.
5.3 Expenses. No Partner shall receive any compensation for its services
hereunder or be entitled to interest on any portion of its capital
contribution to the Partnership or its Capital Account; however, the
Partners shall be entitled to reimbursement for all expenses incurred in
connection with the management of the business and affairs of the Partnership,
including, without limitation, expenses attendant upon transactions
negotiated for or entered into on behalf of the
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<PAGE>
Partnership in accordance with Section 5.1, and the fees and expenses of
counsel, accountants and other experts incurred in the course of the
performance of its duties under this Agreement.
5.4 Indemnification. The Partnership shall and does hereby agree to
indemnify and hold harmless each Partner, and each controlling person,
director, officer, employee or agent of each partner (individually, an
"Indemnified Person" and collectively, the "Indemnified Persons"), to the
fullest extent permitted by applicable law, from any loss, damage, liability,
cost or expense (including attorneys' fees and expenses) arising out of or
in connection with any act or failure to act, done or omitted to be done in
good faith, by an Indemnified Person on any matter related to or in connection
with the Partnership. Any attorneys' fees and expenses incurred in connection
with this Section 5.4 shall be paid by the Partnership as they are incurred
upon receipt, in each case, of an undertaking by or on behalf of the
Indemnified Person to repay such amounts if it is ultimately determined that
such Indemnified Person is not entitled to indemnification therefor.
5.5 Authority.
(a) Except as provided in Section 5.2(b) of this Agreement, any
Partner shall, either directly or indirectly through duly authorized officers,
employees or agents of the Partnership or such Partner, as the case may be,
as the Partner in question shall appoint, be authorized with its signature
alone, to bind the Partnership under, and to execute and deliver on behalf of
the Partnership, such documents and instruments as
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<PAGE>
may be necessary, desirable or appropriate to carry out the decisions made by
the Partners.
(b) In dealing with a Partner, no Person shall be required to inquire into
its authority to bind the Partnership.
ARTICLE 6. ALLOCATIONS
6.1 Allocation of Taxable Income or Loss.
Commencing as of the date hereof, Taxable Income or Loss of the
Partnership (and items thereof) for any Fiscal Year or other period shall be
allocated among the Partners pro rata in accordance with their respective
Percentage Interests.
6.2 Capital Accounts.
(a) Each Partner shall have a capital account established as of the
date of this Agreement (individually, a "Capital Account" and collectively,
the "Capital Accounts"). Each Partner's initial Capital Account shall be the
amount determined pursuant to Section 4.1.
(b) The Capital Account of each Partner shall be increased by (i)
the amount of any cash or the value of any property subsequently contributed
by each Partner to the Partnership, (ii) the amount of any Taxable Income
allocated to such Partner pursuant to Section 6.1 and (iii) such Partner's
share (determined as though it constituted additional Taxable Income) of any
tax-exempt receipts of the Partnership.
(c) The Capital Account of each Partner shall be reduced by (i)
the amount of any Taxable Loss allocated to such Partner pursuant to Section
6.1, (ii) the amount of all distribu-
- 12 -
<PAGE>
tions to such Partner and (iii) such Partner's share (determined as though it
constituted an additional deductible item) of any expenditures described in
Section 705(a)(2)(B) of the Code or which are so treated pursuant to
regulations under Section 704(b) of the Code.
(d) If the Partnership at any time distributes any of its assets
"in-kind" to any Partner, the Capital Accounts of the Partners shall be
adjusted to account for such Partners' allocable shares of Taxable Income
or Loss that would have been realized by the Partnership had it sold the
distributed assets at their respective fair market values immediately prior
to their distributions.
ARTICLE 7. DISTRIBUTIONS
All distributions other than liquidating distributions by the Partnership
to the Partners shall be made pro rata in accordance with such Partners'
Percentage Interests.
ARTICLE 8. TRANSFER OF PARTNERSHIP INTERESTS
8.1 No Transfers. Except as required by the Credit Documents, no Partner
may, directly or indirectly, sell, transfer, assign, dispose of, mortgage,
hypothecate or otherwise dispose of, encumber or permit or suffer any
encumbrance on all or any part of its interest in the Partnership to any
Person or the Partnership, or withdraw from the Partnership, whether
voluntarily or by operation of law, at a judicial sale or otherwise, except
with the prior written consent of each other
- 13 -
<PAGE>
Partner and the Collateral Agent (with the consent of the Required Banks (as
defined in the Credit Agreement) or all of the Banks if required by
Section 12.12 of the Credit Agreement), and any attempt so to transfer
such interest shall be void and no other Partner shall be required to
recognize any equitable or any other claims to any interest in such
Partnership interest on the part of the transferee thereof. As of the date
hereof, all of Daboco's and DRI's interests in the Partnership have been
pledged pursuant to the Partnership Pledge Agreement.
8.2 Certain Successors. In the event of any exercise by the Collateral
Agent of the remedies set forth in the Partnership Pledge Agreement in the
manner and in accordance with the terms of the Partnership Pledge Agreement,
(i) the transferee (including without limitation, the Agent or any
designee) of any interest in the Partnership shall, automatically upon
execution of a copy of this Agreement, be a substituted partner, and no
Partner shall have any right of approval or consent with respect to such
admission, (ii) such transferee shall not be liable for any default under
this agreement which occurred prior to its admission to the Partnership and
(iii) the Partners will execute and deliver any instrument reasonably
requested by the transferee to affirm or implement set forth in this
Section 8.2.
ARTICLE 9. DISSOLUTION AND TERMINATION
9.1 Dissolution; Withdrawal; Right to Continue.
(a) The Partnership shall be dissolved and its business wound up
upon the earliest to occur of the following
- 14 -
<PAGE>
events (each of which is referred to herein as an "Event of Dissolution"):
(i) The expiration of the Term provided in Section 2.4;
(ii) upon the agreement of all the Partners to dissolve and
liquidate the Partnership; or
(iii) the sale or other disposition of all or substantially
all of the Partnership's assets in a single transaction or series of
transactions as a result of which the entire business of the Partnership has
been transferred; provided, however, that the Redemptions as of the date of
this Agreement shall not be deemed to be transactions covered by this
Section 9.1(iii).
(b) The Partners hereby agree that the Partnership shall not be
dissolved by virtue of the Withdrawals or any other withdrawal of any Partner
unless the remaining the Partners, within 20 days of such event, elect not
to continue the Partnership and to wind up its affairs in accordance with
Section 9.2; provided that, such 20-day period shall be deemed not to apply to
the Withdrawals. The Partners agree further that, in the event of any
withdrawal, no further action shall be necessary to continue the Partnership
in its then current form and under its then current name.
(c) If an Event of Dissolution occurs under subsection (a) above or
the Partnership is deemed to be dissolved pursuant to any applicable provision
of law or otherwise, the Partners hereby agree that simultaneously upon the
occurrence of
- 15 -
<PAGE>
such event, the Partnership shall be deemed to be, and shall be reconstituted
in its then current form and under its then current name and that no further
action on the part of the Partners or the Partnership shall be necessary to
effectuate the same. In any such event, the Partners agree that the security
interest created by the Partnership Pledge Agreement shall continue in
effect as to each reconstituted Partnership Interest and each Partner shall
execute and deliver instruments reasonably requested by the Collateral Agent
to confirm the continuing existence of such security interest subject to the
provisions of the Partnership Pledge Agreement.
9.2 Winding Up of Partnership's Business. Upon final liquidation of the
Partnership or upon a Partner's withdrawal from the Partnership (after
crediting all Taxable Income or Loss of the Partnership through such date to
the Capital Accounts), if any Partner (or the withdrawing Partner, in the case
of a withdrawal other than the Withdrawals) has a negative Capital Account
balance, such Partner shall constitute the amount of such balance to the
capital of the partnership which amounts shall be applied in accordance with
this Section 9.2. Upon the occurrence of an Event of Dissolution, except as
provided in Section 9.1(c) of this Agreement, the Partnership promptly shall
proceed to sell the assets of the Partnership to the extent necessary to pay
or provide for payment of the debts of the Partnership, the expenses of the
liquidation and dissolution and the setting up of Reserves to pay contingent
obligations of the Partnership. Any remaining proceeds shall be distributed
or the remaining assets distributed
- 16 -
<PAGE>
in kind if the Partnership so elects, in accordance with each Partner's
Capital Account balance (as determined above) to the extent thereof and,
thereafter, in accordance with such Partners' Percentage Interests.
9.3 Continuation of Indemnification. After the occurrence of an Event
of Dissolution and until the Partnership is fully wound up and its business
terminated as provided in Section 9.2 above, the provisions of Section 5.4
above shall remain operative according to their terms and in full force and
effect regardless of the dissolution, winding up or termination of the
Partnership.
ARTICLE 10. ACCOUNTING; TAX
10.1 Book of Accounts. The Partners shall, on behalf of the Partnership,
keep or cause to be kept, full and accurate records and books of account of
all transactions of the Partnership. The Partnership books and records will be
kept in accordance with generally accepted accounting principles, shall be
maintained at such place as the Partnership may determine and shall be open
to inspection by the Partners or their duly authorized representatives at
all reasonable times during normal business hours.
10.2 Tax Returns. The Partnership shall prepare and file, or cause to be
prepared and filed, all appropriate Federal, state and local income or other
tax returns for the partnership for each Fiscal Year.
- 17 -
<PAGE>
10.3 Information Required for Tax Returns. As soon as practicable after
the end of each Fiscal Year, the Partnership shall cause to be delivered to
each Partner such information as shall be required for the preparation by
such Partner of its Federal, state and local income or other tax returns.
ARTICLE 11. GENERAL
11.1 Amendments. This Agreement may not be amended without the unanimous
written consent of the Partners and in accordance with the provisions of the
Credit Documents. The effective date of an amendment to this Agreement shall
be the date stated in the written consent of the Partners or, if no effective
date is stated, the date on which the last of such required consents is given.
11.2 Notices and Consents. Any notice or consent required or permitted to
be given under this Agreement shall be in writing, signed by or on behalf of
the person giving the notice and shall be deemed to have been given when
delivered by personal delivery or five days after being mailed by certified
mail, postage prepaid return receipt requested and addressed to the person or
persons to whom such notice is to be given in accordance with Schedule A
hereto.
11.3 Binding Effects; Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and permitted
assigns. This Agreement shall inure to the benefit of Bankers Trust Company,
as Agent on behalf
- 18 -
<PAGE>
of the Banks, as a third party beneficiary to the extent provided for herein.
11.4 Modification; Waiver. No modification or waiver of this Agreement or
any part hereof and no notice or consent required or permitted to be given
pursuant to this Agreement shall be valid or effective unless made in writing
in accordance with this Agreement and signed by the party or parties sought to
be charged. No waiver of any breach or condition of this Agreement shall be
deemed to be a waiver of any other subsequent breach or condition, whether of
like or different nature.
11.5 Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, among the parties hereto with respect to
the subject matter hereof.
11.6 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or enforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Agreement in any other jurisdiction.
11.7 Headings. The section and other headings of this Agreement are for
reference purposes only and shall not affect the meaning or interpretation
hereof.
- 19 -
<PAGE>
11.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when duly executed, shall be deemed to be an
original and all of which together shall be deemed to be one and the same
instrument.
11.9 Grammatical Construction. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural and vice versa.
11.10 Governing Law. This Agreement shall be governed by and construed
both as to validity and enforceability in accordance with the laws of the
State of New York applicable to agreements made and to be performed entirely
in the State of New York.
- 20 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Partnership
Agreement as of the day and year first above written.
DABOCO INC.
By: /s/ Illegible
--------------------
President
DUANE READE INC.
By: /s/ Illegible
--------------------
President
- 21 -
<PAGE>
SCHEDULE A
----------
NAME AND ADDRESS
---------------------
Duane Reade Inc.
49-29 30th Place
Long Island City, NY 11101
Daboco Inc.
49-29 30th Place
Long Island City, NY 11101
<PAGE>
AMENDMENT NO. 1
TO SECOND AMENDED AND RESTATED
AGREEMENT OF PARTNERSHIP
OF DUANE READE
Reference is made to the Second Amended and Restated Agreement of
Partnership of Duane Reade, dated as of September 29, 1992 (the "Partnership
Agreement"), by and between DABOCO, Inc., a New York corporation, and DUANE
READ INC., a Delaware corporation (each, individually, a "Partner," and
collectively, the "Partners").
The Partnership Agreement is hereby amended as follows:
1. The definition of "Credit Agreement" is hereby deleted in its entirety
and replaced with the following:
"Credit Agreement." The Credit Agreement, dated as of September 30, 1997,
among Duane Reade, as Borrower, the Partners and Duane Read Holding Corp., a
Delaware corporation, as Parent Guarantors and DLJ Capital Funding, Inc., as
Syndication Agent, Fleet National Bank, as Administrative Agent, Credit
Lyonnais New York Branch, as Documentation Agent, and the various lenders
thereunder, as the same may be amended, modified, supplemented, restated or
refinanced from time to time.
2. The definition of "Credit Documents" is amended as follows:
"Credit Documents." Credit Documents shall have the same meaning as "Loan
Documents" in the Credit Agreement.
3. The definition of "Partnership Pledge Agreement" is hereby deleted in
its entirety and replaced with the following:
"Partnership Pledge Agreement." The Partnership Security Agreement, dated
September 30, 1997, by the Partners in favor of the Administrative Agent (as
defined therein) for the benefit of each of the Secured Parties (as defined
therein), as the same may be amended, modified, supplemented or restated from
time to time.
4. The definition of "Secured Creditors" is amended as follows:
"Secured Creditors." Secured Creditors shall have the same meaning as
"Secured Parties" in the Credit Agreement.
<PAGE>
5. Article 8 is deleted in its entirety and replaced with the following:
ARTICLE 8. TRANSFER OF PARTNERSHIP INTERESTS
8.1 No Transfers. Except as required by the Credit Documents, no
Partner may, directly or indirectly, sell, transfer, assign, dispose of,
mortgage, hypothecate or otherwise dispose of, encumber or permit or suffer
any encumbrance on all or any part of its interest in the Partnership to
any Person or the Partnership, or withdraw from the Partnership, whether
voluntarily or by operation of law, at a judicial sale or otherwise, except
with the prior written consent of each other Partner and the Administrative
Agent (with the consent of the Required Lenders (as defined in the Credit
Agreement) or all of the Lenders, if required by Section 11.1 of the Credit
Agreement), and any attempt so to transfer such interest shall be void and no
other Partner shall be required to recognize any equitable or any other
claims to any interest in such Partnership interest on the part of the
transferee thereof. As of the date hereof, all of Daboco's and DRI's interests
in the Partnership have been pledged pursuant to the Partnership Pledge
Agreement.
8.2 Certain Successors. In the event of any exercise by the
Administrative Agent of the remedies set forth in the Partnership Pledge
Agreement in the manner and in accordance with the terms of the Partnership
Pledge Agreement, (i) the transferee (including without limitation, the
Administrative Agent or any designee thereof) of any interest in the
Partnership shall, automatically upon execution of a copy of this Agreement, be
a substituted partner, and no Partner shall have any right of approval or
consent with respect to such admission, (ii) such transferee shall not be
liable for any default under this agreement which occurred prior to its
admission to the Partnership and (iii) the Partnership will execute and
deliver any instrument reasonably requested by the transferee to affirm or
implement set forth in this Section 8.2.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to the Partnership Agreement as of September 30, 1997.
DABOCO INC.
/s/ William J. Tennent
------------------------
Name: William J. Tennent
Title: Chief Financial Officer
DUANE READE INC.
/s/ William J. Tennent
------------------------
Name: William J. Tennent
Title: Chief Financial Officer
<PAGE>
EXECUTION COPY
===============================================================================
DUANE READE INC.
AND
THE GUARANTORS NAMED ON THE SIGNATURE PAGES HERETO
% SENIOR SUBORDINATED NOTES DUE 2008
---------------------
INDENTURE
Dated as of February , 1998
---------------------
---------------------
State Street Bank and Trust Company of Connecticut, N.A.
---------------------
Trustee
===============================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 - DEFINITIONS AND INCORPORATION BY REFERENCE..................... 1
Section 1.01. Definitions............................................ 1
Section 1.02. Other Definitions......................................
Section 1.03. Incorporation by Reference of Trust Indenture Act......
Section 1.04. Rules of Construction..................................
Section 1.05. Compliance Certificates and Opinions...................
Section 1.06. Form of Documents Delivered to Trustee.................
Section 1.07. Acts of Holders........................................
ARTICLE 2 - THE NOTES......................................................
Section 2.01. Form and Dating........................................
Section 2.02. Execution and Authentication...........................
Section 2.03. Registrar and Paying Agent.............................
Section 2.04. Paying Agent to Hold Money in Trust....................
Section 2.05. Lists of Holders of the Notes..........................
Section 2.06. Transfer and Exchange..................................
Section 2.07. Replacement Notes......................................
Section 2.08. Outstanding Notes......................................
Section 2.09. Treasury Notes.........................................
Section 2.10. Temporary Notes........................................
Section 2.11. Cancellation...........................................
Section 2.12. Defaulted Interest.....................................
Section 2.13. Record Date............................................
Section 2.14. CUSIP Number...........................................
Section 2.15. Computation of Interest................................
ARTICLE 3 - REDEMPTION AND PREPAYMENT......................................
Section 3.01. Election to Redeem; Notice to Trustee..................
Section 3.02. Selection by Trustee of Notes to be Redeemed...........
Section 3.03. Notice of Redemption...................................
Section 3.04. Effect of Notice of Redemption.........................
Section 3.05. Deposit of Redemption Price............................
Section 3.06. Notes Payable on Redemption Date.......................
Section 3.07. Notes Redeemed in Part.................................
Section 3.08. Optional Redemption....................................
Section 3.09. Mandatory Redemption...................................
Section 3.10. Offer to Purchase by Application of Excess Proceeds....
i
<PAGE>
Page
ARTICLE 4 - COVENANTS......................................................
Section 4.01. Payment of Principal, Premium and Interest.............
Section 4.02. Maintenance of Office or Agency........................
Section 4.03. Money for Payments to Be Held in Trust.................
Section 4.04. Reports................................................
Section 4.05. Statement as to Compliance; Notice of Default..........
Section 4.06. Payment of Taxes and Other Claims......................
Section 4.07. Stay, Extension, Usury Laws............................
Section 4.08. Corporate Existence....................................
Section 4.09. Offer to Repurchase Upon Change of Control.............
Section 4.10. Asset Sales............................................
Section 4.11. Limitation on Restricted Payments......................
Section 4.12. Limitation on Incurrence of Indebtedness and Issuance
of Preferred Stock.....................................
Section 4.13. Transactions with Affiliates...........................
Section 4.14. Dividend and Other Payment Restrictions Affecting
Subsidiaries...........................................
Section 4.15. Limitations on Issuances and Sales of Capital Stock of
Wholly Owned Subsidiaries..............................
Section 4.16. Additional Subsidiary Guarantees.......................
Section 4.17. Limitations on Liens...................................
Section 4.18. Sale and Leaseback Transactions........................
Section 4.19. No Senior Subordinated Debt............................
ARTICLE 5 - SUCCESSORS.....................................................
Section 5.01. Merger, Consolidation, or Sale of all or Substantially
all Assets.............................................
Section 5.02. Successor Corporation Substituted......................
ARTICLE 6 - DEFAULTS AND REMEDIES..........................................
Section 6.01. Events of Default and Notice Thereof...................
Section 6.02. Acceleration...........................................
Section 6.03. Other Remedies.........................................
Section 6.04. Waiver of Past Defaults................................
Section 6.05. Control by Majority....................................
Section 6.06. Limitation on Suits....................................
Section 6.07. Rights of Holders of Notes to Receive Payment..........
Section 6.08. Collection Suit by Trustee.............................
Section 6.09. Trustee May File Proofs of Claim.......................
Section 6.10. Priorities.............................................
Section 6.11. Undertaking for Costs..................................
ii
<PAGE>
Page
ARTICLE 7 - TRUSTEE........................................................
Section 7.01. Duties of Trustee......................................
Section 7.02. Rights of Trustee......................................
Section 7.03. Individual Rights of Trustee...........................
Section 7.04. Trustee's Disclaimer...................................
Section 7.05. Notice of Defaults.....................................
Section 7.06. Reports by Trustee to Holders of the Notes.............
Section 7.07. Compensation and Indemnity.............................
Section 7.08. Replacement of Trustee.................................
Section 7.09. Successor Trustee by Merger, Etc.......................
Section 7.10. Eligibility; Disqualification..........................
Section 7.11. Preferential Collection of Claims Against the
Company................................................
Section 7.12. Rights of Holders with Respect to Time Method
and Place..............................................
ARTICLE 8 - LEGAL DEFEASANCE AND COVENANT DEFEASANCE.......................
Section 8.01. Option to Effect Defeasance or Covenant Defeasance.....
Section 8.02. Legal Defeasance and Discharge.........................
Section 8.03. Covenant Defeasance....................................
Section 8.04. Conditions to Defeasance or Covenant Defeasance........
Section 8.05. Deposited Money and U.S. Government Obligations
to Be Held in Trust; Other Miscellaneous Provisions....
Section 8.06. Repayment to Company...................................
Section 8.07. Reinstatement..........................................
ARTICLE 9 - AMENDMENT, SUPPLEMENT AND WAIVER...............................
Section 9.01. Without Consent of Holders of Notes....................
Section 9.02. With Consent of Holders of Notes.......................
Section 9.03. Compliance With TIA....................................
Section 9.04. Revocation and Effect of Consents......................
Section 9.05. Notation on or Exchange of Notes.......................
Section 9.06. Trustee to Sign Amendments, Etc........................
ARTICLE 10 - SUBORDINATION.................................................
Section 10.01. Agreement to Subordinate...............................
Section 10.02. Liquidation; Dissolution; Bankruptcy...................
Section 10.03. Default on Designated Senior Debt......................
Section 10.04. Acceleration of Securities.............................
Section 10.05. When Distribution Must be Paid Over....................
Section 10.06. Notice by Company......................................
Section 10.07. Subrogation............................................
Section 10.08. Relative Rights........................................
Section 10.09. Subordination May Not Be Impaired by Company...........
Section 10.10. Distribution or Notice to Representative...............
Section 10.11. Rights of Trustee and Paying Agent.....................
Section 10.12. Authorization to Effect Subordination..................
iii
<PAGE>
Page
Section 10.13. No Waiver of Subordination Provisions..................
Section 10.14. Certain Definitions....................................
ARTICLE 11 - GUARANTEE OF NOTES
Section 11.01 Subsidiary Guarantee...................................
Section 11.02 Execution and Delivery of Subsidiary Guarantee.........
Section 11.03 Subsidiary Guarantors May Consolidate, etc., on
Certain Terms..........................................
Section 11.04 Releases Following Sale of Assets......................
Section 11.05 Limitation on Subsidiary Guarantor Liability...........
Section 11.06 "Trustee" to Include Paying Agent......................
ARTICLE 12 - SUBORDINATION OF SUBSIDIARY GUARANTEES
Section 12.01 Agreement to Subordinate...............................
Section 12.02 Liquidation; Dissolution; Bankruptcy...................
Section 12.03 Default on Designated Senior Debt......................
Section 12.04 Acceleration of Securities.............................
Section 12.05 When Distribution Must Be Paid Over....................
Section 12.06 Notice By Subsidiary Guarantor.........................
Section 12.07 Subrogation............................................
Section 12.08 Relative Rights........................................
Section 12.09 Subordination May Not Be Impaired By Subsidiary
Guarantor..............................................
Section 12.10 Distribution or Notice to Representative...............
Section 12.11 Rights of Trustee and Paying Agent.....................
Section 12.12 Authorization to Effect Subordination..................
Section 12.13 No Waiver of Subordination Provisions..................
Section 12.14 Certain Definitions....................................
ARTICLE 13 - SATISFACTION AND DISCHARGE....................................
Section 13.01. Satisfaction and Discharge of Indenture................
Section 13.02. Application of Trust Money.............................
ARTICLE 14 - MISCELLANEOUS.................................................
Section 14.01. Conflict of any Provision of Indenture With TIA........
Section 14.02. Notices................................................
Section 14.03. Communication by Holders of Notes with Other Holders
of Notes...............................................
Section 14.04. Certificate and Opinion as to Conditions Precedent.....
Section 14.05. Legal Holidays.........................................
Section 14.06. No Personal Liability of Directors, Officers,
Employees an Stockholders..............................
Section 14.07. Governing Law..........................................
Section 14.08. No Adverse Interpretation of Other Agreements..........
Section 14.09. Successors and Assigns.................................
Section 14.10. Severability...........................................
Section 14.11. Counterpart Originals..................................
Section 14.12. Table of Contents, Headings, Etc.......................
iv
<PAGE>
Page
EXHIBITS
A - Form of Note
B - Subsidiary Guarantee
C - Form of Supplemental Indenture to be Delivered by Subsidiary
Guarantors
D - Form of Notation of Subsidiary Guarantee on Note
v
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
310(a)(1)..................................................... 7.10
(a)(2)................................................... 7.10
(a)(3)................................................... N.A.
(a)(4)................................................... N.A.
(a)(5)................................................... 7.10
(b)...................................................... 7.10
(c)...................................................... N.A.
311(a)........................................................ 7.11
(b)...................................................... 7.11
(c)...................................................... N.A.
312(a)........................................................ 2.05
(b)...................................................... 14.03
(c)...................................................... 14.03
313(a)........................................................ 7.06
(b)(1)................................................... N.A.
(b)(2)................................................... 7.06; 7.07
(c)...................................................... 7.06; 14.02
(d)...................................................... 7.06
314(a)........................................................ 4.04; 14.02
(b)...................................................... N.A.
(c)(1)................................................... 14.04
(c)(2)................................................... 14.04
(c)(3)................................................... N.A.
(d)...................................................... N.A.
(f)...................................................... N.A.
315(a)........................................................ 7.01
(b)...................................................... 7.05; 14.02
(c)...................................................... 7.01
(d)...................................................... 7.01
(e)...................................................... 6.11
316(a)(last sentence)......................................... 2.09
(a)(1)(A)................................................ 6.05
(a)(1)(B)................................................ 6.04
(a)(2)................................................... N.A.
(b)...................................................... 6.07
317(a)(1)..................................................... 6.08
(a)(2)................................................... 6.09
(b)...................................................... 2.04
318(a)........................................................ 14.01
(b)...................................................... N.A.
(c)...................................................... 14.01
N.A. means not applicable.
* This Cross Reference Table is not part of the Indenture.
vi
<PAGE>
INDENTURE dated as of , 1998 between Duane Reade Inc., a
Delaware corporation (the "Company"), the Subsidiary Guarantors executing a
signature page hereto, and State Street Bank and Trust Company of Connecticut,
N.A., as trustee (the "Trustee"). The Company and the Trustee agree as follows
for the benefit of each other and for the equal and ratable benefit of the
Holders of the % Senior Subordinated Notes due 2008.
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.01. Definitions.
Set forth below are certain defined terms used in this Indenture.
"Acquired Indebtedness" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering an asset acquired by such specified Person at the time such asset
is acquired by such specified Person.
"Affiliate" of any specified Person means any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, such specified Person. For purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of a
Person shall be deemed to be control, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Asset Sale" means (a) the sale, lease, conveyance, disposition or
other transfer (a "disposition") of any properties, assets or rights
(including, without limitation, a sale and leaseback transaction) or (b) the
issuance, sale or transfer by the Company of Equity Interests of a Subsidiary,
and in the case of either clause (a) or (b), whether in a single transaction or
a series of related transactions for Net Proceeds in excess of $1.0 million;
provided, however, that the following transactions will be deemed not to be
Asset Sales: (i) sales of inventory in the ordinary course of business; (ii) a
disposition of assets by the Company to a Wholly Owned Subsidiary or by a
Wholly Owned Subsidiary of the Company to the Company or to another
1
<PAGE>
Wholly Owned Subsidiary of the Company; (iii) a disposition of Equity Interests
by a Wholly Owned Subsidiary of the Company to the Company or to another Wholly
Owned Subsidiary of the Company; (iv) the sale and leaseback of any assets
within 90 days of the acquisition of such assets; and (v) a Permitted
Investment or Restricted Payment that is permitted by Section 4.11 hereof.
"Attributable Indebtedness" in respect of a sale and leaseback
transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"Bankruptcy Law" means Title 11, U.S. Code or any similar foreign,
federal or state law for the relief of debtors.
"Board of Directors" means the board of directors of the Company or
any duly authorized committee of such board of directors.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Business Day" means any day other than a Legal Holiday.
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
Person to finance the purchase or construction of any property or assets
acquired or constructed by such Person which have a useful life of more than
one year so long as (a) the purchase or construction price for such property or
assets is included in "addition to property, plant or equipment" in accordance
with GAAP, (b) the acquisition or construction of such property or assets is
not part of any acquisition of a Person or line of business and (c) such
Indebtedness is incurred within 90 days of the acquisition or completion of
construction of such property or assets.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital
lease that would at such time be required to be capitalized on a balance sheet
in accordance with GAAP.
"Capital Stock" means, (a) in the case of a corporation, corporate
stock, (b) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (c) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and
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(d) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (a) United States dollars, (b) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than six months from the date of acquisition, (c) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the
date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500.0 million, (d) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (b) and (c) above entered into with any
financial institution meeting the qualifications specified in clause (c) above,
(e) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Service and in each case
maturing within six months after the date of acquisition, and (f) any fund
investing exclusively in investments of the types described in clauses (a)
through (e) above.
"Change of Control" means the occurrence of any of the following: (a)
the sale, lease, transfer, conveyance or other disposition (other than by way
of merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries, taken
as a whole, to any "person" or "group" (as such terms are used in Section 13(d)
of the Exchange Act) other than the Principals, (b) the adoption of a plan
relating to the liquidation or dissolution of the Company, (c) the consummation
of any transaction (including, without limitation, any merger or consolidation)
the result of which is that any "person" or "group" (as such terms are used in
Section 13(d) of the Exchange Act) other than the Principals becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act), directly or indirectly through one or more intermediaries,
of more than 50% of the voting power of the outstanding voting stock of the
Company, or (d) the first day on which more than a majority of the members of
the Board of Directors of the Company are not Continuing Directors.
"Closing Date" means the closing date of the sale and original
issuance of the Notes under this Indenture.
"Commission" means the Securities and Exchange Commission.
"Common Stock Offering" means the offering and sale of 6,700,000
shares of Common Stock of the Company, pursuant to a prospectus dated
, 1998.
"Company" means Duane Reade Inc., a Delaware Corporation.
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"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (a) an
amount equal to any extraordinary loss plus any net loss realized in connection
with an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (b) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net
Income, plus (c) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance costs
and 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 payments (if any) pursuant to Hedging Obligations), to the
extent that any such expense was deducted in computing such Consolidated Net
Income, plus (d) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses
(other than deferred rental expense) that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period
or amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that (a) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Wholly Owned Subsidiary thereof, (b) the Net
Income of any Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary or its stockholders, (c) the Net Income of any Person acquired
in a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, and (d) the cumulative effect of a change in
accounting principles shall be excluded.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who (a) was a member of the
Board of Directors of the Company on the Closing Date or (b) was nominated for
election to the Board of Directors of the Company with the approval of, or
whose election to the Board of Directors of the Company
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was ratified by, at least a majority of the Continuing Directors who were
members of the Board of Directors of the Company at the time of such nomination
or election.
"Corporate Trust Office of the Trustee" shall be at the address of the
Trustee specified in Section 14.02 hereof or such other address as to which the
Trustee may give notice to the Company.
"Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Depository" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified in Section 2.03 hereof as
the Depository with respect to the Notes, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depository" shall mean or include such successor.
"Designated Senior Debt" means, with respect to any Person, (i) any
Indebtedness of such Person outstanding under the New Credit Agreement and
thereafter (ii) any other Senior Debt of such Person permitted under this
Indenture the principal amount of which is $25 million or more and that has
been designated by such Person as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise is exchangeable
for Indebtedness (except to the extent exchangeable at the option of such
Person subject to the terms of any debt instrument to which such Person is a
party) or redeemable at the option of the holder thereof, in whole or in part,
on or prior to the date that is 91 days after the date on which the Notes
mature; provided, however, that any Capital Stock that would constitute
Disqualified Stock solely because the holders thereof have the right to require
the Company to repurchase such Capital Stock upon the occurrence of a Change of
Control or an Asset Sale shall not constitute Disqualified Stock if the terms
of such Capital Stock provide that the Company may not repurchase or redeem any
such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the provisions of Section 4.11 hereof.
"DLJMB" means DLJ Merchant Banking Partners II, L.P. and its
Affiliates.
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"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Agreement) in
existence on the date of this Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the
sum of (a) consolidated interest expense of such Person and its Subsidiaries
for such period, whether paid or accrued (including, without limitation,
amortization of debt issuance costs and 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 and net payments (if any) pursuant to Hedging Obligations), and (b)
commissions, discounts and other fees and charges incurred with respect to
letters of credit and bankers' acceptances financing, and (c) any interest
expense on Indebtedness of another Person that is guaranteed by such Person or
secured by a Lien on assets of such Person and (d) the product of (i) all
dividend payments on any series of preferred stock of such Person (other than
dividends payable solely in Equity Interests that are not Disqualified Stock),
times (ii) a fraction, the numerator or of which is one and the denominator of
which is one minus the then current combined federal, state and local statutory
tax rate of such Person, expressed as decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Subsidiaries for such period (exclusive of amounts attributable to discontinued
operations, as determined in accordance with GAAP, or operations and businesses
disposed of prior to the Calculation Date (as defined below)) to the Fixed
Charges of such Person for such period (exclusive of amounts attributable to
discontinued operations, as determined in accordance with GAAP, or operations
and businesses disposed of prior to the Calculation Date, but only to the
extent that the obligations giving rise to such Fixed Charges would no longer
be obligations contributing to such Person's Fixed Charges subsequent to the
Calculation Date). In the event that the Company or any of its Subsidiaries
incurs, assumes, guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues preferred stock subsequent to the commencement of
the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at
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the beginning of the applicable four-quarter reference period. For purposes of
making the computation referred to above, acquisitions that have been made by
the Company or any of its Subsidiaries, including all mergers and
consolidations and any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation Date shall be calculated on a pro forma basis and shall be deemed
to have occurred on the first day of such four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated to include
the Consolidated Cash Flow of the acquired entities (adjusted to exclude (x)
the cost of any compensation, remuneration or other benefit paid or provided to
any employee, consultant, Affiliate or equity owner of the acquired entities to
the extent such costs are eliminated and not replaced and (y) the amount of any
reduction in general, administrative or overhead costs of the acquired
entities, in each case, as determined in good faith by an officer of the
Company) without giving effect to clause (c) of the proviso set forth in the
definition of "Consolidated Net Income" in this Section 1.01.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect as of the Closing Date.
"Global Note" means a permanent global senior subordinated note that
contains the paragraph referred to in footnote 1 and the additional schedule
referred to in footnote 2 to the form of the Note attached hereto as Exhibit A,
and that is deposited with the Note Custodian and registered in the name of the
Depository.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States of America is
pledged.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under interest rate swap agreements, interest rate
cap agreements and interest rate collar agreements and other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Holder" means a Person in whose name a Note is registered.
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"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or bankers' acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as Indebtedness
of others secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the guarantee by such Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be (a) the
accreted value thereof (together with any interest thereon that is more than 30
days past due), in the case of any Indebtedness that does not require current
payments of interest, and (b) the principal amount thereof, in the case of any
other Indebtedness.
"Indenture" means this Indenture, as amended or supplemented from time
to time.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees by the referent Person of, and Liens on
any assets of the referent Person securing, Indebtedness or other obligations
of other Persons), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of Section 4.11.
"Legal Holiday" means a Saturday, Sunday or a day on which banking
institutions in the City of New York, the city where the principal office of
the Trustee is located, or at a place of payment are authorized by law,
regulation or executive order to remain closed. If a payment date is a Legal
Holiday at a place of payment, payment may be made at that place on the next
succeeding day that is not a Legal Holiday.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed,
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recorded or otherwise perfected under applicable law (including any conditional
sale or other title retention agreement, any lease in the nature thereof, any
option or other agreement to sell or give a security interest in and any filing
of or agreement to give any financing statement under the Uniform Commercial
Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (a) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (i) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (ii)
the disposition of any securities by such Person or any of its Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries, and (b) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of (without
duplication) (a) the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, sales
commissions, recording fees, title transfer fees, and appraiser fees) and any
relocation expenses incurred as a result thereof, (b) taxes paid or estimated
to be payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), (c) amounts required
to be applied to the repayment of Indebtedness (other than revolving credit
Indebtedness incurred pursuant to the New Credit Agreement) secured by a Lien
on the asset or assets that were the subject of such Asset Sale, and (d) any
reserve established in accordance with GAAP or any amount placed in escrow, in
either case for adjustment in respect of the sale price of such asset or
assets, until such time as such reserve is reversed or such escrow arrangement
is terminated, in which case Net Proceeds shall include only the amount of the
reserve so reversed or the amount returned to the Company or its Subsidiaries
from such escrow arrangement, as the case may be.
"New Credit Agreement" means the Credit Agreement, dated as of
February, , 1998, among the Company, ____________ and ____________, including
any related notes, guarantees, collateral and security documents, instruments
and agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time, subject
to the terms thereof and of this Indenture.
"Notes" means the Company's % Senior Subordinated Notes due 2008
issued in compliance with this Indenture.
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"Note Custodian" means the Trustee, as custodian with respect to the
Notes in global form, or any successor entity thereto.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering" means the offering and sale of the Notes by the Company
pursuant to a prospectus, dated as of , 1998, contained in the Registration
Statement.
"Officer" means the Chairman, Chief Executive Officer, the President,
and any Vice President of the Company.
"Officer's Certificate" means a certificate signed on behalf of the
Company by an Officer of the Company that meets the requirements set forth in
Section 1.05 hereof.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company and who shall be acceptable to the Trustee, in form and
substance satisfactory to the Trustee. Each such opinion shall include the
statements provided for in TIA Section 314(e) to the extent applicable.
"Pari Passu Indebtedness" means Indebtedness of the Company or any
Subsidiary Guarantor that ranks pari passu in right of payment to the Notes or
any Subsidiary Guarantee.
"Permitted Business" means any business in which the Company or the
Subsidiary Guarantors are engaged on the Closing Date or any business
reasonably related, incidental or ancillary thereto.
"Permitted Investments" means (a) any Investment in the Company or in
a Wholly Owned Subsidiary of the Company, (b) any Investment in cash or Cash
Equivalents, (c) any Investment by the Company or any Subsidiary of the Company
in a Person that is engaged in a Permitted Business if as a result of such
Investment (i) such Person becomes (A) a Wholly Owned Subsidiary of the Company
and (B) a Subsidiary Guarantor or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Subsidiary of
the Company, (d) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with Sections 3.10 and 4.10 hereof, (e) any Investment acquired solely in
exchange for Equity Interests (other than Disqualified Stock) of the Company,
and (f) other Investments in any Person that is engaged in a Permitted Business
which Investment has a fair market value (as determined by a resolution of the
Board of Directors of the Company and set forth in an Officer's Certificate
delivered to the Trustee),
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when taken together with all other Investments made pursuant to this clause (f)
that are at the time outstanding, not to exceed $10.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or
a Subsidiary Guarantor or debt securities of the Company or a Subsidiary
Guarantor that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or to
a greater extent than, the Notes are subordinated to Senior Debt.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that (a) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus premium, if any, and accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith), (b)
such Permitted Refinancing Indebtedness has a final maturity date no earlier
than the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, (c) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness is subordinated in right of
payment to the Notes on terms at least as favorable, taken as a whole, to the
Holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, and (d) such Indebtedness is incurred either by the Company or by the
Subsidiary who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Principals" means DLJMB.
"Qualified Offering" means (i) any issuance of common stock or
preferred stock by the Company (excluding Disqualified Stock) that is
registered pursuant to the Securities Act, other than issuance registered on
Form S-8 and issuances registered on Form S-4, and (ii) any private issuance of
common stock or preferred stock of the Company (excluding Disqualified Stock),
other than issuances of common stock pursuant to employee benefit plans of the
Company or otherwise as compensation of employees of the Company.
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"Refinancing Plan" means the Refinancing Plan described in the
Registration Statement.
"Registration Statement" means the Registration Statement No.
333-43313 on Form S-1 relating to the Notes initially filed with the Commission
on December 24, 1997 and all exhibits, schedules and amendments thereto.
"Responsible Officer," when used with respect to the Trustee, means
any officer in the Corporate Trust Office of the Trustee and also means, with
respect to a particular corporate trust matter, any other officer or employee
to whom such matter is referred because of his knowledge of and familiarity
with the particular subject.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Senior Debt" means, with respect to any Person, (a) all Obligations
of such Person outstanding under the New Credit Agreement and all Hedging
Obligations payable to a lender or an affiliate thereof or to a Person that was
a lender or an Affiliate thereof at the time the contract was entered into
under the New Credit Agreement or any of its Affiliates, including, without
limitation, interest accruing subsequent to the filing of, or which would have
accrued but for the filing of, a petition for bankruptcy, whether or not such
interest is an allowable claim in such bankruptcy proceeding, (b) any other
Indebtedness of such Person unless the instrument under which such Indebtedness
is incurred expressly provides that it is subordinated in right of payment to
any other Senior Debt of such Person, and (c) all Obligations with respect to
the foregoing. Notwithstanding anything to the contrary in the foregoing,
Senior Debt will not include (i) any liability for federal, state, local or
other taxes, (ii) any Indebtedness of such Person to any of its Subsidiaries,
(iii) any trade payables or (iv) any Indebtedness that is incurred in violation
of this Indenture.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the Closing Date.
"Stated Maturity" means, with respect to any installment of interest
or principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
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"Subsidiary" means, with respect to any Person, (a) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock 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 such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (b) any partnership (i) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (ii) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantees" means the joint and several guarantees of the
Company's payment obligations under the Notes issued by all of the Company's
present and future Subsidiaries, which guarantees shall be subordinate to all
Senior Debt and shall rank pari passu with or senior to all other Indebtedness
of such Subsidiaries.
"Subsidiary Guarantor" means any Subsidiary of the Company that shall
have guaranteed the payment of all principal of, and interest and premium, if
any, on the Notes and all other amounts payable under the Notes or this
Indenture, pursuant to a Subsidiary Guarantee.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA.
"Trustee" means the party named as such above unless and until a
successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means such successor.
"Weighted Averages Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person.
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Section 1.02. Other Definitions.
Defined in
Term Section
---- -------
"Act"........................................................... 1.07
"Affiliate Transaction"......................................... 4.13
"Asset Sale Offer".............................................. 3.10
"Change of Control Offer"....................................... 4.09
"Change of Control Payment"..................................... 4.09
"Change of Control Payment Date"................................ 4.09
"Covenant Defeasance"........................................... 8.03
"distribution".................................................. 10.14
"DTC"........................................................... 2.03
"Event of Default".............................................. 6.01
"Excess Proceeds"............................................... 4.10
"incur"......................................................... 4.12
"Legal Defeasance".............................................. 8.02
"Offer Amount".................................................. 3.10
"Offer Period".................................................. 3.10
"Paying Agent".................................................. 2.03
"payment"....................................................... 10.14
"Payment Blockage Notice"....................................... 10.03
"Payment Default"............................................... 6.01
"Payment in full"............................................... 10.01
"Purchase Date"................................................. 3.10
"Registrar"..................................................... 2.03
"Restricted Payments"........................................... 4.11
Section 1.03. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"indenture securities" means the Notes;
"indenture security Holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
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"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the Notes means the Company and any successor obligors
upon the Notes.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule under
the TIA have the meanings so assigned to them.
Section 1.04. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular; and
(5) provisions apply to successive events and transactions.
Section 1.05. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee an Officer's Certificate stating that all conditions precedent, if
any, provided for in this Indenture (including any covenant compliance with
which constitutes a condition precedent) relating to the proposed action have
been complied with and an Opinion of Counsel stating that in the opinion of
such counsel all such conditions precedent, if any, have been complied with,
except that, in the case of any such application or request as to which the
furnishing of such documents is specifically required by any provision of this
Indenture relating to such particular application or request, no additional
certificate or opinion need be furnished.
Every certificate or opinion (other than the certificates required by
Section 4.05(a) hereof) with respect to compliance with a condition or covenant
provided for in this Indenture shall comply with the provisions of TIA Section
314(e) and shall include:
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(a) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such individual, he or
she has made such examination or investigation as is necessary to enable
him or her to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
Section 1.06. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representation
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
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Section 1.07. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent
duly appointed in writing; and, except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments are
delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for
any purpose of this Indenture and (subject to TIA Section 315) conclusive in
favor of the Trustee and the Company, if made in the manner provided in this
Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner that the Trustee
deems sufficient.
(c) The ownership of Notes shall be proved by a register kept by the
Registrar.
(d) If the Company shall solicit from the Holders any request, demand,
authorization, direction, notice, consent, waiver or other Act, the Company
may, at its option, by or pursuant to a Board Resolution, fix in advance a
record date for the determination of such Holders entitled to give such
request, demand, authorization, direction, notice, consent, waiver or other
Act, but the Company shall have no obligation to do so. Notwithstanding TIA
Section 316(c), any such record date shall be the record date specified in or
pursuant to such Board Resolution, which shall be a date not more than 30 days
prior to the first solicitation of Holders generally in connection therewith
and no later than the date such solicitation is completed.
If such a record date is fixed, such request, demand, authorization,
direction, notice, consent, waiver or other Act may be given before or after
such record date, but only the Holders of record at the close of business on
such record date shall be deemed to be Holders for the purposes of determining
whether Holders of the requisite proportion of Notes then outstanding have
authorized or agreed or consented to such request, demand, authorization,
direction, notice, consent, waiver or other Act, and for this purpose the Notes
then outstanding shall be computed as of such record date; provided that no
such request, demand, authorization, direction, notice, consent, waiver or
other Act by the Holders on such record date shall be deemed effective unless
it shall become effective pursuant to the provisions of this Indenture not
later than six months after the record date.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act by the Holder of any Note shall bind every future Holder of
the same Note or the
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Holder of every Note issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done, suffered or
omitted to be done by the Trustee, any Paying Agent or the Company in reliance
thereon, whether or not notation of such action is made upon such Note.
ARTICLE 2
THE NOTES
Section 2.01. Form and Dating.
The Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A hereto, the terms of which are
incorporated in and made a part of this Indenture. The Notes may have
notations, legends or endorsements approved as to form by the Company and
required by law, stock exchange rule, agreements to which the Company is
subject, or usage. Each Note shall be dated the date of its authentication. The
Notes shall be issuable in registered form, without coupons, and only in
denominations of $1,000 and integral multiples thereof.
(a) Global Notes. Notes offered and sold in connection with the
Offering shall be issued initially in the form of Global Notes, which shall be
deposited on behalf of the purchasers of the Notes represented thereby with the
Trustee, as custodian of the Depository, and registered in the name of the
Depository or a nominee of the Depository, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the Global Notes may from time to time be increased or decreased by
adjustments made on the records of the Trustee and the Depository or its
nominee as hereinafter provided.
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Each Global Note shall represent such of the outstanding Notes as
shall be specified therein and each shall provide that it shall represent the
aggregate amount of outstanding Notes from time to time endorsed thereon and
that the aggregate amount of outstanding Notes represented thereby may from
time to time be reduced or increased, as appropriate, to reflect exchanges,
redemptions and transfers of interests. Any endorsement of a Global Note to
reflect the amount of any increase or decrease in the amount of outstanding
Notes represented thereby shall be made by the Trustee or the Note Custodian,
at the direction of the Trustee, in accordance with instructions given by the
Holder thereof as required by Section 2.06 hereof.
Except as set forth in Section 2.06 hereof, the Global Notes may be
transferred, in whole and not in part, only to another nominee of the
Depository or to a successor of the Depository or its nominee.
(b) Book-Entry Provisions. This Section 2.01(b) shall apply only to
Global Notes deposited with or on behalf of the Depository.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.01(b), authenticate and deliver the Global Notes that (i) shall
be registered in the name of the Depository or the nominee of the Depository
and (ii) shall be delivered by the Trustee to the Depository or pursuant to the
Depository's instructions or held by the Trustee as custodian for the
Depository.
Participants who hold Notes through the Depository shall have no
rights under this Indenture with respect to any Global Note held on their
behalf by the Depository or by the Note Custodian as custodian for the
Depository or under such Global Note, and the Depository may be treated by the
Company, the Trustee and any Agent of the Company or the Trustee as the
absolute owner of such Global Note for all purposes whatsoever. Notwithstanding
the foregoing, nothing herein shall prevent the Company, the Trustee or any
Agent of the Company or the Trustee from giving effect to any written
certification, proxy or other authorization furnished by the Depository or
impair, as between the Depository and its participants, the operation of
customary practices of such Depository governing the exercise of the rights of
an owner of a beneficial interest in any Global Note.
(c) Definitive Notes. Notes issued in certificated form shall be
substantially in the form of Exhibit A attached hereto (but without including
the text referred to in footnotes 1 and 2 thereto).
Section 2.02. Execution and Authentication.
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One Officer of the Company shall sign the Notes for the Company by
manual or facsimile signature. The Company's seal shall be reproduced on the
Notes and may be in facsimile form.
If an Officer of the Company whose signature is on a Note no longer
holds that office at the time the Note is authenticated, the Note shall
nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature
of the Trustee. The signature of the Trustee shall be conclusive evidence that
the Note has been authenticated under this Indenture. The form of Trustee's
certificate of authentication to be borne by the Notes shall be substantially
as set forth in Exhibit A hereto.
The Trustee shall, upon a written order of the Company signed by an
Officer of the Company, authenticate Notes for original issue up to an
aggregate principal amount stated in the Notes. The aggregate principal amount
of Notes outstanding at any time shall not exceed such amount except as
provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. Unless limited by the terms of such appointment,
an authenticating agent may authenticate Notes whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same rights as an
Agent to deal with the Company or an Affiliate of the Company.
Section 2.03. Registrar and Paying Agent.
The Company shall maintain (i) an office or agency where Notes may be
presented for registration of transfer or for exchange (including any
co-registrar, the "Registrar") and (ii) an office or agency where Notes may be
presented for payment ("Paying Agent") within the City of and the State of New
York or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their respective addresses set forth in the register
of Holders; provided that all payments with respect to (i) Notes the Holders of
which have given wire transfer instructions to the Company will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof, and (ii) Notes represented by one or more
permanent Global Notes will be paid by wire transfer of immediately available
funds to the account of the Depository or any successor thereto. The Registrar
shall keep a register of the Notes and of their transfer and exchange. The
Company may appoint one or more co-Registrars and one or more additional paying
agents. The term "Paying Agent" includes any additional paying agent. The
Company may change any Paying Agent, Registrar or co-Registrar without prior
notice to any Holder. The Company shall notify the Trustee in writing and the
Trustee shall notify the Holders of the name and address of any Agent not a
party to this Indenture. The Company may act as Paying Agent, Registrar or
co-Registrar. The Company shall enter into an appropriate agency
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agreement with any Agent not a party to this Indenture, which shall be subject
to any obligations imposed by the provisions of the TIA. The agreement shall
implement the provisions of this Indenture that relate to such Agent. The
Company shall notify the Trustee of the name and address of any such Agent. If
the Company fails to maintain a Registrar or Paying Agent, or fails to give the
foregoing notice, the Trustee shall act as such, and shall be entitled to
appropriate compensation in accordance with Section 7.07 hereof.
The Company initially appoints The Depository Trust Company ("DTC") to
act as Depository with respect to the Global Notes.
The Company initially appoints the Trustee as Registrar, Paying Agent
and agent for service of notices and demands in connection with the Notes.
Section 2.04. Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent shall hold in trust for the benefit of
the Holders or the Trustee all money held by the Paying Agent for the payment
of principal of, premium, if any, and interest on the Notes, and shall notify
the Trustee of any Default by the Company in making any such payment. While any
such Default continues, the Trustee may require a Paying Agent to pay all money
held by it to the Trustee and to account for any funds disbursed. The Company
at any time may require a Paying Agent to pay all money held by it to the
Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the
Company) shall have no further liability for the money delivered to the
Trustee. If the Company acts as Paying Agent, it shall segregate and hold in a
separate trust fund for the benefit of the Holders all money held by it as
Paying Agent.
Section 2.05. Lists of Holders of the Notes.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee at least seven (7)
Business Days before each interest payment date and at such other times as the
Trustee may request in writing a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Holders, including
the aggregate principal amount of the Notes held by each thereof, and the
Company shall otherwise comply with TIA Section 312(a).
Section 2.06. Transfer and Exchange.
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(a) Transfer and Exchange of Global Notes. The transfer and exchange
of Global Notes or beneficial interests therein shall be effected through the
Depository, in accordance with this Indenture, the procedures of the Depository
therefor and applicable securities laws. Beneficial interests in a Global Note
may be transferred to Persons who take delivery thereof in the form of a
beneficial interest in the same Global Note.
(b) Transfer and Exchange of Definitive Notes. When Notes in
definitive form are presented to the Registrar with a request to register the
transfer or to exchange them for an equal principal amount of Notes of other
denominations, the Registrar shall register the transfer or make the exchange
if its requirements for such transactions are met; provided, however, that any
Note presented or surrendered for registration of transfer or exchange shall be
duly endorsed or accompanied by a written instruction of transfer in form
satisfactory to the Registrar and the Trustee duly executed by the Holder
thereof or by his attorney duly authorized in writing. To permit registrations
of transfer and exchanges, the Company shall issue and the Trustee shall
authenticate Notes at the Registrar's request, subject to such rules as the
Trustee may reasonably require.
(c) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provision of this Indenture (other than the
provisions set forth in subsection (f) of this Section 2.06), a Global Note may
not be transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(d) Authentication of Definitive Notes in Absence of Depository. If at
any time:
(i) the Depository for the Notes notifies the Company that the
Depository is unwilling or unable to continue as Depository for the Global
Notes and a successor Depository for the Global Notes is not appointed by
the Company within 90 days after delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Trustee in
writing that it elects to cause the issuance of definitive Notes under this
Indenture,
then the Company shall execute, and the Trustee shall, upon receipt of an
authentication order in accordance with Section 2.02 hereof, authenticate and
deliver, definitive Notes in an aggregate principal amount equal to the
principal amount of the Global Notes in exchange for such Global Notes.
(e) Cancellation and/or Adjustment of Global Notes. At such time as
all beneficial interests in Global Notes have been exchanged for definitive
Notes, redeemed,
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repurchased or cancelled, all Global Notes shall be returned to or retained and
cancelled by the Trustee in accordance with Section 2.11 hereof. At any time
prior to such cancellation, if any beneficial interest in a Global Note is
exchanged for definitive Notes, redeemed, repurchased or cancelled, the
principal amount of Notes represented by such Global Note shall be reduced
accordingly and an endorsement shall be made on such Global Note, by the
Trustee or the Notes Custodian, at the direction of the Trustee, to reflect
such reduction.
(f) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges, subject
to this Section 2.06, the Company shall execute and, upon the written order
of the Company signed by an Officer of the Company, the Trustee shall
authenticate definitive Notes and Global Notes at the Registrar's request.
(ii) No service charge shall be made to any Holder for any
registration of transfer or exchange (except as otherwise expressly
permitted herein), but the Company may require payment of a sum sufficient
to cover any transfer tax or similar governmental charge payable in
connection therewith (other than such transfer tax or similar governmental
charge payable upon exchanges pursuant to Sections 2.10, 3.07 or 9.05
hereof, which shall be paid by the Company).
(iii) The Registrar shall not be required to register the
transfer of or exchange any Note selected for redemption in whole or in
part, except the unredeemed portion of any Note being redeemed in part.
(iv) All definitive Notes and Global Notes issued upon any
registration of transfer or exchange of definitive Notes or Global Notes
shall be the valid Obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the definitive
Notes or Global Notes surrendered upon such registration of transfer or
exchange.
(v) The Company and the Registrar shall not be required:
(A) to issue, to register the transfer of or to exchange
Notes during a period beginning at the opening of business 15 days
before the day of any selection of Notes for redemption under Sections
3.01 and 3.02 hereof and ending at the close of business on the day of
selection;
(B) to register the transfer of or to exchange any Note so
selected for redemption in whole or in part, except the unredeemed
portion of any Note being redeemed in part;
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(C) to register the transfer of or to exchange a Note
between a record date and the next succeeding interest payment date;
or
(D) to register the transfer of a Note other than in amounts
of $1,000 or multiple integrals thereof.
(vi) Prior to due presentment for the registration of a transfer
of any Note, the Trustee, any Agent and the Company may deem and treat the
Person in whose name any Note is registered as the absolute owner of such
Note for the purpose of receiving payment of principal of and interest on
such Notes, and neither the Trustee, any Agent nor the Company shall be
affected by notice to the contrary.
(vii) The Trustee shall authenticate definitive Notes and Global
Notes in accordance with the provisions of Section 2.02 hereof.
Section 2.07. Replacement Notes.
If any mutilated Note is surrendered to the Trustee, or the Company
and the Trustee receive evidence to their satisfaction of the destruction, loss
or theft of any Note and the ownership thereof, the Company shall issue and the
Trustee, upon the written order of the Company signed by an Officer of the
Company, shall authenticate a replacement Note if the Trustee's requirements
for replacements of Notes are met. If required by the Trustee or the Company,
an indemnity bond must be supplied by the Holder that is sufficient in the
reasonable judgment of the Trustee and the Company to protect the Company, the
Trustee, each Agent and each authenticating agent from any loss which any of
them may suffer if a Note is replaced. The Company and the Trustee may charge
the Holder for their expenses in replacing a Note.
Every replacement Note is an additional Obligation of the Company and
shall be entitled to all of the benefits of this Indenture equally and ratably
with all other Notes duly issued hereunder.
Section 2.08. Outstanding Notes.
The Notes outstanding at any time are all the Notes authenticated by
the Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section 2.08 as not outstanding. If a Note is replaced pursuant to Section 2.07
hereof, it ceases to be outstanding, subject to the provisions of applicable
law to the contrary. If the principal amount of any Note is considered paid
under Section 4.01 hereof, it ceases to be outstanding and interest on it
ceases to accrue. Subject to Section 2.09 hereof, a Note does not cease to be
outstanding because the Company or an Affiliate of the Company holds the Note.
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Section 2.09. Treasury Notes.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company, a Subsidiary of the Company or any Affiliate of the Company shall be
considered as though not outstanding, except that for purposes of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Notes which a Responsible Officer of the Trustee knows to be
so owned shall be so considered. Notwithstanding the foregoing, Notes that are
to be acquired by the Company or an Affiliate of the Company pursuant to an
exchange offer, tender offer or other agreement shall not be deemed to be owned
by such entity until legal title to such Notes passes to such entity.
Section 2.10. Temporary Notes.
Until definitive Notes are ready for delivery, the Company may prepare
and, upon the written order of the Company signed by an Officer of the Company,
the Trustee shall authenticate temporary Notes. Temporary Notes shall be
substantially in the form of definitive Notes but may have variations that the
Company and the Trustee consider appropriate for temporary Notes. Without
unreasonable delay, the Company shall prepare and the Trustee, upon receipt of
the written order of the Company signed by an Officer of the Company, shall
authenticate definitive Notes in exchange for temporary Notes. Until such
exchange, temporary Notes shall be entitled to the same rights, benefits and
privileges as definitive Notes.
Section 2.11. Cancellation.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment.
The Trustee shall cancel all Notes surrendered for registration of transfer,
exchange, payment, replacement or cancellation. Subject to Section 2.07 hereof,
the Company may not issue new Notes to replace Notes that it has redeemed or
paid or that have been delivered to the Trustee for cancellation. All cancelled
Notes held by the Trustee shall be destroyed and certification of their
destruction delivered to the Company, unless by a written order, signed by an
Officer of the Company, the Company shall direct that cancelled Notes be
returned to it.
Section 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Notes, the
Company shall pay the defaulted interest in any lawful manner plus, to the
extent lawful, interest payable on the defaulted interest, to the Persons who
are Holders on a subsequent special record date, which date shall be at the
earliest practicable date but in all events at least five (5) Business Days
prior to the payment date, in each case at the rate provided in the Notes and
in Section
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4.01 hereof. The Company shall fix or cause to be fixed each such special
record date and payment date, and shall, promptly thereafter, notify the
Trustee of any such date. At least fifteen (15) days before the special record
date, the Company (or the Trustee, in the name of and at the expense of the
Company) shall mail to Holders, at their addresses as they appear on the
register of Notes maintained by the Registrar, a notice that states the special
record date, the related payment date and the amount of such interest to be
paid.
Section 2.13. Record Date.
The record date for purposes of determining the identity of Holders
entitled to vote or consent to any action by vote or consent authorized or
permitted under this Indenture shall be determined as provided for in TIA
Section 316(c).
Section 2.14. CUSIP Number.
The Company in issuing the Notes may use a "CUSIP" number and, if it
does so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes. The Company will
promptly notify the Trustee of any change in the CUSIP number.
Section 2.15. Computation of Interest.
Interest on the Notes will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
ARTICLE 3
REDEMPTION AND PREPAYMENT
Section 3.01. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Notes pursuant to Section
3.08 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Company, the Company shall, at least 30 but not more than 60
days prior to the redemption date fixed by it (unless a shorter notice period
shall be satisfactory to the Trustee for its convenience), notify the Trustee
pursuant to an Officer's Certificate of (i) such redemption date, (ii) the
principal amount of Notes to be redeemed and (iii) the clause of this Indenture
pursuant to which the redemption shall occur.
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Section 3.02. Selection by Trustee of Notes to be Redeemed.
If less than all of the Notes are to be redeemed at any time,
selection of Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed or, if the Notes are not so listed, on a pro rata
basis, by lot or by such other method as the Trustee deems fair and
appropriate, provided that no Notes with shall be redeemed in a principal
amount that is less than $1,000.
The Trustee shall promptly notify the Company and the Registrar in
writing of the Notes selected for redemption and, in the case of any Notes
selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Note redeemed or to be redeemed only in part, to the portion of the
principal amount of such Note which has been or is to be redeemed.
Section 3.03. Notice of Redemption.
Subject to the provisions of Sections 3.10 and 4.09 hereof, notice of
redemption shall be mailed by first class mail, postage prepaid, at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed.
All notices of redemption shall state:
(a) the redemption date;
(b) the redemption price;
(c) if less than all Notes then outstanding are to be redeemed, the
identification (and, in the case of a Note to be redeemed in part, the
principal amount) of the particular Notes to be redeemed;
(d) that on the redemption date the redemption price will become due
and payable upon each such Note or portion thereof, and that (unless the
Company shall default in payment of the redemption price) interest thereon
shall cease to accrue on or after said date;
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(e) the places or places where such Notes are to be surrendered for
payment of the redemption price;
(f) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
(g) the CUSIP number, if any, relating to such Notes; and
(h) in the case of a Note to be redeemed in part, the principal amount
of such Note to be redeemed and that after the redemption date upon
surrender of such Note, a new Note or Notes in the aggregate principal
amount equal to the unredeemed portion thereof will be issued.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at its request, by the Trustee in the
name and at the expense of the Company.
Section 3.04. Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance herewith, Notes
called for redemption become irrevocably due and payable on the redemption date
at the redemption price. A notice of redemption may not be conditional.
Section 3.05. Deposit of Redemption Price.
Prior to 11:00 a.m. on any redemption date, the Company shall deposit
with the Trustee or with a Paying Agent (or, if the Company is acting as its
own Paying Agent, segregate and hold in trust as provided in Section 4.03
hereof) an amount of money in same day funds (or New York Clearing House funds
if such deposit is made prior to the applicable redemption date) sufficient to
pay the redemption price of, and accrued interest on, all the Notes or portions
thereof which are to be redeemed on that date.
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Section 3.06. Notes Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Notes so to
be redeemed shall, on the redemption date, become due and payable at the
redemption price therein specified and from and after such date (unless the
Company shall default in the payment of the redemption price and accrued
interest) such Notes shall cease to bear interest. Upon surrender of any such
Note for redemption in accordance with said notice, such Note shall be paid by
the Company at the redemption price together with accrued interest to the
redemption date.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal thereof (and premium, if any, thereon)
shall, until paid, bear interest from the redemption date at the rate borne by
such Note.
Section 3.07. Notes Redeemed in Part.
Any Note which is to be redeemed only in part shall be surrendered at
the office or agency of the Company maintained for such purpose pursuant to
Section 4.02 hereof (with, if the Company, the Registrar or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company, the Registrar or the Trustee duly executed by, the
Holder thereof or his attorney duly authorized in writing), and a new Note in
principal amount equal to the unpurchased or unredeemed portion will be issued
in the name of the Holder thereof upon cancellation of the original Note. On
and after the purchase or redemption date, unless the Company defaults in
payment of the purchase or redemption price, interest shall cease to accrue on
Notes or portions thereof purchased or called for redemption.
Section 3.08. Optional Redemption.
(a) Except as described in this Section 3.08, the Notes will not be
redeemable at the Company's option prior to 2003. Thereafter, the Notes will be
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less than 30 nor more than 60 days' written notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, together with accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on of
each of the years indicated below:
Redemption
Year Price
---- -----
2003................................................. . %
2004................................................. . %
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2005................................................. . %
2006 and thereafter.................................. 100.000%
Notwithstanding the foregoing, on or prior to , 2001, the
Company may, at its option, redeem up to 35% of the original aggregate
principal amount of Notes at a redemption price equal to . % of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the redemption date, with the net proceeds of one or more Qualified Offerings
of the Company; provided that at least 65% of the original aggregate principal
amount of Notes remains outstanding immediately after the occurrence of such
redemption; and provided, further, that any such redemption shall occur within
90 days of the date of the closing of such Qualified Offering.
(b) Any redemption pursuant to this Section 3.08 shall be made
pursuant to the provisions of Sections 3.01 through 3.07 hereof.
Section 3.09. Mandatory Redemption.
Except as set forth under Sections 4.09 and 4.10 hereof, the Company
shall not be required to make mandatory redemption or sinking fund payments
with respect to the Notes.
Section 3.10. Offer to Purchase by Application of Excess Proceeds.
In the event that, pursuant to Section 4.10 hereof, the Company shall
be required to commence an offer to all Holders to purchase Notes (an "Asset
Sale Offer"), it shall follow the procedures specified below.
The Asset Sale Offer shall remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Offer Period"). No later than
five Business Days after the termination of the Offer Period (the "Purchase
Date"), the Company shall purchase the principal amount of Notes required to be
purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than
the Offer Amount has been tendered, all Notes tendered in response to the Asset
Sale Offer.
If the Purchase Date is on or after an interest payment record date
and on or before the related interest payment date, any accrued and unpaid
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be
payable in respect of Notes tendered pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company shall send,
by first class mail, a notice to the Trustee and each of the Holders, with a
copy to the Trustee.
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The notice shall contain all instructions and materials necessary to enable
such Holders to tender Notes pursuant to the Asset Sale Offer. The Asset Sale
Offer shall be made to all Holders. The notice, which shall govern the terms of
the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
3.10 and Section 4.10 hereof and the length of time the Asset Sale Offer
shall remain open;
(b) the Offer Amount, the purchase price and the Purchase Date;
(c) that any Note not tendered or accepted for payment shall continue
to accrue interest;
(d) that, unless the Company defaults in making such payment, any Note
(or portion thereof) accepted for payment pursuant to the Asset Sale Offer
shall cease to accrue interest after the Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to any
Asset Sale Offer shall be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, or transfer by book-entry transfer, to the Company, a
depositary, if appointed by the Company, or a Paying Agent at the address
specified in the notice not later than the third Business Day preceding the
end of the Offer Period;
(f) that Holders shall be entitled to withdraw their election if the
Company, the depositary or the Paying Agent, as the case may be, receives,
not later than the third Business Day preceding the end of the Offer
Period, a telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Note the Holder
delivered for purchase and a statement that such Holder is withdrawing his
election to have such Note purchased;
(g) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Offer Amount, the Company shall select the Notes to be
purchased in accordance with Section 3.02 hereof (with such adjustments as
may be deemed appropriate by the Company so that only Notes in
denominations of $1,000, or integral multiples thereof, shall be
purchased); and
(h) that Holders whose Notes were purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered (or transferred by book-entry transfer).
On or before 12:00 p.m. (New York City time) on each Purchase Date,
the Company shall irrevocably deposit with the Trustee or Paying Agent in
immediately available
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funds the aggregate purchase price with respect to a principal amount of Notes
equal to the Offer Amount, together with accrued and unpaid interest thereon to
the Purchase Date, to be held for payment in accordance with the terms of this
Section 3.10. On or before the Purchase Date, the Company shall, to the extent
lawful, (i) accept for payment in accordance with Section 3.02 hereof the Offer
Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer,
or if less than the Offer Amount has been tendered, all Notes tendered, (ii)
deliver or cause the Paying Agent or depositary, as the case may be, to deliver
to the Trustee Notes so accepted and (iii) deliver to the Trustee an Officer's
Certificate stating that such Notes or portions thereof were accepted for
payment by the Company in accordance with the terms of this Section 3.10. The
Company, the depositary or the Paying Agent, as the case may be, shall promptly
(but in any case not later than five Business Days after the Purchase Date)
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
plus any accrued and unpaid interest thereon to the Purchase Date, and the
Company shall promptly issue a new Note, and the Trustee, upon written request
from the Company shall authenticate and mail or deliver such new Note to such
Holder, equal in principal amount to any unpurchased portion of the Note
surrendered. Any Note not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company shall publicly announce the
results of the Asset Sale Offer on the Purchase Date.
Other than as specifically provided in this Section 3.10, any purchase
pursuant to this Section 3.10 shall be made pursuant to the provisions of
Sections 3.01 through 3.07 hereof.
ARTICLE 4
COVENANTS
Section 4.01. Payment of Principal, Premium and Interest.
The Company shall pay or cause to be paid the principal of, premium,
if any, and interest on the Notes on the dates and in the manner provided in
the Notes. Principal, premium, if any, and interest shall be considered paid on
the date due if the Paying Agent, if other than the Company or a Subsidiary
thereof, holds as of 11:00 a.m. Eastern Time on the due date money deposited by
the Company in immediately available funds and designated for and sufficient to
pay all principal, premium, if any, and interest then due.
The Company shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal at the rate equal
to 1% per annum in excess of the then applicable interest rate on the Notes to
the extent lawful; it shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on
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overdue installments of interest (without regard to any applicable grace
period) at the same rate to the extent lawful.
Section 4.02. Maintenance of Office or Agency.
The Company will maintain an office or agency where Notes may be
presented or surrendered for payment, where Notes may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Notes and this Indenture may be served. The
Company will give prompt written notice to the Trustee of any change in the
location of any such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the Corporate Trust Office of the Trustee, and
the Company hereby appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands.
The Company may from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes, and may from time to time rescind such designation;
provided, however, that no such designation or recession shall in any manner
relieve the Company of its obligation to maintain an office or agency for such
purposes. The Company will give prompt written notice to the Trustee of any
such designation or recession and any change in the location of any such office
or agency.
The Company hereby designates the Corporate Trust Office of
the Trustee as one such office or agency of the Company in accordance with
Section 2.03 hereof.
Section 4.03. Money for Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal of, premium, if any, or
interest on any of the Notes, segregate and hold in trust for the benefit of
the Persons entitled thereto a sum sufficient to pay the principal, premium, if
any, or interest so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided, and will promptly notify the
Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for
the Notes, it will, on or before each due date of the principal of, premium, if
any, or interest on any Notes, deposit with a Paying Agent a sum in same day
funds (or New York Clearing House funds if such deposit is made prior to the
date on which such deposit is required to be made) sufficient to pay the
principal, premium, if any, or interest so becoming due (or at the option of
the Company, payment of interest may be mailed by check to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments with respect to Notes represented by one or
more permanent Global Notes will be paid by wire
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transfer of immediately available funds to the account of the Depository or any
successor thereto) such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest and (unless such Paying Agent
is the Trustee) the Company will promptly notify the Trustee of such action or
any failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Notes in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any default by the Company (or any
other obligor upon the Notes) in the making of any payment of principal,
premium, if any, or interest;
(c) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all respects with the
provisions of this Indenture relating to the duties, rights and obligations
of such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
direct any Paying Agent to pay, to the Trustee all sums held in trust by the
Company or such Paying Agent, such sums to be held by the Trustee upon the same
trusts as those upon which such sums were held by the Company or such Paying
Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying
Agent shall be released from all further liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium, if any,
or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be
paid to the Company at the request of the Company or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, shall at the
expense of the Company (i) cause to be published once, in The New York Times
and The Wall
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Street Journal (national edition), notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Company, and (ii) cause notice to be
promptly sent to each Holder that such money remains unclaimed and that, after
a date specified therein, which shall not be less than 30 days from the date of
such notification, any unclaimed balance of such money then remaining will be
repaid to the Company.
Section 4.04. Reports.
Whether or not the Company is required to do so by the rules and
regulations of the Commission, the Company will file with the Commission
(unless the Commission will not accept such a filing) and, within 15 days of
filing, or attempting to file, the same with the Commission, furnish to the
Holders of Notes (a) all quarterly and annual financial and other information
with respect to the Company and its Subsidiaries that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants, and (b) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports.
The Company shall at all times comply with TIA Section 314(a).
Section 4.05. Statement as to Compliance; Notice of Default.
(a) The Company shall deliver to the Trustee, within 90 days after the
end of each fiscal year ending after the date of this Indenture, an Officer's
Certificate stating whether, to such Officer's knowledge, the Company is in
compliance with all covenants and conditions to be complied with by it under
this Indenture (including with respect to any Restricted Payments made during
such year, the basis upon which the calculations required by Section 4.11
hereof were computed, which calculations may be based on the Company's latest
financial statements), and further stating, as to the Officer signing such
certificate, that to the best of his or her knowledge each entity is not in
default in the performance or observance of any terms, provisions and
conditions of this Indenture (or, if a Default or Event of Default shall have
occurred, describing all such Defaults or Events of Default of which he or she
may have knowledge and what action the Company is taking or proposes to take
with respect thereto) and that to the best of his or her knowledge no event has
occurred and remains in existence by reason of which payments on account of the
principal of or interest or premium, if any, on the Notes is prohibited or if
such event has occurred, a description of the event and what action the Company
is taking or proposes to take with respect thereto. For purposes of this
Section 4.05,
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such compliance shall be determined without regard to any period of grace or
requirement of notice under this Indenture.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the annual reports
delivered pursuant to Section 4.04(a) hereof shall be accompanied by a written
statement of the Company's independent public accountants (who shall be a firm
of established national reputation) that in making the examination necessary
for certification of such financial statements, nothing has come to their
attention that would lead them to believe that the Company has violated any
provisions of Article 4 or Article 5 hereof or, if any such violation has
occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any
Default or Event of Default, an Officer's Certificate specifying such Default
or Event of Default and what action the Company is taking or proposes to take
with respect thereto.
Section 4.06. Payment of Taxes and Other Claims.
The Company shall pay, and shall cause each of its Subsidiaries to
pay, prior to delinquency, all material taxes, assessments, and governmental
levies, except such as are contested in good faith and by appropriate
proceedings or where the failure to effect such payment is not adverse in any
material respect to the Holders of the Notes.
Section 4.07. Stay, Extension, Usury Laws.
The Company and each Subsidiary Guarantor covenants (to the extent
that it may lawfully do so) that it shall not at any time insist upon, plead,
or in any manner whatsoever claim or take the benefit or advantage of, any
stay, extension or usury law whatever enacted, now or at any time hereafter in
force, that may affect that covenants or the performance of this Indenture; and
the Company and each Subsidiary Guarantor (to the extent that it may lawfully
do so) hereby waives all benefit or advantage of any such law, and covenants
that it shall not, by resort to any such law, hinder, delay or impede the
execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law has been
enacted.
Section 4.08. Corporate Existence.
Subject to Articles 5 and 11 hereof, the Company shall do or cause to
be done all things necessary to preserve and keep in full force and effect its
corporate existence, and the
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corporate, partnership or other existence of each of its Subsidiaries, in
accordance with the respective organizational documents (as the same may be
amended from time to time) of the Company or any such Subsidiary; provided,
however, that the Company shall not be required to preserve the existence of
any of its Subsidiaries, if the Board of Directors of the Company shall
determine that the preservation thereof is no longer desirable in the conduct
of the business of the Company and its Subsidiaries, taken as a whole.
Section 4.09. Offer to Repurchase Upon Change of Control.
(a) Upon the occurrence of a Change of Control, the Company shall make
an offer (a "Change of Control Offer") to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of each Holder's Notes at an offer
price in cash equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, thereon to the date of repurchase (the
"Change of Control Payment").
(b) Within 15 days following any Change of Control, the Company shall
(or shall cause the Trustee to) mail a notice to each Holder stating:
(1) that the Change of Control Offer is being made pursuant to
this Section 4.09 and that all Notes validly tendered and not withdrawn
will be accepted for payment;
(2) the purchase price and the purchase date, which shall be no
earlier than 30 days but no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date");
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the
Change of Control Payment, all Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that Holders electing to have any Notes purchased pursuant to
a Change of Control Offer will be required to surrender the Notes, properly
endorsed for transfer, together with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Notes completed and such customary
documents as the Company may reasonably request, to the Paying Agent at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date;
(6) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the
third Business Day preceding
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the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of Notes delivered for purchase, and a statement that such Holder is
withdrawing his election to have the Notes purchased; and
(7) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be equal
to $1,000 in principal amount or an integral multiple thereof.
(c) The Company shall comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to
the extent such laws or regulations are applicable in connection with the
repurchase of the Notes pursuant to a Change of Control Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions of this Indenture, the Company shall comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described in this Indenture by virtue thereof.
(d) On or before 10:00 a.m. New York time on the Change of Control
Payment Date, the Company shall, to the extent lawful, (a) accept for payment
all Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (b) deposit with the Paying Agent an amount equal to the Change
of Control Payment in respect of all Notes or portions thereof so tendered and
(c) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officer's Certificate stating the aggregate principal amount
of Notes or portions thereof being purchased by the Company. The Paying Agent
shall promptly mail to each Holder of Notes so tendered the Change of Control
Payment for such Notes, and the Trustee shall promptly authenticate and mail
(or cause to be transferred by book entry) to each Holder a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered, if any;
provided, however, that each such new Note will be in a principal amount of
$1,000 or an integral multiple thereof. The Company shall publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
(e) The Company shall not be required to make a Change of Control
Offer following a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Indenture applicable to a Change of Control
Offer made by the Company and purchases all Notes validly tendered and not
withdrawn under such Change of Control Offer.
(f) The Change of Control provisions described in this Section 4.09
will be applicable whether or not any other provisions of this Indenture are
applicable.
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Section 4.10. Asset Sales.
The Company will not, and will not permit any of its Subsidiaries to,
consummate an Asset Sale unless (a) the Company (or the Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a Board Resolution set forth in an
Officer's Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (b) at least 75% of the
consideration therefor received by the Company or such Subsidiary is in the
form of (I) Cash Equivalents or (II) property or assets that are used or useful
in a Permitted Business, or the Capital Stock of any Person engaged in a
Permitted Business if, as a result of the acquisition by the Company or any
Subsidiary thereof, such Person becomes a Subsidiary Guarantor; provided,
however, that the amount of (i) any liabilities (as shown on the Company's or
such Subsidiary's most recent balance sheet), of the Company or such Subsidiary
(other than contingent liabilities and liabilities of the Company that are by
their terms subordinated to the Notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Subsidiary from further liability
and (ii) any securities, notes or other obligations received by the Company or
any such Subsidiary from such transferee that are immediately converted by the
Company or such Subsidiary into cash (to the extent of the cash received), will
be deemed to be cash for purposes of this provision; provided further, that the
75% limitation referred to above shall not apply to any Asset Sale in which the
Cash Equivalent portion of the consideration received therefrom, determined in
accordance with the foregoing proviso, is equal to or greater than what the
after-tax net proceeds would have been had such Asset Sale complied with the
aforementioned 75% limitation.
Within 270 days after the receipt of any Net Proceeds from an Asset
Sale, the Company or any such Subsidiary shall apply such Net Proceeds at its
option (or to the extent the Company is required to apply such Net Proceeds
pursuant to the terms of the New Credit Agreement), to (a) repay Senior Debt
(and to correspondingly reduce commitments with respect thereto in the case of
revolving borrowings) or (b) repay Pari Passu Indebtedness of the Company or
any Subsidiary Guarantor (and to correspondingly reduce commitments with
respect thereto), provided that if the Company or any Subsidiary Guarantor
shall so repay Pari Passu Indebtedness, it will equally and ratably reduce
Indebtedness under the Notes if the Notes are then redeemable, or if the Notes
may not then be redeemed, the Company shall make an offer in accordance with
the procedures set forth in Section 3.10 hereof to all Holders of Notes to
purchase at a price in cash equal to 100% of the principal amount thereof (plus
accrued and unpaid interest thereon to the date of purchase), such amount of
Notes that would otherwise be redeemed or (c) an investment in property, the
making of a capital expenditure or the acquisition of other long-term assets,
in each case, of or from an entity that is engaged in a Permitted Business, and
in accordance with the terms of this Indenture. Pending the final application
of any such Net Proceeds, the Company may temporarily reduce Designated Senior
Debt or otherwise invest such Net Proceeds in any manner that is not prohibited
by this
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Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the preceding sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company shall be required to make an Asset Sale
Offer to purchase the maximum principal amount of Notes that may be purchased
out of the Excess Proceeds at an offer price in cash in an amount equal to 100%
of the principal amount thereof plus accrued and unpaid interest thereon to the
date of purchase, in accordance with the procedures set forth in Section 3.10
hereof. To the extent that the aggregate amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased in
accordance with the procedures set forth in Section 3.02 hereof. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
The Company shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions
of this Indenture relating to such Asset Sale Offer, the Company will comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations described in this Indenture by virtue thereof.
Section 4.11. Limitation on Restricted Payments.
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly: (a) declare or pay any dividend or make any other
payment or distribution on account of any Equity Interests of the Company or
any of its Subsidiaries (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Subsidiary of the
Company); (b) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company (other than any such Equity Interests owned by
the Company or any Wholly Owned Subsidiary of the Company); (c) make any
payment on with respect to, or purchase, redeem, defease or otherwise acquire
or retire for value any Indebtedness that is subordinated in right of payment
to the Notes, except a payment of interest or principal at Stated Maturity; or
(d) make any Restricted Investment (all such payments and other actions set
forth in clauses (a) through (d) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
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(ii) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
Section 4.12 hereof; and
(iii) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of this Indenture is less than the sum of (A) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) after the Closing Date to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(B) 100% of the aggregate net cash proceeds received by the Company from
the issue and sale by the Company since the Closing Date of Equity
Interests of the Company (other than Disqualified Stock) or of Disqualified
Stock or debt securities of the Company to the extent that they have been
converted into such Equity Interests (other than any such Equity Interests,
Disqualified Stock or convertible debt securities sold to a Subsidiary of
the Company and other than Disqualified Stock or convertible debt
securities that have been converted into Disqualified Stock).
The foregoing provisions shall not prohibit:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of this Indenture;
(b) the redemption, repurchase, retirement, defeasance or other
acquisition of any Pari Passu Indebtedness or subordinated Indebtedness or
Equity Interests of the Company in exchange for, or out of the net proceeds
of, the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (iii)(B) of the preceding
paragraph;
(c) the defeasance, redemption, repurchase retirement or other
acquisition of subordinated Indebtedness with the net cash proceeds from an
incurrence of, or in exchange for, Permitted Refinancing Indebtedness;
(d) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or any Subsidiary of the
Company held
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by any member of the Company's management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the date
of this Indenture; provided, however, that (i) the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $2.0 million in any twelve-month period plus the aggregate cash
proceeds received by the Company during such twelve-month period from any
reissuance of Equity Interests by the Company to members of management of
the Company and its Subsidiaries and (iis) no Default or Event of Default
shall have occurred and be continuing immediately after such transaction;
(e) payments and transactions in connection with the Refinancing
Plan, the New Credit Agreement (including commitment, syndication and
arrangement fees payable thereunder), the Offering and the Common Stock
Offering (including underwriting discounts and commissions in connection
therewith) and the application of the proceeds thereof; and the payment of
the fees and expenses with respect thereto; and
(f) the declaration and payment of dividends to holders of any
class or series of preferred stock (other than Disqualified Stock) issued
after the Closing Date; provided, however, that at the time of such
issuance, after giving effect to such issuance on a pro forma basis, the
Fixed Charge Coverage Ratio for the Company for the most recently ended
four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such issuance would have been
no less than 2.0 to 1.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officer's Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant described in this section 4.11 were
computed.
Section 4.12. Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock.
The Company shall not, (i) and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become, directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness), (ii) permit any of its Subsidiaries to issue any shares
of Disqualified Stock and (iii) permit any of its Subsidiaries that are not
Subsidiary
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Guarantors to issue any shares of preferred stock; provided, however, that the
Company and any Subsidiary Guarantor may incur Indebtedness (including Acquired
Indebtedness) or issue shares of Disqualified Stock, if the Company's Fixed
Charge Coverage Ratio for the Company's most recently ended four fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
shares of Disqualified Stock are issued would have been at least 2.00 to 1.00,
determined on a consolidated pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period.
Notwithstanding the foregoing, the Company and, to the extent set
forth below, its Subsidiaries may incur the following:
(a) Indebtedness of the Company under the Notes and this
Indenture and Indebtedness of Subsidiaries under the Subsidiary Guarantees;
(b) Indebtedness under the New Credit Agreement in an aggregate
principal amount not to exceed $160.0 million outstanding at any time;
(c) Existing Indebtedness;
(d) Capital Expenditure Indebtedness, Capitalized Lease
Obligations and purchase money Indebtedness of the Company and its
Subsidiaries in an aggregate principal amount not to exceed $20.0 million
at any time outstanding;
(e) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding;
(f) Indebtedness of the Company representing guarantees of
Indebtedness incurred by one of its Subsidiaries pursuant to, and in
compliance with, another provision of this covenant;
(g) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries; provided, however, that (i) if the Company is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations with
respect to the Notes and (ii) (A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than the Company or a Wholly Owned Subsidiary and (B) any sale
or other transfer of any such Indebtedness to a Person that is not either
the Company or a
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Wholly Owned Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Subsidiary, as the
case may be;
(h) any Permitted Refinancing Indebtedness representing a
replacement, renewal, refinancing or extension of Indebtedness permitted
under the first paragraph and clause (c) of this covenant;
(i) Indebtedness arising from agreements of the Company or any
Subsidiary Guarantor providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or Subsidiary for the purpose of
financing such acquisition; provided, however, that (1) such Indebtedness
is not reflected on the balance sheet of the Company or any Subsidiary
Guarantor (contingent obligations referred to in a footnote or footnotes to
financial statements and not otherwise reflected on the balance sheet will
not be deemed to be reflected on such balance sheet for purposes of this
clause (1)) and (2) the maximum assumable liability in respect of such
Indebtedness shall at no time exceed the gross proceeds including noncash
proceeds (the fair market value of such noncash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and/or the Subsidiary Guarantors in
connection with such disposition; and
(j) additional Indebtedness of the Company and its Subsidiaries
in an aggregate principal amount not to exceed $30.0 million at any time
outstanding.
For purposes of determining compliance with this Section 4.12, in the
event that an item of Indebtedness meets the criteria of more than one of the
categories described in clauses (a) through (j) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall,
in its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof.
Section 4.13. Transactions with Affiliates.
The Company shall not, and shall not permit any of its Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate of the Company (each of the foregoing, an "Affiliate Transactions"),
unless (a) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that would have been obtained
in a comparable transaction by the
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Company or such Subsidiary with an unrelated Person, and (b) the Company
delivers to the Trustee (i) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess
of $1.0 million, either (A) a resolution of the Board of Directors of the
Company set forth in an Officer's Certificate certifying that such Affiliate
Transaction complies with clause (a) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors of the Company and (ii) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Company of such
Affiliate Transaction from a financial point of view issued by an independent
accounting, appraisal or investment banking firm of national standing;
provided, however, that the following shall be deemed not to be Affiliate
Transactions: (i) customary directors' fees, indemnification or similar
arrangements or any employment agreement or other compensation plan or
arrangement entered into by the Company or any of its Subsidiaries in the
ordinary course of business (including ordinary course loans to employees not
to exceed (A) $3.0 million outstanding in the aggregate at any time and (B)
$1.5 million to any one employee) consistent with the past practice of the
Company or such Subsidiary; (ii) transactions between or among the Company
and/or its Wholly Owned Subsidiaries; (iii) transactions permitted by the
provisions of this Indenture in accordance with the provisions of Section 4.11
hereof; (iv) payments of customary fees by the Company or any of its
Subsidiaries to DLJMB made for any financial advisory, financing, underwriting
or placement services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or divestitures
which are approved by a majority of the Board of Directors of the Company in
good faith; (v) any agreement as in effect on the date of this Indenture or any
amendment to such agreement (so long as such amendment is not disadvantageous
to the Holders of the Notes in any material respect) or any transaction
contemplated by such agreement; (vi) the existence of, or the performance by
the Company of any of its Subsidiaries of its obligations under the terms of,
any stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the date of
this Indenture and any similar agreements which it may enter into thereafter so
long as such similar agreements contain only terms that are customary of
stockholders and registration rights agreements; and (vii) payments and
transactions in connection with the Refinancing Plan, the New Credit Agreement
(including commitment, syndication and arrangement fees payable thereunder),
the Offering and the Common Stock Offering (including underwriting discounts
and commissions in connection therewith) and the application of the proceeds
thereof, and the payment of the fees and expenses with respect thereto.
Section 4.14. Dividend and Other Payment Restrictions Affecting
Subsidiaries.
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any
Subsidiary to (a)(I) pay dividends or make any other distributions to the
Company or any of its Subsidiaries on its Capital Stock or with respect to
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any other interest or participation in, or measured by, its profits, or (II)
pay any Indebtedness owed to the Company or any of its Subsidiaries, (b) make
loans or advances to the Company or any of its Subsidiaries or (c) transfer any
of its properties or assets to the Company or any of its Subsidiaries, except
for such encumbrances or restrictions existing under or by reason of (i)
agreements governing Existing Indebtedness as in effect on the Closing Date,
(ii) the New Credit Agreement as in effect on the Closing Date and any
refinancings, amendments, restatements, renewals or replacements thereof,
provided, however, that the agreements governing such refinancings, amendments,
restatements, renewals or replacements contain restrictions are not more
restrictive in the aggregate than those contained in the New Credit Agreement
as in effect on the Closing Date, (iii) this Indenture, the Notes and the
Subsidiary Guarantees, (iv) applicable law or any applicable rule, regulation
or order, (v) any agreement or other instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of this Indenture to
be incurred, (vi) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (vii) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (c) above on the property so acquired, (viii) customary provisions in
bona fide contracts for the sale of property or assets, or (ix) Permitted
Refinancing Indebtedness, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are not more
restrictive in the aggregate than those contained in the agreements governing
the Indebtedness being refinanced.
Section 4.15. Limitations on Issuances and Sales of Capital Stock of
Wholly Owned Subsidiaries
The Company (a) shall not permit any Wholly Owned Subsidiary of the
Company to issue any of its Equity Interests to any Person other than to the
Company or a Wholly Owned Subsidiary of the Company, and (b) shall not, and
shall not permit any Wholly Owned Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly
Owned Subsidiary of the Company to any Person (other than the Company or any
Wholly Owned Subsidiary of the Company) unless (i) such transfer, conveyance,
sale, lease or other disposition is of all of the Capital Stock of such Wholly
Owned Subsidiary and (ii) the Net Proceeds from such transfer, conveyance,
sale, lease or other disposition are applied in accordance with Section 4.10
hereof; provided that this clause (b) shall not apply to any pledge of Capital
Stock of any Wholly Owned Subsidiary of the Company securing Indebtedness under
the New Credit Agreement.
Section 4.16. Additional Subsidiary Guarantees
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If the Company or any of its Subsidiaries shall, after the Closing
Date, acquire or create another Subsidiary, then such newly acquired, created
or designated Subsidiary shall execute a Subsidiary Guarantee and deliver an
Opinion of Counsel in accordance with the terms of this Indenture.
Section 4.17 Limitations on Liens.
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien
that secures obligations under any Pari Passu Indebtedness or subordinated
Indebtedness on any asset or property now owned or hereafter acquired by the
Company or any of its Subsidiaries, or any income or profits therefrom, or
assign or convey any right to receive income therefrom, unless the Notes or the
Subsidiary Guarantees, as applicable, are equally and ratably secured with the
obligations so secured until such time as such obligations are not longer
secured by a Lien; provided, that in any case involving a Lien securing
subordinated Indebtedness, such Lien is subordinated to the Lien securing the
Notes or the Subsidiary Guarantees, as applicable, to the same extent that such
subordinated Indebtedness is subordinated to the Notes or the Subsidiary
Guarantees, as applicable.
Section 4.18 Sale and Leaseback Transactions.
The Company shall not, and shall not permit any of its Subsidiaries
to, enter into any sale and leaseback transaction; provided, however, that the
Company or any Subsidiary may enter into a sale and leaseback transaction if
(a) the Company could have (i) incurred Indebtedness in an amount equal to the
Attributable Indebtedness relating to such sale and leaseback transaction
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of Section 4.12 hereof and (ii) incurred a Lien to secure such
Indebtedness pursuant to Section 4.17 hereof, (b) the gross cash proceeds of
such sale and leaseback transaction are at least equal to the fair market value
(as determined in good faith by the Board of Directors of the Company and set
forth in an Officer's Certificate delivered to the Trustee) of the property
that is the subject of such sale and leaseback transaction and (c) the transfer
of assets in such sale and leaseback transaction is permitted by, and the
Company applies the proceeds of such transaction in compliance with, Section
4.10 hereof.
Section 4.19 No Senior Subordinated Debt.
(a) The Company shall not incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt and senior in any respect in right of
payment to the Notes.
(b) No Subsidiary Guarantor shall incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate
or junior in right of payment
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to any Senior Debt and senior in any respect in right of payment to such
Subsidiary Guarantor's Subsidiary Guarantee.
ARTICLE 5
SUCCESSORS
Section 5.01. Merger, Consolidation, or Sale of Assets.
The Company shall not consolidate or merge with or into (whether or
not the Company is the surviving corporation), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (a) the Company is the surviving corporation, or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia, (b) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the
Obligations of the Company under the Notes and this Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, (c)
immediately after such transaction no Default or Event of Default exists, and
(d) except in the case of a merger of the Company with or into a Wholly Owned
Subsidiary of the Company, the Company or the Person formed by or surviving any
such consolidation or merger (if other than the Company), or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described in Section 4.12 hereof.
Section 5.02. Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, assignment, transfer,
lease or conveyance or other disposition of all or substantially all of the
assets of the Company in accordance with Section 5.01 hereof, the successor
corporation formed by such consolidation or into or with which the Company is
merged or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so that from and
after the date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to such successor) and may exercise every right and power of the
Company under this Indenture with the same effect as if such successor Person
had been named as the Company herein; provided, however, that the predecessor
Company shall not be relieved from the obligation to pay the
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principal of and interest on the Notes except in the case of a sale of all of
the Company's assets that meets the requirements of Section 5.01 hereof.
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01. Events of Default and Notice Thereof.
Each of the following constitutes an "Event of Default":
(a) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the provisions of Article 10 hereof);
(b) default in payment when due of the principal of or premium (if
any) on the Notes (whether or not prohibited by the provisions of Article
10 hereof);
(c) failure by the Company to comply with the provisions of Sections
4.09, 4.10, 4.11, 4.12 or 5.01;
(d) failure by the Company for 60 days after notice to comply with any
of its other agreements in this Indenture or the Notes;
(e) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
(or the payment of which is guaranteed by the Company or any of its
Subsidiaries), whether such Indebtedness or guarantee now exists or is
created after the Closing Date, which default (i) is caused by a failure to
pay principal of or premium (if any) or interest on such Indebtedness at
its final stated maturity prior to the expiration of any grace period
provided in such Indebtedness (a "Payment Default") or (ii) results in the
acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been
a Payment Default or the maturity of which has been so accelerated,
aggregates $5.0 million or more;
(f) failure by the Company or any of its Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days;
(g) failure by any Subsidiary Guarantor to perform any covenant set
forth in its Subsidiary Guarantee, or the repudiation by any Subsidiary
Guarantor of its obligations
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under its Subsidiary Guarantee or the unenforceability of any Subsidiary
Guarantee against a Subsidiary Guarantor for any reason, unless, in each
such case, such Subsidiary Guarantor and its Subsidiaries have no
Indebtedness outstanding at such time or at any time thereafter;
(h) the Company or any of its Subsidiaries that is a Significant
Subsidiary pursuant to or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it in
an involuntary case,
(iii) consents to the appointment of a Custodian of it or for all
or substantially all of its property,
(iv) makes a general assignment for the benefit of its creditors,
or
(v) generally is not paying its debts as they become due; and
(i) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any of its
Subsidiaries that is a Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any of its
Subsidiaries that is a Significant Subsidiary or for all or
substantially all of the property of the Company or any of its
Subsidiaries that is a Significant Subsidiary; or
(C) orders the liquidation of the Company or any of its
Subsidiaries that is a Significant Subsidiary; and the order or decree
remains unstayed and in effect for 60 consecutive days.
Section 6.02. Acceleration.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, that so long
as any Indebtedness permitted to be incurred pursuant to the New Credit
Agreement shall be outstanding, such acceleration shall not be effective until
the earlier of (a) any acceleration of any such Indebtedness under the New
Credit Agreement and (b) five Business Days after receipt by the Company of
written notice of
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such acceleration. Notwithstanding the foregoing, in the case of an Event of
Default specified in clause (h) or (i) of Section 6.01 hereof with respect to
the Company, any Significant Subsidiary or any group of Subsidiaries that,
taken together, would constitute a Significant Subsidiary, all outstanding
Notes will become due and payable without further action or notice. Holders of
the Notes may not enforce this Indenture or the Notes except as provided in
this Indenture. In the event of a declaration of acceleration of the Notes
because an Event of Default has occurred and is continuing as a result of the
acceleration of any Indebtedness described in clause (e) of Section 6.01, the
declaration of acceleration of the Notes shall be automatically annulled if the
holders of any Indebtedness described in such clause (e) have rescinded the
declaration of acceleration in respect of such Indebtedness within 30 days of
the date of such declaration and if (i) the annulment of the acceleration of
the Notes would not conflict with any judgment or decree of a court of
competent jurisdiction, and (ii) all existing Events of Default, except
nonpayment of principal or interest on the Notes that became due solely because
of the acceleration of the Notes, have been cured or waived.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of Section 3.08(a) hereof, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Notes. If an Event of Default occurs prior to
, 2003 by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then the amount payable in respect
of such Notes for purposes of this paragraph for each of the twelve-month
periods beginning on of the years indicated below shall become due and payable
to the extent permitted by law upon the acceleration of the Notes as set forth
below, expressed as percentages of the principal amount that would otherwise be
due but for the provisions of this sentence, plus accrued and unpaid interest
to the date of payment:
Year Percentage
---- ----------
1998. . . . . . . . . . . . . . . . . . . . . . . .
1999. . . . . . . . . . . . . . . . . . . . . . . .
2000. . . . . . . . . . . . . . . . . . . . . . . .
2001. . . . . . . . . . . . . . . . . . . . . . . .
2002. . . . . . . . . . . . . . . . . . . . . . . .
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Section 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal, premium, if
any, and interest on the Notes or to enforce the performance of any provision
of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
Section 6.04. Waiver of Past Defaults.
The Holders of a majority in aggregate principal amount of the Notes
then outstanding, by notice to the Trustee, may on behalf of the Holders of all
of the Notes waive any existing Default or Event of Default and its
consequences under this Indenture, except a continuing Default or Event of
Default in the payment of interest or premium (if any) on, or principal of, the
Notes. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in such Holders' interest.
Section 6.05. Control by Majority.
The Holders of a majority in principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, that the Trustee determines may be unduly
prejudicial to the rights of other Holders of Notes or that may involve the
Trustee in personal liability. The Trustee may take any other action which it
deems proper which is not inconsistent with any such direction.
Section 6.06. Limitation on Suits.
No Holder of a Note will have any right to institute any proceeding
with respect to this Indenture or for any remedy hereunder, unless (i) such
Holder shall have previously given to the Trustee written notice of a
continuing Event of Default with respect to the Notes, (ii) the Holders of at
least 25% in aggregate principal amount of the Notes then outstanding shall
have made written request to the Trustee to institute such proceeding and, if
requested by the Trustee, provided reasonable indemnity to the Trustee, with
respect to such proceeding, and
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(iii) the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Notes then outstanding a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days.
Section 6.07. Rights of Holders of Notes to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Note to receive payment of principal of, premium, if any, and
interest on any Note, on or after the respective due dates expressed in any
Note, or to bring suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of such
Holder.
Section 6.08. Collection Suit by Trustee.
If an Event of Default specified in Section 6.01(a) or (b) hereof
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against the Company for the whole
amount of principal of, premium, if any, and interest remaining unpaid on the
Notes and interest on overdue principal and, to the extent lawful, interest and
such further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
Section 6.09. Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel)
and the Holders of the Notes allowed in any judicial proceedings relative to
the Company, the Subsidiary Guarantors or any other obligor upon the Notes, and
their respective creditors or property and shall be entitled and empowered to
collect, receive and distribute any money or other property payable or
deliverable on any such claims, and any custodian in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee, as administrative expenses associated with any such proceeding, and in
the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due to it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, and any other amounts due the Trustee under Section
7.07 hereof. To the extent that the payment of any such compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee under Section 7.07 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation
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or under any plan of reorganization or arrangement or otherwise. Nothing herein
contained shall be deemed to authorize the Trustee to authorize or consent to
or accept or adopt on behalf of any Holder any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights of any
Holder, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding.
Section 6.10. Priorities.
If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money, subject to Article 10 hereof, in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.07 hereof, including payment of all compensation, expense and
liabilities incurred, and all advances made, by the Trustee and the costs
and expenses of collection;
Second: to holders of Senior Debt to the extent required by Article 10
hereof;
Third: to Holders of Notes for amounts due and unpaid on the Notes for
principal, premium, if any, and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the Notes
for principal, premium, if any, and interest, respectively;
Fourth: without duplication, to the Holders for any other Obligations
owing to the Holders under this Indenture and the Notes; and
Fifth: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Notes pursuant to this Section 6.10.
Section 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder
of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than
10% in principal amount of the then outstanding Notes.
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ARTICLE 7
TRUSTEE
Section 7.01. Duties of Trustee.
(a) If an Event of Default shall occur (which shall not be cured), the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his own affairs.
(b) Except during the continuance of an Event of Default:
(1) the duties of the Trustee shall be determined solely by the
express provisions of this Indenture and the Trustee need perform only
those duties that are specifically set forth in this Indenture and no
others, and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture, provided,
that the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section 7.01;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b), (c), (e) and (f) of this Section 7.01 and Section 7.02 hereof.
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(e) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or incur any liability. The Trustee shall be under no
obligation to exercise any of its rights and powers under this Indenture unless
the Holders shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held
in trust by the Trustee need not be segregated from other funds except to the
extent required by law.
Section 7.02. Rights of Trustee.
(a) The Trustee may conclusively rely upon any document believed by it
to be genuine and to have been signed or presented by the proper person. The
Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officer's Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on such
Officer's Certificate or Opinion of Counsel. The Trustee may consult with
counsel and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereof in good faith and in
reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall not
be responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders of Notes unless such Holders of Notes shall have offered to
the Trustee reasonable security or indemnity satisfactory to it against any
loss, liability or expense.
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Section 7.03. Individual Rights of Trustee.
The Trustee, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with the Company with the same
rights it would have if it were not Trustee. However, in the event that the
Trustee acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue as trustee
or resign. Any Agent may do the same with like rights and duties. The Trustee
is also subject to Sections 7.10 and 7.11 hereof.
Section 7.04. Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no representation
as to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from the Notes or any money
paid to the Company or upon the direction of the Company under any provision of
this Indenture, it shall not be responsible for the use or application of any
money received by any Paying Agent other than the Trustee, and it shall not be
responsible for any statement or recital herein or any statement in the Notes
or any other document furnished or issued in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
Section 7.05. Notice of Defaults.
If a Default or Event of Default occurs and is continuing and if it is
actually known to the Trustee, the Trustee shall mail to Holders of Notes a
notice of the Default or Event of Default within 90 days after it occurs.
Except in the case of a Default or Event of Default in payment of principal of,
premium, if any, or interest on any Note, the Trustee may withhold the notice
if and so long as a committee of its Responsible Officers in good faith
determines that withholding the notice is in the interests of the Holders of
the Notes.
Section 7.06. Reports by Trustee to Holders of the Notes.
Within 60 days after each May 15 beginning with the May 15 following
the Closing Date, and for so long as Notes remain outstanding, the Trustee
shall mail to the Holders of the Notes a brief report dated as of such
reporting date that complies with TIA Section 313(a) (but if no event described
in TIA Section 313(a) has occurred within the twelve months preceding the
reporting date, no report need be transmitted). The Trustee also shall comply
with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports
as required by TIA Section 313(c).
A copy of each report at the time of its mailing to the Holders of
Notes shall be mailed to the Company and filed with the Commission and each
stock exchange on which the
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Notes are listed in accordance with TIA Section 313(d). The Company shall
promptly notify the Trustee when the Notes are listed on any stock exchange.
Section 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee, from time to time as may be
agreed upon between them, reasonable compensation for its acceptance of this
Indenture and services hereof. The Trustee's compensation shall not be limited
by any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee promptly upon request for all reasonable disbursements,
advances and expenses incurred or made by it in addition to the compensation
for its services. Such expenses shall include the reasonable compensation,
disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify and hold harmless the Trustee against any
and all losses, liabilities or expenses incurred by it arising out of or in
connection with the acceptance or administration of its duties under this
Indenture, including the costs and expenses of enforcing this Indenture against
the Company (including this Section 7.07) and defending itself against any
claim (whether asserted by the Company or any Holder or any other Person) or
liability in connection with the exercise or performance of any of its powers
or duties hereunder, except to the extent any such loss, liability or expense
may be attributable to its negligence, wilful misconduct or bad faith. The
Trustee shall notify the Company promptly of any claim for which it may seek
indemnity. Failure by the Trustee to so notify the Company shall not relieve
the Company of its obligations hereunder. The Company shall defend the claim
and the Trustee shall reasonably cooperate in the defense. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel. The Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld.
The obligations of the Company under this Section 7.07 shall survive
the satisfaction and discharge of this Indenture.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee, except that held in trust to pay principal and
interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in Section 6.01(h) or (i) hereof,
the expenses and the compensation for the services (including the fees and
expenses of its agents and counsel) are intended to constitute expenses of
administration under any Bankruptcy Law.
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The Trustee shall comply with the provisions of TIA Section 313(b)(2)
to the extent applicable.
Section 7.08. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.08.
The Trustee may resign in writing at any time and be discharged from
the trust hereby created by so notifying the Company. The Holders of a majority
in principal amount of the then outstanding Notes may remove the Trustee by so
notifying the Trustee and the Company in writing. The Company may remove the
Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee or its
property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company, or
the Holders of at least 10% in principal amount of the then outstanding Notes
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee, after written request by any Holder of a Note who has
been a Holder of a Note for at least six months, fails to comply with Section
7.10 hereof, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring
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Trustee shall become effective, and the successor Trustee shall have all the
rights, powers and duties of the Trustee under this Indenture. The successor
Trustee shall mail a notice of its succession to Holders of the Notes. The
retiring Trustee shall promptly transfer all property held by it as Trustee to
the successor Trustee, provided all sums owing to the retiring Trustee have
been paid and subject to the Lien provided for in Section 7.07 hereof.
Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the
Company's obligations under Section 7.07 hereof shall continue for the benefit
of the retiring Trustee.
Section 7.09. Successor Trustee by Merger, Etc.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business (including the trust
created by this Indenture) to, another corporation, the successor corporation
without any further act shall be the successor Trustee.
Section 7.10. Eligibility; Disqualification.
There shall at all times be a Trustee hereof that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or
state authorities and that has, or is a wholly owned subsidiary of a bank
holding company that has, a combined capital and surplus of at least $500
million as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
Section 7.11. Preferential Collection of Claims Against the Company.
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
Section 7.12. Rights of Holders with Respect to Time, Method and
Place.
Subject to the limitations of Article 6 and 7 of this Indenture, a
majority in principal amount of the outstanding Notes issued hereunder shall
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee.
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ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01. Option to Effect Defeasance or Covenant Defeasance.
The Company may, at its option by Board Resolution, at any time, with
respect to the Notes, elect to have either Section 8.02 or Section 8.03 hereof
be applied to all Notes and Subsidiary Guarantees then outstanding upon
compliance with the conditions set forth below in this Article 8.
Section 8.02. Legal Defeasance and Discharge.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, the Company and the Subsidiary Guarantors,
shall, subject to the satisfaction of the conditions set forth in Section 8.04
hereof, be deemed to have been discharged from their respective obligations
with respect to all Notes and Subsidiary Guarantees then outstanding on the
date the conditions set forth below are satisfied ("Legal Defeasance"). For
this purpose such defeasance means that the Company and any Subsidiary
Guarantor shall be deemed to have paid and discharged the entire indebtedness
represented by the Notes and any Subsidiary Guarantees outstanding, which shall
thereafter be deemed to be "outstanding" only for the purposes of Section 8.05
and the other Sections of this Indenture referred to in clauses (i) and (ii) of
this Section 8.02, and to have satisfied all its other obligations under such
Notes, Subsidiary Guarantees and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following which shall survive until
otherwise terminated or discharged hereunder: (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due or on the
redemption date, as the case may be, solely from amounts deposited with the
Trustee as provided in Section 8.04 hereof, (ii) the Company's obligations with
respect to the Notes under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.10, 4.02
and 4.03 hereof, (iii) the rights, powers, trusts, duties, indemnities and
immunities of the Trustee and the Company's obligations in connection therewith
and (iv) this Section 8.02.
Section 8.03. Covenant Defeasance.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, the Company and each Subsidiary Guarantor
shall be released from its obligations under the covenants contained in Article
5 and in Sections 4.04, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17,
4.18 and 4.19 with respect to the outstanding Notes and Subsidiary Guarantees,
on and after the date the conditions set forth below are satisfied
(hereinafter, "Covenant Defeasance"), and the Notes and the Subsidiary
Guarantees shall thereafter be deemed to be not "outstanding" for the purposes
of any direction, waiver, consent
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or declaration or Act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes and
Subsidiary Guarantees shall not be deemed outstanding for financial accounting
purposes). For this purpose, such Covenant Defeasance means that, with respect
to the outstanding Notes and Subsidiary Guarantees, the Company and any
Subsidiary Guarantor may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 6.01(c)
hereof, but, except as specified above, the remainder of this Indenture and
such Notes and Subsidiary Guarantees shall be unaffected thereby. In addition,
upon the Company's exercise under Section 8.01 hereof of the option applicable
to this Section 8.03, Sections 6.01(d) through 6.01(g) shall not constitute
Events of Default.
Section 8.04. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section
8.02 or Section 8.03 hereof to the outstanding Notes and Subsidiary Guarantees:
(i) the Company shall have irrevocably deposited with the
Trustee, in trust, for the benefit of the Holders of the Notes and without
retaining any legal interest corpus of such trust, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest due on the outstanding Notes on the stated maturity
thereof or on the applicable redemption date, as the case may be, and the
Company must specify whether the Notes are being defeased to maturity or to
a particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the United States Internal
Revenue Service a ruling or (B) since the Closing Date, there has been a
change in the applicable U.S. federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel in the United States
shall confirm that, subject to customary assumptions and exclusions, the
Holders of the outstanding Notes will not recognize income, gain or loss
for U.S. federal income tax purposes as a result of such Legal Defeasance
and will be subject to U.S. federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
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(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Notes will not
recognize income, gain or loss for U.S. federal income tax purposes as a
result of such Covenant Defeasance and will be subject to such U.S. federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit) or, insofar as Events of Default set forth in Section 6.01(h) and
(i), at any time in the period ending on the 91st day after the date of
such deposit (it being understood that this condition shall not be
satisfied until the expiration of such period);
(v) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(vi) the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that, as of the date of such opinion and subject
to customary assumptions and exclusions (which assumptions and exclusions
shall not relate to the operation of Section 547 of the United States
Bankruptcy Code or any analogous New York State law provision or related
judicial decisions) after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, and that the Trustee has a perfected security interest in such
trust funds for the ratable benefit of the Holders;
(vii) the Company shall have delivered to the Trustee an
Officer's Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Notes over the other creditors
of the Company with the intent of defeating, hindering, delaying or
defrauding any creditors of the Company or a Subsidiary Guarantor, if any;
(viii) the Company shall have delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel in the United States (which
Opinion of Counsel may be subject to customary assumptions and exclusions)
each stating that all conditions precedent provided for or relating to the
Legal Defeasance or the Covenant Defeasance, as the case may be, have been
complied with; and
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(ix) the Trustee shall have received such other documents and
assurances as the Trustee shall reasonably require.
Section 8.05. Deposited Money and U.S. Government Obligations to Be
Held in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 4.03
hereof, all money and Government Securities (including the proceeds thereof)
deposited with the Trustee (or other qualifying trustee, collectively for
purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof
in respect of the Notes then outstanding shall be held in trust and applied by
the Trustee, in accordance with the provisions of such Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Holders of such Notes of all sums due and to become due
thereon in respect of principal, premium, if any, and interest, but such money
need not be segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the cash or Government
Securities deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof; other than any such tax, fee or other
charge which by law is for the account of the Holders of the Notes then
outstanding.
Anything in this Article 8 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time at the Company's
request any money or Government Securities held by it as provided in Section
8.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.04(i) hereof), are in excess of the amount thereof which would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
Section 8.06. Repayment to Company.
Subject to Section 7.07 hereof, the Trustee shall promptly pay to the
Company, after written request by the Company therefor, any money held at such
time in excess of the amounts required to pay any of the Company's Obligations
then owing with respect to the Notes.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium, if any,
or interest on any Note and remaining unclaimed for two years after such
principal, and premium, if any, or interest, if any, have become due and
payable shall be paid to the Company at the request of the Company or (if then
held by the Company) shall be discharged from such trust; and the Holder of
such
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Note shall thereafter, as an unsecured general creditor, look only to the
Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
trustee thereof, shall thereupon cease; provided, however, that the Trustee or
such Paying Agent, before being required to make any such repayment, shall at
the expense of the Company (i) cause to be published once, in The New York
Times and The Wall Street Journal (national edition), notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining will be repaid to the Company,
and (ii) cause notice to be promptly sent to each Holder that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such notification, any unclaimed balance of
such money then remaining will be repaid to the Company.
Section 8.07. Reinstatement.
If the Trustee or Paying Agent is unable to apply any United States
dollars or Government Securities in accordance with Section 8.02 hereof or
Section 8.03 hereof, as the case may be, by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the Company's and any Guarantor's
obligations under this Indenture, the Notes and the Subsidiary Guarantees,
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 8.02 hereof or Section 8.03 hereof, as the case may be, until such time
as the Trustee or Paying Agent is permitted to apply all such money in
accordance with Section 8.02 hereof or Section 8.03 hereof, as the case may be;
provided, however, that if the Company or any Subsidiary Guarantor makes any
payment of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company or such Subsidiary Guarantor
shall be subrogated to the rights of the Holders of such Notes to receive such
payment from the money held by the Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01. Without Consent of Holders of Notes.
Notwithstanding Section 9.02 hereof, without the consent of any Holder
of Notes, the Company, a Subsidiary Guarantor (with respect to a Subsidiary
Guarantee or this Indenture to which it is a party) and the Trustee may amend
or supplement this Indenture, the Notes or the Subsidiary Guarantees:
(a) to cure any ambiguity, defect or inconsistency;
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(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to comply with Article 5 or 11 hereof;
(d) to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not, in the Opinion of
Counsel, adversely affect the legal rights hereunder of any such Holder;
(e) to comply with requirements of the Commission in order to effect
or maintain the qualification of this Indenture under the TIA; or
(f) to allow any Subsidiary Guarantor to guarantee the Notes.
Upon the written request of the Company accompanied by a Board
Resolution authorizing the execution of any such amended or supplemental
indenture, and upon receipt by the Trustee of an Officer's Certificate and an
Opinion of Counsel, the Trustee shall join with the Company and the Subsidiary
Guarantors, if any, in the execution of any amended or supplemental indenture
authorized or permitted by the terms of this Indenture and to make any further
appropriate agreements and stipulations that may be therein contained, but the
Trustee shall not be obligated to enter into such amended or supplemental
indenture that affects its own rights, duties or immunities under this
Indenture or otherwise.
Section 9.02. With Consent of Holders of Notes.
Except as provided below in this Section 9.02, this Indenture, the
Notes and the Subsidiary Guarantees issued hereunder may be amended or
supplemented with the consent of the Holders of at least a majority in
principal amount of the Notes then outstanding (including, without limitation,
consents obtained in connection with a purchase of, or a tender offer or
exchange offer for, the Notes), and, subject to Sections 6.02, 6.04 and 6.07
hereof, any existing default or compliance with any provision of this
Indenture, the Notes or the Subsidiary Guarantees may be waived with the
consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a tender offer or exchange offer for the Notes).
Upon the request of the Company accompanied by a Board Resolution
authorizing the execution of any such amended or supplemental indenture, and
upon the filing with the Trustee of evidence satisfactory to the Trustee of the
consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee
of an Officer's Certificate and an Opinion of Counsel, the Trustee shall join
with the Company and any Subsidiary Guarantor in the execution of such amended
or supplemental indenture unless such amended or supplemental indenture affects
the Trustee's own rights, duties or immunities under this Indenture or
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otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into such amended or supplemental Indenture.
The consent of the Holders is not necessary under this Section 9.02 to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the
Holders of a majority in aggregate principal amount of the Notes then
outstanding may waive compliance in a particular instance by the Company with
any provision of this Indenture, the Notes or the Subsidiary Guarantees.
However, without the consent of each Holder affected, an amendment or waiver
may not (with respect to any Note or Subsidiary Guarantee held by a
non-consenting Holder):
(i) reduce the principal amount of the Notes whose Holders must
consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any
Note or alter the provisions with respect to the redemption of the Notes
(including provisions relating to Sections 4.09 and 4.10 hereof);
(iii) reduce the rate of or change the time for payment of
interest on any Note;
(iv) waive a Default or Event of Default in the payment of
principal of, premium, if any, or interest on the Notes (except a
rescission of acceleration of the Notes by the Holders of at least a
majority in aggregate principal amount of such Notes and a waiver of the
payment default that resulted from such acceleration);
(v) make any Note payable in money other than that stated in such
Notes;
(vi) make any change in Section 6.04 or Section 6.07 hereof;
(vii) waive a redemption or repurchase payment with respect to
any Note (including a payment required by Section 3.10, 4.09 or 4.10
hereof);
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(viii) except as provided under Article 8 or in accordance with
the terms of any Subsidiary Guarantee, release a Subsidiary Guarantor from
its obligations under its Subsidiary Guarantee, or make any change in a
Subsidiary Guarantee that would adversely affect the Holders of the Notes;
or
(ix) make any change in the foregoing amendment and waiver
provisions of this Article 9.
Notwithstanding the foregoing, any amendment or waiver relating to
Article 10 or 12 hereof will require the consent of the Holders of at least 75%
in aggregate principal amount of the Notes then outstanding if such amendment
would adversely affect the rights of Holders of Notes.
Section 9.03. Compliance With TIA.
Every amendment or supplement to this Indenture or the Notes shall be
set forth in an amended or supplemental indenture that complies with the TIA as
then in effect.
Section 9.04. Revocation and Effect of Consents.
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder of a Note is a continuing consent by the Holder of a Note and
every subsequent Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent is not
made on any Note. However, any such Holder of a Note or subsequent Holder of a
Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment
becomes effective. An amendment, supplement or waiver becomes effective in
accordance with its terms and thereafter binds every Holder.
Section 9.05. Notation on or Exchange of Notes.
The Trustee may, but shall not be required to, place an appropriate
notation about an amendment, supplement or waiver on any Note thereafter
authenticated. The Company in exchange for all Notes may issue and the Trustee
shall authenticate new Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment, supplement or waiver.
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Section 9.06. Trustee to Sign Amendments, Etc.
The Trustee shall sign any amended or supplemental indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Company may not sign an amendment or supplemental indenture until the Board
of Directors approves it. In signing or refusing to sign any amended or
supplemental indenture the Trustee shall be entitled to receive and (subject to
Section 7.01 hereof) shall be fully protected in relying upon an Officers's
Certificate and an Opinion of Counsel stating that the execution of such
amended or supplemental indenture is authorized or permitted by this Indenture,
that it is not inconsistent herewith, and that it will be valid and binding
upon the Company and the Subsidiary Guarantors, in accordance with its terms.
ARTICLE 10
SUBORDINATION
Section 10.01. Agreement to Subordinate.
The Company agrees, and each Holder by accepting a Note agrees, that
the payment of principal of, premium (if any), and interest on the Notes shall
be subordinated in right of payment, as set forth in this Article 10, to the
prior payment in full of all Senior Debt, whether outstanding on the date
hereof or thereafter incurred. For purposes of this Article 10 and Article 12
hereof, "payment in full" means payment of cash.
The provisions of this Article 10 shall constitute a continuing offer
to all Persons that, in reliance upon such provisions, become holders of, or
continue to hold Senior Debt; such provisions are made for the benefit of
holders of Senior Debt and they or each of them may enforce the rights of
holders of Senior Debt hereunder, subject to the terms and provisions hereof.
Section 10.02. Liquidation; Dissolution; Bankruptcy.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of all Senior Debt shall be entitled to
receive payment in full of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the Holders of Notes will be
entitled to receive any payment of cash, securities or other property with
respect to Obligations due in respect of the Notes, and until all Obligations
with respect to Senior Debt are paid in full, any payment, distribution or
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other transfer of assets of the Company or any Subsidiary Guarantor of any
character, whether direct or indirect, by set-off or otherwise, and whether in
cash, securities or other property to which the Holders of Notes would be
entitled, shall be made to the holders of Senior Debt (except that Holders of
Notes may receive Permitted Junior Securities and payments made from the trusts
described in Article 8 hereof).
Section 10.03. Default on Designated Senior Debt.
The Company may not make any payment upon or in respect of the Notes
(except payments in Permitted Junior Securities and payments made from the
trusts described in Article 8 hereof) if:
(a) a default in the payment of the principal of, premium, if any, or
interest on any Designated Senior Debt occurs and is continuing beyond any
applicable period of grace, if any; or
(b) any other default occurs and is continuing with respect to any
Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity and the Trustee
receives written notice of such default (a "Payment Blockage Notice") from
the Company or the holders of any Designated Senior Debt (or their
representative).
Payments on the Notes may and shall be resumed (i) in the case of a
payment default, upon the date on which such default is cured or waived and
(ii) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until 360 days have elapsed since the effectiveness
of the immediately prior Payment Blockage Notice. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been cured or waived for a
period of not less than 90 days.
Section 10.04. Acceleration of Securities.
If the Company fails to make any payment on the Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure shall constitute an Event of
Default and shall entitle the Holders of the Notes to accelerate the maturity
thereof, subject to the terms of Section 6.02 hereof. The Company shall
promptly notify holders of Senior Debt (or their representatives) if payment of
the Notes is accelerated because of an Event of Default.
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Section 10.05. When Distribution Must be Paid Over.
In the event that the Trustee receives any payment upon or in respect
of the Notes at a time when the Trustee has actual knowledge that such payment
is prohibited by Section 10.02 or 10.03 hereof, such payment shall be held by
the Trustee in trust for the benefit of, and shall be paid forthwith over and
delivered, upon written request, to, the holders of Senior Debt (or their
representative) under the indenture or other agreement (if any) pursuant to
which Senior Debt may have been issued, as their respective interests may
appear, for application to the payment of all Obligations with respect to
Senior Debt remaining unpaid to the extent necessary to pay such Obligations in
full in accordance with their terms, after giving effect to any concurrent
payment or distribution to or for the holders of Senior Debt.
In the event that any Holder receives any payment on any Note at any
time when such payment is prohibited by Section 10.02 or 10.03 hereof, such
payment shall be held by such Holder in trust for the benefit of, and shall be
paid forthwith over and delivered, upon written request to, the holders of
Senior Debt (or their representative) under the indenture or other agreement
(if any) pursuant to which Senior Debt may have been issued, as their
respective interests may appear, for the application to the payment of all
Obligations with respect to Senior Debt remaining unpaid to the extend
necessary to pay such Obligations in full accordance with their terms, after
giving effect to any concurrent payment or distribution to or for the holders
of Senior Debt.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically
set forth in this Article 10, and no implied covenants or obligations with
respect to the holders of Senior Debt shall be read into this Indenture against
the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Holders or the Company
or any other Person money or assets to which any holders of Senior Debt shall
be entitled by virtue of this Article 10, except if such payment is made as a
result of the willful misconduct or gross negligence of the Trustee.
Section 10.06. Notice by Company.
The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to the Company that would cause a payment upon or in respect of
the Notes to violate this Article 10, but failure to give such notice shall not
affect the subordination of the Notes to Senior Debt as provided in this
Article 10.
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Section 10.07. Subrogation.
After all Senior Debt is paid in full and until the Notes are paid in
full in cash, Holders of Notes shall be subrogated (equally and ratably with
all other Pari Passu Indebtedness) to the rights of holders of Senior Debt to
receive distributions applicable to Senior Debt to the extent that
distributions otherwise payable to the Holders of Notes have been applied to
the payment of Senior Debt. A distribution made under this Article 10 to
holders of Senior Debt that otherwise would have been made to Holders of Notes
is not, as between the Company and Holders, a payment by the Company on the
Senior Debt.
Section 10.08. Relative Rights.
This Article 10 defines the relative rights of Holders of Notes and
holders of Senior Debt. Nothing in this Indenture shall:
(a) impair, as between the Company and Holders of Notes, the
obligation of the Company, which is absolute and unconditional, to pay
principal of, premium, if any, and interest on the Notes in accordance with
their terms;
(b) affect the relative rights of Holders of Notes and creditors of
the Company, other than their rights in relation to holders of Senior Debt;
or
(c) prevent the Trustee or any Holder of Notes from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Debt to receive distributions and
payments otherwise payable to Holders of Notes.
If the Company fails because of this Article 10 to pay principal of,
premium, if any, or interest on a Note on the due date, the failure is
nevertheless a Default or an Event of Default.
Section 10.09. Subordination May Not Be Impaired by Company.
No right of any holder of Senior Debt to enforce the subordination of
the Indebtedness evidenced by the Notes shall be impaired by any act or failure
to act by the Company or any Holder or by the failure of the Company or any
Holder to comply with this Indenture.
Section 10.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
representative.
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Upon any payment or distribution of assets of the Company referred to
in this Article 10, the Trustee and the Holders of Notes shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such representative or of the liquidating trustee or
agent or other Person making any distribution to the Trustee or to the Holders
of Notes for the purpose of ascertaining the Persons entitled to participate in
such distribution, the holders of the Senior Debt and other Indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article
10.
Section 10.11. Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office at least two Business Days prior to the date of such
payment written notice of facts that would cause the payment on any Note to
violate this Article 10. Only the Company or a representative of the holders of
Senior Debt may give the notice. Nothing in this Article 10 shall impair the
claims of, or payments to, the Trustee under or pursuant to Section 7.07
hereof.
The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. Any Agent may
do the same with like rights.
Section 10.12. Authorization to Effect Subordination.
Each Holder of Notes, by the Holder's acceptance thereof, authorizes
and directs the Trustee on such Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article 10, and appoints the Trustee to act as such Holder's attorney-in-fact
for any and all such purposes. If the Trustee does not file a proper proof of
claim or proof of debt in the form required in any proceeding referred to in
Section 6.01(h) and 6.01(i) and Section 6.09 hereof at least 30 days before the
expiration of the time to file such claim, a representative of Designated
Senior Debt is hereby authorized to file an appropriate claim for and on behalf
of the Holders of the Notes.
Section 10.13. No Waiver of Subordination Provisions.
(a) No right of any present or future holder of any Senior Debt to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act, in good faith, by any such
holder.
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(b) Without in any way limiting the generality of paragraph (a) of
this Section 10.13, the holders of Senior Debt may, at any time and from time
to time, without the consent of or notice to the Trustee or the Holders,
without incurring responsibility to the Holders of the Notes and without
impairing or releasing the subordination provided in this Article 10 or the
obligations hereunder of the Holders to the holders of Senior Debt, do any one
or more of the following: (1) change the manner, place or terms of payment or
extend the time of payment of, or renew or alter, any Senior Debt or any
instrument evidencing the same or any agreement under which Senior Debt is
outstanding; (2) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Debt; (3) release any Person
liable in any manner for the collection of Senior Debt; and (4) exercise or
refrain from exercising any rights against the Company and any other Person.
Section 10.14. Certain Definitions.
For purposes of this Section 10, the terms "distribution" and
"payment" include payments, distributions and other transfers of assets by or
on behalf of the Company (including redemptions, repurchases or other
acquisitions of the Notes) from any source, of any kind or character, whether
direct or indirect, by set-off or otherwise, whether in cash, property or
securities.
ARTICLE 11
GUARANTEE OF NOTES
Section 11.01. Subsidiary Guarantee.
Subject to Section 11.05 hereof, the Subsidiary Guarantors hereby,
jointly and severally, unconditionally guarantee to each Holder of a Note
authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of this
Indenture, the Notes held thereby and the Obligations of the Company hereunder
and thereunder, that: (a) the principal of and interest and premium, if any, on
the Notes will be promptly paid in full when due, subject to any applicable
grace period, whether at maturity, by acceleration, redemption or otherwise,
and interest on the overdue principal and to the extent permitted by law,
interest on any overdue interest, on the Notes, and all other payment
Obligations of the Company to the Holders or the Trustee hereunder or
thereunder will be promptly paid in full and performed, all in accordance with
the terms hereof and thereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other Obligations, the same will
be promptly paid in full when due in accordance with the terms of the extension
or renewal, subject to any applicable grace period, whether at stated maturity,
by acceleration, redemption or otherwise. Failing payment when so due of any
amount so
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guaranteed or any performance so guaranteed for whatever reason, the Subsidiary
Guarantors will be jointly and severally obligated to pay the same immediately.
An Event of Default under this Indenture or the Notes shall constitute an event
of default under the Subsidiary Guarantees, and shall entitle the Holders to
accelerate the Obligations of the Subsidiary Guarantors hereunder in the same
manner and to the same extent as the Obligations of the Company. The Subsidiary
Guarantors hereby agree that their Obligations hereunder shall be
unconditional, irrespective of the validity, regularity or enforceability of
the Notes or this Indenture, the absence of any action to enforce the same, any
waiver or consent by any Holder with respect to any provisions hereof or
thereof, the recovery of any judgment against the Company, any action to
enforce the same or any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor. Each Subsidiary
Guarantor hereby waives diligence, presentment, demand of payment, filing of
claims with a court in the event of insolvency or bankruptcy of the Company,
any right to require a proceeding first against the Company, protest, notice
and all demands whatsoever and covenants that this Subsidiary Guarantee will
not be discharged except by complete performance of the Obligations contained
in the Notes and this Indenture. If any Holder or the Trustee is required by
any court or otherwise to return to the Company, the Subsidiary Guarantors, or
any Custodian, trustee, liquidator or other similar official acting in relation
to either the Company or the Subsidiary Guarantors, any amount paid by the
Company or any Subsidiary Guarantor to the Trustee or such Holder, the
Subsidiary Guarantees, to the extent theretofore discharged, shall be
reinstated in full force and effect. Each Subsidiary Guarantor agrees that it
shall not be entitled to, and hereby waives, any right of subrogation in
relation to the Holders in respect of any Obligations guaranteed hereby. Each
Subsidiary Guarantor further agrees that, as between the Subsidiary Guarantors,
on the one hand, and the Holders and the Trustee, on the other hand, (i) the
maturity of the Obligations guaranteed hereby may be accelerated as provided in
Article 6 hereof for the purposes of its Subsidiary Guarantee, notwithstanding
any stay, injunction or other prohibition preventing such acceleration in
respect of the Obligations guaranteed thereby, and (ii) in the event of any
declaration of acceleration of such Obligations as provided in Article 6
hereof, such Obligations (whether or not due and payable) shall forthwith
become due and payable by the Subsidiary Guarantor for the purpose of its
Subsidiary Guarantee. The Subsidiary Guarantors shall have the right to seek
contribution from any non-paying Subsidiary Guarantor so long as the exercise
of such right does not impair the rights of the Holders under the Subsidiary
Guarantees.
Section 11.02. Execution and Delivery of Subsidiary Guarantee.
To evidence its Subsidiary Guarantee set forth in Section 10.01
hereof, each Subsidiary Guarantor hereby agrees that a notation of such
Subsidiary Guarantee substantially in the form of Exhibit D hereto shall be
endorsed by manual or facsimile signature by an officer of such Subsidiary
Guarantor on each Note authenticated and delivered by the Trustee and that this
Indenture shall be executed on behalf of such Subsidiary Guarantor, by manual
or facsimile signature, by an officer of such Subsidiary Guarantor.
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After the Closing Date, if the Company or any or its Subsidiaries
shall acquire, create or designate a Subsidiary, then the Company shall cause
such Subsidiary to execute a Subsidiary Guarantee substantially in the form of
Exhibit B. Such Subsidiary Guarantee shall be accompanied by a supplemental
indenture substantially in the form of Exhibit C, along with such other
opinions, certificates and documents required under this Indenture.
Each Subsidiary Guarantor hereby agrees that its Subsidiary Guarantee
shall remain in full force and effect notwithstanding any failure to endorse on
each Note a notation of such Subsidiary Guarantee.
If an officer whose signature is on this Indenture or on the
Subsidiary Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which a Subsidiary Guarantee is endorsed, the
Subsidiary Guarantee shall be valid nevertheless.
The delivery of any Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee
set forth in this Indenture on behalf of the Subsidiary Guarantors.
Section 11.03. Guarantors May Consolidate, etc., on Certain Terms.
(a) Except as set forth in Articles 4 and 5 hereof, nothing contained
in this Indenture shall prohibit a merger between a Subsidiary Guarantor and
another Subsidiary Guarantor or a merger between a Subsidiary Guarantor and the
Company.
(b) No Subsidiary Guarantor shall consolidate with or merge with or
into (whether or not such Subsidiary Guarantor is the surviving Person), or
sell all or substantially all of its assets to, another Person, whether or not
affiliated with such Subsidiary Guarantor, unless, other than with respect to a
merger between a Subsidiary Guarantor and another Subsidiary Guarantor or a
merger between a Subsidiary Guarantor and the Company, (i) subject to the
provisions of Section 11.04 hereof, the Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) assumes all
the obligations of such Subsidiary Guarantor pursuant to a supplemental
indenture substantially in the form of Exhibit C hereto, under the Subsidiary
Guarantee of such Subsidiary Guarantor and this Indenture; (ii) immediately
after giving effect to such transaction, no Default or Event of Default exists;
and (iii) the Company would be permitted, immediately after giving effect to
such transaction, to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Interest Coverage Ratio test set forth in the first
paragraph of Section 4.12.
(c) In the case of any such consolidation, merger, sale or conveyance
and upon the assumption by the successor Person, by supplemental indenture,
executed and delivered to the Trustee and substantially in the form of Exhibit
C hereto, of the Subsidiary Guarantee endorsed upon the Notes and the due and
punctual performance of all of the
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covenants and conditions of this Indenture to be performed by the Subsidiary
Guarantor, such successor Person shall succeed to and be substituted for the
Subsidiary Guarantor with the same effect as if it had been named herein as a
Subsidiary Guarantor; provided that, solely for purposes of computing
Consolidated Net Income; the Consolidated Net Income of any Person other than
the Company and its Subsidiaries shall only be included for periods subsequent
to the effective time of such merger, consolidation, combination or transfer of
assets. Such successor Person thereupon may cause to be signed any or all of
the Subsidiary Guarantees to be endorsed upon all of the Notes issuable
hereunder which theretofore shall not have been signed and delivered to the
Trustee. All of the Subsidiary Guarantees so issued shall in all respects have
the same legal rank and benefit under this Indenture as the Subsidiary
Guarantees theretofore and thereafter issued in accordance with the terms of
this Indenture as though all of such Subsidiary Guarantees had been issued at
the date of the execution hereof.
Section 11.04. Releases Following Sale of Assets.
In the event of a sale or other disposition of all of the Equity
Interests of any Subsidiary Guarantor (including by way of merger or
consolidation), or a sale or other disposition of all or substantially all of
the assets of such Subsidiary Guarantor, then such Subsidiary Guarantor (in the
event of a sale or other disposition of all of the capital stock of such
Subsidiary Guarantor) or the Person acquiring the property (in the event of a
sale or other disposition of all or substantially all of the assets of such
Subsidiary Guarantor) shall be released and relieved of any obligations under
its Subsidiary Guarantee; provided, however, that (i) the Net Proceeds from
such sale or other dispositions are applied in accordance with the provisions
of Section 4.10 hereof and (ii) the Company is in compliance with all other
provisions of this Indenture applicable to such disposition. Upon delivery by
the Company to the Trustee of an Officer's Certificate to the effect of the
foregoing, the Trustee shall execute any documents reasonably required in order
to evidence the release of any Subsidiary Guarantor from its Obligation under
its Subsidiary Guarantee. Any Subsidiary Guarantor not released from its
Obligations under its Subsidiary Guarantee shall remain liable for the full
amount of principal of, premium, if any, and interest on the Notes and for the
other Obligations of such Subsidiary Guarantor under this Indenture as provided
in this Article 11.
Section 11.05. Limitation on Subsidiary Guarantor Liability.
For purposes hereof, each Subsidiary Guarantor's liability shall be
limited to the lesser of (a) the aggregate amount of the Obligations of the
Company under the Notes and this Indenture and (b) the amount, if any, which
would not have (i) rendered such Subsidiary Guarantor "insolvent" (as such term
is defined in applicable Bankruptcy Law) or (ii) left such Subsidiary Guarantor
with unreasonably small capital at the time its Subsidiary Guarantee was
entered into; provided, however, that, it will be a presumption in any lawsuit
or other proceeding in which a Subsidiary Guarantor is a party that the amount
guaranteed pursuant to the Subsidiary Guarantee is the amount set forth in
clause (a) above unless any creditor, or
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representative of creditors of such Subsidiary Guarantor, or debtor in
possession or trustee in bankruptcy of the Subsidiary Guarantor, otherwise
proves in such a lawsuit that the aggregate liability of the Subsidiary
Guarantor is the amount set forth in clause (b) above. In making any
determination as to solvency or sufficiency of capital of a Subsidiary
Guarantor in accordance with the previous sentence, the right of such
Subsidiary Guarantor to contribution from other Subsidiary Guarantors, and any
other rights such Subsidiary Guarantor may have, contractual or otherwise,
shall be taken into account.
Section 11.06. "Trustee" to Include Paying Agent.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article 11 shall in each case (unless the context shall
otherwise require) be construed as extending to and including such Paying Agent
within its meaning as fully and for all intents and purposes as if such Paying
Agent were named in this Article 11 in place of the Trustee.
ARTICLE 12
SUBORDINATION OF SUBSIDIARY GUARANTEES
Section 12.01. Agreement to Subordinate.
The Subsidiary Guarantors agree, and each Holder by accepting a Note
agrees, that all Subsidiary Guarantees, shall be subordinated in right of
payment, to the extent and in the manner provided in this Article 12, to the
prior payment in full of all Senior Debt, whether outstanding on the date
hereof or thereafter incurred.
The provisions of this Article 12 shall constitute a continuing offer
to all Persons that, in reliance upon such provisions, become holders of, or
continue to hold Senior Debt; such provisions are made for the benefit of
holders of Senior Debt and they or each of them may enforce the rights of
holders of Senior Debt hereunder, subject to the terms and provisions hereof.
Section 12.02. Liquidation: Dissolution; Bankruptcy.
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Upon any distribution to creditors of any Subsidiary Guarantor in a
liquidation or dissolution of such Subsidiary Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to such
Subsidiary Guarantor or its property, an assignment for the benefit of
creditors or any marshalling of such Subsidiary Guarantor's assets and
liabilities, the holders of Senior Debt will be entitled to receive payment in
full of all Obligations due in respect of such Senior Debt (including interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Debt, whether or not such interest is in an allowed claim
under applicable law) before the Holders of Notes will be entitled to receive
any payment under the Subsidiary Guarantee of such Subsidiary Guarantor, and
until all Obligations with respect to Senior Debt of any are paid in full, any
distribution under the Subsidiary Guarantees to which the Holders of Notes
would be entitled shall be made by such Subsidiary Guarantor to the holders of
Senior Debt (except that Holders of Notes may receive Permitted Junior
Securities and payments made from the trust created pursuant to Article 8
hereof).
Section 12.03. Default on Designated Senior Debt.
No Subsidiary Guarantor may make any payment upon or in respect of
such Subsidiary Guarantee (except that Holders of Notes may receive Permitted
Junior Securities and payments made from the defeasance trust created pursuant
to Article 8 hereof) if:
(a) a default in the payment of the principal of, premium, if any, or
interest on Designated Senior Debt occurs and is continuing
beyond any applicable period of grace, if any; or
(b) any other default occurs and is continuing with respect to any
Designated Senior Debt that permits holders of such Designated
Senior Debt as to which such default relates to accelerate its
maturity and the Trustee receives a written notice of such
default (a "Payment Blockage Notice") from the Company, a
Subsidiary Guarantor or the holders of any Designated Senior Debt
(or their representative).
Payments on the Subsidiary Guarantees may and shall be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated. No new period of payment
blockage may be commenced unless and until 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such default shall have been cured or waived for
a period of not less than 90 days.
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Section 12.04 Acceleration of Securities.
[Intentionally omitted.]
Section 12.05. When Distribution Must Be Paid Over.
In the event that the Trustee receives any payment of any Obligations
with respect to a Subsidiary Guarantor at a time when the Trustee has actual
knowledge that such payment is prohibited by Section 12.02 or 12.03 hereof,
such payment shall be held by the Trustee, for the benefit of, and shall be
paid forthwith over and delivered, upon written request to, the holders of
Senior Debt (or their representatives), as their respective interests may
appear, under the indenture or other agreement (if any) pursuant to which such
Senior Debt may have been issued for application to the payment of all
Obligations with respect to such Senior Debt remaining unpaid to the extent
necessary to pay such Obligations in full in accordance with their terms.
In the event that any Holder receives any payment of any Obligations
of a Subsidiary Guarantor at a time when such payment is prohibited by Section
12.02 or 12.03 hereof, such payment shall be held by such Holder in trust for
the benefit of, and shall be paid forthwith over and delivered, upon written
request to, the holders of Senior Debt (or their representative) under the
indenture or other agreement (if any) pursuant to which such Senior Debt may
have been issued for application to the payment of all Obligations with respect
to such Senior Debt remaining unpaid to the extent necessary to pay such
Obligations in full in accordance with their terms.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically
set forth in this Article 12, and no implied covenants or obligations with
respect to the holders of Senior Debt shall be read into this Indenture against
the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Holders or the
Subsidiary Guarantors or any other Person money or assets to which any holders
of Senior Debt shall be entitled by virtue of this Article 12, except if such
payment is made as a result of the willful misconduct or gross negligence of
the Trustee.
Section 12.06. Notice By Subsidiary Guarantor.
Each Subsidiary Guarantor shall promptly notify the Trustee and the
Paying Agent of any facts known to such Subsidiary Guarantor that would cause a
payment of any Obligations to violate this Article 12, but failure to give such
notice shall not affect the subordination of the Subsidiary Guarantees to the
Senior Debt as provided in this Article 12.
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Section 12.07. Subrogation.
After all Senior Debt is paid in full and until the Subsidiary
Guarantees are paid in full, Holders shall be subrogated (equally and ratably
with all other Pari Passu Indebtedness) to the rights of holders of Senior Debt
to receive distributions applicable to Senior Debt to the extent that
distributions otherwise payable to the Holders have been applied to the payment
of Senior Debt. A distribution made under this Article 12 to holders of Senior
Debt that otherwise would have been made to Holders is not, as between the
Subsidiary Guarantors and Holders, a payment by the Subsidiary Guarantors on
the Senior Debt.
Section 12.08. Relative Rights.
This Article 12 defines the relative rights of the Holders and holders
of Senior Debt. Nothing in this Indenture shall:
(i) impair, as between the Subsidiary Guarantors and the Holders,
the obligation of the Subsidiary Guarantors, which is absolute
and unconditional, to pay principal of, premium, if any, and
interest on the Notes in accordance with the terms of the
Subsidiary Guarantees;
(ii) affect the relative rights of Holders and creditors of the
Subsidiary Guarantors other than their rights in relation to
holders of Senior Debt; or
(iii) prevent the Trustee or any Holder from exercising its available
remedies upon a Default or an Event of Default, subject to the
rights of holders and owners of Senior Debt to receive
distributions and payments otherwise payable to Holders.
If any Subsidiary Guarantor fails because of this Article 12 to pay
its Obligations in accordance with its Subsidiary Guarantee on the due date,
the failure is nevertheless a Default or an Event of Default.
Section 12.09. Subordination May Not Be Impaired by Subsidiary
Guarantor.
No right of any holder of Senior Debt to enforce the subordination of
the Subsidiary Guarantees shall be prejudiced or impaired by any act or failure
to act by the Subsidiary Guarantors or any Holder or by the failure of the
Subsidiary Guarantors or any Holder to comply with this Indenture.
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Section 12.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
representative.
Upon any payment or distribution of assets of a Subsidiary Guarantor
referred to in this Article 12, the Trustee and the Holders shall be entitled
to rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such representative or of the liquidating trustee or
agent or other Person making any distribution to the Trustee or to the Holders
for the purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Debt the amount thereof or payable
thereon, the amount or amounts paid or distributed thereon and all other facts
pertinent thereto or to this Article 12.
Section 12.11. Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article 12 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Subsidiary Guarantees, unless the Trustee shall have
received at its Corporate Trust Office at least two Business Days prior to the
date of such payment written notice that the payment of any Obligations with
respect to the Subsidiary Guarantees would violate this Article 12. Only the
Subsidiary Guarantors or a representative of the holders of Senior Debt may
give the notice. Nothing in this Article 12 shall impair the claims of, or
payments to, the Trustee under or pursuant to Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. Any Agent may
do the same with like rights.
Section 12.12 Authorization to Effect Subordination.
Each Holder of a Note by the Holder's acceptance thereof authorizes
and directs the Trustee on the Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 12, and appoints the Trustee to act as the Holder's attorney-in-fact
for any and all such purposes. If the Trustee does not file a proper proof of
claim or proof of debt in the form required in any proceeding referred to in
Section 6.09 hereof at least 30 days before the expiration of the time to file
such claim, a representative of Designated Senior Debt is hereby authorized to
file an appropriate claim for and on behalf of the Holders of the Notes.
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Section 12.13. No Waiver of Subordination Provisions.
(a) No right of any present or future holder of any Senior Debt to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act, in good faith, by any such
holder.
(b) Without in any way limiting the generality of paragraph (a) of
this Section, the holders of Senior Debt may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders, without
incurring responsibility to the Holders of the Notes and without impairing or
releasing the subordination provided in this Article or the obligations
hereunder of the Holders to the holders of Senior Debt, do any one or more of
the following: (1) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter, any Senior Debt or any instrument
evidencing the same or any agreement under which Senior Debt is outstanding;
(2) sell, exchange, release or otherwise deal with any property pledged,
mortgaged or otherwise securing Senior Debt; (3) release any Person liable in
any manner for the collection of Senior Debt; and (4) exercise or refrain from
exercising any rights against any Subsidiary Guarantor and any other Person.
Section 12.14. Certain Definitions.
For purposes of this Section 12, the terms "distribution" and
"payment" include payments, distributions and other transfers of assets by or
on behalf of any Subsidiary Guarantor (including redemptions, repurchases or
other acquisitions of the Notes) from any source, of any kind or character,
whether direct or indirect, by set-off or otherwise, whether in cash, property
or securities.
ARTICLE 13
SATISFACTION AND DISCHARGE
Section 13.01 Satisfaction and Discharge of Indenture.
This Indenture shall be discharged and will cease to be of further
effect as to all Notes issued hereunder, when either:
(a) all such Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid and Notes
for whose payment money has theretofore been deposited in trust and
thereafter repaid to the Company) have been delivered to the Trustee for
cancellation; or
(b) (i) all such Notes not theretofore delivered to such Trustee for
cancellation have become due and payable by reason of the making of a
notice of
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redemption or otherwise or will become due and payable within one year and
the Company or a Subsidiary Guarantor, has irrevocably deposited or caused
to be deposited with such Trustee as trust funds in trust an amount of
money sufficient to pay and discharge the entire Indebtedness on such Notes
not theretofore delivered to the Trustee for cancellation for principal,
premium, if any, and accrued interest to the date of maturity or
redemption;
(ii) no Default or Event of Default with respect to this
Indenture or the Notes shall have occurred and be continuing on the date of
such deposit or shall occur as a result of such deposit and such deposit
will not result in a breach or violation of, or constitute a default under,
any other instrument to which the Company or a Subsidiary Guarantor is a
party or by which the Company or a Subsidiary Guarantor, is bound;
(iii) the Company or a Subsidiary Guarantor has paid or caused to
be paid all sums payable by it under this Indenture; and
(iv) the Company has delivered irrevocable instructions to the
Trustee under this Indenture to apply the deposited money toward the
payment of such Notes at maturity or the redemption date, as the case may
be.
In addition, the Company must deliver an Officer's Certificate and an
Opinion of Counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
Section 13.02 Application of Trust Money.
Subject to the provisions of the last paragraph of Section 4.03
hereof, all money deposited with the Trustee pursuant to Section 13.01 hereof
shall be held in trust and applied by it, in accordance with the provisions of
the Notes and this Indenture, to the payment, either directly or through any
Paying Agent (including the Company acting as Paying Agent) as the Trustee may
determine, to Persons entitled thereto, of the principal (and premium, if any)
and interest for whose payment such money has been deposited with the Trustee.
If the Trustee or Paying Agent is unable to apply any money or
Government Securities in accordance with Section 13.01 hereof by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's Obligations under this Indenture and the Notes shall
be revived and reinstated as though such deposit had occurred pursuant to
Section 13.01 hereof; provided that if the Company has made any payment of
principal of, premium, if any, or interest on any Notes because of the
reinstatement of its Obligations, the
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Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money or Government Securities held by the
Trustee or Paying Agent.
ARTICLE 14
MISCELLANEOUS
Section 14.01 Conflict of any Provision of Indenture With TIA.
If any provision of this Indenture limits, qualifies, or conflicts
with the duties imposed by TIA Section 318(c), the imposed duties shall
control.
Section 14.02 Notices.
Any notice or communication by the Company, any Subsidiary Guarantor
or the Trustee to the others is duly given if in writing and delivered in
Person or mailed by first class mail (registered or certified, return receipt
requested), telecopier or overnight air courier guaranteeing next day delivery,
to the others' address:
If to the Company or any Subsidiary Guarantor:
Duane Reade Inc.
440 Ninth Avenue
New York, New York 10001
Attention: Chief Financial Officer
Facsimile: (212) -
If to the Trustee:
State Street Bank and Trust Company of Connecticut, N.A.
Goodwin Square
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Attention: Corporate Trust Department
Facsimile: (860) -
The Company or the Trustee, by notice to the others may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered
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back, if telexed; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first class
mail, certified or registered, return receipt requested, or by overnight air
courier guaranteeing next day delivery to its address shown on the register
kept by the Registrar. Any notice or communication shall also be so mailed to
any Person described in TIA Section 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
Section 14.03 Communication by Holders of Notes with Other Holders of
Notes.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection
of TIA Section 312(c).
Section 14.04 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officer's Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 1.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 1.05 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been satisfied.
Section 14.05 Legal Holidays.
In any case where any interest payment date, any date established for
payment of defaulted interest pursuant to Section 2.12 hereof, or any maturity
date with respect to any
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Note shall not be a Business Day, then (nothwithstanding any other provisions
of this Indenture, the Notes or any Subsidiary Guarantee) payment of interest
or principal (and premium, if any) need not be made on such date but may be
made on the next succeeding Business Day.
Section 14.06 No Personal Liability of Directors, Officers, Employees
and Stockholders.
No director, officer, employee, incorporator or stockholder of the
Company or any Subsidiary Guarantor, as such, shall have any liability for any
obligations of the Company or any Subsidiary Guarantor under the Notes, the
Subsidiary Guarantees or this Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each holder of Notes
by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes and the
Subsidiary Guarantees. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that
such a waiver is against public policy.
Section 14.07 Governing Law.
THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO THE CHOICE OF LAW RULES THEREOF.
Section 14.08 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret any other indenture, loan
or debt agreement of the Company or its Subsidiaries or of any other Person.
Any such indenture, loan or debt agreement may not be used to interpret this
Indenture.
Section 14.09 Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its respective successors and assigns, whether so expressed or not. All
covenants and agreements in this Indenture by the Trustee shall bind its
respective successors and assigns, whether so expressed or not.
Section 14.10 Severability.
In case any provision in this Indenture or in the Notes or Subsidiary
Guarantees shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
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Section 14.11 Counterpart Originals.
The parties may sign any number of counterpart copies of this
Indenture. Each signed copy shall be an original, but all of them together
represent the same agreement.
Section 14.12 Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed in New York, New York as of the day and year first above
written.
Dated: February , 1998 DUANE READE INC.
By:
-------------------------------
Name:
Title:
Dated: February , 1998 DUANE READE
By: DUANE READE INC., a general
partner
By:
-------------------------------
Name:
Title:
By: DRI I INC., a general partner
By:
-------------------------------
Dated: February , 1998 DRI I Inc.
By:
-------------------------------
Name:
Title:
Dated: February , 1998 STATE STREET BANK AND TRUST COMPANY
OF CONNECTICUT, N.A.
By:
-------------------------------
Name:
Title:
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Exhibit A
(Face of Note)
[Unless and until it is exchanged in whole or in part for Notes in
definitive form, this Note may not be transferred except as a whole by the
Depositary to a nominee of the Depositary or by a nominee of the Depositary to
the Depositary or another nominee of the Depositary or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary. The Depository Trust Company shall act as the Depositary until a
successor shall be appointed by the Company. Unless this certificate is
presented by an authorized representative of The Depository Trust Company (55
Water Street, New York, New York) ("DTC"), to the Company or its agent for
registration of transfer, exchange or payment, and any certificate issued is
registered in the name of Cede & Co. or such other name as may be requested by
an authorized representative of DTC (and any payment is made to Cede & Co. or
such other entity as may be requested by an authorized representative of DTC),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an
interest herein].(1)
% Senior Subordinated Notes due 2008
No. Cusip No:
DUANE READE INC.
promises to pay to Cede & Co. or registered assigns, the principal sum of
$_________________ (_______________________________ Dollars) on , 2008.
Interest Payment Dates:
Record Dates:
- --------------
(1) This paragraph should be included only if the Note is issued in global
form.
A-1
<PAGE>
DUANE READE INC.
By:
-------------------------------
Name:
Title:
A-2
<PAGE>
This is one of the % Senior Subordinated Notes due 2008 referred
to in the within-mentioned Indenture:
STATE STREET BANK AND TRUST COMPANY
OF CONNECTICUT N.A.,
as Trustee
By:
-------------------------------
Authorized Signature
A-3
<PAGE>
(Back of Note)
% Senior Subordinated Notes due 2008
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below.
1. Interest. Duane Reade Inc., a Delaware corporation (the "Company"),
promises to pay interest on the principal amount of this Note at % per annum
from , 1998 until , 2008. The Company shall pay interest semi-annually in
arrears on and of each year, or if any such day is not a Business Day, on the
next succeeding Business Day (each an "Interest Payment Date"). Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of original issuance; provided that
if there is no existing Default in the payment of interest, and if this Note is
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; provided, further, that the first Interest
Payment Date shall be , 1998. The Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
principal and premium, if any, from time to time on demand at a rate equal to
1% per annum in excess of the per annum rate on the Notes then in effect; it
shall pay interest (including post-petition interest in any proceeding under
any Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace periods) from time to time on demand at the same rate to the
extent lawful. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
2. Method of Payment. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on and next preceding the Interest
Payment Date, even if such Notes are cancelled after such record date and on or
before such Interest Payment Date, except as provided in Section 2.12 of the
Indenture with respect to defaulted interest. The Notes will be payable as to
principal, premium, if any, and interest at the office or agency of the Company
maintained for such purpose within the City and State of New York, or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders at their addresses set forth in the register of Holders; provided that
all payments with respect to (i) Notes the holders of which have given wire
transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
holders thereof, and (ii) Notes represented by one or more permanent Global
Notes will be paid by wire transfer of immediately available funds to the
account of the Depository Trust Company or any successor thereto. Such payment
shall be in such coin or currency of the United Sates of America as at the time
of payment is legal tender for payment of public and private debts.
3. Paying Agent and Registrar. Initially, State Street Bank and Trust
Company of Connecticut, N.A., the Trustee under the Indenture, will act as
Paying Agent and
A-4
<PAGE>
Registrar. The Notes may be presented for registration of transfer and exchange
at the offices of the Registrar. The Company may change any Paying Agent or
Registrar without notice to any Holder. The Company or any of its Subsidiaries
may act in any such capacity.
4. Indenture. The Company issued the Notes under an Indenture dated as
of , 1998 (the "Indenture") between the Company and the Trustee. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are referred to the Indenture and such Act for a statement of such
terms. The Notes are general unsecured obligations of the Company limited to
$80,000,000 in aggregate principal amount.
5. Optional Redemption. Except as set forth in the next paragraph, the
Notes will not be redeemable at the Company's option prior to 2003.
Thereafter, the Notes will be subject to redemption at any time at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' written notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, together with accrued and unpaid interest
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on of each of the years indicated below:
Redemption
Year Price
---- -----
2003................................................... . %
2004................................................... . %
2005................................................... . %
2006 and thereafter.................................... 100.000%
Notwithstanding the foregoing, on or prior to , 2001, the Company may,
at its option, redeem up to 35% of the original aggregate principal amount of
Notes at a redemption price equal to . % of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the redemption date, with
the net proceeds of one or more Qualified Offerings of the Company; provided
that at least 65% of the original aggregate principal amount of Notes remains
outstanding immediately after the occurrence of such redemption; and provided,
further, that any such redemption shall occur within 90 days of the date of the
closing of such Qualified Offering.
6. Mandatory Redemption. Other than as set forth in paragraph 8, the
Company shall not be required to make mandatory redemption or sinking fund
payments with respect to the Notes.
A-5
<PAGE>
7. Notice of Redemption. Notice of redemption will be mailed at least
30 days but not more than 60 days before the redemption date to each Holder
whose Notes are to be redeemed at its registered address. Notes may be redeemed
in part, provided that no Notes shall be redeemed in a principal amount that is
less than $1,000. On and after the redemption date, interest ceases to accrue
on Notes or portions thereof called for redemption.
8. Repurchase at Option of Holders. (a) Upon the occurrence of a
Change of Control, the Company shall make an offer (a "Change of Control
Offer") to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of the Notes at a price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase (the "Change of Control Payment"). Within 15 days following any
Change of Control, the Company shall (or shall cause the Trustee to) mail a
notice to each Holder of Notes issued under the Indenture, with a copy to the
Trustee, containing the information set forth in Section 4.09 of the Indenture.
Holders of Notes that are subject to an offer to purchase may elect to have
such Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" on the reverse side of this Note.
(b) Within 270 days after the receipt of any Net Proceeds from an
Asset Sale, the Company or any such Subsidiary shall apply such Net Proceeds at
its option (or to the extent the Company is required to apply such Net Proceeds
pursuant to the terms of the New Credit Agreement), to (a) repay Senior Debt
(and to correspondingly reduce commitments with respect thereto in the case of
revolving borrowings) or (b) repay Pari Passu Indebtedness of the Company or
any Subsidiary Guarantor (and to correspondingly reduce commitments with
respect thereto), provided that if the Company or any Subsidiary Guarantor
shall so repay Pari Passu Indebtedness, it will equally and ratably reduce
Indebtedness under the Notes if the Notes are then redeemable, or if the Notes
may not then be redeemed, the Company shall make an offer in accordance with
the procedures set forth in Section 3.10 of the Indenture to all Holders of
Notes to purchase at a price in cash equal to 100% of the principal amount
thereof (plus accrued and unpaid interest thereon to the date of repurchase)
the amount of Notes that would otherwise be redeemed or (c) an investment in
property, the making of a capital expenditure or the acquisition of other
long-term assets, in each case, of or from an entity that is engaged in a
Permitted Business, and in accordance with the terms of the Indenture. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Designated Senior Debt or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the preceding sentence of
this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Company shall be
required to make an Asset Sale Offer to purchase the maximum principal amount
of Notes that may be purchased out of the Excess Proceeds at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest thereon to the date of purchase, in accordance with the
procedures set forth in Section 3.10 of the Indenture. To the extent that the
aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than
the Excess
A-6
<PAGE>
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased in accordance with the procedures set forth in
Section 3.02 of the Indenture. Upon completion of such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
9. Denominations, Transfer, Exchange. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000.
The transfer of Notes may be registered and Notes may be exchanged as provided
in the Indenture. The Registrar and the Trustee may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and to
pay any taxes and fees required by law or permitted by the Indenture. The
Company need not exchange or register the transfer of any Note or portion of a
Note selected for redemption. Also, it need not exchange or register the
transfer of any Notes for a period of 15 days before a selection of Notes to be
redeemed or during the period between a record date and the corresponding
Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a Note may be
treated as its owner for all purposes.
11. Subordination. Each Holder by accepting a Note agrees that the
payment of principal of, premium, if any, and interest on each Note is
subordinated in right of payment, to the extent and in the manner provided in
Article 10 of the Indenture, to the prior payment in full in cash of all Senior
Debt (whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed or guaranteed; provided that such creation, incurrence,
assumption or guarantee is in accordance with the provisions set forth in the
Indenture), and this subordination provision is for the benefit of the holders
of Senior Debt.
12. Amendment, Supplement and Waiver. Subject to certain exceptions,
the Indenture, the Notes and the Subsidiary Guarantees issued hereunder may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or a tender
offer or exchange offer for, the Notes), and, subject to the terms of the
Indenture, the Notes and the Subsidiary Guarantees, any existing default or
compliance with any provision of the Indenture, the Notes or the Subsidiary
Guarantees may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes (including, without limitation,
consents obtained in connection with a tender offer or exchange offer for the
Notes). Without the consent of any Holder of Notes, the Company, a Subsidiary
Guarantor (with respect to a Subsidiary Guarantee or the Indenture to which it
is a party) and the Trustee may amend or supplement the Indenture, or Notes or
the Subsidiary Guarantees to cure any ambiguity, defect or inconsistency; to
provide for uncertificated Notes in addition to or in place of certificated
Notes; to comply with Article 5 of the Indenture; to make any change that would
provide any additional rights or benefits to the Holders of the Notes or that
does not,
A-7
<PAGE>
in the opinion of counsel, adversely affect the legal rights hereunder of any
such Holder; to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act;
to allow any Subsidiary Guarantor to guarantee the Notes; or to provide for the
appointment of a successor trustee in compliance with the requirements of
Section 7.08 of the Indenture.
13. Defaults and Remedies. Each of the following constitutes an "Event
of Default": (a) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of this
Indenture); (b) default in payment when due of the principal of or premium (if
any) on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (c) failure by the Company to comply with the provisions of
Sections 4.09, 4.10, 4.11, 4.12 and 5.01 of the Indenture; (d) failure by the
Company for 60 days after notice to comply with any of its other agreements in
the Indenture or the Notes; (e) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Subsidiaries), whether such Indebtedness or guarantee now exists or is
created after the Closing Date, which default (i) is caused by a failure to pay
principal of or premium (if any) or interest on such Indebtedness at its final
stated maturity prior to the expiration of any grace period provided in such
Indebtedness (a "Payment Default") or (ii) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $5.0 million or more; (f)
failure by the Company or any of its Subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; (g) failure by any Subsidiary Guarantor to
perform any covenant set forth in its Subsidiary Guarantee, or the repudiation
by any Subsidiary Guarantor of its obligations under its Subsidiary Guarantee
or the unenforceability of any Subsidiary Guarantee against a Subsidiary
Guarantor for any reason, unless, in each such case, such Subsidiary Guarantor
and its Subsidiaries have no Indebtedness outstanding at such time or at any
time thereafter; and (h) certain events of bankruptcy with respect to the
Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, that so long
as any Indebtedness permitted to be incurred pursuant to the New Credit
Agreement shall be outstanding, such acceleration shall not be effective until
the earlier of (a) any acceleration of any such Indebtedness under the New
Credit Agreement and (b) five business days after receipt by the Company of
written notice of such acceleration. Notwithstanding the foregoing, in the case
of an Event of Default specified in clause (h) of (i) of Section 6.01 hereof
with respect to the Company, any Significant Subsidiary or any group of
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all
A-8
<PAGE>
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in this Indenture. In the event of a declaration of acceleration of
the Notes because an Event of Default has occurred and is continuing as a
result of the acceleration of any Indebtedness described in clause (e) of the
preceding paragraph, the declaration of acceleration of the Notes shall be
automatically annulled if the holders of any Indebtedness described in clause
(e) have rescinded the declaration of acceleration in respect of such
Indebtedness within 30 days of the date of such declaration and if (i) the
annulment of the acceleration of the Notes would not conflict with any judgment
or decree of a court of competent jurisdiction, and (ii) all existing Events of
Default, except nonpayment of principal or interest on the Notes that became
due solely because of the acceleration of the Notes, have been cured or waived.
Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Holders of a majority in aggregate principal amount of
the Notes then outstanding, by notice to the Trustee, may on behalf of the
Holders of all of the Notes waive any existing Default or Event of Default and
its consequences under this Indenture, except a continuing Default or Event of
Default in the payment of interest or premium (if any) on, or principal of, the
Notes.
14. Trustee Dealings with Company. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company, and may otherwise deal with the Company, as if it
were not the Trustee.
15. No Recourse Against Others. No director, officer, employee,
incorporator or stockholder of the Company or any Subsidiary Guarantor, as
such, shall have any liability for any obligations of the Company or any
Subsidiary Guarantor under the Notes, the Subsidiary Guarantees or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability.
16. Authentication. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
17. Abbreviations. Customary abbreviations may be used in the name of
a Holder or an assignee, such as: TEN COM (= tenants in common), TENANT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minor Act).
18. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such
A-9
<PAGE>
numbers either as printed on the Notes or as contained in any notice of
redemption and reliance may be placed only on the other identification numbers
placed thereon.
19. Governing Law. The internal law of the State of New York shall
govern and be used to construe the terms of this Note.
The Company shall furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to:
Duane Reade Inc.
440 Ninth Avenue
New York, New York 10001
Attention: Chief Financial Officer
A-10
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to
---------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
-------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- -------------------------------------------------------------------------------
Date:
------------------------
Your Signature:
----------------------------------------
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee.
A-11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.09 or 4.10 of the Indenture, check the box below:
[ ] Section 4.09 [ ] Section 4.10
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.09 or Section 4.10 of the Indenture, state the
amount you elect to have purchased:
$
------------
Date: Your Signature:
------------------------ -------------------------
(Sign exactly as your name appears on the Note)
Tax Identification No.:
-----------------
Signature Guarantee.
A-12
<PAGE>
SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES(2)
The following exchanges of a part of this Global Note for Notes in
definitive form have been made:
<TABLE>
<CAPTION>
Principal Amount
of this Global
Amount of decrease Amount of increase Note following Signature of
Date in Principal Amount in Principal Amount such decrease authorized
of Exchange of this Global Note of this Global Note (or increase) officer of Trustee
- ----------- ------------------- ------------------- ------------- ------------------
<S> <C> <C> <C> <C>
</TABLE>
- --------
(2) This should be included only if the Note is issued in global form.
A-13
<PAGE>
Exhibit B
SUBSIDIARY GUARANTEE
Subject to Section 11.05 of the Indenture, each Subsidiary Guarantor
hereby, jointly and severally, unconditionally guarantees to each Holder of a
Note authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of the
Indenture, the Notes and the Obligations of the Company under the Notes or
under the Indenture, that: (a) the principal of, premium, if any, and interest
on the Notes will be promptly paid in full when due, subject to any applicable
grace period, whether at maturity, by acceleration, redemption or otherwise,
and interest on overdue principal, premium, if any, and (to the extent
permitted by law) interest on any interest, on the Notes and all other payment
Obligations of the Company to the Holders or the Trustee under the Indenture or
under the Notes will be promptly paid in full and performed, all in accordance
with the terms thereof; and (b) in case of any extension of time of payment or
renewal of any Notes or any of such other payment Obligations, the same will be
promptly paid in full when due or performed in accordance with the terms of the
extension or renewal, subject to any applicable grace period, whether at stated
maturity, by acceleration, redemption or otherwise. Failing payment when so due
of any amount so guaranteed or any performance so guaranteed for whatever
reason, the Subsidiary Guarantors will be jointly and severally obligated to
pay the same immediately.
The obligations of the Subsidiary Guarantor to the Holders and to the
Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly
set forth in Article 11 of the Indenture, and reference is hereby made to such
Indenture for the precise terms of this Subsidiary Guarantee. The terms of
Article 11 of the Indenture are incorporated herein by reference. This
Subsidiary Guarantee is subject to release as and to the extent provided in
Section 11.04 of the Indenture.
This is a continuing guarantee and shall remain in full force and
effect and shall be binding upon each Subsidiary Guarantor and its respective
successors and assigns to the extent set forth in the Indenture until full and
final payment of all of the Company's Obligations under the Notes and the
Indenture and shall inure to the benefit of the successors and assigns of the
Trustee and the Holders and, in the event of any transfer or assignment of
rights by any Holder or the Trustee, the rights and privileges herein conferred
upon that party shall automatically extend to and be vested in such transferee
or assignee, all subject to the terms and conditions hereof. This is a
guarantee of payment and not a guarantee of collection.
Each Subsidiary Guarantor hereby waives diligence, presentment, demand
of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right
B-1
<PAGE>
to require a proceeding first against the Company, protest, notice and all
demands whatsoever and covenants that this Subsidiary Guarantee will not be
discharged except by complete performance of the Obligations contained in the
Notes and the Indenture.
This Subsidiary Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note upon which this
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
For purposes hereof, each Subsidiary Guarantor's liability shall be
limited to the lesser of (i) the aggregate amount of the Obligations of the
Company under the Notes and the Indenture and (ii) the amount, if any, which
would not have (A) rendered such Subsidiary Guarantor "insolvent" (as such term
is defined in the Bankruptcy Law and in the Debtor and Creditor Law of the
State of New York) or (B) left such Subsidiary Guarantor with unreasonably
small capital at the time its Subsidiary Guarantee of the Notes was entered
into: provided that, it will be a presumption in any lawsuit or other
proceeding in which a Subsidiary Guarantor is a party that the amount
guaranteed pursuant to the Subsidiary Guarantee is the amount set forth in
clause (i) above unless any creditor, or representative of creditors of such
Subsidiary Guarantor, or debtor in possession or trustee in bankruptcy of such
Subsidiary Guarantor, otherwise proves in such a lawsuit that the aggregate
liability of the Subsidiary Guarantor is limited to the amount set forth in
clause (ii) above. The Indenture provides that, in making any determination as
to the solvency or sufficiency of capital of a Subsidiary Guarantor in
accordance with the previous sentence, the right of such Subsidiary Guarantors
to contribution from other Subsidiary Guarantors and any other rights such
Subsidiary Guarantors may have, contractual or otherwise, shall be taken in
account.
Capitalized terms used herein have the same meanings given in the
Indenture unless otherwise indicated.
B-2
<PAGE>
Dated as of February , 1998 DRI I INC.
By:
-------------------------------
Name:
Title:
Dated as of February , 1998 DUANE READE
By: DRI I INC., General Partner
By:
-------------------------------
Name:
Title:
By: DUANE READE INC., General
Partner
By:
-------------------------------
Name:
Title:
B-3
<PAGE>
Exhibit C
FORM OF SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
__________, _____ among Duane Reade Inc., a Delaware corporation (the
"Company"), [Subsidiary Guarantor], a subsidiary of the Company (the "New
Susidiary Guarantor"), and State Street Bank and Trust Company of Connecticut,
N.A., as trustee under the indenture referred to below (the "Trustee").
Capitalized terms used herein and not defined herein shall have the meaning
ascribed to them in the Indenture (as defined below).
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture, dated as of February , 1998 (the "Indenture"), providing
for the issuance of an aggregate principal amount of $80,000,000 of % Senior
Subordinated Notes due 2008 (the "Notes");
WHEREAS, the Indenture provides that under certain circumstances the
Company may or must cause certain of its Subsidiaries to execute and deliver to
the Trustee a supplemental indenture pursuant to which such Subsidiaries shall
unconditionally guarantee all of the Company's Obligations under the Notes
pursuant to a Subsidiary Guarantee on the terms and conditions set forth
therein; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Company, the New Subsidiary Guarantor and the Trustee mutually covenant and
agree for the equal and ratable benefit of the Holders of the Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
2. Agreement To Guarantee. The New Subsidiary Guarantor hereby agrees,
jointly and severally with all other Subsidiary Guarantors, to guarantee the
Company's Obligations under the Notes and the Indenture on the terms and
subject to the conditions set forth in Article 11 of the Indenture and to be
bound by all other applicable provisions of the Indenture.
C-1
<PAGE>
3. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator, shareholder or agent of any Subsidiary
Guarantor, as such, shall have any liability for any obligations of the Company
or any Subsidiary Guarantor under the Notes, any Subsidiary Guarantee, the
Indenture or this Supplemental Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder by
accepting a Note waives a releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes and the Subsidiary
Guarantees.
4. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK
SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE.
5. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
6. Effect of Headings. The Section headings herein are for convenience
only and shall not affect the construction hereof.
7. The Trustee. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this
Supplemental Indenture or for or in respect of the correctness of the recitals
of fact contained herein, all of which recitals are made solely by the New
Subsidiary Guarantor.
C-2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated: DUANE READE INC.
-----------------------
By:
-----------------------------
Name:
Title:
Dated: [Name of New Subsidiary Guarantor]
-----------------------
By:
-----------------------------
Name:
Title:
Dated: STATE STREET BANK AND TRUST
----------------------- COMPANY OF CONNECTICUT, N.A.,
as Trustee
By:
-----------------------------
Name:
Title:
C-3
<PAGE>
Exhibit D
FORM OF NOTATION OF SUBSIDIARY GUARANTEE ON NOTE
Each Subsidiary Guarantor (as defined in the Indenture) has jointly
and severally unconditionally guaranteed (a) the due and punctual payment of
the principal of, premium, if any, and interest on the Notes, whether at stated
maturity, by acceleration, call for redemption or otherwise, (b) the due and
punctual payment of interest on the overdue principal and premium of, and
interest, to the extent lawful, on the Notes and (c) that in case of any
extension of time of payment or renewal of any Notes or any of such other
Obligations, the same will be promptly paid in full when due in accordance with
the terms of the extension of renewal, whether at stated maturity, by
acceleration or otherwise.
Notwithstanding the foregoing, in the event that the Subsidiary
Guarantee would constitute or result in a violation of any applicable
fraudulent conveyance or similar law of any relevant jurisdiction, the
liability of the Subsidiary Guarantor under its Subsidiary Guarantee shall be
limited to such amount as will not, after giving effect thereto, and to all
other liabilities of the Subsidiary Guarantor, result in such amount
constituting a fraudulent transfer or conveyance.
The Subsidiary Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note upon which the
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual or facsimile signature of one of its authorized
officers.
Dated: ____________, _____ [Subsidiary Guarantor]
By:
-----------------------------
Name:
Title:
D-1
<PAGE>
[LATHAM & WATKINS LETTERHEAD]
February 2, 1998
Duane Reade Inc.
DRI I Inc.
Duane Reade
440 Ninth Avenue
New York, New York 10001
Re: Registration Statement No. 333-43313; $80,000,000 in
aggregate principal amount of Senior Subordinated Notes due 2008
----------------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933, as
amended (the "Act") by Duane Reade Inc., a Delaware corporation (the "Company")
of $80,000,000 in aggregate principal amount of Senior Subordinated Notes due
2008 (together with additional Senior Subordinated Notes due 2008, if any, to
be offered by the Company pursuant to Rule 462(b) under the Act, the "Notes")
and the registration by DRI I Inc., a Delaware corporation ("DRI") and Duane
Reade, a New York general partnership ("Duane Reade") of guarantees of the
Notes (together with additional guarantees of the Notes, if any, to be
offered by DRI or Duane Reade pursuant to Rule 462(b) under the Act, the
"Guarantees"), on a registration statement on Form S-1 filed with the
Securities and Exchange Commission (the "Commission") on December 24, 1997
(File No. 333-43313), as amended by Amendment No. 1 filed with the Commission
on January 15, 1998 and by Amendment No. 2 filed with the Commission on
February 2, 1998 (collectively, the "Registration Statement"), you have
requested our opinion with respect to the matters set forth below. Capitalized
terms used herein but not defined have the meanings given them in the
Registration Statement.
<PAGE>
[LATHAM & WATKINS LOGO]
Duane Reade Inc.
DRI I Inc.
Duane Reade
February 2, 1998
Page 2
In our capacity as your counsel in connection with such registration, we
are familiar with the proceedings taken and proposed to be taken by the
Company, DRI and Duane Reade in connection with the authorization and issuance
of the Notes and Guarantees, as the case may be, and for the purposes of
this opinion, have assumed such proceedings will be timely completed in the
manner presently proposed. In addition, we have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity to authentic original documents of all documents submitted to us
a copies.
We are opining herein as to the effect on the subject transaction only
of the internal laws of the State of New York and the General Corporation
Law of the State of Delaware, and we express no opinion with respect to the
applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any
matters of municipal law or the laws of any other local agencies within the
state.
Subject to the foregoing and the other qualifications set forth herein,
it is our opinion that, as of the date hereof:
1. The Notes have been duly authorized by the Company and, when
executed, issued and authenticated in accordance with the terms of the
Indenture and as contemplated by the Registration Statement and delivered and
paid for in accordance with the terms of the Underwriting Agreement, the Notes
will be legally valid and binding obligations of the Company, enforceable
against the Company with their terms.
2. The Guarantees have been duly authorized by each of DRI and Duane
Reade, and, when the Guarantees are executed and delivered and the related
Notes have been executed, issued and authenticated in accordance with the
terms of the Indenture and as contemplated by the Registration Statement and
delivered and paid for in accordance with the terms of the Underwriting
Agreement, the Guarantees will be legally valid and binding obligations of
each of DRI and Duane Reade, enforceable against each of them in accordance
with their terms.
The opinions rendered herein relating to the enforceability of the Notes
and the Guarantees, respectively, are subject to the following exceptions,
limitations and qualifications: (i) the effect of bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors; (ii) the effect
of
<PAGE>
[LATHAM & WATKINS LOGO]
Duane Reade Inc.
DRI I Inc.
Duane Reade
February 2, 1998
Page 3
general principles of equity, whether enforcement is considered in a proceeding
in equity or at law, and the discretion of the court before which any
proceeding therefor may be brought; (iii) the unenforceability under certain
circumstances under law or court decisions of provisions providing for the
indemnification of or contribution to a party with respect to a liability
where such indemnification or contribution is contrary to public policy; and
(iv) we express no opinion concerning the enforceability of the waiver of
rights or defenses contained in the Indenture.
To the extent that the obligations of the Company under the Notes may
be dependent upon such matters, we have assumed for purposes of this opinion
that (i) each of the Underwriter and the Trustee (a) is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization; (b) has the requisite organizational and legal power and
authority to perform its obligations under each of the agreements relating
to the Notes and Guarantees to which it is a party; (c) is duly qualified to
engage in the activities contemplated by each such agreement; and (d) has
duly authorized, executed and delivered each such agreement; (ii) with respect
to each of the Underwriter and the Trustee, each agreement relating to the
Notes to which it is a party constitutes its legally valid and binding
agreement, enforceable against it in accordance with its terms; and (iii)
the Trustee is in compliance, generally and with respect to acting as Trustee
under the Indenture, with all applicable laws and regulations. We have also
assumed, with your consent, that the choice of law provisions in each of the
agreements relating to the Notes would be enforced by any court in which
enforcement thereof might be sought.
We consent to your filing this opinion as an exhibit to the Registration
Statement and any registration statement for the same offering covered by the
Registration Statement that is to be effective upon filing pursuant to Rule
426(b) under the Act and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
/s/ Latham & Watkins
<PAGE>
Exhibit 12.1
Duane Reade Inc.
Computation of Ratio of Earnings to Fixed Charges
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
Predecessor Company
------------- ----------------------------------------------------------------------
Period Period
January 1 September 26
to to Fiscal Year
September 25, December 31, ------------------------------------------------------
1992 1992 1993 1994 1995 1996
------------- -------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pre-tax income (loss) before
extraordinary items $16,340 $(7,293) $(24,418) $(16,438) $(18,058) $(17,854)
------------- -------------- ----------- ----------- ----------- ----------
Fixed charges:
Capitalized interest 192 847
Interest expense and amortization
of deferred financing costs on
all indebtedness (B) 3,298 6,989 26,199 27,480 30,224 32, 396
Rentals: operating leases - 1/3 3,479 1,164 4,732 5,791 7,568 8,140
------------- ------------- ----------- ----------- ----------- ----------
Total Fixed Charges 6,777 8,153 30,931 33,463 38,639 40,536
------------- ------------- ----------- ----------- ----------- ----------
Earnings before income taxes,
extraordinary items and fixed
charges 23,117 860 6,531 17,025 20,581 22,682
Less; Interest capitalized during
the period (192) (847)
------------- ------------- ----------- ----------- ----------- ----------
Earnings (loss) before income taxes,
extraordinary items and adjusted
fixed charges 23,117 860 6,513 16,833 19,734 22,682
------------- ------------- ----------- ----------- ----------- ----------
Ratio (deficiency) of earnings to
fixed charges 3.41 $(7,293) $(24,418) $(16,630) $(18,905) $(17,854)
============== ============= =========== =========== =========== ==========
<CAPTION>
--Pro Forma-- (A)
39 Weeks Ended ----------------------------------
-------------------------------- 39 Weeks Ended
September 28, September 27, Fiscal September 27,
1996 1997 1996 1997
-------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Pre-tax income (loss) before
extraordinary items $(12,485) $(14,165) $(5,687) $(3,899)
-------------- ------------- ------------ ---------------
Fixed charges:
Capitalized interest
Interest expense and amortization
of deferred financing costs on
all indebtedness (B) 24,334 25,433 19,689 15,092
Rentals: operating leases - 1/3 6,083 6,524 8,140 6,524
-------------- ------------- ------------ ---------------
Total Fixed Charges 30,417 31,957 27,829 21,616
-------------- ------------- ------------ ---------------
Earnings before income taxes,
extraordinary items and fixed
charges 17,932 17,792 22,142 17,717
Less: Interest capitalized
during the period
-------------- ------------- ------------ ---------------
Earnings (loss) before income
taxes, extraordinary items and
adjusted fixed charges 17,932 17,792 22,142 17,717
-------------- ------------- ------------ ---------------
Ratio (deficiency) of earnings
to fixed charges $(12,485) $(14,165)(C) $(5,687) $(3,899)(D)
============== ============= ============ ===============
</TABLE>
(A) Adjusted to give effect to (i) decreased interest expense of
$10,341 related to the Refinancing Plan, including the
consummation of the Offering, the Common Stock Offering and the
application of the net proceeds therefrom as set forth under "Use of
Proceeds" as if all such transactions had occurred at December 31, 1995
and (ii) a provision of $75,000 for compensation expense relating to
previously issued stock options for the 39 weeks ended September 27, 1997.
Does not reflect an extraordinary loss of $23.9 million for fiscal 1996
relating to the redemption of the Senior Notes and the Zero Coupon Notes
and the write-off of the unamortized deferred financing fees.
(B) Includes the accretion of principal on the Zero Coupon Notes for all
periods presented, as applicable.
(C) Included in the loss before extraordinary items for the 39 weeks ended
September 27, 1997 was a nonrecurring charge of $10,887 as disclosed in
Note 11 to the Company's consolidated financial statements. If such
charge had not been incurred, earnings would have been insufficient to
cover fixed charges by $3,278.
(D) Included in the loss before extraordinary items for the 39 weeks ended
September 27, 1997 was a nonrecurring charge of $10,887 as disclosed in
Note 11 to the Company's consolidated financial statements. If such
charge had not been incurred, on a pro forma basis, after giving effect to
the Offering, the ratio of earnings to fixed charges would have been 1.3.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 18, 1997,
except as to the recapitalization and the reverse stock split described in
Note 12 and net loss per common share described in Note 1 which are as of
January 14, 1998, relating to the financial statements of Duane Reade
Holding Corp., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 4, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
---------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) __
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
John R. Towers, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
---------------------
DUANE READE, INC.
(AND CERTAIN GUARANTORS IDENTIFIED IN THE FOOTNOTE* BELOW) (Exact
name of obligor as specified in its charter)
DELAWARE 04-3164702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
440 NINTH AVENUE
NEW YORK, NY 10001
(Address of principal executive offices) (Zip Code)
-------------
Senior Subordinated Notes due 2008
(Title of indenture securities)
The following Guarantors are co-registrants incorporated in the states and
having the I.R.S. Employer Identification Numbers indicated: 1) DRI I Inc., a
Delaware Corporation (04-3166107) and II) Duane Reade, a New York corporation
(11-2731721)
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington, D.C.,
Federal Deposit Insurance Corporation, Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its
parent, State Street Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF
ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now
in effect, is on file with the Securities and Exchange
Commission as Exhibit 1 to Amendment No. 1 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with
the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee
to commence business was necessary or issued is on file with
the Securities and Exchange Commission as Exhibit 2 to
Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the
Registration Statement of Morse Shoe, Inc. (File No. 22-17940)
and is incorporated herein by reference thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE
DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise
corporate trust powers is on file with the Securities and
Exchange Commission as Exhibit 3 to Amendment No. 1 to the
Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Morse Shoe, Inc.
(File No. 22-17940) and is incorporated herein by reference
thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibit 4
to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Eastern
Edison Company (File No. 33-37823) and is incorporated herein
by reference thereto.
1
<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS
IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(B) OF THE ACT.
The consent of the trustee required by Section 321(b) of the
Act is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR
EXAMINING AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates
to matters peculiarly within the knowledge of the obligor or any underwriter
for the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Hartford and The
State of Connecticut, on the 28th day of January, 1998.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Susan C. Merker
-----------------------------------
NAME: SUSAN C. MERKER
TITLE: ASSISTANT VICE PRESIDENT
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by DUANE
READE, INC. of its SENIOR SUBORDINATED NOTES DEBENTURES DUE 2008, we hereby
consent that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Susan C. Merker
-----------------------------------
NAME: SUSAN C. MERKER
TITLE: ASSISTANT VICE PRESIDENT
DATED: JANUARY 28, 1998
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking
institution organized and operating under the banking laws of this commonwealth
and a member of the Federal Reserve System, at the close of business June 30,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act and in
accordance with a call made by the Commissioner of Banks under General Laws,
Chapter 172, Section 22(a).
Thousands of
ASSETS Dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ............ 1,842,337
Interest-bearing balances...................................... 8,771,397
Securities......................................................... 10,569,119
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary ...................... 5,953,036
Loans and lease financing receivables:
Loans and leases, net of unearned income ................. 5,769,090
Allowance for loan and lease losses....................... 74,031
Allocated transfer risk reserve........................... 0
Loans and leases, net of unearned income and allowances .. 5,695,059
Assets held in trading accounts.................................... 916,608
Premises and fixed assets.......................................... 374,999
Other real estate owned............................................ 755
Investments in unconsolidated subsidiaries......................... 28,992
Customers' liability to this bank on acceptances outstanding....... 99,209
Intangible assets.................................................. 229,412
Other assets....................................................... 1,589,526
Total assets....................................................... 36,097,449
==========
LIABILITIES
Deposits:
In domestic offices....................................... 11,082.135
Noninterest-bearing ................................ 8,932,019
Interest-bearing ................................... 2,150,116
In foreign offices and Edge subsidiary.................... 13,811,677
Noninterest-bearing ............................. 112,281
Interest-bearing ................................ 13,699,396
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary....................... 6,785,263
Demand notes issued to the U.S. Treasury and Trading Liabilities .. 755,676
Other borrowed money............................................... 716,013
Subordinated notes and debentures.................................. 0
Bank's liability on acceptances executed and outstanding........... 99,605
Other liabilities.................................................. 841,566
Total liabilities.................................................. 34,091,935
EQUITY CAPITAL
Perpetual preferred stock and related surplus...................... 0
Common stock....................................................... 29,931
Surplus............................................................ 437,183
Undivided profits and capital reserves/Net unrealized holding
gains (losses) .................................................. 1,542,695
Cumulative foreign currency translation adjustments................ (4,295)
Total equity capital............................................... 2,005,514
Total liabilities and equity capital............................... 36,097,449
==========
4
<PAGE>
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Charles F. Kaye
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 28, 1996 AND SEPTEMBER 27,
1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 52 WEEKS
ENDED DECEMBER 28,1996 AND 39 WEEKS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895364
<NAME> DUANE READE INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1996 DEC-27-1997
<PERIOD-END> DEC-28-1996 SEP-27-1997
<CASH> 216 218
<SECURITIES> 0 0
<RECEIVABLES> 7,171 9,084
<ALLOWANCES> 0 0
<INVENTORY> 47,914 65,872
<CURRENT-ASSETS> 56,466 76,545
<PP&E> 30,090 34,471
<DEPRECIATION> (7,025) (9,553)
<TOTAL-ASSETS> 222,476 239,520
<CURRENT-LIABILITIES> 46,549 46,696
<BONDS> 245,657 262,649
0 0
0 0
<COMMON> 101 103
<OTHER-SE> (59,497) (73,664)
<TOTAL-LIABILITY-AND-EQUITY> 222,476 239,520
<SALES> 381,466 313,796
<TOTAL-REVENUES> 381,466 313,796
<CGS> 288,505 236,413
<TOTAL-COSTS> 288,505 236,413
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32,396 25,433
<INCOME-PRETAX> (17,854) (14,165)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (17,854) (14,165)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (17,854) (14,165)
<EPS-PRIMARY> (1.69) (1.34)
<EPS-DILUTED> 0 0
</TABLE>
